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Analysis

Merger Sees Canadian Operator Broaden Horizons

Wed, 10/21/2015 - 09:44

While the head office for Scorpio Mining Corporation (Scorpio) is based in Toronto, this Canadian silver producer is focused almost entirely on Mexican mines. The Nuestra Señora Mine, which Scorpio owns 100%, is situated in the Cosalá District of Sinaloa and has adopted flexible mining methods in order to diversify its metal production. It has a fully mechanized underground operation and a processing facility with a capacity of around 1,500 t/d, but this facility already has permits in place to expand its capacity to 4,000 t/d. The plant produces zinc, copper, and lead concentrates, but silver contributes around 50% of the mine’s revenue. Production from the Nuestra Señora operations totaled 573,224 silver equivalent ounces in the third quarter of 2014. Even so, it was the second quarter of 2014 that held the historic record for the company, producing around 10.9% more throughput than the third quarter Nevertheless, copper and lead production were higher in the third quarter due to higher head grades and recovery factors. Scorpio intends to maintain the plant’s ore production at its current levels by providing it with material mined from both the Nuestra Señora Mine and the La Verde Mine. The El Cajón silver-copper-gold deposit, located approximately 14km from the existing Nuestra Señora processing facility, is expected to become a new regular source of plant feed, with its importance increasing during its ramping up phase in the first two quarters of 2015, eventually displacing Nuestra Señora as the main source. El Cajón is a complex silver-copper-gold skarn deposit hosted in calcareous sedimentary rocks which are in contact with a granodiorite intrusion. Mineralization is primarily chalcopyrite and tetrahedrite with lesser amounts of sphalerite and galena, but also numerous ruby silver minerals. In order to provide access to the upper production stopes in El Cajón, Scorpio performed underground development work at the site during late 2014. After two additional quarters for ramping up mining activities, El Cajón is expected to operate at an expected 1,500 t/d.

Scorpio Mining has holdings of approximately 26,819 hectares in the Cosalá District, which covers numerous advanced deposits, exploration targets, and historic producing mines. Multiple types of mineralization are present in the district, including low- and highsulphide silver, zinc, copper, lead, and gold, as well as silver-gold stockworks, porphyry copper, magnetite, and wollastonite. Outside of Cosalá, Scorpio holds two high-grade silver properties in the Parral District called La Revancha and Tepozan. The Parral district is host to several past and currently producing mines, including Grupo Mexico’s Santa Barbara deposit and Minera Frisco’s San Francisco deposit. However, due to its large land holdings, and the potential for unearthing more valuable deposits, Scorpio’s main opportunity for growth lies within the Cosalá District. Toward the end of 2014, Scorpio announced the completion of a purchase option agreement for the Cosalá 2 concession. The preliminary mapping and sampling of the concession has indicated several areas of similar geology to the Nuestra Señora deposit. The Cosalá 2 concession covers 305 hectares and borders on the same land package as Nuestra Señora mine and the historical Candelaria mine. Logically, the company expects this area to hold high potential for the discovery of additional resources.

2014 saw the merger of Scorpio with U.S. Silver & Gold, which is the second largest primary silver producer in the US, with a current expected annual rate of silver production of 1.65-1.75 million ounces. The company owns and operates the Galena Mine Complex in the heart of the Silver Valley/Coeur d’Alene Mining District, Shoshone County, Idaho, which produces high-grade silver and is the second most prolific silver mine in the country’s history, delivering over 250 million ounces to date. U.S. Silver & Gold also owns the Drumlummon Mine Complex in Lewis and Clark County, Montana. Following a merger estimated at US$55 million, the combined company maintains the name of Scorpio Mining Corporation and will run the Nuestra Señora mine in Sinaloa and the Galena Complex in Idaho for a combined production of 4.5-5 million ounces of silver equivalent. This merger largely exemplifies how such a deal can be structured to create a larger yet more efficient company while avoiding common issues such as financial waste and disagreements between the two boards. This merger is expected to save US$1.6-2.5 million dollars by eliminating overlapping general and administrative costs. Furthermore, U.S. Silver and Gold has been hailed for reducing its all-in sustaining cash costs at Galena by close to 50% in two years through strict cost control and productivity enhancement methods.

Overall, the newly formed company will save US$1.6-2.5 million dollars a year by doing away with overlapping general and administrative costs. “This merger creates a stronger, better positioned company that is capable of not only surviving the current low silver price environment, but potentially transitioning from a junior precious metals company to an intermediate producer over the next couple of years,” stated Darren Blasutti, the former President and CEO of U.S. Silver & Gold, who now takes on the same role in the new version of Scorpio Mining.