In the commodities complex I rarely like buying a company based on the justification that if the commodity price stays high that their FCF will be superb, unless they are at the point already of paying dividends. Cyclical industrial management lies (share buybacks, shareholder returns...they ultimately just screw you with more acquisitions at the top of the cycle) Commodities are cyclical and share buybacks are great, but a dividend speaks volumes when it comes to shareholder returns (hat tip to PBR/a, EC). Therefore, I instead prefer opportunities where I see the potential to make multiples of my capital.
And one thing I really like is being late to the party (cannabis in 2019/2020) only to be given the opportunity to actually be on time in-so-far as it relates to risk/reward.
Case in point, Vizsla Silver. They own 100% of the Panuco silver project in Sinaloa Mexico, El-Chapo's former turf. The company is fully funded and has net cash of ~USD 120 mil in the bank. The project is only 30% explored and based on the 2025 feasibility study has an IRR of 111% an after tax NPV5 of USD 1.8 bil at US35/oz silver and US 3,100/oz gold.
Update those metals price assumptions to $60 silver and $4,200 gold and you get an appx NPV of US 3.2 billion and an IRR of 170-odd%! The project is a monster with significant potential for extension of mine life. Did I mention it's only 30% explored?
So why is it trading at a market cap of only USD 1.2 billion today? Because in January, 10 of its employees got abducted and murdered by the cartel. This halted the project briefly and caused the share price to waterfall. So security is gumming up development, even though permitting advances.
Since the event, the US has gone hard on Mexico. While El-Chapo is in the US, they extradited El-Mayo, another cartel leader who is behind bars. The governor of Sinaloa stepped down in May for accusations he's linked to the cartel. Change is afoot. How long it takes to get stability back in the region is anyone's guess, but it's happening. Spoiler: the cartel isn't going away. At some point we are likely to just see peace come back to the region as turf is settled and people agree to leave certain parts of the economy alone. So the game is patience, but buying a world-class silver asset for peanuts might just be a gift.
The company is working through final permits, specifically its MIA, and thereafter will go to FID planned for 2H 26. The stock is already washed out. The underlying asset is world class and they have roughly USD 400 million in the bank. The setup is an interesting one when considering the fully-funded nature of the company and asset quality.
🚨Full disclosure: I'm biased as I hold a position. So don't take this as a recommendation, but do your own work on the company and come to your own conclusion.
