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Arian Silver: Significant room for growth if miner can seal debt deal

Arian Silver  is a stock that has, until recently, been among the most actively traded on AIM. Lacking direction, the share price of the Mexico-focused junior is hovering around the 32p mark, valuing the business at just under £11mln. We assess whether things might be looking up for the London and TSX-litsed junior.
Arian Silver: Significant room for growth if miner can seal debt deal

Arian Silver (LON:AGQ, CVE:AGQ) is a stock that has, until recently, been among the most actively traded on AIM.

Lacking direction, the share price of the Mexico-focused junior is hovering around the 32p mark, valuing the business at just under £11mln.

This rather paltry market capitalisation reflects two factors:

-     An extended period of down-time as the group has switched from toll milling the silver and lead from its San Jose mine, in the Zacatecas district in Mexico, to acquiring and commissioning its own plant;

-     Worries that group will fail to refinance a $15.6mln convertible note it has with Platinum Partners of New York that matures in September.

The latter first: via sources plugged into the network of boutique lenders and financiers in the US, Proactive has learned that chief executive Jim Williams is gaining significant traction for the story (more of this later).

Meanwhile, the refurbishment of the second-hand plant the company acquired should be complete in September or October, allowing the silver miner to restart production.

If we assume a staged ramp-up to the optimum production level, then we should see the plant operating at half capacity of around 750 tonnes per day of ore for 12-15 months, rising to 1,500 tonnes thereafter.

Output would be 1.3mln ounces of silver a year, rising to 2.6mln ounces. It might go even higher if the silver head grade increases with depth, which is usually the case with these well-modelled epithermal vein systems of central Mexico. 

With all-in costs of around $13 an ounce, Arian will be generating enough cash to pay off its debt and break-even by year four.

Based on the publically available figures, the repurposed Arian has a net present value of $72mln at $20 silver, applying an 8% discount rate.

That’s the equivalent of 118p per share.

Here’s where it gets really interesting. This little piece of spreadsheet analysis doesn’t take into account any upside in the silver price. 

Neither does it account for any increase in silver head grade. Even a small uptick in either, or both of these could have a disproportionate impact.

The fundamentals for the precious metal are good with industrial demand buoyant as the world’s major economies move into growth mode.

At the same time, this is hardly an oversupplied market.

A little sleeper in there is the zinc credit. While recoveries are only going to be in the 50% range (it is a second bi-product to the silver-lead), it would move the needle if, as widely predicted, the price of the base metal advances at the rate of 50% forecast over the next 12-18 months.

Also, those familiar with underground silver mining might look at San Jose and conclude the head grade is only going to rise as Arian mines deeper into the deposit.

As the grade improves, so do the recoveries, which then has a knock-on and positive impact on output and ultimately bottom-line financials.

Longer term it is eminently feasible that San Jose can hit a production target of 5mln ounces a year given it has been permitted for daily production of 2,500 tonnes a day – 1,000 tonnes above the current maximum capacity of the recently purchased processing plant.

At that level you have a very sizeable project – and all put together at a fraction of the cost of starting something like this from scratch.

Now here’s the tricky part: all of this is just pie in the sky if Arian fails to refinance its loan with Platinum.

It is understood that the New York hedge fund remains very supportive of management should it require some wiggle room to conclude alternative finance.

There may even be an offer to re-finance with Platinum.

However, one thing the lender won’t be doing is converting the senior debt into equity at the current price. The trigger for that is C$1.10 a share price (the stock is also quoted in Toronto) and we are well shy of that level currently.

Now those sources plugged into the New York specialist finance community tell us Williams and his team may be close to securing a finance package of up to $35mln.

It is understood repayments would be over a longer period of time, perhaps with an initial holiday period. The coupon, meanwhile, even though right now still only indicative, is said to have much better terms than the Platinum structure.

People familiar with the company say Williams’s plan last year had been to raise $30mln instead of the $15.6mln he finally secured.

This higher figure would have allowed Arian to be more aggressive in its development of the mine, while also funding the acquisition of the processing plant.

So a new inflow of funds of the quantum and on the terms speculated would be transformational.

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