Mexican Silver Mines to earn in to Iamgold’s La Arena

Vancouver – Less than two years into its corporate life Mexican Silver Mines (MSM-V) wants to get into production and so is acquiring a private company with earn-in rights to the development-stage La Arena gold-copper project in Peru.

Iamgold (IMG-T) took ownership of La Arena in its 2006 takeover of Cambior. The major soon decided to divest the development project and has been looking for a good deal for more than a year.

As for Mexican Silver, until late last year it was focused on exploring its three exploration-stage projects in northeast Mexico. When the economic downturn hit, the junior reduced its exploration plans and turned its attention to acquisition opportunities: “In today’s market it is cheaper to buy than to explore and drill for production and reserves,” the company said.

At the end of the November Mexican Silver had $7 million on hand and was looking for a place to spend it. It seems La Arena will be that place.

Iamgold worked out an earn-in deal whereby Rio Alto, a privately-owned company incorporated just a year ago, can earn up to 38.7% of La Arena by investing US$30 million to develop a gold mine. Rio Alto can then acquire the remaining 61.3% of La Arena for payments totalling US$48.55 million over two years. Iamgold also gets a 5.5% interest in Rio Alto.

And Mexican Silver just signed a letter of intent to merge with Rio Alto. Specifically, Rio Alto shareholders will get one Mexican Silver share for each Rio Alto share and Rio Alto will become a wholly-owned subsidiary.

Before the all-share deal happens, Rio Alto has to raise $3 million in a private placement comprising 15 million shares at 20¢ a piece. In addition, Mexican Silver will buy 5 million Rio Alto shares for $1 million.

La Arena is in northern Peru, 480 km northwest of Lima in the Huamachuco district. According to a recent technical report on La Arena, the Huamachuco district “displays a particularly rich endowment of minerals (Cu-Au-Ag) occurring in porphyry and epithermal settings…”

Mineralization was discovered at La Arena in 1994 and Cambior (now part of Iamgold) staked the property. By 2006 the staked project covered 20,745 hectares and Cambior had delineated a deposit called La Arena as well as several other porphyry or epithermal targets.

The La Arena deposit occurs as gold-silver mineralization within a Mesozoic quartzite cap to a Tertiary porphyry gold-copper intrusion. All told the site has seen 351 drill holes totalling almost 60,000 metres and 60 trenches, though there’s been no exploration activity at the site since mid-2007.

The technical report commissioned by Rio Alto, which was completed in mid-2008, pegged sulphide resources at 226 million indicated tonnes grading 0.27 gram gold per tonne and 0.36% copper and 170 million inferred tonnes averaging 0.22 gram gold and 0.32% copper. Indicated oxide resources add 55 million tonnes of 0.49 gram gold; inferred oxide resources contribute 1.7 million tonnes grading 0.28 gram gold and 0.35 gram silver per tonne.

Rio Alto wants to first develop an inexpensive dump leach operation processing 24,000 tonnes of oxide ore daily. In four years the dump leach operation is expected to process 30.2 million tonnes of ore and produce 385,000 oz. gold, assuming 65% gold recovery.

Cash flow from the dump leach operation would then be used to develop a 24,000-tonne-per-day flotation plant to process the primary and secondary sulphide ore as well as any copper-rich oxide material. Over 17 years the flotation plant should produce 1.1 billion lbs. copper and 667,000 oz. gold.

The capital cost to develop both operations is US$268 million. The project should create a 25% internal rate of return and carries an after-tax net present value of US$195 million, using an 8% discount. Payback is achieved in 37 months. The financial model used US$2 per lb. copper, US$760 per oz. gold, and US$12 per oz. silver, and assumed 100% equity financing.

The La Arena operation would then be expected to produce an ounce of gold for US$28 and pound of copper for 85¢.

On the news Mexican Silver’s share price gained 4¢ to close at 20¢. The company has a 52-week trading range of 6.5¢ to 65¢ and has 40 million shares outstanding.