MAG Silver sings Juanicipio’s praises

In a conference call on June 14, MAG Silver’s (MAG-T, MVG-X) president and CEO, Dan MacInnis, enthusiastically described the company’s Juanicipio polymetallic project in Mexico as “bulletproof” and “one of — if not the — best undeveloped silver projects out there.”

MacInnis said “outstanding numbers” in an updated preliminary economic assessment (PEA) of the project by AMC Mining Consultants (Canada) include a base-case, after-tax internal rate of return (IRR) of 43% and an after-tax net present value, at a 5% discount rate, of US$1.23 billion. Payback is three years after plant start-up, although if spot prices were used, he said, the payback period would probably drop to two years.

“At MAG it’s always been about grade, and the economic numbers you see here today are stellar,” he told investors and shareholders tuning into the conference call. “This is a phenomenal deposit.”

MAG Silver owns 44% of the joint-venture project, and Fresnillo (FNLPF-O, FRES-L), the world’s largest primary silver producer and Mexico’s second-largest gold producer, holds the remaining 56% stake. Juanicipio is not far from Fresnillo’s Saucito mine.

The PEA estimated that life-of-mine payable production would reach 153 million oz. silver, 430,000 oz. gold, 361 million lb. lead and 584 million lb. zinc from producing lead, zinc and pyrite concentrates.

During the first six years of commercial production, the high-grade underground silver project in Zacatecas state could produce an average of 15.1 million payable oz. silver at a cash cost of US27¢ per oz. silver, net of by-product credits. MAG’s 44% annual share is 6.6 million oz.

Over the 14.8-year mine life, Juanicipio could produce an average of 10.3 million payable oz. silver a year at total cash costs of negative US$0.03 per oz. silver, net of by-product credits. MAG’s 44% annual share equates to 4.5 million oz. payable silver.

About 13.3 million tonnes are projected to be mined and processed during the mine’s lifespan, averaging 416 grams silver per tonne, 1.3 grams gold per tonne, 1.4% lead and 2.7% zinc.

The PEA’s base case employed a 5% discount rate and three-year trailing average metal prices to Dec. 3, 2011, of US$23.39 per oz. silver, US$1,257 per oz. gold, US95¢ per lb. lead and US91¢ per lb. zinc.

Initial capital cost, or capital expenditure, is expected at US$302 million over a three-and-a-half-year pre-development period. During the life of the mine, sustaining capital could add up to US$267 million, which would be funded from operations. Sustaining capital is planned to consist of waste development (footwall) and equipment replacement (US$234 million), major repairs to the mill (US$16 million) and major upgrades and replacement of surface infrastructure and equipment (US$16 million).

After deducting total capital and operating costs of US$2 billion from life-of-mine revenues of US$5 billion, MacInnis said the project results in a pre-tax cash margin of roughly US$3 billion, or 60%, which he argues significantly de-risks Juanicipio.

“Undoubtedly in this world of rampant capital and operating-cost inflation, the extraordinary IRR and cash margin significantly de-risks the Juanicipio project, when you compare that to other advanced projects,” he noted. “I defy you to find anyone else out there that has these kind of numbers . . . this project is extremely insensitive to both capex and operating expenditure. That was again confirmed in the original scoping study way back in 2009. We could demonstrate [even then] that it takes a lot to hurt this project . . . it drives home the point that it’s one of these projects that you just can’t knock down.”

The PEA was based on the resource estimate and model developed by Strathcona Mineral Services in November 2011. Total indicated resources stand at 5.7 million tonnes grading 702 grams silver per tonne, 1.9 grams gold, 2.2% lead and 4.2% zinc. Inferred resources add 4.3 million tonnes grading 513 grams silver, 1.4 grams gold, 1.6% lead and 3.0% zinc.

“MAG Silver has always been about grade,” MacInnis continued. “This is just a phenomenal deposit and a primary example of why high grade matters.”

The AMC study concluded that ramp access is the best and most cost-effective option for Juanicipio. Primary access to the mine is planned through a 14% decline. All ore and most of the waste would be hauled to surface using the decline.

The recommended mining method in the PEA is long-hole retreat stoping. Cemented paste fill from mill tailings would be used to fill most of the voids and development waste would be used as backfill.

Production is expected to average 880,000 tonnes per year over the first three and half years with mill feed from the Valdecanas and Desprendido veins. Once the Juanicipio vein is brought online, production could average 950,000 tonnes per year over a five-year period. For the final six years of mine life, production is anticipated to average 865,000 tonnes per year.

The processing plant has been designed to treat a nominal 850,000 tonnes per year of ore. Actual mill throughput could peak as high as 950,000 tonnes per year when the three veins — Valdecanas, Desprendido and Juanicipio — are all in production.

Combined lead and zinc concentrate recoveries for silver, gold, lead and zinc is projected at 88%, 72%, 94% and 95%, respectively. Test results indicate that the silver grade in the lead concentrate would average almost 11,000 grams silver per tonne with minimal penalty elements.