Many times we’ve witnessed that famous quote we hear shouted from the mountaintops when the price of gold goes up a notch: “Hay Jimmy, what’s that stockpile worth now”. The 20,000 Tonnes of stockpiled ore scheduled to be on-site and ready to go on Day 1 when the FF plant becomes operable, actually has quite a bit of “VALUE” from a variety of points of view.
- First of all, its presence provides “INSURANCE” against the Auryn miners not being able to keep up with the daily “throughput” rate of the FF plant which initially is 100 Tonnes per day or 3,000 Tonnes per month or 36,000 Tonnes per annum. Recall that the daily “throughput” is the weight of the raw crushed and ground ore (coming out of the gyratory crusher and then the ball mill) that goes INTO the FF plant on a daily basis. If 100 Tonnes per day goes INTO the plant, perhaps about 20 tonnes will exit the plant as an extremely high-grade “float concentrate” while perhaps 80 tonnes will exit as somewhat worthless “tailings”, some of which might be further crushed and ground in preparation for one last trip through the plant. Most of the “tailings” will be piped over to Auryn’s “Dry Rack Tailings Storage Facility” which is an extremely environmentally safe modality for tailings storage . . The last thing Auryn wants is to have a brand-new FF plant with all of the high-tech bells and whistles only to temporarily run out of “feed”. “MINING AND STOCKPILING”, while the FF plant is being built, is the correct way to provide this “INSURANCE”. Since each mining operational site is allowed to produce 1,000 Tonnes per month or 12,000 Tonnes per year, it will take 3 operational sites to keep the FF plant at “nominal throughput” capacity. The presence of a 20,000 Tonne stockpile of ore will “BUY SOME TIME” for Auryn to get 3 operational sites in production without affecting the throughput of the FF plant.
I can’t describe how incredibly low a 100 TPD initial “throughput” rating really is for an FF plant and how this rating is likely to be increased many fold through time. What is amazing is how much money can be made even at this low of an initial “throughput” level under the current conditions. “Scalability” is a concept to keep an eye on. I’m guessing that it will take about 10-months to process that 20,000 Tonne initial stockpile of ore. With a 100 Tonnes per day “Nameplate throughput”, it should theoretically take 200-days to process that ore. However, you need to remember that there is a “fine-tuning” process wherein the engineers and metallurgists will be tweaking the “flow sheet” while determining which variables will lead to the maximum “recovery rates” for the gold, silver and copper. The “fine tuning” process includes “cold commissioning”, “hot commissioning”, “optimization”, and “long term optimization/control”. I ’m penciling in perhaps 300-days or 10-months to process that initial 20,000 tonnes of previously stockpiled ore. I’m guessing the operations might hit the “nameplate throughput” rate of 100 TPD in perhaps 5 or 6 months after a ramping up process.
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With Auryn, the stockpiled ore is going to be of a very high-grade. This is because the intra adit raw ore is of a very high “head grade” to start with, but it is also because from early 2023 to early 2024, Auryn was mining in a manner they refer to as “DIRECTLY FROM THE VEIN WITH MINIMAL DILUTION”. This means that there was no blasting which tends to mix less well-mineralized wall rock ore with the much higher grade “VEIN PROPER” ore. With there being a limitation on the amount of ore being mined in any one adit, you can see how it is important to make sure that the tonnage of ore being mined is as rich as possible i.e. preferably mined “DIRECTLY FROM THE VEIN WITH MINIMAL DILUTION” when that is possible. This is a function of the vein width. When the veins periodically constrict, more wall rock is going to need to be removed in order to provide a “minimum width” to allow men and equipment to access the deeper levels of the adit.
Recall from the 10/30/24 quarterly update that management cited that the 70 gpt “gold equivalent” grade they got from sending the “experimental batch” of ore to the Enami smelter (57 gpt gold, 978 gpt silver, and 3.23% copper) “PROVIDES A SOLID BASELINE FOR GRADE EXPECTATIONS”. This is one of the most important assertions Auryn management has ever made, but there is a caveat here. This is the grade to expect, IF AND ONLY IF, the mining is done in a somewhat surgical manner, with percussion hammer/jack-legs i.e. without blasting. Blasting causes “DILUTION” of the grade of the ore contained within the VEIN PROPER. This management team does not PROMOTE at all. Maurizio is the antithesis of the typical hyper-promotional mining CEO. That seemingly bold statement about grade expectations of 70 gpt “gold equivalent” is very critical to appreciate in context. We have a long list of the GRADE results at the DL2 Vein, from historical production, channel sampling, smelter tests, etc. The grades within the VEIN PROPER are stellar, period. Why? It’s partially because we’re in what’s known as a high-grade “BOILING ZONE”. These vertical oriented zones are where the pressure and temperature were ideal for the deposition of very high-grade gold. The vertical range of these zones is 50 to 800-meters in width. The average width is about 300-meters.
We know that Auryn was mining and stockpiling ore in this “DIRECTLY FROM THE VEIN WITH MINIMAL DILUTION” from early 2023 to early 2024. Three separate quarterly updates cited how they were making great progress in this fashion, and things were going very smoothly. In that same 10/30/24 update cited above, in the very next sentence after talking about 70 gpt grades “PROVIDING A SOLID BASELINE FOR GRADE EXPECTATIONS”, management cited that in normal course mining involving blasting, it might be more realistic to expect “AT LEAST 10 GPT” for average grades. The takeaway is that the stockpiled ore, much of it mined in this “WITH MINIMAL DILUTION” fashion using percussion hammers without blasting, is going to be very high-grade material obviously grading somewhere in between “AT LEAST 10 GPT GOLD” and 70 gpt gold. Keep your focus on the “AT LEAST” portion of the “AT LEAST 10 GPT” phraseology. This provides cover for management just in case the grades turn out to be much higher than many might anticipate.
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When the 10/30/24 update came out, I immediately contacted management and expressed some concern about that “AT LEAST 10 GPT” portrayal of the grades to be expected when blasting is involved. Over the years, I’ve drafted a “SCHEDULE A” listing all of the historical grades found to date at the DL2 Vein. They are extremely impressive. For instance, the artisanal miners, with limited technology, averaged 64 gpt gold over the years they mined the DL2 Vein. However, their mining methodologies were so inefficient that their “discards” are still present to this day in a series of on-site “tailings dumps”, and some of them still average over 14 gpt gold WITHIN THE DISCARDS. Mentally, I interpret the average grade achieved by the artisanal miners as being north of 70 gpt gold.
The “SCHEDULE A” numbers for the historical average grades are head and shoulders above “AT LEAST 10 GPT”. Maurizio understood my concern, and he told me that he and his BOD worked very hard in coming up with the proper phraseology to use in regard to future grade “EXPECTATIONS”. Listing out 70 gpt and “at least 10 gpt” in back-to-back sentences, might obviously create some confusion amongst shareholders or prospective investors not familiar with how blasted wall rock can “dilute” the grades found within the VEIN PROPER. In a previous quarterly update, management cited that they had “DETAILED CASH FLOW ANALYSES” that had been done back when they were sitting with potential financiers. I asked Maurizio if we shareholders could gain access to these “analyses”. He promised to share them with us, but first he wanted to run a certain amount of tonnage through the FF plant so that Auryn’s OFFICIAL FORWARD-LOOKING GUIDANCE could be backed up with more complete data. I agreed.
In our markets, if a company misses “official guidance”, there are typically share price penalties to pay. Management is walking a tightrope; they have to release “material facts”, good or bad. If they provide ultra-conservative guidance, then certain shareholders are going to be mad because the shareholders have the right to know the “material facts” as they stand. If management provides hyperbolic guidance, on the other hand, and if for some reason actual results fall short of “guidance”, then management is going to be in trouble with other groups of shareholders, and the share price may pay a penalty. Conservatism makes a lot of sense until fresh data is received. In retrospect, I now think that they threaded the needle in that 10/30/24 update fairly well. The 70 gpt prognostication has scientific backing and is backward looking in nature, with 20-20 hindsight. It is easily defensible. The “AT LEAST 10 GPT” prognostication is forward-looking and since the vein deposits have not been fully drilled out, management thought it wise to conservatively “manage expectations”, and put out the “at least 10 gpt” guidance FOR NOW, SUBJECT TO BEING REVISED LATER IF NEEDED, after a certain tonnage of raw ore is run through the new FF plant and the actual numbers are available. I was encouraged to learn about the involvement of all of the Board members in writing the quarterly updates. Interestingly, I’ve never heard the name Isaac Burstein mentioned on this forum, but this Auryn Board member, Head of Business Development at Hochschild Mining, has a wonderful reputation worldwide and has been the keynote speaker at many Mining and Banking forums. You can see some of his speeches on the Internet.
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If you want to model the “IN-SITU VALUE” of that stockpile of 20,000 tonnes of ore partially mined in a “WITH MINIMAL DILUTION” fashion, you might set up the calculation using an estimated average GRADE involving several grades in that range in between “AT LEAST 10 GPT” and 70 gpt. To make the math easier, you might start with 15.5 gpt because that is the equivalent of one-half ounce per tonne (0.5 OPT). You might also consider 23.3 gpt because that represents three-fourths of an ounce per Tonne. One ounce per tonne (1 OPT) equals 31.1 gpt. In doing your modeling, don’t forget that FF plants are not 100% efficient. I’m using an estimated “recovery rate” of 80% for now until we have access to the actual numbers. As far as the math goes, “MrB”, a frequent poster on TheMiningPlay forum, just posted an Excel spreadsheet modeling the first full year of production. His input variables included a 100 TPD throughput rate, an average grade of 20 gpt, 300 days per year of production, a marginal profit of $2,350 per ounce (price of gold minus AISC), and a “recovery rate” of 80%. The projected pre-tax profits came in at $36.2 million. I’m going to assume that Auryn has enough net operating losses, accumulated over the years, to offset most tax liabilities for the early years.
5) The new Chilean “SMALL MINING PRODUCERS STATUTE”, limits production to 1,000 Tonnes per month per adit in operation. In exchange for agreeing to this, these “SMALL PRODUCERS” receive favorable tax treatment BUT EVEN MORE IMPORTANTLY THEIR PERMITTING PROCESSES GET GREATLY STEAMLINED. Auryn’s “mining and stockpiling” program prior to this new statute becoming effective, allowed Auryn to get a large amount of ore “grandfathered in”.
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The extremely high-grade stockpiled ore also brings “value” in that it presents certain “BLENDING OPTIONS”. The “offtake partners” of Auryn that will be buying their float concentrate will often prefer a product with certain properties like grades above a certain threshold or contaminant levels below a certain threshold level. The stockpiled ore mined “DIRECTLY FROM THE VEIN WITH MINIMAL DILUTION” could be used to augment the grade of the float concentrate produced while using “blasting”. “Blending” is typically done to maximize the earnings of the producer and is a form of “OPTIONALITY”.
7) You need to also keep in mind that the 20,000 Tonnes of stockpiled ore has already been paid for in terms of the mining costs, labor, diesel, electricity, transporting to surface, etc. That’s already on the bill owed to Maurizio. Nobody is going to have to sell any shares out of the Treasury in order to pay for that 20,000 Tonnes of ore sitting in the stockpile. If you’re going to take the amount of money currently owed to Maurizio (about $10.3 million) at face value, then don’t forget to adjust the AISC for the stockpiled ore downwards significantly. This will increase the “MARGINAL PROFITS” per ounce produced for the stockpiled ore.
So, in essence that 20,000 Tonnes of stockpiled ore has a “value” far in excess of the “value” of the gold, silver, and copper it contains. In order to estimate the earnings from the “out years” after Year #1, we need to get an idea for how long it takes Auryn to incrementally add each new operating site that will be producing 1,000 Tonnes per month per adit. The first 3 operating sites will produce 3,000 Tonnes per month (100 Tonnes per day) which equals the “nameplate throughput” of the FF plant. The “throughput” capacity of the FF plant will be incrementally increased by the addition of new “cells”, “banks of cells”, and “columns”, as the number of operational sites increase over the three sites needed to keep the FF plant “busy”. Management did make a citation in a previous quarterly update that after ordering the 100 TPD FF plant, they added to the order additional equipment, but they did not cite the change it made to the 100 TPD “throughput” figure.
The rate of increase in Auryn’s “PRODUCTION PROFILE” over time will determine the “multiple” of EARNINGS PER SHARE that the Auryn share price will trade at. Investors want to see robust “PRODUCTION PROFILE GROWTH” and they’re willing to pay up for it. The mining majors and mid-tiers cannot increase their operating sites 8-fold like Auryn can by going from one operating site in Q-4 of 2025 to perhaps 8 operating sites in “X” amount of quarters. Auryn has already listed the identities of 8 sites that they figure on operating from in an undisclosed number of quarters. The streamlined permitting arrangements provided by being in compliance with the new “Small Mining Producer’s” statute should help in this regard. Auryn has 7 “Main Veins” within the “Vein Set” they are mining. Each vein should provide multiple operational sites.
WHAT’S THE “REAL STORY” BEHIND AURYN?
The “Real Story” behind Auryn has to do with it being a “PACKAGE DEAL” with several components. Auryn’s “CROWN JEWEL” is its share structure with only 70 million shares issued and outstanding and 62% of those held in a “semi-restricted” from resale format by management. That’s the foundation of the “PACKAGE”.
Next, you need to layer on that foundation the stellar grades of the ore being mined. Since “GRADES” are inversely proportional to the ALL IN SUSTAINING COST (AISC) to produce each ounce of gold produced, extremely high grades lead to extremely low AISCs. These then directly lead to extremely high “MARGINAL PROFITS” (POG minus AISC) per ounce produced. This is especially true when the prices of the 3 metals being mined and sold are trading at or near all-time highs.
High “MARGINAL PROFITS” per ounce produced, when multiplied by the number of ounces produced per year, then lead to high levels of “TOTAL ANNUAL PROFITS”. High levels of “TOTAL ANNUAL PROFITS” when divided by a tiny number of “SHARES OUTSTANDING” lead directly to extremely high levels of EARNINGS PER SHARE (EPS). An extremely high level of EPS (like .51 cents) when multiplied by the high “multiples” accorded to “GOLD PRODUCERS”, especially those capable of rapidly ramping up their “PRODUCTION PROFILES”, then leads to extremely high share price levels. You can see how, in the case of Auryn, the “real story” is that it is a multi-factor “PACKAGE DEAL”.
Being in a position to generate pre-tax profits of perhaps somewhere around $36 million in the first full year of production sounds somewhat impressive but it’s really somewhat miniscule when the prices of the metals being mined are where they are. What’s REALLY impressive is being able to generate perhaps $36 million in pre-tax profits (a total guesstimate) WITH ONLY 70 MILLION SHARES ISSUED AND OUTSTANDING. Auryn’s “crown jewel” is its share structure. Why is this? It’s because a ho-hum earnings figure of $36 million per year actually represents an OFF THE CHART 51.4-cents per share in EARNINGS.
I know it seems counterintuitive that 51.4-cents per share is a heck of a lot more impressive than $36 million in annual earnings. The explanation has to do with the fact that share prices, which is why we invested in the first place, have to do with EARNINGS PER SHARE (that 51.4-cent figure) and the “multiple” of EPS that a given corporation deserves to be trading at.
Why is this? It’s because in this sector, mining producers tend to trade at an average “multiple” of 31-times EARNINGS PER SHARE. The primarily gold producers have always fetched the highest “multiple” of all of the miners. If you do the math, this suggests that an appropriate share price might be over $15 per share once Auryn is producing “float concentrate”, but Auryn, currently not producing any “float concentrate” but will be shortly, is trading at about 50-cents per share. Note that this “potential 30-bagger" is not a prediction.
The reality is that If Auryn had to sell shares over the last 8 years to pay for exploration and development, they could easily have 700 million shares issued and outstanding instead of 70 million. Maurizio was generous enough to advance the cash needed to go all of the way into production while charging zero interest. Auryn has had zero “COST OF CAPITAL”.
With 700 million shares issued and outstanding, Auryn would have had to generate $360 million in earnings, instead of $36 million, in order to achieve a 51-cents per share EPS deserving of a perhaps $15 share price. In investing EARNINGS PER SHARE (EPS) is everything and therefore the number of shares issued and outstanding is also everything since it is the denominator in the EPS fraction.
But wait a minute, don’t most of the major miners trade at a “multiple” of around 18 to 20-times earnings per share? This is exactly right but “multiples” of EPS are based on “POTENTIAL GROWTH RATES IN EARNINGS” as well as whether the primary product being mined is a precious metal or a base metal. The majors can’t go from operating at 100 operational sites to 800 operational sites as easily as Auryn can go from one operational site to 8 operational sites. Most of today’s majors have trouble even maintaining current levels of production let alone increasing them 8-fold. The “Auryns” of the world need to enjoy this ability to produce dynamic growth profiles early on, because the day is coming when, perhaps as a mid-tier producer, their production profiles will also plateau out and their “multiples” will decrease.
What can be a little scary to think about is the potential EARNINGS PER SHARE for Auryn while keeping in mind the stellar grades they are mining, the low AISC they will have, the presence of their own ore processing facility, the current prices of the metals they are mining, and their potential ability to achieve a robust PRODUCTION PROFILE, ALL WHILE HAVING ONLY 70 MILLION SHARES ISSUED AND OUTSTANDING. That’s scary. Overlay that with the fact that 62% of Auryn’s shares are semi-restricted from resale because they are owned by management, and things can get really scary. There is an awful lot of work yet to be done, but gaining an appreciation for what is waiting at the finish line is extremely important. It is also important to be able to appreciate the incremental advances being made towards arriving at that finish line.
Mining and the prices of the metals being mined is EXTREMELY CYCLICAL. When you are in a “bear market” for the metals, it seems like no matter how hard you work on investment due diligence, there’s just no money to be made. When investors find themselves in a roaring bull market, like this one, they need to roll up their sleeves and do in depth due diligence. In these “secular bull markets”, the price of gold moves first, then the prices of the major miners go up. This is followed by the prices of the mid-tier producers. Next in line comes the “JUNIOR PRODUCERS” many of which nobody has ever heard of. A lot of “generalist investors” are now being attracted to the precious metals sector. They can see that the prices of the majors and mid-tiers have already gone up 100% to 150%. THEY WANT TO SEARCH OUT “PRODUCERS” ABLE TO LEVERAGE THE MASSIVE RECENT INCREAES IN THE POG, BUT THEY WANT TO IDENTIFY THE “PRODUCERS” WHOSE SHARE PRICES HAVE NOT MOVED UP YET. Auryn, being a brand new “PRODUCER” that nobody has ever heard of, fits nicely into this description. The potential to produce outstanding EARNINGS PER SHARE is what needs to be focused in on.
The “GDX” index of miners is up over 90% year to date. Many of the investors in the majors or in an index like this are cashing in on their profits and seeking out other PRODUCERS that have not moved up in price yet. With there being 3,000 other “junior miners” in existence today, it’s easy to see how an Auryn-type brand new “JUNIOR PRODUCER” could go undetected and never did appear on anybody’s radar screen. Why is this? It’s because 99% of those 3,000 juniors will never make it into production.
I recently read an article done by a mining analyst that follow just the junior miners. He commented that there was a tiny subdivision of the juniors known as the “JUNIOR PRODUCERS” but he cautioned that the inhabitants of this category don’t stay there for very long. This is because they tend to be either taken out by a major or mid-tier or they graduate into the “mid-tier producers” category.
I like to look forward about 3 or 4 years from now. Is it conceivable that Auryn could be producing from perhaps 8 operational sites while feeding in ore to a froth flotation plant with a “throughput” of perhaps 300 Tonnes per day? What happens to “Mr. B’s” $36 million earnings projection if this were to be the case? That $36 million figure for Year 1 might be closer to $108 million (3-times $36 million). What if the price of gold was trading at $4,000 per ounce instead of the current $3,500 or so. That marginal profit of $2,350 per ounce may now be somewhere around $2,850 or so, representing a 21% increase. This might move that $108 million figure to somewhere around $131 million. What if the engineers and metallurgists were able to increase the “recovery rate” from 80% to 90% over time? This would bump up that $131 million figure yet another 12.5%.