On October 16, Gatos Silver announced the terms of its IPO. The company expects to raise $US150 Million at a price per share of US$7.00-$9.00. At the mid-range, this gives it a market cap of approximately $433 million. Gatos expect to finalize the price of its offering the week of October 26.
As we discussed previously, Gatos looks like an interesting silver play. The company expects to generate $105 million in revenue in 2021 at all-in sustaining costs of $13.97 pre share. Considering Silver traded around $15.00 for the past five years before its current run-up, the company is likely to generate considerable cash flow even if the price of silver collapses to pre-covid levels.
Since the company only recently entered production stage, it has been operating at a loss. Given this, let's take a look at valuation as compared to sales.
At the mid-range, the company is trading at 4.12 times forward sales. In comparison PAAS.TO, FVI.TO and SVM.TO are trading at 3.55, 2.86 and 9.31 times forward sales. Given this, the company seems to be aiming for an average valuation.
As a smaller cap, the company likely has more growth potential, and a slight premium in a bull market is deserved. Since we believe the price of silver is likely to maintain its strength over the short to medium term, we’d consider Gatos fairly valued at the mid-range of its offering price.
One positive aspect is the company has a low debt load. According to the consolidated statements, Gatos will have a D/E ratio of only 0.12 which is one of the lowest in the industry. Important to note however, the JV of which it will own 70%, does have a higher debt load (D/E of 3.3).
Overall, we are liking what we see from this junior silver play. It has a nice asset, low costs and should generate considerable cash flows. Although it is not yet profitable, we expect this to change in a material way after a full-year of production out of the Cerro Los Gatos Mine. There also appears to be ample opportunity for expansion with more than 85% of its land yet to be explored.