Golden Minerals (AUMN) - Generating Cash Flow to Fund Development

September 21 2020, 11:46 GMT+01:00

Golden Minerals

  • Shares Outstanding: 1.48M
  • Share price C$0.45 (21.09.2020)
  • Market Cap: C$67.85M

Golden Minerals was formed in 2009. Golden Minerals is a gold-silver exploration and development company that is based in Colorado. With gold and silver both going on remarkable bull runs at this moment, Golden Minerals hopes to give investors leverage to rising gold and silver prices.

Golden Minerals is a multinational player, with gold-silver projects in Mexico, Argentina and the US. There are 3 core projects: Velardeña, El Quevar, and Rodeo. Velardeña is definitely the flagship but bringing the small (2-year life-of-mine) but economic Rodeo into production will give the company the cash it needs to develop Velardeña. Developing Velardeña has been a rather protracted process, with issues resolving metallurgy, but now it looks like Golden Minerals could be primed to pull the trigger. The cash flow doesn't end there; the company smartly opted to lease out an oxide mill at Velardeña for the last 4-years or so, and an earn-in agreement at El Quevar with Barrick Gold was signed in April; that one will be a little longer in the making.

The share price has been quite volatile, but for the most part, it has been gradually heading North. Can this gold-silver mining story give investors returns or is it too small to capture the attention?

We Discuss:

  1. 2:44 - Company Overview
  2. 3:30 - US Project: Sand Canyon Update and Plans
  3. 4:21 - Projects in Argentina: El Quevar Update and Plans
  4. 6:35 - Debt Turns Into Bought Deal: Why & What Do The Shareholders Think?
  5. 10:06 - Mexico Projects: Santa Maria and Rodeo. Overview, Plans and Deals
  6. 16:02 - The Velardena Project: Financing, Acceleration, and Economic Potential
  7. 26:06 - Blue Sky Potential and Upside to Look Forward to

Matthew Gordon: Can you give us a one-minute overview of the business and then we'll pick it up from there?

Warren Rehn: We're a publicly listed company. We're in the Gold and Silver exploration and mining business. We have been a production company before and we're getting ready to go back into production with a Gold asset in Mexico. Most of our assets are in Northern Mexico, Durango State, but we do also have a major asset in Northern Argentina and some exploration property in Nevada. It's a transition period for the company, moving back into production early next year.

Matthew Gordon: The US project in Nevada - San Canyon, are you doing anything with that? Has anything changed since we last spoke?

Warren Rehn: Nothing new, we had the first round of drilling. It was interesting, not compelling. We're looking at where else we will focus within that large property position, but nothing immediate. It's still a property we are maintaining and we're doing some surface work on, but no big spend in the immediate future. And frankly, we've met our commitments until 2021.

Matthew Gordon: Argentina, El Quevar is something that you have got, well, Barrick has got an option on it, what have they been able to do? Are they encouraged? Are you getting any feedback? What do you know?

Warren Rehn: Yes, they haven't really been able to sink their teeth into it yet based on the COVID restrictions in Argentina. Argentina shut down early and completely, and they really have not yet been able to get back up on the project. We're delayed a bit on that and that's been delayed since April. We expect that they'll be able to start work now the southern hemisphere spring. But we don't have any news to follow up on that yet, but they are still ready to go as soon as they can.

Matthew Gordon: Remind me exactly what their commitment is to that project?

Warren Rehn: They're committed to exploration work totalling at least USD$1M over the first 2-years. They're going to start with surface work. They're very interested in the high-sulfidation epithermal system there, they think they can find a big Gold deposit. We've found a reasonably-sized Silver deposit that just wasn't quite big enough to make it work for us. It was a great opportunity for us to get a big company here, a company who really knows the ropes in these types of systems to come in and see if they can be successful. They've got up to 8-years to complete their process. In order to invest, they have to come out with a PFS, Pre-feasibility Study on a deposit that has at least 2Moz of Gold or Gold equivalent in it in order to invest. And they need to spend USD$10M in a minimum spend over that 8-year period. We expect them to move a lot faster than that.

Matthew Gordon: And you've got no liabilities, there's no expenditure required from your part?

Warren Rehn: No, they'll cover all the costs. We merely have to make the basic structure in Argentina, and they'll cover the camp costs, property costs and all their costs moving forward until they invest, and we are carried at 30% once they do.

Matthew Gordon: You were talking about raising some debt, you've ended up doing a bought deal instead. What happened?

Warren Rehn: We looked hard at the debt possibility moving forward and the terms were not attractive. When we got to a point in capital markets where we could do an equity deal without warrants at a reasonable discount, we moved that way instead. Our share price had increased quite a bit since the April deal that we did, a small deal. And so, it gave us the opportunity, which was better in our mind for the company and the shareholder to do it on an equity basis than a debt basis. The problem is, these companies are asking for way too much collateral for the debt that you're acquiring

Matthew Gordon:What were they asking for? What were the terms?

Warren Rehn: Actually, the collateral that they're asking for was basically all of our assets in Mexico which are potentially worth USD$100M, more or less, just discounted. And that was for a USD$4M debt deal. You look at that and you say, well, what could go wrong here? We didn't have a permit in hand, you don't know what's happening out there in the world beyond your control. It was much more favourable to the company and to the shareholder, in my opinion, to do the bought deal. It's a matter of limiting risk here. So that's what we were doing.

Matthew Gordon: If you're looking for USD$4M and they want USD$100M of coverage. I guess they didn't value your assets the same way you did.

Warren Rehn: From their perspective, it’s a matter of having a part of a company that would be able to produce the kind of money that they needed to recover in a worst-case scenario. The problem is their worst-case scenario is pretty drastic and it doesn't take into account the shareholder or the company. It would have basically left us in an untenable position moving forward if for some reason we'd had to give collateral up instead of repaying the loan. So that level of risk just wasn't acceptable to me and to the board, so we've moved the other way.

Matthew Gordon: What was the feedback from the shareholders?

Warren Rehn: Yes, the feedback was no, not again more dilution. It was perhaps a 15-20% dilution to the shareholder, but it gave us clear runway moving forward and we could move forward on more than just a Rodeo. We could also move forward on other exploration projects. We can move forward on plans at Velardeña earlier than we otherwise could. So, a bit of pain, but long-term gain and it completely de-risks our position moving forward, in terms of money in the bank. We have plenty of cash to do what we need to do. Now I can say categorically that we will not have to raise more money before Rodeo is in production.

Matthew Gordon: Let's talk about Santa Maria because you've got an option where another junior company looking at that. What's that deal look like and why have you done it?

Warren Rehn: Yes. Santa Maria was a focus for us since 2014, earlier on we thought we could build a production centre in the Parral area of Chihuahua, and that was going to be the basis. It didn't get big enough fast enough. And we spent a fair bit of time and money moving it forward. It wasn't quite big enough to capture our complete interest and get the board on the side and make a production decision. So we tried to find some partners in it, and we finally found a group, Fabled Copper, run by a guy who has had success in getting in the capital markets and getting things funded. Makes great sense for us as being too small a project for us to farm it out to a company that it's the right size for. We're pleased with the deal they're going to pay us about USD$4M in cash over 2-years, USD$500,000 on signing and then we have a Royalty interest on top of that, which could, over the life of the mine, produce another USD$2M or USD$3M. More than pays us back. It's a great little project for a smaller company and it removes a distraction from us. It's just the way to go forward.

Matthew Gordon: Let's talk about Rodeo, what you're trying to do?

Warren Rehn: Rodeo is a Gold deposit within trucking distance to our Velardeña oxide mill. That's an oxide mill that we've had leased out to Hecla mining company for 5 years. Their lease is ending in November of this year. And then we would obviously like a way to use that mill to make money. The best way forward for us with that asset right now with an oxide source is the Rodeo Gold deposit. It's a small deposit, it's close by. It's about 90km from the mill. Haulage cost is low and it's a high-grade open pit, low capital project that we can put together rapidly. We're well on our way to getting permits to go ahead with it. It'll produce about 44,000oz of Gold over about two and a quarter year at a cash cost of around USD$800 p/oz. So huge margin, very low capital, USD$1.5M capital cash before we actually make money. So that's the spend going into the production period and we can gear up to have it running in January of 2021.

Matthew Gordon: But it is a 2-year life of mine, there's not any exploration upside around it - this is purely to produce cash.

Warren Rehn: That's the main, there is some upside and we will do some more work around it. But the key here is that you have to have a grade that allows you to track and mill process. You can't heap leach this stuff. It has to be milled, given the type of ore that we're talking about. But then the milling recoveries are good. They're in the 80% range. There is an upside, I will do some more work on it but this gives us, the PEA was anticipating about USD$25M free cashflow net after tax. That was at $1,600 Gold, now with the sensitivities and looking at the increased Gold price that we're talking north of USD$30M net after-tax income over a couple of years period. A great way to cash up the company and move us forward to bigger things, including Velardeña and possibly additional exploration in Rodeo and our other projects.

Matthew Gordon: Let's say USD$20M+ free cash flow, but that's going straight back in the ground on your other projects, mainly Velardeña, right?

Warren Rehn: Yes. And we don't need that much. It gives us float to do what we need to do at Velardeña and do additional work and look at additional opportunities, which is really the way to grow the company. Velardeña is a great asset. It's not a huge mine either, a narrow vein so you can't produce it very quickly, but it does have a high value that we've unlocked using the bio-oxidation test work that we've done. We do need a bit of cash to make that go about USD$5 to USD$6M is what we think that's going to cost us. And then a couple of millions just for working cap to get it going. But with the money we're making from Rodeo, we'll have more than enough there to move that forward and continue to move forward with our exploration plays:  Yoquivo, Sand Canyon, other opportunities, and there are many,

Matthew Gordon: Can we talk about Velardeña, there were some metallurgy issues for quite a while, which have been resolved? You have leased out the oxide mill for a period. Can you just tell us about that? The structure of that deal?

Warren Rehn: Yes. The lease out to Hecla mining company, they started that in 2015 and it's been a 5-year run and we've been making about USD$5M p/an on the lease, free cash coming out after expenses. It's been quite attractive to us. It's helped us limit the amount of other cash we needed to raise, even though we have had to raise more capital to be a going concern. It's been a very successful relationship with Hecla. They're apt to have no additional needs going forward to use that mill again sometime, we'll probably see some future relationship. We haven't nailed that down yet. They're still getting their permits for their oxide deposit together, or their additional oxide deposit. But meanwhile, the Rodeo fits in perfectly in the gap period after a Hecla leaves, until we have an additional source of oxide material, either from Velardeña, possibly, from additional material that Hecla wishes to run and, very significantly, from the bio-oxidation products that we will be able to produce from the sulphide mining at Velardeña.

So that has to be signed ideally then that would go to that oxide mill as well. It just doesn't fill it up. We'd like to have additional feed sources down the road.

Matthew Gordon: Velardeña with Hecla, you mentioned the number USD$5M, is that per year or is that over the 5-year term?

Warren Rehn: Velardeña needs capital investment to build the bio-oxidation plant of USD$5M to 6M. That was 5M p/a that we were getting from Hecla on that, so they started production in 2016, about half a year pre-production period there, but we've netted USD$20M from that lease since 2015.

Matthew Gordon: Obviously, covering GNA and so forth. But what were you spending that money? What was it going on?

Warren Rehn: We've moved forward on exploration projects over that period of time, including the Santa Maria, the work we did at Yoquivo, which was significant work at Sand Canyon. Our exploration folio in general, that has been invested in, including the work we've done on Rodeo, getting that ready. Frankly, people don't realise it, but it costs a lot of money to run a small public company in the US, more in the US than in Canada. So, if you're US-domiciled, you'll spend more money than you will if you're Canadian domiciled, by far.

Matthew Gordon: Have you changed your plan with regards to Velardeña yet?

Warren Rehn: Yes, we have. And in my mind, this is still tentative, needing board approval and things like that, but the board is well behind this effort, we can accelerate the Velardeña restart. The question is understanding exactly how far we can accelerate, how fast we can accelerate and to make sure that we could be profitable selling the other two concentrates. We make three concentrates from the sulphite material coming out of the Velardeña. A Lead concentrate, which contains most of the Silver values, a Zinc which is fairly low value. And then the pyrite con, which contains all of the Gold value essentially. We'd have to be able to make money on the Lead con, Zinc con. And I think we can in this environment. I need to do a bit more work, just confirming that we can do that with the change in processing to get all of the Gold that we can get into the pyrite concentrate because of the better payable.

Then it's a question of how long can we stockpile that material until we have the bio-oxidation facility built? So that's the open question right now. I think we can start and stockpile, then once we have the bio-oxidation facility built, then process. That would potentially allow us to start Velardeña sulphide mining in 2021, accumulating the pyrite concentrate with all the Gold values and then process that bio-oxidation plant, once we have it built, which will take about a year and a half from today's date through engineering studies, through design studies, construction plans to actually get that facility. There are some time things here.

Matthew Gordon: What confidence do you have that you're going to be able to accelerate the Velardeña effort?

Warren Rehn: The big-time consumer was figuring out which way to go; so you look at every possibility, we looked at and all the different options from autoclaves to some sorts of fine grinding oxidation roasters. Now, having selected with two independent, separate tests over a period of years showing essentially the same result, I have a lot of confidence that we know what we're doing now and the way to move forward. Now it's a matter of just getting the details of what's the sulphur content, how much material are we going to produce? What the tank sizes have to be to make this work before you start to build, you just don't want to build the wrong size facility. You have to build the one that works for you best, otherwise, you overspend. I'm quite confident that we know how to go about it. It's just a matter of getting these steps organised and in place. And we have a contract from the local engineering company here, is headed up by probably the best bio-oxidation expert in the country. I'm very pleased with the work that's been going on there. And then the support we've had from Tetra Tech, who has championed the process, I'm very confident that we know doing and that we can excel.

Matthew Gordon: Remind me of some of the numbers.

Warren Rehn: The PEA that we put out earlier this year, using three-year trailing prices, which are quite low, this is a $1,300 Gold price and a $16 Silver price, that study showed a net present value of around USD$80M for a 10-year project at Velardeña. When you factor that up with the sensitivities on the new pricing, that's over USD$100M, well over USD$100M and almost double what the PEA was suggesting at current prices. It's a very dramatic prize for us to go after, for a company with a market cap of USD$65M. You see what we're looking at here. We've got Rodeo in production; it gives us the cash we need to go forward on Velardeña. We move Velardeña forward as rapidly as we can, but being conscious and careful at every step, not overspend and not to waste money,

Matthew Gordon: What's the next step with regards to Scoping Studies? What's happening next after the PEA, how do you drive this?

Warren Rehn: We've engaged the engineering company to do the studies. They've done a gap study to see what we need to do to actually make it to the next step. Our next step will be getting new material out to do flotation separation studies, to further characterise the exact characteristics of that iron ore and our senior pyrite concentrate. We know what size plant to build and what we'll need to neutralise acids and keep the oxygen or the air moving through it. That gives us the construction plans and the blueprint, basically, of what we need to build. And then we can move forward. If you don't have the blueprint, you can't build it, so it's that series of steps.

From today's date to completion, a realistic time schedule is about a year and a half to having that bio-oxidation facility built. Then the question is, how soon before that, do we start the sulphide production in the stockpile? We can process more of this material faster, basically, while still taking advantage of the sulphide production from Velardeña in the current price environment. To me, it works.

Matthew Gordon: Where is the blue sky upside coming from and can you fund it?

Warren Rehn: Yes, there's a couple of obvious things with the current projects. One is exploration potential at Rodeo, we'll carry that forward. As we're producing, we'll do the exploration. We'll see exactly how much that can be increased in size - that would be the low hanging fruit. We'll do that for sure. But the Velardeña resource is open at depth, it's a small property, but these veins go deep, and we have evidence that there is another more than 500m of the vertical extent to the system based on drilling in hand. We know we can make that bigger and it'll last longer, that increases value.

Then we have our portfolio of exploration projects, one of which we'll be able to drill this fall; the Yoquivo district. It's an epithermal vein district in Chihuahua, just on the East side of the Sierra Madre, great location, veins that are known, they've produced in the past in a historical fashion and we're ready to go. We know of grade material on the surface, we have the drill permit in hand. We'll have results on that by the end of the year. And we'll know if that's going to be a potential, big focus for the company after Velardeña, or to bring on next in the pipeline.

We will also continue in Nevada with the Sand Canyon project, great location, great project, interesting results, but nothing compelling, but we know there's more to be done there as well. We also have an exploration portfolio in Argentina. As soon as we can move forward in Argentina. This is outside of El Quevar? That also looks quite attractive and frankly, one of the better properties I've seen in my career down there that we're trying to move forward. So, there is exploration upside in the company and significant and that's going to be basically able to be explored, self-financed from the cash flow from Rodeo and Velardeña. So that's the model and that's the blue sky.

In addition to that, Barrick success would change this company overnight into a very different beast. They find the 5Moz Gold deposit that they're looking for, our 30% will be worth well more than any of these projects put together. There's great blue sky there.

Matthew Gordon: If things happening in the right order for you. What I want to see from you is some accelerated delivery plan to take advantage of the current environment.

Warren Rehn: That's exactly what we're putting together. We will do that now. There is no question in my mind, we'll be able to accelerate. And as we continue to get news flow from Rodeo, get the permits in hand, which I expect this fall, we get that put together and we go from there. We have our contractor in place. We start preparing to mine and we'll be ready to get that ore moving to the mill early next year, January, and then be pouring Gold in late January, which would be a great step forward for us.

Matthew Gordon: Beautiful, Warren. Thanks very much for the update. Lovely to speak to you again. It's great hearing what you're up to. Give us a call when things start happening and especially looking forward to seeing if we can't hit those deadlines. Appreciate it. Thanks again.

Warren Rehn: Thank you, Matt. Great talking to you.

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

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