A Golden Arrow in the Heart of Argentina's Silver Industry

Written by Nick Hodge
Posted September 12, 2017 at 4:09PM

Publisher's Note: Yesterday we saw the genesis story of how Joseph Grosso and his Grosso Group came to be pioneers in the Argentinian mining space. Today we have the second part of that interview, in which Joseph and Gerardo discuss the current state of mining in Argentina, the recent deal Golden Arrow (TSX-V: GRG)(OTC: GARWF) made with Silver Standard in the country, and what's next for Golden Arrow's portfolio of properties down there. 

To your wealth,

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Nick Hodge
Publisher, Outsider Club

joseph GrossoJoseph Grosso: Argentina today is trying to follow some of our discussions that I had with Daniel Meilán. Daniel Meilán was the mining minister at the time when Argentina opened to foreign investment. He's a geologist, and he looked to that Argentina, it had to come up speaking with one voice. Not speaking with 24 different provincial needs and wishes and wants. Unfortunately, his party lost. Cristina came in for 12 long years, and the objective of Cristina wasn't really developing mining, but she was overtax mining for the purposes that she had, what to do with the money.

But I must say that Daniel Meilán is back there. He's been asked by the current government, and he's implemented, and he has managed in a very rapid period of time in having 22 of the 24 provinces signing up and becoming desirous to understand what one voice means, and practice that. That they want to talk as a country, not just as a province.

This is in progress, and it's coming along extremely well, but if I had to tell you that Argentina's fully developed with the sophistication that a United States or Canada or Australia has, I would say that we are some distance away from that accomplishment. But it's coming. It's coming because the magnitude of the geology of that country, and the size, definitely make it a very desirable destination to go and explore in finding the discoveries.

Turning back to what did we do. Well, we definitely treasured the advice of Dr. Méndez, and we started doing exploration, and his portfolio has produced for the Grosso Group three discoveries. One was in gold, which is now owned and managed by Yamana in the province of San Juan. The second one was discovered in 2004, one of the largest silver discoveries, which is getting extremely close to one billion ounces of silver deposit equivalent. It is known as the largest in the world today. The third one, discovery happened several years later, 2012, Chinchillas silver, and the contributions of the silver are from zinc and lead, and definitely a very positive contribution, very complementary to the silver. In equivalence, we have a 43-101 resource, which is... 43-101, it's an international accepted formula that is... everybody has to, in order that they can say what they found with the drilling. It's compiling a drilling result known, and within the regulation of the mining.

Gerardo Del Real: You actually segued right into my next question, which was about the Chinchillas project. Now, I don't believe that the market has fully appreciated the benefit of the joint venture that you have with Silver Standard, called the Puna Operations, which Golden Arrow owns 25% of. You've obviously come a very long way from your initial days in Argentina to where you are now, having 25% of a producing joint venture with a company like Silver Standard.

Can you provide the details of the deal with Silver Standard, and the benefit to Golden Arrow shareholders? Benefits that have already materialized in part because you've already received certain payments that have contributed significantly to Golden Arrow's balance sheet. But there is more coming in the near future. Can we talk about that a bit?

Joseph Grosso: Well, the first thing about the subject is that I'm extremely enthusiastic at the summary that you have given, and I will follow on that base in saying that it is very frustrating for us, and we're looking for an eloquent person like you that will help us to explain. I'll tell you why. As an exploration company, we have long said, "Look what we've got," and everybody got enthusiastic. They knew that we owned 100%, but 100% of what? We owned 100% of that resource value that needed knowledge, further investment, to come up with the value of that. The feasibility study, the people that know production, which is a long way from the knowledge that we have from exploration. Exploration, it's one industry. Producing a study, a different animal altogether, because the discoveries are made with geologists.

Gerardo Del Real: Correct.

Joseph Grosso: The production are put together by mining engineers that can find out that the road, how far is the closest water, how far... What are the impediments in the way, and what kind of infrastructure it's going to be needing to deal with a distinct type of mineral found. So, for us, having 100% of something that was not producible, certainly not with all the explanation that's needed to reach the $350 to $400 million that we needed to put together and come up with a production and a trained staff with an incredible international reputation that Silver Standard has. Very economic producers.

When we signed an agreement with them, I want you to know that it was a very tense time waiting, because of their reputation, and the proximity of only about 23 miles away from each other, which in the mining industry, it's a very close proximity. If I give you a comparison with that, Pan American just made a similar deal of combining their deposit with a production facility, and they are 149 kilometers away. We are talking about 35 kilometers away.

Gerardo Del Real: Right.

Joseph Grosso: So, that explains that the distance became very economic to merge the two, and it took about 18 months to come to the conclusion that yes, Chinchillas was economic, and yes, that they would provide the facility for production, and yes, that they would spend the $40 million it took to take Chinchillas from resource-only to stage one production, which is being coordinated and integrated right now.

Because of the announcement of Silver Standard that they would close the operation because it had no more minerals to process, and they gave an advance notice of a couple of years. Of course, that was an incredible break for us, to be able to make an 18-months contract with them. In the contract, while they were developing Chinchillas from a resource to a production... just production deposit, they would give us a signing bonus of 25% of their profit that they were getting while they were producing from their own owned deposit. The name of the facility, of course, is Pirquitas, and Pirquitas has been in operation in Argentina since 2009.

Gerardo Del Real: Correct.

Joseph Grosso: At the end of the 18 months, we found the doors open that Golden Arrow did not have to raise any appreciable amount of dollars over the $350 million expected to cost. We didn't have to spend any money on changing over from a resource into a deposit, which took approximately $40 million from Silver Standard. And we continued on, that when we finally signed that 160 documents that we had to sign between Canada and United States and subsidiaries and so on, it was May 30, 2017, and June 1st we were partners, at 25-75 partners.

Now, the point that you brought up that frustrates us. A shareholder basically saying, "Oh, this is going to be a bad deal. They owned 100%, and now they want to own only 25%." The ownership of an undeveloped project like Chinchillas, and 25% with being in production, without having to worry about the training for production, the facility for production, it is an incredible achievement. So, we ended up being 25% future partners, which may last decades. Say it again: decades. Chinchillas has the potential, and has the geology and the location, that could go through three of the current stages that we are experiencing now, and preparing for now two of them, for a total of decades, really.

And the something can be learned by reading accurately the public documents that we have. They explain intimately well that... To give you an idea, stage one will produce approximately 67 million ounces of silver over eight years at a very conservative price of $19.50, which we think is ultra-conservative, over the duration of the period. By doing that, we will achieve, like, $1.31 billion of sales with a net after tax of 29%, which I think is very robust. So, it is an incredible story that I hope that you will help us, not in one session, but in several sessions, explain the remaining of the properties that we have at the moment, which is the same portfolio that produced three very excellent discoveries, that we have a chance of discovering some more.

However, how do we discover more value for our shareholders? By using the income that comes in from our partnership? No. I think that gets us to one of your questions. One of the questions is that we are going to take the... no credit from the shareholders today on the portfolio of properties that we've got. We're spinning it off, and we are building a 100% subsidiary to do exploration. Where do we get the funds? Well, the initial funds, by spinning into this 100% subsidiary, will be some prescribed amount that the stock exchange will tell us we have to have working capital. So, we may take $1 million to $3 million working capital, and make that part of the spinoff. We feel that we can come up with a fairly large controlling stock position, which makes instantly a second value for the shareholder who don't think that the properties have got any value.

Gerardo Del Real: Correct.

Joseph Grosso: We will apply and... The plan is that we would like to take the company and list it on a stock market for venture capital. We have sufficient control that we could issue up to 40% to new investors in a venture capital market, to get the 60% left from the subsidiary part of it, and increase the value of Golden Arrow immeasurably. Because we feel that, if you take a look at some of the projects that we're spinning off, it's unquestionable that they have the opportunity of becoming new producers, new discoveries. I could see within a period of time of a couple of years to come up with a couple more discoveries, and if we are thought to be very successful with three, I must say that we are on the way to continue the discovery from the same property portfolio, which the stock market today gives us no credit for, or shareholders.

Gerardo Del Real: I must say if I may that I think... One of the reasons that I reached out to interview you... One, of course, your background and your history is absolutely fascinating, but the second reason is I do feel that one of the most underappreciated aspects of the deal with Silver Standard is that it allowed you to limit the dilution to shareholders, while simultaneously allowing you to pivot and focus again on what your strengths are, which really is exploration. You gain all the expertise from Silver Standard on the production end, and you now are able to go back to market with this new vehicle, BA Exploration, and focus on exploring and growing discoveries right nearby an area that you're intimately familiar with.

I think that as we enter this better commodity market, this better silver, lead, zinc market, that shareholders are going to catch on to the prospectivity of those properties. Hopefully, that's something that we can communicate. You have the right team. I've spoken to Brian McEwen in the past, and I know that he's excited to continue exploring in that part of the world. He believes the geology is phenomenal, and I think in 6 to 12 months' time, we're going to look back at this interview and laugh at the prices and the value that you were getting for these properties, which essentially right now is zero.

Joseph, it's been an absolute pleasure. Is there anything else that you'd like to add?

Joseph Grosso: Well, besides the gratitude of the time that you're taking to interview, and the eloquence in which you summarize, it's astounding that we have the right spokesman hopefully briefing our displeased shareholders who don't understand it all. I'm looking avidly in that relationship with you that we can do that. I do believe, though, that there's a change of temperament in our shareholders. The change is that they are... The venture capital investors, they sell on news.

Gerardo Del Real: Correct.

Joseph Grosso: They sell on news, and they're probably doing that not understanding the future values appreciation. But the target of the next type of investor is the one that they buy value long-term earnings potential, and that's a different animal. So, I feel that we'd like to rescue some of the people that should stay in the stock, even though they should forget about sell on news, because the news is so great and the value that we have... value potential. I'll venture to say that our stock is trading at a huge discount, that it should be noticed, and become one of the top opportunities to invest today for future gains.

We were also chosen by the stock market which we're listed on as one of the top 50. The top 50 included five different industries. Each one would have 10 participants per industry, and we came very close to... being close to the one or two within our exploration industry. The exchanges are very positive in their marketing of their selections of the top 50. They're marketing us as one of the top 50, and I'm marketing ourselves as one of the top 10 of the industry.

Gerardo Del Real: Well, it's definitely a compelling story, Joseph. I definitely look forward to following the company's developments, and reporting them as, again, as I said earlier, as we enter into a better commodities cycle. I completely agree that speculators and investors in our space tend to take a very short-term approach, but I think when the company is re-valued as some of those production dollars flow in, it's going to catch a lot of people off guard, and I think it's a pretty compelling opportunity. So, I look forward to developments from the company.

Joseph Grosso: We will obviously offer the speculator, we offer the other... the company, we're eventually listing within the first quarter of 2018. So, they've got an opportunity to stay with us as well.

Gerardo Del Real: Fantastic. Well, I want to thank you again, sir, for your time, and I look forward to catching back up soon.

Joseph Grosso: Thank you, thank you, thank you, Gerardo.

For the past decade, Gerardo Del Real has worked behind-the-scenes providing research, due diligence and advice to large institutional players, fund managers, newsletter writers and some of the most active high net worth investors in the resource space. Now, he is bringing his extensive experience to the public through Outsider ClubResource Stock Digest Premium, and Junior Mining Trader. For more about Gerardo, check out his editor page.


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