Today In Silver

A few weeks ago we wrote a “teaser” for the Metal Augmentor service about an exploration company that we believe offers a very good opportunity to double your money in the near term. Our report on that company is now “sold out” and today we will reveal its name along with a synopsis of our full report, which is available only to Metal Augmentor subscribers.

In addition, we would like to announce the availability of a new Special Report that features two gold companies we feel have very strong prospects in the months ahead. These companies have recently been featured as part of the Metal Augmentor service, so if you are already a subscriber or buyer of a previous Special Report, there is no need to purchase this latest report, just log in at http://metalaugmentor.com/subscribers/start.php.

Founding Memberships to the Metal Augmentor service were supposed to close yesterday but we have extended the deadline to the end of this week so that late comers can have one last chance at the current price of $87 per year. If we do open the service to new Founding Members again in the future, it will be at a higher price and only after we have officially launched the Metal Augmentor website.

If you were looking for another tease, we apologize but we are not going to extoll the virtues of the two companies in the new Special Report. What we will say, however, is that each sits on a world-class gold deposit and yet trades at a fraction of the share prices of its peers. Moreover, both these world-class gold deposits are likely to come to the attention of investors later this year as they move through advanced feasibility toward development. We feel the summer doldrums will be a perfect opportunity to pick up some shares in these companies before they are discovered by everybody else. One of these companies trades on the Toronto exchange and the other trades on both the Toronto and the AMEX exchange.

We are also preparing an analysis of a little-known Australian-listed Platinum Group Metals (PGM) explorer that is advancing an exciting project with excellent exploration upside and development potential. Metal Augmentor subscribers, including buyers of our latest Special Report, will have an opportunity to find out about this company when they log in to the Metal Augmentor website (log in information will be contained in the Special Report).

Please note that the Special Report, priced at US$87, includes a one-year Founding Membership to the Metal Augmentor service. The report will only be available until the end of this week. After this Sunday, we will close the service to new subscribers and focus on our official website launch. If and when we open The Metal Augmentor to new subscribers again, it will be at a higher price.

Our new Special Report can be purchased for US$87 here:

(You can securely use any major credit card, or a Paypal account if  you have one)

(Use this link if the above does not work:
http://www.metalaugmentor.com/order.php)

And now for the name of the company in the original Metal Augmentor “teaser”. (The following has been excerpted from recent reports available only to Metal Augmentor subscribers.)

[Warning: Shares in this company are extremely thinly traded because there aren't too many of them out there. There do not appear to be any more sellers near the original $2 level where we and many of our subscribers acquired positions but patient investors may yet be able to pick up some shares at a reasonable price. All orders should be limit orders as there is a wide gap between the bid and ask price and therefore a market order will get filled much higher than the last trade.]

Background Excerpts

Golden Minerals Company, the successor to Apex Silver, currently trades on the Pink Sheets under the symbol GDMN at slightly more than $2 per share, which significantly undervalues the company’s finances and prospects.  We believe buying Golden Minerals at the current price and subsequently selling within the next few months in the $4-$5 range represents a low-risk (that is, not very speculative) proposition that is largely insulated from fluctuations in metal prices and the general markets.  Given how “under-the-radar” Golden Minerals is currently, the gains might come even faster.

Golden Minerals is the surviving entity of what was formerly Apex Silver Mines (NYSE: SIL).  Apex Silver sold its flagship San Cristobal silver-zinc-lead operation to Sumitomo after being forced into bankruptcy due primarily to a poorly-designed hedging policy, volatile zinc prices and a difficult external financing environment (i.e. the company was unable to refinance its debt).  Since much of Apex Silver’s management team remains with Golden Minerals, this may not reflect particularly well on the company and they will have something to prove going forward.

Golden Minerals has over 45 exploration properties located throughout South and Central America, several joint ventures and royalty agreements, a lucrative management agreement at San Cristobal with Sumitomo, and a significant amount of cash.

In 2008, $25 million was spent on Golden Minerals’ exploration portfolio, with a total 112 holes drilled on 8 projects (approx. 23,000m).  Over 3,000m have already been drilled in 2009, and the company plans to spend an additional $11 million during the 12 month period ending March 31, 2010.

In this report we will attempt to assess the value of Golden Minerals by breaking it down into its main components:  1) the Paca-Pulacayo joint venture with Apogee Minerals (TSX-V: APE); 2) the royalty agreement with Excellon Resources (TSX: EXN); 3) the management services agreement with Sumitomo; and 4) the company’s strong underlying working capital position.  Our analysis will, for the most part, assume zero value for the company’s large exploration portfolio and other miscellaneous joint-venture interests beyond Paca-Pulacayo, although there is clearly upside to this portfolio if the company intends to spend upwards of $11 million in exploration this fiscal year.

Paca-Pulacayo Joint Venture: Golden Minerals maintains a 40-60 joint venture on the Paca-Pulacayo project with Apogee Minerals.  The project, located in Bolivia, hosts a combined Indicated and Inferred resource of about 24 million oz. silver, 405 million lbs. zinc, and 204 million lbs. lead (Golden Mineral’s 40% share).

Platosa Royalty: Golden Minerals retains a net smelter royalty interest on Excellon’s Platosa project.  The royalty is currently 5% and will decrease to 2% after $4 million in royalty payments have been received.  As of December 31, 2008, the company had received $3.2 million in payments.  We estimate that by the end of 2009 the royalty will hit the $4 million milestone and decrease to the 2% level, at which point we estimate that it will generate under $1 million per year.  Once the milestone is hit, Excellon will have the right to reduce the royalty interest to 1% by making a payment of $1 million.  We will conservatively value this royalty at $2 million.

Sumitomo Management Agreement: Golden Minerals is in charge of managing operations at what is now Sumitomo’s San Cristobal project in Bolivia.  This agreement is expected to result in annual net cash flow of approximately $6 million (not counting potential incentive fees of $1.5 million per year or the reimbursement of approximately $3.5 million per year of Golden Mineral expenses associated with managing the mine).  Considering that the company is currently valued at under $10 million, this is very substantial. The Sumitomo agreement has an initial term of 12 months after which it can be terminated by either Golden Minerals or Sumitomo.  If terminated by Golden Minerals, 12 months prior notice is required.  If terminated by Sumitomo, 6 months prior notice is required along with a termination fee of $1 million.  If Golden Minerals can retain this $6 million per year contract with Sumitomo while expanding its revenue base to cover its $12 million per year G&A expenses, the company should be in a position to generate positive cash flows with which to fund its exploration activities without fully draining its current cash position.

Cash Flow Summary: Internal Company Estimate for 12-month period ending March 31, 2010

• Management Services Agreement: $9.5 million (includes $3.5 million reimbursed expenses)
• Royalties and Interest Income: $2 million
• Exploration Expenditures: -$11 million
• G&A Expenses: -$12 million
• Final Reorganization Costs: -$4 million
• Accrued Liabilities = -$8 million
• We assume that $4 million (out of approximately $8 million) of accrued liabilities at March 31, 2009 pertains to the above G&A and final reorganization costs, and can therefore be netted out.
  • Net Cash Flow = $9.5 + $2 + $4 - $11 - $12 - $4 - $8 =  -$19.5 million

If accurate, this would still leave Golden Minerals with about $5 million in cash and $5 million in auction rate securities at March 31, 2010, in which case the company would still have a negative enterprise value at the current price (although this would assume that the auction rate securities can be sold at some point).  In any case, we don’t intend to hold Golden Minerals come March 31, 2010 unless major positive developments (acquisition, etc.) warrant it.

Conservative Valuation Summary

• Paca-Pulacayo JV: $3.2 million
• Platosa Royalty: $2 million
• Cash: $24.4 million
• Auction Rate Securities: $5.2 million
• Liabilities: -$8.6 million
• Net Breakup Value: $26.2 million
  • Net Breakup Value per share: $8.04*

*Does not include any value for property portfolio such as the joint venture with Vena Resources on the Esquilache property in Peru (see recent Vena news release).

Future Catalysts

Listing on Higher Exchange

The company intends to list its shares on both the Toronto Stock Exchange in Canada and OTC (or higher) exchange in the United States.  Once accomplished, this should bring significantly more liquidity (i.e. share volume) and attention (i.e. analyst and newsletter coverage) to the company.

New Resource Estimate on El Quevar Project

While we do not expect a significant increase in the amount of resources at this property given that the last resource report was released somewhat recently in December 2008, the new resource report (expected shortly) could bring some attention to the company.  Currently, El Quevar hosts a relatively small resource of 6.2 million ounces silver (Golden Mineral’s 65% interest).

Property Acquisition

Golden Mineral’s large cash position enables it to consider possible property acquisitions.  We would much prefer that the company pursue a strategic acquisition, of which we believe there are currently several good candidates, rather than thinly spread its funds across a large number of early-stage properties by spending $11 million on exploration this year (of which only $3.5 million is slated for advanced-stage projects). That $7.5 million of cash slated for general exploration and property maintenance payments would instead be able to acquire a property or two of significant merit.

Monetization of Property Portfolio

The company has the opportunity to carry out more joint ventures and perhaps outright sell certain of its projects in order to better focus its exploration efforts and continue to strengthen its working capital position.  As mentioned above, Golden Mineral’s management team is not so much an exploration team as it is a mine development and operations team and thus they should focus on what they know how to do, which is to develop and operate mines.

Share Structure Opportunity

There have been some very large blocks of shares moving across the tape in the past few weeks including a block of over 350,000  shares on June 10, 2009. Several similar blocks have been traded recently such that the total share turnover is now approaching 1.5 million shares or half of the “share float”. Normally this wouldn’t necessarily be a huge deal but in this case it is important to understand who the initial shareholders of Golden Minerals are given that they consist of a somewhat unique group.

Simply put, the shareholders are the creditors of Apex Silver. This is relevant for two reasons.

One relevant consideration is that a certain group of these creditors could care less about stocks in general and will try to unload shares of Golden Minerals at any decent price. In fact, this has been happening since late March when Golden Minerals first began trading (several thousand shares were sold by a creditor for just a few pennies). These creditors may have small or large stakes. We as retail shareholders with orders of a few hundred or thousand shares at a time have been picking up our shares around $2 from the smaller creditors with small stakes. Meanwhile, institutional investors and others with bigger pockets have been picking up shares from the larger creditors in large blocks.

In any case, what matters is there is a finite supply of these shares being sold by Apex Silver creditors. Once they are gone, the available shares should get very constricted at the $2 price level and we believe the share price will need to move to a significantly higher level to entice further selling. What level? The key to answering that question lies in realizing that $2 is an arbitrary share price. It is a small fraction of the company’s value.

The other relevant consideration is that a certain group of Golden Minerals shareholders are financially savvy. These are primarily the large debtholders of Apex Silver. It is this group that decided the ultimate fate of Apex Silver in bankruptcy simply because they held most of the unliquidated debt. In other words, it is this group that allowed Golden Minerals to emerge with $15 million in cash plus other assets that could have been otherwise sold in a bankruptcy fire sale to raise perhaps another $10 million in cash. That $25 million or so in total cash could have been distributed to creditors instead of allowing Golden Minerals to emerge from bankruptcy as the successor of Apex Silver. So, why did these major creditors of Apex Silver not take the cash? We suspect it is because they expect Golden Minerals to generate bigger returns in the near term.

Let’s consider the $15 million in cash only. That is $5 per share, meaning that as long as Golden Minerals is trading for less than $5, the creditors will definitely receive less under the reorganization deal they approved then they would have received from a straight liquidation. We can look at this several ways. One, Golden Minerals management has a major incentive to get the share price above $5. Two, a large group of creditors (now shareholders) will not be sellers at a price below $5.

Now do you see the “squeeze” that could occur between the $2 share price where some of the “disinterested” creditors have been selling vs. the minimum $5 share price the “interested” creditors are probably holding out for? This is essentially the basis of our Golden Minerals trade and why the $4-$5 level should be a real sweet spot for taking profits.

Conclusion

Although Golden Minerals has its caveats as an investment consideration (namely management, G&A expense levels, low trading volume, and current status as a company trading on the Pink Sheets), it certainly has its positives as well:

1. Huge current cash position (negative enterprise value, i.e. Cash King),
2. Several sources of significant cash flow (management agreement, interest and royalties), and
3. Large exploration portfolio.

While the low volume and lack of market presence could result in some future buying opportunities below the $2 level, the downside risk should be relatively minimal given the company’s large cash position and other cash flow producing assets.  In other words, despite the run-up in price over the past month or two, the current price still appears to be an attractive level at which to accumulate a position.

We believe Golden Minerals could reach the $4-$5 level within the next few months at which point we would be inclined to sell our position unless new developments (such as property acquisition or major discovery) warrant holding the shares for further gains.  At the same time, what we find particularly attractive here is that the share price could reach the $4-$5 level very quickly since there are only 3.2 million shares outstanding.

Disclosure:  The above are only excerpts from our report to subscribers of The Metal Augmentor. This information is provided solely for purposes of illustrating the depth of our analysis. Our full report includes more details and follow-ups containing additional important considerations. We own a significant position in Golden Minerals and will probably be buying more especially if the price remains low. On the other hand, we will likely be sellers at the $4-$5 level. So if you are buying at that level, please be aware that you might be buying our shares. We have not been compensated in any way to write this analysis and we currently have no relationship with the company. This is not investment advice; should you seek investment advice we recommend you discuss the company with a licensed investment adviser or broker.

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