PEA outlines Scorpio’s mine-expansion plans

VANCOUVER — Scorpio Mining (SPM-T) has faced more than a few challenges over the last year, starting with the need to downsize the resource at its Nuestra Senora deposit when mining revealed more geologic variations than expected. Soon after, the company’s CEO abruptly abandoned ship.

But Scorpio persevered, never losing sight of its goal to grow its Mexican mine by putting additional deposits into production. Now the company has a plan to make that happen, in the form of a preliminary economic assessment (PEA) that predicts a 150% after-tax internal rate of return (IRR) and an 11-year mine life. 

The Nuestra Senora mine in Sinaloa state is an underground operation, with a 1,500-tonne-per-day processing facility that produces zinc, copper and lead concentrates. Two of those concentrates also contain significant silver, enough that payable silver contributes more than half of the mine’s revenues.

At present the mine is only tapping into one deposit — the namesake Nuestra Senora deposit — which is why the market chopped 50% from Scorpio’s share price last June on news of the body’s resource downgrade. The downgrade was no surprise, as Scorpio had warned months earlier that mining had revealed a deposit more varied in mineralization and confined in extent than believed. 

The updated resource came in at 2.4 million measured and indicated tonnes grading 94.9 grams silver per tonne, 1.74% zinc, 0.9% lead and 0.27% copper (or 179 grams silver equivalent), plus 2 million inferred tonnes averaging 89 grams silver, 1.44% zinc, 0.71% lead and 0.26% copper. It represented a significant downgrade relative to the earlier estimate of 3.1 million measured and indicated tonnes grading 349 grams silver equivalent. 

Regardless of the downsize, Scorpio pushed ahead with its plans to expand the mine, and now that effort has produced PEA. For starters, the PEA pulled a “reserve” out of that resource: Nuestra Senora is home to 422,000 proven and probable tonnes grading 181.9 grams silver, 3.17% zinc, 1.61% lead and 0.47% copper. In announcing the reserve-quality tonnage Scorpio attributed the rather low resource-to-reserve conversion rate to depletion from mining over the six months since the resource was assessed, using a relatively stringent US$60-per-tonne net smelter return cut-off to define the reserve and eliminate distant or non-continuous blocks of resource, among other reasons.  

The reserve alone would only feed the 1,500-tonne-per-day operation for 12 months, but Scorpio has two tactics to address this seeming lack of ore. First, the company and the consultants behind the PEA believe Nuestra Senora holds more ore than the conservative reserve states. Specifically, the PEA assumed Nuestra Senora would provide another 1.5 million tonnes of feedstock to the mill, which is considerably more than the 422,000 tonnes of reserve.

Second, Scorpio is doing its utmost to bring the nearby El Cajon deposit into production within the next year, so that “this source of higher-grading silver plant feed can replace Nuestra Senora’s output, as its current reserves are gradually mined out.” In fact, El Cajon is expected to provide enough ore to feed an expanded mill: Scorpio plans to expand throughput at the processing facility to 2,750 tonnes per day from 1,500 tonnes per day by the end of 2014.

As outlined in the new PEA, the expanded mill and the underground mine at El Cajon are just the starting points for the new and improved Nuestra Senora mine. In 2015, once mining is well underway at El Cajon, the company will start mining another deposit, known as San Rafael. Nuestra Senora will dry up in 2017. By 2018, El Cajon will also be tapped out, at which point Scorpio expects to go underground at San Rafael. 

Scorpio had planned to build a separate mill to serve San Rafael and El Cajon, but dropped that plan in favour of expanding its existing mill and transporting ore in from satellite deposits. El Cajon is 14 km north of Nuestra Senora, while San Rafael is 17 km north of the mill. 

The PEA says that mining at Nuestra Senora and new mining operations at El Cajon and San Rafael would provide 10.2 million tonnes of ore to the mill over an 11-year project life. It is expected to cost US$85.3 million to expand the mill and develop the new mines, of which US$50 million is required in the next two years. Cash flows from the operation would repay the initial US$50-million expenditure within three years.

The plan in the PEA gives Nuestra Senora a net present value of US$166.7 million, using a 5% discount rate and prices averaging US$25 per oz. silver, US85¢ per lb. zinc, US90¢ per lb. lead, US$3.40 per lb. copper and US$1,400 per oz. gold. The project is expected to generate a 151% after-tax IRR. 

Scorpio received environmental approval for the mill expansion and the new El Cajon and San Rafael mines in late April. The only outstanding regulatory issue is a land-use permit change, which the company expects to receive shortly. The company has $26 million on hand — and combined with cash flow from the mine, this could likely fund the work. 

The expansions planned for Nuestra Senora should improve a mine that is already performing well. In the first quarter of the year Scorpio booked $1.3 million in net earnings, based on Nuestra Senora’s payable metal production of 221,447 oz. silver, 2.5 million lb. zinc, 413,000 lb. copper and 1.7 million lb. lead. Those production numbers came from the highest quarterly plant throughput in the mine’s young history.

Scorpio also continues to drill at the property. The company is completing 11,500 metres of surface and underground drilling near the Nuestra Senora deposit aimed at investigating new areas and increasing confidence in inferred resources. Scorpio is planning 5,000 metres of drilling at three new targets, as well as geophysical surveys. The company’s exploration budget for 2013 is $5.2 million. 

News of the PEA added half a cent to Scorpio’s share price, which closed at 47.5¢ — not far above its 52-week low of 44.5¢. Last October shares traded up to $1.28. Scorpio has 198 million shares outstanding.

Scorpio Mining

Ball mills at Scorpio Mining’s Nuestra Senora polymetallic mine in Mexico.