VSA Morning Miner, 17/11/21
Guanajuato Silver (Guanajuato Silver Company Ltd (TSX-V:GSVR, OTCQX:GSVRF))
Guanajuato Silver (Guanajuato Silver Company Ltd (TSX-V:GSVR, OTCQX:GSVRF)) has announced a historic Collective Bargaining Agreement (CBA) with the union representing workers at El Cubo, the mill and mine which last month GSVR restarted and we expect to produce over 2mnozpa AgEq. The previous agreement had been in place for 70 years and had been applied to multiple previous owners of the mill, however, it was not without friction and past operators have clashed with the unions. GSVR has taken a different approach to working with the union and indeed the community and we believe that today’s announcement is reflective of that and sets up the mine for a longer future.
GSVR has highlighted that the new CBA is appropriate for the projected mine economics and represents significant cost savings compared to the former CBA. This arrangement will likely enable a longer more profitable mine life leading to greater job security for the union workers. However, the key is in GSVR’s approach of mutual respect which has enabled these negotiations to be successfully agreed. GSVR’s operational approach is a step change in style; as highlighted by the workforce and Board composition and indeed the renaming of the company. Only one member of the senior operating team is an ex-pat. Ramon Davila and Hernan Dorado Smith have decades of experience of silver mining in Guanajuato District and as Board members and shareholders of GSVR are indicative of this approach as well as being instrumental in the negotiations given their strong local relationships.
A US$490k one off fee will be payable in instalments over an 18 month period as compensation for terminating the previous CBA; it may be settled in part in equity which would further align interests. Further details have yet to be announced but these could enhance our forecasts.
Additionally, GSVR has announced the early repayment of the US$2.5m promissory note to Endeavour Silver (EDR CN), a positive step highlighting the company’s confidence in its ramp up phase. EDR and GSVR have agreed to reduce the principal by US$25k and that EDR will settle the associated Mexican VAT of US$390k in acceptance of further shares in GSVR. 901,224 shares will be issued to EDR taking their holding to 10.76% of GSVR, a further show of commitment to the company and its El Cubo strategy; the additional shares have no material impact on our target price.
We reiterate our Buy recommendation and C$1.10/sh. target price.
Oliver O'Donnell, CFA, Head of Research & Natural Resources Analyst | T: +44 (0)20 3617 5180 | E: oodonnell@vsacapital.com
Paul Renken, Senior Geologist | T: +44 (0)20 3005 5011 | E: prenken@vsacapital.com
VSA Capital Research | T: +44 (0)20 3005 5000 | E: research@vsacapital.com
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