Lazarus Investment Partners
Author's Note: This article discusses a microcap stock.
Please be advised of the risks associated with microcap stocks.
Research for this article is based in part on a conversation
between Lazarus Investment Partners LLLP and Silver Bull
Resources, Inc. Silver Bull had no input into the selection of
the title of this article nor into the content of this article.
Lazarus is a shareholder of Silver Bull and received no
compensation for this article.
Legendary oilman T. Boone Pickens has said that his rationale
for some of his takeovers of energy companies was that it was
cheaper to buy oil on Wall Street than to drill for it. We think
this investment approach applies to Silver Bull Resources (
). Relative to the amount of silver in the ground and relative to
the NPV of the company's project, this stock is dirt cheap. On top
of the company's silver resource, there are also over 2 billion
pounds of zinc, which we think the market has largely failed to
notice. We wrote about Silver Bull previously, but with silver and
zinc prices climbing this year and the company progressing nicely
towards production, we thought it would be a good time to revisit
the story and check in with management.
For background on Silver Bull and our reason for owning it, see
. As a refresher, the company has one of the world's largest and
most attractive independent silver assets, based in a
mining-friendly jurisdiction in northern Mexico. The project is
estimated to have 164 million ounces of silver and 2.2 billion
pounds of zinc. The last Preliminary Economic Assessment indicated
an after tax net present value of $464 million with an after tax
IRR of 23.1%. The market cap today is around $40 million. The
company has no debt and cash to last into 2017, if needed.
Management has no intention of mining the asset themselves. They
are setting the table so a larger company can walk up to a turnkey
operation. Brian Edgar, the company's chairman, sold a prior
company to Kinross (
) for $7 billion.
Progress this year
Silver Bull has reported significant advances in its flagship
Sierra Mojada project this year. In February the company announced
that it received permits to access up to 3.5 million cubic meters
of water annually. This is important because it's about 1 million
cubic meters more than the company needs at this point, which will
make it easier should Silver Bull decide to expand to some of the
very promising but lesser studied surrounding parcels. In addition,
Mexico has since changed the water permitting process, making new
permits more difficult to obtain.
With M&A in the silver market having slowed down
dramatically, Silver Bull cut back its own exploration efforts and
has brought down the burn rate to about $450,000 a quarter. The
sale of the company's non-core Ndjole property in West Africa may
close as early as August and bring up to $1.5 million in additional
cash, on top of the $3.5 million the company already has. Silver
Bull has no near-term financing needs.
As part of the cost cutting, Silver Bull has been very
successful in renegotiating options on adjacent parcels, at times
for pennies on the dollar. These efforts enhance Sierra Mojada's
optionality and speak well to management's cost-consciousness.
Looking ahead, over the next year Silver Bull expects to make
additional permitting progress, especially with regard to power
upgrades and surface rights. It will also advance its metallurgy
and bring the company close to a feasibility study. We don't see a
feasibility study as a requirement for an acquirer to sink their
teeth into Silver Bull.
As part of our research, we took a visit to Silver Bull's
mine in Mexico. This picture is from our trip.
Metal prices and the Mystery of Silver Bull
On top of the company's permitting progress this year, silver
and zinc prices have been quietly advancing. Year to date, silver
is up around 8% and zinc is at or near a 3-year high. With
significant zinc mines coming offline, including Century
(Australia) and Lisheen (Ireland) there's a bull case to be made
for zinc's continued strength.
The market has noticed the upturn in these metals' prices and
awarded many companies this year. Here is a look at some of the
relevant ETFs for silver companies. Perhaps the most relevant one,
the junior silver ETF, is up over 45% year-to-date. In contrast,
Silver Bull - that has reported only positive corporate progress
and has no near-term financing needs - is down over 25%. If Silver
Bull shares performed only in line with the average ETF quoted
below, they would be up 33% this year. Silver Bull's current price
should be 78% higher just to keep the stock's performance in line
with the ETF this year.
Global X Silver Miners
iShares MSCI Global Silver Miners
PureFunds ISE Junior Silver ETF
Market Vectors Junior Gold Miners ETF (includes many
Silver Bull Resources
iShares Silver Trust (physical silver)
Of course all this begs the question of why Silver Bull is down
when news from the company and on silver and zinc pricing is
positive. We heard that a large investor in Silver Bull had to
liquidate their position to fund redemptions this year. Beyond
that, we don't have a great answer, other than to say therein lies
the opportunity. Microcaps are often priced inefficiently and we
think Silver Bull is one such example.
From our mine visit. No Starbucks in sight, but lots of
natural beauty. (And silver!)
True to its name, Silver Bull offers significant optionality on
the price of silver. At $25 silver, the Sierra Mojada project's NPV
rises to $529 million. At $30 silver, the NPV is $745 million.
These are after tax NPVs. Just 2 years ago, silver was near $35.
Within the past 5 years, silver made a run towards $50. Of course,
sentiment has since turned, but we think that part of investing is
buying assets that are out of favor. Silver is down and out, yet
the economics of Silver Bull's project still work. Even at $20
silver - below the current price - the project has an NPV of over
$300 million, which is 7.5x today's market cap. If silver gets back
into the low 30s, we are looking at an NPV that's 20-something
times today's market cap. One need not be precise here to make
money - but more about that in a moment.
One aspect of the Silver Bull story that few appreciate is that
the company also has over 2 billion pounds of zinc. (There are
hundreds of millions of pounds of lead and copper as well, but
we'll save that for a different time). With zinc prices now at
multi-year highs, this part of the resource becomes more
interesting. Earlier in its life when zinc was even higher than it
is today, Sierra Mojada was looked at as a potential zinc mine.
Management has said that they plan to be more proactive about
communicating the attractive zinc component to the story. We love
the optionality in this company; whether it's silver or zinc or
both, there are multiple ways to win, and to win big.
We are not the only one who sees this optionality. At least
thirteen companies have signed confidentiality agreements with
Silver Bull so they can review the resource, as a step towards an
acquisition. Coeur Mining (NYSE: [[CDE]]) is the company's largest
shareholder and invested at share prices of $0.50 and $0.68 -- more
than twice today's price. Silver M&A is in go-slow mode for the
moment, but we see signs of life. Silver prices have been ticking
up this year and we saw Agnico (NYSE: [[AEM]]) and Yamana (NYSE:
[[AUY]]) close on their Osisko Mining acquisition for $3.5
Yes, some suitors won't do more than kick tires until they see
$30 silver, but we think the forward thinking ones understand that
the time to buy assets is when they are cheap and out of favor -
especially if there are hints of an upturn. In fact, one of the key
risks we see with Silver Bull is that someone buys the company
here, when it's so cheap. Yes, we'd make a tidy profit, but that's
not why we have millions of dollars invested in Silver Bull - we
are in it for a big win.
On the topic of risks, we remind you that there's no shortage of
ways for things to go wrong with a junior exploration company.
Silver and zinc prices can stay flat or turn down. Mexico can pass
new, unfriendly rules. There can be a holdup in permitting. Mine
preparation and construction can go wrong. Meanwhile, the company
is not cashflow positive. We are dependent on management to execute
and to realize Sierra Mojada's true value. To do that, they are
dependent on metal prices and mining M&A sentiment which is
outside of their control.
Horseshoes, Hand Grenades, and Silver Bull
Here's why we think that "almost" counts for this company.
Anyone with an engineering bent can look at our analysis or the
company's 345-page Preliminary Economic Assessment and play the
what-if game. What if silver goes down by 10%? What if taxes go up
by a few percentage points? What if it costs a bit more than
expected to build or operate the mine? Our response: it doesn't
In 2006 and 2007 Silver Bull traded at over $4 a share. That's
sixteen times the current stock price. The Sierra Mojada project is
forecasted to have an average annual cashflow of $92 million.
That's more than twice the company's market cap today - and that's
one year of cashflow. The project's net cash cost per ounce of
silver is $6.58. Pick the discount rate you want, pick the silver
price you want, you still make money. On top of the silver, the
company has zinc worth about $2.4 billion today. Management wants
to sell the company, so there's no need to worry about how to
finance it all.
Look only at today's metal prices and take all the discounts you
want, the company is still worth multiples of where it's priced
today. Now keep your discounts and ask: what happens if silver or
zinc advance to levels seen just a couple of years ago? Or what if
your discounts are too conservative and the engineering reports
just happen to be right? We are talking about a company that could
be worth 10-20x the current share price. Maybe more. We don't think
the exact upside target is predictable, or that it matters. What
matters is that the true value of the company is much, much higher
than the current stock price, which is what we believe.
In preparing for this article, Tim Barry, Silver Bull's CEO,
generously agreed to allow us to interview him. We expect to
publish a transcript of the interview shortly in a follow-up
article. We thank Tim for participating in this interview.
The author is long SVBL. The author wrote this article themselves,
and it expresses their own opinions. The author is not receiving
compensation for it. The author has no business relationship with
any company whose stock is mentioned in this article.
I voluntarily restrict myself from selling shares of SVBL beginning
with submission of this article through 5 days following
publication, or until notified that this article will not be
published. My transactions in the securities of SVBL are reported
to the Securities and Exchange Commission.
Eli Lilly: Strong Future Prospects Will Restore The