How can an investor find a company which has real potential but is trading at a knock down price?
Junior mining investors can be forgiven for frustration in the face of a market where even the best stories don’t seem to get much traction.
The Canadian junior mining is locked into a “one size fits all” regulatory regime under National Instrument 43-101. Compliant technical reports, resource estimates, Preliminary Economic Assessments and then full, bankable, feasibility studies make a lot of sense for companies which are taking a green or brown field exploration play and trying to make a mine. With new mine CAPEXs running to the 100s of millions of dollars, de-risking is the name of the game. But this process makes less sense where a company has significant historical data and is able to get right to the business of mining.
You would think that having “actuals” rather than “estimates” would be seen as significantly de-risking a project. But that is not how the regulator sees it. Historical drill results count for nothing unless they are “confirmed” with a modern drill program. Which means that a company which is actually mining, but has not completed the required 43-101 steps, is not allowed to talk about resources, ore or a deposit in any but the vaguest way and is required to festoon any claims it makes with disclaimers.
We saw an example of this last week when Bayhorse Silver (V.BHS) (KHPLF) was halted. The company had engaged Fundamental Research – a paid research house in Vancouver – to do an analysis of the company’s prospects. Fundamental’s report was positive and Investment Pitch Media used that report as the basis of a video. That video, which was not reviewed by the company, contained a number of statements which are not allowed without full 43-101 compliance.
In its mea culpa press release Bayhorse outlined the non-compliant language used (emphasis added):
Investment Pitch Media news release contained a material misstatement that there was a mineral reserve estimate….
The Company advises that it does not have, nor has it stated in its ongoing disclosure that there are mineral resources or mineral reserves at the Bayhorse Silver Mine, but in its ongoing disclosure, has fully disclosed the historical estimate on the Bayhorse Mine as reported by Herdrick (1981) accompanied with the required disclaimer
The Investment Pitch news release contained a statement that the Company had significantly extended the historic reserve estimate along strike. This is a misstatement and is incorrect and contrary to the disclosure requirements of S. 2.2 and 2.3 of National Instrument NI 43-10.
The Company has consistently stated in its ongoing disclosure, accompanied by the required disclaimers, that historic information suggests a potential Exploration Target of between 500,000 and 1,000,000 tonnes grading between 17-20 ounces silver per ton. This potential exploration target is conceptual in nature, there has been insufficient exploration to define a mineral resource and it is uncertain if further exploration will result in the target being delineated as a mineral resource.
The Investment Pitch News Release contained a statement that the Company estimated production of between 640,000 to 1,2 million ounces of silver over the next 12 months from the Bayhorse Mine.
The Company advises that production estimates must be supported by a preliminary economic assessment, pre-feasibility study or feasibility study. The Company has not completed or filed a PEA, PFS or FS to support such disclosure.
Note Bayhorse, in its mea culpa, is not saying that these statements are not true; rather it is acknowledging they are statements which, no matter how correct, cannot be made within the four corners of the 43-101 rules.
As is common in halt situations the share price of the company took a hit. Where it had been trading in the $0.20 to $0.25 range it kicked down as low as $0.165.
Back in February, no-nonsense commentator Bob Moriarty wrote about Bayhorse at Streetwise Reports,
“I say that mining is the art and science of extracting minerals from the ground at a profit. Mining is not poking a bunch of holes in the ground until a project looks like a giant Swiss cheese. Counting ounces is not mining: It may eventually contribute to profit but for the most part, counting ounces is an expense.
Bayhorse did a couple of thing outside the box. They aren't drilling until the cows come home. The production decision was based on a Herdrick 1981 technical report showing about 3 million ounces of high-grade silver and 1.2 million ounces of lower grade material. There is no feasibility study and they smile as they say they don't need one while recognizing the lack of a feasibility study adds risks while saving loads of money…
Graeme O'Neill realized that if the grade is high enough, you could make a whole lot of mistakes and still make money. And obviously wasting billions of dollars drilling useless holes has put more juniors out of business than a lack of ore. He also recognized that if the rules in Oregon wouldn't allow process within the state, shipping costs to more mining friendly states would be key.
He did a lot of research and concluded that if they brought in a Steinert ore sorting machine from Germany they could raise the average grade of the ore from 17/20 opt (ounces per ton) to 150/160 opt, making shipping costs reasonable.
I love it. He's guessing they will produce about 640,000 to 1,280,000 ounces of silver this year. I'm so sick of guys presenting me formal 43-101-blessed numbers and promptly blowing up their companies.”
Running a public company with an eye on the bottom line is not a new idea. Getting to free cash flow and then to profit is every junior’s goal. But sometimes that means going directly to a mining program rather than marching through the 43-101 steps.
For investors, the 43-101 regime is designed to quantify and disclose a project’s risks as well as its potential. However, so long as there is proper disclosure of the material facts a company is proceeding on, investors have the option of doing their own due diligence and assessing the risks a company presents for themselves absent the 43-101 steps.
As Moriarty points out, a 43-101 compliant set of numbers is no guarantee a company is going to be able to actually build a mine.
Working outside the 43-101 framework presents its own challenges. In particular, institutional investors are leery of companies operating outside the 43-101 box. Which means that a company like Bayhorse needs to be very creative about how it meets its financing goals. Fortunately, as a producing silver mine, Bayhorse has options non-producers do not: it has a product to sell.
At a guess, Bayhorse will be looking for a forward-looking “off take” agreement with an entity with the size required to buy most or all of the mine’s projected production. If the company can get such an agreement, even if the terms of that agreement are behind an NDA, it will have very little trouble raising money on the strength of that agreement.
Running the mine on the cash flows the mine generates is very good news for investors because it means there is much less dilutive pressure on the shares of the company. One of the ways companies “blow up” is by having to issue rafts of shares simply to keep the doors open and finance the CAPEX. This should not be an issue for Bayhorse.
Going forward, the milestones for Bayhorse are a bit different from the milestones which would be expected from a 43-101 compliant company. And evaluating those milestones requires a bit of back of the envelope math.
News releases detailing how much material is running through the sorter are important. So are releases indicating what is being done with the fines and material which, for whatever reason, is unsuitable for sorting. Because Bayhorse is blasting underground, a significant portion of the silver bearing rock ends up as fines so recovery of that silver is important. Business arrangements, particularly where there is an agreement to purchase some or all of the upgraded material will also be crucial to the success of Bayhorse.
Obviously, the price of silver is important as well. It is not, however, something Bayhorse can control. What Bayhorse can do is use sorting technology, recovery technology and intelligent mine planning to reduce the costs and increase the shipping grades at its Oregon mine. The lower the all in cash cost per ounce of silver, the less the fluctuations in the price of silver matter to Bayhorse investors. With one, big, exception: having a low cost silver mine in operation gives an investor significant exposure to the possibility of a substantial upwards move for silver.
The final item an investor looking at Bayhorse needs to pay attention to is the ongoing expansion of the mine’s silver showings. While Bayhorse is not filing 43-101 resource estimates, it is disclosing what it is finding as it extends the workings of the mine. And, of course, the company is not flying blind. While the Herdrick 1981 technical report does not qualify for 43-101 status, it can guide Bayhorse to where the best chances of finding more silver are.
The biggest issue for an investor in Bayhorse is the need for the company to provide pretty much continuous updates on its progress and production. While there are still some flow chart issues to be worked out, a regular, quarterly, then monthly, report of throughput tonnage and, in due course, ounces of silver and other materials sold, would go a long way towards inspiring investor confidence. All the more so as the credits for the other metals in the Bayhorse rock, begin to show up: copper and gold are part of the system. So is zinc and there is some hint of rarer and more valuable minerals.
There is no need for a 43-101 set of reports if a mining company can produce a monthly announcement of how much material it has shipped, how many ounces of silver that material contained and how much money the company has been paid for those ounces. Actuals beat estimates every time.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.