INVESTMENT COMMENTARY — Weak junior resource market takes shine off Minefinders

Despite an updated resource estimate and a positive scoping study, the share price of Minefinders (MFL-T) has not kept step with the improving fundamentals of its Dolores gold-silver project in west-central Mexico, says Victor Flores, mining analyst with HSBC Securities. He explains that this is an unfortunate sign of the current state of the market for junior mining equities.

Flores recommends Minefinders as a buy with a target of $3.75. The stock has been trading at about $1.15 in a 52-week range of $2.65-80 cents. Minefinders has US$1.5 million in cash and 14.1 million shares outstanding, or 15.8 million on a fully diluted basis.

Flores’ target price assumes the company’s in situ ounces are worth about US$10 per oz. Currently, Minefinders is trading for about US$3 per resource ounce.

“As recently as 1997, the average resource ounce in Mexico was trading at US$20 per oz.,” Flores writes. “While there is no doubt the market has softened somewhat, it is our opinion that an above-average asset of the quality of Dolores should fetch that much in the market price. Minefinders remains an extremely undervalued and attractive situation.”

Comprising more than 400 sq. km, the Dolores project is set in rugged terrain in the Sierra Madre Occidental mountains in Chihuahua state, near the border with Sonora. Access is limited to a small local landing strip, though it can also be reached by a 5.5-hour drive along 87 km of rough gravel logging roads from the town of Madera (pop. 35,000).

The project centres on a past-producing gold mining camp, from which about 300,000 oz. gold and 14 million oz. silver were produced between 1906 and 1929 from narrow, underground, high-grade veins. Fire destroyed the vat leach cyanide mill in 1929, ending all mining and exploration. By 1993, when Minefinders acquired an option to earn a 100% interest, the property had undergone little modern exploration and had never been drilled.

Surface mapping and geochemical sampling revealed a north-northwesterly trending zone of mineralization extending for at least 4,000 metres along strike, with an envelope of at least 60 metres wide. The gold-silver mineralization is related to the emplacement of north-southerly trending latite dykes along the contact between a complex sequence of interbedded andesites belonging to the Lower Sierra Madre Group and an agglomerate latite tuff of the Upper Sierra Madre.

The main trend is a low-sulphide, epithermal, quartz-adularia-sericite system structurally controlled by northwesterly trending, high-angle shear zones. The mineralization is associated with silicified, brecciated and stockwork-veined volcanics. Gold occurs as fine grains in quartz, as auriferous pyrite plating along the edges of pyrite grains, and as electrum. The silver occurs as argentite, polybasite and as silver sulfosalt assemblages.

The main trend is divided into four zones along strike: the North, the central Chabacan and Hondo, and the Target.

Since drilling began in September 1996, about 32,000 metres of core in 136 holes and 23,500 metres of reverse-circulation (RC) in 115 holes have been completed. Included in this total are 56 holes drilled by Echo Bay Mines (ECO-T) in 1997 during a short-lived period in which it held an option to earn a 60% interest. Minefinders re-acquired a 100% interest by paying $4 million cash and surrendering 1.25 million of its shares to Echo Bay. That transaction increased to 25% Echo Bay’s ownership of Minefinders.

Drilling to date has tested 2,700 metres of strike, most (185 holes) of which focused on a 1,900-metre length of the trend that includes the Chabacan and Hondo zones.

Flores says much of the drilling in the Chabacan Canyon zone was completed on 25-metre centres along a strike length of 300 metres, while all 1,900 metres of strike have been drilled on at least 50-metre centres to a vertical depth of 200 metres.

The latest resource calculation conducted on the company’s behalf by MRDI Canada, a division of H.A. Simons, represents an increase of 32.3% for gold and 41.7% for silver, compared with the resource figures announced in early June. Using the model of an inverse distance to the fifth (ID5), MRDI estimated an indicated and inferred resource of 61 million tonnes grading 0.83 gram gold and 44.05 grams silver per tonne, equivalent to 1.6 million countained ounces gold and 86.3 million contained ounces silver. The revised 3-D block model limits the influence of high-grade intercepts by capping gold at 4 grams and silver at 220 grams, with a cutoff grade of 0.5 gram gold-equivalent.

MRDI used several modeling techniques to calculate the resource (including a model capped at 10.2 grams gold and 447 grams silver) but concluded that the ID5 model capped at lower-grades best represented the deposit, based on the exploration data available. There are still some lingering doubts about the appropriate capping grade. “Although the final verdict on the appropriate capping grade will probably depend on additional drilling, it is apparent that this deposit has a high-grade core that will lead to improved economics,” writes Flores.

The most significant change from the June resource estimate is that data from infill drilling have given MRDI the confidence to extend the mineralization to surface. Flores says Minefinders had carried out a fair amount of surface sampling that was not included in the original resource data set.

An initial scoping study on the Dolores project was prepared by MRDI and shows the economic potential for an open-pit, heap-leach mine. Using a 0.4-gram gold-equivalent cutoff, MRDI estimates an open-pit resource of 47.3 million tonnes grading 0.79 gram gold and 47.8 grams silver per tonne, based on a capping of the higher-grade at 10.2 grams gold and 447 grams silver. The stripping ratio is estimated at 2.9-to-1.

The project would produce an annual average of 71,226 oz. gold and 3.3 million oz. silver, or 125,244 oz. gold-equivalent, over a mine life of 14 years at a cash cost of US$177 per gold-equivalent ounce, or US$6.61 per tonne of ore.

Ore would be mined at the daily rate of 10,000 tonnes (3.6 million tonnes annually), initially from two separate starter pits: a high-grade gold pit to the north and a high-grade silver pit to the south. Mining would then alternate between the two pits in order to maintain a smooth production level and avoid periods of excessive stripping.

The starter pits would be separated by Chabacan Canyon in the early years but would coalesce into one pit as mining lowers the pits below the current level of the canyon.

The ore would be hauled by trucks to a primary crusher, then fed by apron feeders to the secondary cone and tertiary shorthead crushers. MRDI assumes the lower-grade ore (averaging 0.5 gram gold and 29.4 grams silver) will have to be crushed to 70% passing 9.5 mm. The higher-grade material averaging 1.42 grams gold and 85.3 grams silver would be processed separately and routed to a 5,000-tonne-per-day grinding circuit, with 80% passing 200 mesh. This material would be thickened to 75% solids and agglomerated with cement and NaCN before being mixed with the lower-grade ore and placed on the leach pads.

Gold and silver would be recovered in a standard Merrill-Crowe circuit. Recovery rates for the higher-grade ore are assumed to be 87% for gold and 71% for silver, whereas the lower-grade ore would yield a projected 75% for gold and 50% for silver. Further metallurgical tests will be necessary to determine ultimate recoveries.

Capital costs for the project are estimated to total US$80.5 million, which includes US$14.7 million in indirect costs and a 20% contingency. The internal rate-of-return is expected to be 11.4%, based on a gold price of US$325 per oz. and a silver price of US$5.50 per oz.

MRDI presented a second scenario, based on a 0.5 gram gold-equivalent cutoff. The open-pit model contains a resource of 38 million tonnes grading 0.93 gram gold and 55.2 grams silver at a stripping ratio of 3.8-to-1. On this basis, the project would produce an annual average of 85,931 o
z. gold and 4 million oz. silver, or 151,193 oz. gold-equivalent, over an 11-year life. Cash costs average US$169 per oz. gold-equivalent, or US$7.39 per tonne.

The total capital cost is projected to be US$80.7 million, with an internal rate-of-return predicted to be 13.5%.

The resource at Dolores still requires additional drilling. Minefinders has indicated that an additional 16,000 metres of drilling are required to move most of the indicated material in the two starter pit areas into the measured category.

States Flores: “Data from the infill drilling will be critical in order to determine the influence of individual drill intercepts, whether there are other geological controls on the distribution of the mineralization in the ore zone, and the extent to which high assays are skewing the overall grade.

“Additional geostatistical work will also be required to finalize the reserve calculation. MRDI not only identified that there are two distinct populations (high- and low-grade), but that there is uneven distribution of gold and silver assays. For example, the semi-variograms indicate that there is fairly good continuity of the low-grade gold population, but that there is a high nugget effect and much less certainty of continuity among the high-grade material. Based on a lognormal plot of the frequency distribution of the high-grade population, there appears to be much better continuity of silver than gold.”

Another concern Flores raises is whether there is a significant difference between RC and core drilling. “Based on the (relatively) limited data set, the RC assays for gold were 33% higher than core assays, while silver core assays were 42% higher than RC assays.”

Flores says Minefinders’ strategy is to utilize its remaining cash resources to add value to the ounces already identified at Dolores. In the short-term, Flores expects the company will have to raise additional funds to offset its depleting cash position. Over the longer-term, Flores says, Minefinders might have to seek a partner in order to advance the property into development.