Golden Arrow Resources (GRG.V) has announced it has entered into an agreement with Silver Standard Resources (SSO.TO, SSRI) whereby the latter can earn up to 75% of GRG’s Chinchillas project.

As part of the deal, Silver Standard will have to pay C$2M in cash in 4 installments, as well as spending up to US$12.6M at Chinchillas to advance the project towards a feasibility study. A final 75/25 joint venture will be established if Silver Standard pays Golden Arrow a cash amount based on five parameters (net cash flow, capex, reclamation costs, Chinchillas pre-development expenses and repatriation taxes).

If we would now make this calculation based on the most recent quarter at Pirquitas (which was the best quarter of the past 18 months), we can enter a few of the parameters. The 18 month production would be 14.7 million ounces and at the current silver price, the margin would be US$5/oz. The total capex will be approximately $15M, and we would expect Silver Standard to spend the full $12.6M in pre-development expenses at Chinchillas.

Inserting all these parameters in the equation, the original cash flow would be $73.5M minus $15M minus $12.6M or $46M. The reclamation costs at Pirquitas should be minimal, and we are attributing a $1M discount for this. The (important) unknown part of the equation is the repatriation tax, which is 15% for a Canadian company operating in Argentina, and we will budget a $10M repatriation tax, resulting in a $35M net cash generation. Golden Arrow will receive 25% of this, which could be $9M.

That’s not a lot to give up 75% of the project, but there are also advantages. The capital expenditures will be slashed by a substantial amount and could very well be less than $75M. We would hope these additional expenditures could be covered by the cash flow from Pirquitas (which would be $30-40M per year based on the current silver price) so there won’t be a cash call from the JV-co.

In the optimistic scenario, Golden Arrow will be able to keep the $9M in cash (which would represent a net cash position of C$0.22 per share) and fund the Chinchillas capex with the operating cash flow from Pirquitas. However, should the silver price fall back to $13/oz, it’s not impossible Golden Arrow will have to contribute cash to the JVco as its 25% interest is NOT free carried.

Sometimes ‘a deal’ is better than no deal at all, but we trusted Joseph Grosso when he said he would not let another strategic asset slip through his fingers. This doesn’t mean it’s a bad deal, but a lot will depend on the silver price in the next 3 years, as the silver price will have an impact on the exercise payment as well as the ability of Pirquitas to self-fund the development at Chinchillas. If that’s the case, then this is an acceptable agreement. However, if the silver price doesn’t recover and the JVco will have to issue a cash call to Golden Arrow, the situation changes.

The jury’s out on the deal, but at least there will be a continuous news flow as the project is being advanced. Additionally, Pirquitas’ operating performance will become increasingly important for Golden Arrow, as its future is now fully linked to this producing silver-zinc mine.

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Disclosure: The author holds a long position in Golden Arrow Resources but might downsize it at any time. Golden Arrow was a sponsor of the website in the past 12 months. Please see our disclaimer for current positions.


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