Golden Arrow: Excellent Near-Term Bet

| About: GOLDEN ARROW (GARWF)

Summary

Silver Standard has 45 days to make decision on Chinchillas.

Antofalla exploration program has commenced with first drill results expected in Q2 2017.

Impending catalysts make GRG an excellent near-term bet for silver bulls.

Golden Arrow Resources (OTCQB:GARWF)

Featured In: July 2016

Partnership Average Cost per Share: C$0.24

Current Market Price (Feb. 9, 2017): C$0.75

Golden Arrow Resources was one of our top performers last year, with a share price gain of 265%. The company benefited from a revival in the silver price twinned with renewed optimism for the Argentinean mining industry. Thanks to near-term catalysts at both Chinchillas and Antofalla, Golden Arrow looks poised to carry this outperformance into 2017.

Golden Arrow's flagship asset is the Chinchillas Project located in northern Argentina. Since acquiring the project in 2011, the company has successfully discovered 250 million silver-equivalent ounces. This makes Chinchillas one of the largest silver development stories in the world.

In October 2015, Golden Arrow (which at the time had a sub C$10m market cap) signed a JV deal with precious metals heavyweight, Silver Standard (NASDAQ:SSRI). Silver Standard's rationale for doing the deal was simple - its Pirquitas Mill runs out of feed in 2017 and it sees an opportunity to use Chinchillas, located only 30km from the mill, to extend Pirquitas's production life by multiple decades.

The JV agreement stipulated that Silver Standard would "spend a minimum of US$4 million for pre-development activities" and "up to US$12.6 million based on the success of the pre-development activities". To form the joint venture, Silver Standard must pay Golden Arrow an amount equal to 25% of the Pirquitas Mine's cash equivalent earnings starting October 2015 (minus certain expenditures for exploration, capital investment, and closure costs). The 25% exercise payment must be sent to Golden Arrow by March 31, 2017.

It has now been 16 months since the deal was signed, and Silver Standard has not yet entered into the JV. However, Silver Standard's hand will be forced shortly as the March 31, 2017, deadline is fast approaching. I remain confident that the deal will go through for the following reasons:

  1. Since the agreement was signed in October 2015, the precious metals markets have seen a dramatic reversal in fortune. The price of silver was roughly $14.50 when this agreement was first signed; it now sits around $18 and has risen as high as $20.50 within the past 12 months. If Silver Standard was able to justify this deal at $14.50 silver, then the higher metal prices will only increase their enthusiasm for Chinchillas.
  2. Silver Standard confirmed on a November conference call that all technical work will be completed at Chinchillas before the March 31st deadline. Additionally, the company stated that it had already spent US$10.5 million at Chinchillas, including US$3M in Q3/16 alone. It is likely that US$12.6M in expenditures stipulated in the agreement has already been reached.

Given the improvement in silver prices and Silver Standard's aggressive expenditures on pre-development activities, I am nearly certain that this deal will go ahead in Q1. What we don't yet know is the structure, and we could see any of the following occur:

  1. Silver Standard acquires 100% of Golden Arrow,
  2. Silver Standard buys the Chinchillas Project from GRG for shares/cash,
  3. Silver Standard and Golden Arrow put Pirquitas Mill and Chinchillas into a separate vehicle, or
  4. Silver Standard vends Pirquitas Mill into Golden Arrow in exchange for shares.

Beyond Chinchillas, Golden Arrow also has upcoming catalysts at its fully-owned Antofalla Project. The company is particularly excited about Antofalla due to its strong geologic similarities to Chinchillas.

In October 2016, Golden Arrow announced a C$2m work program at Antofalla, including "remote sensing, IP/Resistivity geophysics, and geochemical sampling to delineate targets that will be tested with an estimated 3,000-meter drill program". I anticipate that first drill results from Antofalla will be announced in Q2 of this year. This prospect has a legitimate chance of becoming the Grosso Group's fourth major mineral discovery in Argentina and could generate significant value beyond Chinchillas.

There are very few silver plays with such significant milestones expected over the coming months. Additionally, the nature of the Chinchillas deposit (bulk tonnage and relatively low-grade) gives Golden Arrow shareholders substantial leverage to further increases in the silver price. The next couple of quarters will be transformational for GRG, and investors interested in the story should get involved while the share price is below C$1.

Disclosure: I am/we are long GARWF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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