MAG Silver updates Juanicipio PEA

In a conference call earlier today MAG Silver’s (MAG-T, MVG-N, MVG-X) president and chief executive, Dan MacInnis, enthusiastically described the company’s Juanicipio project in Mexico as “bullet-proof” and “one of—if not the—best undeveloped silver projects out there.”

MacInnis said “outstanding numbers” in an updated preliminary economic assessment of the project by AMC Mining Consultants Canada include a base case after-tax internal rate of return of 43% and an after-tax net present value, at a 5% discount rate, of US$1.23 billion. Payback is three years after the plant start-up, although if spot prices were used, he said, the payback period would probably drop to about 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 (FRES-L), which claims to be the world’s largest primary silver producer and Mexico’s second-largest gold producer, holds the remaining 56% stake. (The Juanicipio project is not far from Fresnillo’s Saucito mine.)

The PEA estimated that life-of-mine payable production will reach 153 million ounces of silver, 430,000 ounces of gold, 361 million pounds of lead and 584 million pounds of zinc from the production of lead, zinc and pyrite concentrates.

Over the first six years of commercial production, the high-grade underground silver project in Zacatecas state will produce an average of 15.1 million payable ounces of silver at a cash cost of US$0.27 per oz. silver, net of byproduct credits. MAG’s 44% annual share is 6.6 million ounces.

Over the 14.8-year mine life, Juanicipio will produce an average of 10.3 million payable ounces of 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 ounces of payable silver.

About 13.3 million tonnes will be mined and processed during the course of 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, $0.95 per lb. lead and $0.91 per lb. zinc

Initial capital costs, or capex, will come in at US$302 million over the pre-development period of three and a half years. During the life of the mine, sustaining capital will add up to about US$267 million, which will be funded from operations. Sustaining capital will consist of waste development (footwall) and the replacement of equipment (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 about US$2 billion from life-of-mine revenues of about 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 opex. That was again confirmed in the original scoping study way back when, 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 and primary access to the mine will be via a 14% decline to the top of the mining area. All ore and most of the waste will be hauled to surface via 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 will average 880,000 tonnes per year over the first three and half years with mill feed from the Valdecañas and Desprendido veins. Once the Juanicipio vein is brought on-line, production will average 950,000 tonnes per year over a five-year period. For the final full six years of mine life, production will 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 will peak as high as 950,000 tonnes per year when the three veins—Valdecañas, Desprendido and Juanicipio—are all in production.

Combined lead and zinc concentrate recoveries for silver, gold, lead and zinc will be 88%, 72%, 94% and 95%, respectively. Current test results indicate that the silver grade in the lead concentrate will average almost 11,000 grams silver per tonne with minimal penalty elements.

In addition, AMC has incorporated a circuit for the flotation of the zinc concentrate tails to create a pyrite concentrate, with projected incremental silver and gold recoveries of 6% and 19%, respectively, resulting in overall silver and gold recoveries of 94% and 91% respectively, the company said.

News of the updated PEA failed to lift MAG Silver’s share price in Toronto, where it ended the trading session down 3.05% or 28¢ at $8.89 per share. Over the last 52 weeks the Vancouver-based company has traded within a range of $6.17 and $11.46. The company has about 55.7 million shares outstanding.