Adapt, survive, Excellon style

Surviving tough times in the mining cycle requires adaptability, and if an investor is looking for an example, they need not look further than Excellon Resources (TSX: EXN; US-OTC: EXLLF).

The Toronto-based miner began the year intent on pumping cash from its Platosa high-grade silver mine in Mexico’s Durango state back into the ground, but with market valuations for explorers drying up, it changed gears.

“The plan at the beginning of year was to explore for the source at Platosa with an $18-million drill budget, and just break-even for the year . . . we’ve since scaled that back a little,” Excellon’s CEO Brendan Cahill says in an interview. “At the end of March we shifted our focus. We said: ‘Let’s focus on production, asset recognition and intelligent acquisition.’”

Excellon decided that rather than build resources that weren’t getting value on the market, it made more sense to buy other company’s assets at attractive prices.

So while Excellon sunk $6.5 million into exploration in the first quarter and just about broke even with a $500,000 loss, it is now focused on making Platosa the most efficient mine it can be — thereby bolstering its treasury and bringing more acquisition targets into its range.

The company has $8–10 million in cash available, depending on how its silver-delivery contracts are settled. Delivery contracts involve an upfront payment to Excellon for its silver concentrates and settlement two to four months from the delivery date, with a price adjustment made based on the spot price for silver at the settlement date.

In addition to having a healthy balance sheet, Excellon has a track record of making “intelligent” acquisitions.

In 2009 Excellon took note of Silver Eagle Mines, a company that had just completed a $15-million mill for its Miguel Auza silver mine. When silver prices collapsed in the wake of the financial crisis the company was under pressure to sell, and Excellon swept in and captured the company and its new mill for just $5 million in shares.

Before buying the mill Excellon was toll milling its ore with Penoles and getting 70% recoveries. The mill bumped up that number significantly, and recoveries have improved each year for the last three years. In 2010 it managed 85% recoveries, the next year it was up to 89% and last year it hit a record 93%.

When high recoveries meet with a high-grade deposit the kitty will grow, and last quarter Excellon showed it was beefing up its balance sheet. The company produced 607,252 equivalent oz. silver — a 50% increase over the previous quarter — and did so at an all-in cost of US$10.65 per equivalent oz. silver. That was good news on the cost side, as last year all-in costs came in at US$15.32 per equivalent oz. silver.

What is generating those returns is the Mantos deposit at Platosa. “Mantos” is related to the Spanish word “manta” for blanket, which aptly describes the deposit’s flat nature, which has measured and indicated resources of 637,000 tonnes grading 836 grams silver per tonne, 8.95% lead and 10.58% zinc, for 17.1 million oz. silver, 125.7 million lb. lead and 148.5 million lb. zinc.

The Mantos is 4 metres high and occurs at a 135-metre depth.

But while the deposit’s structure is straightforward, with visible contact points and very little dissemination outside of the Mantos, mining the ore is complicated due to water-management issues. Platosa is a wet mine, and that involves not only pumping out water, but also grouting and cement work.

Cahill intends to make that mining process as efficient as possible.

“Once we are at a consistent 200 tonnes per day, we can go up to 210 tonnes and then 220 tonnes,” he says. “Those small, incremental gains — small efficiencies of 1–2% — will transfer into faster mining and more ounces per year.”

To get those gains Excellon is examining every aspect of its mining process.

“Are we using the right mixture of concrete? Do we have the right miners available? Are we getting the concrete there as quickly as possible? Are we grouting most effectively? It’s really just fine-tuning,” Cahill says.

The company has high-calibre consultants considering ways to manage the water issue.

One thing is certain: as more ore comes out of the mine, the mill will be ready for it. Ore from Platosa is trucked 200 km to the plant for processing at a mill that can handle 350 tonnes per day that only runs 16 days of the month. Having a fixed cost like a mill running the full month would drive down overall costs.

Platosa is part of Mexico’s carbonate-replacement deposit (CRD) belt, which is responsible for 40% of the country’s silver production.

And while the Mantos supplies plenty of grade, and will do so for the next decade, Excellon is pursuing the source of its mineralization. It says its previous drill program may have been on the verge of discovering just that, as its Rincon del Caido discovery hole from mid-year shows signs of being on the periphery of a yet-to-be-discovered source.

Drilling at Rincon, located 1 km from Platosa, returned highlight intercepts of 55.5 metres grading 132 grams silver, 3.13% lead, 1.74% zinc and 0.07 gram gold, and 7 metres grading 13.07 grams gold and 21.1 grams silver.

Cahill says that gold in the assays could mean that Rincon is near the source, because the CRD system that it says sources the Mantos will likely have higher gold grades and lower silver grades.

When precious metal prices bounce back, Excellon will be positioned to adapt again, and possibly deliver a big-tonnage story.