Golden Minerals (AUMN) - Gold-Silver Player Needs to Deliver Some Upside

In this article, I will be exploring the story of Golden Minerals. Gold and silver are both very topical at this moment, so what better kind of company to interview than a gold-silver explorer?

Golden Minerals was formed in 2009 and is based out of Colorado. On the face of things, it looks like a fairly archetypal mineral exploration company. However, the company's portfolio is rather unique. The company's 3 core assets should offer investors leverage to the rising prices of gold and silver, but it is a complex riddle that needs analysis. The 3 projects include Velardeña, situated in Mexico; El Quevar, located in Argentina; and Rodeo, also situated in Mexico. Golden Minerals also has assets in the US and we discussed these with Rehn. We'll get to that in a minute. For now, let's focus on the 3 South American projects.

Velardeña

First up is flagship polymetallic project, Velardeña. The company released an updated PEA outlining its potential in April 2020. Here are some of the highlights in USD. Silver is the clear focus, and the PEA assumes a base case of $1,324/oz Gold, $16.23/oz Silver, $0.90/lbs Lead and $1.25/lbs Zinc. 

1. Pre-Tax NPV(8%): $85.9M
2. Pre-Tax IRR:  138.6%. This makes Velardeña a very economic project.
3. Pre-Tax Payback Period:  1 year
4. Pre-Production CAPEX:  $10.27M (inc. 10% contingency)
5. Post-Production & Sustaining Capital:  $15.93M (inc. 10% contingency)
6. Pre-Production Development Period:  1 year. Velardeña could be into production very quickly indeed.
7. Life Of Mine (LOM): 10 years
8. Contained Silver & Gold:  12.3Moz silver and 188Koz Gold. It isn't an enormous Resource, but this is of a reasonable scale.
9. Average Silver & Gold Grades:  337g/t silver, 5.15g/t gold. This is a high-grade project.
10. LOM Pre-Tax Free Cash Flow:  $130.2M
11. Cash Cost: $0.92/oz silver
12. AISC: $3.48/oz silver

Velardeña came into the picture in 2011, when Golden Minerals segued to production-ready assets in Mexico. It acquired two c. 20-year-old mills and a series of mines in the Velardeña District. Production was stopped in 2013 because of metallurgical issues; specifically, issues pertaining to gold recovery rates that were caused by narrow veins and general recovery issues. It took a while to resolve that riddle, but Rehn and his team are now confident they have sorted matters, having deduced a bio-oxidation workaround that retains the project's economics and is more realistic. This is not a huge project, but it is low cost, low risk and could be throwing off cash in a short timeframe. There is possibly an exploration upside too, so investors should keep that in mind.

What has Golden Minerals been doing at Velardeña in the meantime to strengthen its balance sheet? Well, the bio-oxidation mill has been leased out since 2015 to Hecla Mining Company for proceeds of around $5M pa in free cash flow. This was definitely a smart move and has allowed the company to minimise dilution where possible. To this end, Rehn explains that Golden Minerals will use the cash generated at Rodeo to get Velardeña into production.

The project's $10.27M CAPEX is derived from the need to conduct additional underground development and to upgrade the bio-oxidation facility. The remainder of the infrastructure is in place given the project's brief prior production.

El Quevar

When investors hear Barrick Gold has recently became involved in April via an earn-in agreement, their eyes but light up. I am sorry to disappoint, but this will be more a slow burn. Barrick has been unable to "sink their teeth" into things yet because of COVID-19 restrictions in Argentina. They will be getting to work "as soon as they can," hopefully towards the spring 2021. Barrick Gold is committed to funding at least $1M exploration work over the first 2 years. It is always a good sign when a major of this stature comes into the fold, but it is important to remember they have many, many option plays like this all over the world. They operate at their own speed and have their own drivers. The asset would need to be exceptional for them to move forward.

The Argentinian silver project has been optioned out on reasonable terms: Barrick can earn up to 70% of the project, leaving Golden Minerals with a responsibility to bankroll the addition 30% of the CAPEX. This is a good problem to have if it happens, and if Golden Minerals does need to pull the trigger, raising capital for a project of this kind on good terms should not be issue. However, the chances are low until there is significantly more data generated by Barrick Gold.

It is a 56,719ha project with 31 mining concessions in total. El Quevar's PEA, released in September 2018, is okay. Let's take a quick look at some of the highlights assuming a base silver price of $16.66/oz:

1. After-Tax NPV(5%): $45M
2. After-Tax IRR:  17%
3. After-Tax Payback Period:  3.4 years
4. Total Pre-Production CAPEX:  $97M (inc. $16M contingency)
5. Pre-Production Development Period:  2 years
6. Life Of Mine: 6 years (based on mineral resource estimate)
7. LOM Free Cash Flow: $80M
8. AISC: $9.45/oz silver

These are decent numbers and could create value once El Quevar is monetised. Investors will be hoping the Barrick Gold/Golden Minerals JV can accelerate things a little. They won't want to miss this gold cycle.

Rodeo

A small and strategically important project, Rodeo is Golden Minerals' means to get cash flowing to fund its more senior priorities at its other 2 projects. It is located just 90km away from the company's mill.

Rodeo is c. 20,000oz gold pa asset but its life-of-mine is just 2 years. It has an NPV(8%) of $22.5M at $1,622/oz gold. This is a low-cost, low-risk, open-pit gold mining operation that could eventually throw off $25M given its impressive cash costs of $800/oz gold. Creating this capital and then plowing it back into the ground at Velardeña will definitely sound like a protracted process to value creation, but it could work in the long run. The question is do investors invest now or later?

This is an investment that is unlikely to create a lot of short-term value, and this might be an issue for most. You see, since Golden Minerals' share price reached the heights of US$1 in late 2016, it has slowly and consistently declined. Though it has rallied in recent months, there have clearly been some legacy reputation issues regarding the company's struggle with metallurgy. It remains to be seen how Rehn can quell these concerns and cope with a potential overhang.

Golden Minerals is still targeting January 2021 for commencing production. The company will need to invest another $1.5M before is can make money. It is allegedly "well on its way" to obtaining a mining permit from the Mexican government. Mexico is a good mining country so permitting is a simple process, all things being equal. If Rehn delivers the next stage of this project in his promised timescale, will investors start to believe again? The company has just hit 24m grading 6.7g/t during its resource definition drill program, so mining it seems a no brainer.

Over in the US at Sand Canyon, a 4,220ha Nevadan gold-silver asset and one of the company's lower priorities, Golden Minerals has the option to earn 60% interest by financing $2.5M over 4 years plus $140,000 cash payments spread over 2020-2022. It is aiming for the initial drill programme to be complete by Q1/21 and its drill permit applications have been received. Santa Maria has an unappealing risk profile and should be sold when a suitable buyer comes along.

This story might seem a little small and boring, but exploration could be the key to driving some excitement into it. Once Golden Minerals gets into production, it will be on the hunt for low-hanging fruit and underground resource expansion. Velardeña is apparently open at depth and could offer much more upside than currently on show. This is an organic growth vessel that first needs to prove its competency and then needs to source an upside. Lots to do.

Lastly, let's take a quick look at the company's Q2/20 financials that dropped on August 6th:

1. Revenue of $1.2M with a net operating margin of $800,000. The $1.2M is $100,000 down on the same period in the previous year.
2. $3.7M raised via Barrick Earn-In Agreement and an additional £2.8M raised via a priviate placement in April.
3. Cash & equivalents position of $3.6M at the end of June.
4. Net loss of $0.02 per share.
5. $800,000 spent on exploration.

Company Website: https://www.goldenminerals.com/