VZLA - Vizsla Silver: Tier 1 Silver Project In Mexico

2023-07-10 17:45:24 ET

Summary

• Vizsla Silver has one of the world's best silver development projects, Panuco, with over 200M oz AGEQ and excellent grade. The mine is expected to grow in size and could provide significant long-term potential free cash flow.
• The company faces potential risks such as share dilution, permit issues, higher taxes and royalties in Mexico, and possible partial nationalization. The project's first pour is not expected until around 2028, making it a long-term investment.
• Despite the risks, Vizsla Silver has significant upside potential, especially if silver prices rise.

Introduction

Vizsla Silver ( VZLA ) has one of the best silver development projects (Panuco) in the world. It's already over 200M oz AGEQ , plus the grade is excellent at 400 gpt AGEQ. Finding large high-grade silver mines has become very difficult.

Plus, it is growing in size. They have 9 drills turning, and only 40 targets out of 135 have been drilled. They already have 7 discoveries that they are drilling. And this is all surface drilling. With these high grades, it's likely open at depth. I'm valuing them at 300M oz, but I think that is conservative. This is going to be a very large mine.

What gets me excited is the long-term potential FCF (free cash flow) that this mine could eventually provide at $75 silver. If they find 300M oz, then it should produce at least a 12M oz AGEQ annually. If break-even costs per oz are $25, then that would be 12M oz x $50 = $600M annual FCF. With a multiple of 5x, you get a valuation of $3B (it will likely get a multiple of 10x or higher, but I'm using 5x to account for share dilution between now and the first pour).

With development projects, I look for a variety of potential red flags. Here is a list of some and how Vizsla stacks up.

Resources: Excellent long-life mine.

Grade: Excellent. Should be economic at any silver price.

Management: A question mark, but they claim they can take to it production.

Location: It's a past-producing mine in a good area. Permitting should not be an issue (although that is an assumption).

Capex: We don't have a PEA yet, so this is unknown. My guess is that the capex will be high, but not a show-stopper.

Timeline to Production: This is ugly, with production not until around 2028. But I don't mind waiting.

Share Dilution: This could be ugly. Big mines are expensive to develop.

Exploration: Excellent. This mine will grow in size.

Insiders: Excellent. They are not likely to sell before the first pour.

The bad news is that this is a long-term investment. A PEA won't come out until 2024. That means the first pour is years away, perhaps 2028. This is the reason their FD market cap is only $279 million.

Also, development projects tend to break your heart because so much can go wrong. The biggest risk is that they will sell before the first pour, which nearly always happens with projects of this quality. They do have enough insiders to prevent a hostile takeover, but if the board accepts a friendly takeover, those nearly always succeed.

The other significant risks are share dilution to advance the project and pay for the capex, as well as potential permit issues, and higher taxes and royalties in Mexico. Another risk is partial nationalization, which I think could happen by 2028. This would entail Mexico requiring companies to give them partial ownership of mines. Hopefully, that never happens.

One thing I always like to point out is that investing in PM miners is speculating . We are gambling since so many things can go wrong. Keep your allocations low and expect to lose money on some of your PM mining stocks. What we are really betting on is PM prices going higher. If silver prices rise, then Vizsla will be in a strong position. If silver prices languish, then bad things can happen.

Company Overview

Vizsla Resources was formed in 2019. They purchased a large property (Panuco) in Mexico for $43 million in cash and shares. Currently, they owe $20 million that must be paid over 6 years. $2.3 million was paid in 2022, and the payments get larger in 2023. This will create dilution, so that adds risk. But they are currently cashed up with about $20 million. However, they have 9 drills turning, which burns through cash. Expect significant share dilution.

Panuco (25,000 acres) is a past-producing area with 20 known veins and more than one past-producing mine. I would expect it to take them at least 4-5 years to begin producing, although they say that one of their mines was a producing mine. They have about 70 miles of known veins. Currently, they are drilling about 5 veins in three different corridors: Napoleon (8 meters at 1800 gpt), Cordon Del Oro (3.2 meters at 1300 gpt), and Animas (3.6 meters at 1250 gpt). As you can see, the grade is excellent.

Vizsla looks like the real deal. However, they just started drilling in 2020, and this will take a while to develop. A PEA is due in 2024. So, production is about 4-5 years away. One thing to like is that management owns 16% and Eric Sprott 10%. So, they are not likely to be acquired anytime soon. They want to drill the entire property and find out what they have.

The Panuco property has a 500 tpd mill. They do not say if it is permitted or what permits are required to restart it. At 360 gpt, that is about 2 million oz per year. Clearly, that is not large enough for their resources, but perhaps it can be expanded and reduce the time required to permit the project. There are some red flags, such as an unknown path to production. Another red flag is the long wait until production, which always entails significant share dilution.

The positives are they have 9 drills turning and are cashed up to drill a lot of meters. This resource will continue to grow in size. They are drilling these deposits (see list below), and there will be additional discoveries.

Copala.

Tajitos.

Cristiano.

Napoleon.

Josephine.

Cruz Negra.

Animas.

Company Info

Cash: $48 Million.

Debt: (No long-term debt, $20 million owed for their option over 6 years).

Current Silver Resources: 250 million oz.

Estimated Future Silver Resources: 300 million oz.

Estimated Future Silver Production: 12 million oz.

Estimated Future Silver All-in Costs (breakeven): $25 per oz.

Estimated Future FCF Multiple: 5 (decreased for share dilution).

Scorecard (1 to 10)

Properties/Projects: 8.

Costs/Grade/Economics: 7.5 (estimate, no PEA yet).

People/Management: 7.

Cash/Debt: 7.

Location Risk: 6.5.

Risk-Reward: 7.5.

Upside Potential: 8.

Production Growth Potential/Exploration: 8.

Overall Rating: 7.5.

Strengths/Positives

Tier one asset (large resource / high grade).

Significant upside potential.

Exploration potential.

Strong insiders.

Risks/Red Flags

Likely share dilution.

Dependence on higher PM prices.

Could be acquired.

Speculation stock (high risk).

Estimated Future Valuation ($75 silver)

Silver production estimate for the long term: 12 million oz.

Silver All-In Costs (break-even): $25 per oz.

12M oz. x ($75 - $25) = $600 million annual FCF (free cash flow).

$600 million x 5 (FCF multiplier) = $3 billion.

Current FD market cap: $279 million.

Upside potential: 975%.

Future Valuation Explained

This is an estimated return and will only occur if all assumptions are correct. A more likely outcome will be something less than this amount, although it is not crazy talk to expect silver to exceed $75 or the FCF multiple to reach 10.

My All-In Costs are the expected costs that will generate FCF (free cash flow).

I used a future FCF multiplier of 5, which I discounted to adjust for share dilution. I expect them to receive at least a 10 multiple.

I used a future PM price of $75 silver because I am a long-term investor who plans to wait for higher silver prices. I expect to see this level reached within 3-5 years. In fact, I use $100 silver for valuations on my website since that is my expected future price. I tone it down a bit to $75 on Seeking Alpha, which I think is more reasonable.

It is my opinion that gold drives the silver price and that macroeconomics drives the gold price. The only reason I expect to see $100 silver is that I expect to see at least $3,000 in gold.

A $75 or $100 silver price may seem like pie-in-the-sky fantasy, but silver traded at $49 in 2011 when gold was at $1,935. If gold rises 50% from its current level, there is a good chance that silver will rise 150%. This is usually what happens as the GSR gets squeezed. Of course, this is an assumption.

Balance Sheet/Share Dilution

They currently have a strong balance sheet with $48 million in cash and no long-term debt. However, large mines are expensive to develop, and they will need dilute share significantly.

They do owe $20 million over six years, which will cause some share dilution. But this is minimal based on their market cap.

Risk/Reward

As I mentioned at the beginning, investing in PM miners is speculating . Why? Because one of your assumptions is bound to get flipped. The biggest risk is that PM prices won't rise, or inflation will cause costs to rise significantly, reducing expected margins. Many things can go wrong.

The reward for Vizsla is enticing if silver prices rise substantially and they build the mine. We are buying silver in the ground for less than $1 per oz, and it could easily be worth many multiples of that value once the mine is built.

Investment Thesis

Development stocks are not my favorite place to invest since the risk-reward is not great. The closer they are to development reduces that risk, but even then, the risk is high. A project can be fully permitted and one year away from production and many things can still go wrong. You need the financing to be favorable to shareholders; you need construction to not have cost overruns; you need the ramp-up to hit your expected production and cost targets; and, you need the company to not sell the project. And these are just issues in the last year!

Because development projects have such high risk, I only invest low allocations of around .5% of my total cost basis or less. I have never invested more than .5% in a development stock. And I make sure the upside is sufficient to take the high risk. Vizsla clearly has the upside to make this stock worthwhile. It is perhaps the best silver development project in the world besides Discovery Silver, which is my favorite because of its massive resource size. But Vizsla could get much larger.

I see Vizsla as a potential slam dunk. Why? Because of its high insiders, a large resource size, and high grade. Once silver gets above $30 and begins trending to $50, Vizsla's valuation is going to stand out. Yes, that payoff will be years away, but as long as silver prices remain elevated, eventually that silver will come out of the ground with a nice profit. It could easily become a cash flow machine, and silver projects like this have become exceedingly rare.

Strategy to Manage Risk

I use a pyramid approach (as discussed in my book) to manage risk, along with low allocations (normally less than 1% per individual stock), whereby I use less risky assets at the base of the pyramid and riskier stocks as I move up the pyramid.

As the shape of a pyramid implies, the bulk of my portfolio is on the lower half. This means that I hold fewer riskier stocks as a portion of my cost basis. Also, the base of the pyramid should be strong enough to withstand major corrections when the riskier stocks (exploration and development) higher up on the pyramid get obliterated (sometimes down 70% or more).

I don't trade. Instead, I buy and hold. However, I have exit strategies for each stock. Also, I often add to stocks that crash more than 50% if I still like the story, thereby reducing my cost basis. I rarely add to stocks that fall less than 50% unless I think I am underweight an exceptional stock. Moreover, I always buy big stock market corrections to improve my portfolio (this is usually the best time to buy).

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