Arian planning to produce at San Jose

Production will begin in October at the past-producing San Jose silver mine in Zacatecas, Mexico, with cash flow anticipated in the fourth quarter, Arian Silver (AGQ-V, AGQ-L) says.

The London-headquartered junior plans to use some of that cash to further explore its 100%-owned mine site because National Instrument 43-101 resources identified so far make up just 10% of the total known strike length of the San Jose vein.

“We’ve identified about 43 million oz. silver, 120 million lbs. lead and 250 million lbs. zinc already, so theoretically there’s no reason why we shouldn’t be able to define 200 million oz. or more in the remaining 90% of the known strike length,” Williams says in a telephone interview from his country home in Wales.

“The total strike length of the San Jose vein is roughly 15 km and all the work we’ve done so far has been done within about 2.5 km. It’s a fairly homogenous vein structure both in composition and thickness.”

The contract mining operation is slated to produce 500 tonnes per day but has the potential to immediately expand to 1,500 tonnes per day if capacity at the mill is available. Initially, however, the mill will handle 400 tonnes per day with plans to increase to 500 tonnes per day following upgrades to its crushing circuit. In addition, a single mill is being sought to accommodate even greater throughput, Williams says.

At a 400-tonne-per-day rate, the mill, leased exclusively to Arian Silver, should produce 125 tonnes of concentrate a month with an anticipated silver content of between 370 and 440 oz. per tonne.

The total cost to mine and deliver ore to the mill will be about US$26 per tonne, while milling costs will reach about US$290,000 per month — or US$29.22 per tonne at 400 tonnes per day, but this figure will decline once the operation is fine-tuned and production increases, Williams says.

A 2% net smelter return royalty on the concentrate value produced is payable to the original owners of the property, who sold it to Arian Silver three and a half years ago.

Based on a contained silver content of 405 oz. per tonne at US$18 per oz. silver, Arian Silver expects its concentrate will be valued at about US$6,500 per tonne.

U.K.-based Edison Research notes that under its current mining and milling contracts, Arian Silver should generate revenue of US$14.2 million per year at a gross cash cost of US$6.6 million. “This increases our forecast of the company’s profit before tax by 20%, from US$3.7 million previously to US$4.4 million,” analysts Charles Gibson and Michael Starke wrote in a recent report.

The San Jose property, covering about 65 sq. km, is 55 km from Zacatecas, a city with an international airport and rail line.

San Jose’s mineable resources have been identified into seven blocks of silver, lead and zinc mineralization, but three have been chosen specifically to exploit because they are of sufficient grade and thickness for sub-level open stoping and full mechanizationmining.

The first block, Ramal Norte, has indicated resources of 82,461 tonnes grading 209.7 grams silver per tonne, 0.14% lead and 0.30% zinc, in addition to inferred resources of 24,523 tonnes at 161.90 grams silver, 0.10% lead and 0.31% zinc.

The second block, San Jose 75- metre level Central zone, has indicated resources of 65,542 tonnes grading 155.9 grams silver, 1.20% lead and 2.05% zinc, and inferred resources of 7,290 tonnes at 110.10 grams silver, 0.40% lead and 0.66% zinc.

The Santa Ana block has indicated resources of 208,332 tonnes at 192.30 grams silver, 0.80% lead and 1.31% zinc, and inferred resources tally 63,380 tonnes at 180.40 grams silver, 0.30% lead and 0.62% zinc.

Williams says the mining will focus on the Santa Ana block first, where the company has delineated blocks-within-blocks of 300 grams silver per tonne. He estimates that mining the Santa Ana block in its entirety will take at least 18 months at 500 tonnes per day.

The chief executive also noted that the mine came with good infrastructure, including a vertical shaft and a 3-km decline big enough to accommodate low-profile 20- tonne haulage trucks. It also has a good electrical supply, self-sufficient off the main grid, abundant water sources and administrative buildings.

Today’s strong silver price of about US$21.7 per oz. makes the mine look incredibly attractive, Williams says, noting that the mine was shut down in 2001 when silver was trading at no more than US$5 per oz. He forecasts silver could reach as high as US$25 per oz. by the end of the year, but predicts a correction, possibly before then, will bring it back to the US$18- US$20 per range.

And he’s bullish about demand. “Institutional and retail investors in the U.K. are waking up to the fact that silver is becoming a very, very important mineral and see the price is still relatively undervalued when you consider the historical ratio between gold and silver prices. Historically that ratio held at 35-to-1. Now it’s twice that, which means that for one ounce of gold you’d get 70 oz. of silver. I believe in gold as well, but you have to be realistic about the ratio.”

Arian Silver currently has about US$2 million in cash after raising $3.5 million in a financing in January. “The financing was far easier than we had expected and was oversubscribed with Sprott taking up about half of it,” Williams says. “We had to give money back to the tune of about $500,000 due to further over-subscribing.”

At presstime in Toronto, Arian Silver’s shares were 29.5¢, trading within a 52-week range of 5¢-30¢. The company has a market cap of about $70.8 million with 240 million shares outstanding.