Jun 2, 2021
 in 
Precious Metals

Caesars Report: Sierra Madre Gold & Silver (TSX.V: SM) Targeting a Rapid Resource Expansion, Mexico

Sierra Madre Gold and Silver (SM.V) is the newest Mexico-focused silver and gold exploration company on the TSX Venture Exchange. After closing an initial financing round in June 2020, the company didn’t waste any time and pursued an IPO financing late last year. Despite completing the IPO-related sub receipt financing in late October, Sierra Madre went through the lengthy process of TSX-V listing, but is now really off to the races.

This new company combines a proven team that pretty much put Prime Mining (PRYM.V) on the rails, with a Nayarit-based gold and silver project with a known resource and known metallurgy. With C$15M in cash in the bank, Sierra Madre Gold and Silver appears to be perfectly positioned to prove up the value of its flagship Tepic project and this year’s drilling activities should result in an updated resource estimate before the end of this year.

The project was gathering dust on a shelf but the current climate is ideal for Tepic

The flagship Tepic project is located in Nayarit, just about 30 kilometers south-southeast of the capital (which is also called Tepic). The close proximity to the state capital ensures excellent access to existing infrastructure: the project is just about 3 kilometers from paved roads while the Tepic airport offers services to Mexico City. Just a little bit further away (about 150 kilometers) is the Puerto Vallarta airport and as that airport serves the main tourist hub with regular connections to even European destinations (in a pre-COVID era, that is), it seems to be easy enough to get in and out of Nayarit.

The previous owner, Cream Minerals, completed in excess of 31,000 meters of drilling in 149 holes between 2002 and 2011, and the property has pretty much been ‘forgotten’ since the silver price moved away from its all-time highs around the $50 level. Cream Minerals had a market cap of over C$100M during these highs.

The numerous drill holes and abundance of available drill data helped the previous owners to report on several historical resource estimates but none of those estimates really delivered one ‘core’ resource estimate: as the silver price were very volatile back in the day, pretty much every calculation contained a version with a low cutoff grade and a version with a higher cutoff grade. Sierra Madre is using the most recent historical resource calculation (from 2013) which used a 75 g/t AgEq cutoff grade for all the mineralized zones on the Tepic project.

The indicated resources contain about 5.1 million ounces of silver at an average grade of 144 g/t, while the 538,000 tonnes in the inferred resource category are hosting an additional 2.1 million ounces of silver for a total of 7.2 million ounces of silver. Additionally, there are about 30,000 ounces of gold in the indicated resource category and about 15,000 ounces in the inferred resource category. On a silver-equivalent basis (using a 70:1 silver:gold ratio), the 2013 resource is hosting about 10.3 million ounces silver-equivalent.

The ongoing exploration program should add a lot of value

Sierra Madre isn’t wasting any time and drilling has already started on the Tepic project. The company is fully permitted to drill 67 holes and in this first phase exploration program, a total of 21 holes will be completed. This drill program is currently in full swing and as we expect Sierra Madre to provide assay results in batches rather than reporting on every single hole coming in, we are expecting the first batch of drill results to be released in June.

The reason for drilling just 21 holes while the company is permitted for 67 holes is quite simple: the rainy season will start soon and it’s easier to just wrap up a first phase drill program, analyze the data and get back in the field after the rainy season rather than fighting nature forces. According to the Wikipedia page of the city of Tepic, about 80% of the annual rainfall actually falls in the months of July-September with an average rainfall of about 15 inches in July alone (in the 1951-2010 era). So while drilling is theoretically still possible, it likely wouldn’t be a very efficient drill program when you’re battling potentially torrential rains.

This means we will likely see the assay results of all 21 holes being released throughout the summer with the second batch of up to 46 holes to be drilled in Q3 2021. However, Sierra Madre also recently announced a 2,700 metre trenching program over multiple new discovery zones, which will operate during this rainy season and provide steady news flow.

The drill programs will consist of Reverse Circulation holes. Not only because this is substantially cheaper with an anticipated all-in cost of less than US$100/meter, but also because this will be a major help to figure out if the historical grades may have been underestimated due to the poor recovery of the drill core. While we obviously have to be cautious at this stage of the exploration program, there seem to be elements that make a 15-30% grade boost for the gold credit quite realistic. The potential underestimation of the silver grade will likely have a lower impact.

The 67 hole drill program will work the project on two angles: resource expansion by rapidly adding tonnes to the existing historical resource estimate by reinterpreting the mineralized structures on the project, while the RC drill program should further increase the confidence level in the gold and silver grades.

Tripling the resource strike length potential could provide more low-hanging fruit

When Sierra Madre started their work program at Tepic, only a small portion of the project had been mapped. The historic resource sits in a close cluster of four vein structures; Dos Hornos 1 and 2, Tomas and Once Bocas North. The total strike length of these veins was 3.5km. OnceBocas South wasn’t included in the most recent resource estimate, but the previous resource, which was issued 6 months earlier, included this vein and increased the resource to 18.2 million ounces of silver equivalent.

Over 9 km of mineralized structures identified to date.

Fast forward to today and the strike length potential has more than tripled to over 11km. Most of the newly discovered veining is within the central area of the project, but 2 other highly prospective areas are now also ready for comprehensive work. The 2,700 metres of trenching will concentrate on these newly discovered veins and apparently this type of trenching can be included in a future resource estimate.

The acquisition terms are extremely favorable

Sierra Madre gold is able to acquire full ownership by making total payments of US$450,000 in cash to Cream Minerals. The structure of the cash payments is very favorable and the company already completed most payments while Sierra Madre still was a private company. The only remaining payments are US$50,000 in October and a final US$50,000 in April next year, and that’s it for the option terms.

By April 2022, the company will have to officially exercise the option which will trigger a final payment of US$1.5M or the grant of a 3% NSR which will be extinguished after making US$4M in royalty payments. Additionally, Sierra Madre could elect to issue the 3% NSR and gradually buy back the NSR at a rate of US$1M per 1%. So the choices are pretty straightforward: Sierra Madre either needs to pay US$1.5M in cash, or issue a 3% NSR which will ultimately cost the company US$3-4M but those amounts would only have to be settled further down the road.

With about C$14.6M (which is in excess of US$10M) in cash in the bank, we would expect Sierra Madre to elect the easiest way forward and simply pay the US$1.5M lump sump to earn an unencumbered full ownership of the project. It makes little sense to mess around with NSR’s that would have to be repurchased if you have the cash readily available. Obviously, a decision doesn’t have to be made right away and the final decision will be based on the updated resource estimate which should be published ahead of the decision date.

Sierra Madre is just a US$1.6M in cash payments away from acquiring full ownership of Tepic. The project is not subject to any other royalties. While the deal sounds suspiciously cheap, we need to remember when the agreement was signed: in December 2017, when silver was trading at just around $16/oz. This means the acquisition was quite well-timed and while the economics of the project may not be too impressive at $16 silver, the current silver price of in excess of $25/oz obviously changes everything.

Conclusion

Sierra Madre Gold and Silver has all the ingredients to be an exciting exploration story this year. It has a historical resource which provides an excellent starting point and the 67 permitted drill holes should be sufficient to confirm and increase that historical resource estimate. While that historical estimate of just 10.6 million ounces silver-equivalent seems to be pretty uninspiring, Sierra Madre has an excellent chance of rapidly expanding the historical resource as it’s using a new interpretation of the mineralized system as a blueprint for its exploration program while the more efficient RC drill program could provide a small grade boost.

Sierra Madre Gold and Silver is trading 80% above its C$0.50 IPO price but even at the current market capitalization of less than C$60M there could be plenty of upside potential if the resource can be expanded and if a realistic development scenario can be developed. Meanwhile, the company is trying to implement a ‘hub and spoke’ model and we expect Sierra Madre to try to acquire similar projects that could be satellite deposits and provide mill feed to one centralized processing facility.

With C$14.6M in cash in the bank, Sierra Madre has enough firepower to rapidly drill Tepic in an attempt to establish a viable silver-gold resource.

*DISCLAIMER: This write up was completed by Caesars Report who has a long position in Sierra Madre. We are currently engaged by Sierra Madre.
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