Bill Cara

Fifty years in the market, and I’m still learning lessons

November 3, 2023

Reviewing New Pacific Metals (NEWP)( for the final time before the 1Q2024 Carangas Project PEA.

The company’s fundamental analysis indicates substantial undervaluation relative to its peers. Detailed assessments of its financials and market position also suggest that the company trades at a significant discount compared to its actual resource value. Given the expansive investor relations programs with Stansberry, Rick Rule, Frank Holmes, and others and multiple site visits to Bolivia for mining analysts and newsletter writers, this stock should be trading at a premium. After all, it’s not a secret that NEWP has reported ownership of 884.4 mil oz (Moz) Silver Equivalent (AgEq), no debt, and about US$28 million cash, and the shares are tightly controlled.

At the recent Silver spot price of US$23.00, the gross valuation amounts to about $20.3 Billion. The NEWP market value, however, is presently US$265-$280 million. The silver industry explore-co peer average is 0.19x NAV, and New Pacific trades materially below that, so deeper analysis is required to understand my concerns and why I remain invested.

The average price for a mine developer that the market is paying for an ounce of silver in the ground is around US$0.55/oz. That price has been as high as +$1.25/oz recently. Most developers’ value has been down hard from 12-24 months ago because the market’s commodity risk appetite fell significantly when Treasury yields lifted, which means carrying costs are higher. However, I believe this valuation will revert to about US$0.90/oz within 12-18 months after yields normalize.

Suppose I use that $0.55/oz average and apply it to the company’s actual 884.4 Moz resource. In that case, I get an implied valuation of US$486.4 million, which means, using this benchmark, New Pacific, with a market valuation of US$280 million, is trading at around a 42.5% discount using that average value paid by the market. So, clearly, New Pacific is greatly undervalued to similar companies for an ounce of Silver in the ground.

In a few years, New Pacific will be in production. Producers get more value per ounce, ranging from over $1.00 to $8.00, because, in the words of mining analysts, with commercial production, there is less risk to investors, and the economic cost of extraction is directly measurable. In just a few years, this company will go into production with both Silver Sand and Carangas projects, and I believe the stock valuation will increase accordingly.

Using the most conservative valuation methodology, we should consider what the Silver Sand and Carangas projects could be worth today in terms of fully funded project economics. To do that, we must include all costs to production, including capex, processing, and the time value of extracting each ounce to calculate the Net Present Value.

We know that the Silver Sand Project has a US$726 million post-tax NPV, as stated in the recent PEA. At current prices, the Carangas Project has an NPV value of US$1,063 million (a number used by a prominent mining analyst using comparable projects, but he thinks it’s worth more than that). For argument’s sake, the NEWP NPV is about US$1,789 million.

Let’s also assume, using company guidance and analyst expectations, that the Silver Sand and Carangas’ capex to get into production in four years is $308 million and $500 million, respectively, and that is financed with 100% equity at the average share price of the past four years, which is US$2.83. That would result in an additional 285.51 million shares being issued, which, together with the present 170.86 million shares outstanding, amounts to about 456.37 million outstanding shares when these mines begin profitable operations in a few years.

Based on this data, i.e., US$1,789 million divided by 456.37 million, the NEWP share value should be US$3.92 today, except the price is in the US$1.60-$1.70 range. On this basis, New Pacific trades at a 58% discount to industry calculations of fair value.

I have been asking management and industry analysts why this stock continues to trade at much lower valuations than the other Silver stocks I follow, and I have never received a proper answer.

I am on record that NEWP shares ought to be bought under US$2.50, and the minimum value I place on them is US$4.00. Professional mining analysts make legitimate arguments that NEWP shares today represent good value at US$6.00, which is the 12-month price target set by the US-based Roth Capital Partners analyst who follows the company.

I am also an investor in Silvercorp (SVM), which trades at around $2.30 and has a 12-month price target of US$4.35 for the two analysts who follow it. Given the SVM 27.4% ownership of NEWP, any major increase in NEWP shares will likely result in a substantial increase in SVM.

For the past two years, I have complained in emails and Zoom calls with various executives of New Pacific that the trading activity in the stock is dubious at best. I have written about this in blogs numerous times. Then came the offensive so-called private placement on September 25 that set me off, probably because many of you know I had anticipated it based on earlier trading.

On September 25, New Pacific sold 13,208,000 shares to raise C$35 million (US$26M) for C$2.65 (US$1.96), with about 50% of the offering purchased by a combination of Silvercorp Metals (now holding 27.4%) and Pan American Mining (now holding 11.6%). I believe that the transaction price was materially below the 30-day low market price. Outsiders were not invited to buy those cheap shares.

Let me explain my issue with the deal pricing and the deal itself.

The trading for the month leading up to the deal was at increasingly lower prices, which several people on social media were questioning. Then, on September 11, the CEO, major shareholder, and actual decision-maker for this entire group of companies announced his resignation from management. There was also an unexplained major stock sale of 344,500 shares on the Toronto Exchange at very low prices at the closing bell on Friday, September 15, which I flagged immediately as a sign a secret financing deal had been struck. In the two-and-a-half months before September 15, the average daily trading volume on the TSX was under 28,000, and the biggest trade was 102,100 shares on July 12. Then, two days immediately before the announced deal, the share prices dropped materially lower than the month leading up to the deal, which I noted as I had been watching the stock closely.

So, given my assessment that inside knowledge of financing led to falling prices and trading volume, I struck these two days from my calculations. I discovered that in the month before that, and bearing in mind the deal was struck at US$1.96, the average open and close on the New York American Exchange were US$2.43 and $2.42. The lows traded between US$2.20 and $2.55, with an average low of US$2.36. The daily highs traded between US$2.32 and $2.68, with an average high of US$2.49. The average daily volume in New York was 108,970. The shares also traded an average of 45,000 daily during the prior 30 days in Toronto. So, the market prices were liquid.

The stock’s average high-low-close for the twenty trading days before the deal was struck was US$2.49-$2.36-$2.42, which placed a market value on the company of US$381.5 million (with a low of US$387.0 million and a high of US$406.9 million). [The US$381.5 million results from a US$2.42 average price times 157.65 million pre-deal shares outstanding.]

In this deal with mostly insiders and, I presume, a few friends and family, the company then raised US$26 million (C$35 million) in cash, resulting in a new valuation that is now roughly US$$270 million. How is it possible that US$381.5 million plus US$26 million in new cash results in a new valuation of US$270 million?

That is an answer I’m not prepared to put in writing other than to say the independent shareholders, like me, got screwed.

I am also offended at this deal because another large public company, Pan American Silver (PAAS), made a strategic investment within that widely available so-called private placement that took its holding beyond the 10% pre-reporting threshold requirement. I firmly believe the September 25 financing should have been a fully disclosed public offering using industry valuations and third-party opinions. Other than Silvercorp and Pan American, I would like to know the other investors in the deal. Were they aware that Pan American was making a strategic investment, and were they told what the Pan American valuation was (and clearly, Pan American’s Board would have required one)?

I am disappointed. I’ve also reached my limit with all the superficial assurances and empty words from senior management, who I like but are not in the room when insider trading and deals are being discussed. They are just the market-facing grunts who work for the people behind them, making all the money.

So, I formally reported my concerns to the relevant regulatory authorities, emphasizing the need for transparent and fair practices within the industry. I’ll leave it at that.

Would I buy more NEWP at these prices? No longer, and the people I know who are also invested would not either. Once the insiders stop their price suppression tactics that helped them pick up cheap stock, the usual hype from the company will continue, and the price will rise above my cost. Then I’ll sell.

As it stands today, money, clients, and reputation are lost. But another lesson has been learned.