New Pacific Metals (NYSE: NEWP) reported the largest silver discovery in Bolivia in the last 30 years. In addition, the company recently compared one of its exploration projects with another project valued at more than $1.28 billion. Currently trading with a valuation of approximately $400 million, new feasibility study to be published in 2022, and information on drilling in the Carangas project could boost the share price. With that, note that the stock is not for everyone as inflation risks and failure to assess reserves could lead to volatility in the stock price.
New Pacific Metals
Incorporated in Canada, New Pacific Metals run it silver sand project, which is believed to be Bolivia’s largest silver discovery in the last 30 years. The company also has two exploration projects, Carangas and Silverstrike.
I believe that investors are expecting fairly optimistic results from the feasibility studies that will be reported on the Silver Sand project. However, in my view, they can also build on the upbeat results from the Carangas and Silverstrike drilling projects. Keep in mind that management compared the Carangas project to the Filo Del Sol project, which yields an after-tax net present value of $1.28 billion. These numbers may explain why the current market capitalization is much higher than the valuation of Silver Sand Project.
When it comes to projects managed by New Pacific Metals, I think 2022 and 2023 could be quite exciting in terms of share price catalysts. Management is set to release Silver Sand’s Preliminary Economic Assessment along with reports on new environmental permitting activities and further updates in September. I think new information about production plans could push the stock price higher.
Finally, note that the company is present on social networks, where many new articles on the PEA and the Bolivian government’s 2021 to 2025 economic development plans have been published.
At the moment we are doing a PEA and it will be finished by the end of this year, also in parallel we are trying to do a PFS to take advantage of the Bolivian government’s economic development plan 2021 to 2025. Source: New Pacific Metals – Twitter
Under normal circumstances, the valuation of the Silver Sand project does not exceed $100 million
For the evaluation of the Silver Sand project, I assumed nearly 35 million tonnes of mineral resources including 8.4 million tonnes measured and 26.99 million tonnes indicated mineral resources. I also used 137 grams of silver per ton. These figures were reported by New Pacific Metals in a technical report:
I also used EBIT/Sales figures from other silver miners. Silvercorp (SVM) and Endeavor (EDR) report EBIT/Sales between 37% and 17%. My hypothesis includes an operating margin close to 32%:
I assumed a total production of almost 35 million tons, 137 grams per ton of silver and $62 per gram. I think the business could produce 1700 kt per year from 2029 and 1200 kt from 2042 to 2049. With an operating margin around 32%, non-operating income after tax would be almost $23 million per year. year from 2029 to 2041 and $16 million from 2042 to 2049.
Now with growing D&A, working capital/sales swings of around 0.5%, and optimistic capex/sales, I’ve gotten a max free cash flow of $19 million per year. The NPV would be close to $100 million.
I believe management’s assessment of the mine is clearly aligned with the assumptions made in this scenario. As of March 31, 2022, the interest on the mining properties was worth $83 million. That said, I think there is room for optimism as mining properties have gone from $75 million in June 2021 to $83 in March 2022. In my view, as management continues to explore and drill new areas, proven reserves will likely tend to increase. Therefore, future production and future free cash flow could also increase.
It is also advantageous that the company has no financial debt and has $35 million in cash. This means that New Pacific Metals can receive debt financing if management deems it necessary. Keep in mind that the asset/liability ratio is over 50x.
A more optimistic scenario results in a valuation of the Silver Sand project of $332.5 million, and traders could bet on the Carangas project
If you are an optimistic investor, you will probably like this scenario more than the previous one. Given the increase in mineral properties reported in the latest review, I assumed that more exploration would lead to more proven reserves. Let’s not forget that I assume New Pacific Metals will produce until 2052. Obviously, management has plenty of time to continue exploration and development.
I assumed reserves of 50 million tons, production close to 2.5 million tons and revenues close to $300 million. Results include a 2030 NOPAT of $45 million and an operating margin of approximately 32%.
In my best-case scenario, future free cash flow would even reach almost $45 million from 2030 to 2045, and the FCF/Sales ratio would be 15%. The net present value with a 5% discount would be $332.5 million.
New Pacific Metals is currently trading with a valuation of over $400 million. This means that many market participants believe that the Carangas project and the Silverstrike project are promising. I couldn’t find much information on the expected proved reserves. Management will most likely have to invest a lot more money to measure reserves in these new areas. With that, the information we have so far is promising.
The Silverstrike project includes a gold zone. Previous drilling by Rio Tinto (OTCPK:RTPPF) includes gold mineralization with a concentration close to 1.02 grams per tonne gold and 18 grams per tonne silver. Management need only assess the total value of these gold and silver mineralizations.
Regarding the Carangas project, the company disclosed mineralization with 78 g/t silver and 1.26% zinc. The project has been compared by management with Filo Del Sol Projectreported to have an after-tax value actual net value of $1.28 billion. The Filo Del Sol project is located in the same metallogenic belt.
In my opinion, we will soon have much more information on the mineral reserves of the Carangas project. Keep in mind that the company has announced a drilling program of over 40,000 meters to be completed in 2022.
New Pacific Metals is currently trading at less than $500 million. I do not believe that the Silver Sand project can justify such an assessment with the information we have. In my opinion, the upside potential is quite significant due to the Carangas project. In sum, the title is not intended for very conservative investors, but could be very profitable for some others.
If the Silver Sand project is ultimately worth $332.5 million, with $35 million in cash, we would get a valuation of $367.5 million. If we assume that the Carangas project is worth 25% of the NPV of the Filo Del Sol project, we could give an estimate of around $725 million. The sum of these projects could amount to more than a billion dollars. If we assume 150 million shares outstanding, the implied price would be $6.6 per share.
Risks related to the failure of the reserve estimate, inflation or supply chain could drive the stock price down
New Pacific Metals and I have made a significant number of assumptions regarding the overall life of the company’s flagship project. The company will unveil a lot of new information on the economic feasibility of the projects and possibly new mineralization figures. If the numbers are below market expectations, the stock price will likely fall. Finally, the company may also produce less ore than expected because geological models may be too optimistic. As a result, the fair valuation of the company would be lower than expected.
A rise in inflation could also be very detrimental to New Pacific Metals. Salaries could increase, capital expenditures could be higher than expected, or operating expenses could exceed expectations. Therefore, future free cash flow may be lower than I expected. In the worst case, one would expect a decline in the company’s valuation.
In certain circumstances, New Pacific Metals may experience supply chain complications. Management needs certain machines and tools for drilling, exploration and mining. If the company cannot have these tools or has to pay too much for future free cash flow, margins would shrink, which would lower the company’s stock valuation.
The valuation of New Pacific Metals has reached over $400 million, which is significantly more than the net present value of the Silver Sand project. I believe the mineralization found in the Carangas project and the association with the Filo Del Sol project has generated significant optimism in the market. In the same metallogenic belt where the Carangas project is located, the Filo Del Sol project is said to have a net present value of over $1.28 billion. With that in mind, I think the Carangas project could be worth enough to justify New Pacific Metals’ current market valuation, and possibly more.