Junior Picks Up La Guitarra for Shares

Source: Streetwise Reports   05/27/2022

Mexico is known for “la plata”, and silver has been mined there since Spanish colonial times. One aggressive junior explorer just pulled the trigger on a deal to acquire a past-producing mine that management knows intimately (maybe even more than the previous operators). The acquisition just needs to be approved by regulators and shareholders.

Sierra Madre Gold and Silver Ltd. (SM:TSX.V) is looking to play an old but familiar tune with its all-share deal to acquire the 34-sq.-kilometer La Guitarra silver-gold property — which contains two sizeable past-producing mines — from First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE).

The proposed deal, subject to regulatory and shareholder approval, would make First Majestic Sierra Madre’s largest shareholder and possibly turn Sierra Madre into a mid-tier silver producer.

At its essentials this is a reverse-takeover that would see Sierra Madre acquire all the outstanding shares of La Guitarra Compania Minera S.A. de C.V. — a wholly owned subsidiary of First Majestic that owns La Guitarra.

The bonus is that La Guitarra Compania comes with all the necessary permits for mining and processing, including an operating license, water use permit, an Environmental Impact Authorization for the La Guitarra and Coloso mines, and exploration permits for the following properties in the land package: Nazareno, Tlacotal, Trancas, La Guitarra NW, Temascaltepec, and San Simon.

The price? Sierra Madre will issue to First Majestic 69,063,076 common shares at CA$0.65 or CA$0.09 lower than the closing price the day before the deal was announced. The shares have an aggregate value of US$35 million (US$35M).

Sierra Madre had slightly less than 64 million shares outstanding before the acquisition, so it would more than double the junior’s number of outstanding shares. Sierra Madre Executive Chairman and Chief Operating Officer Gregory Liller and President and Chief Executive Officer Alex Langer had some lengthy discussions before pulling the trigger.

“Alex [Langer] and I looked at the numbers, and we looked at what would it take to put us in this exact same position. We knew we would have to have made a big acquisition to do that. I think this is probably the biggest undeveloped silver district in Mexico,” Liller told Streetwise Reports.

He added: “If we can get to that 50 to 100 million ounce (resource) level — hopefully the upper end of that — in fairly short order, then I’d say it was worth it.”

Sierra Madre management expects to get exploration drills turning once the deal is approved.

If the deal receives approval, it would mark the second time La Guitarra has come under Liller’s purview.

In April 2003, as president of the now-defunct Genco Resources, Liller spearheaded a deal to acquire a 73-sq.-kilometer land package that contained La Guitarra. Liller and Sierra Madre’s Director of Exploration and Development, Luis Saenz, operated La Guitarra from 2006 to 2009 when a management change led to a Genco merger with another junior silver company.

La Guitarra is about 130 kilometers southwest of Mexico City. It operated well after the Genco days until mid-2018 and there is still an on-site 500-tonne-per-day mill and a flotation recovery circuit.

The property hosts two underground centres — La Guitarra and Coloso — that remain on care and maintenance as well as three past-producing zones: Nazareno, Mina de Agua and El Rincón (care and maintenance means that there are people who regularly maintain the mill and other infrastructure to make sure it’s never far from being ready to swing back into production).

Past production between 2015 and 2018 was 1 to 1.5 Moz silver-equivalent annually. The first-ever production was from high-grade mines on the eastern portion of the land package during the Spanish colonial period.

“If (First Majestic) didn’t think we could do this thing justice, they would never have done the deal. I mean, they nicknamed this (transaction) the Phoenix. So they’re hoping we can make it rise from the ashes,” Liller told Streetwise Reports.

2014 Resource Estimate

A technical report filed by First Majestic late in 2014 stated that the Measured and Indicated resource at La Guitarra was 1.15 million tonnes in sulphides at 318 grams per tonne silver (318 g/t Ag) and 1.65 g/t gold (Au) or 412 silver-equivalent oz (Ag eq) for a total of 11.73 million oz (11.73 Moz) silver or 15.2 Moz Ag eq.

The Inferred resource, meanwhile, tallies 739,000 tonnes in sulphides at 197 g/t Ag and 1.23 g/t Au or 267 g/t Ag eq for a total of 4.67 Moz Ag or 6.34 Moz Ag eq.

The National Instrument 43-101-compliant resource was calculated using $22/oz silver and $1,350/oz gold, and recoveries of 85% for silver and 79% for gold.

Once the transaction closes (which seems likely), Sierra Madre will have three precious metals projects in Mexico: Tepic and La Tigra, two early-stage exploration projects, and La Guitarra, which the company hopes to put back into production, possibly by the end of the year.

Details of the Deal

Any of the 69,063,076 Sierra Madre shares issued to First Majestic in excess of 19.9% can be distributed to First Majestic shareholders.

The remaining shares that comprise First Majestic’s 19.9% stake are subject to several hold periods. Twenty-five percent of the shares issued to the silver producer can’t be sold for six months; 25% must be held for 12 months; 25% would be subject to an 18-month restriction; and the final 25% can’t be sold for 24 months (all periods are from the date of closing).

After closing, First Majestic would have the right to participate in further financings to maintain its interest in Sierra Madre, up to 19.9%.

The deal doesn’t come with a board seat for First Majestic, but a clause in the deal says that the mid-tier producer must vote its shares with the junior’s board.

First Majestic also retains a 2% net smelter return (NSR) royalty on all production from La Guitarra. Sierra Madre would have the right to buy back 1% of the royalty for $2M.

Sierra Madre also intends to complete a private placement to raise up to CA$10M.

Now on the OTCQX

The junior recently qualified to trade on the OTCQX Best Market, a step up from the OTCQB Venture Market. It trades under the symbol SMDRF.

U.S. investors can find current financial disclosures and real-time Level 2 quotes for the company on the OTC Markets website.

To qualify for the OTCQX, companies must meet high financial standards, follow best practice corporate governance, and demonstrate compliance with applicable securities laws.

“We have strong U.S. investor support, and we continue to increase our marketing and investor awareness campaigns in Canada, the U.S., and Europe,” Langer said in a release.

London-based VSA Capital gives Sierra Madre a “speculative buy” rating.

It currently trades in a 52-week range of CA$0.39 and CA$0.90.

Disclosures

1) Brian Sylvester compiled this article for Streetwise Reports LLC and provides services to Streetwise Reports as an independent contractor/employee. They or members of their household own securities of the following companies mentioned in the article: None. They or members of their household are paid by the following companies mentioned in this article: None. Their company has a financial relationship with the following companies referred to in this article: None.

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