VZLA - Vizsla Silver: This Emerging Silver Explorer Deserves Some Love From Investors

Summary

• Vizsla Silver kept intersecting thick, high-grade veins in the recently consolidated Panuco mining district in Mexico.
• The next mineral resource update is scheduled for late 2023, to be followed by a PEA in early 2024. These technical studies may establish Panuco as a tier-1 silver project.
• This article examines Vizsla Silver's business strategy and evaluates its risk-reward profile for long-term resource investors.

Investing in exploration-stage mining projects is commonly considered highly speculative, yet this oversimplification overlooks the potential for those who adhere to value investing principles as has been discussed in Seeking Alpha interviews from 2021 and 2022 , to achieve significant returns by investing in value-generating explorers.

Below, I use Vizsla Silver Corp. ( VZLA ) as an example to show how we at The Natural Resources Hub apply value investing principles to the analysis of exploration-stage mining stocks, with the goal of ascertaining its risk-reward profile to help long-term resource investors make a rational decision.

Vizsla Silver overview

Consolidating the Panuco district

In September 2019, Vizsla Silver acquired two mining concession owners, consolidating the Panuco mining district in Sinaloa, Mexico, for the first time in 460 years of artisanal mining history (see Figure 1). Vizsla subsequently obtained a 100% interest in the 6,761-hectare district, comprising over 86km of veins, 35km of underground mines, a permitted on-site 500 tpd mill, and necessary infrastructure (illustrated in Figure 2).

Mineral resource

The Panuco district contains intermediate to low-sulfidation epithermal polymetallic veins in siliceous volcanic rocks of the Oligocene and Miocene Tarahumara Formation. Based on over 250,000m of drilling, Vizsla estimated in January 2023 that the Panuco project hosted an estimated indicated mineral resource of 104.8 Moz AgEq and an inferred resource of 114.1 Moz AgEq, as listed in Table 1. Initial metallurgical testing returned high precious metal recoveries for the Napoleon and Tajitos veins.

Based on the mineral resource presented above, it seems that the Panuco project is exceptionally promising compared to other silver projects, both those currently in production and those undergoing exploration and development. This is due to its large mineral resource size and high average grades, as shown in Figure 3. Therefore, it is reasonable to believe that Panuco project has the potential to become a producing mine that rivals the Juanicipio silver mine of Fresnillo plc ( FNLPF ) and MAG Silver ( MAG ) in the future.

Exploration upside

Vizsla has drilled only 40 out of the 135 identified targets and the mineral resource mentioned earlier only includes 10 veins located predominantly in the western part of the Panuco district, which represent approximately 10% of the total vein strike-length, as shown in Figure 4. These 10 veins, including the high-grade, thick Copala vein that accounts for about half of the indicated resource, are still open along strike and towards depths. Therefore, Vizsla is expected to expand the mineral resource in the under-explored district through continued drilling.

Vizsla is fully funded with $62 million in cash and no debt for the year 2023, allowing the company to drill 90,000m of bore holes using seven rigs. The drilling program aims to upgrade and expand the mineral resource base while testing other high-grade targets throughout the district. As of February 13, 2023 , Vizsla has already reported bonanza-grade silver mineralization in step-out and infill drilling of the Copala vein, which has expanded beyond the January 2023 mineral resource boundary.

Near-term catalysts

Over the next 12 months, Vizsla has two major catalysts. Firstly, a mineral resource update is scheduled for the second half of 2023, and secondly, a preliminary economic analysis ((PEA)) based on the updated and expanded mineral resource will probably be released in early 2024.

Vizsla has also mentioned the possibility of expedited development of the western part of the district, leveraging existing operating infrastructure. The company is in advanced discussions with local Ejido communities to secure 30-year operating agreements with four primary groups, and it has completed social baseline studies and public consultation for the five ejidos adjacent to the Panuco project.

Investment thesis

Resource investments are widely known for their high volatility, which can be attributed to several factors such as uncertain subsurface geology, jurisdictional risks, long lead times, capital intensity, and fluctuations in commodity prices. This volatility poses a significant risk for short-term speculators but can be advantageous for long-term investors who adhere to value investing principles. In resource investing, it is crucial for value investors to concentrate on the observable value created by the underlying business.

As I shall demonstrate below, Vizsla Silver is creating value for its shareholders by finding an increasing number of silver ounces in the Panuco project. Additionally, the company is anticipated to create further value as it advances the project towards commercial production in the upcoming years.

Finding silver ounces

Vizsla Silver has so far released two mineral resource estimates for the Panuco land package, one in March 2022 and another in January 2023 . Between these two estimates, the company was able to increase the global mineral resource in all categories (measured, indicated, and inferred) from 106.7 Moz AgEq (51.7% in silver) to 218.9 Moz AgEq (58.9% in silver), an increase of 105.2%.

If Vizsla Silver maintains the same level of capital efficiency it has had since November 2019, the planned 90,000m drilling program for 2023 could potentially bring the global mineral resource in Panuco up to around 314 Moz AgEq by the time when the second mineral resource estimate is released, as shown in Figure 5.

Vizsla Silver raised capital for its exploration program through several private placements conducted respectively in June 2020 , July 2020 , June 2022 , November 2022 , and February 2023 . These five rounds of financing resulted in Vizsla raising a total of C$138.6 million of equity since becoming a publicly traded company, as shown in Figure 6. Currently, Vizsla has no debt and $62 million in cash , which is sufficient to fund its operations for about a year. Notably, Eric Sprott, a prominent figure in the industry, became a major shareholder in the company after participating in the second round of financing in July 2020.

From its inception until December 2021, Vizsla utilized US$0.23 to find each ounce of in-situ silver equivalent, while between December 2021 and September 2022, it spent only US$0.15 to find the same amount. This increase in capital efficiency was primarily due to the discovery of the Copala vein, which is exceptionally thick and of high grade.

The finding cost of in-situ mineral resource depends on an array of factors, such as how richly the land package is endowed with the desired mineral; the size, continuity and average grade of the orebody; the accessibility of infrastructure and the availability of low-cost labor and equipment; and the efficiency of the management in running the exploration program.

An arbitrage

What is the stock market's valuation for each ounce of silver equivalent that Vizsla has discovered in the Panuco land package? It is currently at US$0.94/oz AgEq. By finding underground silver equivalent ounces at only US$0.15-0.23/oz AgEq while selling the same resource in the stock market for US$0.94/oz AgEq, Vizsla earns an instant four-fold return , which explains why investors, including Eric Sprott, are so willingly to fund Vizsla's exploration program.

Advancing Panuco to production

Figure 7 illustrates a significant difference between Vizsla Silver's EV/MRE ratio and that of established silver producers, including MAG Silver ( MAG ), Aya Gold & Silver ( AYASF ), SilverCrest Metals ( SILV ) and Endeavour Silver ( EXK ). These producers all have an EV/MRE greater than US$6.0/oz AgEq. Therefore, if Vizsla can successfully bring its high-grade Panuco project into commercial production in the near future, there is potential for a 6.4X rerating .

Upside

The upside of Vizsla Silver can be attributed to three key value-generating activities. These include the potential for a 4.0X return from arbitraging the low finding cost and the market value of in-situ silver equivalent ounces, a potential 6.4X increase in value as Panuco enters commercial production, and the possibility of discovering additional underground silver equivalent ounces on the vast land package, which at the minimum includes a potential of 1.4X by the second half of 2023 as shown in Figure 5.

However, financing for further exploration (estimated at 0.5X) and mine construction (estimated at an additional 0.8X) may result in equity dilution that offsets the positive effects of these activities.

Overall, I believe that Vizsla Silver offers investors a significant potential for capital appreciation if they hold onto their investment for a time horizon of more than five years before Panuco reaches commercial production.

Risks

Despite the upside potential mentioned earlier, there are various risks associated with the Panuco project that could hinder its success. These risks could potentially obstruct the investment thesis in several ways.

To begin with, Vizsla Silver may face challenges in replicating its success with the Copala vein as it expands exploration to the central and eastern regions, given the subsurface uncertainty. This could lead to increased costs for discovering additional mineral resource. Secondly, the complex metallurgy of the polymetallic mineralization found in the project requires further research to mitigate the metallurgical risk. Thirdly, even if Vizsla discovers more silver equivalent ounces, the company may not be able to secure agreements with local Ejido communities or obtain the necessary permits from the Mexican government. Lastly, the existing mill may not be adequate to process the mineral resource to be eventually found on the Panuco project.

Although there are risks as mentioned earlier, I have confidence that the Vizsla management team will effectively guide the project towards success. The CEO Michael Konnert and chairman Craig Parry have demonstrated their ability to implement the exploration program swiftly and effectively. They along with other insiders hold a significant stake (16%) in the common shares, indicating their vested interest in the company's success. Furthermore, the management, especially Konnert, has recently purchased Vizsla shares from the public market as of February 21, 2023.

Investor takeaways

Over the past few years, Vizsla Silver has successfully consolidated the Panuco district and proved it has the potential to become a tier-1 silver project. A well-executed exploration program led to the identification of a significant amount of in-situ high-grade silver equivalent ounces in the western region of the under-explored district.

Despite this achievement, the stock price seems to have mainly followed the fluctuating silver price, as evidenced in Figure 6, and has not adequately reflected the success of the exploration program. Our analysis suggests that the stock offers significant upside potential offset by various risks.

Therefore, in my opinion, investors who have a long-term time horizon should consider acquiring a position before the release of a mineral resource update in the 2H2023 and a preliminary economic analysis, possibly in early 2024, two important catalysts that can drive the share price significantly higher.

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