Silver Lake Resources: A Potential Takeover Target at Current Valuation (OTCMKTS:SVLKF)

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The fourth quarter earnings season for the Gold Miners Index (GDX) has finally begun, and at the same time, Australian gold miners are preparing to release their fiscal second quarter 2021 results. One of the The first names to announce its results is mid-tier gold producer Silver Lake Resources (OTCPK:SVLKF), a 250,000-ounce producer operating out of the world’s No.1 jurisdiction, Western Australia. While costs are rising sharply year-over-year due to the strong Australian dollar, the company remains on track to meet guidance with 122,500 gold equivalent ounces. [GEOs] product in the first half of 2021. Based on Silver Lake’s growing cash balance and a very reasonable valuation of ~$893m on an enterprise value basis, I consider this pullback below 1.70 Australian dollar as a low risk buying opportunity. All figures are calculated in US dollars at an exchange rate of 0.76 Australian dollars to one US dollar.

Silver Lake Resources trades significant volume daily on the Australian Stock Exchange (ASX:SLR), but trades minimal volume on the OTC market. Therefore, the best way to trade stocks is on the Australian Stock Exchange. Buying in the over-the-counter market involves significant risk due to wide bid/ask spreads, low liquidity and no guarantee of future liquidity.

(Source: Company Presentation)

Silver Lake Resources released its fiscal second quarter 2021 results this week and reported quarterly production of ~58,900 GEO, down sharply from the ~71,000 GEO reported in the prior year quarter. While a year-over-year decline is certainly not a number to get excited about, it’s important to note that the company had a massive quarter with the second-best quarterly results yet, so a decline was not surprising. With lower metal sales and the continued strength of the Australian dollar, all-in sustaining costs rose to $1,210/oz, well above the industry average. However, the company should benefit from a stronger performance in the second half of fiscal 2021, and a weaker performance in fiscal 2021 was expected anyway. Indeed, the company has guided a decline in year-over-year production after posting record results last year. Let’s take a closer look at the results below:

(Source: author’s table, company filings)

Beginning with the company’s flagship Mount Monger operations, Silver Lake produced ~33,800 ounces during the quarter, a sharp decline from ~38,400 ounces in the second quarter of fiscal 2020. This decline was entirely attributed to lower grades, with an average head grade of 3.4 grams per tonne gold in the second quarter of the year versus 4.2 grams per tonne gold a year ago. Fortunately, high throughput partially offset the lower grades with 327,000~tons processed in the quarter compared to 318,000~tons in the second quarter of fiscal 2020.

(Source: company report)

The culprit for the lower grades was the fact that Silver Lake benefited from very high grades in the Harry’s Hill and French Kiss pits last year, but has since switched to waste stripping to develop the Karonie South pit. This led to a decline in open pit grades from 2.3~grams per tonne gold to 1.3~grams per tonne gold, which is entirely due to mine sequencing, as material movements focus on waste stripping. Meanwhile, underground grades were also lower year-on-year (4.2 grams of gold per tonne versus 5.1 grams of gold per tonne), further weighing on the forecast. The good news is that Silver Lake should have a much stronger fiscal H2 at Mount Monger with underground stoping areas being established, and the company should benefit from better access to higher grade ore at the pit. Karonie South after tax H1 waste stripping.

(Source: company report)

Moving on to the company’s bonanza-grade Deflector mine, the quarter was also weaker here, with ~25,100 GEOs produced, a decrease of 19% from a record quarter in the second quarter of fiscal 2020 of 31,200 ~GEO. The lower production can be attributed to lower gold (GLD) and copper grades. During the second quarter of the year, head grades reached 5.1 grams per tonne gold and 0.30% copper versus 6.1 grams per tonne gold and 0.45% copper one year ago. Fortunately, while we saw a sharp drop in production after a record quarter, the company continues to make solid progress from a development perspective.

(Source: company report)

Silver Lake noted that 1,180~meters of underground development is now complete at Rothsay and the portal to access the Southwest Deflector veins was established at the end of the second quarter of the fiscal year, along with 50 meters of development . Assuming the company stays on schedule, the company should be able to begin ore development here in the first quarter of fiscal 2022. For those unfamiliar, Deflector South West is a very high resource. content, with initial resource estimate amounting to 634,000 tonnes at 14.9 grams per tonne gold and 0.60% copper. This translates to ~304,000 ounces of gold and 3,600 tonnes of copper, double the grades that Silver Lake currently processes at Deflector.

So why Silver Lake if it just emerged from a relatively weak first half with weaker production and higher costs?

(Source: author’s table, company filings)

As previously reported, although Silver Lake had a tough H1 2021, it is still on track to meet expectations as H2 2021 is expected to see higher ratings. This would translate to another year of sales similar to fiscal 2020, which is impressive considering the company is enjoying a year of 54% growth. The company also continues to grow its massive cash position for a company of its size, ending the quarter with $239 million in cash and bullion, an increase of $9~million from last quarter. It should be noted that this $9 million sequential increase in cash and bullion was achieved even though it was a very expensive quarter. Indeed, the company spent over $21 million in exploration and capital expenditures due to Deflector’s growth projects, and Silver Lake also received a one-time payment of $5~million in related stamp duty. on its acquisition of Doray Minerals. Therefore, if this were a more normal quarter, Silver Lake would have added $20~million or more to its balance sheet despite a relatively weak quarter operationally.

(Source: author’s table, company filings)

As Silver Lake heads into the second half of 2021, the company has sold ~127,400 ounces of gold and 931 tonnes of copper at an average gold price of $1,824/oz. This translates to strong margins of over 35% against all-in sustaining costs of $1,142/oz, despite a relatively weak first half that was also heavy on growth capital. It’s also worth noting that the company is expected to see an additional ~$6 million added to its balance sheet in February after it sold its Andy Well and Gnaweed projects to Latitude Consolidated Limit (ASX:LCD). This should push Silver Lake’s cash and bullion position to over $285 million to end fiscal 2021, or more than 24% of its current market capitalization ($1,145 million).

(Source: Author’s Notes)

While Silver Lake was mostly a growth story in fiscal 2020, it is now turning into a value play with the stock valued at just $169.49/oz based on ~5.31m. ounces of gold resources. The fact that the company’s gold resources are all located in the world’s premier mining jurisdiction makes the stock a potential takeover target, given that a mid-tier or junior senior producer could add ~250,000 ounces. production in a safe jurisdiction for less than $1 billion. . Given that Saracen Mineral Holdings (OTCPK:SCEXF) recently merged with Northern Star (OTCPK:NESRF) for $256.47~/oz, an enterprise value per ounce of $169.49 is quite an attractive proposition. It is important to note that this figure may seem high compared to other producers in the sector, but the premiums are large enough to lock in production and high quality ounces in Western Australia, given its #1 ranking.

(Source: Company Presentation)

Although a very reasonable valuation for Silver Lake does not prevent the stock from falling, I think the stock could become a buyback target if it remains below A$1.70. Indeed, the stock is very inexpensive given its high-grade resource in a Tier 1 jurisdiction and the fact that its production profile could eventually approach ~275,000 ounces with the benefit of higher-grade Deflector South West ore. Clearly, the first fiscal half of 2021 hasn’t been a record half for the company, but that was mostly expected for those following guidance, and Silver Lake is on track to beat guidance regardless. For now, I continue to view Silver Lake as a top 12 gold producer, and believe this drop below A$1.70 offers a low-risk entry to start a position in the action.

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