How undervalued is Golden Arrow Resources Corp (CVE:GRG) and how come it hasn't attracted more investor appreciation? These are questions posed by Peter Epstein in his latest research note.
The tie-up of its Chinchillas project with Silver Standard Resources Inc's (TSE:SSO, NASDAQ:SSRI) Pirquitas mine in Argentina was finally sealed at the end of March after an option period.
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Silver Standard will be the operator of the combined assets in a new joint venture, holding 75%, while Golden Arrow will have 25%.
Epstein notes that in this 18-month period, Silver Standard pumped in around US$16mln, plus a C$2mln option payment.
"Among other things, this capital paid for 24,000m of drilling, engineering studies and metallurgical test work, culminating in a pre-feasibility study (PFS). Overnight, Golden Arrow jumped from explorer to 25% owner of a producing mine and mill," he says.
Investors were underwhelmed, he suggests, by the PFS, which outlined an eight year Chinchillas project with a post-tax NPV (net present value) of US$178mln, of which, a 25% share would be US$ 44.5mln, or equal to about 60 Canadian cents a share.
He also points to possible uncertainty as to how management will fund Chinchillas’ estimated US$ 20.25mln capital requirement over the next 18 months.
But Epstein answers this by saying that once the joint venture deal closes, Golden Arrow will have around C$27mln, or US$20mln of cash.
"On top of that, there’s an additional C$ 7mln from in-the-money options and warrants, plus an estimated C$ 11mln stretching out into mid-2018 from its share of cash flow from processing stockpiles at the Pirquitas mine," he suggests.
In terms of the pre-feasibility study, Epstein says there is a "substantial" amount of upside to the net present value, including from a potentially extended mine life and higher production.
The Pirquitas mill operated at an average of 5,175 tons per day (tpd) in the final quarter of 2016- 30% more than nameplate, so if this alone was replicated rather than at 4,000tpd in the PFS, the economics would increase by 40%, suggests Epstein.
Other upside could come from lower upfront and sustaining capital costs per unit, he adds.
Last month, Golden Arrow's chief executive Joseph Grosso said the joint venture was a "classic win-win" with benefits to both parties.
"In one transaction, Golden Arrow has leapfrogged into producer status overnight and secured itself a substantial part of the residual production value (and immediate share of the revenues) at Pirquitas and brought much closer the pipeline value of Chinchillas, which would otherwise have been a long and expensive slog to production," he had said in a letter to shareholders.