Silver One — Exploration update and analysis

Since our initiation note on Silver One, the company has completed a 15,000 metre, 52-hole, reverse circulation (RC) drilling programme at Candelaria. The results of the programme were released to the market in three tranches, on 16 February, 26 May and 15 July 2021 and complement the results of nine diamond core drill holes, which were reported to the market on 26 May 2020.

The goals of the drilling programme were threefold:

In all three of these goals, Silver One was successful.

Assays received confirmed the presence of down-dip, higher-grade silver mineralisation north of the Mount Diablo pit and between the Northern Belle and Mount Diablo pits. Highlights of this portion of the campaign included:

Significantly, Silver One reported that this higher-grade mineralisation is ‘beginning to form coherent clusters that could potentially define mineralized bodies that may be accessible by either an expansion of the open pit or by underground methods’.

A map of the locations of each of the new holes in relation to the Mount Diablo and Northern Belle pits and also the locations of historical drill holes is provided in the exhibit below:

In addition to higher-grade, down-dip mineralisation, drilling to the east and west of the Mount Diablo pit also demonstrated significant mineralised widths with silver grades exceeding historical cut-off grades, thereby confirming the continuity of robust near-surface silver oxide mineralisation along strike for at least 500m to the west and 100m to the east of the Mount Diablo pit. Highlights of this aspect of the drilling programme include:

This aspect of the drilling programme suggests that these areas may potentially be amenable to open pit mining, with the prospect of combining the newly mined material with historic heap leach material and thereby potentially increasing both overall silver grades and recoveries. In the meantime, the mineralised system remains open along strike in both directions in an environment in which numerous historical workings occur on the property along the main east-west trending mineralised structure and have been traced for over 4km to the east and west of the two open pits, thereby increasing the potential for the discovery of additional, similar mineralised systems.

Of the 52 RC holes drilled, 39 were mineralised – in some cases exhibiting high silver grades in excess of historical cut-off grades – while 13 (25%) were either abandoned or returned low or insignificant metal grades. A summary of all 39 RC holes exhibiting mineralisation is provided in Exhibit 2, below, which also compares the results with those of nine diamond drill holes reported to the market in March and May 2020.

For the purposes of the above analysis in Exhibit 2, readers should note that (for ease of presentation and comparison) holes with multiple intercepts have had their intercepts conflated with their grades expressed as an average, weighted according to the width of each individual intercept. A number of features of the analysis are noteworthy:

In addition to the 35 mineralised RC holes drilled in the region of the Northern Belle and Mount Diablo pits, four additional holes (highlighted in green in Exhibit 2) were drilled to test the potential for IOCG/skarn targets. This system was first identified in historic adit dumps near to the Georgine pit, which returned assays of up to 2.76% Cu, 25g/t Ag and 0.67g/t Au, and more recently in felsic dykes and altered intrusives. The possibility of a porphyry-related mineralised system below the existing area of near-surface silver oxide mineralisation adds an entirely new dimension to the Candelaria prospect. To examine it, drill targets were identified from Silver One’s 2019 airborne magnetic and IP surveys. The locations of the four drill holes in question are provided in Exhibit 4, below.

For orientation, readers may observe that hole SO-C-21-095 appears in both Exhibit 1 (at the bottom left of the map) and Exhibit 4.

In this case, while the silver grades intersected by the four holes were relatively low, the gold grades were noticeably high (see Exhibit 2). Drilling north of the Candelaria fault, hole SO-C-20-081 (drilled vertically) in particular exhibits over 300m of moderate to strong hydrothermal alteration from the base of Tertiary to Quaternary volcanic rocks at 647.7m to the bottom of the hole at 990m. Alteration is reported to proceed downhole from nearer-surface propylitic alteration through quartz-sericite alteration and then into 81m of a diorite porphyry with hydrothermal alteration suggestive of proximity to a potential porphyry/skarn system, including massive sulphide veinlets in a potasically altered diorite with secondary biotite containing 5.99g/t Au over 0.67 metres within a 13.33m zone averaging 0.5g/t Au.

After the completion of its RC drilling programme, Silver One has three ongoing initiatives at Candelaria:

Beyond Candelaria, Silver One has also commenced a 1,500m diamond drilling programme on its 100%-owned Cherokee project in eastern Nevada (see our initiation note, Candelaria shining brightly, published on 28 August 2020). It is also advancing its Phoenix Silver project in Arizona (see below).

On 17 August, Silver One announced the start of a 1,500m diamond drilling programme at Cherokee in eastern Nevada. Cherokee is a district-sized prospect covering 5,200ha (52km2) encompassing a 12km long by 4km wide structurally controlled silver-copper-gold system with multiple epithermal vein targets that have never been drill tested. The current drilling will therefore test rich silver-copper-gold epithermal vein targets, both along strike and to depth, on patented claims overlying the past producing Cherokee and Southeast Cherokee historical workings. Additional drilling of veins and targets outside patented land (but still within the company’s claims) is planned for 2022 following environmental permitting. Work performed to date also leads management to believe that there is excellent potential to discover additional mineralised systems within the company’s property holdings.

The Cherokee and Southeast Cherokee veins occur within an extensive structural zone of multiple veining and alteration. Individual vein thicknesses vary from 2–10m within a wider 50m-thick envelope of hydrothermally altered rock, including sheeted and/or stockwork quartz-calcite veinlets that strike NW and generally dip 60–75° to the southwest. Surface sampling along the Cherokee vein system has returned multiple surface samples of c 100g/t silver, with highs of 954g/t Ag and 4.8% Cu at Cherokee and 1,163g/t Ag and 4.3% Cu in combination with strongly elevated gold grades on the Southeast Cherokee vein. Crustiform and colloform textures at old Cherokee workings illustrate classic epithermal boiling point characteristics. They are also similar in nature to veins exploited in the early mining of Pioche, 75km to the north of Silver One’s claims, which were hosted in Paleozoic limestones of similar age to those that underlie much of Cherokee.

Subsequent mining at Pioche also uncovered larger tonnage, base and precious metal-bearing carbonate replacement deposits, which were successfully mined until the mid-1990s. A third type of mineralisation may also be present in the form of a porphyry molybdenum deposit associated with an interpreted buried intrusive in the southeastern portion of the claims that was targeted by exploration in the 1980s and subsequently exhibited a strong magnetic high in Silver One’s 2019 airborne magnetometer survey. Three-dimensional modelling of the magnetic data subsequently identified a large northeast oriented zone of low magnetic susceptibility by the eastern margin of the Viola and Blue Nose areas (see Exhibit 5). Canyon Resources’ drilling of this area in the 1980s was designed to explore a buried porphyry molybdenum target, but did not penetrate the overlying limestone cover rocks. Nevertheless, the geophysical features associated with this zone have strong similarities with other large known copper, molybdenum porphyry and/or precious metal deposits (which is consistent with the observed corridor of hydrothermal alteration in limestones).

The veins that are Silver One’s primary initial target have been traced on the company’s patented claims for over 1.75km along strike and are known to extend off the patents to both the northwest and southeast. Drilling will test the veins both along strike and at depth on patented claims overlying the past producing Cherokee and Southeast Cherokee historic workings. Additional drilling off patented land, but still within the company’s claims, targeting the Johnnie, Mojoto and Hidden Treasure veins, is planned for 2022 once environmental permitting has been completed.

The Phoenix Silver project is located within the Arizona Silver Belt, which occurs on the margins of the prolific copper producing area near Globe (Arizona) and which hosts a number of small historic mines (eg the McMorris, Buckeye and Stonewall Jackson mines), but where mining majors such as BHP, Rio Tinto, and Freeport McMorran also have producing mines as well. The deposits are characterised by both native silver and other silver bearing minerals in vein structures.

Most of the veins trend east-west, similar to the mineralised structures at McMorris and Buckeye. In addition, several vein structures are partially exposed on the property and several super high grade native silver vein fragments have been uncovered from beneath the overburden just downslope from the projection of some of these veins. These samples are interpreted to be derived from the nearby vein structures, as determined by both the intergrowth of the quartz and carbonate with native silver and other silver minerals and by the non-abraded physical nature of the fragments, which suggests that they have not been transported very far.

Where they have been assayed, the samples have, in general, returned grades from background to 149 g/t Ag. However, one particularly notable sample from the central area of the property weighed 417lbs and was observed to contain large amounts of native silver (see 417Ibs fragment in Exhibit 7). This exceptionally rare fragment was not assayed to preserve its quality and integrity. However, one 18.7lbs sample was assayed by concentrate sampling techniques at Skyline Assayers & Laboratories in Tucson and found to contain 459,000g/t silver (ie 45.9% silver or 14,688oz/t).

A full suite of photographs of vein fragments discovered at Phoenix Silver is available on Silver One’s website.

Hitherto, Silver One has conducted detailed mapping and sampling at Phoenix Silver along with soil geochemical and geophysical surveys to explore for covered areas of the vein structures that may be the source of some of some of the super high-grade vein fragments already discovered (see our initiation note, Candelaria shining brightly, published on 28 August 2020). Now that this process is complete however, Silver One is in a position to drill test its findings and has lodged a Plan of Operations at the Tonto National Forest. To date, this process has been delayed by the US Forest Service as it has diverted resources to fight the forest fires that have swept across the western United States in recent months. Nevertheless, the drill permitting process is underway and is now expected to be concluded in Q421.

As at Cherokee however, Silver One’s management also believes there is evidence of two mineralising events at Phoenix Silver, with a Tertiary era porphyry event overprinting the super high grade veins emplaced in the Precambrian era.

Our Mining Prospects notes are not intended to include detailed financial modelling or valuations of the companies concerned. However, the following are some observations that investors or potential investors may consider relevant in assessing Silver One’s current enterprise value (market cap minus net near cash) of US$55.4m.

On 18 August, Silver One Resources announced an updated mineral resource on its heap leach pads at its flagship, past producing Candelaria silver project in Nevada. While there was a slight, 5.7% reduction in overall size of the comparable resource relative to its previous, historical estimate (performed in May 2001), this difference could largely be explained by a conservative methodology, including capping high silver values and low estimated densities. Importantly, however, the update promoted a significant portion of the resource from the inferred to the indicated category. Overall, the updated global resource in leach pads in the indicated plus inferred categories at Candelaria amounted to 45.4Moz silver (30.0Moz indicated and 15.4Moz inferred) compared with an historical resource of 48.2Moz all in the inferred category (see Exhibit 8). When it was published, the updated resource for the leach pads at Candelaria superseded the equivalent historical resource relating to the leach pads. The following is a table of the updated resource at Candelaria as well as the residual historical resource which was not the subject of the update (ie it excludes the resources contained within the leach pads).

The historical resource remains extant, albeit with the proviso that additional work will be required to bring it up to contemporary standards. Once this work is completed, there is no guarantee the updated resource at Candelaria will approximate the historical one, especially given the requirement for reasonable prospects of economic extraction (although the fact that the updated resource for the leach pads reconciled well with the equivalent historical resource augurs well for the balance of the deposits being drilled).

These resources (either updated or historical and updated) may be compared with Silver One’s enterprise value (EV) of US$55.4m.

In an update to our report Gold stars and black holes published in January 2019, we calculated a weighted average in-situ value for undeveloped silver resources of US$0.62 per total ounce (at a silver price at the time of US$26.00/oz). The components of the analysis (excluding Silver One) are shown in the graph below:

Whereas previous work had yielded discrete results for the measured, indicated and inferred categories of resources, in the case of the updated analysis, the results generated on this basis were (in the majority of instances) to a low level of statistical confidence and so have been disregarded in favour of the blended average valuation of US$0.62 per total ounce.

Since Edison’s updated in-situ value for undeveloped silver resources was calculated, the silver price has fallen by 13.3%, from US$26.00/oz to US$22.55/oz. Within the context of the above analysis, the ratio of the average in-situ value calculated in our most recent update to the prevailing price of silver was 2.4%, which is at the bottom of its historical range of 2.8–4.1% (see Exhibit ). Alternatively, the empirical relationship between the in-situ value of silver resources and silver metal may be derived from a regression analysis between the two, as depicted in Exhibit 10 (note, however, that with a Pearson product moment correlation coefficient of 0.56, the analysis may not be said to be statistically significant at the 5% level, given the number of data points; that is to say, there is a more than 5% chance that the observed correlation between in-situ silver values and the silver price occurred by chance):

There are two potential methods to address the change in the silver price since Edison’s updated value of US$0.62/oz (at a silver price at the time of US$26.00/oz) was calculated:

In addition, investors should bear in mind the fact that Candelaria is located in a premium mining jurisdiction (see below).

In its 2020 survey of Investment Attractiveness, the Fraser Institute ranked Nevada the top jurisdiction for mining investment, worldwide.

On this basis, it might be expected that Silver One’s resources should command a premium rating. In the case of our updated analysis, the highest-value rating observed among the junior silver explorers (with a resource of a comparable size to Silver One) is US$1.23/oz for a resource located in Australia.

Silver One is preparing an economic study on Candelaria for completion in H222. Among other things, the study will investigate the potential to reprocess the historic heap leach pads alone, as well as combining them with near-surface in-situ mineralisation close to the existing pads, with the goal of potentially increasing the overall grade of silver and/or its recovery. In our report, Gold stars and black holes published in January 2019, we calculated that companies with projects at the preliminary (or scoping study) stage of development are typically valued at between -4.8% and 50.7% of attributable NPV, with a weighted average of 11.7% of attributable NPV.

Silver One had net cash on its balance sheet of C$14.1m at end-June 2021, including C$0.2m in short-term investments and C$3.0m in marketable securities (and C$0.3m in lease liabilities).

Within the context of its cash resources, it is notable that the well known mining financier, Mr Eric Sprott (via a subsidiary company), has a holding of 33.1m shares in the company (c 15.0% of the total), plus an estimated 16.6m warrants, which is unchanged since his active participation in Silver One’s C$9.5m equity raising in July last year. Mr Sprott has been a regular supporter of Silver One and the July 2020 equity raising was the third occasion on which he has invested in the company.

Excluding investments in short-term securities and proceeds from the completion of the sale of its Mexican assets earlier this year, Silver One’s pre-financing cash outflow was C$5.6m in FY20, followed by C$2.6m in Q121 and C$2.0m in Q221.