Solid cash flow stories have been rewarded with decent multiples by the market, but the reality is that what Mr. market is really paying for these days is high-grade drill holes.
We have found a story that we believe will combine the two over the next 12 months, and beyond.
Pershimco Resources Inc. [TSXv:PRO] which closed today at C$.72 has projects in Mexico and Quebec that should deliver excellent news flow and results, going forward.
Mexico
In Mexico, Pershimco’s J/V partner Dia Bras Exploration Inc. [TSXv:DIB] has the right to earn a 70% interest in the Cusi land package, comprising the La Bamba and San Miguel mines. DIB will vest that interest sometime this year leaving PRO with 30% of the Cusi Camp, and a 2% NSR on production.
Currently La Bamba is producing up to 300 tpd of oxide material though DIB’s Malpaso mill, and it is expected that by mid-2007 this will be ramped up to the 500 tpd level.
With 20,000 meters of drilling slated to begin very soon, Pershimco believes that it can prove up something in the neighborhood of 1 million tonnes of material grading greater than 300 g/t by the fourth quarter of this year, or more than 10 million ounces of silver – about 2/3 of which will likely be oxide, and 1/3 will be higher-grade sulphide material with base metal credits.
A scoping study at La Bamba will put some specific numbers on what looks like a very attractive option – increasing production to the 1,000+ tpd level in 2008. This would most likely be achieved by the building, lease, or purchase by Pershimco of an additional mill in the region.
The company has also acquired an option on 100% of the Camila and Melina properties from which we expect to see positive development news throughout the year. A program is planned to test what appears to be attractive and high-grade copper-gold and copper-zinc targets with the potential for very considerable tonnage.
All of these operations are very exciting and we believe will grow their resource bases substantially through the drill-bit, while the company brings in cash flow from bulk-sampling and pilot production.
Quebec
At the company’s Courville project in Quebec, a development program including a first phase of 5,000 meters of drilling, a 43-101, bulk-sampling and additional drilling will look to expand the present known anomaly stretching 1 km long, 200 m deep, and 200 m wide. It is believed that mineralization averaging 1-1.5 g/t potentially exists along 3-4 kms.
If this is confirmed, drilling to test mineralization at depth will be the next step.
At a specific gravity of 2.7 and based on a 30% recoverability factor typical in the Abitibi area, 1 million to 1.5 million ounces of gold are suggested in the present area of mineralization alone.
We think that if drilling confirms what the company’s geological team believe, (and several technical staff on loan to the company from Agnico-Eagle [TSX:AEM] (who is sniffing around) rumblings of comparisons to an Osisko [TSXv:OSK] type super-pit could start to echo in the junior market.
This is a very big, and growing target – and the higher-grade portions are easily targeted for bulk-sampling to pay for development.
Cash Flow
With only 25.5 million shares outstanding and 34 million shares fully diluted, PRO has a cleaner structure than most of its peers, and leverage to cash generated and discovery is consequently amongst the highest in its class.
On the cash flow front, once production from the Cusi camp increases at mid-year to 500 tpd, Pershimco’s annualized share of 30% plus the 2% NSR will equal about $5 million at current silver prices.
In addition, bulk sampling from Courville which we expect to average 3 g/t, and bulk sampling from PRO’s other Mexican projects should contribute another $3-$5 million this year.
This yields total cash flow per share for 2007 of anywhere from 23c - 30c if one uses fully diluted per share numbers, and 30c to 40c on outstanding share numbers. A multiple of 5X is the most that is achievable for now, given that development work is ongoing and cash flow totals are not at critical mass levels.
But, as the company proves up 43-101 compliant tonnage through the course of the year and demonstrates its plans to grow production at Cusi in 2008, we believe that a multiple of 10X could be achieved given the company’s primary silver production and steep growth curve. This multiple may be achieved in early 2008, and will be based on the higher cash flows, which we expect to grow significantly with production next year, over and above this year’s numbers.
Exciting Drilling and Production Newsflow
The other facet to this story that could drive the company’s share price well beyond the cash flow multiples discussed above is the 40,000-50,000 meters of drilling that we expect to be completed throughout 2007. At least 10,000 meters will be in Quebec on Courville, 20,000 will be at Cusi and paid for by Dia Bras, and we expect the rest to come from the company’s other Mexican projects that have the potential to build large, high-grade tonnage fairly quickly.
Your correspondent does not know of too many companies of this size that are conducting 40,000-50,000 meters of drilling this year, and none on targets that are development targets which can be reasonably expected to deliver grades that will capture the market’s interest.
We expect that PRO could be delivering news – pilot production and bulk sample results, and drill results every two weeks for the rest of the year, starting in mid-March.
If Pershimco can prove its geological theory on Courville and either demonstrate the widespread mineralization it already sees, or hit the indicated high grades at depth, the stock will run.
Equally, if on the Mexican side the 20,000 meters of drilling is successful in showing high-grade silver like one kilo over short widths, or 400 g/t – 500 g/t silver over say, 50 meters or 100 meters, the share price will explode.
This is the current market reality and underpinned by solid and growing cash flow at projects with expanding tonnage, we believe that Pershimco will deliver exactly the hot drill hole results that the market wants to see, and that this could move the stock in a very meaningful way.
Conclusion
As Pershimco reaches 500 tpd of production around the middle of this year, we see its value as closer to C$1.50, or about double current levels, based on its cash flow and growing projects in the Americas.
Moving into 2008, as the company demonstrates its ability to grow production further at Cusi and comes out with 43-101 resources at Camila/Melina and Courville, we think that shares could trade closer to C$3.
The caveat is that just one of the aforementioned hot drill holes could push the stock to these 6 month and 12 month targets much faster – as early as March when results start to roll in. This story would appear to truly combine the best of both worlds – growing cash flow and resources, and hot, high-grade drill holes.
We have found a story that we believe will combine the two over the next 12 months, and beyond.
Pershimco Resources Inc. [TSXv:PRO] which closed today at C$.72 has projects in Mexico and Quebec that should deliver excellent news flow and results, going forward.
Mexico
In Mexico, Pershimco’s J/V partner Dia Bras Exploration Inc. [TSXv:DIB] has the right to earn a 70% interest in the Cusi land package, comprising the La Bamba and San Miguel mines. DIB will vest that interest sometime this year leaving PRO with 30% of the Cusi Camp, and a 2% NSR on production.
Currently La Bamba is producing up to 300 tpd of oxide material though DIB’s Malpaso mill, and it is expected that by mid-2007 this will be ramped up to the 500 tpd level.
With 20,000 meters of drilling slated to begin very soon, Pershimco believes that it can prove up something in the neighborhood of 1 million tonnes of material grading greater than 300 g/t by the fourth quarter of this year, or more than 10 million ounces of silver – about 2/3 of which will likely be oxide, and 1/3 will be higher-grade sulphide material with base metal credits.
A scoping study at La Bamba will put some specific numbers on what looks like a very attractive option – increasing production to the 1,000+ tpd level in 2008. This would most likely be achieved by the building, lease, or purchase by Pershimco of an additional mill in the region.
The company has also acquired an option on 100% of the Camila and Melina properties from which we expect to see positive development news throughout the year. A program is planned to test what appears to be attractive and high-grade copper-gold and copper-zinc targets with the potential for very considerable tonnage.
All of these operations are very exciting and we believe will grow their resource bases substantially through the drill-bit, while the company brings in cash flow from bulk-sampling and pilot production.
Quebec
At the company’s Courville project in Quebec, a development program including a first phase of 5,000 meters of drilling, a 43-101, bulk-sampling and additional drilling will look to expand the present known anomaly stretching 1 km long, 200 m deep, and 200 m wide. It is believed that mineralization averaging 1-1.5 g/t potentially exists along 3-4 kms.
If this is confirmed, drilling to test mineralization at depth will be the next step.
At a specific gravity of 2.7 and based on a 30% recoverability factor typical in the Abitibi area, 1 million to 1.5 million ounces of gold are suggested in the present area of mineralization alone.
We think that if drilling confirms what the company’s geological team believe, (and several technical staff on loan to the company from Agnico-Eagle [TSX:AEM] (who is sniffing around) rumblings of comparisons to an Osisko [TSXv:OSK] type super-pit could start to echo in the junior market.
This is a very big, and growing target – and the higher-grade portions are easily targeted for bulk-sampling to pay for development.
Cash Flow
With only 25.5 million shares outstanding and 34 million shares fully diluted, PRO has a cleaner structure than most of its peers, and leverage to cash generated and discovery is consequently amongst the highest in its class.
On the cash flow front, once production from the Cusi camp increases at mid-year to 500 tpd, Pershimco’s annualized share of 30% plus the 2% NSR will equal about $5 million at current silver prices.
In addition, bulk sampling from Courville which we expect to average 3 g/t, and bulk sampling from PRO’s other Mexican projects should contribute another $3-$5 million this year.
This yields total cash flow per share for 2007 of anywhere from 23c - 30c if one uses fully diluted per share numbers, and 30c to 40c on outstanding share numbers. A multiple of 5X is the most that is achievable for now, given that development work is ongoing and cash flow totals are not at critical mass levels.
But, as the company proves up 43-101 compliant tonnage through the course of the year and demonstrates its plans to grow production at Cusi in 2008, we believe that a multiple of 10X could be achieved given the company’s primary silver production and steep growth curve. This multiple may be achieved in early 2008, and will be based on the higher cash flows, which we expect to grow significantly with production next year, over and above this year’s numbers.
Exciting Drilling and Production Newsflow
The other facet to this story that could drive the company’s share price well beyond the cash flow multiples discussed above is the 40,000-50,000 meters of drilling that we expect to be completed throughout 2007. At least 10,000 meters will be in Quebec on Courville, 20,000 will be at Cusi and paid for by Dia Bras, and we expect the rest to come from the company’s other Mexican projects that have the potential to build large, high-grade tonnage fairly quickly.
Your correspondent does not know of too many companies of this size that are conducting 40,000-50,000 meters of drilling this year, and none on targets that are development targets which can be reasonably expected to deliver grades that will capture the market’s interest.
We expect that PRO could be delivering news – pilot production and bulk sample results, and drill results every two weeks for the rest of the year, starting in mid-March.
If Pershimco can prove its geological theory on Courville and either demonstrate the widespread mineralization it already sees, or hit the indicated high grades at depth, the stock will run.
Equally, if on the Mexican side the 20,000 meters of drilling is successful in showing high-grade silver like one kilo over short widths, or 400 g/t – 500 g/t silver over say, 50 meters or 100 meters, the share price will explode.
This is the current market reality and underpinned by solid and growing cash flow at projects with expanding tonnage, we believe that Pershimco will deliver exactly the hot drill hole results that the market wants to see, and that this could move the stock in a very meaningful way.
Conclusion
As Pershimco reaches 500 tpd of production around the middle of this year, we see its value as closer to C$1.50, or about double current levels, based on its cash flow and growing projects in the Americas.
Moving into 2008, as the company demonstrates its ability to grow production further at Cusi and comes out with 43-101 resources at Camila/Melina and Courville, we think that shares could trade closer to C$3.
The caveat is that just one of the aforementioned hot drill holes could push the stock to these 6 month and 12 month targets much faster – as early as March when results start to roll in. This story would appear to truly combine the best of both worlds – growing cash flow and resources, and hot, high-grade drill holes.
