San Miguel begs to be built, Paramount says

It has taken eight years but Paramount Gold and Silver Corp. (PZG-T, PZG-N) chief executive Christopher Crupi says the company’s San Miguel project in northern Mexico, about 300 km southeast of Hermosillo, has been well worth the wait.

“It’s been a long road,” Crupi says in a telephone interview from Ottawa, but  “a fun road.”

And with the preliminary economic assessment released today, which takes some of the risk out of the project and demonstrates solid economics, the junior stands out among many of its peers, he says.

“It’s not that common for junior companies to go from discovery to actually having something quantifiable in the ground that you can put numbers around,” he says.

The gold and silver project will be mined by a combination of open pit and underground methods and will produce a total of 803,000 ounces of gold and 43.2 million ounces of silver over the course of its 14-year mine life.

Start-up capital costs including working capital are estimated at US$243 million. Sustaining capital costs over the project’s life are projected to be an additional US$227 million. Adding in US$70.3 million in contingencies, total life-of-mine capital costs are forecast to reach US$540 million.

At US$1,500 per oz. gold and US$29 per oz. silver (the three-year trailing average of gold and silver prices at the end of January), San Miguel has an estimated US$1.1 billion in pre-tax net cash flow, a US$707 million pre-tax net present value at a 5% discount rate and a pre-tax internal rate of return of 33.2%. (The company was unable to provide post-tax NPV and IRR numbers before presstime.)

Paramount envisions five different mines at the project that will all feed a central mill. Of the five mines, two will be mined as open pits and three will be mined from underground. Of the three underground mines, two will be mined by both underground and open pit methods, Crupi explains. Four of the proposed mines would be within 4 km of the central processing plant with the fifth 8-10 km away.

“We’ll get economies of scope and we’ll be able to run this mill at its maximum because we’re going to be running them [the mines] all independently,” he says. “So it’s low capex to build one facility.”

Crupi says the company will start with the open pits and once it develops some cash flow it will move underground. At first the company will be mining predominantly silver and then move into gold as it proceeds. He also notes that while there will be some infrastructure to build, there won’t be much because the Mexican government has already brought in power and Paramount has its own wells and water rights. And with its property surrounding the land on which Coeur d’Alene (CDM-T, CDE-N) built its Palmarejo mine, there is also a network of roads that it can access.  

The mining district has attracted many other heavyweights as well. Goldcorp‘s (G-T, GG-N) El Sauzal mine is 65 km southeast of San Miguel and the Mulatos mine owned by Alamos Gold (AGI-T, AGI-N) is 130 km to the north.

“It’s a low-cost project relatively speaking and in these environments where markets aren’t liquid it’s better to have a low-cost project you can get into production faster and that you can fund as you go, as opposed to raising large amounts of money, which in some cases can strangle you if the project timeline slips or costs overrun,” Crupi says.

Crupi says the company will have sufficient funds to complete a feasibility study on the project within the next 18 months. Currently Paramount has about $10 million in cash and will have about $8 million dollars of warrants coming back to the company. in March The warrants are held by hedge fund manager Albert Friedberg, a commodities trader and founder of the Friedberg Mercantile Group in Toronto. Forbes magazine named Friedberg among the top 40 highest-earning hedge fund managers in 2011.

Collectively, Friedberg, Crupi and the company’s board of directors, own about 30% of Paramount’s shares.

San Miguel has a measured and indicated open-pit resource of 4.89 million tonnes grading 122 grams silver per tonne for 19.19 million oz. contained silver and 0.39 gram gold for 62,000 oz. contained gold.

Its open-pit inferred resource stands at 4.74 million tonnes grading 80 grams silver per tonne for 12.25 million oz. contained silver and 0.37 gram gold for 57,000 oz. of contained gold.

Underground resources in the measured and indicated category are 4.94 million tonnes grading 112 grams silver for 17.78 million oz. silver and 2.60 grams gold for 412,000 oz. contained gold. The project’s inferred underground resource is 3.92 million tonnes grading 102 grams silver for 12.87 million oz. contained silver and 2.61 grams gold for 329,000 oz. contained gold.

Adam Graf of Dahlman Rose & Co in New York commented in a research note that the PEA demonstrates “positive returns on capital and solid project fundamentals” and he has a Buy rating on the stock with a price target of US$11.73 per share. (At presstime in New York Paramount was trading at US$2.03 per share within a 52-week range of US$1.89-2.82.)