All That Glitters: Aya's Zgounder Mine and the Emperor's New Clothes

Executive Summary

Aya Gold & Silver Incorporated (“Aya”) (TSX:AYA)(OTCQX:AYASF) is a company that is focused on exploring, developing, and mining mineral deposits in Morocco. It currently has several projects and prospects, but only two are material for a valuation: the Zgounder silver mine, which will soon see a significant production expansion, and Boumadine, a polymetallic project for which a mineral resources estimate (“MRE”) was recently published with 4.0 Moz AuEq at very attractive grades. 

The market has rewarded the company handsomely over the last few years, with the share price rising more than thirteenfold since June 2020. Currently, the market capitalisation is more than C$2.0 billion. This caught the attention of Crux Investor and is the reason for this issue of the Analyst’s Notes. 

Aya’s involvement in Zgounder and Boumadine started around 2013/14 when it acquired 85% of each project from a state entity ONHYM (The National Office of Hydrocarbons and Mines) owning the mineral rights. Initially, Aya focused on restarting production at the Zgouder mine and advancing studies to expand production by building an additional process plant. Despite being very low, commercial production was declared on 1 January 2019. A feasibility study was completed in February 2022 to expand the treatment rate from 700 tonnes per day (“tpd”) to 2,700 tpd with planned commencement of treatment in the additional plant during Q1 2024. This plant was 96% complete by 30 June 2024 with production start expected in Q3 2024. 

Crux Investor’s valuation of the Zgounder mine indicates that it is a robust project because of an attractive average life of mine (“LOM”) silver feed grade of 264 g/t Ag with little difference in grade between open pit sourced and underground sourced ore. 

The expansion feasibility study (“FS”) arrived at an NPV5 of US$373 million assuming a silver price of US$22.0/oz and US$691 million at a silver price of US$30.0/oz. However, the review by Crux Investor of the technical report uncovered many shortcomings and omissions. 

The declared open pit reserves contain tonnes of material that is almost 5.6x Measured and Indicated (“M&I”) mineral resources. This is not explained in the FS, but Crux Investor suspects that the floor of the pit was substantially extended downward from the conceptual resource pit. 

The economic assessment in the FS was found to be flawed and internally inconsistent by Crux Investor. Important omissions are the technical assistance fee of 2.75% of the revenue that Aya earns, the 5% royalty on revenue minus mining and processing cost to Global Works, the 15% beneficial interest of ONHYM, and cost provisions that do not reconcile between various tables and the cash flow model. 

Crux Investor also found that when comparing FS cost rates with actual costs during H1 2024 the overall FS operating costs fall considerably short, and should be increased by 83%. Crux Investor has also included cash corporate expenses of US$14.0 million per annum (“pa”). When using Crux Investor input parameters, which include a silver price that is 35% higher, the Earnings Before Interest Tax Amortisation and Depreciation (“EBITDA”) increases to US$805 million, but the cash margin drops to 44.7% from 52.5%. The net free cash flow attributable to Aya shareholders is 17% higher. Crux Investor arrives at an NPV5 value of US$319 million. Sensitivity analysis indicates a robust project with relatively small changes in NPV5 value for changes in silver price, operating cost, and capital expenditure. The Zgounder mine is a valuable asset. However, the market puts a ridiculous rating on Aya. The diluted Enterprise Value of US$1.62 billion on 23 August equates to US$39/oz silver in attributable reserves. Expressed another way, the company is trading at 69 years of annualised attributable revenue in H1 2024. The market seems to greatly value the growth story with silver sales projected to increase almost fourfold. The problem is that the current market valuation is 20% higher than the total attributable at-mine revenue over the LOM of Zgounder. At the current share price, it will be mathematically impossible for shareholders to make a positive return. 

That leaves Boumadine to account for the balance of the company value. A review of the project’s MRE reveals that it is based on fantasy payability terms for the prospective Pb-, Zn-, and pyrite concentrates. The lead and pyrite concentrates are of very poor quality, with marketing terms that can be expected to be far less attractive than those incorporated in the MRE. A very experienced ex-CEO of a smelting operation advises that, given the low Cu and Pb metal contents in the Pb-concentrate, this is an unsaleable product. In addition, the pyrite concentrate will attract a treatment charge of approximately US$200/t. The MRE should never have been published without including realistic input parameters for the net smelter royalty (“NSR”) cut-off grades. The market should ignore the MRE as unproven and invalid. 

When it comes to being an overvalued precious metal company, Aya takes the cake.

Introduction

Aya Gold & Silver Incorporated (“Aya”) (TSX:AYA)(OTCQX:AYASF) is a company that was incorporated in 2009 as Maya Gold & Silver Inc., but changed its name to the current form in July 2020. The company is focused on exploring, developing and mining mineral deposits in Morocco. 

In 2014 Aya took effective control of the defunct Zgounder silver mine by acquiring from a Moroccan state institution called the Office National des Hydrocarbures et des Mines (“ONHYM”) an 85% beneficial interest in the company owning the mineral rights of Zgounder. ONHYM retained a 15% interest, initially free-carried, and a 3% net smelter return (“NSR”) royalty. At the time Aya was also securing the Boumadine polymetallic deposit from ONHYM on the same terms. In addition, the company owns a number of other Moroccan prospects that are not material for this valuation. 

The company's main focus was to explore and develop the Zgounder deposit while it concurrently produced small quantities of silver by underground mining.  By 2014 Aya completed a pre-feasibility study (“PFS”) declaring 5.8 million ounces (“Moz”) silver reserves at an average grade of 317 g/t Ag. In July of 2014, production restarted with the plant initially fed from broken rock left in the old stopes and processed in a leach plant to produce silver ingots. The annual proceeds from silver sales were around US$5 million and credited against investments. 

Commercial production was declared on 1 January 2019 when a new flotation plant became operational, which supplemented silver production in ingots with silver production in concentrate. Annual production rose to approximately 1.9 Moz by 2022. An FS was completed in February of that year to expand the treatment rate from 700 tpd to 2,700 tpd with planned commencement of treatment in the additional plant during Q1 2024. This plant was 96% complete by 30 June 2024, with production start expected in Q3 2024. 

In parallel with advancing Zgounder the Boumadine prospect has been explored since 2013, first by surface mapping and grab sampling, and since 2017 by drilling. In 2024 an updated mineral resource estimate (“MRE”) was published, with attractive grades for base and precious metals. 

Figure 1_1 shows the share price history of Aya on the Toronto Stock Exchange since commercial production started on 1 January 2019.

After initial lukewarm interest, the company share price has performed spectacularly by rising from C$1.20 at the end of June 2020 to the current C$15.85. The latest increase from C$7.5 in November 2023 is probably due to enthusiasm about the vast silver production expansion expected to start in 2024, and the updated MRE published for Boumadine.

This report will investigate whether or not the market's enthusiasm is warranted.

Valuation of the Zgounder Mine

Background

The technical information has been dominantly extracted from a NI.43-101 compliant technical report reporting on the findings of the FS on the expansion project, dated 31 March 2022, and drafted under the supervision of DRA Global Limited ("DRA") as lead consultant. Unless specifically stated otherwise, all illustrations, technical information, and wording in Section 2.1 to Section 2.6.5 have been drawn from this report.

The Zgounder mine is located approximately 265 km east of the City of Agadir, and 220 km west of Ouarzazate, in the central part of the Anti-Atlas Mountains, Kingdom of Morocco. (see Figure 2.1_1).

The mine site is accessible from the port city of Agadir by a well-maintained paved road (N10) traversing 216 km east to Taliouine. From Taliouine, a hillside paved road heads north 50 km to the Village of Askaoun. The mine site is accessible from Askaoun by a well-maintained 5 km gravel road.

The exploitation license covers 16 km² and is valid until 17 October 2027. The technical report does not discuss extensions, but Crux Investor presumes these as given considering the material investments made in the last few years.

Apart from a 3% NSR royalty ONHYM also benefits from a free-carried interest of 15%, which converts to a carried interest after 6.76 Moz of silver has been “mined”. Based on production to date, this threshold has been reached. 

Another party, Global Works, Assistance and Trading S.A.R.L (“Global Works”) is entitled to a royalty of 5% of silver revenue net of mining and processing costs. 

Geology and Mineralisation

The Zgounder Deposit is a low-sulphidation epithermal silver deposit hosted within the Proterozoic Siroua Massif. Such deposits are from gas-rich hydrothermal fluids that are near neutral acidity and minerals with low sulphur content. Mineralisation at Zgounder occurs in a unit of coarse-grained pelite (= a metamorphosed rock from originally clay-rich sediment) with millimetric clasts in sericitic or chloritic tuffaceous bands. The bands have a volcano-sedimentary origin and host polymetallic mineralisation {pyrite (FeS₂), sphalerite (ZnS), galena (PbS), arsenopyrite (FeAsS), silver sulphide (Ag₂S), and native silver}. The economic silver concentrations at Zgounder are present mainly as vertical bodies, complex clusters, shear zones, and veinlets, and at the intersection of the E-W and N-S fractures, though preferentially at the contact zones between schist and dolerite. 

Tension gashes originally trapped the silver mineralisation within a NNE-oriented shear zone affecting the shale-sandstone beds that contain anomalous Ag values. The silver is interpreted as having been remobilised by E-W-oriented structures forming isolated Ag-mineralised lenses and fissures. The silver mineralisation extends laterally over 1,000 m and dips sub-vertically to the south. 

Figure 2.2_1 shows a longitudinal view of the Zgounder mine generated in 2013 with the various lode structures known at the time.

Drilling has intercepted a granitoid intrusion at depth, which the technical report postulates as the source of the mineralisation.

Native silver is by far the most common silver mineral, representing 1.07% of mineralised material concentrate, and 65% to 90% of Zgounder silver. The native silver is an Ag–Hg amalgam, rather than pure silver, forming inclusions 25 μm to 480 μm in size (average 150 μm to 250 μm).

Mineral Resources and Mineral Reserves

Mineral Resources

The resource was estimated by an employee of Aya and reviewed by P&E Mining Consultants Incorporated (“P&E”). The discussion reflects the review nature of the exercise with little detail on how the geological model was generated and domains defined. 

A total of five individual geological zones were defined (no details provided) and “each block within a defined geological zone was subsequently categorised by assigning the grade of the nearest 1.20 m composite to the block using an oriented search ellipsoid. The orientation of the search ellipsoid is vertical, rotated 75^o clockwise, with a long axis of 40 m, a vertical intermediate axis of 40 m, and a minor axis of 20 m. Blocks with a resulting grade of 40 g/t Ag or higher were categorised as potentially mineralised material and assigned a Rock Code of 210, 220, 230, 240 or 250. Blocks with the nearest composite grade of less than 40 g/t Ag were categorised as waste and assigned a Rock Code of 40. Blocks intersecting mined-out areas were assigned a block code of 10.”

Composite values (1.2 m length) were capped at 6,000 g/t Ag to reduce the impact of outliers. Variography analysis used uncapped composite values for the various domains. Standardised spherical models using three structures were used to model experimental semi-variograms. The search radii are relatively short, with the third pass using 50 m x 40 m x 50 m.

The model block size is 2 m x 2m x 2 m, which is very small for the type of deposits and the probable Selective Mining Unit. Block grades were estimated using ordinary kriging (“OK”).

Two scenarios were considered to determine the reasonable prospect of potential economic extraction: open pit and underground mining. The conceptual open pit was constrained by a 65 g/t Ag cut-off, assuming a silver price of US$22.50/oz, silver recovery of 90%, open pit mining cost of US$15.0/t (very high, seems to apply a strip ratio), processing cost of US$20/t and General and administrative (“G&A”) expenses of US$7.0/t. The underground mining cost is assumed as a very low US$20/t. This is why the underground cut-off grade is marginally higher at 75 g/t Ag.

Table 2.3.1_1 gives the Measured and Indicated (“M&I”) mineral resources effective 13 December 2021.

The Out of Pit resources are, with 93%, by far the most important contributor to contained silver in M&I Resources. Open Pit resources however have a higher average grade and should give the higher profit margin. 

Inferred resources, not shown in the table, comprise a small proportion of total resources containing only 6.4 Moz. 

As part of the validation, the technical report does not provide sections through the block model compared to sampled composite grades, something that is always very illustrative.

Mineral Reserves

Open Pit Reserves

Total Open Pit Reserves (Proven and Probable) amount to 2.2 Million Tonnes (“Mt”) at a grade of 253 g/t silver.

The open pit optimisation was developed assuming a standard open pit truck and shovel operation and a production rate of 288,000 tonnes of ore per year.

The pit optimisation assumed a silver price of US$20/oz, ignored final product transport charges, used a silver recovery of 92%, mining cost of US$2.0/t waste and US$4.0/t ore, processing cost of US$19.35/t treated, and G&A cost of US$3.55/t treated. Mining dilution is estimated at 15%. This results in a cut-off grade of 47.4 g/t Ag. A high overall average pit slope of 52.5 degrees was assumed. 

Figure 2.3.2_1 shows the results of the pit optimisation. 

A revenue factor of 0.80 was chosen for the open pit design, which is aggressive, as the undiscounted net cash flow graph is horizontal here. Being undiscounted the impact of early stripping is underplayed and small unfavourable changes to input parameters would make such a pit not optimal. 

Underground Reserves

Estimation of the underground reserves assumes that the deposit will be mined using conventional mechanised transverse long-hole (“TLH”), longitudinal long-hole (“LLH”), and cut-and-fill (“C&F”) mining methods.

The same input parameters for open pit reserves have been assumed where relevant. A meagre mining cost of US$24.00/t was used for C&F and US$18.03/t for long-hole open stoping (“LHOS”). Mining dilution is variable depending on the mining method and primary/secondary stopes. Generally, skin sizes of 0.3 m for long-hole stoping and 0.1 m for C&F stoping were applied. Based on these assumptions, a cut-off grade of 85 g/t Ag was selected for all methods. 

Mineral Reserve Statement

Table 2.3.2_1 gives the Mineral Reserves Statement effective 13 December 2021.

As tailings account for a negligible proportion of total reserves, this report ignores discussing this component. 

The reserve material for open pit mining is almost 4.3x the material in open pit mineral resources. This inconsistency is ignored in the technical report and Crux Investor’s only explanation is that the mineral reserve pit bottom has been extended considerably downward from the conceptual resource pit. In this respect, the wording “a limit at Level 2000 was placed to ensure an adequate pillar remains between the bottom of the open pit operation and the top of the underground operation”, does not make sense, as it implies that the pit bottom was raised compared to the conceptual pit. The amount of waste required to be stripped to access the open pit reserves is 23.4 Mt for a strip ratio of 10.8.

With the cut-off grade derived for pit optimisation at 46.4 g/t Ag, which is considerably lower than the 65 g/t Ag for the conceptual mineral resource pit, the much higher open pit contribution to total contained silver is explained. More than 25% of the total contained silver is in open pit reserves compared to 6.1% for mineral resources. In addition to applying 15% dilution, this also explains the drop in grade of almost 30% for open pit reserves. 

The underground reserves have now 32% less material than in mineral resources, with 41% less metal, as the grade has also dropped by 14%. 

Mining Operations

Open Pit Mining 

Open pit mining in a single pit is done by conventional drilling, blasting, loading, and hauling by a contractor. The planned bench height is only 5 m, probably to limit dilution, which is also the reason the mining equipment has been sized relatively small. Waste will be hauled out of the pit for disposal on a waste dump immediately east of the pit. Ore will be trucked to an ore pass and dropped underground to join the ore stream there. Ore will also be hauled to low-grade and high-grade stockpiles (no definitions provided). How this will be handled in practice is not explained. Dumping the various grade materials down an ore pass and still keeping these apart will be problematic in practice. 

The layout of the mine site is shown in Figure 2.4.1_1. The red dot indicates the location of the mill, which is constructed on top of a hill with all material having to be hauled over a considerable distance against gravity. 

Underground Mining 

As mentioned above, underground mining will be undertaken using TLH, LLH, and C&F methods. According to the technical report, the need for three different mining methods is due to the complexity of the deposit, and historic mined excavations. 

The underground mine will be accessed from the surface, and the historic underground drift excavations that need to be rehabilitated. The main ramp will start on the 2000L main level and be excavated up and down to the 2092L and 1648L respectively. Historic underground stope excavations were assumed to be cement backfilled prior to developing new drifts nearby.

Figure 2.4.2_1 shows the 2000 L main level layout with the main portal in the west. The illustration is also very useful to get a good impression of the dispersed nature of individual deposits and their relatively small size in diameter. 

Rock mechanical conditions and the small size of individual deposits are also evident from the small dimensions for stopes. The sublevel spacing for LHOS is only 12 m. TLH stopes will be mined in a primary-secondary sequence, with both stopes 12 m wide and 15 m deep. The primary stopes will be excavated first and then backfilled as the sequence advances. Once the curing of the backfill is completed, the production of the adjacent secondary stope can begin. Once the primary and secondary stopes are completed on a given level in a production zone, the production in that zone can then move to the upper level.

The LLH stopes width will vary from 3 m to 10 m, and have a length of 12 m (contradicted by giving 18 m as length in Table 16.9 of the technical report). Mining retreats from east to west, or vice versa, with retreating of the stope starting at the bottom level of a given longitudinal mining zone. The first stopes are excavated and then backfilled. The next stope in the longitudinal sequence will be ready for production when the curing of the backfill in the previous stope has been completed. Once a production level is completed in a longitudinal mining zone, the production on the level above, in the same given zone, can begin.

C&F is, with TLH, the preferred mining method due to its low operating cost in the region and its selective approach, yielding high recovery and low dilution. The selected height of the C&F stopes is 4 m for optimum combined recovery and productivity. The width of the stope will vary following the outline of the mineralisation. The minimum width of the stope is 3 m, to fit the production equipment. The maximum width, or open span, is 8 m, to minimise the ground support requirement.

All stopes will be backfilled with cemented rockfill (“CRF”). A waste pass will be driven from underground to the surface open pit to ensure enough waste is available for backfilling the stope. A load haul dump (“LHD”) truck at each level will move the waste from the waste pass access to the stopes. The cement milk will be added to the LHD bucket in a selected cut-out on the sub-level. The cement milk will come from the surface plant through a pipe installed at the main level, the main ramp, and through drill holes between levels. Mixing the rock with the cement milk will be done naturally while unloading the cemented rockfill in the stope. The cemented rockfill will simply be dumped from the top access for the long-hole stopes. For the drift-and-fill stopes, the cemented rockfill will be rammed inside the stope tight to the back.

Hauling of rock out of the mine will be done using 10 t loaders feeding 20 t trucks.

From the discussion above it is clear that mining is not of a bulk nature, with small stopes and small equipment, requiring much ground support. This does not make for low-cost underground mining. 

Metallurgy and Processing Operations

Metallurgical Test Work

The metallurgical performance of the two existing plants, one cyanidation plant producing silver in ingots, and one flotation plant producing silver in concentrate, is well established with an overall recovery in the mid-eighties. 

The new flotation plant with a capacity of a nominal 2,000 tpd, and producing silver in ingots, is however supposed to increase overall recovery to 91.7%. This rate is based on metallurgical test work carried out in 2021. 

Comminution testing indicates that the mineralisation is extremely hard, with an average Bond Index of 23.3 kWh/t, and moderately abrasive, with an average index of 0.125. Gravity separation has a sufficiently high recovery (i.e. almost 34%) to justify inclusion in the flowsheet. Rougher flotation tests show that a grind size lower than 100 μm does not materially improve recovery and would not be worthwhile. 

Locked cycle tests including rougher flotation and regrinding before cleaner flotation (with and without a gravity circuit) gave overall recoveries of between 84.2% and 87.7%, with the highest value when including gravity concentration. 

Intensive leaching of the gravity concentrates gave a silver recovery between 91.5% and 93.2%. Leaching of flotation concentrates indicated that the best silver recovery results were obtained from leaching rougher concentrates. However, the leaching of cleaner concentrates allows for smaller counter-current desorption thickeners, and the lower recovery of such concentrates is compensated by leaching flotation tailings. Leaching of tailings by carbon in pulp (“CIP”) indicated a silver recovery of 61.6%. Precipitating silver by adding zinc to the pregnant leach solutions (i.e. the Merrill-Crowe process) achieved an efficiency very close to 100%. 

The overall silver recoveries for gravity/flotation/cyanide leaching were between 82.9% and 90.6% for the main composite at particle sizes between P80 μ66 m and 116 μm, and between 84.4% and 94.4% for five variability tests.  

The main interpretations of the results were that:

• The anticipated recoveries can be expected to be in the high 80% to low 90% range. The production model assumes an overall recovery of 91.7% which seems high and not supported in the discussion above;
• Inclusion of flotation of gravity tailings allows for the production of low volumes of concentrate which reduces the size of CCD thickeners appreciably; and 
• The best recoveries from cyanidation are achieved at extended durations and high cyanide levels, resulting in high cyanide consumption. Prior pre-oxygenation and elevated oxygen levels reduce cyanide consumption. 

Processing

Based on the test work results, the selected flow sheet for the new plant includes two stages of crushing followed by grinding in a ball mill with a gravity separation circuit and gravity tailings returned to the ball mill. The milled product at a target size of 80% passing (“P80”) 100 μm is subjected to rougher flotation, followed by regrinding of the concentrate and three stages of cleaner flotation. All product streams are subjected to cyanide leaching: gravity circuits to intensive leaching; flotation concentrates to cyanidation at elevated cyanide concentrations; and flotation tailings to carbon in pulp (“CIP”) cyanide leaching. The gold leached from gravity and flotation concentrates is recovered using the Merril-Crowe process, and gold leached from tailings is recovered from the loaded carbon in an adsorption-desorption recovery (“ADR”) process. The sludges are dried and melted in a refinery to produce doré silver ingots. 

The new plant allows the acceptance of the products and tailings of the old plants for further processing. Figure 2.5.1_1 shows a simplified block flow diagram of the integrated plants. 

It means that upon full commissioning of the new plant, no silver concentrates will need to be shipped, and all silver production will be in the form of ingots that need refining off-site. The treatment of tailings of the existing flotation plant is partially responsible for the increase in overall silver recovery. 

Economic Valuation

Metal Prices and Marketing Terms Assumed

This study has considered two price cases. One case uses the silver price of US$22.0/oz in the FS study and another case uses the spot price of US$29.78/oz on 23 August 2024 as Base Case for this valuation cash flow model. The FS cash flow model was not recreated to validate the tax model as it suffers from too many shortcomings and omissions, and the tax regulations in Morocco are fairly simple.

Examples of ommissions are the technical assistance fee Aya earns (2.75% of gross revenue), the 15% beneficial interest of ONHYM, the 5% royalty of Global Works, and Aya corporate expenses. According to the technical report, 99.7% of silver is payable and refining charges will be US$0.20/oz. When referring to the Management Discussion and Analysis (“MDA”) report for the quarter ending 30 June 2024 the average received silver price in the first six months of 2024 was US$24.67/oz, which is more than 5% lower than the average spot price during this period. For the June quarter itself, the received price was almost 9% lower. Crux Investor concludes that the FS is far too optimistic in this respect, but has made no amendments. 

Another example of the shortcomings is the assumption in the FS that transport and insurance charges total US$0.15/oz. However, when referring to the MDA reports, smelting, transport, and refining charges amounted to US$1.35/oz sold in 2022, US$1.49/oz in 2023 and US$1.90/oz in H1 2024. The difference is too material to ignore, and Crux Investor has applied US$1.90 for such activities in its model. 

Production Schedule

Figure 2.6.2_1 shows the mine production schedule as per the FS. We are two and a half years into this programme and not close to the production level planned for 2024 (i.e., 0.32 Mtpa annualised H1 2024 production versus 0.86 Mtpa planned).

Crux Investor has ignored this ramp-up delay and modelled silver production as per the FS schedule. 

Figure 2.6.2_2 shows the forecast contribution to plant throughput from the various sources. All ore mined underground is sent directly to the mill, but a proportion of the ore mined from the open pit is sent to low-grade and high-grade stockpiles for later treatment. The substantial rehandling is not evident from the graph, with 40% of the open pit ore mined being rehandled. The high-grade stockpile is treated until 2030, but 0.18 Mt of the 0.37 Mt of low-grade stockpiled material is held back for treatment until the last year. 

Operating Expenditure

Table 2.6.3_1 shows the cost structure suggested in the FS and used by Crux Investor to calculate the total H1 2024 cost based on achieved production. 

When applying US$1.09/t for open pit waste mining, a rate that is not credible, the LOM cost for this aspect with 23.45 Mt mined would be US$25.6 million, more than the total open pit mining cost, including ore mining. Crux Investor has added the rate of US$4/t open pit ore mined used for the reserve estimation to prove how underestimated the cost rates are. When comparing the calculated operating cost based on actual H1 2024 production against the reported actual H1 cash operating cost, the exact number is twice as high (refer to the column on the right). 

Unfortunately, DRA made a complete mess of things with the various cost tables contradicting each other. It seems no thorough peer review was undertaken. For example, Table 21.11 of the FS report gives LOM cost of US$50.3 million for G&A, and US$11.0 for Environmental, Security and Governance (“ESG”). Yet the cash flow model in Table 22.4 has for G&A combined with ESG cost only US$51.5 million, but still arriving at the same total LOM operating cost of US$476 million, including US$9.7 million for silver transport and insurance. It is almost as if DRA worked towards a particular LOM number. 

Crux Investor has adjusted the various cost rates on a trial-and-error basis to get close to the reported H1 2024 figure. When maintaining the open pit ore mining cost rate, increasing the open pit waste mining cost rate to US$3.5/t, increasing the underground mining cost rate to US$60/t, maintaining the processing cost rate and increasing overheads by 150%, then the simulated H1 total operating cost comes close to the reported overall cost. Crux Investor has used these rates for the valuation.

Crux Investor has also added corporate expenses to arrive at net free cash flow, assuming that the actual 2023 cash expenditure of US$14.0 million will also apply in the future. 

Capital Expenditure

The expansion project capital expenditure can be considered fully incurred considering the new plant is almost complete. This valuation simplistically will model the cash flow generated with 2024 production at the expanded level. With the delay, this will in reality happen one-half year later. This introduces an optimistic bias but is not important given the conclusions drawn at the end of the results section.

Table 2.6.4_1 shows the sustaining capital cost estimates in the FS study. 

The average annual capital expenditure of approximately US$7 million seems very low, but Crux Investor has adopted the numbers without amendment.

Royalties and Taxes

As discussed in Section 2.1 the state company ONHYM is entitled to a 3% NSR royalty. 

The FS report gives the following details on the Moroccan tax regime:

• Mining tax is levied at US$3/t processed;
• Income tax at a rate of 20%. This rate is contradicted in the corporate presentation which gives 25% and adopted for this valuation; and
• Allowed deductions for the calculation of taxable profit are amortisation of initial capital expenditure at 10% on a straight-line basis, and depreciation of sustaining capital expenditure at 20% on a straight-line basis.

Results

Table 2.6.6_1 summarises the LOM results for the FS scenario and Crux Investor valuation for the base case silver price and the input parameters set out above.

Using the FS parameters, but including items overlooked by the FS, the project has an excellent operating margin of more than 52%. Corporate expenses have a particularly large negative impact on the net free cash flow attributable to Aya shareholders. Giving the project the benefit of the doubt, and using a discount rate of 5% instead of 8% for project status ventures, the net present value (“NPV”) is US$273 million.  

When using Crux Investor input parameters the Earnings Before Interest Tax Amortisation and Depreciation (“EBITDA”) increases to US$805 million, but the margin drops to 44.7%. The total operating costs are 83% higher than for the FS. The net free cash flow attributable to Aya shareholders is 17% higher. Crux Investor arrives at an NPV5 value of US$319 million. 

Table 2.6.6_2 expresses the sensitivity of the project value as the change in Net Present Value per percentage point change in the main parameters: metal prices, operating expenditure, and capital expenditure.

The sensitivity analysis demonstrates the very robust nature of the Zgounder mine, with the NPV5 increasing by 2.7% (US$8.6 million) for every percentage point increase in the silver price (i.e. US$0.30/oz) and dropping by only 1.1% (US$3.7 million) for every percentage point increase in operating cost (i.e. US$0.92/t milled). With the low sustaining capital expenditure sensitivity to change are negligible. 

Should additional resources be found of a similar quality to existing resources to extend the LOM by one year, the NPV5 will increase by around US$45 million. 

Review of the Boumadine Polymetallic Prospect

Background

The technical information has been dominantly extracted from an NI.43-101 compliant technical report reporting on an updated MRE, dated 31 May 2024 and drafted by P&E. Unless specifically stated otherwise, all illustrations, technical information, and wording in this report section have been drawn from this report.

The Boumadine Property is located in northeast Morocco, approximately 220 km east of the City of Quazazate, and 70 km southwest of the City of Errachidia (see Figure 3.1_1).

The project area is accessible from Quarzazate City to the west via the National Highway 10 over 220 km, or from Errachidia City to the east via 70 km along the same highway. The nearest town is Tinejdad, 16 km north of the historical Boumadine Mine, from where the project area is accessible by all-terrain vehicles on a paved and gravel road. 

The most important mineral rights for this report are two mining permits (in red) and three exploration permits (in yellow) that are contiguous and cover an area of 66.1 km².  

Aya secured its rights to the property by entering into an agreement with ONHYM, with similar terms for the Zgounder mine, granting a 3% NSR royalty and an interest of 15% in the joint venture company holding the permits. The minority share is non-contributory until Aya matches all the previous ONHYM investments. Aya will receive a management fee equal to 2.75% of the revenue from mining the property.

The quarterly financial statements for the period ending 30 June 2024 give total exploration and evaluation expenditure of US$34.3 million, without disclosing whether this has matched historical ONHYM expenditure. 

Geology and Mineralisation

The mineralisation at the Boumadine Deposit is a curvilinear vein system traced on the surface and in drilling over 5,200 m along strike (Figure 3.2_1). 

As the plan shows, the strike direction varies from mainly northwest to northerly and dips from steeply NE to steeply SW. The deposit consists of 15 mineralised domains grouped into five separate zones. The South and Central Zones consist of up to seven stacked mineralised vein domains. From the South Zone's south end to the Central Zone's north end, these domains extend for 4,600 m along strike, as much as 300 to 400 m across strike, and a maximum of 1,000 m down-dip. The south end of the South Zone appears to be open to expansion by drilling along strike to the south. The South Zone seems to be offset dextrally along a northeast-trending fault from the Central Zone. The north end of the Central Zone appears to be offset sinistrally along a northeast-trending fault from the North Zone.

The North Zone consists of two closely spaced mineralised vein domains. This Zone is 650 m long, 5 to 10 m thick, and 500 m down-dip. It strikes northwest and dips steeply southwest. The North Zone appears to be truncated by the Imarinen Zone.

The mineralised domains are massive sulphide veins and lenses that are 1 - 4 m wide. The massive sulphide veins (>70% sulphide) are composed mainly of pyrite, sphalerite, galena (PbS), arsenopyrite, and chalcopyrite (CuFeS₂), with subordinate amounts of cassiterite (SnO₂), silver-rich sulphosalts, stannite (Cu₂FeSnS₄), enargite (Cu₃AsS₄), bismuthinite (Bi₂(CO₃)O₂), native copper and bismuth. The main mineralisation zone is generally surrounded by a 1 m to 10 m (locally up to 20 m) thick halo of 10 to 30% disseminated pyrite and two types of veinlets: 1) quartz-carbonate-galena-sphalerite veinlets; and 2) massive pyrite veinlets.

Geochemically, there is a strong positive correlation between gold and silver, and copper and a weaker correlation between zinc and lead and molybdenum.

Between 20 m and 50 m from the surface, there is "iron cap" alteration that consists principally of goethite (FeO(OH), jarosite (KFe₃(SO₄)₂(OH)₆) with sparse hematite (Fe₂O₃). This mineralogical assemblage indicates that the oxidation fluids were strongly acidic. Mn, Zn, Cd, Ni, and Co are highly mobile and leached in such conditions. However, Ag, Au, Ba, Sr, and Pb are immobile and form stable sulphosalts. Artisanal workers have partially mined the hydroxide-rich ‘‘mantos’’ for ochre and precious metals.

Figure 3.2_2 reproduces one of the cross sections with broader and more consistent veins, and has been included to demonstrate the general narrow nature of the individual veins. 

Drilling has intercepted a granitoid intrusion at depth, which the technical report postulates as the source of the mineralisation.

Native silver is by far the most common silver mineral, representing 1.07% of mineralised material concentrate, and 65% to 90% of Zgounder silver. The native silver occurs as an Ag–Hg amalgam, rather than pure silver, forming inclusions 25 μm to 480 μm in size (average 150 μm to 250 μm).

Metallurgical Testwork

This section precedes the MRE discussion as the findings have significant implications for the validity of the estimation. 

There has been a tremendous amount of metallurgical test work, which dates back to the 1980s. The efforts are a reflection of the very difficult amenability of the mineralisation to upgrading and generation of saleable products. Aya commissioned SGS Lakefield to carry out a wide range of tests, first in 2018, and then in 2022, which included gravity, flotation, cyanidation, and roasting followed by carbon in leach (“CIL”) leaching, pressure oxidation (“POX”) followed by CIL, some with hot curing (= dropping the pressure to atmospheric levels), biological oxidation (“BIOX”) followed by CIL, and Albion leaching (= a combination of ultrafine milling and exothermic oxidative leaching) followed by CIL. For the sake of brevity, this section will only report on the main findings, being:

• Comminution testing indicates that the mineralisation is moderately hard for grinding; 
• Gravity grinding would not add value; 
• Flotation to produce a lead concentrate, zinc concentrate, and pyrite concentrate could not generate products with decent Pb grade, and only 72% of Zn recovered in Zn concentrate. The precious metals recoveries in lead + pyrite concentrate were good: >90% for gold and >85% for silver;
• Leaching of precious metals, especially gold, from the pyrite concentrate, however, proved very problematic; and
• Reagent consumption was generally very high. 

The section about metallurgy in the MRE technical report ends without recommended forecast recoveries and concentrate qualities, but in the MRE discussion, it becomes clear that the results of the flotation locked-cycle test are used in Table 13.8 of the 2024 MRE report. These are reproduced in Table 3.3_1. 

Crux Investor has highlighted in green values that are reasonably good and in brown those that are bad. Given the very low Pb-grade of the Pb-concentrate, there should be serious questions about the marketability of this product. The zinc content in Zn-concentrate is good, but a recovery of 72% is not great. The pyrite concentrate captured 69% of the feed grade, but the contents of 3.8 g/t Au and 78.5 g/t Ag are poor.

Mineral Resource Estimation

Introduction

The wireframes for the mineralised domains were developed by Aya geologists based on logged drill holes, lithology, and assay grades. Aya identified continuous zones of mineralisation with a massive sulphide percentage of 70% or greater, and zones where the assay grades were ≥100 g/t silver equivalent (“AgEq”), and the massive sulphide percentage was ≥30%. However, metal grades are converted to AgEq based on fantasy payability factors. 

Table 3.4.1_1 compares conventional payability assuming an attractive marketable product with payability suggested for the MRE. 

The reason for the minimum deductions is the loss of that metal in the downstream process. From the metallurgical test work, it is evident that hydrometallurgical processes are unsuitable for recovering precious metals. The marketing terms therefore seem to suggest pyrometallurgical processing. The minimum deduction values in the table are for standard to attractive concentrates. However, the Pb- and pyrite concentrates from Boumadine are far from attractive. 

Crux Investor has consulted a very experienced ex-CEO of a smelter about the terms that can be expected for the Pb- and pyrite concentrate. His advice is the Pb-concentrate is unsaleable until the lead content can be pushed up to 35-40% and even then, the copper content will not be paid. It is also not saleable as a copper product. Moreover, the pyrite concentrate will attract treatment charges, probably around US$200/t.

Further shortcomings in the derivation of NSR values in the MRE are very low transport and ship loading charges for the Zn- and Pb-concentrates: US$50 per wet metric tonne (“wmt”). The treatment charges for these concentrates are also pitched very low. Finally, no transport charges are included for pyrite concentrate. 

The input terms for calculating the NSR values in the MRE result indicate according to P&E that 42.5% of the value contribution would come from Cu and 34.3% from Au, exactly those metals that have been treated far too favourably. Silver supposedly contributes only 0.4% to the total value. It is therefore very inappropriate to use this element to express the overall grade as AgEq. 

Crux Investor concludes that the suggested AgEq conversions are invalid and, more seriously, the overall NSR value is overstated. This MRE should never have been carried out until P&E had obtained proper marketing terms for the Boumadine products based on suggested concentrate qualities. This section will continue the discussion on the MRE methodology, but the mineral resource statement should be ignored as unproven and invalid.

Mineral Resource Estimation Methodology

The average spacing to the nearest drill hole collar is 48 m, which is not small for vein-type deposits. 

Using the criteria mentioned in the first paragraph of the previous report section Aya arrived at 15 individual vein wireframes.

The composite length is 1.00 m, which is a reflection of the generally narrow width of the veins. The length is based on the mode of sample length distribution. It raises the question of how a large number of sample lengths longer than 1.00 were handled in the compositing process. Such “compositing” makes no sense.

It was found that only a very low number of assay values needed capping as outliers. 

Variography could only develop an acceptable semi-variogram for one domain. A standardised spherical model with two structures was used to model the experimental semi-variogram.

A block size of 2.5 m x 5 m x 5 m was chosen and block grades were estimated using OK for Au in the Main domain and Inverse Distance Squared (“ID2”) for the other domains. Despite the poor variography, long search lengths were used with the first pass 200 m along strike, 130 m down dip, and 60 m perpendicular to these directions. Given that the deposits are relatively narrow veins, the 60 m is strange. Seeing as the vein borders have been treated as hard boundaries for grade estimation, the 60 m would never apply in practice.  

For determination of the reasonable prospects for eventual economic extraction, the conceptual pit was constrained by a US$95/t NSR cut-off, assuming the metallurgical performance as per Table 3.3_1, and marketing terms as per Table 3.4.1_1. The assumed copper price was US$4.00/lb, gold price US$1,900/oz, and mining cost of US$2.0/t for waste, US$3.0/t for ore, US$89/t for processing, and US$6/t for G&A. 

For out-of-pit mineral resources mining cost of US$30/t was used, resulting in a cut-off grade of US$125/t NSR. As demonstrated for the Zgounder mine, such low underground mining costs are unrealistically low, particularly for a narrow vein deposit such as Boumadine. 

From the above, it is clear that P&E bent over backwards to generate a decent mineral resource for this project. 

Table 3.4.2_1 summarises the mineral resources statement effective 23 February 2024, with only the Cu and Au grades as the most important value contributors.

The table shows that the Inferred resources category is by far the dominant source of resources. Based on the above numbers total resources contain 2.11 Moz gold. P&E gives 4.10 Moz for total gold equivalent ounces. This would imply that gold constitutes 52% of the total resource value, not the suggested 34.3% as per the NSR calculation. It is another example of the inconsistencies in the MRE exercise.  

The Enterprise Value of Aya Gold & Silver On 23 August 2024

At the share price of C$15.85 on 23 August 2024, the market capitalisation for the 130.4 million shares is C$2,067 million, or US$1,530 million.

On 30 June 2024, the company had no warrants outstanding, but 4.7 million share options, which were all in the money at an average price of C$1.97.

On 30 June 2024, Aya had net current assets of US$77.0 million and debt of US$96.4 million.

Based on the above an Enterprise Value on a diluted basis for Aya of C$2,187 million (US$1,619 million) is derived as shown in Table 4_1

This Enterprise Value is 5.1 times the NPV5 calculated by Crux Investor (see Table 2.6.6_1). Another metric to show the total over-valuation of Aya is expressing the Enterprise value per ounce of silver in mineral reserves attributable to Aya. The website refers to the mineral reserves as of 13 December 2021. When depleting these for production in 2022 and 2023, the remaining reserves contain 65.23 Moz, of which 55.45 Moz is attributable to Aya. This means that the company is valued at US$39/oz in reserve. 

In the Analyst’s Notes published in July 2024 under the title David vs Goliath: Can Junior Gold Miners Outshine the Majors – A Comparative Analysis, it was found that Wesdome Gold Mines was very much overrated, trading at five times the revenue multiple of the average of the sample group, which was almost two years annual revenue. In other words, Wesdome Gold Mines was trading at ten times its historical annual revenue. In the case of Aya, it is trading at 69 years of annualised attributable (= 85%) H1 2024 revenue. The market seems to value the growth story significantly, with silver sales projected to increase almost fourfold. The problem is that the current market valuation is 20% higher than the total attributable at-mine revenue over the Life of Mine of Zgounder. At the current share price, it will be mathematically impossible for shareholders to make a positive return. 

When it comes to being an overvalued precious metal company, Aya takes the cake.

Addendum - 02 September 2024

Following the publication of the Analyst’s Notes on Aya Gold & Silver Incorporated (“Aya”), Crux Investor received a response from a person very knowledgeable about the company, who pointed to several mistakes and perceived mistakes. We welcome this thoughtful response and thank them for pointing to data. This addendum addresses the points raised.

The issues raised concerning our report were:

The Analyst’s Notes assume that Aya still only owns an 85% beneficial interest in the Zgounder mine, but this changed in 2022 with the company since then owning 100%. Crux Investor relied on the technical report dated 31st March 2022 and missed the change. This is an oversight that should not have happened and for which the analysts offer their apologies.

The 5% net profit interest (“NPI”) of Global Works no longer applies. On 28 June 2023, an amount of US$1.6 million was paid and the NPI agreement was terminated. Crux Investor relied on the technical report dated 31st March 2022 and missed the change. This is an oversight that should not have happened and for which the analysts offer their apologies.

The Mining Tax of US$3.0/t is wrong and is actually one-tenth of this. However, Crux Investor used the rate specifically mentioned in the expansion feasibility study (“FS”) report which Aya management was satisfied with by not correcting it before publishing.

A charge of US$1.90/oz for smelting, refining and transport should not apply in future. The US$1.90/oz was derived from the amount reported in the management discussion and analysis (“MDA”) for the quarter ending 30 June 2024. If the charge only applies to ounces in concentrate, the charge converts to US$6.17/oz, which would be an enormous increase from the US$4.10/oz in the first half of 2023 and unlikely. This is the reason why Crux used the total number of silver ounces. 

The much higher operating costs are blamed on the commissioning of the new plant with more labour on site. If this were the case the cost of constructing and commissioning the new plant would be charged to the profit and loss account and not capitalised. This is contrary to all accounting rules. Aya could easily dispel operating cost concerns by publishing in its quarterly accounts the cost rates for mining, processing, and overheads. Crux Investor rejects this criticism as unjustified.

The Crux Investor valuation does not account for a large amount of drilling completed since 2021 and that it “is safe to assume that reserves have grown and will continue to grow”. Crux Investor referred to the Resources & Reserves listed on the website which still refer to the 2021 numbers. If these numbers are no longer applicable Aya should update these. It is not proper for Crux Investor to make guesstimates.

The Crux Investor report should have mentioned the expansion potential of 1,000 tonnes per day (“tpd”). Again, it is not proper for Crux Investor to bring in changes that may or may not happen. In any case, the valuation concluded that the company valuation exceeded the life of mine (“LOM”) revenue. Expansions would increase annual revenue, not total LOM revenue.

In light of the feedback, Crux Investor has re-run its valuation model taking into account those comments which we find to be material:

• Removing the 5% NPI, 
• Totally removing Mining Tax
• Totally removing smelting, refining, and transportation charges
• Removing the 15% minority interest. 

Table 1 summarises the LOM results for the FS scenario and Crux Investor valuation for the base case silver price and the amended input parameters set out above.

With the amended input parameters Crux Investor the Earnings Before Interest Tax Amortisation and Depreciation (“EBITDA”) increased by US$176 million to US$981 million, giving a cash margin of 54.5%, which is excellent. Crux Investor arrives at an NPV5 value that is now US$137 million higher at US$456 million. Using the same diluted Enterprise Value as in the Analyst’s Notes the company is valued at US$34/oz in mineral reserves and 58 years of annualised H1 2024 revenue. Expressed differently, the diluted Enterprise Value is equal to 95.4% of LOM revenue.

For shareholders to earn a 5% return, Aya would have to declare annual dividends/share buybacks of US$81 million annually and indefinitely starting in 2024. 

Based on the above, the conclusion by Crux Investor that the valuation of Aya is well over the top does not change; it is only slightly less extreme.

The issues raised concerning the Boumadine project are:

The Analyst’s Notes falsely assume that Aya will be selling the pyrite concentrate instead of treating it on-site. Crux Investor has not assumed anything but relied on the approach in the MRE. The metallurgical performance and payability terms clearly indicate that concentrates will be produced and sold, including the pyrite. The terms are however such that these reflect standard to attractive products, which these are not, as per Table 3.3_1 of the Analyst’s Notes. The introduction of hydrometallurgical processing of the concentrates, as postulated, is not supported by testwork. For example, whereas the Albion process gives good recoveries, it is only at very fine grinding (less than 6 microns) and with very high reagent consumption. This explains the absence of a conclusion and recommendation section on metallurgy. If Aya disagrees with the MRE assumptions, it should have objected and corrected the authors of the MRE. 

The suggestion is made to sell the Pb-Cu concentrate just for its value of precious metals where it would get payabilities of 90-95%. This suggestion seems to have been grabbed out of thin air. When the concentrate is sent to a Pb-smelter it will not attract credits for the copper content and extraction of gold will be very problematic for the facility. If gold will be paid for at all, it will be heavily discounted. Alternatively sending the concentrate to a copper smelter will also be very problematic given the high lead content. It is unlikely to be marketable to such a facility.

Crux Investor is criticised for being focused on the copper value. The reader is referred to Table 14.1 of the MRE report that gives as contributors to the value per tonne of “ore” (a term not allowed to be used for Boumadine at its current status) 42.5% for Cu and 34.3% for Au. If Aya disagrees it should have raised it with the authors of the MRE and corrected them.

Based on the above Crux Investor maintains its conclusion that the MRE should never have been carried out until P&E had obtained proper marketing terms for the Boumadine products based on suggested concentrate qualities. Any MRE should be based on realistic NSR values from each metal derived from realistic recoveries, and realistic marketing terms with metals not being paid for and relatively low payabilities of metals in certain products. The applicable NSR cut-off grade should account for the narrow nature of the veins and the difficult amenability to metallurgical upgrading. With substantial lower revenue and higher operating cost the NSR cut-off grade may well result in no to little resources with a “reasonable prospect of potential economic extraction”.

Further points raised relating to Boumadine are:

The 15% interest of ONHYM is not free-carried, which means that this is being diluted by continued exploration. This may be so, but the MDA report for the quarter ending 30 June 2024 still reports an 85% interest in Boumadine indicating that there was no earn-in from investments before that date. Anyway, for the Crux Valuation, this issue is of minor importance until the Boumadine project has been proven to be of any material value.

The Analyst’s Notes fail to mention the “immense exploration potential of Boumadine with 120,000 metres to be drilled”.Considering the sparse drill density for the type of deposit being drilled, Crux Investor assumes that most of the drilling will be to increase the confidence level of the “resources”. The MRE report mentions that expansion is possible to the south of the South Zone. No other areas are mentioned. If Aya disagrees, it should have corrected the authors of the MRE. Even if there is potential for extensions, it is purely speculative and, until such time the metallurgy has shown the Boumadine material to be able to generate economical products, these extensions have no value.