By Brent Connolly
Pacifico Minerals Limited (PMY: ASX)
With the silver price having its biggest weekly rise in 40 years in July there is a mad scramble by investors and brokers to determine the best options for silver exposure on the ASX. https://www.kitco.com/commentaries/2020-07-27/Gold-Swot-silver-s-biggest-weekly-gain-in-40years.html
The options are limited.
A ten year bear market has left low stockpiles of minerals and metals with few projects in the Australian and global pipeline, with major silver producing countries such as Mexico having exhausted several of the super mines that ran for centuries. Sustained low prices have made most potential sources of supply uneconomic, unless the silver is available to be mined with other metals.
At the current share price of 2.0c, PMY with its Sorby Hills project in north Western Australia is the best value risk reward silver developer investment on the ASX. It presently screens cheaply at around 50% of its Australian peers on an EV/Silver Equivalent Oz’s basis (fully diluted), see Chart 1.
At the current market capitalisation of $57.8 M the market is placing a value of $1.58 Oz of its silver resource, no value for lead and zinc, and no value for exploration potential.
Here lies the opportunity.
The recent optimised PFS confirms that PMY has the potential to use its lead and zinc resources to fund the cost of capital and mining and extract silver for “free” making every dollar of silver price appreciation from today’s prices pure upside. PMY also has the greatest exploration upside potential of any of its development peers in Australia and is perfectly placed to capture the benefits of the commodity price up-cycle that is only just getting underway.
It’s an outstandingly economic institutional quality investment grade development and a “Silver Speculators” dream.
Why?
It’s in one of the best mining jurisdictions in the world, Tier 1 Western Australia, with all key approvals already secured and close to existing infrastructure.
It has the second biggest silver resource in Australia at 55 Million Oz’s (75% to PMY, 40.4 Million Oz’s) of the developers and explorers, and the second biggest silver equivalent resource. On an Enterprise Value/Ag Equivalent Resource basis it is the best value per ounce on a total resource basis (at $0.43 per Ag Eq Oz) and on a Life of Mine resource basis (at $1.24 per Ag Eq Oz), based on available mining studies or estimated material for mining, see Chart 1.
It has the highest metal grade of the Australian developers and explorers at 116 g/t with a total resource of 165.1 Million Oz’s Ag equivalent (75% to PMY, 123.8 Million Oz’s).
It has material infill and extension drilling and exploration upside at Sorby Hills (75%) and the adjacent and much larger lease, Eight Mile Creek (100%).
It’s outstandingly economic. The Sorby Hills deposit is large and near-surface with simple well understood metallurgy. The lead-silver-zinc is of a high-grade, which lends itself to simple, efficient processing, producing high recoveries and high quality concentrate. This together with the shallow open cut mining required produces high operating margins.
Large, near surface Pb-Ag-Zn deposit, with a Mineral Resource of 44.1Mt at 3.3% Pb, 38g/t Ag and 0.5% Zn and Proved and Probable Reserves of 13.6Mt at 3.6% Pb, and 40.2g/t Ag (4.6% Pb Eq1 ).
The Optimised Pre-feasibility Study released in August 2020 on Sorby Hills delivered a NPV of $303 Million (100% of project) and a pre-tax internal rate of return of 46%, with a less than 2 years payback. The forecast capital spend is all about setting the mine up for a very long life. So the initial LOM is 10 years, however, the existing resources could easily see that extended. The Board recognises the massive upside potential of the Sorby Hills site alone and has laid a solid foundation with a capital spend suitable for a multiple decade long mine life.
The Optimised PFS Base Case (OPFS) incorporates the mining of 14.7Mt of ore (circa 92% Measured and Indicated, 8% Inferred) from four key deposits, Omega, A, B and southern portion of Norton. This mine plan is underpinned by Proved and Probable Reserves of 13.6 Mt at 3.6Pb and 40g/t Ag, which is 92.5% of the total mine plan and unusual for a PFS and very encouraging from a financiers perspective.
https://www.asx.com.au/asxpdf/20200825/pdf/44lwc8fdqqb2s7.pdf
It’s an investment grade project with a potential long life, which can generate profits at low commodity prices and make stellar profits at high prices. High grade material quantities of metal means that the project does not demand a high silver price (> $40 USD) constantly to be economic. As an investment PMY has low relative risk with high commodity prices producing potentially massive upside. It’s a thoroughbred stayer.
Canny brokers and analysts know that few primary silver mines are historically long term profitable, however, base metals plus silver have a long track record of delivering silver price optionality on top of strong lead and zinc earnings.
It has the potential for free silver optionality. The quantity, grade and price of the base metals, lead and zinc have the potential to cover all the capital and mining costs, making the silver production effectively “free”. (The NPV of $303M is greater than the estimated NPV of the total Ag revenue of circa $245M (undiscounted revenue being $431.1M).
The focus for investors then becomes the amount of silver Oz's produced per year and, in a rising silver price market, the amount of silver Oz’s in the ground, those identified and the exploration potential. As the market applies its weighing machine function, PMY’s “free silver optionality” will increasingly get priced in.
There are as many different ways as there are analysts to show how commodity prices can impact valuations. I have chosen two that give an indication of the scale of the opportunity presented by movements in the Ag price for PMY.
The first is to take the OPFS and adjust the NPV by the impact of increases in the Ag price. This uses the sensitivity table data from the OPFS Figure A-14.
The revised NPV is shown at 75% net to PMY with a 70% risk weighting (LHS Axis), and the relationship to the PMY share price is also shown (RHS Axis), (All share numbers in this report are Pre Capital Raise 18 September 2020). See chart 2.
The second is to look at broker research and the commodity price sensitivity analysis they provide. I have used the Euroz updated research report dated 25 August 2020 released after the OPFS. It places a revised base line target spare price of 4c per share (with a target of 7c per share when the mine is successfully developed and using original pricing assumptions), with a revised base target above 5c when the Ag price is reflected at US$27 (or spot).
Using their own sensitivity analysis of their valuation to the movements in the Ag price only, we get results like those shown in Chart 3. Note that the Euroz valuations are post tax and also use a 70% risk weighting and add $20M for exploration upside (net of corporate costs). See Chart 3.
There are other methods including placing values on the resources in the ground and these will be discussed later.
There is a deeper strategic upside, beyond Ag. PMY is perfectly positioned to capture commodity price growth from the favourable price outlook now impacting all USD denominated hard commodities, lead and zinc included.
The King USD cycle is over. While the USD is rising commodities are psychologically linked to it and are not free to rise to the natural price set by innate supply and demand. But, when that cycle is over the gravity headwind inverts and becomes a tailwind. If you look closely there appears to be a stealth rally underway in lead and zinc, the prices of which are inching higher. With the DXY at about 93 the USD has stopped being the foot on the neck of all metals.
Gold is a currency. Silver is a currency whenever it goes into a bull phase. The fact that the USD gold price has risen so extremely in the past two years despite a rising USD should tell you everything that you need to know about the future direction of gold and silver now that the USD has commenced falling.
The position of silver is better as it is only now entering the bull market, it is three years behind gold and PMY is perfectly placed to capture all curves as they inflect higher, the commodities of lead and zinc and the currency, silver.
Plenty has been written about the gold silver ratio being at historically high levels, currently at 72. As that lowers the silver price will rise faster than gold. That does not mean we will go to a ratio of 20 overnight, but it means that the price of silver tends to rise extremely sharply.
To provide an indication of the effect on the value of PMY we can also look at the Euroz chart and add the combined impact of rises in commodity prices of Pb and Ag. Using the same basis as in chart 3 and including assumed and modest price rises on Pb, we have the following in chart 4 –
If you like to talk in waves, we are currently at the start of a new wave cycle, say wave 1 of a multi wave series. These waves are part of massive global cycles and it will take time for the full wave to rise up………..
……precisely like a tsunami, all you see at the start is the first tide rushing out (March 2020), then you start to see little ripples in the water moving toward you (July 2020) then the water rises to your ankles, waist and throat………….
…….and finally you’re getting swept through the streets wondering how you didn’t see it coming. https://hotcopper.com.au/threads/ann-retraction-of-production-targets.5503914/page47?post_id=45915169
On the myriad of methods that can be used to value Ag companies, you can look at the value the market places on the ounces of Ag Eq in the ground, by reference to other companies. In this case we have compared PMY to other companies on the ASX and some in the US and Canada with resources in a variety of geographies.
What I find particularly exciting is that PMY is very good value when compared to other opportunities especially when you consider that it has been more substantially de-risked and that its exploration upside is potentially massive. See Chart 5.
PMY has institutional scale. There is potential for multiples of that existing scale at Sorby Hills and with a newly acquired, geologically similar, adjacent and materially larger exploration tenement at Eight Mile Creek. https://www.asx.com.au/asxpdf/20200421/pdf/44h3h78hlgv9pt.pdf
Infill and extension drilling of Sorby Hills has consistently delivered a high conversion rate of inferred resources to indicated, with further drilling and geological understanding expected to confirm significant potential to grow the deposits which are open in most directions. https://www.asx.com.au/asxpdf/20200602/pdf/44j9w99y4ch30g.pdf
The current Investor Presentation includes a chart (Chart 6) which tracks the expansion of the Mineral Resource Estimate since the Sorby Hills site was acquired in Q3 2018.
It’s the only one of its natural Australian located peers to have meaningful decent grade silver drilling success of recent times. That means PMY is not just reliant on existing silver resources but has the potential to materially grow recoverable silver Oz’s………and if that silver production can be “free” because the costs of the mining are met by base metals, you have the silver speculators dream………
Images 1, 2 and 3 show the exploration potential relative to the existing resource base.
It seems to me that only about 30% of Sorby Hills 42km2 has been drilled and what has been drilled of late has had a very high success rate - both exploration success for target extension drilling and conversion of Inferred to Indicated for infill drilling. As noted above, there have been some particularly exciting recent drilling results for Ag with an area of high grade results the target of upcoming drilling, like the one shown in Image 4 and included in this ASX announcement - https://hotcopper.com.au/threads/ann-sorby-hills-returns-further-robust-intersections.5195680/
And none of the 217km2 recently acquired tenement of Eight Mile Creek has been explored. A new program commenced on 9 September 2020, here is the announcement - https://hotcopper.com.au/threads/ann-drilling-underway-at-sorby-hills-lead-silver-zinc-project.5613155/-
There is so much exploration potential that PMY could become Australia's next Monster Miner.
PMY is fully funded to Sorby Hills Final Investment Decision (FID). With a heavily oversubscribed capital raising of $12M just complete, the Company is fully funded for all DFS expenditure and infill and exploration drilling to FID on Sorby Hills. https://hotcopper.com.au/threads/ann-pacifico-funded-to-final-investment-decision.5632193/
And for the build of the mine, Sorby Hills has a 25% capital contributing and offtake joint venture partner in Henang Yuguang Gold & Lead Co. Ltd which operates the biggest gold, silver and lead smelter in China. Its appetite for silver will be driven by the macroeconomic factors discussed, but it is also seeking a clean lead-silver concentrate free from deleterious elements to offset the closure of a number of lead mines in China. Looking at their March 2020 quarterly, they would appear to have plenty of capacity to fund capital and offtake with AU $386M in cash and cash equivalents available.
And just in case you are worried about China, recent economic data showed manufacturing activity has risen https://www.msn.com/en-us/finance/markets/chinas-manufacturing-recoverypicks-up-the-pace/ar-BB17oG5P and Henang Yuguang recently confirmed that they are back at pre-COVID levels of production.
On 29 June 2020 PMY appointed BurnVoir a Sydney based financier to manage the Competitive process for Sorby Hills funding. There is multiple party interest for OFFTAKE and FINANCING and COMPETITION for both. This makes complete sense because the economics of this project are outstanding. The recent announcement by Galena Mining Limited that it has achieved funding for its Abra project in WA provides extra confidence that financiers are actively seeking projects like Sorby Hills.
On 14 September 2020 PMY announced that it had entered the Due Diligence phase in its application for development funding with the Australian Government’s Northern Australia Infrastructure Fund (NAIF). This is step 3 in a 4 step process. There is the potential for NAIF to provide concessional funding for the majority of PMY’s share of the development cost of Sorby Hills, and this could be up to 100% of that share. https://hotcopper.com.au/threads/ann-sorby-hills-progressed-to-due-diligence-by-naif.5621030/
Of particular note is the return on the capital required for the Sorby Hills mine relative to Australian resource peers. Not only does it deliver a forecast 46% IRR(Pre-Tax), it delivers a higher rate of Ag Eq revenue per its Enterprise Value adjusted for CAPEX relative to its Australian resourced peers. See Chart 7. This is impressive considering as well that the CAPEX has been forecast on the basis that the LOM is extended beyond its initial 10 years and can operate as a multi decade mine.
And as a final indicator of value, my personal favourite, is the comparison of the AUD value of Ag Eq resources in the ground compared to Enterprise Value (EV). When you look at Chart 5 above AUD$3 is not unreasonable when you look at the current value placed on the Ag Eq by the market – a low of 0.43c and a high of $2.37 (Developers only) at the START OF A BULL RUN into which very few institutions and individuals are yet to invest.
PMY represents the best value of its Australian peers and offers a multi-bag opportunity of 6.8 times on this basis. See Chart 8. Remember that as the BULL run really hits Ag, the market starts to complete its weighing machine function and increasingly values resources in the ground……
PMY has a strong management team that has consistently delivered against key milestones. The recent appointment of highly experienced Gary Comb as Executive Chairman, who was previously with Jabiru Metals & Finders Resources and an engineer with over 30 years’ experience in the Australian mining industry, with a strong track record in successfully commissioning and operating base metal mines is a big win and highlights that Pacifico Minerals is moving strongly forward towards production and worthy of being put on the radar of potential investors and speculators.
PMY is heavily backed and supported by a number of High Net Worth mining affiliated and industry wide recognised leaders, very unlike your usual top 20 for a junior. The top 10 shareholders own 36% and include 2 Directors, the Lowell Resources Fund, and Toni Poli. There has been solid insider buying in recent quarters with Managing Director Simon Noon, Executive Chairman Gary Comb and Director Richard Monti and also some top 20 shareholders all making on market purchases.
PMY has plenty of near term catalysts.
- Quarter 3 2020, DFS and expansion drilling – just commenced
- Quarter 4 2020 and following, DFS and expansion drilling results
- Quarter 3 2021 Definitive Feasibility Study and Offtake and Financing process.
- Quarter 4 2021 Decision to mine.
What’s not to like?
I am a shareholder of Pacifico Minerals and acting independently from the Company in writing this research report. I would like to thank fellow shareholders and Hot Copper posters @Verily1 and @goldbear77 for their assistance with the computations and graphs used in preparing this report.
Brent Connolly, 22 September 2020
