Minera Andes back to business (March 30, 2009)

SITE VISIT

PERITO MORENO, ARGENTINA — The guanacos, smaller cousins to the llamas, have noticed something unusual taking place here on the sleepy, endless pampas of Santa Cruz province, in Argentina’s Patagonia region. The curious animals have not seen anything like this before — a row of shiny metal objects being erected on the dry plane before their very eyes.

It’s no wonder that it looks unfamiliar to the wild creatures, since the shiny objects are pylons ready to carry the first electrical line in the area. The partners at the San Jose silver-gold mine, owned 51% by operator Hochschild Mining (HOC-L, HCHDF-O), and 49% by Minera Andes (MAI-T, MNEAF-O), are building the 130-km, 132-kilovolt line to Las Heras as a part of a project to double throughput to 1,500 tonnes per day.

Peru-based Hochschild is a 40-year-old precious metal miner, and the world’s fourth-largest silver miner. So it feels right at home at San Jose, an underground primary silver mine with high-grade, low-sulphidation epithermal veins. The mineralization was discovered by Minera Andes, who brought in Hochschild as a partner in 2001.

Once the expansion project is completed, San Jose, which started commercial operation in January 2008, is expected to become one of the top 10 primary silver-producing mines in the world. The partners initially projected the expansion would double annual gold production to 120,000 oz., and silver production to 6 million oz. With the expansion expected to be complete in mid-2009, production this year is projected at 95,000 oz. gold and 7.5 million oz. silver.

But there is another side to the San Jose expansion, which saw Minera Andes experiencing a sudden financial crisis late last year, as a result of an unexpected US$11.3- million cash call. The call was made by Minera Santa Cruz, the

Argentina-based subsidiary that operates the mine, owned 51% by Hochschild and 49% by Minera Andes.

Allen Ambrose, Minera’s president, attributes the surprise cash call to a combination of three factors: cost overruns at the mine, startup delays that saw production ramping up in October instead of August, and a sharp decline in precious metal prices.

Hochschild adds two further reasons for the cash call: furnace problems at the mine, and a delay receiving value-added tax rebates from the government of Argentina.

One reason for the delayed startup was ground conditions encountered while developing decline- ramp access to a new zone, the Kospi vein. This forced rerouting of the ramp, slowing it down. In addition, the new electrical line had to be rerouted at an extra cost because of right-of-way issues. And since access to Kospi was delayed, the mine milled some lower-grade stockpiled ore.

All this meant that project expenditures could not be met by cash flow generated by the mine, as originally anticipated. And to top it all, Minera also had to repay US$7.5 million on a US$17.5-million loan from Macquarie Bank.

So Minera suddenly found itself in a situation where it had to pay US$18.8 million within weeks, at a time when its treasury held US$3.3 million. Not being able to make the payments would have meant the loss of Minera’s 49% stake in San Jose to Hochschild and Macquarie.

A flurry of rapid-fire financial moves followed to try to address the cash crunch. Minera initially looked to raise money on the capital markets, but weak conditions quickly precluded that.

Financier Rob McEwen, who already owned a 24% stake in Minera and was a director, then made an offer to invest $40 million for 121 million Minera shares at 33¢ each.

Having little other choice, Minera accepted the offer, but the massive dilution it entailed could not have made shareholders very happy. At the time, Minera had 189.5 million shares outstanding. Although the shares were trading at 33¢ in early February, they had been trading at $1.07 in September before equity markets collapsed, and as high as $1.81 in February 2008.

Smelling a bargain, Hochschild made its own offer. It proposed to either buy Minera’s 49% San Jose stake for US$70 million, or to buy the company itself. The takeover bid at first offered 0.22 of a Hochschild share per Minera share, but was later raised to 0.24 of a Hochschild share, valuing Minera shares at 87¢ apiece.

Faced with Hochschild’s higher offer, McEwen countered, offering to invest the same $40 million, but now asking for only 40 million Minera shares at $1 each. Minera accepted, and Hochschild withdrew its offer.

It was almost possible to hear a collective sigh of relief from Minera shareholders, since the final deal allows Minera to meet the cash call and repay the Macquarie loan in full, with about US$5 million left in the treasury. And the number of shares issued is a third of the number that would have been issued had McEwen’s first offer gone ahead.

“It worked out very well,” Ambrose says. “It’s back to business, with a clean balance sheet and a nice, robust project. I think it’s a big endorsement of the assets of the company with somebody like Rob (McEwen) coming in, so we are pleased with the outcome.”

With the $40-million financing complete, Minera Andes has 230.5 million shares outstanding, of which McEwen owns 86 million shares, or 37.4%. He has been appointed executive chairman, and has named two directors.

Minera issued the new shares without putting the matter to a shareholder vote. The Toronto Stock Exchange has allowed the company to proceed without shareholder approval owing to its financial difficulties.

“We can sleep a little better at night,” Ambrose says. “Definitely, we were under a lot of pressure, with both the cash call, and then a bid coming in, and the condition of the markets.”

With the financial drama behind it, Minera can now return its attention to mining. San Jose is in the midst of a 17,000-metre drilling program designed to expand resources. Proven and probable reserves stand at 2.4 million tonnes grading 6.8 grams gold and 430 grams silver per tonne, equivalent to 521,000 oz. gold and 38 million oz. silver.

Measured and indicated resources, which include the reserves reported above, are 2.37 million tonnes grading 7.9 grams gold and 500 grams silver per tonne, for 602,000 oz. gold and 38 million oz. silver. Inferred resources are 230,000 tonnes of 7.8 grams gold and 452 grams silver, for 58,000 oz. gold and 3.3 million oz. silver. These reserves and resources, which are compliant with National Instrument 43-101, were derived from drilling completed by mid-2007.

(Hochschild reports resources independently from Minera, and uses Australia’s JORC code. Based on drilling to mid-2008, measured and indicated resources, which include the reserves reported above, are 2.5 million tonnes grading 7.1 grams gold and 490 grams silver per tonne, for 571,000 oz. gold and 39.4 million oz. silver. Inferred resources are 912,000 tonnes of 5.3 grams gold and 356 grams silver, for 156,000 oz. gold and 10.4 million oz. silver.)

Updated resource estimates are expected from Hochschild in April, and later this year from Minera Andes.

San Jose currently mines two veins, Frea and Huevos Verdes, from eight production stopes. During The Northern Miner’s visit in November, the ramp to the Kospi vein was being cut, and was 240 metres from the vein. The ramp is now complete, and San Jose is cutting drifts along the vein, with development scheduled to be complete by mid-2009.

Ambrose says that typical vein widths at Kospi are in the 2.5-to 3.5- metre range, suitable for mechanized mining. Kospi is 1.3 km long, and has reserves of 854,000 tonnes grading 6.5 grams gold and 536 grams silver per tonne (included in the overall mine reserves reported above.)

Ongoing exploration has discovered more veins: Ayelen, Frigga, Odin, Lourdes and others. Resources for some of these may be included in upcoming estimates. A prospective area of the property, Aguas Vivas, is yet unexplored. Ambrose beli
eves that more resources are likely to be found with further exploration on the 500-sq.-km property. Only 15% of a 40-km-long structural trend has been drilled so far, and geophysics surveys have identified 5 km of exploration targets.

In the first three quarters of last year, ore throughput was between 60,000 and 68,000 tonnes per quarter. Average head grades were 6.8- 7.6 grams gold and 550-680 grams silver per tonne. Gold production was 12,100-12,400 oz. per quarter, and silver production 970,000 to 1.1 million oz. per quarter.

In the fourth quarter, with mine expansion partially completed, throughput jumped to 108,000 tonnes, with production rising to 17,400 oz. gold, and 1.3 million oz. silver. Average head grades were lower than those reported in the previous three quarters, falling to 5.9 grams gold and 463 grams silver.

For the whole of 2008, throughput was 296,000 tonnes, with production of 54,300 oz. gold and 4.4 million oz. silver. Average head grades were 6.7 grams gold and 559 grams silver.

While the drop-off in head grades in the fourth quarter seemingly indicates that, with higher tonnages, the mine is struggling to maintain grades, the situation is probably better than what the drop-off would suggest. During the expansion, San Jose milled 750 tonnes per day of run-of-mine ore, with the balance, 250 tonnes, coming from lower-grade stockpiles.

Once mining from Kospi starts, the mine will not need to feed stockpiled ore, and head grades should improve. At full production, Frea and Huevos Verdes would continue to supply 750 tonnes per day, with 750 tonnes of new feed coming from Kospi.

San Jose has 18,000 metres of underground workings, accessed through three ramps to a maximum depth of about 200 metres. The mineralized veins are being mined in a primary mechanized cut-and-fill method, with a secondary conventional cut-and-fill method. The mill runs a Gekko gravity flotation/ intensive leaching process and Merrill-Crowe recovery, achieving average recoveries of 85% for gold and 82% for silver.

The end product is 40% dor bars and 60% concentrate. The concentrate grades 100 grams gold and 8- 9 kg silver per tonne. Concentrate is subject to a 10% federal export tax plus a 2.55% provincial mouth-of- mine royalty, while federal export tax on dor bars is 5%, and provincial mouth-of-mine royalty is 1.85%, so San Jose has a strong incentive to export all production as dor. When the expansion is complete, including an upgrade of the leaching circuit, Minera Andes anticipates that all production would be exported in dor form.

In the third quarter of 2008, operating costs were US$431 per oz. gold and US$7.31 per oz. silver. Costs were lower in the first half of 2008, at US$322 per oz. gold and US$6.16 per oz. silver. The higher costs are likely an outcome of milling some lower-grade ore from stockpiles during the third quarter.

The mine has a 730-strong employee workforce, plus more than 200 contractors, most of whom work on the expansion project. A substantial part of the labour force is made up of skilled miners from Peru, with another group coming from northern Argentina. The mine also employs unskilled workers from Patagonia, who are being trained here.

Hochschild works closely with both levels of government. Eduardo Landin, Hochschild’s general manager for Argentina, says the company works with the governor, and also with the secretary of mines in Buenos Aires.

San Jose is in the extreme northwestern corner of the Deseado Massif, 100 km east of the village of Perito Moreno, with the distance covered partly by paved road, and the rest by unpaved road. The village has an airstrip. The nearest large settlement is the port city of Comodoro Rivadavia (population 140,000), 350 km northeast of the mine by paved road.

According to a technical report filed by Minera Andes in February, most mineralization is hosted in the Bajo Pobre formation, which is characterized by Jurassic rocks of intermediate composition. Some mineralization is hosted in the Chon Aike formation — also Jurassic rocks, mostly ignimbrites, and part of the felsic Bahia Laura group, which overlies the Bajo Pobre formation. Mineralization has also been documented in Cretaceous rocks.

Mineralization is developed in low-sulphidation epithermal quartz vein, breccia and stockwork systems, and consists of banded-to-mottled “ginguro” quartz with irregular sulphide bands, mineralized by fine-grained argentite, pyrite and occasionally arsenopyrite. Sulphide percentages vary from vein to vein, but average between less than 1% and 5%.

Completion of the power line should reduce costs, since it will replace expensive diesel generators. San Jose designed the line so that it will allow the two nearest villages, Perito Moreno (population 4,000) and Los Antiguos (population 2,000), to connect to the line.

“We are working very closely with the villages,” Landin says. “They really appreciate that we construct this line in this (fashion).”

Minera’s second flagship property is the Los Azules copper project in San Juan province. The company filed a technical report for the project in January. Minera has also 35 exploration projects.

On Sept. 30, Minera Andes had cash and equivalents plus accounts receivable of US$7.1 million, and accounts payable of US$1.4 million. For the three months ending Sept. 30, Minera had a net loss of US$3.5 million, and for the nine months ending Sept. 30, the company posted a net income of US$3.7 million.

To finance construction at San Jose, Hochschild has loaned US$65 million to Minera Santa Cruz, of which 49%, or US$32 million, is Minera Andes’ portion. Minera Andes plans to repay its share of the loan with cash flow from the mine. Minera Santa Cruz has a further US$20-million of debt outstanding.

Minera Andes has 263 million shares fully diluted. At presstime, the shares were trading at 63¢. The stock hastraded in a range of 32¢- $1.67 over the last 12 months.