Silver Bull is 100% owner of the Sierra Mojada project, located in Coahuila in northern Mexico. The project is in a mining district discovered in 1879 and known for its silver, zinc, and lead. There is excellent infrastructure in place with paved roads, grid power, labor supply, 5 company-owned water wells, and railway to site. The project's total land package contains 40 mining concessions totaling over 52,000 acres. Highlights from the resource include:
* 164 million indicated ounces of silver (71.4 g/t, 25 g/t cutoff)
* 2.2 billion indicated pounds of zinc
* 547 million inferred pounds of lead
* 129 million inferred pounds of copper
According to the November 2013 Preliminary Economic Assessment (PEA), the project has a pre-tax net present value [NPV] of $641 million and an internal rate of return [IRR] of 26.9%. On an after-tax basis, the NPV is $464 million and the IRR is 23.1%. These numbers assume a price of $23.50 for silver, which was a discount to the $24 price of silver at the time the report was prepared.
Silver has since slipped closer to $20. At $20 silver, the pre-tax NPV is $431 million and the IRR is 20.0%. Since the project falls in the top quartile for cash costs per ounce and production volumes, it has a double-digit IRR even at $16 silver and only needs $13 silver to break even. Below is a sensitivity table and if you care to see the full PEA (or NI 43-101 report), it is available here ( http://tinyurl.com/kmk4cpd ).
(click to enlarge)
Balance sheet. Our view on Silver Bull is that much of the risk is behind us. The company already has extensive drilling completed, which is necessary for defining the resource. With so many other exploration companies, to get in at a low price you have to take a lot of risk and hope that the drill results match up to the big stories mining executives are fond of telling. In Silver Bull's case, the mining district is well known and we already know a ton about the resource from the completed PEA and NI 43-101 reports. We do believe that there is upside to those reports and the company is considering inexpensive studies on areas adjacent to the ore body. Silver Bull has over $5 million in cash and is burning under $160,000 a month. This implies that the company can go over 2.5 years on current cash resources.
2014 milestones. Over the next 12 months we expect to see the project continue to get de-risked. In 2014 the company will focus on getting out a pre-feasibility study followed a few months later by the full feasibility study. Other milestones to look for in 2014 include on the permitting front. Next year we could see final permits for water rights and the remaining area's surface rights. We should also see progress in the environmental impact assessment, although a final answer there is only expected to come once the feasibility report is complete.
Likely to be acquired. The other thing that could very well happen next year is that the company could get acquired. We are not just speculating about a potential sale - Silver Bull is in talks with 13 potential acquirers. Silver Bull's Chairman Brian Edgar was Lead Director of Red Back Mining which he sold to Kinross for $9 billion. The current management team recognizes that they are exploration experts, but have neither the skill set nor the capital base to see the Sierra Mojada project through its estimated 18 years of mining life. They are simply putting all the pieces together so a bigger mining company can walk up to a set table.
One potential acquirer is Coeur Mining (NYSE: CDE) which already took an 11% stake in Silver Bull, and at much higher prices than where the stock trades today (half of Coeur's investment came in at over double the current price). Below you can read what Tim Barry, Silver Bull's CEO, has to say on whether he thinks a bid is more likely to come before or after the feasibility report is complete.
What's it worth? All of this raises the question of what Silver Bull's project is actually worth. Silver Bull's market cap today is just below $50 million. The PEA cites an after-tax NPV at $20 silver of $312 million. If silver catches a bid and rises to $25, that number becomes $529 million.
Earlier this year, a bidding war broke out between First Majestic Silver (NYSE: AG) and Coeur Mining-the same Coeur that owns over 11% of Silver Bull-for Orko Silver Corp. At stake was La Preciosa silver project in Mexico; all very demonstrative of the interest Silver Bull could garner for its own Mexican silver project. Coeur ended up acquiring Orko in a transaction valued at $384 million and paying a 70% premium for the shares. Per ounce of silver in the ground, the transaction took place at $1.70. Silver Bull is trading now at $0.30 per ounce in the ground. At Orko's valuation, SVBL shares should be about $1.75, which is over 5.5x the current price. That transaction was in a different silver environment and this analysis is an oversimplification, but the point is: Silver Bull is worth much more than its market price today.
Let's be clear about one thing: a lot of this has to do with the price of silver. When Coeur first announced its proposal to acquire Orko, silver was near $30 an ounce. As a result of that, Coeur's market cap was around $2 billion, roughly double what it is today and mining companies were feeling great about the world. The reversal in silver prices this year towards the $20 range means two things: first that all mining project economics take a turn for the worse, and second, that M&A appetite from large miners is down significantly. That said, you'll read Tim make the point in the below interview that miners have dwindling resources which are getting to the point that need to be replaced, so he's expecting M&A to pick up in 2014.
So, will Silver Bull be a 10-bagger in 2014? When we hit our 31-bagger (which, by the way, was also with a Mexican property) a few things came together to make the investment work so well. Like Silver Bull, we got in before the asset was fully understood or fully permitted, but when we saw a clear path and reasonable time frame for those things to happen. The other thing that clicked is that metals prices moved upward over our holding period.
Silver is very much out of favor now. What's true for the metal is true in spades for small cap exploration companies. That's one reason why Tim argues in the below interview that it's such a compelling time for the majors to be acquiring - - there's a fire sale in the industry.
In our view, for Silver Bull to hit 10-bagger territory or above, the price of silver will have to move significantly. That can happen, and it can happen quickly-look at the fall from $30 to $20 just this year. Because the Sierra Mojada project breaks even at around $13 silver, every $1 in incremental silver pricing adds incredible value to the project. (This is not a thorough analysis-there's a lot more to consider, including copper, lead, and zinc pricing, but we are trying to hit the highlights.) Thirty dollar silver is only 50% more than $20 silver, but it makes the pre-tax NPV of the project $1.03 billion instead of $431 million, almost 140% higher.
The way we think about it, if one of the 13 companies that has a signed confidentiality agreement with Silver Bull seeks to acquire the company in today's depressed silver environment, we can see making 2 to 4 times our money. But if commodity prices start to improve, and if Silver Bull continues to make permitting progress while remaining on track to get their feasibility out on time, then we think later next year or early in 2015, 10-bagger territory and above is back on the table. This is win/win big - either we make a lot of money, or we make really a lot of money.
We can't control, or even predict silver prices, but we can buy rare trophy assets when they are out of favor and deeply undervalued, and put ourselves in position to get really lucky if a few things crack our way. With Silver Bull's cash balance, we know we have through 2015 to see how the situation develops. Many of our greatest investments have been along these lines - where we don't have a lot to lose if we are wrong, have a base case where we do just fine, but also position ourselves to hit a grand slam if we get lucky. It's not about waiting for luck to fall randomly from the sky, rather sticking around spots where it's plausible for luck to fall and waiting patiently with a bucket to catch it.
What can go wrong? We make no claims to having the golden touch with miners - we've had our successes, but we've also gotten some wrong. No surprise, there are many ways to lose in junior exploration companies - even ones with resources as unique as Silver Bull's.
Silver prices can continue to head lower. Or they can even head higher, but not high enough to awaken the M&A market. Mining companies seem to find ways to spend cash, so it's possible that the current war chest won't last as long as we anticipate. Mexico has a history of being mining friendly, but there's always risk that that can change, especially if populist leaders come to power. The next set of permits Silver Bull is targeting may not come on time, or at all. And we don't know what the feasibility study will say until we get a preview later in 2014.
But if you ask us what concerns us most with this investment, it's not losing big, but that it might be sold too cheaply. What happens in the very possible scenario that the company gets an offer next year to be acquired at a 50% to 100% premium over the current stock price? If only for legal reasons, the Board will have a hard time turning it down.
Sure, we can think of worse outcomes, but recall our situation as investors: we have a long term investment of millions of shares in this illiquid (for our purposes), out of favor stock. We don't make investments like this targeting 50% upside - it's not worth the risk in our view. How many times in our lives will we have the opportunity to be a top two shareholder of one of the most unique mining assets on the planet? We're in this to hit it big. As we described, we definitely see a path for Silver Bull to end up at multiples of its current share price, but there's also a path for it to be snatched away on the cheap by Coeur or another mining company interested in buying one of Mexico's, and probably the world's, most attractive silver assets while the sector is out of favor.
Conclusion.
* CEO Tim Barry calls Silver Bull, "one of the top three largest undeveloped silver resources in Mexico that isn't already owned by a major."
* The company's flagship project is in a world class mining region and has very attractive economics with high returns.
* There's a low cash burn and over two years of cash on hand.
* Investment catalysts for next year include a pre-feasibility study, permitting progress, and resource expansion.
* Silver Bull is interested in selling itself and has 13 signed confidentiality agreements in place.
* Coeur, a top ten silver producer with a history of acquiring Mexican silver properties, owns over 11% of Silver Bull and paid for their shares prices 61% and 119% higher than the current share price.
* Silver prices are one of the big unknowns to the story, although the company's project is breakeven with silver as low as $13, and has exponential upside should silver go to levels it saw just earlier this year.
* 164 million indicated ounces of silver (71.4 g/t, 25 g/t cutoff)
* 2.2 billion indicated pounds of zinc
* 547 million inferred pounds of lead
* 129 million inferred pounds of copper
According to the November 2013 Preliminary Economic Assessment (PEA), the project has a pre-tax net present value [NPV] of $641 million and an internal rate of return [IRR] of 26.9%. On an after-tax basis, the NPV is $464 million and the IRR is 23.1%. These numbers assume a price of $23.50 for silver, which was a discount to the $24 price of silver at the time the report was prepared.
Silver has since slipped closer to $20. At $20 silver, the pre-tax NPV is $431 million and the IRR is 20.0%. Since the project falls in the top quartile for cash costs per ounce and production volumes, it has a double-digit IRR even at $16 silver and only needs $13 silver to break even. Below is a sensitivity table and if you care to see the full PEA (or NI 43-101 report), it is available here ( http://tinyurl.com/kmk4cpd ).
(click to enlarge)
Balance sheet. Our view on Silver Bull is that much of the risk is behind us. The company already has extensive drilling completed, which is necessary for defining the resource. With so many other exploration companies, to get in at a low price you have to take a lot of risk and hope that the drill results match up to the big stories mining executives are fond of telling. In Silver Bull's case, the mining district is well known and we already know a ton about the resource from the completed PEA and NI 43-101 reports. We do believe that there is upside to those reports and the company is considering inexpensive studies on areas adjacent to the ore body. Silver Bull has over $5 million in cash and is burning under $160,000 a month. This implies that the company can go over 2.5 years on current cash resources.
2014 milestones. Over the next 12 months we expect to see the project continue to get de-risked. In 2014 the company will focus on getting out a pre-feasibility study followed a few months later by the full feasibility study. Other milestones to look for in 2014 include on the permitting front. Next year we could see final permits for water rights and the remaining area's surface rights. We should also see progress in the environmental impact assessment, although a final answer there is only expected to come once the feasibility report is complete.
Likely to be acquired. The other thing that could very well happen next year is that the company could get acquired. We are not just speculating about a potential sale - Silver Bull is in talks with 13 potential acquirers. Silver Bull's Chairman Brian Edgar was Lead Director of Red Back Mining which he sold to Kinross for $9 billion. The current management team recognizes that they are exploration experts, but have neither the skill set nor the capital base to see the Sierra Mojada project through its estimated 18 years of mining life. They are simply putting all the pieces together so a bigger mining company can walk up to a set table.
One potential acquirer is Coeur Mining (NYSE: CDE) which already took an 11% stake in Silver Bull, and at much higher prices than where the stock trades today (half of Coeur's investment came in at over double the current price). Below you can read what Tim Barry, Silver Bull's CEO, has to say on whether he thinks a bid is more likely to come before or after the feasibility report is complete.
What's it worth? All of this raises the question of what Silver Bull's project is actually worth. Silver Bull's market cap today is just below $50 million. The PEA cites an after-tax NPV at $20 silver of $312 million. If silver catches a bid and rises to $25, that number becomes $529 million.
Earlier this year, a bidding war broke out between First Majestic Silver (NYSE: AG) and Coeur Mining-the same Coeur that owns over 11% of Silver Bull-for Orko Silver Corp. At stake was La Preciosa silver project in Mexico; all very demonstrative of the interest Silver Bull could garner for its own Mexican silver project. Coeur ended up acquiring Orko in a transaction valued at $384 million and paying a 70% premium for the shares. Per ounce of silver in the ground, the transaction took place at $1.70. Silver Bull is trading now at $0.30 per ounce in the ground. At Orko's valuation, SVBL shares should be about $1.75, which is over 5.5x the current price. That transaction was in a different silver environment and this analysis is an oversimplification, but the point is: Silver Bull is worth much more than its market price today.
Let's be clear about one thing: a lot of this has to do with the price of silver. When Coeur first announced its proposal to acquire Orko, silver was near $30 an ounce. As a result of that, Coeur's market cap was around $2 billion, roughly double what it is today and mining companies were feeling great about the world. The reversal in silver prices this year towards the $20 range means two things: first that all mining project economics take a turn for the worse, and second, that M&A appetite from large miners is down significantly. That said, you'll read Tim make the point in the below interview that miners have dwindling resources which are getting to the point that need to be replaced, so he's expecting M&A to pick up in 2014.
So, will Silver Bull be a 10-bagger in 2014? When we hit our 31-bagger (which, by the way, was also with a Mexican property) a few things came together to make the investment work so well. Like Silver Bull, we got in before the asset was fully understood or fully permitted, but when we saw a clear path and reasonable time frame for those things to happen. The other thing that clicked is that metals prices moved upward over our holding period.
Silver is very much out of favor now. What's true for the metal is true in spades for small cap exploration companies. That's one reason why Tim argues in the below interview that it's such a compelling time for the majors to be acquiring - - there's a fire sale in the industry.
In our view, for Silver Bull to hit 10-bagger territory or above, the price of silver will have to move significantly. That can happen, and it can happen quickly-look at the fall from $30 to $20 just this year. Because the Sierra Mojada project breaks even at around $13 silver, every $1 in incremental silver pricing adds incredible value to the project. (This is not a thorough analysis-there's a lot more to consider, including copper, lead, and zinc pricing, but we are trying to hit the highlights.) Thirty dollar silver is only 50% more than $20 silver, but it makes the pre-tax NPV of the project $1.03 billion instead of $431 million, almost 140% higher.
The way we think about it, if one of the 13 companies that has a signed confidentiality agreement with Silver Bull seeks to acquire the company in today's depressed silver environment, we can see making 2 to 4 times our money. But if commodity prices start to improve, and if Silver Bull continues to make permitting progress while remaining on track to get their feasibility out on time, then we think later next year or early in 2015, 10-bagger territory and above is back on the table. This is win/win big - either we make a lot of money, or we make really a lot of money.
We can't control, or even predict silver prices, but we can buy rare trophy assets when they are out of favor and deeply undervalued, and put ourselves in position to get really lucky if a few things crack our way. With Silver Bull's cash balance, we know we have through 2015 to see how the situation develops. Many of our greatest investments have been along these lines - where we don't have a lot to lose if we are wrong, have a base case where we do just fine, but also position ourselves to hit a grand slam if we get lucky. It's not about waiting for luck to fall randomly from the sky, rather sticking around spots where it's plausible for luck to fall and waiting patiently with a bucket to catch it.
What can go wrong? We make no claims to having the golden touch with miners - we've had our successes, but we've also gotten some wrong. No surprise, there are many ways to lose in junior exploration companies - even ones with resources as unique as Silver Bull's.
Silver prices can continue to head lower. Or they can even head higher, but not high enough to awaken the M&A market. Mining companies seem to find ways to spend cash, so it's possible that the current war chest won't last as long as we anticipate. Mexico has a history of being mining friendly, but there's always risk that that can change, especially if populist leaders come to power. The next set of permits Silver Bull is targeting may not come on time, or at all. And we don't know what the feasibility study will say until we get a preview later in 2014.
But if you ask us what concerns us most with this investment, it's not losing big, but that it might be sold too cheaply. What happens in the very possible scenario that the company gets an offer next year to be acquired at a 50% to 100% premium over the current stock price? If only for legal reasons, the Board will have a hard time turning it down.
Sure, we can think of worse outcomes, but recall our situation as investors: we have a long term investment of millions of shares in this illiquid (for our purposes), out of favor stock. We don't make investments like this targeting 50% upside - it's not worth the risk in our view. How many times in our lives will we have the opportunity to be a top two shareholder of one of the most unique mining assets on the planet? We're in this to hit it big. As we described, we definitely see a path for Silver Bull to end up at multiples of its current share price, but there's also a path for it to be snatched away on the cheap by Coeur or another mining company interested in buying one of Mexico's, and probably the world's, most attractive silver assets while the sector is out of favor.
Conclusion.
* CEO Tim Barry calls Silver Bull, "one of the top three largest undeveloped silver resources in Mexico that isn't already owned by a major."
* The company's flagship project is in a world class mining region and has very attractive economics with high returns.
* There's a low cash burn and over two years of cash on hand.
* Investment catalysts for next year include a pre-feasibility study, permitting progress, and resource expansion.
* Silver Bull is interested in selling itself and has 13 signed confidentiality agreements in place.
* Coeur, a top ten silver producer with a history of acquiring Mexican silver properties, owns over 11% of Silver Bull and paid for their shares prices 61% and 119% higher than the current share price.
* Silver prices are one of the big unknowns to the story, although the company's project is breakeven with silver as low as $13, and has exponential upside should silver go to levels it saw just earlier this year.
