With silver at a historical inflection point, an undervalued Mexican silver stock is positioned to capitalize on the metal’s imminent bull run.
Active primarily in Sonora and Chihuahua, Kootenay Silver (TSXV:KTN) is a mineral exploration company developing one of the largest, junior-owned silver asset bases in Mexico. Among its many great projects – Columba, Promontorio, La Negra and La Cigarra – Columba stands out for its new high-grade discovery residing on the Sierra Madre Trend, which has yielded billions of ounces of silver dating back to the 1500s.
Backed by large resource estimates and high-grade exploration projects, the company finds itself leveraged to silver during one of the most attractive periods in the metal’s history in terms of supply and demand, macroeconomics and investor sentiment.
The case for silver soaring to new highs
With the gold-silver ratio at around 80-1, well beyond the 250-year average of 40-1, silver looks ready to spike to the upside, just like it has on numerous past occasions, including:
- In 1979, when the ratio was below 20:1, and silver shot up from less than US$10 to more than US$40 per ounce
- In 2011, when a similar run-up occurred from under US$20 to almost US$50 per ounce
Besides historical data, this thesis is supported by booming silver demand, with the metal registering a 237.7 million ounce (Moz) deficit in 2022 and a projected 142.1 Moz deficit in 2023, with the solar sector likely to widen that figure.
Silver is essential for conducting electricity from solar panels into homes, potentially accounting for more than 20 per cent of annual supply by 2027 and up to 95 per cent of current reserves by 2050, which doesn’t even include the hundreds of millions of ounces required for the metal’s other applications in jewelry, electronics and industrial processes.
Couple these demand dynamics with the more than 10-year timeframe it takes to get a new silver mine off the ground, as well as the persistence of global inflation supporting demand for silver as a hedge, and we are looking at a supply squeeze scenario where higher prices cannot be immediately met with increased production, despite its expected 5 per cent rise in 2023 to 873 Moz, the highest level since 2016.
To put the ongoing silver deficit into perspective, global inventories from 2021-2023 will fall by some 430 Moz, which is over half of forecasted 2023 mine production, according to the Silver Institute.
This scenario is why savvy investors are piling into prospective silver stocks, whose high betas hold the potential to soar multiples above the physical metal’s return alone. If, for example, gold were to reach US$3,000 and the gold-silver ratio were to fall to its historical average, the price of silver would triple to more than US$75.
The main ingredients for explosive growth
Equipped with accretive tailwinds tied to its metal of choice, as well as enticing projects we’ll detail below, we believe Kootenay’s current share price suggests excessive investor pessimism.
Shares of the silver stock are down by more than 86 per cent from their 5-year-high, despite the company’s history of high-profile allocators stepping in and taking advantage of an implied discount, adding credence to a value-potential mismatch poised for outsized returns.
These major players have included Coeur Mining, Agnico Eagle and Pan American Silver, which took stakes based on the quality of Kootenay’s discoveries, as well as billionaire Eric Sprott, whose position near 7 per cent speaks to his bullish view for silver and Kootenay’s strong silver portfolio.
Let’s take a closer look at what drew these investors to Kootenay’s properties, and why its depressed share price makes now the best time to top up your precious metal equity allocation.
Ingredient No. 1: High-grade discoveries
Columba
Kootenay’s Columba Silver Project in Chihuahua is a high-grade epithermal vein system notable for its multi-100-Moz potential. The underexplored property boasts a similar footprint to two Mexican projects of this size, Panuco and the producing Las Chispas, leading the company to interpret it as a new silver vein district.
Due to high-grade intercepts over numerous different veins and the areal extent of the vein system, Columba has become Kootenay’s focus and lead project.
Columba is composed of a past-producing mine that operated from 1900-1910, uncovering classic veins with more than 10 km of strike and more than 6 m in width. Kootenay, for its part, has mapped veins over a 3 km x 4 km area with strike lengths between 200 m and 2 km on the barely eroded project.
The silver stock surpassed historical grades between 600-900 g/t silver during successful 2019-2022 drilling of more than 27,000 m, which confirmed multiple high-grade areas over multi-metre widths. Highlights include:
- 2.45 m of 5,840 g/t silver (D vein)
- 1.63 m of 2,330 g/t silver (F vein)
- 6 m of 2,035 g/t silver (D vein)
- 4.6 m of 1,186 g/t silver (B vein)
The first part of a multi-phase 50,000 m drill program slated for August will step out from Columba’s defined high-grade zones on the road to a maiden resource estimate and preliminary economic assessment.
In addition to testing new mineralized zones, high-priority targets include the F vein, notable for consistent silver across 700 m of length and 200 m of depth, and the D vein, whose high grades, flanked by mineralized stockwork and breccia, represent Columba’s best prospect for building size toward economical extraction.
Kootenay will conduct these activities as Columba’s 100-per-cent owner having completed US$3.29 million in staged payments.
“With the drilling we’ve accomplished to date, we see zones and areas where we might have 100 Moz in sight already,” James M. McDonald, president and CEO, said in an interview with Stockhouse. “With the caveat that these are open-ended intercepts we need to drill and prove, we believe we’ve discovered a brand new vein district.”
La Negra
Kootenay’s La Negra Project houses a 2014 silver discovery measuring 100 to 200 m x 500 m that yielded high-grade mineralization in most of the 95 holes (17,000 m) completed to date.
The initial 25 drill holes encountered significant wide silver intercepts as high as 156 g/t silver over 200 m, including 420 g/t silver over 50 m and 1,337 g/t silver over 6 m.
Kootenay sees potential for a low-cost, open-pit mine anchored by a hilltop with good silver grades and diatreme breccia mineralization a few hundred metres deep.
Metallurgical testing at La Negra by Kappes Cassiday and Associates demonstrates leach extraction silver recoveries from 71-90 per cent and flotation-based recoveries between 85-98 per cent. High leaching recoveries indicate potential for an on-site dore, leading to significant cost advantages compared to sulphide concentrate produced by flotation.
The silver stock is currently re-examining targets at La Negra and Promontorio, which we’ll cover next, to design a work plan to coincide with increasing silver market strength.
Ingredient No. 2: Resource properties
Kootenay’s properties with compliant resource estimates – Promontorio and La Cigarra – boast 35 Moz silver equivalent (AgEq) inferred and 136 Moz AgEq measured and indicated. These figures represent billions in potential revenue that set the silver stock apart from the majority of junior miners, whose land packages house more hopes and prayers than indications of worthwhile production.
Promontorio
The company’s Promontorio property resides in Sonora’s Promontorio Mineral Belt, which also houses its La Negra project 7 km to the north. Both were optioned by Pan American Silver from 2016-2019 and advanced with a combined US$3.6 million in expenditures.
After more than 65,000 m of drilling, Promontorio has returned numerous high-grade intercepts and remains open in three directions and to depth. Its potential open-pittable resource is estimated at:
- 84 Moz AgEq measured and indicated at a grade of 58.7 g/t AgEq, including 39,740 oz. silver, 506 oz. gold, 392,907 lbs. lead and 459,619 lbs. zinc
- 21.7 Moz AgEq inferred at a grade of 46.3 g/t AgEq, including 11,683 oz. silver, 132 oz. gold, 89,430 lbs. lead and 98,462 lbs. zinc
Additional underground potential breaks down as follows:
- 0.4 Moz AgEq measured and indicated at a grade of 53.3 g/t AgEq
- 2.3 Moz AgEq inferred at a grade of 55.6 g/t AgEq
These estimates – from an NI 43-101 technical report by SRK Consultants – are strengthened by tested metallurgical recovery assumptions of up to 70 per cent gold, 74 per cent silver, 81 per cent lead and 88 per cent zinc.
The mineralization at Promontorio is hosted in a diatreme breccia complex, a structure known to host precious and base metal deposits. This has proven out in the Pit and NE zones, both extensively drilled and prospects for future expansion, with numerous other areas with similar geochemical or geophysical characteristics and little to no drilling slated for testing as well.
La Cigarra
Kootenay’s 100-per-cent-owned La Cigarra Project in Chihuahua hosts a mineralized system extending over 9 km, with results from 171 holes (30,935 m) delineating over 4.4 km of strike length across the La Borracha, San Gregorio and Las Carolinas zones.
Mineralization occurs in sulphides within quartz-vein stockwork and silicified breccias containing disseminated sulphides only 26 km from the historic silver mining city of Parral. Mineralization is also on trend with numerous top silver producers, including the San Francisco Del Oro and the Santa Barbara mines, which have produced more than 800 Moz of silver to date.
La Cigarra’s current NI 43-101 mineral estimate (GeoVector Management, 2015) suggests an open-pittable resource that lives up to its neighbours’ prospectivity:
- 51.5 Moz silver measured and indicated at an in-situ grade of 86.3 g/t, as well as 41,000 oz. gold, 53,870,000 lbs. lead and 74,770,000 lbs. zinc
- 11.5 Moz silver inferred at an in situ-grade of 80 g/t, as well as 8,000 oz. gold, 12,680,000 lbs. lead and 15,610,000 lbs. zinc
- The estimate incorporates data from 156 of 173 drill holes completed within a potentially surface-minable area – including San Gregorio and Las Carolinas – whose total strike length of 2.4 km holds the potential for further expansion
Metallurgical testing between 2011 and 2015 suggests overall 88 per cent silver recoveries producing a high-grade lead-silver concentrate of 34 per cent lead and 23,000 g/t silver. Testing also unveiled the option to produce a zinc-silver concentrate of up to 58 per cent zinc and 2,500 g/t silver.
Protected by surface rights and a 20-year lease agreement, Kootenay is working on expanding La Cigarra’s strike extension to the north and south, as well as testing separate mineralized trends, guided by an updated geological model expected to result in a considerable grade upgrade by year end.
“The high likelihood of a reasonable grade bump, coupled with ample blue-sky exploration potential, makes La Cigarra a standalone project,” McDonald said. “We’ve barely scratched the surface.”
Generative portfolio
While focused on silver exploration, Kootenay will also capitalize on opportunistic transactions if accretive to shareholder value.
A recent example of this is its 35 per cent interest in the early stage Cervantes Property – a larger than 3,500 hectare porphyry gold-copper project in Sonora – which it sold to Aztec Minerals for 10 million shares at C$0.25 and a 0.5 per cent Net Smelter Return royalty.
The company’s current holdings of 7.6 million shares are poised to rise thanks to Cervantes’ potential to host a large gold-copper deposit. Aztec’s first discovery hole yielded 1.49 g/t gold over 137 m and 1 g/t gold over 165 m, leaving six more prospective mineralized zones to explore.
Ingredient No. 3: An attractive entry point thanks to risk-off sentiment
With four projects boasting bright futures, backed by defined silver ounces with a high probability of growth, Kootenay’s $35 million market cap signals that all is not well with the general investing public.
As Canadian interest rates rose from 0.5 per cent in March 2022 to 5 per cent in July 2023 and dampened overall business activity, the appetite for risk has waned in response, with global equities coming up roughly flat during that timeframe.
This dampening effect has been even more pronounced with small and micro-cap stocks, whose generally high betas have created dislocation opportunities for investors well adept at identifying solid businesses when there’s “blood in the streets.”
This is undoubtedly the case with Kootenay, whose market cap traded above C$100 million as recently as June 2021. Such a precipitous fall demonstrates how the company’s clear value proposition and years of standout results have been lost amid similarly scary returns across the micro-cap space, as well as the investing herd’s panicked retreat to safer assets.
“Pay attention to the silver market and where it is in the cycle,” McDonald said. “Gold is near all-time-highs and silver hasn’t even approached that, but it always follows. Additionally, there’s a serious silver supply deficit, the first in decades, that’s depressing above-ground silver stocks, which could make things really interesting.”
“There’s no crystal ball here,” he added, “but we’re bullish on silver and think the price is going to break through US$30 and run up much higher. We believe it will eventually break its historic high. Given how it’s traded over the last few years, it certainly looks like it’s setting up for that breakout.”
This scenario offers the opportunity to own a silver stock at a bargain price that tilts the odds of exponential gains in your favour. As Kootenay explores numerous untested mineralized areas and adds them to new and existing resource estimates, the broad market will eventually key into the ongoing silver deficit and recognize untapped value, as it always does, positioning shareholders to be rewarded for their conviction in the company’s high-grade assets.
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