When I first read the newest update from Auryn dated 10/9/23, it became obvious that the contents would divide the shareholders into 3 camps. Those actively working at convincing existing shareholders to sell their shares in order to create a low-risk entry point for themselves, as well as those already convinced of pending doom and gloom and already frustrated out of their mind by the perception that the contents of this update might lead to further delays and impending dilution, are going to have a field day criticizing management. Those whose dream has been to be a charter member of a producing mining firm committed to being VERTICALLY INTEGRATED and doing their own extremely high-grade ore processing and beneficiation/concentration on-site, will think that they just won the lottery. The 3rd group doesn’t know what to think or who to believe. They’re just tired and confused.
After reading this newest update dated Oct. 9, 2023, the ELEPHANT IN THE ROOM clearly remains the GRADES at level 3 of the new mine. Once again, the average GRADE of gold being mined worldwide today is 1 gpt in open pit operations. These miners are currently making good money. The average grade being mined worldwide in underground vein mining operations, like that at the DL2 Vein, is 4.18 gpt gold. These miners are also making good money at today’s gold prices. These average grades being mined are dropping by 6% per year because of the lack of new discoveries and the fact that miners, with a choice, tend to mine the highest-grade ore first and leave the lesser grade ore for later i.e. “high-grading”. Well, now is later for them.
THE NEW WORSE CASE SCENARIO-AURYN MAKES A FORTUNE SELLING 70 GPT “GOLD EQUIVALENT” ORE TO ENAMI WHILE HAVING ONLY 70 MILLION SHARES OUTSTANDING
I think that most observers might find that to be a pretty impressive WORSE CASE SCENARIO. I was blown away when I originally read that Enami’s DIRECT SMELTING test of the DL2 Vein ore came in at 57 gpt gold, 970 gpt silver and 3.3% copper AFTER ENAMI TOOK OUT THEIR FEES. This is referred to as an “agreed to” or “settlement” grade. This represents a “gold equivalent” grade of about 70 gpt when you factor in the contributions from the silver and the copper. Do yourself a favor and discard the 57 gpt figure and insert the 70 gpt “gold equivalent” grade. The smelting process is able to recover the silver and the copper so these are legitimate “by-product credits”.
Comparing 70 gpt gold ore to 1 gpt (a multiple of 70) or 4 gpt gold ore (a multiple of 17) is not much of a comparison. Auryn could obviously make some VERY HANDSOME PROFITS from shipping this high-grade ore directly to the Codelco/Enami smelting facility. THIS NOW BECOMES THE WORSE CASE SCENARIO-BIG PROFITS WITH A TINY NUMBER OF SHARES OUTSTANDING WITH PLENTY OF SCALABILITY PRESENT DUE TO THE NEW VENTILATION SYSTEM AND THE ABILITY TO MINE SEVERAL SUB LEVELS SIMULTANEOUSLY.
This is the scenario if Auryn chose to get screwed by Enami’s fee structure and let Enami do all of the ore processing. It remains a very desirable OPTION. Having this OPTION, rules out the need for management to EVER sell shares at ridiculously low-price levels in order to fund developments. That possibility is officially off the table. The new BOD would have never passed this CORPORATE RESOLUTION in a unanimous fashion if it were a possibility.
Now, I read that independent smelting tests done in a Peruvian lab came in at 128 gpt gold WITHOUT ANY FEES BEING DEDUCTED. We weren’t given a “gold equivalent” grade from this testing but it should come in at about 157 gpt “gold equivalent” based on the Enami smelter silver and copper figures. Again, uncomplicate things and do yourself a favor. The numbers to study are a 70 gpt “gold equivalent” figure AFTER ENAMI TOOK OUT THEIR FEES and a 157 gpt “gold equivalent” figure WITHOUT ANY FEES BEING SUBTRACTED BY AN ENAMI-TYPE PROCESSOR. Enami is famous for providing low-cost loans to young producers like Auryn wishing to build their own processing facilities. It sounds counterintuitive, but part of Enami’s job is to attract miners and their investment capital, to Chile. Enami bankrolled the artisanal miners of the DL2 Vein. Enami evolved from the “CCM” (Credito Casa de Minera) which was a bank that loaned funds to Chilean miners. I have no idea if there is any deal from Enami currently on the table, or if there is some kind of chess game going on behind the scenes where posturing is involved.
I assume that the 157 gpt smelting results was part of the 120 Kg (264 pounds) sample sent to the Plenge Laboratory in Lima taken from the intersection site of the Antonino Adit and the DL2 Vein at “level 3”. The Plenge Lab is the one that determined that “flotation” was the beneficiation methodology resulting in the highest recovery of the sought-after metals for the DL2 ore. Almost all “sulphide” ores are considered “refractory” and need “flotation” to remove unwanted sulphides, like arsenopyrite. “Oxide” ores, found closer to surface, on the other hand, are easier to process. These are more likely to be “free milling”. Most mines are mining “sulphide ore”. A lot of the “oxide” ore on the planet has already been mined and is now gone.
So, the base case scenario here is that Auryn would make very handsome profits by sending their high-grade ore to Codelco/Enami’s direct smelting facility BUT THE BAD NEWS, IF YOU COULD CALL IT THAT, IS THAT THEY WOULD LEAVE A FORTUNE ON THE TABLE IF THEY SO CHOSE, ABOUT $5,000 PER TONNE, IF THEY WERE TO USE ENAMI INSTEAD OF DOING THE PROCESSING ON-SITE.
In the most recent update, management referred to this $5,000 figure as a “direct financial impact” from allowing Enami to do the processing. Yet using Enami, still presents a very desirable OPTION to Auryn. But it’s more than an OPTION. The Auryn BOD has already made a UNANIMOUS decision to “take control of our ore processing” and bypass Enami. Are they bluffing, who knows? By way of review, here are some snip-its from the curriculum vitaes of the 2 new BOD members, Isac Burstein and Mark Dingley:
“Isac has been involved in four discoveries that became operating mines, over 60 deals from asset sales, JVs, earn-ins, private placements, royalty sales, etc. His skills include negotiating and structuring deals, financial modeling and valuation, and technical due diligence. Isac holds a BSc in Geological Engineering from the Universidad Nacional de Ingenieria in Peru, an MSc from the University of Missouri, and an MBA from Purdue University.” [I think you can see why somebody with Isac’s credentials was brought in when he was.]
Mark is an associate member of the International Bar Association. He holds a Law degree (LLB) and an Economics Master’s degree from Canterbury, an MBA from Harvard Business School, and a PhD in Applied Economics from Wharton Business School. [The same applies to Mark.]
As BOD members with a long list of fiduciary duties owing to shareholders, what would they have carefully reviewed prior to coming to this UNANIMOUS decision? Obviously, they would have reviewed the COST OF CAPITAL and the various financing options on the table. They would have carefully reviewed any untoward side effects from dilution as well as how to take advantage of the vast amount of LEVERAGE ($5,000 per tonne) present.
One thing to keep in mind here has to do with Maurizio’s willingness to advance all of the cash needed to put the project into production while charging zero interest. As of the most recent financials (Q-2, 2023), Auryn owed him about $4.6 million. He has agreed not to take a penny back until the project was in production and the profits could provide his repayment. This recent decision means that Maurizio is basically saying to the company, don’t pay me back now, I am willing to wait until the big profits are being realized.
If you look upon this in terms of the ore currently being stockpiled, Maurizio is essentially saying in a metaphorical sense, pay me back with perhaps 3 piles of stockpiled ore later on, instead of 6 piles today. As a shareholder, I can easily live with that. Remember, there is no interest rate clock ticking. Maurizio’s family is missing out on the interest that this money could have been earning for all of these years (OPPORTUNITY COST).
I’ve seen the critiques made by posters on THEMININGPLAY investment forum. Let’s be objective for a moment. These guys are experienced mining people that have done many, many dozens of mining transactions. They have full visibility of the playing field and all of the pros and cons involved in making any decision. This is what they do all day long. We forum participants are looking through a tiny crack through the door leading to the playing field. We don’t make these decisions all day long. We have no clue as to what is going on in regards to the playing field. We are extremely frustrated by the share price and venting that frustration by searching for somebody to blame is natural for some. Putting others down in order to make oneself seem taller is what some people choose to do even if they know that their view and their experiences in this particular type of situattion is limited.
Management commented that it was the COMBINATION of flotation being the preferred beneficiation methodology for the ore in conjunction with the vastly disparate smelting results (70 gpt “gold equivalent” from Enami AFTER THEY TOOK OUT THEIR FEES versus 157 gpt “gold equivalent” from the Peruvian Lab) that made Auryn’s building of their own flotation plant the UNANIMOUS decision of the BOD.
The combined “FINANCIAL IMPACT”, in regards to this “option”, came in at a whopping $5,000 per tonne DIFFERENTIAL. This is OVER AND ABOVE the handsome profits that Auryn would make in shipping their unprocessed ore to the Codelco/Enami smelter i.e. the worse case scenario. However, you still need to factor in the CAPEX involved in constructing the processing facilities, as well as the OPEX (operating expenses) and you need to amortize that over the life expectancy of the processing plant.
HOW DOES THE MATH WORK WITH THIS $5,000 FIGURE?
The price of gold is currently about $1,927 per Troy ounce. Since there are 31.1 grams of gold in one Troy ounce of gold, this means that one gram of gold is worth about $61.96. The difference between a “gold equivalent” grade of 157 gpt versus 70 gpt is 87 gpt. When you multiply this 87 gpt DIFFERENTIAL by $61.96 you get a DELTA/DIFFERENTIAL of $5,390 PER TONNE OF ORE. To that figure you need to ADD the TRANSPORTATION COST per tonne of ore shipped savings associated with each truckload of CONCENTRATED ORE holding that many more ounces of gold. From this TOTAL DIFFERENTIAL you then need to subtract the amortized CAPEX and OPEX costs associated with building and operating the new plant.
In order to provide some context, an underground miner mining the worldwide average of 4 gpt gold, will receive about $220 per tonne IN TOTAL from Enami, after Enami takes out their fees. This $5,000 figure refers to the DIFFERENTIAL, OVER AND ABOVE what Enami would pay for 1 tonne of Auryn’s extremely high-grade (70 gpt “gold equivalent” post-smelting) ore. Note that this new 157 gpt gold post-smelting figure, represents YET ANOTHER DATA POINT, signifying the INSANELY HIGH grades of the DL2 Vein in the vicinity of where Auryn is currently mining. Previous sampling at the intersection of the Antonino Adit and the DL2 Vein came in at 164 gpt gold and 4.5% copper in one grouping and 150 gpt gold in another. These Peruvian smelter results shouldn’t be all that surprising. Recall that the historical grades achieved by the artisanal miners of the DL2 Vein averaged 64 gpt gold AFTER ENAMI TOOK OUT THEIR POUND OF FLESH.
HERE’S THE CATCH IN THE CASE OF THE ALREADY FRUSTRATED AURYN/MEDINAH SHAREHOLDERS
Frustrated shareholders had their heart set on some IMMEDIATE CASH FLOW coming out of the DL2 Vein project. The last thing an already frustrated shareholder that has already experienced seemingly endless delays, wants to hear about is a DELAY in realizing that CASH FLOW. But is there such a thing as a “great news” delay? I guess that depends on your level of frustration and your ability to perceive progress towards a goal i.e. that of building a mining company capable of making an absolute ton of money ONCE PRODUCTION COMMENCES IN EARNEST, WHETHER IT BE PRODUCTION THAT LEADS TO HANDSOME PROFITS USING ENAMI, OR GIGANTIC PROFITS FROM PROCESSING THE ORE ON-SITE.
Those opting to be a naysayer are obviously going to say: “Management led us to believe that we would be in profitable production by “X” date. Recall from history, that management said that we feel that we can be producing at a 40 tpd pace soon, just from the “old works” at levels 0,1, and 2. Later, they cited that they can’t meet that 40 tpd pace until AFTER the Antonino Adit intersects the DL2 Vein and we can open up production from the 2 new working faces that this intersection made available. After the intersection, management cited that they would first construct the new “gallery” and then the new “ventilation/safety egress chimney”.
As management was progressing with the drifting of the Antonino Adit, they told shareholders that soon we hope to be making regular shipments to Enami i.e. AFTER THE INTERSECTION WAS MADE WITH THE DL2 VEIN AND AFTER THE “GALLERY” AND THE “VENTILATION/SAFETY EGRESS CHIMNEY” WAS COMPLETED. The assumption here was that the path of the vein downwards would match the downward “dip” angle it showed near surface. Near surface, the vein was “dipping” downwards to the NE at a 45-degree angle and the vein should have been intercepted early on.
As it turns out, Mother Nature had a different plan. The course of the vein steepened up and it starting diving straight downwards i.e. at a 90-degree “dip” from the surface. The intersection, and therefore the construction of the “gallery” and the new “ventilation/safety egress chimney” came much later than anticipated. So too did the commencement of the “regular shipments to Enami” projected by management prior to their learning of the change in the “dip” of the vein.
Management didn’t help their cause much when on 3 different occasions they cited that they just hit a mineralized vein that visually looks just like the DL2 Vein and that they sent samples to the lab to make sure the “DNA” matched. Three times in a row, after management cited that they are almost positive that they finally, after all of these delays due to the changed “dip”, intersected the DL2 Vein, the lab results didn’t match. Then on Dec. 23, 2022, they got a “DNA” match on the thin branch of the DL Vein, the DL1 Vein. On January 4, 2023, they got a “DNA” match on the extremely high-grade DL2 Vein. The first 2 groups of samplings at the intersection site were, as expected, off the charts.
Now, after all of this, fast forward to Oct. 9, 2023. When management stated that the ECONOMICS of producing from the DL2 Vein and shipping the ore to Enami, will indeed lead to very handsome profits, however, the profits are going to be through the roof if we stockpile the EXTREMELY HIGH-GRADE ore we are currently mining (157 gpt “gold equivalent as determined by an independent smelter in Peru) and process it on-site with our own processing facilities once completed.
As noted, the DIFFERENTIAL between stockpiling now and processing the ore on-site prior to shipping, would amount to an off the chart $5,000 per tonne BONUS. For somebody with the patience of Job, like myself, who has been through many delays in this industry (admittedly not this bad), it was the most encouraging update I’ve ever seen by Auryn. For somebody already frustrated beyond belief, not so much. THE CURRENT FRUSTRATION LEVELS ARE 100% UNDERSTANDABLE. RECALL THE CORPORATE GOVERNANC MISCUES OF A PREVIOUS MEDINAH MANAGEMENT TEAM MEMBER.
Let’s look at management’s, and the BOD’s point of view. Do they cater to the desires of frustrated shareholders and take $5,000 less for every single tonne shipped, and make a handsome profit in the process or do you temporarily stockpile this extremely high-grade ore and build the plant in order to rake in a mega-fortune FOR DECADES after the plant is completed and commissioned? Is there a right or a wrong answer to this dilemma?
WHAT DOES AN “EXTRA” $5,000 PER TONNE LOOK LIKE IN A MINING OPERATION LIKE THIS?
Management has been kicking around an INITIAL PRODUCTION RATE of 40 tonnes per day (“40 tpd”) for quite some time. This “$5,000 DIFFERENTIAL”, all of a sudden, becomes $200,000 PER DAY even with a de minimis INITIAL PRODUCTION RATE of only 40 tpd. Don’t forget that you need to amortize the CAPEX cost over the life of the processing facility. There will also be OPERATING EXPENSES (“OPEX”) to consider. This would include the purchase of things like reagents for the flotation facility. The COST OF CAPITAL also needs to be factored in.
LET’S DO SOME EXTREMELY ROUGH MATH
If the daily “DELTA/DIFFERENTIAL” between these 2 options is $200,000 per day for a 40 tpd operation ($5,000 per tonne times 40 tpd), then a $10 million facility is going to ROUGHLY take 50 days to pay off the CAPEX portion. I’m not including the savings in regards to the TRANSPORTATION COSTS which will probably more than offset the OPEX costs. Likewise, a $20 million facility might take 100 days to pay off. If Auryn, in the future, is simultaneously producing from 5 separate levels, then this $200,000 per day DIFFERENTIAL becomes $1 million per day. That seems like a lot of money UNTIL YOU REMEMBER HOW MUCH HIGHER THE GRADES ARE IN COMPARISON TO THAT BEING MINED BY THE AVERAGE UNDERGROUND VEIN MINER.
What are the ingredients needed for Auryn to completely knock the ball out of the ballpark? As the saying goes in the mining industry, “GRADE IS EVERYTHING”. That’s #1. You also need SCALABILITY. This is #2. The new ventilation/safety egress chimney provided that in spades. Auryn can now simultaneously mine level 3 as well as several of the sub levels. Ramping up production should be very predictable. Factor #3 is a tiny number of shares outstanding. SHAREHOLDER REWARDS will be based on EARNINGS PER SHARE. Even with moderate earnings, a tiny number of shares outstanding will “supercharge” the EPS ratio. Share prices are determined by the EPS multiplied by an industry standard “multiple”. In the mining industry it averages a little bit over 30-times.
IS THERE AN IN BETWEEN SOLUTION THAT MIGHT APPEASE ALL PARTIES?
How about if management were to promise to keep the shareholders informed about the grades and tonnage of the ore being stockpiled? The shareholders would be able to do the math on the approximate value of the ore to be shipped later after that $5,000 per tonne BONUS was cashed in on. I think shareholders and prospective investors should be able to appreciate the 2 OPTIONS involved and how there really isn’t a bad choice but the necessity to make a choice.
A potential investor in the facilities being constructed would have the ability to appreciate the circumstances. Attracting willing investors that understand the “DELTA/DIFFERENTIAL” involved shouldn’t be that difficult to do. Because of this unique “DIFFERENTIAL”, the very money being loaned is going to all but guarantee a low risk attached speedy payback. A pathway to being repaid should not be that tough to visualize in a scenario like this for a professional investor. If the price of the metals being harvested should break out to the upside, then management could always opt to liquidate some of the stockpiled ore if they feared a retracement in the price of the metals.
