Kuya Silver Corp. (TSXV: KUYA; OTC: KUYAF)

Kuya Silver is one of the very few public natural resource companies left that focus solely on silver exploration, development, and (soon) production. The company has two assets: The 100%-owned, near-term producing, high-grade, high-margin “Bethania” project in Peru, and an exploration JV in Canada, called “Silver Kings”, on which drilling has already started.

As an inexperienced natural resource investor and reporter, when I want to look into a mining company, I stick to a research framework (that I am still working on), called “The 6 P’s”.

I will discuss those 6 P’s below, but before that, here’s a TLDR:

1. Ticker symbols:
– Canada: KUYA
– USA: KUYAF
– Germany: 6MR1

2. Market cap:
$40M

3. Shares:
– Outstanding: 45.2M
– Fully diluted: 49.3M

4. Warrants:
2.4M

5. Options:
1.6M

6. Cash:
4.5M CAD

7. Debt:
1.5M CAD

8. Projects:
– Focus: Bethania, Peru. Silver, lead & zinc. Very high grade. Four concessions totalling 1750 Ha. Past-producing mine (stopped in 2016). 100% owned. Close to production. Infrastructure present. Weather stability. Big exploration potential. Biggest risk: political situation, nationalising.

– Others: Silver Kings, Ontario, Canada. 900-hectare land package. Very shallow. News coming soon. Not too far from NI 43-101. Previous grades include: 3.57m of 821g/t silver. 2.5m of 1,441g/t silver. 2m of 450 g/t silver. 2.2m of 515 g/t silver. Biggest risk: financing.

9. Time until first production (Peruvian project):
– Best case: less than 12 months
– Average: 12-18 months
– Worst: more than 18 months

10. Ownership of the company:
– CEO & Founder, David Stein: +20%
– Management: 22% (total, with the CEO’s ownership included)
– Erika Soria: 8.8%
– Eric Sprott: 4.3%
– Sprott Asset Management: unknown but existent
– Crescat Capital : unknown but existent
– First Cobalt: unknown but existent
– Earth Resource Group: unknown but existent
– Retail: 65%

11. Staff needed to mine in Peru:
100-150 people, staying on site. Possibly on a two-weeks-on two-weeks-off basis

12. Team strength:
Technical

13. Team weakness:
Marketing

14. CEO’s pay:
$235K CAD/year

15. Upcoming catalysts:
– Drill/update historical estimate
– PEA
– Mine Expansion
– Finance plant/expansion

16. Short-term goals:
– Commission/Production
– Regional exploration

17. Medium-term goals:
– Grow Bethania production & resource
– Start developing Kerr Project

18. Long-term goals:
– Even more growth of production in Peru
– Multi-mine low-cost, high-grade silver producer
– 4-5 producing mines

19. CEO:
David Stein. 43 years old. $12M net worth. Director at Panthera Resources PLC. Background in Geology and Engineering, and mining stocks analysis.

20. 3 main risks:
– Political
– Financing
– Production

Now let’s have a look at my 6 P’s more in-depth:

Although Kuya Silver has projects in Canada as well, they’re mostly dependent on Peru, which is currently going through turbulent political times. Some miners have spoken out and said that “the future of mining in Peru looks cloudy”.

I have personally spoken to David Stein, CEO & founder of Kuya Silver, who visits Peru most often, and he doesn’t seem to agree. Especially not in the region where the Bethania past-producing silver mine is based. He tells me the community risk is extremely low and that the political leader on Peru’s top, President Castillo, gets a lot of push back from other politicians.

There is readily available working force, the weather allows mining and exploration year-round, the infrastructure is there, and the economy is heavily dependent on the mining industry.

Let’s look at some objective statistics.

2.1: Fraser Institute of Canada ranking:

Peru is not in the top, nor the bottom 10 mining jurisdictions in the world, according to the 2020 Fraser Institute Annual Survey of Mining Companies.

However, the “Investment Attractiveness Index” (IAI) has dropped 6.3% between 2019 & 2020, to 70.41 for the year 2020. This in addition to a drop of 7.86% the year before that. Larger drops are expected in the IAI for the upcoming years, as President Castillo stays on top of Peru.

70.41 IAI is not bad, though. For comparison, the worst mining jurisdiction (according to said survey) for 2020 was Venezuela, which scored 17.14 on the same index. The best mining jurisdiction was Nevada, which scored 91.05.

With a score of 70.41 on the IAI, Peru scores in line with jurisdictions like Montana, Wyoming, Portugal, Sweden, Northern Ireland, and other well-known, stable mining jurisdictions.

The IAI combines both the PPI (Policy Perception Index) and the BPMPI (Best Practice Mineral Potential Index), to measure the attractiveness of a mining jurisdiction.

Separately, the PPI for Peru in 2020 was 75.16, which falls in line with British Columbia, Yukon, Colorado, Washington, Victoria (Australia), Russia, Spain, and others.

The BPMPI for Peru in 2020 was 67.24, which falls in line with Alberta, Montana, New Mexico, Ireland, and others.

In conclusion, according to the 2020 Fraser Institute Annual Survey of Mining Companies, Peru is a very attractive mining jurisdiction, despite potential policy issues.

However, one should know that President Pedro Castillo assumed office on July 28, 2021. This means the 2021 Fraser Institute Annual Survey of Mining Companies will be more important for this company than the one I showcased above. I will be adjusting the data above once the 2021 survey becomes available to me, in the first half of 2022.

Summed up: Peru is a good mining jurisdictions with promising mineral reserves but potential policy challenges might be ahead. One should not just “set and forget” an investment in this country. This should be monitored closely.

2.2: Economic situation:

Peru’s economy isn’t doing great. They are only the seventh-biggest economy in Latin America. The Peruvian GDP dropped by 11.2% in 2020, sending the country in a nasty recession. Unemployment shot up to 13.8% in 2020, as mines were being closed. Although transitory, this period hasn’t done the economic situation of the country any good. Expectations are positive, though. Outlooks for 2021 suggest an economic expansion of 10%.

The Purchasing Power Parity of Peru was at 1.8 LCU per international dollar in 2020. This might be seen as a positive for a Canadian mining company, since, for example, the price of a liter of gasoline is 0.99 USD, as oppose to 2 USD in Europe. The BigMax index suggested, in 2020, that a BigMac in Peru would cost $2.93, whereas it costed $5.32 in Canada. This suggests that dollars raised in Canada or the US might get the company further than they would in other jurisdictions.

2.3: Availability of skilled labour:

Mining has been in Peru since the late 1800’s. It’s not a new concept. As a matter of fact, Peru’s main economic driver currently is the mining industry. Copper and gold represent a very important part of the country’s GDP mix.

Here are some numbers coming from engineer Enrique Garay for bnamericas:

10% of Peruvian GDP comes from mining.
60% of Peruvian exports are mining-related.
16% of private investments happen in the mining sector.
19% of tax income comes from the mining & metals industry.

Those numbers are projected to grow. This, by the way, also makes me lean to the “not worried about it” side of the political situation in Peru.

With there currently being more than 10 mining projects in the pipeline, I’m even less worried. It’s not impossible for mining to go through a turbulent time, but banning it, or nationalising the mines for example, will send the country in the worst depressions the continent has ever seen.

To the point:
Mining is very important for the Peruvian economy and the Peruvian people. Peru experienced its first gold rush in the 1930’s and that lasted all the way through the 1960’s. This attracted a lot of attention to the industry and it had people from all over the country looking for a job as miners. In the 1980’s Peru saw a second gold rush which only added to the aforementioned. In 2002, new laws were passed that made it possible for artisanal miners to, legally, make money from the mining industry. This, too, added to the interest in the mining industry and thus helped increase and improve the mining working force.

Summed up:
Mining is very important for the Peruvian economy and there’s a lot of skilled labour available.

2.4. Weather

Peru’s weather is quite different across the country. The Bethania Silver project is located in Central Peru, in the northwestern part of Huancavelica Department, approximately 316 km by road from Lima.

The rainy season there starts in November, and goes all the way through March, with, typically, 76 out of the 105 annual rainy days taking place during that period.

There could be temperatures in, and below the 30 degrees (F) (0 or below C) from May through September. The warmest it ever gets is in November, at around 70 degrees (F). David told me that there are certain things that they avoid doing during the rainy season, but they can still do exploration. In fact, Kuya started drilling at the end of 2020, during the rainy season, even though snow, and they managed to mobilise it all.

3.1. Bethania Silver project:

In total, according to rough estimations, Kuya controls about 2550 Ha of prospective ground in Peru.

Kuya’s Peruvian project is a past-producing underground mine at the side of a hill located next to the mining village of Bethania, which is accessible by road from Huancayo. The mine was operational before, but it was never managed by a publicly listed company.

Since 1977, the mine operated at a small scale, on and off, for about 40 years, until being put on care and maintenance in 2016, due to lack of working capital (they ran out of money, couldn’t finance it because of market conditions).

The Bethania Silver project encompasses four concessions totalling 1750 Ha that are accessible year-round via a 4-hour drive from the city of Huancayo.

The focus of the project is the Santa Elena concession, a mining concession where the Bethania Silver Mine is located. The project was in production until 2016, toll milling its ore at various concentrate plants in the region. Kuya is looking to change that toll milling.

Historically, the mine has produced silver-lead and zinc concentrates from the run-of-mine material until being placed on care and maintenance.

In December 2020, Kuya Silver acquired 100 per cent of the issued and outstanding shares in the capital of S&L Andes Export SAC, the Peruvian company that owns the Bethania mine and holds the mining concession, permits and other rights. This means Kuya now owns 100%.

The company has received approval from the regional government of Huancavelica for the semi-detailed environment impact study (EIA) for the Bethania processing plant project. The EIA approval covers a plant design for 350 tonne per day crushing, grinding and flotation circuits, as well as a tailings storage facility and ancillary infrastructure. Kuya plans to implement an expansion and construct a concentrate plant at site before restarting operations in 2021.

The Bethania Silver Project is located over the Cordillera Central, a region containing prolific and prospective base and precious metals belts. The area is host to numerous styles of mineralisation, including epithermal Au – Ag, porphyry Cu-Au- Mo, and replacement/skarn Zn-Cu.

The Bethania Mine is located along an interpreted major north-northeast fault line within Southern Peru’s Au – Ag Epithermal Belt. The Santa Elena Concession (Bethania Mine) covers Tertiary volcanic rocks that include andesite, dacite and tuff. All of the mineralized veins discovered to date are hosted by altered andesite and/or dacite with some anomalous mineralization hosted by silicious bodies of stockwork quartz-breccia.

The focus of past on-vein exploitation has focused on east-northeast trending systems but numerous north – northwest trending veins have seen little if any exploration and testing. The total lengths of the vein system are not clear for all the veins and there is evidence that the northeast-trending veins could extend several hundred meters along strike. In addition, many of the veins continue at depth as evidenced from underground mine developments.

When I talked to David recently, I asked him what he thinks Kuya’s main edge is, given that Bethania isn’t really huge. He told me: “It isn’t huge *yet*, but we’ll see”.

One thing I really like about this project, and the thing that drove the company to focus on this project in the first place, is that they can optimise future production to a point where the costs are decreased significantly, which can eliminate the issue the previous owner of the mine had.

Namely, Kuya wants to optimise three things:

1. Treatment and refining:
– Onsite 350 tad facility
– Better TC/RC market
– Addition of copper/gold circuit

2. Processing
– no toll milling fees
– better recovery rates

3. Transport
– eliminate transport of the ore

Basically, Kuya has a lot of work to do, which will take time and money, but it’s positive that there is a lot of room for improvement.

There are no royalties on the Bethania project, besides the sliding-scale royalty that the Peruvian government has, which is pretty much a tax.

Basically, the higher the revenue, the higher the Peruvian royalty. In the case of Kuya Silver, when they restart Bethania, that royalty would be around 1%, but as they grow it, the royalty could go to 2 or 3%, according to what David told me in our interview.

The project is accessible by road, and has access to all the needed water, electricity, etc.

Electricity is generated by diesel generators. There are plans to connect to hydropower, which is readily available in Peru.

Once the company moves on to hydropower, this will be good for the relationship with the community, and their perception on the environmental impact the company might have. So, I see it as a positive in the long term.

The project isn’t located at a dry part of Peru. Water is plentiful around the project. Still, Kuya Silver is working on a clever engineering design to use the water more efficiently. This is not a main priority. So, it will come when it comes.

One main concern I have with the project is the width of the veins. Some veins are as narrow as 3ft. Kuya plans on using cut-and-fill drilling, which could be more expensive but is justified by higher grade, according to Kuya’s CEO.

Not the entire project is characterised by narrow veins. So, different mining methods are likely to be used through the project.

Bethania failed in 2016 because they ran out of money. Geologists have suggested that this was because they were using a rather expensive mining method, that made the mine unprofitable.

When I asked David about that, he told me that the previous company mainly failed because of the high costs the company had. For example, trucking the ore (not the concentrate, the ore) to other mines for processing hurt the company the most.

Toll milling is very expensive because of three reasons, that Kuya is trying to get rid of:

1. Additional trucking costs. 15x to 20x times higher than trucking concentrate.

2. Higher milling costs higher because you have to pay a toll milling fee to the mill owner.

3. Lower recoveries, because the mill is not set up specifically for your ore, so you’re giving up some of the recovery.

According to David, you can still make money using this method, as long as the price of the metal you’re selling is high enough and as long as you don’t run into troubles relative to counter-party risk – 2 things that are uncontrollable by the company, both of which Kuya is trying to eliminate. This is, by the way, the business model that under-capitalised, often non-listed companies use.

The main risk here is running out of working capital, according to David. Bethania could fail again, if they run out of working capital. This seems unlikely for now, but it is still a real risk.

Depending on the geometry of each individual stope, Kuya will use one of two mining methods, but mainly cut and fill.

Cut and fill is often used in small-tonnage and/or selective-mine deposits with a large variation in vein types, widths, etc. This mining method has already been proven to be profitable on this project, by the family business that owned the Bethania mine before.

On some, really narrow veins (below 3ft) they might have to use the resue mining method, which is more expensive but could be worth it if the grade is there.

Speculation has it; Karmelita, which is only about 3km from Bethania, and owned by Kuya, could be a deposit from the same type and size as Bethania. None of it is proven but the team has the suspicion it is there.

This, although uncertain, could completely change the company. If Karmelita is anywhere close to Bethania in size and grade, it could be added to the same mining operation, which will increase the production, but decreased the costs.

Even if Karmelita was not a potential, Bethania still remains open along strike and depth. This means that the veins could be more plentiful, longer, thicker and higher grade, than what we’ve seen so far. However, with Karmelita added to the mix, this suggests the company might have a lot more growth potential.

At the time of writing, Kuya has drilled 36 holes, on seven of the historical veins, located on the Western side of the project.

These are the early days for Kuya, and I believe, although biased, that Bethania has a lot more to show than what is already visible, and that’s what I find the most attractive for Kuya.

The political situation, however, if worsened, could definitely get in the way of this being well-developed and is to be monitored closely.

3.2. The Silver Kings Project

This is Kuya’s exploration project.

The Silver Kings Project is located in Northern Ontario’s most prolific silver mining camp, situated near the historic mining town of Cobalt, Ontario.

The Project encompasses 10,000-hectare and consists of both Kuya’s 100%-owned Kerr Project along with the Silver Kings Joint Venture that Kuya has entered into with First Cobalt Corp.

The Kerr Project at Silver Kings is located within a 900-hectare land package that includes several historic silver mines: Crown Reserve, Kerr Lake, Lawson, Drummond, Conisil, Hargrave, Silver Leaf and Bailey.

Between 1905-1970, these mines produced over 50 million ounces of silver and 900,000 pounds of cobalt.

Although incredibly prolific, the deepest mine shaft of the package was less than 200 metres, providing an opportunity for deeper exploration.

Also included in the Kerr Assets is the nearby Silverfields property, which was previously mined by Teck until 1983 to a depth of 300 metres and produced over 17 million ounces of silver, further demonstrating the depth potential to some mineralised systems.

Depth is the name of the game for this project. It won’t be cheap to explore, but if we look at what previous drills have shown for the project there, we might want to cosider is worth it.

– FC-18-0058 intersected 3.57m of 821g/t silver and 0.45% cobalt (including 1.57m of 1,756g/t silver and 0.71% cobalt) from 29.43m.

– FC-18-0174 intersected 2.5m of 1,441g/t silver and 0.28% cobalt from 66m.

– FC-18-0094 intersection 2m of 450* g/t silver and 0.10% cobalt from 20m.

– FC-18-0093 intersected 2.2m of 515* g/t silver and 0.61% cobalt (including 0.7m of 1,460* g/t silver and 1.81% cobalt) from 1.72m.

*Individual silver assays capped at 1500 g/t included in reported intersection

This could be promising down the road, but my focus remains on Bethania.

The way I understand it, Kuya wants to get Bethanica cash flowing, to finance further exploration and acquisition of assets.

Although the Silver Kings project is definitely early stages, it’s still much closer to production than most silver explorers on the market today.

Ontario also adds geo-political diversification to the company, and that too seems positive to me.

According to David, both of those projects should be in production in the medium-long term of 3 to 5 years.

The Bethania silver mine produced silver up until 2016, with about 100 people in staff, and David Stein, Kuya’s CEO, thinks they will need to hire a little more people than that, but he doesn’t think it will be a lot more. The main addition to the team will be underground mining staff.

When I asked David what the team is especially good at, he told me that the team’s best side is the technical expertise.

Their local team in Peru is, to his words, very strong and it has gone through a lot of challenges already; moving the engineering design forward, completing a drilling program during the height of the Covid crisis in Peru and permitting the project for further exploration.

When I asked David what the team is not so good at, he told me that the team’s most-important weakness is marketing.

David told me that he recognizes marketing as a very important part of the development of a mine, since it’s directly correlated to the ability of the company to raise capital, yet it remains a challenge for the company. Finding a good ratio of being promotional to focusing on delivering results, though, is not easy, according to Kuya’s CEO. David is a believer in natural marketing that comes from not only talking but mainly from doing and providing shareholders with results. However, he does realise that if the company doesn’t focus on marketing a little more aggressively, with the current political situation in Peru, this might present a challenge for raising capital. What I do like about this, is that Kuya appears to be focusing on underpromising and overdelivering, and not the opposite, which is often seen in this industry.

4.1: The CEO:

The founder and largest shareholder in the company, David Stein, owns roughly 20% of the outstanding shares of the company, and takes a salary of $235K CAD annually.

David is 43 years old, has a net worth of roughly $12. He’s spent most of his 20-year career in mining investments, first as a sell-side analyst and more recently as an investment manager.

4.2: The COO:

Christian Aramayo is a UK-educated Peruvian engineer, previously worked on global projects for Kinross before starting his own mining consultancy. He founded SIGC Consultants in Lima, and Kuya has access to Mr. Aramayo and his team for engineering and planning as well as access to a deep network in South America.

4.3: The CFO:

Annie Sismanian is a chartered professional accountant (CPA, CA) with over 18 years of broad progressive experience in finance, strategy and corporate development. Prior to joining Kuya, she was vice-president of corporate finance and investor relations at Guyana Gold and has held senior financial roles at Hydro One, Kinross, Barrick, Fairmont and PWC.

4.4: The advisory team:

– Although Dr. Hennigh retired from Kuya Silver in late 2021, to focus on Crescat Capital, Kuya still has direct access to Dr. Hennigh is an unofficial advisor. Dr. QH is an economic geologist with more than 25 years of exploration experience with major gold mining firms, including Homestake Mining, Newcrest Mining and Newmont Mining.

– Erika Soria manages the commercial and administrative affairs of the Bethania mine and is the liaison with the local community. She is also well-connected in the Peruvian mining community and sources new opportunities for Kuya.

– Hector Aramayo, related to the COO, based in Lima, Peru, is an experienced civil engineer, consultant and project manager with experience in retail and industrial construction in Latin America. He is the Founder of SICG SAC, a construction contractor and management company that over the past 20+ years has built blue chip client base in Latin America.

The main goal, as mentioned several times so far, for Kuya Silver, is to get into production as soon as possible, and then grow the annual production through exploration and development, by using the proceeds from the already producing mines. This is a very strong long-term strategy as it could lead to low-dilution multi-year growth story.

The 3 main risks are:

– Political:
The current political situation in Peru isn’t great. It has been rumoured that President Pedro Castillo has the potential to make changes in mining policy, which can lead to expropriations and license cancellations.

– Financing (working capital):
Financing a natural resource company can prove to be a challenge before the company’s producing any natural resource. In the case of Kuya Silver, the risk could be that they run out of working capital before Bethania is in production, or before Bethania becomes profitable. This could lead to inability to finance further exploration and development, which could lead to less production over time, dropping revenues, and a general mess.

– Production:
Although Kuya has a clear path to production in less than two years from the time of writing of this, a lot of things can go wrong in between. The path to production, at a low cost, should be monitored closely.