Scorpio’s challenge

If you had to choose one word to describe Scorpio Mining’s (SPM-T) fortunes over the first half of the year, it would have to be “change.”

The year began on the right note, with first-quarter results showing the company turning a profit of $3.3 million compared to a lost of $1.04 million in the fourth quarter of last year.

That profit was on the back of solid production from its Nuestra Senora silver mine in Mexico’s northwestern Sinaloa state.

But as quickly as the good times were ushered in, new challenges presented themselves.

The second quarter saw production at the mine fall slightly and the amount of resources at the main deposit drop significantly.

Then at the end of July, founder and former chairman Peter Hawley stepped in as interim chief executive after former chief executive Parviz Frasangi’s abrupt departure. The company continues to search for a permanent CEO.  

Fortunately for Scorpio, all this is unfolding on top of what is a pretty steady foundation as the company has a producing silver mine with no debt, no hedge and no royalties, all  surrounded by good infrastructure.

In the second quarter Nuestra Senora turned out 606,786 oz. silver equivalent, down slightly from first quarter production of 620,356 oz. That production comes in the form of lead, copper and zinc concentrates with the copper and lead concentrates containing significant amounts of silver.

Cash costs, net of by-product credits for the second quarter, came in at $15.05 per oz.

Despite those solid numbers, cash flow from operating activities decreased by 63% to $2 million from $5.5 million the quarter previous with lower grades mined at Nuestra Senora being blamed as the culprit.

The poorer performance of the mine came as the company realized that the initial resource estimate done on the deposit was lacking.

Scorpio says that once mining got underway, the deposit was more variable in distribution and continuity and more confined in extent than it had previously believed.

That led to an updated resource estimate for Nuestra Senora, which was released at the end of June.

The new resource estimate outlined measured and indicated resources of 2.42 million tonnes grading 179.37 silver equivalent for 7.4 million oz. silver, 92,967 lb. zinc, 48,142 lb. lead and 14,186 lb. copper. And while those numbers may sound good on their own, when put up beside the previous numbers in an estimate from October 2010, the lack becomes apparent.

That initial estimate outlined measured and indicated resources of 3.1 million tonnes with a 349 grams silver equivalent grade.

But Scorpio isn’t letting a smaller resource get in the way of its hefty production plans.

Instead, the company is in the midst of expanding its mill, with additional feed anticipated to come from two deposits between 15 and 20 km to the north of Nuestra Senora, known as San Rafael and El Cajon.

Scorpio had originally planned to build a separate mill to facilitate the two deposits, but has now scrapped a prefeasibility study on a second plant in favour of doing a preliminary economic assessment (PEA) for expanding its existing plant at Nuestra.

The PEA will look at boosting plant capacity at Nuestra by 80% to 2,750 tonnes per day.

Scorpio recently wrapped up a drill program at San Rafael with highlight intercepts of 5 metres grading 2,802 grams silver, 1.75 grams gold, 0.928% copper, 4.489% lead and 2.341% zinc; and 6 metres of 2,626 grams silver, 2.096 grams gold, 0.614% copper, 2.335% lead and 0.203% zinc.

Both San Rafael and El Cajon are skarn-related deposits with El Cajon sitting 14 km north of the plant, and San Rafael sitting 17 km north.

Drill results for El Cajon have yet to be released, but the deposit has indicated resources of 2.4 million tonnes grading 129.4 grams silver, 0.44% copper and 0.19 gram gold, and inferred resources of 996,000 tonnes grading 97.2 grams silver, 0.34% copper and 0.13 gram gold.

Both the latest results from San Rafael and the El Cajon results will go into a resource update due by the end of August.

As for San Rafael, it is made up of five distinct bodies: the zinc-lead-silver Main zone; an oxidized silver-gold-copper portion of the Main zone; the zinc-lead-silver Upper zone; the copper-silver 120 zone; and the Northwest Extension, which is similar to the Upper zone.

The Upper zone and newly discovered Northwest Extension are relatively flat-lying bodies contained entirely within the upper rhyolitic volcanic rocks, as opposed to the more contact-related Main zone and structurally controlled 120 zone.

The completed drill program focused on infill drilling on known zones and delineating mineralization in the newly discovered NW Extension, which it says could add tonnage to the upcoming resource update. In total, 3,300 metres were drilled at the project so far this year.

The San Rafael Main and Upper zone have measured and indicated resources of 5.99 million tonnes grading 89.5 grams silver, 3.42% zinc, 0.06% copper, 1.46% lead and 0.12 gram gold.

The San Rafael 120 zone has indicated resources of 1.9 million tonnes grading 130.6 grams silver, 0.48% zinc, 0.34% copper, 0.13% lead and 0.17 gram gold.