Guanajuato Silver; 6M silver equiv. ounces in Mexico in 2024!

In looking over prior articles on Guanajuato Silver [G-Silver] (TSX-v: GSVR) / (OTCQX: GSVRF) there was some wishful thinking. Most notably in my views of future silver & gold prices.

I’ve been saying that at $23/oz. silver (“Ag“) + rapidly growing production, the Company offers an attractive story. And, what makes G-Silver even more compelling is the upside from; (faster growth, higher prices, lower unit costs, better recoveries).

Today, silver’s at $24.24/oz., and the Company just announced 2.15M Ag Eq. ounces were produced in 2022 with a solid 86.8% recovery in the 4th qtr. Management announced a tailings dry-tacking plan at El Cubo to expand capacity by an additional 15 years!

In the past year, Chairman & CEO James Anderson and his seasoned team in central Mexico have delivered success after success, enabling the faster growth to flourish. {see Corp. Presentation}. On January 17th G-Silver announced the restart of its third mill, and Mr. Anderson said,

“With the Cata mill now operational, G-Silver adds a third processing facility to our growing inventory of operating assets. With four operating mines and three production plants, we remain one of the fastest growing silver producers in Mexico.”

Cata will start at ~8,000 tonnes per month (“tpm”) and ramp up to 20,000 tpm by year end. Full capacity is 36,000 tpm. Management expects initial recoveries of 83%-85% for​ both​ silver ​&​ gold.​

Thirteen months ago I wrote that if all went as planned, production in 2023 could be 2.6M Ag Eq. ounces. However, due to operational excellence + acquisitions, G-Silver is instead looking at nearly double that amount.

Two months ago I described how wonderful things would be @ $23/oz. Ag Eq., when the price was ~$21/oz. As I publish this on January 26th the price is $24.24/oz., +38% from 4.5 months ago.

As a producer (not just an explorer or developer), G-Silver’s shareholders directly benefit from higher prices.

Readers of mine know I don’t try to predict commodity prices. I watch for conditions that typically lead to higher or lower prices, but the timing of meaningful moves is nearly impossible to grasp. A 38% gain in silver is meaningful move, why is this happening?

The last paragraph of Daniel Oliver’s latest investment letter nails it. Mr. Oliver manages Myrmikan Research & is a Director at G-Silver. In his piece he shows that short-term yields point to a Fed pivot (less tightening ahead). That, combined with China’s reopening, is bullish for commodities.

Daniel thinks commodity markets have caught on. Nickel, silver, copper, zinc, platinum, lead & gold are up a lot; 60%, 38%, 35%, 30%, 29%, 24% & 20%, respectively from 52-wk lows. Oliver said, {boldface mine}. Note, G-Silver produces silver, gold, zinc & lead.

Rhetoric from Powell & Fed governors is: higher yields for longer to slay inflation. The bond market doesn’t believe it. Neither does gold, which has spiked from $1,615/oz. on Sept. 28th to > $1,920/oz. This jump has evoked surprisingly little commentary, suggesting we’re early in the move. Many miners have bounced well off the bottom, but not to the extent the move in gold warrants, again suggesting we’re early in the move. The gold market spent two years shaking out investors late to the party in 2020. Now it’s time for the next leg higher.

A year ago when CEO Anderson started pounding the table on the growing need for silver in solar cells, I didn’t see the threat as urgent. Today, think tanks & pundits say solar companies have to drastically reduce silver content in panels or risk major shortages.

Massive solar industry players don’t change overnight, silver demand in solar power applications will remain strong for a long time. That means strong margins for low-cost producers. Not all Ag-heavy producers will enjoy robust margins, but at $24/oz. Guanajuato is on its way to greatness.

I’ve used the word, “de-risk” many times with this Company. I’m forced to use it again because no other word better describes what $24/oz. vs. $21/oz. means for G-Silver’s operations.

Equally important, the tremendous blue-sky potential I pegged at $30/oz. looks a lot more achievable now. Readers are reminded that adjusted with the BLS inflation calculator, silver peaked at an equivalent of ~$185/oz. in early 1980!

That extreme peak was short-lived, but the inflation-adj. price for the entire year was ~$79/oz. At $30/oz,. $16/oz. costs & 6M Ag. Eq. ounces produced, G-Silver would generate C$88M in EBITDA. {I adjust the margin by deducting 10% of gross sales to get net sales, marketscreener.com shows a much larger 2024e EBITDA #).

In the chart below, @ $30/oz., GSVR would be trading at an EV/EBITDA ratio of 1.6x.

If the average EV/2024e EBITDA multiple of peers at $30/oz. silver were to fall by the same percentage as G-Silver’s, it would be ~4.0x. It seems reasonable that GSVR’s shares could re-rate via substantial outperformance vs. the peer group.

Anderson likes to call G-Silver Mexico’s fastest growing silver producer. If the Company achieves 6M Ag Eq. ounces in 2024, I agree it would be the fastest 3-yr. growth rate of any precious metal play in Mexico. The question then becomes, how large could G-Silver become?

I don’t know how large, or how soon, but I have no problem SPECULATING that before 12/31/24 management could announce one or more additional acquisitions around Guanajuato.

Looking at the map below shows several operating & dormant mines within ~16 km, a few of which might be better suited (due to economies of scale + logistics) in the hands of G-Silver.

Management continues to look at stranded deposits across Guanajuato. If more mines, mills, resources can be locked up, unit costs could fall further. Importantly, long-term sustainable, high-margin operations command robust earnings multiples.

With those assets would come additional milling operations, tailings capacity, millions of ounces. Imagine delivering (for argument’s sake) 8M Ag Eq. ounces in 2026, perhaps with acquisitions in the State of Durango.

Readers are reminded that President & Director Ramón Dávila is well connected in the state of Durango, where he served as Minister of Economic Development. There are interesting opportunities to replicate the successful hub & spoke model at Guanajuato’s El Cubo complex in Durango or neighboring states.

Although not necessarily this year’s business, readers are reminded of the potential for a meaningful dividend once most of the growth investment is done. I envision a payout ratio of 25% to 50% could be implemented.

On C$88M of EBITDA in 2024 (or perhaps 2025), distributing just one third of cash flow (after cap-ex + taxes) would generate a yield of ~7%. No silver producer on the list above yields more than 3%.

Anyone who has read this far probably is fairly bullish on precious metals. For a junior miner, Guanajuato Silver offers a degree of safety (proven mgmt. team & strategy, in production) AND substantial blue-sky potential (continued production growth, exploration upside, cheap valuation).

Disclosures / disclaimers: The content of this article is for information only. Readers fully understand and agree that nothing contained herein, written by Peter Epstein of Epstein Research [ER], (together, [ER]) about Guanajuato Silver, including but not limited to, commentary, opinions, views, assumptions, reported facts, calculations, etc. is to be considered implicit or explicit investment advice. Nothing contained herein is a recommendation or solicitation to buy or sell any security. [ER] is not responsible for investment actions taken by the reader. [ER] has never been, and is not currently, a registered or licensed financial advisor or broker/dealer, investment advisor, stockbroker, trader, money manager, compliance or legal officer, and does not perform market making activities. [ER] is not directly employed by any company, group, organization, party or person. The shares of Guanajuato Silver are highly speculative, not suitable for all investors. Readers understand and agree that investments in small cap stocks can result in a 100% loss of invested funds. It is assumed and agreed upon by readers that they will consult with their own licensed or registered financial advisors before making any investment decisions.

At the time this article was posted, Peter Epstein owned stock in Guanajuato Silver and the Company is an advertiser on [ER]. 

While the author believes he’s diligent in screening out companies that, for any reasons whatsoever, are unattractive investment opportunities, he cannot guarantee that his efforts will be (or have been) successful. [ER] is not responsible for any perceived, or actual, errors including, but not limited to, commentary, opinions, views, assumptions, reported facts & financial calculations, or for the completeness of this article or future content. [ER] is not expected or required to subsequently follow or cover any specific events or news, or write about any particular company or topic. [ER] is not an expert in any company, industry sector or investment topic.