- SLVRF has a strong correlation with silver prices, and has significantly outperformed two benchmark silver ETFs during the recently-concluded silver rally.
- Despite having a promising 'long' outlook, silver's near-term price outlook is troubled on account of multiple macro headwinds, and I expect this situation to haunt SLVRF's near-term price trajectory.
- Nonetheless, SLVRF manages a portfolio of very promising exploration projects that are scalable, located in Tier-1 mining jurisdictions, and manageable from a liquidity perspective.
- The two major risk factors are the prevailing uncertainty in precious metals' prices, and the 'long' timelines associated with project development.
- That said, I believe an appropriate investment strategy at present is to assign only a small portion of your portfolio to this junior explorer, keeping in view the two main risk factors highlighted above.
Silver One Resources (OTCQX:SLVRF) is a Canadian junior silver explorer having operational presence solely in the US. For me, the direction of an exploration company's price trajectory is largely determined by two factors; (1) the overall momentum in prices of the underlying metal (silver in this case), and (2) the company's fundamental profile (including the progress and status of drilling/exploration activities, the company's mining jurisdiction and associated risk, as well as the mining attraction of the company's flagship project).
This article will incorporate a detailed discussion of these two factors to help assess the stock's growth outlook in the medium-to-long term. So let's get into the details without further ado.
Figure-1 (Source: Silver One's website-Candelaria project)
Catalyst-1: Silver prices
At the time of writing, spot silver last traded at $25.30, witnessing an approximately 16% decline from the ~$30/oz level recorded about one month ago (Figure-2). It's debated that silver's near-term price performance is impacted by strong US bond yields, a strengthening US Dollar in the wake of upbeat jobs data (and as denoted by the recent hike in the USD Index; check Figure-3). Given silver's recent price performance, we could possibly witness the PM (read: Precious Metal) moving closer to the YTD (read: Year-to-Date) support levels of ~$24/oz.
On a separate note, it's worth mentioning that SLVRF's TTM (read: Trailing Twelve Months) price returns have massively outperformed the returns of two benchmark ETFs namely Global X Silver Miners ETF (SIL), and ETFMG Prime Junior Silver Miners ETF (SILJ). Figure-4 reveals that SLVRF's price has staged strong upside during a bullish silver price environment, and has shown a greater correction on every weakness in silver prices (compared with the benchmark indices).
I expect this near-term volatility in SLVRF's prices to continue because I believe that the near-term outlook for silver prices will remain challenged due to the reasons mentioned earlier. That said, it's not recommended to load up SLVRF's shares in anticipation of rapid price recovery. However, I'd note that silver's long-term outlook appears to be promising given its role in the EV (read: Electric Vehicles) and 5G evolution. On that note, I'm not surprised to see Bank of America expecting silver's medium-to-long term target price between $35-50/oz.
Catalyst-2: Strong Fundamentals
Top mining jurisdiction
SLVRF has three key exploration projects in its portfolio namely Candelaria Mine project (in Nevada), Cherokee project (also in Nevada), and the Phoenix Silver project (in Arizona). Figure-5 provides brief details about these projects.
Figure-5 (Source: Company Presentation, pg.3)
It's also worth noting that SLVRF recently completed the disposal of its Mexican assets (comprising 3 properties), with the intent to focus on its US assets, and to strengthen its cash position to enable smooth operations/exploration activities at the US assets. It's encouraging to know that 2 out of 3 projects are located in Nevada, including SLVRF's flagship exploration project (that is, Candelaria). According to the Fraser Institute's Annual Survey of Mining Companies 2020 (released in February 2021), Nevada claims the no.1 spot as the lowest-risk mining jurisdiction in the world (check the full report here). Note that the said report takes into account both mineral, and policy considerations while assigning these ratings. Even if we ignore the ranking assigned by this report, we cannot ignore the fact that the US, and Canada are generally considered Tier-1 mining jurisdictions; whereas Mexico lies somewhere between Tier-1 and Tier-2. That said, I believe SLVRF's decision to dispose of the Mexican assets in an attempt to focus on the US assets, is a wise move [case in point; First Majestic Silver (a Mexico-based silver producer) is troubled on account of an ongoing tax dispute with the Mexican authorities].
Apart from having operations in a Tier-1 mining jurisdiction, the other reason why Candelaria is the focus of SLVRF's exploration activities is the scalable resource at this property. The project is located on a belt that's been mined for silver since 1859. The Candelaria project has two major deposits (Mount Diablo Pit and the Northern Belle Pit), and hosts a 'M&I' (read: Measured and Indicated) resource of 46.63 Moz AgEq (read: a million ounces of silver equivalent resource) together with an 'Inferred' resource of 36.65 Moz AgEq. Note that this is a historical resource estimate of the property, and SLVRF's primary operational goal is to confirm the resource underlying this property through ongoing drilling/exploration activities. The operational model of Candelaria is based on future 'heap leach' mining methodology, and the 2020 Heap Leach Pads Technical Report assumes average LoM (read: Life of Mine) silver price of $20/oz, and gold prices of $1,500/oz. Presently, both gold and silver prices are significantly above these levels (even though both PMs are currently in correction mode) and I see further increase in project resource given a favorable 'long' outlook for silver prices (as discussed earlier).
Impressive performance on the E&D front
SLVRF has done well on its 15,000 meter proposed E&D (read: Exploration and Drilling) program at Candelaria. The company's latest news announcement reveals that a total of 9,381 meters (>50% of total drilling target) have been drilled to date. Plus, these drilling activities are yielding impressive results. To put that into context, I'd mention some of the key resource grades highlighted during the 2020-2021 drilling/exploration programs:
- 1,129 g/t Ag plus 1.33 g/t Au over 8 meters within 28 meters at 350 g/t Ag plus 0.45 g/t Au (hole ID: SO-060).
- 407 g/t Ag plus 0.5 g/t Au over 6.1 meters within 9 meters at 295 g/t Ag plus 0.40 g/t Au (hole ID: SO-060).
- 1,032 g/t Ag plus 1.51 g/t Au over 3 meters within 12 meters at 407 g/t Ag plus 0.55 g/t Au (hole ID: SO-059).
- 894 g/t Ag plus 2.84 g/t Au over 2 meters within 8 meters at 237 g/t Ag plus 0.70 g/t Au (hole ID: SO-053).
- 502 g/t Ag plus 0.95 g/t Au over 8.2 meters, and 396 g/t Ag plus 0.58 g/t Au over 2.09 meters within 17 meters at 318 g/t Ag plus 0.58 g/t Au (hole ID: SO-048).
These grades fit well with SLVRF's expectation that Candelaria is the highest-grade silver project in Nevada. The map below (Figure-6) shows that SLVRF's drilling priority is to target the 1.5 kilometers belt covering the 'Deep Diablo Pit' extension, and the 'Northern Belle Pit' extension. Then again, the objective of these drilling activities is to specify more clearly, the underlying resource potential of the two key deposits at the Candelaria project.
So what's the essence of these drilling activities?
The ongoing drilling activities are just part of the story that leads to production. According to SLVRF, the next steps would include metallurgical testing of the resource to ascertain resource quality, that'd be followed by a PFS (read: Pre-Feasibility Study), and finally a FS (if that's needed) before Candelaria can head into production (Figure-7).
It's all about cash management
To facilitate its business model that's based on exploration of three US-based mining properties, SLVRF has structured its liquidity position such that the cash flows could be conveniently managed in line with the long timelines (associated with project development). It's my view that these financing transactions have been structured such that SLVRF does not run short of cash. For instance; if we review the Mexican assets disposal, we find the purchase consideration comprises CA$ 6,000,000 that's bifurcated into the following:
- Payment of CA$ 1,250,000 cash on deal closing,
- Issuance of 4,375,000 shares of Silverton (the acquirer) to SLVRF,
- Payment of CA$ 750,000 cash; 18 months after deal closing, and
- Payment of US$ 500,000 cash; 24 months after deal closing.
- Payment of a 1.5% "NSR Royalty" from Silverton to SLVRF on future production from each mining asset sold (if Silverton re-purchases 2/3 of the Royalty from SLVRF, it'll have to pay US$ 500,000 to SLVRF against each property)
Likewise, when we consider the Option agreement to acquire the 100% ownership interest in the Candelaria project from SSR Mining (SSRM), we find that the Option agreement has been restructured to allow a more long-term/production-oriented view on financing the transaction. For reference, the prior agreement to pay US$ 1,000,000 (in SLVRF's shares) to SSR Mining has been amended last year, to allow payment of US$ 1,000,000 to Maverix Metals (MMX) upon Candelaria achieving commercial production of not less than 2.5 Moz Ag each year (the "Production Payment"). For more details about the amended Option Agreement on Candelaria project, take a look at Figure-8.
Figure-8 (Source: MD&A, Q3 2020-pg.3)
In my view, the above financing transactions highlight the management's ability to ensure that liquidity requirements are adequately met (to enable continuous E&D activities) while keeping in view the long-term project development timelines.
A brief account of SLVRF's other projects
The 'Cherokee' property is 100%-owned by SLVRF. It represents a high-grade, silver-copper and gold project on which SLVRF has already commenced its 2020 exploration program (in August 2020). The exploration program is focused along a 12 kilometer strike hosting multiple PM and BM (read: Base Metals) style epithermal veins. SLVRF discovered several new promising vein areas during the 2019-2020 exploration program, and there's surely room for more positive news on the project's exploration front. SLVRF's FY 2021 targets for Cherokee include mapping and sampling of high-grade veins, assessing the project's geophysics, and publishing the exploration results during the year.
Similarly, SLVRF has an option to acquire 100% interest in the promising 'Phoenix Silver' project. Of course, this project has a lot of exploration potential but the main reason why I call this project 'promising' is because of the recent discovery of the 417 Vein; representing an angular vein fragment weighing 417 lbs (or 189 Kgs). SLVRF expects that ~70% content of this boulder is silver. Meanwhile, silver content of other smaller boulders (typically weighing ~100 lbs or more) is ~50% (Figure-9). In my view, these impressive ore discoveries imply a promising future for SLVRF's exploration program at the Phoenix Silver project.
Figure-9 (Source: Company Presentation, pg.20)
Risk Analysis and Investor Takeaway
So basically, we're seeing a very long timeline (and one that's not yet certain) before the Candelaria project could finally move to production status; and that presents an element of risk, in my view. For one, we cannot be sure what'd be the prevailing silver price environment when commercial production commences from Candelaria. Second, the time of full-scale production (not test production) from Candelaria is not certain. The same risk assessment also holds true for the other two projects. Since the company's focus is to explore, and potentially develop the Candelaria project, I see the possibility of acquisition of one (or both) of the other projects.
From an investor's perspective, I see that the company hosts a portfolio of promising exploration projects located in safe mining locations. However, considering the prevailing silver price environment (which may potentially deteriorate in the near-term), only a small proportion (typically not more than 8-10%) of your mining assets portfolio should comprise of SLVRF, and that too with a long-term investing horizon.
This article was written by
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