Gatos Silver shares rise on revised reserve at Cerro Los Gatos

Gatos Silver (TSX/NYSE: GATO) shares rose almost 10% Monday despite the release of a revised update that reduced reserves at its Cerro Los Gatos (CLG) mine in northern Mexico by more than one third.

The miner had previously announced an issue with its resources and reserve statement in January this year, noting that there were errors and overestimations in its 2020 technical report. Gatos said the revised reserve for contained metals is now lower by 32% for silver, 37% for zinc, 36% for lead and 35% for gold, after accounting for depletion.

The reduction is within the bottom half of the 30% to 50% range it had estimated originally, Gatos said in a news release.

An aerial view of the Los Gatos silver project taken in 2018. Credit: Sunshine Silver Mining.

The Denver, Colo.-based company, which is in the process of transitioning its executive office to Vancouver, has a 70% interest in CLG, located about 120 km south of Chihuahua City in the northern state of Chihuahua. Dowa Metals and Mining holds a 30% interest in the project.

The updated 2022 proven and probable reserve now comes to 6.1 million tonnes grading 244 grams silver per tonne, 4.48% zinc, 2.14% lead and 0.27 gram gold per tonne, containing 47.7 million oz. silver, 599.1 million lbs. zinc, 286.7 million lbs. lead and 51,800 oz. gold.

In the 2020 technical report, total reserves were estimated at 9.6 million tonnes grading 306 grams silver per tonne, 0.35 gram gold, 2.76% lead and 5.65% zinc.

Updated measured and indicated mineral resources – exclusive of reserves – are now 1.9 million tonnes grading 96 grams silver, 3.01% zinc, 1.56% lead and 0.19 gram gold.  

Inferred resources come to 2.1 million tonnes grading 113 grams silver, 4.3% zinc, 2.45% lead and 0.2 gram gold.

Material errors

Gatos said the reduced metal content in the reserve is due to updates to geological modelling, mining dilution and recovery assumptions, increased operating cost assumptions and decreased zinc plant recoveries.

The company said there were two “material and compounding errors” that resulted in an overestimation of grades in the 2020 technical report.

“First, the block model used in preparation of the reserve estimate was distorted during transfer between software packages resulting in reduced block dimensions and unestimated spaces between blocks,” it said in the news release.

“Second, an incorrect software parameter was used in calculating tonnes and grades within designed stope solids that resulted in any unestimated volume (both planned intentional dilution outside the estimated vein and unestimated spaces resulting from the distortion) being applied at the average mineralized grade instead of zero grade for dilution.”

Mine life

CLG’s mine life estimate for the underground operation has also been revised downwards, from 11 years in the 2020 report to six years.

Average annual production is estimated to be 7.4 million oz. silver at average all-in sustaining costs of US$7.06 per payable ounce. At US$22 per oz. silver, the new life-of-mine plan projects average annual cash flow of US$79 million after taxes until 2028. It pegs the project’s pre-tax net present value – at a 5% discount rate – at $491 million, with sustaining capital costs at $123.4 million.

However, Gatos also noted that despite the issues with the 2020 technical report, operations at CLG have performed well so far in 2022 because of underground drilling, geological mapping and sampling and short-term mine planning.

In addition, it said that recent exploration at CLG has shown the potential for an extended mine life.

Drilling at the North-West, Central and South-East zones returned 17 metres at 291 grams silver per tonne, 5.55% zinc, 6.14% lead and 1.01% copper.

Under the South-East zone, drilling returned 7.5 metres at 247 grams silver per tonne, 5.97% zinc and 3.58% lead in hole GA-SEE-477. Hole GA-SE-475 intercepted 16 metres at 135 grams silver per tonne and 1.34% copper.

Gatos CEO Dale Andres said in a comment that the company had taken the time to “rebuild” the 2022 mineral reserve and resource “from the ground up.”

“Now that we have the solid foundation with this updated reserve, we can return our attention towards realizing our district-scale upside with further exploration,” he said.

“Together with our partner Dowa Metals and Mining, our objectives are to extend the mine life beyond 2028 and to further develop the 103,000-hectare Los Gatos district.”

BMO Capital Markets analyst Ryan Thompson said in a note on Monday that in BMO’s modelling, CLG’s net asset value rose 27% to $215 million from $169 million due to higher-than-expected zinc production over the mine life and lower-than-expected operating costs.

“Following conversations with management, we are now modelling lower per tonne costs (in line with the assumptions in today’s release),” he said. “Costs on a per tonne basis are expected to be driven lower, mostly as a result of pushing higher throughput (2,900 tonnes per day), a new energy contract and other site-level initiatives (more long hole; paste plant).”

Thompson added that BMO sees the potential for conversion of the higher-grade portion of the inferred resource to add to mine life.

Gatos shares were trading at $4.12 on Monday afternoon in Toronto, in a 52-week window of $3.06 and $18.46. It has a market cap of $284 million.