Update: Paramount Gold And Silver Announces Updated San Miguel PEA

Aug.25.14 | About: Paramount Gold (PZG)

Summary

Paramount Gold and Silver has released an updated PEA on San Miguel, which has included a heap leach scenario.

This update was expected and the outcome doesn't really surprise me, as nothing materially changes.

The investment thesis remains standing; Paramount Gold and Silver is levered to the gold and silver price, and San Miguel will likely remain uneconomic/unfinanceable at the current prices.

Paramount Gold and Silver (NYSEMKT:PZG) has released the results of an updated economic study on the San Miguel project in Mexico. This study was based on a starter pit with oxidized ore being placed on leach pads to leach the gold and silver out, and a second phase which includes the construction of a mill. The initial capital expenditures for the first phase are quite limited at $69M, but the company would obviously still have to spend hundreds of millions of dollars on the mill scenario (which is currently being considered as $346M in sustaining capex).

I'm not sure if starting up the project with the leach pad has a lot of additional benefits, as the capital payback of the $69M only occurs in year 3, so the cash flow from the leaching scenario will not contribute that much to the construction cost of the facilities needed for the milling scenario. So whilst it's attractive to be able to start up the operations for $69M, there's definitely the need to find $350M in additional capital.

The updated PEA has resulted in an after-tax NPV10% of almost $107M, using a gold price of $1350/oz (+5%) and a silver price of $22/oz (+13%). Unfortunately, no numbers were given for a $1250 gold price and $20 silver, but I'm afraid the NPV10% would be very close to zero. However, I am keeping an open mind, and will write another in-depth article when the technical report has been released.

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