A Silver Junior with Giant Potential

Sean Brodrick

When gold and silver prices pull back, I like to buy precious metals and the companies that mine them — and you probably do, too. But when you get that pullback, what do you buy?

One that I like is Great Panther Resources (GPR on the TSX, GPRLF on the pink sheets in the U.S.). Great Panther is a Canadian miner operating primary silver mines in Mexico, with some gold and base metals also in the mix. I’ve visited their projects at Guanajuato and Topia in the past, and I was very impressed by what I saw. And last week I had lunch with Bob Archer, Great Panther’s CEO.

Recently, Great Panther has announced a parade of good news. Production is booming, mining costs are dropping, and the company has “blue-sky” potential in new zones it is exploring.

That’s why Bob wanted to touch base — to make sure I had all the latest on Great Panther. First, here’s the good news that Great Panther reported recently for its third quarter …

  • Metal production for the quarter came in at 597,057 silver equivalent ounces, an increase of 34% from the year-earlier quarter and a new company record.

  • At the same time, silver production hit 398,811 ounces, an increase of 41% from the year-earlier quarter and another new record.

  • Gold production of 1,951 ounces, an increase of 36% year-over-year, and a third company record.

And here’s a picture of the company’s production results in graphic form …

GPR 2006 - 2007 Total Quarterly Production of Silver equivalent ounces

The company’s production has increased in 12 of 15 successive quarters. Two-thirds of Great Panther’s production comes from the Guanajuato Mine in Guanajuato, Mexico. The other third comes from the company’s Topia Mine, also in Mexico.

The Silver of the Conquistadores

Great Panther doesn’t have a (NI 43-101) compliant resource estimate for all of the individual mines at its Guanajuato Mine Complex. That may sound a bit odd, but it makes sense when you know the history of the mine. Guanajuato has been mined for over 400 years, starting back in the days of the Conquistadores!

What’s more, over a billion ounces of silver have come out of that mine. The silver that was mined for centuries was visible silver found above 400 meters depth.

Flash forward to today — the Guanajuato Complex is 2.6 miles long and has seven big silver veins, the primary of which is the Veta Madre. It has five areas that are currently being mined, and two areas where high-grade silver deposits have been defined for future mining.

Guanajuato Mine Complex

When Bob’s team took over the mine, they just mined the veins in areas where they knew they had silver and boom! They had a producing mine.

But it’s a deep mine, which makes exploratory drilling to delineate a resource expensive.

Also, the fact that a city (Guanajuato) has grown up around the mine in the past 400 years — in fact, I can tell you from personal experience that there is a taco stand not 75 feet from the mine’s main entrance — makes the kind of exploratory drilling that other miners do rather difficult.

Resources Are Growing

Still, Great Panther has done enough drilling to get a resource estimate of the Cata Clavo Resource, which starts about 430 meters down in the Guanajuato Complex. That one resource contains an estimated 5.3 million ounces of silver equivalent.

And there could be a lot more. “We have a much better understanding of the geology of the area now, and the continuity of the veins,” Bob explained.  “We don’t need to make our resources compliant with NI 43-101 in order to mine them.” 

As a result, the company has been able to open up parallel veins alongside old works. And the deeper they go, the richer the resource gets.

There’s still a lot of exploring to be done. In fact, the company plans a $14-million, three-year drilling program at both Guanajuato and Topia, and that should prove up a lot more of what they think they have.

The goal is to delineate 40 million ounces of silver equivalent. And as to what they think they might have … well … the geology leads Bob’s team to believe the next 200 meters down at Guanajuato could have as good or better grades as the previous 400 meters. And that 400 meters contained a billion ounces.

“You do the math,” Bob told me with a grin.

Now notice that I’m using words like “might” and “think” — nothing is proven. But there’s another part to the company’s story — Topia.

While Topia will never be more than 50% of production from Guanjuato, Topia has a rich vein called the Argentina Vein. All told, Topia contains a resource of 11.1 million ounces of silver, or three-fourths of the company’s known resources.

And remember, this isn’t even the company’s big producer … yet. But over the next three years, Great Panther plans to bring the Argentina vein into full production.  Added to rising production from Guanajuato, that could push the company’s annual production to 3.8 million ounces in 2012.

China Grain Stockpiles

This works out to annual increases of approximately 20% and a total increase of more than 100% from 2008 levels.

Capital expenditures for the new strategy are projected to total approximately $22 million over the next three years, with an additional $14 million in exploration spending. It is anticipated that the vast majority of this will be funded internally from cash flows.  However, the company announced a $10 million equity offering this week.  That can be dilutive, but it’s probably already priced in.

As production goes up, costs go down because the company can process more ore at the same plant. And that brings us to the next good thing …

Costs Are Going Down

In the time that I’ve covered Great Panther, its mining costs have gone from $11.30 an ounce to between $6 and $6.50 an ounce this year, net of byproducts. As it ramps up production into 2012, the company expects costs to fall even more, to $4 an ounce.

Part of what made its costs so high was that the price Great Panther was charged by the smelter went up 150%. This happened at just the same time that silver prices cratered last year.

So, Bob and his team shut down some operations temporarily, renegotiated contracts and made some other hard-but-necessary cuts. They found new buyers for their production from both projects, at better prices. All the pain paid off. Great Panther was able to slash its costs by close to 30% over a three-month period.

Today, we are seeing pain turn into gain, as the price of silver is over $17 an ounce and going higher. And after all that cost-cutting, Great Panther, which doesn’t hedge production, is in a great position to make the most of rising prices.

Also helping costs, the company’s processes are becoming more efficient. The company’s plant at Guanajuato has capacity of 1,200 tonnes a day, but only operates at 500 tonnes a day.

Obviously there’s room for expansion there, and Great Panther has started to upgrade the plant to improve recovery efficiencies, installing new equipment including cyclones, flotation cells and filters. This should boost production and cut costs down the road.

And greater efficiency at the Guanajuato plant has already boosted Great Panther’s gold recoveries. Metal recoveries for Q3 2009 averaged 84.8% for gold and 82.9% for silver compared to Q3 2008 when they were 77.5% and 83.0%, respectively.

At the Topia plant, metal recoveries run at 91.2% for silver, 79.8% for gold, 93.0% for lead, and 89.3% for zinc — all very good, and plant records for zinc, lead and silver recoveries. So Great Panther is improving metal recoveries at both plants. This, in turn, should boost profits.

Result of All This: Revenues Are Soaring

Total Gross Revenues (CAD$)

Right now, the company doesn’t make a net profit, due to some non-cash charges.  But that should change. Looking at this chart, you can see that Great Panther’s revenues have recovered from the hit they took last year to close in on C$9 million. Looking forward, Great Panther expects annual revenue in excess of C$50 million by 2012.

In the next quarter, the company should also have a third successive quarter of positive corporate cash flow and have increased its cash position slightly to about $2.5 million, while reducing short term debt.

Are There Any Problems?

I think Great Panther went through most of its potential problems last year, and came out a leaner, meaner company that is better able to ride the rally in metals. However, there is political risk in Mexico.

You’ve heard about how the government is battling drug cartels, and there’s more than that. Opposition lawmakers in Mexico are pushing for a royalty on Mexican mining production as the country faces a fiscal gap of 3% of gross domestic product next year. The next big election in Mexico is four years away, but this and the threat of other potential laws could weigh on miners working in Mexico.

Also, Great Panther isn’t a pure silver play — it also produces gold, lead, zinc, and uses credits for the other metals to bring down the cost of its silver ounces. Some people will have a problem with that; I don’t.

Finally, there is the risk of another equity offering, but cash flow from Great Panther’s silver production should be enough to pay for mine upgrades.

Now, let’s look at a weekly chart of Great Panther …

Weekly chart show the recent pullback in Great Panther is only bringing it closer to its big uptrend ... a good time to buy.

Great Panther pulled back this week, but that’s just bringing it closer to its big uptrend, which has been a good place to buy so far this year.

My Red-Hot Global Small-Caps subscribers are already in this stock. If you’re thinking of adding it to your own portfolio, do your own due diligence. Also, be aware that this stock doesn’t have high volume, so you’ll probably want to enter it in stages.

Great Panther is most liquid on the Toronto Stock Exchange. In the U.S., where Great Panther lists on the pink sheets, it’s not liquid at all.

Recent strength in the dollar has knocked some great metals producers for a loop. But that has me licking my chops — it’s making these companies cheap, and the dollar rally rounds counter to the big trend. The U.S. Treasury is printing greenbacks like toilet paper, and generally doing everything it can to flush the value of the buck down the tubes in the longer term.

So I hope the dollar rallies for a while — it could make some great mining companies dirt cheap. That makes for all the bigger gains when the dollar slumps again and these miners springboard higher.

Yours for trading profits,

Sean

P.S. Remember, you can read my daily updates and commentary on my Red-Hot Energy and Gold blog at http://tinyurl.com/dxfyhs.



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Sean travels far and wide to seek out small-cap values in the natural resource sector. His journey started in New England. As a youth he worked on Mt. Washington, on the cog railroad that runs to the summit.