Santacruz hopes to get San Felipe in production by 2016

VANCOUVER — Producer Santacruz Silver Mining (TSXV: SCZ; US-OTC: SZSMF) is sizing up a major boost in silver-equivalent output over the next few years, and a big part of that plan is its San Felipe asset located 130 km northeast of Hermosillo in Sonora State, Mexico. The company has taken a step toward hitting its 2016 production target at the project with a new preliminary economic assessment (PEA) that features good returns and an increase in resources.

Santacruz is looking to ramp up of its sole producting asset — the Rosario silver–gold–zinc–lead mine, 110 km north of the city of San Luis Potosi — and produce 1.8 million equivalent oz. silver annually starting in 2015. The company produced a total of 168,300 equivalent oz. silver in the second quarter at a cash cost of US$22.72 per equivalent oz. silver.

If Santacruz’s plan at San Felipe comes to fruition, the mine will expand the company’s annual production by 178% to 5 million equivalent oz. silver. The PEA models a US$36.3-million hybrid development that produces both lead and zinc concentrates, with the lead concentrate containing the payable silver.

Resource estimates have been calculated on the four veins Ventana, Las Lamas, San Felipe and Transversales. Under the PEA model, the upper parts of the Ventana, San Felipe and Tranversales veins would be mined by open pits, while underground workings would access the lower parts of the Ventana and San Felipe veins, and the Las Lamas vein.

Santacruz has tallied total indicated resources of 1.2 million tonnes grading 72.4 grams silver per tonne, 2.36% lead and 6.03% zinc, for 15.6 million oz. silver equivalent. Inferred resources tack on 4 million tonnes averaging 58.4 grams silver, 1.7% lead and 4.3% zinc for 37.5 million contained oz. silver equivalent. All resource calculations assume a 125-gram silver equivalent cut-off grade. The San Felipe estimate is based on 55,000 metres of drilling in 260 drill holes, with a total of 11,526 assays.

San Felipe would feature a 1,250-tonne-per-day milling facility and produce 5.5 million oz. silver, 107.3 million lb. lead and 328.7 lb. zinc in concentrate over a 7.5-year mine life. The proposed mill contains a crushing circuit, ball mill and flotation circuits. Concentrates would be sold and delivered to a smelter or concentrate trader.

Annual output is estimated at 3.2 million equivalent oz. silver at all-in cash costs of US$12.72 per oz., with recoveries projected at 80% silver, 86% lead and 87% zinc.

“The significant increase in resources in the recent estimate shows that the efforts of our exploration team are paying off. Some of the resource areas are still open, and surface work over the last year has identified additional vein targets,” president and CEO Arturo Prestamo noted in the release. “The estimated [capital expenditures] for the project is relatively low, and [we] believe that, similar to many vein deposits, if a mine is developed on the current San Felipe resource there will be opportunities to identify new resources to keep the operation going for many years to come.”

Assuming a US$19.91 per oz. silver base case, San Felipe would feature a US$61.2-million after-tax net present value (NPV) at a 5% discount rate, along with a 37.7% internal rate of return (IRR) and a 2.3-year payback period. If silver prices jump to US$21 per oz., the project has a US$70.4-million after-tax NPV at a 5% discount rate and a 42.2% IRR.

In early September Santacruz renegotiated its San Felipe acquisition agreement with Hochschild Mining (US-OTC: HCHDF) to make the payment schedule a bit more forgiving. The company had been scheduled to make a US$5-million payment by the end of October and another US$16-million payment on the same date next year. Under revamped terms Santacruz will pay US$2 million by Dec. 1, US$5 million a year later and US$14 million by mid-December 2015.

Santacruz has traded within a 52-week window of 67¢ to $1.34 per share, and closed at 98¢ per share at press time. The company has 103.5 million shares outstanding for a $101-million market capitalization, and reported US$1.9 million in cash and equivalents at the end of June.