Mag finds moly at Cinco de Mayo and scopes potential at Valdecanas

Vancouver – A hostile, and eventually failed, takeover bid from its joint venture partner Fresnillo (FNLPF-O, FRES-L) in late 2008 is still having ramifications for Mag Silver (MAG-T, MVG-X).

To demonstrate the value of its exploration properties in the face of a takeover bid the company accelerated its 2009 exploration program dramatically and finished a year’s work in six months. Results from that work continue to come in, including assays showing a new molybdenum zone at Mag’s Cinco de Mayo property in Mexico.

And now a scoping study for the joint-ventured, high-grade Valdecanas silver property is increasing tension between the partners again: Mag released and supports the study while Fresnillo, which operates the project and co-commissioned the study, has publicly voiced doubts about its findings.

At Cinco de Mayo, a carbonate replacement deposit (CRD) target in northern Chihuahua state, recent drilling shows the Jose silver-lead-zinc manto zone may be accompanied by a molybdenum-gold zone 4 km to the southwest.

The new zone, dubbed the Pezo Seco zone, has seen five holes on 250-metre spacings. Two holes returned particularly promising intercepts. Hole 130 cut 75 metres grading 0.307% molybdenum, 0.07 gram gold per tonne, and 0.08% lead from just 6 metres downhole. The intercept included 34.5 metres carrying 0.637% moly. And hole 83 returned 56.8 metres grading 0.19% molybdenum, 0.11 gram gold, and 0.28% lead from 23 metres depth, including 17.4 metres averaging 0.47% moly.

For Mag president and CEO Dan MacInnes the Pezo Seco discovery demonstrates the strength of the Cinco de Mayo system: “The system continues to demonstrate its strength as a very high percentage of the recent holes, drilled in the 7.5-by-16 km area south and west of the Jose manto, have encountered new silver, gold, and molybdenum mineralization.”

The moly discovery is also significant because it may indicate that a causative intrusive centre is located nearby. Mag’s exploration efforts have been focused on finding such a centre – the company conducted a district-scale airborne geophysical survey searching for signs of a centre and has spent the last year drilling anomalies resulting from that survey.

Cinco de Mayo is part of the regional structure that hosts the largest CRDs in Mexico. At other major CRDs, molybdenum mineralization in silicified breccias, identical to the mineralization at Pezo Seco, lies above a positive magnetic anomaly representing the centre of the system. Pezo Seco was drilled because it correlates with a 2-by-3 km positive magnetic anomaly. Even though the signs are lining up, however, the company warns it still considers the project an early stage venture.

The main zone at Cinco de Mayo, the Jose manto, is developing into a thin, high-grade silver-lead-zinc deposit. The zone does not yet carry a defined resource but some of the better drill results of late include 2.7 metres grading 462 grams silver per tonne, 10.6% lead, and 13.6% zinc and 12.4 metres averaging 125 grams silver, 2.3% lead, and 4.95% zinc. The manto sits between 300 and 800 metres depth.

Mag owns Cinco de Mayo outright. The same cannot be said of its development-stage Valdecanas property, of which Mag owns 44% and Fresnillo owns 56%.

Valdecanas is part of the Fresnillo silver trend in Zacatecas state, Mexico, home to the world’s largest primary silver mine. The Fresnillo mine is in fact just 5 km from the Valdecanas vein and is owned and operated by Fresnillo. The new scoping study for Valdecanas did not, however, consider any possible synergies with the Fresnillo operation – the study treated Valdecanas as a stand-alone property. The reasons for that relate to Fresnillo’s takeover bid for Mag and the hostilities from that failed bid continue to disrupt the development progress at Valdecanas. But first, the scoping study results.

The study investigated the merits of a ramp-accessed underground mine producing 2,350 tonnes of ore daily through a combination of long-hole stoping and mechanized cut-and-fill. Ore would be processed through an on-site mill via conventional comminution and flotation.

Over a 12.6-year mine life the operation would churn through 2.28 million indicated tonnes grading 683 grams silver, 1.8 grams gold, 2.3% lead, and 3.7% zinc as well as 6.79 million inferred tonnes averaging 529 grams silver, 1.5 grams gold, 2% lead, and 3.1% zinc. Recoveries are expected to be good, averaging 91.4% for silver, 79.6% for gold, 95.6% for lead, and 77.8% for zinc. Each year the operation would produce, on average, almost 14 million oz. silver.

To develop the mine is expected to cost US$217 million. To produce each ounce of silver is expected to cost US$2.56, net of byproduct credits and including transport, treatment, and marketing charges. Over the mine’s lifespan it would produce 176.4 million ounces of silver.

The study used several metal price scenarios in its valuations. In the base case scenario, which used US$10.59 per oz. silver, US$681 per oz. gold, US56¢ per lb. lead, and US80¢ per lb. zinc, the project carries a pretax net present value (NPV) of US$671 million, using a 5% discount rate, and would produce a 38.5% internal rate of return (IRR), before taxes. The returns would pay back the capital investment in 3.5 years.

Using four-year average metal prices instead, which are US$12.32 per oz. silver, US$698 per oz. gold, US79¢ per lb. lead, and US$1.10 per lb. zinc, the pretax NPV rises to US$967 million, the pretax IRR climbs to 48.4%, and the payback period falls to 2.2 years. The cost to produce an ounce of silver also drops, to US$1.77, as a result of increased byproduct credits.

The fact that Valdecanas will never be developed as a stand-alone property is mentioned several times in the scoping study news release. In a quote MacInnes says the reader “is cautioned that the stand-alone plan is a hypothetical development scenario that is unlikely to occur in its current form and there may be considerable upside potential to the JV property and the Fresnillo regional operations from potential synergies [yet] to be considered…”

In terms of synergies, not only does Valdecanas sit 5 km away from the Fresnillo headframe but it is also only 1.5 km west of the Saucito vein, where preparations are underway to start sinking a 600-metre shaft and 2,200-metre declne. Fresnillo also owns the Saucito property.

Possible synergies aside from infrastructure and underground access include tax credits to which Fresnillo, as a Mexican company, has access as well as the option to amortize capital costs over a greater number of produced ounces.

MacInnes says those synergies will be explored in the next phase of development work, which will involve a pre-feasibility study. But first Mag and Fresnillo will likely have to stop disagreeing. When Mag released the scoping study, which it says was co-commissioned by Fresnillo, the Mexican major immediately sent out a news release claiming “concerns” with the study.

“The management of Fresnillo has concerns about a number of the assumptions on which the result of this scoping study are based,” read the release. “Whilst the Minera Juanicipio joint venture is providing Fresnillo with good results, the company remains cautious given uncertainties embedded in a scoping study.”

The statement alone is not particularly significant, or even strongly worded. But it comes against a backdrop of bickering that makes it resonate beyond its words.

In late 2008 Fresnillo launched a hostile takeover bid for Mag. As a Mag insider, by virtue of its 19.8% ownership stake, Fresnillo’s move triggered the need for an independent valuation of Mag, under Canadian securities laws. That process led quickly to an argument over just exactly what Fresnillo had planned for Valdecanas.

Mag alleged Fresnillo was withholding information about its intent to make Valdecanas part of its Fresnillo II development (which includes Saucito) and was limiting valuation documents to those pertaining specifically to the joint venture property, thereby reducing the value of the project and in turn the company.

Mag suspended the valuation process, which prompted Fresnillo to ask the Ontario Securities Commission (OSC) to force Mag to move along. But in an apparent repudiation of Fresnillo’s position, in June the OSC ordered Fresnillo to provide further documents. Two days later Fresnillo withdrew its takeover offer.

Bitter battles or not, the two companies are partners at Valdecanas and will have to resolve their differences in order to advance the project.

As of the end of June Mag had $35.4 million in the bank. The company’s share price gained 38¢ on news of the Cinco de Mayo moly find to reach $5.96. Mag has a 52-week trading range of $3.95 to $8 and has 49 million shares outstanding.