Mag Silver Still Battling Fresnillo

VANCOUVER — Mag Silver (MAG-T, MVG-X) CEO Dan MacInnis still contends that a significantly slimmed- down resource estimate for the Valdecanas silver vein system on the company’s 44%-owned Juanicipio joint-venture property in Mexico is hard to reconcile with a duelling Valdecanas resource estimate recently produced by Fresnillo (FNLPF-O, FRES-L), the owner of the remaining 56% stake in Juanicipio. Consulting firm Scott Wilson RPA had to recalculate Mag’s resource estimate following a clerical error for which it was responsible.

MacInnis has stated he believes Fresnillo may be trying to undervalue the Juanicipio asset as the two companies lock horns in an increasingly bitter takeover attempt that saw Fresnillo offer US$4.54 per Mag share in early December. And in a recent interview, he maintains that Fresnillo continues to stymie Mag’s attempts to value its assets as part of that takeover bid — efforts which have been suspended as a result.

MacInnis says the suspension will remain in effect until Mag receives information it has requested so it can not only explain discrepancies between the two companies’ resource estimates, but more importantly, he says, value Juanicipio as per Fresnillo’s ongoing development plans for the property.

On Feb. 24, both Fresnillo and Mag announced two very different resource estimates for the Valdecanas vein system, which lies less than 10 km west of Fresnillo’s namesake mine. Along with significant gold and base metal credits, Mag pegged Valdecanas at 3.88 million indicated tonnes grading 972 grams silver per tonne for 121 million contained ounces silver. It put inferred resources at 8.24 million tonnes grading 549 grams silver for 145 million oz.

Meanwhile Fresnillo, presenting in February at the BMO Global Metals and Mining conference in Hollywood, Fla., released its own resource estimate for Valdecanas — one that was significantly lighter in silver ounces. According to Mag, Fresnillo estimated the indicated resource at Valdecanas at 2.14 million tonnes grading 783 grams silver for 53.9 million contained ounces silver, plus 6.63 million inferred tonnes grading 601 grams silver for 128.1 million oz.

With Mag’s estimate showing 125% more contained ounces silver in the indicated category than Fresnillo’s, 54% more in the inferred category and grades 24% and 12% higher, respectively, in the indicated and inferred categories, the difference was then staggering enough that MacInnis made it clear what he thought Fresnillo might be attempting.

“Mag is deeply concerned that this appears to be yet another facet of Fresnillo’s strategy to keep Mag and its shareholders in the dark about the true value of the Juanicipio project, while Fresnillo attempts to acquire control of Mag through a lowball take-under offer that is not in any way reflective of the true value of Mag’s world-class assets,” MacInnis stated.

But since then, a transposing error came to light, requiring the recalculation of Mag’s Valdecanas resource estimate — and the differences between it and Fresnillo’s are largely diminished.

Mag’s revised resource estimate pegs Valdecanas at 2.95 million indicated tonnes grading 879 grams silver for 83 million oz. silver, plus 7.21 million inferred tonnes grading 458 grams silver for 106 million oz. silver. In the indicated category, the silver grade reported by Mag is now 12% higher than Fresnillo’s, not 24%, and the contained silver is 54% higher, not 125%. As for the inferred category, the silver grade is 24% lower, not the previously reported 9%, and contained ounces silver are in fact 17.3% lower than Fresnillo’s, not 13% higher.

Despite the heavily revised numbers, Mag said in a release that “although the two estimates (Fresnillo and Mag’s) are closer as a result of the restatement, significant discrepancies continue to exist. . . particularly for the indicated portion of the resource.”

However, now that the resource estimates aren’t as drastically different, MacInnis agrees the discrepancies might in fact stem from assumptions underlying each company’s resource estimate models, such as what qualifies as an inferred resource versus an indicated one.

“Yep, it could be as simple as that,” MacInnis says. “It could be a different search ellipse or radius. It could be more or less reliability on geological continuity — all kinds of different parameters there. . . We’re not even sure if (Fresnillo’s resource estimate) includes part of the hangingwall vein or others. Who knows? We just don’t have enough detail to know whether (we’re) comparing apples and oranges.”

That lack of details, MacInnis argues, is part of a larger issue between the two companies as Fresnillo pursues a takeover of Mag. “It’s more than just the resource estimate,” MacInnis says.

When Fresnillo announced its offer of US$4.54 per Mag share in December, it triggered an asset valuation process required as part of Ontario Securities Commission (OSC) regulations pertaining to takeovers by insiders. Fresnillo has close to a 20% stake in Mag.

According to those regulations, a valuation of the company being taken over must be completed at the cost of the would-be acquirer before it can send a circular to shareholders detailing its bid.

After Fresnillo announced its takeover intentions, Mag began the valuation in December and as part of the process, sent an independent consultant to visit Juanicipio in early January.

From that visit, Mag says that it was clear Fresnillo was beginning to ramp up activity in anticipation of developing Juanicipio, “including construction of a headframe, significant underground development and a box cut heading straight for the Juanicipio joint-venture property.”

Mag says the consultant then requested Fresnillo provide engineering, geological and development information on its plans for Juanicipio, but when its independent valuation committee said Fresnillo was not providing Mag with that data, Mag told the OSC that it was suspending the process until Fresnillo gave it the information it wanted.

“To proceed in these circumstances would require Mag’s minority shareholders to decide whether to sell their Mag shares without the ability to assess the fair value of their company and, in the independent committee’s view, would be abusive of the Canadian capital markets,” Derek White, chairman of Mag’s independent committee on the valuation and a director of the company, said in a statement.

In response, Fresnillo called the suspension an “inappropriate delaying tactic” and appealed to the OSC, a move that MacInnis says Mag followed by submitting its own arguments to the regulator, which should make a decision within a couple of weeks.

At issue is just what Fresnillo plans for the Juanicipio joint venture and, therefore, how much the joint venture is worth to Mag. MacInnis says the committee wasn’t willing to make a “guesstimate” based on an inadequate understanding about what Fresnillo intends to do at Juanicipio. He notes that Fresnillo has stated publicly it intends to develop the Valdecanas veins as part of a proposed Fresnillo II expansion project, which would exploit a series of vein targets to the west and southwest of its existing Fresnillo mine.

“Yet they don’t make any of that information available to us or our shareholders — as to production schedules, mine design and planning, discounted cash flow — all that stuff that you would normally like to have that would affect your net present value,” MacInnis says.

On its website, Fresnillo says the Fresnillo II project would be roughly the same size as the existing Fresnillo mine and would double silver production there “within the next ten years.”

Fresnillo writes that the plan is for an underground mine with a 15-year mine life that would include developing Valdecanas; ongoing work “currently includes land acquisition, environmental studies, permitting, engineering studies and underground access.”

To that end, the c
ompany has purchased 18 sq. km of land on which to build the mine and it is progressing permitting for a power line.

“Basic engineering studies are complete and detailed engineering plans to build the surface facilities are scheduled to start during 2008,” Fresnillo writes.

At presstime, Fresnillo had not returned calls for an interview.