SS1 finds silver in step out hole - bring on the assays…

Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 3,810,000 SS1 shares at the time of publishing this article. The Company has been engaged by SS1 to share our commentary on the progress of our Investment in SS1 over time. Share holdings correct on 21st August 2024.

Our 2024 Small Cap Pick of the Year Sun Silver (ASX:SS1) is drilling right now for silver at its project in Nevada, USA.

Today SS1 reported some initial early results, demonstrating that silver mineralisation extends further than first thought.

An XRF reading was for a grade of up to 296 g/t... in a step out hole.

This step out drill hole is 115m outside of the boundary of the company’s 292,000,000 ounce silver equivalent resource.

Because it is a “step out hole” and not one that was already part of the existing JORC resource, the results indicate an extension to the high grade zone of mineralisation at the northwest part of the project.

So while SS1’s silver resource is already the largest silver deposit in the “early development” stage on the ASX and TSX - it could get even bigger...

SS1 has plenty more drilling planned - a total of 7,500m - to work out just how much the mineralisation extends.

Now all SS1 needs is for the silver price to go on another surge upwards - which would mean the value of its ground will only grow.

Whilst today’s news is positive, it’s worth noting that the grades SS1 announced today were based on XRF readings, not lab assays.

An X-ray fluorescence (XRF) spectrometer is an x-ray instrument used for routine, relatively non-destructive chemical analyses of rocks, minerals, sediments and fluids.

These results are a guide to mineralisation only and are limited to the accuracy of the XRF device.

This means that they are generally less reliable, and we will really need to wait for lab assay results to be released in a few weeks time to get an accurate picture of grades and lengths of mineralisation...

IF assay results confirm today’s announcement and drilling continues delivering more news like today’s - then SS1’s upcoming resource upgrade could come in a lot higher (in size and grade) than the market expects.

The whole purpose of SS1’s current round of drilling is to:

1. Upgrade the size of its JORC resource (through exploration drilling), AND
2. Upgrade its resource classification (through definition or infill drilling)

The market generally knows what to expect with the infill drilling, however it is an important part of increasing the resource classification for the company (going up from inferred into higher confidence categories).

From a mine development perspective, upgrading the resource classification is a critical step to bring on more institutional investors and banks who are in a position to cut bigger cheques.

Mines are expensive to build, so those that ultimately fund the mine want to mitigate as much of their investment risk as possible (through increased resource classification, metwork results, feasibility studies etc...).

While SS1 progresses its project toward feasibility studies, there are still heaps of blue sky opportunities to unlock through increasing the SIZE of the resource.

This is the “upside” case for the company - and what we are most interested in.

Multiple results like the one published today, where potentially high-grade intercepts are found outside of SS1’s resource boundary are what can lead to material increases in the SIZE of the JORC resource.

SS1 vs ASX silver peer

At the moment, the biggest pure play silver exposure on the ASX is Silver Mines.

Silver Mines's market cap is ~$235M, and the company has a 400M ounce silver equivalent resource.

Right now SS1’s market cap is $58M, and it has a 292m ounce silver equivalent JORC resource.

So Silver Mines market cap is ~4 times bigger than SS1 and in a few months SS1 could have a resource much closer in size (and we hope bigger?) to Silver Mines.

IF SS1 can get its resource numbers and classification up to the point where they are bigger than Silver Mines that is when we would hope to see SS1 close its valuation gap to its peer.

We also think that a resource upgrade will bring with it interest from the much bigger companies operating mines in Nevada, where SS1’s project sits.

Nevada is home to the largest primary silver mine in the US and there are over 50 different operating silver/gold mines.

Companies like Barrick ($42B) and Kinross Resources ($13.5B) are operating projects not that far away from SS1.

There has already been billions of dollars sunk in the region to build out gold and silver processing infrastructure, so acquiring more “resources in the ground” could be a play for these major companies.

But, SS1 will need to advance the classification over its resources and grow its size to become an attractive takeover play.

Here is where SS1 sits relative to those big operators in Nevada:

What could re-rate SS1’s share price from here?

Between now and the end of the year we think there are three key catalysts that could re-rate SS1’s valuation.

Catalysts are known events with unknown outcomes (like drilling results, or resource upgrades).

If SS1 is able to beat the market expectations by announcing a result better than what the market expects, it should re-rate the stock upwards.

Here are the three key catalysts that we are looking out for from SS1 before the end of the year:

1. Results from the current 7,500m drilling campaign & resource upgrade
2. Metallurgical testwork results
3. Progress on Silver Paste program

Drilling Results & Resource Upgrade

SS1 is at the early stages of a 7,500m drilling program.

Over the next few months we expect more drilling results to be announced from this program.

We are looking forward to the first batch of assay results, especially after the early positive signs from the XRF readings.

Any high-grade assay results from holes outside of SS1’s existing resource are “blue sky” upside for the company, and potentially a catalyst by themselves (particularly if there are any big, BIG hits).

Once the drilling program is complete, SS1 will review all of the drilling and publish an upgraded JORC resource.

Depending on the success of the drilling program, SS1 will upgrade the size and classification of its resource.

The bigger the size, the better the result for SS1.

In order to understand the context of the results before they are released, we will publish a bull/bear/base case scenario for the upgraded resource once drilling has been completed.

In addition to growing the size of the resource, SS1 will be able to improve the classification of its resource (reducing the development risk for larger funds, banks and major miners in the area).

At the moment, SS1’s resource is 100% in the inferred category - which is the lowest confidence interval and where there is still some level of uncertainty around a resource estimate.

SS1 moving that resource into higher confidence categories and potentially increasing the size could start to bring more institutional/corporate interest into the company.

🎓 Learn more about JORC resources here: What is a JORC resource? How does a company define a resource?

In the meantime, we will be watching to see what comes from the company’s drill program.

Objective #1: Drilling to upgrade existing JORC resource

We want to see SS1 run geophysical surveys, identify new drill targets and then run an infill/extensional drill program to upgrade its JORC resource.

Milestones
✅ Geophysics survey
✅ Drill permits granted
✅ Drilling commenced
🔄 Drilling assays

Source: “What do we expect SS1 to deliver?” - SS1 Investment Memo 18 May 2024

Metallurgical test work updates

One key question that sits over SS1’s project is how easy is it to mine and process gold and silver from the resource?

This answer is found through metallurgical testwork (also known as met work).

Met work determines how easy it is for SS1 to recover silver and gold from its resources by testing various processing methods.

It's a bit of an iterative process, which tends to take a few months to refine.

Metwork is something of particular importance to later stage corporate investors and bigger resources funds that want a clear line of sight over the costs of operating the mine.

When it comes to metallurgy, “simple and boring” is what we want to see, that allow for processes that have been tried and tested for many decades...

IF SS1 can show that its resource is easy to process and shares similarities with some of the mines already in operation, then we think it will start to stack up as a potential target for bigger companies in the area and larger corporate funds...

Silver Paste US$60M Funding Application

While the drilling campaign is ongoing, SS1 is also working on downstream processing solutions for silver paste.

Silver paste is a key ingredient in solar panels.

Recently, the US approved a 50% tariffs on Chinese solar imports...

As the US looks to on-shore manufacturing for key products for the global energy transition, products like “silver paste” will become more and more important.

As SS1 develops its project towards feasibility studies, “silver paste” could become an increasingly important part of the SS1 story.

SS1 recently submitted an application to the U.S. Department of Energy for a USD $60M investment tax credit for a Silver Paste Production Facility in the USA, aimed at supporting local solar photovoltaic (PV) cell manufacturing.

In addition, SS1 has mentioned that it is looking at other grant opportunities for the downstream part of the business.

Securing these grants are very good for existing shareholders as it provides non-dilutive funding for SS1 to develop an area of its business that could prove to be very valuable as it moves towards feasibility studies.

It is still relatively early days, and the key focus for the company is still on the drilling program, however we will be tracking a number of milestones in relation to the Silver Paste opportunity over the next few months:

🔲 Commence silver paste scoping studies

🔄 Secure silver paste grant funding

🔲 Commence feasibility studies

Ultimately its a combination of these catalysts and the macro environment that we hope help SS1 achieve our Big Bet which is as follows:

Our SS1 Big Bet

“SS1 re-rates to a +$300M market cap by expanding its large US silver resource and moving into development studies and/or attracting a takeover bid at multiples of our Initial Entry Price”

NOTE: our “Big Bet” is what we HOPE the ultimate success scenario looks like for this particular Investment over the long term (3+ years). There is a lot of work to be done, many risks involved - just some of which we list in our SS1 Investment Memo. Success will require a significant amount of luck. There is no guarantee that our Big Bet will ever come true.

What are the risks in the short term?

In the short term the risk we see for SS1 are “exploration risk”.

SS1 is currently running an infill and extensional drill program.

There is no guarantee that the drilling delivers extensions OR confirmation of the existing mineralisation.

Exploration risk

There is no guarantee that SS1’s upcoming drill programs in Nevada are successful and SS1 may fail to find economic silver-gold deposits.

Source: “What could go wrong?” - SS1 Investment Memo 18 May 2024

To see other risks to our Investment Thesis check out our SS1 Investment Memo here.

Our SS1 Investment Memo

For a full rundown of our investment thesis, read our SS1 Investment Memo, where we share:

• What SS1 does
• The macro theme for SS1
• Our SS1 Big Bet
• What we want to see SS1 achieve
• Why we are Invested in SS1
• The key risks to our Investment Thesis
• Our Investment Plan