Excellon swings back into profit as costs fall

Excellon Resources (TSX: EXN) is back in the black, after more than two years of losses.

The operator of the high-grade Platosa silver-lead-zinc mine in Mexico reported a second-quarter adjusted profit of US$900,000, or a cent per share, which is up from last year’s adjusted loss of US3¢ per share. Excellon last recorded a net profit of US$1.9 million — or US3¢ per share — in the first quarter of 2014.

The second-quarter adjusted earnings were ahead of the nil per share that Cormark analyst Graeme Jennings had projected, while cash flow per share of a cent met expectations. (The adjusted profit removed a US$5.4-million fair value adjustment loss on embedded derivatives and warrants.)

The return to profitability came from improved costs, Brendan Cahill, Excellon’s president and CEO, says in an interview. “We’ve seen mining costs per tonne go down 50% or more, since the beginning of 2015, or the end of 2014.”

Cost per tonne mined and milled fell from US$481 in the fourth quarter of 2014 to US$242 in the second quarter of 2016.

The portal at Excellon Resources’ Platosa silver-lead-zinc mine in Mexico. Credit: Excellon Resources.

The executive, a lawyer by training, also attributes costs to better management, lower input costs and a stronger U.S. dollar. “In Canada, people talk about the benefit of mining with the Canadian dollar when you’re selling in U.S. dollar. In Mexico, that is even more of a benefit, where the peso has gone from 11 or 10-to-1 a few years ago to almost 19-to-1 now.

“Mexico is a great place to operate,” Cahill says, adding that the slump in oil prices has resulted in cheaper electricity. “We’ve seen prices per kilowatt hour drop from 14 cents in late 2014 to under 6 cents per kilowatt hour … when you compare that to the price in Ontario right now, it’s pretty impressive.”

Located in northeastern Durango state, the underground Platosa mine produced more silver and lead in the June quarter, owing to improved grades and recoveries. Zinc output, however, fell on declining grades.

The company’s sole producing asset churned out 368,568 equivalent oz. silver, up 8% from the year earlier. This includes 227,826 oz. silver, 1.31 million lb. lead and 1.57 million lb. zinc. Grades averaged 536 grams silver per tonne, 5.1% lead and 6.3% zinc.

All-in sustaining costs per oz. silver dropped 21% to US$19.27, which included one-time costs associated with optimization at Platosa. Adjusted all-in sustaining costs were US$15.27, or more than US$2 below the average realized silver price.

The company processes all of the ore at its Miguel Auza mill, located 220 km away in Zacatecas, at 160 tonnes per day. The 650-tonne-per-day mill runs half of the time, with Excellon seeking opportunities for the extra capacity, Cahill notes.

From there, Excellon transports Platosa’s silver-lead concentrate and silver-zinc concentrate to the port of Manzanillo, where a subsidiary of the Trafigura Group buys them at market price.

Production costs should improve after the optimization plan to prevent water inflows, Cahill says, helping the firm increase underground production and development rates.

Excellon has mined Platosa since 2005, which contains several high-grade massive sulphide mantos, hosted by permeable limestone. It has used reactive pumping to control water inflows, after the mine workings extended below the local water table in 2007.

Since the process was time-consuming and expensive, the miner in late 2014 retained Quebec-based firms Hydro-Ressources and Technosub to assess alternative water management solutions. They designed a proactive plan — currently underway — to install a system to pump directly from water-bearing faults, so that water wouldn’t enter the mine.

Once Excellon implements the estimated US$6-million plan, it could dewater at 4 metres per month, Cahill says, adding that initial results indicate the drawdown would occur much faster.

The deepest parts of the mine are 160 metres below surface, or 20 metres below the water table, meaning it would take five months to dewater, Cahill says, and installing the pumping system could take 10 months.

The executive notes that the mineralization is ramp accessible, which makes mining at Platosa rather easy. “You need almost no ground support whatsoever. The rock is competent. As long as you can get rid of the major bottleneck, it is actually a beautiful little mine to work in. It’s obviously exceptionally high grade as well, which makes things easier.”

Without specifying when the optimization plan should wrap up, Cahill reveals by year-end “we should be in very good shape.”

In the first half of 2017, the executive forecasts production could double to 4 million equivalent oz. silver, while all-in sustaining costs would halve to US$9 per oz. silver, on an annualized basis.

With the optimization efforts well advanced at Platosa, Excellon initiated a 25,000-metre exploration program on Aug. 17.

Underground drilling in the Platosa mine.Credit: Excellon Resources.

“The exploration story is wide open, we really haven’t done any resource expansion drilling since 2011,” Cahill says, noting once Excellon realized Platosa had a 10-year mine life, it looked for other high-grade mantos mineralization and large source-style skarn deposits. (“Source” refers to carbonate replacement deposit [CRD] mineralization, as Platosa falls within the prolific Mexican CRD belt.)

In July 2012, the company discovered a source-style deposit, 1 km from Platosa. But the next year, the “market fell apart, and we ratcheted back on drilling since [first-half] 2013,” Cahill says.

Given that Platosa’s resource covers 56 hectares of the 21,000-hectare project, Cahill says the chances of finding more skarn and manto-style mineralization are high.

As part of its exploration plans, Excellon aims to locate massive sulphide targets and new mantos discoveries near the mine infrastructure, as well as explore and drill source targets, and generate regional targets by reinterpreting geophysical and drilling data.

Platosa’s resource estimate includes 428 million measured and indicated tonnes grading 1,252 equivalent grams silver per tonne for 17.2 million equivalent oz. silver. It has another 4,000 inferred tonnes grading 2,492 equivalent grams silver. Based on measured and indicated resources, Platosa has a six-year mine life.

The company has enough cash to optimize and explore Platosa, Cormark’s Jennings notes. It ended June with $4.5 million in cash and marketable securities, and closed an oversubscribed $15.2 million bought-deal in July.

Commenting on the recent financing, Cahill says it reflects the improved market and the company’s strong shareholders, which include Eric Sprott, Sprott Asset Management, Dundee Corp. and Blackrock Global Silver Miners ETF.

“It will be interesting to see what we do next. It will be exciting.”

Since releasing its financials on Aug. 8, Excellon shares are up 54% to close Aug. 12 at $2.19.

“We expect to see Excellon continue to be rerated, as precious metal prices strengthen and as operations improve throughout the year from drier conditions and higher grades,” Jennings says. As of Aug. 9, he had a “buy” and a $2 target price on the stock.