First Majestic improves Del Toro’s prospects

First Majestic Silver (FR-T) is busy building its Del Toro silver project, which is set to become its fifth producing silver mine in Mexico with initial production expected by year end.

Recent metallurgical tests have improved the recoveries and economics of Del Toro in Zacatecas state, leading to the company updating the project’s resource estimate and mine plan.

On a silver-equivalent basis, Del Toro, consisting of silver-lead-zinc deposits, contains 76.5 million oz. from 8.6 million tonnes in measured and indicated. It has another 81.8 million oz. from 7.5 million tonnes in inferred.

Compared to the previous estimate, released in May, tonnage in the measured and indicated category fell by 9% and inferred tonnes dropped by 19%. This reduction resulted from the exclusion of Del Toro’s large San Juan zinc deposit until more metallurgical work can be done. 

Despite the slightly fewer tonnes, First Majestic reported an increase in silver resources thanks to better grades. Resources in measured and indicated grew 9% to 48.4 million oz. as the average grade climbed 20% to 175 grams per tonne silver. Inferred resources were expanded by 14% to 41.9 million oz. averaging 174 grams silver, representing a 40% improvement in grade.

The new resource estimate is based on exploration and development work completed up until the end of June, which includes over 45,000 metres of diamond drilling and 9,850 metres of underground development. The 13 holes that were completed after June were not included in the resource. First Majestic still has six drills probing the property, and is working on expanding its dual circuit processing mill from 1,000 tonnes per day to 4,000 tonnes, which it recently received the final permit to do so.

Production is slated to start later this year and will gradually reach full capacity during the third ramp-up phase, scheduled to begin in 2014. At which time, the mine should deliver around 7.2 million silver-equivalent oz., representing 5.4 million oz. silver, 23 million lbs. lead and 25.2 million lbs. zinc a year.

To swing Del Toro into full production, the miner estimates it has a remaining US$100 million in capital requirements. An expense it says it could fund with its current and future cash flows and cash on hand. At the end of June, the debt-free silver producer had a cash cushion of US$70.9 million.

Thanks primarily to the improved silver grades and zinc recoveries, which moved from 40% to 57%, the project also appears more economic. Using a 5% discount rate and US$25 silver price, the post net present value increased by 30% to US$191 million, and the internal rate of return went from 43% to 49%, compared to the May prefeasibility study. Payback is expected in three and half years.

Total operating costs at Del Toro are projected at US$35 per tonne, and cash costs at US$7.05 per oz. silver on a by-product basis over the life of mine. Based on the current measured and indicated resource, the mine should last for 6.5 years.

The other silver mines First Majestic operates in Mexico include: La Encantada, La Parrilla, San Martin and La Guitarra. The latter, it scooped up from its recent acquisition of Silvermex Resources.

First Majestic is guiding production of 9.1-­9.7 million silver-equivalent oz., containing roughly 8.3-9.1 million silver oz. in 2012. 

It hopes to roughly double its annual silver output to 16 million oz. by 2014.

First Majestic recently closed at $19.44, within a 52-week range of $12.26-$24.55.