Equity Silver on profit path

Probably more so in mining than any other industry timing is everything. Even the best-conceived production plans are subject to unpredictable changes in metal markets — something that Equity Silver Mines learned first hand when it stepped up to bat for the first time in 1980.

Shortly after production began, the Hunt brothers threw Equity a curve which, at least graphically, represented more of a free-fall into oblivion from which Equity has only just started to recover. The Hunts lost control of the silver market they had almost cornered and artificially-inflated prices for silver plummeted. Home base was still silver-plated but it was worth substantially less and well below Equity’s cost of production.

The company had also incurred a large debt, much of it relating to cost overruns in the leach plant which was designed to remove arsenic and antimony from the Southern Tail orebody. Although only trace amounts existed, their appearance meant that much of Equity’s concentrate production was unpalatable to Japanese smelters. So not surprisingly project financing was conditional upon leach plant construction.

Ironically the $58-million plant was not really needed. Shortly after it reached design capacity, market acceptance for unleached concentrate grew; and when mining shifted to the Main zone orebody the level of arsenic and antimony dropped significantly.

The plant shut down three years ago although part of the facility is being used to upgrade molybdic trioxide on a toll basis from Placer Development’s Endako mine. But essentially, the leach plant is on a care-and-maintenance basis with part of the pressure filter area being used to provide additional watering capacity for the concentrator. The upgraded material is used in specialty products which are growing to be an important part of Placer’s business activities in the base metals sector. Placer is the controlling shareholder in Equity Silver with 59.6% of its common stock.

Equity has struggled to reduce costs from its breakeven point of $6(US) per oz at start-up to about $3.15 today. And with silver prices about $2 stronger than the 1986 average, things haven’t looked so good in years. By year-end, the company should be completely debt free and the higher silver prices will be reflected directly on its bottom line. Forecast production in 1987 is about 5.5 million oz so the improvement should have a major impact on profitability, approximately $15 million(C) if prices hold firm.

Things actually started looking better for Equity in 1984 when the company eliminated most of its interest expense by repaying all long-term debt. As a result of this debt- restructuring program, Equity managed to generate a profit of $230,000 in 1986 compared to a $4.8-million loss the previous year. The company did this by arranging a silver sale agreement with Placer which generated $69.5 million to Equity against future delivery of 7,235,000 oz silver. In addition, Equity realized $28.6 million from a public issue of convertible preferred shares which was also applied to reducing bank debt.

In April, Equity sold Placer 6.6 million Class B common shares at $5.62 per share, proceeds from which were used to purchase 4,985,000 oz silver at $7.40(C) for delivery under its sales agreement with Placer. The remaining 750,000 oz of silver will be delivered this year. The Class B shares created a contributed surplus of more than $37 million which allowed payment of dividends on the convertible preferred shares. Major operational changes

Besides the debt restructuring program, a number of major operational changes were instituted at the mine site. Placer, the parent company, has long advocated the philosophy that sometimes you have to spend money to make money. In the case of Equity, a decision was made to expand mill capacity by 89% in 1986 at a cost of $11 million. The work included the installation of an extra rod and ball mill plus the addition of more flotation capacity.

Design capacity was exceeded almost immediately after completion and the production cost of $3.68(US) per oz declined to $3.15. This allowed a 22% reduction in cutoff grade which effectively converted 6.5 million tons of previously uneconomic material to ore. The plant is currently processing about 11,000 tonnes per day but it has achieved over 12,000 tonnes depending on rock hardness. In general the work index is about 22. Approximately 130 tonnes of concentrate are produced each day averaging 3,500 g silver per tonne, 18%-19% copper and 18-20 g gold. Gold production this year should be around 37,000 oz. Silver accounts for approximately 60% of concentrate revenue, gold about 20%-30%, and the rest copper. 006 Underground potential 005

The mining rate in the Main pit is about 43,000 tonnes per day which includes more than 10,000 tonnes of ore. Mine manager D. W. (Dick) Zandee feels “Equity has gone the route on open pit reserves,” suggesting the potential to extend mine life on this basis is somewhat limited. Instead, the company is examining the underground potential which might be viable after open pit reserves are exhausted in five years. Holes have been drilled beneath the Main zone which doesn’t extend as deep as expected. More success was achieved drilling beneath the Southern Tail where mineralization was confirmed to depth. Last year the underground potential was assessed at one million tonnes which they would like to increase to 4-6 million tonnes.

The Main pit, which is scheduled for completion in 1990, will be mined simultaneously with the Waterline zone beginning in 1988. The latter will require at least $6(US) silver to justify the stripping ratio, says Mr Zandee. Drilling to the north of the Waterline has partially defined a copper-zinc- gold mineralized structure which has been traced for over 4,000 ft.

On property exploration expenditures this year will total about $575,000. The company has also taken a much more aggressive approach to exploring off property and five new properties have been staked in the region. Equity’s new general manager for exploration, R. Terry Heard, has picked up a number of impressive gold properties elsewhere in the country, one near the Canamax Ketza River project in the Yukon and another in the Pickle Lake area of Ontario which he feels has some real production potential.

He told The Northern Miner that most of the $5 million in flow- through funding organized in February had been committed, adding the company has looked at 125 separate properties.

Peter Neilans, mine superintendent, said a higher cutoff grade would be required for underground reserves and he estimated a reasonable “ball park figure” would be around 150 g silver equivalent, over double the present mine cutoff. Mill throughput would be lower, of course, with the underground mining method, assuming it was viable.

Because Main zone recoveries were lower than the Southern Tail, Equity installed a scavenger circuit which is not yet operating at full capacity, said Philip MacIntyre, mill superintendent. He added that the real test will come in the next month. The circuit is designed to capture 30% of the available gold in tailings. Silver is uneconomic to recover because of reagent costs.

Environmental controls at the mine site have been very costly and they were largely unpredicted at feasibility. About $1.2 million is spent each year to collect and process acid water. Initially, it was thought that the microbic link necessary for acid generation was not sustainable at that latitude which wasn’t the case. All runoff from pyritic rock must be collected and tailings ponds have to be constructed of non-acid-generating rock. Acidity readings are taken at 15 different sites and Equity may have to monitor acid generation after mine closure although the exact program has yet to be worked out.

Equity Silver is somewhat of an anomaly in British Columbia, the most unionized province in the country. Everybody at the mine is on staff and with no trade demarcation workers are extremely productive. They are also very honest. When inventory was taken last year in the
company’s unsupervised tool crib, there was about $3,500 worth of equipment missing. But that was over a 7-year period.

The workforce was handpicked and employee involvement is a key ingredient in policy decisions. Elmer Borneman, employee relations superintendent, has perfected principals developed at Kidd Creek mines in Timmins and applied them to Equity with considerable success. Placer Development’s Gibraltar mine is the company’s only unionized operation in North America.