The Pirquitas mine in the Jujuy province of Argentina is an impressive asset, and being an open pit silver mine it is also one of rare kind that’s getting even rarer. This particular mine is operated by precious metals miner Silver Standard (SSO.TO, SSRI), a company that has managed to use the ongoing precious metals market quite opportunistically so far, for example by purchasing the Marigold mine in Nevada from Barrick Gold (ABX) at a very advantageous price. Silver Standard’s latest investment in an 8% stake in junior explorer Golden Arrow Resources has not created the same amount of press, but precious metals investors should take note nevertheless.
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Why is Silver Standard so interested in Golden Arrow?

Here is why: there is only about 4 years of reserve-based mine life left at the aforementioned Pirquitas mine; and Golden Arrow Resources owns a large open-pittable silver project called Chinchillas located not a lot further than a stone throw down the road from the Pirquitas mine.

The Chinchillas project deserves attention in its own right, especially since the release of the updated preliminary economic study late last year which almost tripled the previous indicated resource category to 72M ounces of silver plus significant amounts of zinc and lead by-products.

But not only did the PEA surprise to the upside in terms of the documented silver resource, it also showed a technically simple project with extremely robust economics. The project considered in this study outlines an open pit operation with an initial 12 year mine life and an 8000tpd mill, capable of annual production in the order of 8M ounces of silver plus lead and zinc as by-products.

A standard flotation process was found sufficient to achieve excellent recoveries, whereby thickened tailings can be stored in a lined impoundment built from mine waste rock. A very reasonable upfront capital estimate of $237M stems from this simple and tried concept.

In fact, the simplicity of the Chinchillas project has led to the decision to go straight to a full feasibility study, and skip the PFS stage.

Running the numbers at Chinchillas

Cash costs at Chinchillas should end up well below $10/oz even before accounting for by-products according to the PEA, which in turn supports an estimate of $12/oz for the all-in sustaining costs considering life of mine sustaining capital of $84M, or $0.88/oz mined silver, and allowing for contingency, G&A, and some near mine exploration. The combination of modest up-front capital and low operating costs leads to a very healthy NPV of $225M at an 8% discount rate and an IRR of 24.3%. Admittedly, these numbers were calculated with a silver price of $22/oz in mind, but re-working the numbers shows that the project would remain profitable down to $13/oz. This doesn’t mean the mine would get built if silver would be trading at for instance $14/oz, but it indicates the strength of this project.

The potential synergies between Pirquitas and Chinchillas

There are several factors at play at Chinchillas supporting the undeniable attraction of the project. For starters the geology is highly conductive to open pit mining, with a deposit geometry comprised of flat lying zones (or mantos) with good thickness and starting from surface, allowing for a strip ratio of around 2.5:1 waste-to-ore. (For comparison the Pirquitas mine is operating at a strip ratio of 11.1.)

Furthermore, the ore at Chinchillas has a high lead content, allowing for simple processing with metallurgical recovery of 94% of the silver reporting to a sellable lead concentrate, plus production of a sellable zinc concentrate. (Another advantage of the Chinchillas project over Pirquitas where a low lead content complicates the flow sheet and reduces silver recovery.)

And lastly, but certainly not least, the Chinchillas project is blessed with ample existing infrastructure. Water and grid power are available (whereby the latter requires a small upgrade of existing lines which shouldn’t be too expensive), and the project is has road access all year round.

And also very important, a trained local work force is in place thanks to the neighbours up the road (have we mentioned the Pirquitas mine yet?).

A potential win-win situation?

The Chinchillas project is a great project by itself, and gets even better when considering the proximity of the depleting Pirquitas mine. If Silver Standard decides to maintain operations in Argentina beyond the current Pirquitas mine life, then the Chinchillas project would be an ideal and utterly logic addition to the company’s portfolio since it is located well within trucking distance and could be operated as a satellite ore source.

Economic parameters would sky-rocket in the event of a combination thanks to the established and operating mill at Pirquitas (resulting in a huge reduction in the initial capex at Chinchillas). And if Silver Standard decides to exit Argentina then this would present Golden Arrow with an opportunity to purchase the Pirquitas plant and other equipment second hand and presumably at a discount, again improving economics at Chinchillas significantly. On top of that, Golden Arrow would be able to hire an army of skilled miners and mill operators to hit the ground running.

The Grosso Group which forms the backdrop to Golden Arrow Resources has plenty of Argentine in-country experience and has successfully discovered and sold two precious metals projects in the past, namely the Gualcamayo mine which is nowadays operated by Yamana Gold (YRI.TO, AUY), and the Navidad project now owned by Pan American Silver (PAA.TO, PAAS). Is the Chinchillas project going to be number three on this list? The upcoming general elections in Argentina will mark the end of president Kirchner’s reign, which will be seen as distinct positive by most investors and operators in the country alike. The recent Silver Standard investment in Golden Arrow already gives some indication which way the story might be developing.

We’re not saying anything will happen, but Silver Standard has obviously blinked by initiating a relatively sizeable position in Golden Arrow Resources.

Meanwhile, Golden Arrow continues to drill for more silver

And while further corporate negotiations might or might not be taking place, exploration continues on the ground discovering more silver, zinc and lead; adding value all the while. The latest news release bears testimony to this assertion and especially step-out drill hole CGA-170 caught our attention with assays returning 30m @ 250 g/t silver-equivalent, including 5m of almost 1kg silver-equivalent – bonanza grades over significant thickness. These assays in combination with equally impressive results from another drill hole CGA-172 expand the so-called Socavon-Basement zone significantly and can be expected to have a very positive effect on the next resource estimate.

The ongoing Phase IV drill program will total about 16,000m of diamond drilling, of which 11,200m have been completed. The deposit remains open in all directions including at depth and expanding the deposit is a major goal of this drill program, beside infill drilling to upgrade additional portions of the deposit to the measured and indicated category and some drilling for infrastructure and geotechnical studies.

So far, the Phase IV program has certainly delivered: a western extension to the previously known resource was discovered, a new zinc-rich zone in the Socovon basement zone on the eastern side of the resource was found, and an entirely new zone has been located underneath and to the south-east of the planned pit.
The company is currently taking a short break to take stock of the initial drilling results. Finalisation of the program will follow shortly based on the analysis of incoming results promising the news flow necessary to maintain the attention of precious metal investors.

Conclusion

Golden Arrow Resources has come a very long way in relatively short time and has developed one of the most promising silver deposits we are aware of. Incidentally this growing deposit is located in close proximity to an existing silver mine that will need additional ore sources to continue operations before long.

We continue to be impressed by the results uncovered by this exploration team; and we note the seasoned management team that has been in similar situations before, twice in fact, and knows how to monetize an asset of high quality. The ducks are lining up, and summer doldrums might just provide the dip needed for nimble precious metal investors.

Disclosure: Golden Arrow Resources Corp. is a sponsoring company. Please see our disclaimer for current positions.


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