It’s unusual for a privately held company to put a mine into production before it becomes a publicly listed company.
“It’s incredibly rare – by and large it’s virtually impossible unless you find other sources of funding,” says Steve Orr, CEO of Gatos Silver (TSX: GATO; NYSE: GATO).
But that’s exactly what Electrum Group LLC, a private precious metals investment company based in New York chaired by mining entrepreneur Thomas Kaplan, accomplished in Mexico over the last decade, explained Orr, who joined the company in 2011, shortly after it was founded in 2010.
Gatos Silver and later with its joint-venture partner, Japan’s Dowa Metals & Mining (Dowa), put the Cerro Los Gatos underground silver-lead-zinc mine into production in July 2019, and sent the first shipments of concentrate in September of that year. The company then dual-listed its shares on the Toronto and New York stock exchanges on October 27, 2020.
Since the initial public offering on the TSX at $8.50 per share (US$7 per share on the NYSE), the stock has more than doubled, surging to $17.08 per share, up 101%. (On the NYSE it currently trades at US$14 per share.)
Last year the mine produced 4.2 million ounces of silver in concentrate, 34.2 million zinc pounds in zinc concentrate, 27.4 million lead pounds in lead concentrate, and 4,900 gold ounces in lead concentrate.
Orr, who prior to joining Gatos Silver was president and CEO of Ventana Gold, reflected on how keeping the company private for so many years was a big advantage.
“When I look back on it, it’s been an absolute pleasure to remain private for this past decade and not be constantly under scrutiny of the market,” he said. “The only way we could do it was Electrum was incredibly patient. They understand resources, they play the long game and they were always supportive of us.”
In addition, Orr said, the New York investment firm has been successful in recruiting funds from non-traditional sectors like Mubadala, Abu Dhabi’s sovereign wealth fund, and the Municipal Employees’ Retirement System (MERS) of Michigan. “Electrum has been incredibly effective in bringing in what would have been probably viewed as uncommon sources of investment,” Orr said. “Abu Dhabi invested a meaningful amount of money into the Electrum registered funds and MERS has invested a meaningful amount of money into their funds … and in fact, MERS was so captivated by what we were doing at Gatos Silver they wanted a direct investment in the company.”
Operating under the radar as a private company in the early stages of discovery and resource definition also proved beneficial, as management quietly expanded its land position in the district to over 103,000 contiguous hectares and acquired surface rights over the main deposit area and another two key mineralized areas in deals with local landowners – mainly owners of large-scale ranches living in the United States or in Mexico City.
“This area is semi-arid and really sparsely populated and there is only one Ejido that’s even close and it’s 8 km away … and so the surface rights are large-scale cattle ranches and they’ve existed actually from the days of the Spaniards, pre-Revolution, and have been passed through the generations of the families and none of the owners actually live there anymore.”
Starting from the beginning
The story of Los Gatos begins in 2007, when the Electrum Group acquired an exploration option on the property in the state of Chihuahua, about 100 km to the south of Chihuahua City and about 200 km to the southeast of Agnico Eagle Mines’ (TSX: AEM; NYSE: AEM) Pinos Altos underground mine.
By the time Orr joined the company, Electrum had already drilled the discovery hole in 2008 (34 metres grading 414.3 grams silver per tonne, 2.1% lead and 4.8% zinc) and with silver trading at around US$40 per oz., a private placement followed – attracting US$165 million from a handful of key funds (including Tocqueville Asset Management and Liberty Metals and Mining), and high net worth individuals, Orr said.
By the start of 2012, however, silver prices had fallen significantly and a syndicate of banks that had been interested in a private placement at the same price as the first, altered course. As a result, Electrum decided to wait until the markets rebounded, and spent the time drilling out the deposit and undertaking exploration on its wider land package, ultimately pinpointing 14 separate zones of mineralization along the area’s predominant mineralized trend.
But by the end of 2013, Orr said, the company needed to look for alternative sources of money. “We were starting to get a little concerned about funding – the precious metals market was looking even worse back then,” Orr recalled, noting that they weren’t interested in the money so much to build a mine as to “continue to opportunistically add value.”
Fortunately Orr had developed a relationship earlier in his career with Dowa, the largest zinc refiner in Japan, when he was president and CEO of Homestake Canada Inc. and responsible for the Eskay Creek gold-silver project in northwestern British Columbia, now owned by Skeena Resources (TSX: SKE; US-OTC: SKREF). (Barrick (TSX: ABX; NYSE: GOLD) holds about 12.4% of Skeena Resources.)
The mineralized material at the Eskay Creek project “was quite complex metallurgically and there were only two smelters in the world that would take it,” Orr recalled, “one was the then Noranda-owned smelter in Rouyn-Noranda, Quebec, and the other was Dowa’s smelter, which had a precious metals line in it as well.” Both companies took portions of the Eskay Creek material.
“Over the years we had a good relationship with Dowa – it did very well – so they contacted us and said they were interested in doing some due diligence on the discovery at Cerro Los Gatos,” Orr said. “They looked at our resource model and at that time most of it was still inferred and said they’d be very interested in securing the zinc.”
While Cerro Los Gatos is a silver dominant deposit, it has a meaningful zinc profile to it, Orr explained, so Gatos Silver formed a joint-venture with Dowa in 2014, under which Dowa became a non-operating partner with a 30% stake in the Los Gatos Joint Venture (LGJV) for US$50 million, giving it life-of-mine rights to the zinc. The only stipulation was that the money should be spent on developing the largest zone and initial discovery at the project – Cerro Los Gatos.
Ultimately US$7 million of the funds was spent on definition drilling, which led to the project’s first meaningful measured and indicated resource, and ultimately to proven and probable reserves, with money left over to spend on technical work, environmental baseline data, and buying more surface rights.
While working on the feasibility study, the joint venture partners felt so confident in the deposit that it decided to drive a decline into the mineralized area. “We intercepted the mineralization in November 2016, conducted trial mining to physically see the mineralization and the continuity and collected a bulk sample, and used SGS to do all our metallurgical work in Burnaby, B.C.,” Orr said. “They constructed a small-scale pilot plant, for the concentrate circuits, and we shipped 2,000 tonnes of ore across two borders up to the Lakefield, Ontario research center, and the last phase of the feasibility study was conducting this pilot plant.”
With the luxury of pilot plant testing, Orr said, the company could test metallurgical recoveries and do significant underground development before committing to construction. “I am glad we did it because we had to change grind sizes, had to experiment with different reagents … and it gave us the confidence that if we built it we think we’d know how it works,” he explained. “And because we drove the decline, we agreed that there was no point in having the development contractor demobilized, they might as well stay there and we would start developing the mine.”
As a result, Gatos Silver has completed about 16,000 metres of development and has ample access to ore, which “has been a godsend for us in terms of our ability to ramp up production,” Orr said.
The feasibility study estimated pre-production capex of US$316 million to develop the underground operation and envisioned a 2,500 tonne-per-day processing plant that would produce zinc and lead concentrates. Most of the silver reports to the lead concentrate, Orr noted, which is positive for the company because metal purchasers and refiners give a higher payable for silver in lead concentrate than silver in zinc concentrate, he explained, “so we try to pour it all into the lead concentrate.”
Cerro Los Gatos contains 10.4 million measured and indicated tonnes at average grades of 269 grams silver per tonne, 2.7% lead, 5.5% zinc, 0.34 gram gold per tonne, and 0.11% copper and 3.7 million inferred tonnes grading 107 grams silver per tonne, 2.8% lead, 4.0% zinc, 0.28 gram gold per tonne, and 0.14% copper.
Dowa was anxious to see the mine built, Orr continued, and said they would bring in a syndicate of banks to help fund construction. They accomplished that in 2017 – bringing in Japan’s Mizuho Bank and the Japanese Bank of International Cooperation (JBIC) – which provided a debt facility totaling US$210 million with an interest rate of approximately 6% including all fees. The funds covered two-thirds of pre-production capex, with the remainder the responsibility of the joint-ventures partners (Gatos Silver (70%) and Dowa (30%).
But the precious metal market still hadn’t come back by that point, Orr recalled, and it was difficult to raise its 70% of the remaining capex. What once had served as an advantage (being private) was now something of a liability.
“One thing that isn’t so great about being private is that it’s very hard to raise financing, because funds get stuck in an illiquid product and there is no certainty of a liquidity event and so they are reluctant to participate,” Orr said.
Electrum was able to secure about US$28 million from its existing shareholders but it wasn’t nearly enough, and Dowa said they would loan them the money at Libor plus 1%. “That was the cheapest funding we could ever get,” Orr said. The decision meant Gatos Silver’s share of the project dropped from 70% to 51.5% but the company has the right to regain the full 70% before the end of June this year.
With the funds in hand, the joint-venture partners secured the permits and built the mine in 18 months. “Of course the mine had had a head start,” Orr noted, “and so we were able to aggressively continue the development and expose ore faces and we were so far ahead that we produced first ore in 2018.”
From there, the joint venture took a measured approach, stacking the mined ore until the processing plant was completed in July 2019 – at which point there was over 100,000 tonnes of mineralized material ready to feed the mill.
Even with Covid-19, the operation has run relatively smoothly, Orr said, due to their decision to build a residential camp. While the mine is not far from Chihuahua – about an hour and forty-five minute drive – the company decided that busing employees would be difficult for scheduling shifts and decided on a 20-day rotation giving it more flexibility.
When the pandemic hit, the mine was able to implement rigid protocols. Employees returning to camp are taken to a hotel in Chihuahua City the evening before, tested for the virus, and if positive are sent home in the morning. Those that test negative proceed to the camp. “The decision for a residential mine by happenstance and good fortune turned out to be our first defence against Covid-19 because it’s such a controlled environment,” Orr said.
Ultimately, Electrum decided to go public with Gatos Silver last year, due to the rise in precious metal prices. “We all agreed that now was the time to IPO because silver is rebounding and it looks like we’re going to get into a sustained bull market on silver,” Orr said, adding that the metal is particularly attractive “due to its lovely dual personality – its incredible industrial use and the fact that its viewed as a store of value much like gold.”
Cerro Los Gatos is expected to produce about 12.2 million silver-equivalent ounces a year over a mine life of eleven years. But Orr noted that there is tremendous exploration upside with roughly 85% of the 103,087-hectare land holding yet to be drilled.
“This has truly been the most rewarding undertaking I’ve ever done in my career,” Orr said. “It’s the first time I’ve had the pleasure to work for a private company, and through a lot of good fortune and through the efforts of a very talented management team, we had the ability to keep the team very small – there are only six executives in the whole company – and we didn’t have the external market distractions so we were able to focus all our efforts on getting Los Gatos right.”
(Electrum now hopes to do the same with its Sunshine mine project in northern Idaho, under its Denver-based Sunshine Silver Mining & Refining Corp., which it spun out into a separate entity when Gatos Silver went public. Electrum purchased the iconic past-producer (360 million ounces of silver) out of bankruptcy and plans to reactivate exploration.
Gatos Silver has about 59.2 million common shares outstanding. At the time of the IPO in October last year, Electrum and its affiliates owned 45.1% of the company; other institutional and private investors 29.6%; Fidelity 13.4%, MERS 11.1% and management and directors 0.8%.