Guanajuato Silver Wants to Revive Tired Former Producers

• Guanajuato Silver Company (G Silver) now operate 4 former producing mines and 3 production facilities in Mexico.
• The company produced around 950,000 silver equivalent ounces last quarter. Their costs were high at over $22/oz due to updating the acquired mines and a strengthening Mexican peso.
• Guanajuato Silver has invested around $50 million so far to acquire and expand their mines. They plan to continue financing through equity, debt and cash flow.
• The company expects to reach profitability in 2024.
• Guanajuato Silver is focused on silver due to its belief in its increasing use in solar panels and other industrial applications.

Guanajuato Silver Company operates 4 mines and 3 production facilities in Mexico after acquiring distressed assets over the past few years. The company aims to continue expanding silver and gold production, taking inspiration from First Majestic Silver's growth.

In its most recent quarter, Guanajuato Silver produced approximately 950,000 silver equivalent ounces. The production mix comprised 50% silver, 40% gold and 10% base metals. This focus on precious metals contrasts with some other Mexican miners where base metals often make up a larger share. Guanajuato Silver's all-in sustaining costs averaged over $22/oz last quarter. Restarting previously closed mines involves productivity challenges that can increase costs. For example, the Valenciana mine only resumed operations in December 2021. Upgrading infrastructure such as shafts and rail may enhance productivity and lower costs going forward.

Additionally, the rising Mexican peso has impacted costs. G Silver's revenue is in USD but around 75% of expenditures are in pesos. The currency appreciated about 20% against the dollar over the past year, creating headwinds. However, the peso has reversed slightly downwards recently, potentially relieving some cost pressure if sustained.

So far Guanajuato Silver has invested approximately $50 million in acquiring and expanding their Mexican mines. The company financed this through a mix of equity, debt and payments to previous owners. For example, the El Cubo mine was purchased for $15 million, despite previously changing hands for $200 million. Going forward, Guanajuato Silver plans to continue financing growth through similar means. The company wants to avoid excessive debt burdens. Guanajuato Silver has supportive institutional shareholders like Fidelity and partnerships with debt providers like Ocean Partners.

CEO James Anderson projects the company may reach profitability in early 2024 once capital investments mature. Reopening old mines requires major upfront investment before production and cash flow can sufficiently expand. The company is working to access higher-grade zones and improve infrastructure across its mines.

Guanajuato Silver remains focused on expanding silver production in Mexico, though some geographic diversification is possible. The company is assessing further acquisitions of distressed mines, and potentially larger "greenfields" development projects. However, quality acquisition opportunities appear limited currently with many assets for sale.

Silver Demand May Trend Upwards

Guanajuato Silver targets silver due to its growing industrial uses, constrained new mine supply, and potential upside from clean energy growth. These factors could support higher silver prices longer-term.

Industrial applications account for over 50% of silver demand. Electronics utilize more silver than any other industry, with photovoltaic demand forecast to rise 8% in 2023. With energy prices elevated, government incentives for solar power like Germany's parking lot scheme may persist. Meanwhile, mine supply growth lags. The Silver Institute forecasts total silver supply will rise just 1.1% in 2023. Few major new deposits have been discovered recently and smaller mines face challenges expanding. This supply/demand imbalance may place upward pressure on silver prices.

Guanajuato Silver's leadership has extensive industry experience. CEO James Anderson expresses confidence in his 100-person Mexican mining team's skills, led by veteran Ramon Davila. Their specialized knowledge of narrow vein underground mining could help maximize productivity at G Silver's complex assets.

Mexico’s Mining Policy Carries Uncertainty

Mexico's current government has not been particularly mining-friendly since taking power, downgrading the mining ministry and increasing taxes. With elections upcoming in 2024, miners hope a more supportive administration may emerge.

However, extractive companies have limited ability to shape policy in their operating countries. Governments make policies based primarily on local political pressures. More diversified emerging economies like Mexico's have the additional latitude to introduce mining policy changes if desired. Therefore, miners in risky jurisdictions face enhanced uncertainty over future policy shifts. Taxes or regulatory changes can quickly curb profitability. While Mexico's mining industry looks resilient overall, political changes could potentially introduce some volatility for Guanajuato Silver.

Key Investment Considerations

For investors comfortable with the risks, Guanajuato Silver provides exposure to expanding silver production in Mexico. However, profitably developing mines into sustainable operations requires significant capital and skill. Stock liquidity also remains limited for a smaller miner.

Potential catalysts include:

• Growing production and lowering costs
• Higher silver prices if demand strengthens
• Accretive acquisitions or new discoveries
• Improved mining policy support in Mexico

Before investing, understanding Guanajuato Silver's key risks is critical:

• Execution risks during asset turnarounds
• Dilution if unable to finance at reasonable rates
• Silver price volatility or weakening industrial demand
• Adverse policy shifts in Mexico

Guanajuato Silver will likely remain a volatile stock best suited to risk-tolerant investors. However, the company offers leveraged exposure to potentially rising silver prices through its production growth pipeline. For investors bullish on silver over the long term, G Silver mines Mexico's historic silver districts to capitalize on this trend.