Seeking silver in Big Sky Country

SITE VISIT

Libby, Montana — Tall pines blanket the Cabinet Mountains here in northwestern Montana, an area held up as some of the region’s most spectacular wilderness. It is home to some of the last remaining grizzly bears in the state and its ecological significance is reflected in its status as one of the first designated wilderness areas in the United States.

But this temperate rainforest doesn’t just hold living riches on its surface, it also holds massive mineral wealth deep in its crust, and the cohabitation of wildlife and silver and copper deposits makes mine development in the area a sensitive issue.

Nonetheless, Mines Management (MGT-T, MGN-X) believes it has some distinct advantages in bringing its Montanore silver-copper project into production here.

First off, the project has already been fully permitted before — it is currently going through a second environmental impact study (EIS), the first one having lapsed because it wasn’t acted on for some 15 years. Secondly, Montanore is not an open-pit project and will not use cyanide in its extraction — two non-starters in the state of Montana. Lastly, it enjoys the robust support of nearby communities hungry for jobs the mine would bring.

The Montanore project received all necessary approvals and was ready to swing into operation in the early 1990s under Noranda’s management. Falling silver prices, however, put the project on hold for nearly 10 years until Noranda, now part of Xstrata (xsraf-o, xta-l), made a corporate decision to pull out of its U.S. mining operations altogether.

As the original holders of the permitted claims, the property fell back into Mines Management’s hands.

“Noranda reclaimed the project to us in August of 2002 and within three or four months, the price of silver and copper turned around, took off and hasn’t looked back,” says Mines Management president and chief executive Glenn Dobbs.

But tapping into a suddenly robust market wasn’t as simple as just reactivating the licences Noranda had secured. The EIS had become “stale” and needed to be re-done in a less friendly political climate.

The collective reputations of miners in Montana had been tarnished by environmental mishaps at numerous open-pit gold mines in the state: Basin Creek; Golden Sunlight; Kendall; Beal Mountain; and most infamously, the Zortman-Landusky mine — which was responsible for over a dozen cyanide spills and a serious acid mine drainage problem.

The mishaps led to a 1998 referendum in which citizens of Montana voted to ban the use of cyanide in the state.

Montanore is largely free from concerns associated with failed mines in the past. As an underground mine, surface disruption would be minimal, no cyanide would be used, and the orebody’s location below the mountain means that acid mine drainage would be minimized as adits would descend into the deposit.

But while the project is being planned so as to leave the faintest footprint possible on the land, the company has to contend with an obstacle outside of its control: the permitting of the Rock Creek silver-copper project, owned by Revett Minerals (RVM-T, RVMIF-O).

That’s because some contend that while the Cabinet wilderness could handle one mine, two mines may be too much of a strain.

Bridget Fahey, chief of endangered species for the Mountain and Prairie Region at the U.S. Fish and Wildlife Service, says that permitting both of the mines does complicate things.

“We did have pre-existing consultation for Montanore, but we took it out of the baseline (when analyzing the environmental impact of Rock Creek) and that made a difference in the effects analysis, because we did it with only one mine instead of two,” she says.

But Dobbs insists that the Fish and Wildlife Service is distorting the facts.

“That is false, that is not true at all,” Dobbs says of the perception that only one mine can go into production. “Fish and Wildlife throw it out as if it’s fact when it isn’t. They’re going beyond their boundaries and lobbying for one mine in the Cabinet Mountains instead of two, but they have no say in that whatsoever.”

Green reputation

While Fish and Wildlife has little to say on any specifics surrounding Montanore, it is, as Dobbs points out, not the final authority on all things environmental in Montana.

As seen with the cyanide ban, environmental non-governmental organizations have had significant success in dictating policy, and in delaying projects. And even though Rock Creek was approved by Fish and Wildlife, the project has still been held up by constant legal challenges from various environmental groups over the EIS.

Still, Dobbs says the environmental hard-line reputation the state has earned isn’t entirely accurate.

“There’s the perception that Montana is difficult to mine — and there’s some truth to that — but in general, it is a good mining state,” he says.

Jeff Barber, the mine reclamation program director at Montana Environmental Information Centre (MEIC) — the group that proposed the motion to ban all cyanide leaching in the state — says that his organization is not anti-mining per se, only against certain practices.

Barber cites Stillwater Mining (SWC-N), a company that has been producing platinum group metals in the state for over 20 years, as a good example of how mining can and should be done.

Even though the position of environmental groups is more nuanced then some investors might suspect, the fact that they carry considerable clout in the state’s capital of Helena has highlighted the importance of forging relationships there.

“We recognized that permitting in the U.S. is a political process, so we began developing relations,” says Dobbs, who chalks up the presence of Democratic Governor Brian Schweitzer as a plus for Mines Management.

“He’s performed well,” Dobbs says of Schweitzer. “He’s stood by his word. When we hit speed bumps he brings everyone together and we discuss the issues and come to an understanding. We don’t always get what we want, but it’s an environment in which we can work.”

Schweitzer gave Mines Management a significant vote of confidence back in January 2005 when he told a group of some 70 locals from the town of Libby, near Montanore, that he supported the project.

The locals had made the 6-hour trek to the capital to voice their support of the project, which would create roughly 500 jobs during construction, and about 250 during operations. Dobbs expects 80-85% of the workforce will come from the local community.

Serendipity

The tale of how such mineral-rich claims landed in Mines Management’s lap — without the company having to pay Noranda a cent — goes back to the days when Mines Management was known as Heidelberg Silver.

Heidelberg had been poking around the area for nearly 50 years and had a chain of claims that included much of the present-day Montanore.

In the early 1980s, another company, Borax Mining, made a discovery and staked some claims over some of Heidelberg’s claims.

Rather then get into a legal fight over the land, the two companies drew up an agreement whereby Borax would lease the claims, and return them to Heidelberg if Borax ever gave them up.

When Borax sold the claims to Noranda, the terms of the deal with Heidelberg were transferred too.

Noranda began an intense 3-year build-up of the project in 1988, and in the process dug a 4,270-metre adit (which is now being rehabilitated by Mines Management). But as they dug, nitrates were released into the water and the costs of treating the water in a low metal price environment became too expensive. The company shut the project down, despite having sunk roughly US$100 million into it.

Then came the corporate decision to pull out of U.S. mining altogether.

When Noranda left, the property fell back to Mines Management, only it no longer resembled the prospective property staked by Heidelberg long before. It was now a well-defined copper and silver depo
sit with a completed engineering study, operating plan, metallurgical and environmental studies, and a bankable feasibility study.

“Serendipity blessed this little company. It had struggled along for fifty-five years until then,” Dobbs says.

As for the EIS, vice-president of operations Eric Klepfer explains that while the company was told it would take between 24 and 36 months, he expects it will be closer to the 36-month mark, which would see it completed in July 2008.

“We’re hoping they can get the draft done by the end of this year and we’ll have a full permit in the first quarter of 2008,” he says. “This footprint will be very small. There’ll be some loss of habitat, but we’ll have to make up a replacement for it.”

In the meantime, the company is pushing ahead with the dewatering of the Noranda-built adit and drilling. In April, it completed a public offering that raised US$30 million. The money will be used to dewater the adit, and then advance it another 915 metres toward the middle of the deposit, do an additional 3,000 metres of development drifting for drill access to different portions of the deposit, for the construction of drill stations, and diamond core drilling of about 50 holes totalling roughly 14,000 metres.

“Our strategy is to push forward as fast as possible,” Dobbs says. “We’ll have physical access to the orebody by the first half of 2008 and we anticipate having a bankable feasibility study done some time in the first half of 2009.”

As for the production levels, while Noranda was looking at milling 20,000 tonnes of ore a day, that company had the advantage of owning its own smelter. Mines Management doesn’t, and is therefore seeing smaller as better.

Klepfer says the plan is to start at 12,500 tonnes and expand to 15,000 tonnes a couple of years into production. The amount of copper in the concentrate would be more than Noranda had planned.

“Noranda had copper concentrate at twenty-eight per cent because they had a higher silica content value for their smelter,” Klepfer explains.

Mines Management is looking at a 38% copper content in the concentrate.

The estimated base case operating capacity targets roughly 8 million oz. silver and 60 million lbs. copper per year.

Using a 35-gram-per-tonne silver cutoff, Montanore has a measured resource of 3.6 million tonnes grading 64 grams silver per tonne and 0.74% copper; 70 million tonnes of 70 grams silver and 0.75% copper; and 32 million tonnes of 64 grams silver and 0.71% copper.

Those numbers would make Montanore one of the top 10 silver mines in the world, according to The Silver Institute’s 2005 World Silver Survey.

Provided the EIS comes through, Mines Management will push ahead with construction, which will take roughly 2.5 years and cost around US$400 million. The main projects will be the construction of two more declines.

While the project is in the wilderness, it is not cut off from sound infrastructure. Just 22 km from the site, the company can tap into power at US4-6 per kilowatt-hour.

Once concentrate is produced, the plan is to truck it 26 km to Libby, where it can be shipped by rail cars.

The project’s current resources come from two mineralized zones — B1 and B2 — which were initially defined by Noranda.

And while those zones were robust enough to be economic even when the price of silver was just US$4 per oz., they could be getting more enticing. Mines Management’s own drilling has added 15 metres to the B1 zone for a total of 24 metres. Noranda had identified only 9 metres of mineralization, although at a higher grade.

The increased size of the mineralized zone means that the company can entertain more economical forms of mining.

“Instead of mining by drifting, we can now do it by bulk mining,” Kepfler says. “Now up to sixty per cent of the mining can be done by bench mining.”

The bigger zones also mean the mine life can be extended by eight or nine years, and those additions come while the project remains open in three directions: vertically, and to the east and northwest.

Rock Creek-Montanore?

The synergies between Rock Creek and Montanore are apparent. The two deposits are, after all, the likely result of movement along a fault that sent Montanore downward and Rock Creek upward.

However, while Dobbs says Mines Management is open to discussions with Revett, it has been cool to the idea of a merger.

“We’ve made offers to Revett for a joint-operating agreement whereby the Rock Creek deposit could be mined through the Montanore deposit, and for whatever reasons, they have rejected our proposals,” Dobbs says.

But the stalemate between the companies isn’t holding Mines Management up.

“Our project doesn’t have a completed EIS, but we’re being allowed to move forward with work on the ground,” says Doug Dobbs, the company’s vice-president of investor relations. “On the other side of the mountain, they have their EIS approved but they’re not allowed to move forward.”