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Analysis

Funding Slowdown Delays Silver Mine Construction

Wed, 10/21/2015 - 08:43

In 2002, Silver Standard, a Vancouver-based precious metal mining company, made a grassroots discovery in the municipality of Inde in the central part of Durango, on the eastern flank of the Sierra Madre Occidental mountain range. This marked the beginning of the story of the Pitarrilla Project. Ten years later, Silver Standard and M3 Engineering and Technology completed a feasibility study on Pitarrilla, which showed that it was one of the largest undeveloped open pit projects in Mexico. This made it a considerable addition to Silver Standard’s portfolio of two operating mines in the US and Argentina, two other development projects in Peru and Argentina, and several exploration projects.

According to the company’s NI 43-101 technical report, the Pitarrilla property is formed by 12 contiguous mineral concessions entitled to Silver Standard’s Mexican subsidiary, Silver Standard Durango, and spans a total of approximately 136,191 hectares. The company controls a majority of the surface rights required for mining, milling, and surface facilities. In 2002, a series of rockchip sampling programs ultimately led to the outlining of multiple zones of silver mineralization which became exploration targets. These targets were eventually drilltested, and resulted in the discovery of five zones of oxide silver mineralization which constitute the upper part of the Pitarrilla project deposit. The Pitarrilla project is located on the erosional remnant of one of the Earth’s most voluminous accumulations of intermediate to felsic volcanic rock, known as the Sierra Madre Occidental. This mountain range is part of a calc-alkaline magmatic arc formed roughly 52 to 25 million years ago and hosts a large number of medium- to high-level hydrothermal systems enriched in silver, gold, lead and zinc. These systems were generated during the same period of volcanism that created the epithermal mineral systems that formed the famous Mexican silver mining districts in Guanajuato and Zacatecas. The Pitarrilla project holds a silver-zinc-lead deposit hosted by deformed Cretaceous marine sediments and younger overlying volcanic, volcaniclastic, and intrusive formations. The mineralization at Pitarrilla occurs as a vertically stacked mineralized system on rhyolitic dykes and sills, while sulphide-associated mineralization is rooted in the basement Cretaceous sedimentary strata and extends into the overlying volcaniclastic rocks.

The technical report suggests that the Pitarrilla project contains 479 million ounces of silver in probable mineral reserves, with an average measured grade of 95.4 g/t. Additionally, the project contains 1.014 billion pounds of lead, at a grade of 0.29%, and 2,722 million pounds of zinc at a grade of 0.79%. The mineral reserves contain two ore types, direct leach ore and flotation-leach ore. Though the NSR calculation method varies for the two ore types, their average process recovery is 69.6% for silver, 57.4% for lead, and 61.3% for zinc. The project is expected to have a 32-year life span with an average of 15 million ounces of silver production per year during the first 18 years of production. The expected mine life is 20 years, after which the plant will continue to mill ore from existing stockpiles for an additional 12 years. The average cash costs are expected to be US$10.01 per ounce of silver, with a strip ratio of 6:1 and a mill throughput of 16,000 t/d.

Pitarrilla has an after-tax net present value of US$737 million at base case metal prices and US$1.7 billion at spot metal prices. The after-tax internal rate of return is 12.8% at base case metal prices and 21.2% at spot prices, with a total construction cost of US$741 million, including the three year pre-production operating costs and pre-production revenue. The project presents low technical risk since it utilizes standard truck-and-shovel open-pit mining methods and well-established flotation and leach processing methods. A report by a Mexican hydrogeological consultant concluded “that local aquifers could provide the quantities of water required to operate the project.” Sadly, back in 2012, Silver Standard found itself without sufficient funds to complete the project, and was looking at a series of funding options. However, no financing has been secured for the project to date. At the end of 2013, the company completed the sale of its San Agustin project in Durango to Argonaut Gold for an aggregate consideration of approximately US$75 million. With regards to the transaction, John Smith, President and CEO of Silver Standard, stated that “this transaction demonstrates the value within our portfolio beyond our mine and development projects. Selling San Agustín adds to our balance sheet strength for funding future growth. We continue to focus on optimizing our business to deliver long-term, sustainable shareholder return.” Silver Standard retained a 2% NSR royalty on sulphide ore produced from San Agustín.

Despite these woes, the company maintains an active exploration program across the Americas. At the moment, it is mainly focused at the San Luis project in Peru and on additional mineral properties located in Canada, the US, and Mexico, including the San Marcial silver project in Sinaloa and the Parral Mining District in southern Chihuahua.