Tracker - May 10, 2021: What is the upside potential for Sonoro's upcoming Cerro Caliche PEA?
Sonoro Gold Corp, initially assigned a Bottom-Fish Spec Value rating at $0.135 on December 14, 2018, was confirmed as such in July 2020 (see SVR Overview Tracker July 17, 2020), but, following a successful $8 million financing, was upgraded into a Fair Spec Value rated Favorite at $0.33 on August 14, 2020 (see What's Next Tracker August 14, 2020). Sonoro was continued as a Fair Spec Value rated 2021 Favorite at $0.23 on December 31, 2020 and effective May 10, 2021 is confirmed as such with an immediate price target of $0.40-$0.60 ahead of a PEA expected in late July 2021. The basis for this recommendation is an updated Outcome Visualization for the Cerro Caliche project (May 10, 2021) which projects a future $2.03 per share price target based on a 15,000 tpd open pit heap leach operation that mines 75 million tonnes of 0.55 g/t gold over 14 years. While there is high grade discovery potential within the flanking trends, the main near term basis for valuing Cerro Caliche will be the numbers generated by the PEA for a projected 5-6 year resource from the central zones and the price of gold. The Sonoro Cerro Caliche OV is dynamic in that every night it is updated to reflect the current gold price, CAD:USD exchange rate and the latest fully diluted figure for Sonoro. The OV as of May, 2021 has been crystallized as OV Tracker May 10, 2021. When Sonoro publishes its PEA the OV will be updated to reflect he PEA parameters.
The $8 million financing in 2020 enabled Sonoro to pursue a 3 prong strategy for its 100% optioned Cerro Caliche project in Mexico's Sonora state. The first prong was to launch a core drilling program to test the deeper potential of this low sulphidation epithermal system for high grade bonanza zones. At the time gold had broken above $2,000 and the market, perversely, was excited about high grade discovery holes which did not need a higher gold price. The second prong was to undertake RC drilling to expand the open-pittable low grade gold potential of the zones that make up 4 main northwest oriented trends within Cerro Caliche to support Sonoro's original Plan A, which was to develop a demonstration heap leach operation (HPLO) of 3,500-4,000 tpd funded by a combination of Chinese investment and EPC backing (by a "engineering, procurement & construction" service company that usually includes a 20% cost markup). At the start of 2020 Sonoro was pursuing Plan A on the basis of a 2019 resource for the Japoneses Zone (11,470,000 tonnes at 0.5 g/t gold) but the Covid pandemic sidelined that strategy. However, depending on how the bonanza core drilling turned out, the third prong of Sonoro's strategy was to revive an 8,000 tpd version of the HPLO based on a bigger resource delivered by the RC drilling.
Drilling got underway in September 2020 with a core and RC rig, with both focusing on the Japoneses zone. By November it had become clear that the deeper core holes underneath the Japoneses were not delivering the high grade bonanza veins while the shallow RC drilling was expanding the open-pittable resource.
A strategic decision was made to divert the core rig to the flanking Cabeza Blanca-El Colorado and El Rincon-Veto de Oro trends to drill shallow holes for structure. These trends had seen less historical drilling but had delivered higher grade intervals than the Japoneses zone. Sonoro ended up drilling 48 core holes for 6,014 m rather than the 20-25 holes for 6,000 m as initially planned. The result was positive in that both of the flanking trends appear to have strike continuity with high grade segments that will need to be stitched into open-pittable resources with future drilling.
Around the same time the success Sonoro was having with the RC drilling led to a decision to expand the HPLO plan from demonstration scale to a full-fledged 15,000 tpd open pit heach operation similar the San Agustin Mine developed by Argonaut Gold Inc. The core rig was replaced by a second RC rig in January 2021. When drilling wrapped up in April 2021 the tally stood at 433 holes for 47,500 m consisting of 367 RC and 66 core holes of which Sonoro drilled 266 RC and 48 core holes.
Based on the volume and drill density Sonoro believes that it can deliver a 43-101 resource estimate to support a PEA for 5-6 years of mining at 15,000 tpd mostly from the Buena Suerte and Japoneses trends combined into a single pit but also with ore from a second pit on the Cabeza Blanca-El Colorado trend. A PEA is now expected by the end of July, with the main holdup being completion of metallurgical studies which are key to determining optimal recovery, crushing and leach cycle inputs for the PEA.
Sonoro's $8 million private placement of 36.4 million units at $0.22 with a full 3 year warrant at $0.30 came free trading in December 2020. Pallisades Goldcorp, which took a lead order, participated in numerous other financings in 2020, and, in most cases, adopted a systematic clip the warrant and flip the stock strategy. Sonoro was no exception and the stock as a 2020 KRO Favorite finished down 30.3% at $0.23 where it was continued as a Fair Spec Value rated KRO 2021 Favorite on December 31, 2020. During the first four months of 2021 the stock has undergone a major ownership rotation as those shareholders hoping for a bonanza grade discovery at Cerro Caliche departed, along with the free lunch seeking clip and flippers. The first part of 2021 also proved to be a dismal period for gold despite all the hand-wringing about the inflation that the Federal Reserve's monetary policy and Biden's fiscal stimulus bills are supposed to generate. During 2021 the GLD ETF had lost 4.7 million ounces through May 7, 2021.
The best explanation for gold's weakness other than the departure of Donald Trump as a destabilizing force is the siren song of cryptocurrency being hyped as a new and enduring asset class which, in the case of Bitcoin, would need to gain another 1,000% in order to have the same current value as the above ground gold stock, about $12 trillion. It is difficult to predict when the crypto greater fool spiral will peak, but it is easy to predict that when it does, crypto prices will collapse because these digital "assets" are not grounded in anything but themselves and are only needed by those unfortunate enough to become a victim of ransomware. And cryptocurrencies are not legal tender so if holders want to convert their expanded digital wealth into real things, they will first have to find suckers to swap dollars for crypto. The first part of 2021 has been difficult for advanced gold juniors like Sonoro, but in early May there are signs that the market is warming up again to resource juniors.
The weak start for gold juniors in 2021 collided with ramped up spending by Sonoro, which bit the bullet in April by raising another $3 million through a private placement of 17.3 million units at $0.18 with a full 2 year warrant at $0.30. This will be sufficient to allow Sonoro to deliver its PEA and began the task of securing project financing. The result is 102.4 million issued and 166.5 million fully diluted with dilution largely coming from 56.2 million warrants at $0.30 which expire in April-August 2023. While this is a substantial overhang, these warrants are not transferable, and must be exercised to deliver profits to the holders. Full exercise would raise about $16.8 million for Sonoro.
|Operating Rate (tpd):||15,000||SS||Mining Type:||Open Pit||VS|
|Mine Life (years):||13.7||Startup:||2022||SS|
|Tax Treatment:||SLM Straight Line Depreciation||VS||Tax Rate:||38.0%||VS|
So an obvious question is, what might be the upside stock price potential for Sonoro Gold Corp in rational terms that justifies keeping it a Fair Spec Value rated Favorite? In August 2020 I created an outcome visualization based on the global potential at Cerro Caliche to host a resource of 75 million tonnes at 0.4 g/t gold open-pit mined and heap leached at 15,000 tpd with a 72% gold recovery. That resulted in a 14 mine life generating 681,000 oz gold which at a 10% discount rate at $1,944/oz gold indicated an after-tax NPV of CAD $272 million which, based on 124 million fully diluted back then, translated into a future price target of $2.20 per Sonoro share. I based my cost assumptions on those used in a PEA by Argonaut for its 15,000 tpd San Agustin open-pit, heap leach operation. Since then we have ended up with a lower gold price and 166.5 million fully diluted, but there have also been several important changes on the Cerro Caliche front which have prompted me to revise my OV for Cerro Caliche.
A new Outcome Visualization for Sonoro's Cerro Caliche project was created on May 10, 2021 with gold at $1,840 and the CAD:USD exchange rate at 1.2095 which generated a future price target of CAD $2.03 for Sonoro Gold Corp which is lower than the August 2020 target of $2.20 despite better cost and deposit parameters mainly due to the lower gold price, higher fully diluted and stronger Canadian dollar. The after-tax net present value (NPV) at 8.5% discount rate is USD $280 million or CAD $338 million with an internal rate of return of 166.0%.
|Metal 1||Metal 2||Metal 3||Metal 4|
|Grade:||0.55 g/t||SU||4.00 g/t||SU|
|Price:||$1,840.45 /oz||VS||$27.74 /oz||VS|
|Annual Payable:||71,159 oz||207,007 oz|
|LOM Payable:||974,778 oz||2,835,718 oz|
The key deposit parameter changes were to boost the gold grade from 0.4 g/t to 0.55 g/t and the gold recovery from 72% to 75%. The greater drill density created by the 35 m spacing of the RC drilling on the central trend zones (Buena Suerte and Japoneses) which will now be mined as a single pit has led management to project a grade in the 0.5-0.6 g/t range, better than the 0.5 g/t grade of the original Japoneses resource estimate. I had used 0.4 g/t in the original OV on the assumption that the effort to add more tonnage would dilute the average grade, which appears to have been too conservative. The consequence of turning the central zones into a single pit is that the waste to ore strip rate has grown from 1:1 to something in the order of 2-3:1, so I chose 2.5 as a mid point. Ongoing metallurgical tests have yielded recoveries up to 80%, better than the 72% used for the initial resource estimate, so I boosted the recovery to 75% though this is a key number we won't know until early July due to ongoing tests. Under the new OV scenario Cerro Caliche would average 71,159 oz payable gold per year for a LOM total of 975,000 ounces.
|Currency||USD Cost||Exchange Rate|
|Mining Cost ($/t rock):||$1.50||SS||USD||$1.50||1.000|
|Mining Cost ($/t ore):||$5.25||USD||$5.25||1.000|
|Processing Cost ($/t):||$7.00||SU||USD||$7.00||1.000|
|Other Cost ($/t):||$0.50||SS||USD||$0.50||1.000|
|Total OpEx ($/t):||$12.75||USD||$12.75||1.000|
OpEx ended up higher while CapEx and Sustaining Capital declined. Rock mining cost at $1.50 per tonne stayed the same but with the strip rate boost mining cost increased to $5.25 per tonne. Processing costs increased to $7.00 per tonne because management is anticipating a finer crush to boost recovery and shorten the leach cycle. With $0.50 per tonne in other costs total OpEx comes in at USD $12.75 per tonne ore processed. CapEx at $40 million for Argonaut's San Agustin was reduced to $25 million because Sonoro does not intend to install a 39,000 tpd crushing facility for its 15,000 tpd mining operation. Sonoro also plans to use contract mining, which allowed me to reduce sustaining capital for the 14 year mine life from $40 million to $15 million.
Coming up with a plausible outcome visualization, namely monetarily quantifying the size of the prize, is only half the valuation problem. The numbers used are speculative, and even when the company releases a 43-101 PEA, that economic study's numbers will themselves have a 30%-35% uncertainty. Sonoro's Cerro Caliche is still at the pre-PEA stage which involves infill drilling that further defines the deposit and metallurgical studies which feed into the cost structure of mining that deposit. The market is currently pricing Sonoro at CAD $38 million which is about 11% of the projected $338 million outcome value ($0.23 per share versus $2.03 per share using 166.5 million fully diluted and a 100% interest). That sounds like a real bargain, but in fact it is slightly above the fair value range and technically represents poor speculative value.
According to the rational speculation model, which applies an uncertainty range to each stage of the project cycle, the rational price of an expected outcome is that outcome's value multiplied by the certainty it will be delivered, which for the infill-metallurgy rung of the uncertainty ladder is 5% to 10% or $0.10 to $0.20. However, we are only 3 months away from getting a PEA for Cerro Caliche, which in turn will improve the certainty of the outcome defined by the PEA to 10%-25% which is CAD $33.8 million to $84.5 million in absolute terms or $0.20-$0.51 in per share terms. These are Fair Speculative Value ranges. Note the column on the right labeled "MSV" for "Market Speculative Value". This is the range defined by the infamous S Curve that a project's market valuation will often command as it works its way through the exploration-development cycle. In bull markets resource projects tend to be priced above the fair spec value range because there is all this speculation about how much bigger a deposit could get, how much higher the metal prices may rise, and what sort of wild strategic premium an over-priced bigger company might pay to own that project. The resource juniors are not currently in a bull market of this nature, though 2020 appears to have been a turnaround year for a decade long resource sector bear market.
Fair Speculative Value Ladder
|USD OV NPV||CAD OV NPV||Exch Rate||Diluted||Net Interest|
|Project Stage||Uncertainty Range||CAD FSV Range||CAD FSV per Share Range||CAD MSV per Share Range|
||0.5% - 1.0%
||$1,691,196 - $3,382,392
||$0.01 - $0.02
||$0.02 - $0.05
||1.0% - 2.5%
||$3,382,392 - $8,455,980
||$0.02 - $0.05
||$0.05 - $0.10
||2.5% - 5.0%
||$8,455,980 - $16,911,959
||$0.05 - $0.10
||$0.10 - $1.52
|Infill & Metallurgy
||5% - 10%
||$16,911,959 - $33,823,919
||$0.10 - $0.20
||$1.02 - $2.03
||10% - 25%
||$33,823,919 - $84,559,797
||$0.20 - $0.51
||$0.51 - $1.52
||25% - 50%
||$84,559,797 - $169,119,594
||$0.51 - $1.02
||$0.51 - $1.02
|Permitting & Feasibility
||50% - 75%
||$169,119,594 - $253,679,391
||$1.02 - $1.52
||$0.51 - $1.02
||75% - 100%
||$253,679,391 - $338,239,188
||$1.52 - $2.03
||$1.02 - $1.52
||$2.03 - $2.54
The PEA is an important milestone because it defines what sort of deposit a company has delineated and a rough estimate of what it would cost to mine in the optimal scenario. If the outcome is very robust the project will attract funding to proceed to the prefeasibility stage. Once that funding is in place and the company is taking steps to proceed with a PFS, the project gets moved to the PFS stage where the certainty of the outcome outlined by the PEA is 25%-50% of its value. If Sonoro were to get its warrants exercised and start work on a PFS, its fair speculative value would be $0.51-$1.01, where we could expect it to trade. Note that the S-Curve value range at this stage is now the same as the fair spec value range. Should Sonoro deliver a PFS which confirms the PEA outcome, the project would advance to the permitting and feasibility study stage. Fair spec value would jump into the $1.01-$1.52 range, but note that the market speculative value stays in the $0.51-$1.01 range. This is the dreaded "value trough" of the "S Curve" where a project is discounted from its fair speculative value because very little will improve in the fundamentals when the feasibility study is complete, and the timing of a permit remains uncertain. The value trough is what is currently giving Perpetua's Stibnite gold project its Good Speculative Value.
Sonoro Gold Corp's Cerro Caliche project is different in that the management team believes it can secure CapEx funding to put the gold project into production on the basis of the PEA alone with only 5-6 years of ore so far outlined. But note that with a 166.0% IRR the payback period is less than a year, 7-8 months. If the PEA delivers 43-101 compliant numbers similar to those in my OV, Sonoro's financial wizard, chairman John Darch, wants to skip the additional feasibility demonstration stages and go direct to project financing, possibly with an EPC company though that would reduce the NPV of the project. But if this takes place in a rising gold price market, financing deals can be created that allow the lender to participate in the upside generated by a higher gold price. The catch, of course, is that construction cannot start until a mining permit has been received. The timeline provided by Sonoro is that a permit for Cerro Caliche will be in hand by Q4 of 2021, with production commencing in H2 of 2022. This would not be possible in a jurisdiction like Canada or the United States, but Sonoro's team, which includes Jorge Diaz and Mel Herdrick, has mine permitting and development experience in Mexico.
Should Cerro Caliche be permitted and financed by Q4 of 2021, including a key loose end in terms of surface rights from the single private landholder, and the PEA numbers are similar to those of the OV or better, fair speculative value would jump into the 50%-75% range or $1.01-$1.52. Sonoro Gold Corp is a Fair Spec Value rated 2021 Favorite at $0.225 because it is on the threshold of transitioning from an exploration play to a mine development play with 50,000-75,000 oz gold per annum output potential whose cash flow would go into expanding the mine life from 6 years to 14 years while also pursuing the deeper bonanza potential of the Cabeza Blanca-El Colorado and El Rincon-Veto de Oro trends on the flanks of the central Buena Suerte and Japoneses trends that will supply the first 6 years of production.
The question will arise as to what if ultimately there is only 6 years worth of ore feed instead of 14 years? The OV projects a LOM average after-tax cash flow of USD $41.5 million or CAD $50.2 million at 1.2095 exchange rate. At 8.5% the NPV of 14 years is CAD $356 million (the OV model is $338 million because it calculates only 13.7 years of ore). Because of the way the discounted cash flow model works each extra year of cash flow contributes a smaller amount to the NPV figure. The first 6 years has an NPV of CAD $183 million at 8.5% or 51% of the 14 year NPV. Sonoro will probably use a 5% discount rate in its PEA like everybody else does for a gold project; that NPV for 6 years is CAD $214 million and $467 million for 14 years. These are still good numbers, but before we worry about whether the market will price in 75 million tonnes or just 30 million tonnes, we should wait for the PEA results some time in July. Sonoro Gold Corp should settle into the $0.40-$0.60 range over the next few months ahead of the PEA.
Sonoro Gold Corp offers Fair Speculative Value at $0.225 with a price target in the $0.50-$1.00 range if the upcoming PEA delivers a similar outcome as presented in the May 10, 2021 Outcome Visualization, and management provides evidence that it can secure project financing for fast-track development of Cerro Caliche as a 15,000 tpd open pit heap leach operation.