Value investing

Golden Arrow Finalizes Deal with Silver Standard

Golden Arrow Resources Corporation (TSX-V: GRG) (OTC: GARWF) recently announced the completion of its transaction with Silver Standard Resources Inc. (NASDAQ: SSRI) (TSX: SSO). Under the terms of the deal, the companies formed a joint venture, called Puna Operations Inc., that’s 75% owned by Silver Standard and 25% owned by Golden Arrow. The Silver Standard-managed JV combines the Chinchillas project with the producing Pirquitas operation.

“This news release cannot do justice to express the huge significance that the formation of Puna Operations Inc. has for Golden Arrow and our shareholders,” said Golden Arrow President & CEO Joseph Grosso in the press release announcing the finalization of the deal. “We are looking forward to play any role that best supports our partnership in the merged assets.”

The deal enables Golden Arrow to fast-track the development of its Chinchillas property with far less capital outlay, since Silver Standard will operate the mine using existing production facilities from its Pirquitas operation. Management anticipates construction starting during Q3’17 with ore delivery to the mill by 2H’18. In the meantime, the company benefits from cash flow generated from the already-producing Pirquitas operation and a C$17.5 million cash payment.

Golden Arrow Remains a Bargain

Golden Arrow’s stock price has generated quite the performance that you’d expect from such a significant announcement. In fact, shares are trading about 7% lower so far this year and roughly 6% lower over the past 52 weeks (see Figure 1). The price rose significantly on high volume when the deal was first announced, but shares have since fallen to their pre-announcement levels, which could suggest that the stock is undervalued. 

Figure 1 - Golden Arrow Resources Chart - Source: StockCharts.com

The company’s market capitalization stands at C$66.7 million, according to the TMX, which represents just a fraction of its new-found potential. In a pre-feasibility study, the company estimated that the joint venture would require an initial investment of US$81 million to develop a silver mine capable of producing 8.4 million silver equivalent ounces per year over the next eight years - or roughly $140 million per year in revenue at $17 per ounce.

The company’s investor presentation estimates that net revenue could reach $1.06 billion with post-tax cash flow of $267 million, a 29.1% internal rate of return, and a 3.5 year payback period. These are compelling economics for a company that’s valued at less than C$70 million, especially considering that the valuation doesn’t include its Antofalla project that could have equally-promising results and long-term potential.

Looking Ahead

Golden Arrow Resources Corp. (TSX-V: GRG) (OTC: GARWF) represents a compelling opportunity in the mining sector. With its major partnership finalized, the company has already received significant payments and is well-positioned to develop its Chinchillas mine in rapid and low-cost fashion over the coming years. Investors interested in the silver market may want to take a closer look as the stock may not be reflecting its potential.

For more information, visit the company’s website at www.goldenarrowresources.com