First Majestic to merge with Silvermex

First Majestic Silver (FR-T) believes Silvermex Resources ’ (SLX-T) key asset can take it to the next tier of silver producers.

The company has announced a friendly offer for Silvermex that is made up of 0.0355 share of a First Majestic share and $0.0001 in cash per share of Silvermex — an amount that values Silvermex at 60¢ per share, or a 33% premium to its closing price on April 2.

The driver behind the deal is Silvermex’s La Guitarra silver-gold project, a hitherto underperforming mine that sits on a land package brimming with geological potential.

And while First Majestic’s team is preparing to zero in on longer-term goals at the project — such as updating resources, boosting production and driving down costs — even as it stands now, La Guitarra would help First Majestic approach an important threshold.

“With the addition of La Guitarra’s 850,000 oz. production we’ll have a good chance to break through the 10-million-oz. mark,” Keith Neumeyer, First Majestic’s president and chief executive, said during a conference call. “And that is an important number because it would catapult us into the senior silver-producer area, and we would likely get additional market acceptance for getting there.”

First Majestic has three producing mines and is in the midst of building its US$129-million flagship Del Toro mine. It expects to have Del Toro in production by the end of this year, which means that if the Silvermex deal goes through — and shareholders will vote on the transaction in June — the company could end the year with five producing silver mines in Mexico.

Last year First Majestic produced 7.6 million oz. silver. This year the company has issued guidance reaching 9 million oz., not including La Guitarra.

While First Majestic is acquiring a decent-sized mine with big exploration upside, it is not a project without its challenges. The two chief concerns with the project have been a lack of a consolidated and economically verified resource, and high production costs at the current mine.

“The resource potential excites us,” Neumeyer says. “It’s why Silvermex bought it from Gemco Minerals. But it is a big property and it will take time to develop. We feel confident that there is 100 million oz. silver there, and that is the basis of our reason for acquiring the asset.”

Neumeyer estimates it would take First Majestic 12 to 18 months to do a thorough resource calculation on the property, which would mean that a resource update would be released by mid-2013.

But a more thorough understanding of what is in the ground is only half the project’s challenge. The other is to mine at a more economical rate.

To put the current mining costs in context, La Guitarra is producing silver at US$105 per tonne, while First Majestic’s three producing mines ring in with an average cost in the low US$40-per-tonne range.

“Going from US$105 to US$40 per tonne is a big task,” Neumeyer says. “It’s not going to happen overnight. But we know how to attack it, and we know how to bring the costs down. You’ll see us bringing the operation to the streamlined efficiency that you see elsewhere at First Majestic.”

A focus on cost reduction means the company will hold off on any plans to expand the plant in the first year. But once costs are brought into a more acceptable range, Neumeyer says the company will consider bolstering the plant to a 1,000-tonne-per-day operation from its 320-tonne-per-day capacity.

“For us to buy an asset, obviously we have expansion plans. Now there are risks there — this is mining, after all,” Neumeyer says. “But we hope that once the acquisition is completed we can bring growth to this mine. But it will take time and money.”

La Guitarra sits in the Temascaltepec mining district, 130 km southwest of Mexico City.

Modern production at the site goes back to the early 1990s, but the district has seen mining since the 1550s.

The land position covers 397 sq. km and hosts over 15 km of strike length. La Guitarra, San Rafael, Mina de Agua, Rincon, Nazareno and Coloso are the main areas of interest.

While ore for the mine is coming from an underground operation at the La Guitarra main zone, Silvermex CEO Duane Nelson says recent results from the San Rafael vein point to the area adding to production in the near future.

Silvermex has estimated life-of-mine production grades of 266 grams per tonne silver and 3.5 grams gold.

The mine went out of production in 2008 and Silvermex recommenced the operation in 2010. While the previous operator was on a production downtrend — from 800,000 oz. silver in 2005, to fewer than 500,000 oz. in 2008 — Silvermex is projecting 800,000 oz. production for this year.

When the deal was announced on April 3, First Majestic shares were off 45¢, or 3%, to $16.46, while Silvermex shares were up 12¢, or 26%, to 57¢.