First Majestic sets its sights on senior status

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

The company announced a friendly offer for Silvermex that is made up of 0.0355 common shares of First Majestic and $0.0001 in cash per common 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, and the apple of First Majestic’s eye is Silvermex’s La Guitarra project, a hitherto underperforming mine that sits on a land package bursting 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. of production we’ll have a good chance to break through the 10 million ounce mark,” Keith Neumeyer, First Majestic’s president and chief executive said on 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 currently has three producing mines and is in the midst of constructing its US$129 million flagship mine, Del Toro. It expects to have Del Toro in production by 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….all of which would be in Mexico.

Last year First Majestic produced 7.6 mill oz. of silver and the company has issued guidance this year of 8.5 to 9 mill oz. not including La Guitarra.

And 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 (the previous owner). But it is a big property and it will take time to develop. We feel confident that there are 100 mill oz. of 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 the middle of 2013.

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

To put the current mining costs into context, La Guitarra is producing silver at a cost of 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 over night. 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 expansion plans to the plant in the first year. Once costs are brought into a more acceptable range however, Neumeyer says the company will consider bolstering the plant to a 1,000 tonne per day operation from its current 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 say, “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 roughly 130-km south west of Mexico City.

Modern production goes 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 with the main areas of interest being La Guitarra, San Rafael, Mina de Agua, Rincon, Nazareno, and Coloso.

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

Silvermex has estimated that life of mine average production grades will be 266 grams per tonne silver and 3.5 grams gold.

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

In Toronto on April 3, First Majestic shares were off 45¢ or 3% to $16.46, while Silvermex shares were up 12¢ or 26% to 57¢.