New Pacific Metals (NYSE: NEWP) offers investors a unique silver investment thesis from a developing mine and upside blue sky exploration if they are willing to take the Bolivian jurisdictional risk. The company is advancing projects at a high rate, so investors can expect plenty of news in the remaining months of 2022. For example, an updated mineral estimate on the already massive drill results from the Silver Sand project of the 40,000 meter drilling campaign on the Carangas project. The share price is down 60% from its January 2021 high, resulting in an attractive entry price for new investors. LLet’s review the investment thesis.
The Silver Sand project is located on the central Andean silver belt and 35 km from the famous Cerro Rico mining camp. This camp is the second largest silver producer based on the historical amount of silver. New Pacific began drilling in 2017 and released a Mineral Resource Estimate (MRE) in 2020. MREs suggest the project contains 155.86 M oz of Ag at 137 g/t Ag. New Pacific has drilled 32,700 additional m of infill and step-out drilling to explore potential satellite deposits. This will be included in an updated MRE, which is expected to be released in September 2022. Released drill results from the 2022 drill program have revealed incredible infill holes of long high grade silver intersections near surface. A drilling even returned 86.03 m at 229 g/t Ag, including 15.35 m at 734 g/t Ag from 37.90 m to 53.25 m. These infill drill results could increase the updated MRE a lot.
The company plans to release a preliminary economic assessment (PEA) based on the updated MRE. The Silver Sand project has specific elements that could lead to low production costs. Therefore, the PEA could suggest a high economic value for the Silver Sand project.. It is important to note that the following arguments are elements that can make a mine potentially more economical. Ultimately, only a published PEA/pre-feasibility/feasibility study can estimate the potential economic value of the project.
The project is likely a rare open pit primary silver mining project. Open pit projects have lower operating costs with higher production compared to underground mines. A key element for surface mining is mineralization near the surface and not too deep. This is certainly the case for the Silver Sand project. Most published drill results show mineralization down to 200 meters depth.
The recovery process could be a heap leach process. Heap leach column metallurgical testing yielded an average of 80% recovery. Heap leach operations are relatively easy to build as they require little infrastructure and energy.
The project is a silver deposit only, so it lacks by-products to reduce AISC costs. However, the relatively high rating makes up for that. The current MRE is 112 g/t Ag, which is a much better grade than other open pit silver mine development projects like Cordero from Discovery Silver, Corani from Bear Creek Mining or Diablos from Abrasilver.
A sweetener is that Silver Sand could enjoy a accelerated authorization process. The Bolivian government wants to start the production of 6 mines by 2025 and Silver Sand could be one of these mines. This would make the project even more valuable. New Pacific completes pre-feasibility study, in parallel with the PEA to accelerate the progress of the project. An important advantage is that the development of an open pit silver-only heap leach mine is simple from a development perspective. I think the question is not whether Silver Sand will be a working mine, but rather who will build it; Silver Sand or another major mining company.
In an interview, founder and presidents Rui Feng said that the Carangas is the new flagship project. This is an impressive statement as the Presidents believe it exceeds the potential Tier 1 Silver Sand project. The Carangas project was staked by New Pacific Metals. Geologists were performing due diligence on historical drilling records for the project. Historical drilling found silver near the surface but did not drill deep enough to uncover the gold system below the silver system.
Currently, five drill rigs are executing a total drilling program of 40,000 meters. Three of the drill rigs are testing down to 1,000m depth, the other two drill rigs are focusing on the shallow silver zone. New Pacific has already released some drilling from the 2022 program with phenomenal results:
- “Golden hole DCAr0044: Interval of 514.85 m (from 266.35 m to 781.2 m) grading 1.10 g/t Au and 6 g/t Ag, including higher grade intervals of 14.15 m (from 436.2 m at 450.35 m) grading 3.8 g/t Au, 11 g/t Ag and 0.12% Cu.”
- “DCAr0031 gold hole: 595.7 m (from 161.55 m to 757.25 m) intersecting 1.25 g/t Au and 7 g/t Ag, including 98.9 m (from 457.3 m to 556.2 m) grading 2.58 g/t Au, 6 g/t Ag and 42.11 m grading 3.51 g/t Au, 2 g/t Ag and 0.1% Cu (from 711.0 m at 753.11m)”
- “DCAr0041 Money Hole: Interval of 78.68 m (from 37.8 m to 116.48 m) grading 75 g/t Ag, 0.71% Pb and 0.69% Zn”
- “DCAr0042 Money Hole: Interval of 79.2 m (from 53 m to 132.2 m) grading 77 g/t Ag, 0.73% Pb and 1.43% Zn”
The drilling results suggest that the hypothesis of a near-surface open pit silver mine with an extensive gold system is true. Investors should wait for further confirmations over the next few months, which could drive the stock price higher. Overall, this project offers a lot of potential.
This project is the earliest project in New Pacific’s portfolio. Rio Tinto drilled 8 diamond holes and 12 RC holes in 1995. The company found silver and gold but they were exploring copper projects so they left the project. According to Chairman Rui Feng, the Silverstrike Project has similar geology to the Silverstrike Project. This should help identify the best drill targets for the 6,000 meter drill program, which started in June 2022.
Presidents Rui Feng founded the company and selected a great team to develop potentially world-class assets. Mark Cruise has already built five mines in his career. This offers the possibility for the management to sell a project or to build it themselves. Management and the board own 8% of the shares, so they are aligned with shareholders to create shareholder value.
New Pacific has first-mover advantages in the Bolivian exploration industry. The team has experience and expertise in Bolivian geology, which is unique considering that mining companies have barely invested in Bolivia for exploration. This competitive advantage allowed New Pacific to create shareholder value by staking the Carangas project. The team of geologists are reviewing historical drill results from another project to be staked as they did with the Carangas project. Thus, investors could see new projects added to the portfolio.
Bolivia has a history of anti-international corporations, particularly in the domestic resource industry. The government even renationalized the natural gas industry in 2006. As gas reserves dwindle, mining may become more important to the Bolivian government to generate revenue. The mining industry already accounted for 47% of Bolivia’s exports in 2020. The recent tax the reform eliminated the value added tax on imported capital goods. This could be the first small step in the right direction, I would recommend investors beware of jurisdictional risk.
An assessment can be determined based on the current resource of the Silver Sand Project. The Silver Sand mine is exposed to many future expenses and risks, so the resources in the ground from an exploration company are much less valuable than the resources from an operating mine. I like to be conservative in my valuations of risky stocks. Therefore, I value silver in the ground at only 15% of the current price of silver ($18.5). The current silver resource of the Silver Sand Project contains 155.86 million ounces of Ag. This translates to a valuation of $432 million. Readers should keep in mind that an updated MRE is expected in September 2022. The resource could increase significantly based on recently released infill drilling results. This increase in resources should therefore increase the valuation of New Pacific Metals.
The Carangas and Silverstrike projects offer additional value for shareholders, but it is very difficult to determine a value without a resource or economic study. To be conservative in the valuation of risky stocks, I do not attribute any value to these projects. This provides an added benefit to the risks investors take. The current market capitalization is justified by the conservative valuation based on the current resource of the Silver Sand project. Thus, investors can speculate for free on the Carangas and Silverstrike projects, which could bring a lot of value.
New Pacific Metals’ first mover advantage to enter the Bolivian metals exploration industry has resulted in a unique portfolio of large silver projects. The stock is currently valued at fair value based on the conservative resource assessment of the Silver Sand project alone. This provides an attractive entry price for investors to speculate on the future growth of the three projects. In particular, the updated MRE and PEA could create a lot of shareholder value in 2022. Additionally, the current valuation offers investors the opportunity to speculate on the Carangas and Silverstrike projects for free.
Bolivia’s jurisdictional risk increases the already risky investment thesis of a silver exploration company. I think the potential rewards outweigh the risks at the current valuation. Thereby, I would recommend buying a speculative position in New Pacific Metals. I would hold the position for at least three years to speculate on the development of the Silver Sand project and a resource estimate and completed PEA study of the Carangas project.