Golden Minerals: A Look At The Valuation After The Drop

Summary

• Golden Minerals has slid more than 40% from its highs following the frothy sentiment we saw in February in the silver space.
• This pullback has occurred despite the fact that the company remains on track to meet its guidance of ~13,000 ounces of gold production this year from its Rodeo Gold Project.
• At a current market cap of ~$122 million, Golden Minerals is valued at ~$3.58/oz based on solely measured & indicated ounces at Rodeo and Velardena.
• While this is not an unreasonable valuation for a junior producer, I see better value elsewhere in the sector.

Photo by Ivan Boryshchak/iStock via Getty Images

It's been a rough few months for the Silver Miners Index (SIL) after we saw a brief bout of extreme exuberance in the sector in early February. Typically, parabolic rallies in cyclical stocks do not end well, and many names, including Golden Minerals (NYSE:AUMN), are now down more than 40% from their highs. This weakness is despite the fact that Golden Minerals has begun mining at its Rodeo Project and should generate positive free cash flow this year. However, while Golden Minerals is reasonably valued at ~$3.58 per M&I ounce, junior producers typically trade at a massive discount to peers. Therefore, I still don't see the valuation as overly attractive at $0.75 per share.

(Source: Company Presentation)

Golden Minerals has had a busy few months with the company announcing the commencement of mining activities at its Rodeo Project in December and its first production in mid-January. This is a welcome change from previously leasing its oxide mill to Hecla (HL) to process material, given that mining on its own should generate substantially more revenue than the $7.7 million reported in FY2019 related to the services provided under the lease. Based on the most recent update, early production seems to be progressing well, with 1,559 gold-equivalent ounces [GEOs] produced in Q1 and just over 1,000 GEOs of dore sold.

(Source: Company News Release)

As shown in the chart above, Golden Minerals is tracking well in line with its guidance of 12,000 to 14,000 ounces of gold produced in FY2021, given that nearly ~1,400 ounces of gold were produced in the ramp-up period in Q1 alone. This production was based on ~18,800 tonnes being processed at an average grade of 3.0 grams per tonne gold with an ~84% recovery rate, or a throughput rate of 209 tonnes per day. However, Golden Minerals has noted that it has now installed a second regrind mill circuit at its Velardena oxide plant, with the goal being that this will allow for higher throughput for the harder material being trucked from Rodeo. The plan is for production to ramp up to 450 tonnes per day by 2021, which would be more than double the current throughput rate (209 tonnes per day).

(Source: Company News Release)

Assuming Rodeo can process 450 tonnes per day or nearly ~40,000 tonnes per quarter at a head grade of ~3.3 grams per tonne gold, this should translate to the production of more than ~3,600 ounces of gold in Q3 and Q4. So, to meet the low-end of the company's target of 12,000 ounces of gold for FY2021, the company will need to produce roughly ~3,400 ounces of gold in Q2, which looks like a viable target assuming the company can meet its goal of 450 tonnes per day this month.

(Source: Company Presentation)

If we assume that Golden Minerals can meet the low end of its production targets of 12,000 ounces of gold (GLD) and 25,000 ounces of silver, Golden Minerals will generate $21.6 million in revenue in FY2021, up substantially from the $7.7 million in FY2019 and $5.6 million in FY2020. At first glance, Golden Minerals might appear undervalued given that it would be trading at just below 6x revenue at a market cap of ~$122 million. However, junior producers (those producing less than 100,000 ounces of gold per year) typically see very discounted multiples. In fact, they don't trade anywhere near larger producers that can command valuations of up to 6x sales. In fact, they rarely trade at more than 3x sales. These revenue projections are based on all of this metal being sold at $1,750/oz gold and $25.00/oz silver, to be conservative.

(Source: YCharts.com, Author's Notes)

As we can see in the chart above, senior gold companies which produce more than 1 million ounces of gold per year typically trade at between 3.0x to 5.0x sales on a trailing-twelve-month basis. Meanwhile, junior gold producers that produce less than 100,000 ounces of gold per year trade between 1.0x sales and 3.0x sales. With Golden Minerals trading at 5.5x forward sales based on projected revenue of ~$21.6 million at conservative gold prices, the stock does not look all that cheap here relative to what's available elsewhere in the sector. Even if we were to assume much more favorable metals prices of $1,850/oz gold and $28.00/oz silver, revenue projections would increase to just $22.9 million, still leaving Golden Minerals at more than 5.3x forward sales.

(Source: Company Presentation)

Some investors might argue that this is far too conservative of an estimate when it comes to Golden Minerals' long-term potential, given that its Velardena sulfide mill is sitting idle while its oxide mill processes Rodeo material. While it's certainly true that Velardena could become a significant source of revenue in FY2023, this is still more than two years away, and the project is in the Preliminary Economic Assessment [PEA] stage. So, while the challenge of low payable gold recovery may be solved with the addition of a bio-oxidation circuit to improve recoveries, there is still no guarantee that Velardena will go into production or what the timeline will look like. The proposed timeline is above, but with reliance on a PEA and solely measured & indicated resources, it is still preliminary in nature.

(Source: Company Presentation)

The other issue is that Rodeo only has a ~2-year mine life, and the Velardena Project will need to offset Rodeo, or revenue will drop considerably beginning in FY2023. This means that unless Golden Minerals can build on its resource base at Rodeo, the company's second project is not representing organic growth to a higher production profile but is mostly replacing the cessation of mining activities at Rodeo.

Even if we assume that all goes well at Velardena and the project restarts in FY2023 with ~25,000 GEOs produced, this would translate to ~$43.8 million in revenue at a $1,750/oz gold price, leaving Golden Minerals trading at 2.8x revenue, which is where companies like Karora Resources (OTCQX:KRRGF) trade currently. The difference is that Karora Resources is a ~100,000-ounce producer in the most attractive jurisdiction globally, and Golden Minerals is a producer in a Tier-2 jurisdiction, Mexico. If we assume an upside case that Rodeo stays in production and finds new resources, Velardena restarts, and the company sells 30,000 GEOs FY2023, revenue would come in at ~$52.5 million at $1,750/oz gold, leaving the company valued at 2.3x FY2023 sales while Karora trades at 2.5x FY2020 sales.

(Source: Company Presentation)

Based on the above assumptions, I would argue that while Golden Minerals is not expensive if everything goes right, it's not that cheap relative to peers either. This is especially true given that Mexican producers typically trade at a large discount to their peers in better jurisdictions. Even with two mines online, Golden Minerals would still be a Tier-2 producer with a junior production profile. For this reason, I don't see the valuation as baking in a large margin of safety here, even if the stock is 40% from its highs.

If we look at valuing Golden Minerals on resources at its Rodeo and Velardena Projects, I believe it's best to focus solely on measured & indicated resources as they are in the highest confidence category. Looking at the above table and using an 80 to 1 gold/silver ratio, we come up with ~3.9 million ounces of measured & indicated silver-equivalent resources at Rodeo and ~30.5 million measured & indicated silver-equivalent resources at Velardena. Combined, this equals 34.1 million silver-equivalent ounces, which places the value on each ounce at ~$3.58. This is not an unreasonable valuation compared to other producers trading at well above $5.00/oz, but as noted earlier, junior producers typically see a large discount, and it's hard to even classify Golden Minerals as an established producer with revenue of less than $50 million per year.

Rising metals prices will lift all boats, but I think there is better value in names like GoGold Resources (OTCQX:GLGDF) and Karora Resources, which have more upside to their stories and better reward to risk propositions. Golden Minerals will likely do very well if it announces a Velardena restart and silver stays above $25.00/o. Still, I don't see much downside protection if metals prices continue to slide, given that it's a smaller name with a less inspiring story. Therefore, I don't see the stock as a compelling Buy here, even after this 40% correction, and I remain focused elsewhere in the sector.

Analyst’s Disclosure: I am/we are long GLD, GLGDF. 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.

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.