A feasibility study for Phase II of McEwen Mining’s (MUX-T, MUX-N) El Gallo project supports production of an additional five million oz. silver a year for seven years from the company’s mining complex in Sinaloa, Mexico. Permits to start construction and production are expected in the third quarter of 2013.
During the first six years the study forecasts average annual production of 5.2 million oz. silver and 6,100 oz. gold at a cash cost of US$9.86 per oz. silver, net of gold by-product and including royalties.
Over the life of the mine, production is expected to reach 11.7 million tonnes of ore at 101.3 grams silver per tonne and 0.12 gram gold per tonne for total recoverable silver and gold of 32 million oz. and 38,000 oz., respectively. Total operating costs are anticipated to be about US$10.47 per oz. produced.
At US$25 per oz. silver and US$1,415 per oz. gold and a 5% discount rate, the after-tax net present value reaches US$118 million, yielding an internal rate of return of 26%. Based on spot silver and gold prices (US$32 per oz. silver and US$1,700 per oz. gold) the after-tax NPV rises to US$248 million and the after-tax IRR to 44%.
Estimated initial capital expenditures including a 14.4% contingency would come in at US$178 million with total life-of-mine capital expenditures forecast at US$187 million. The pay-back period on an after-tax basis would be 2.6 years at US$25 per oz. silver and US$1,415 per oz. gold.
In a research note Adam Graf of Dahlman Rose & Co. said he has “marginally pushed back production and modestly reduced mineable grades” but says his model “still shows El Gallo to be an attractive project for the company.”
The analyst has a buy rating on McEwen Mining with a price target of US$7.67 per share—an expected return of 74.2%. At press time in New York McEwen Mining was trading at US$4.32 per share within a 52-week range of US$1.96-US$6.34.
McEwen Mining’s management believes it can contain cost creep by taking measures such as sourcing good used equipment, not permitted in the feasibility study, and deepening its operating team so that the company will be able to manage more of the project internally.
It also says it expects to extend the mine life of Phase II beyond the initial seven years, by converting areas of inferred resources into proven and probable reserves, hopefully over the coming six to nine months. The feasibility study was based only on the El Gallo and Palmarito deposits and the drilling used to define the resources that formed the basis of the reserve was completed in April 2012.
The El Gallo complex along the foothills of the Sierra Madres was discovered in November 2008 and includes the El Gallo and Palmarito silver deposits and the Magistral gold deposit (Phase I), all within a 13 km radius.
Phase I or Magistral is currently being commissioned and is forecast to produce 30,000 oz. gold a year.
As of June 30 McEwen Mining had cash and assets of US$38 million.
At presstime in Toronto the company was trading at $4.20 per share within a 52-week range of $2.02-6.26.
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