Telson Mining shifting focus from zinc to gold

Mounting challenges at its wholly owned Campo Morado zinc mine in Guerrero state, Mexico, has prompted Telson Mining (TSXV: TSN) to put the operation on care and maintenance, and devote its resources to getting the Tahuehueto gold operation in Durango state into commercial production.

Telson recently announced its decision to indefinitely curtail operations at Campo Morado, citing both security and safety concerns for its workers, and low metal prices — specifically zinc, which recently dropped to a three-year low near the US$1 per lb. level.

“At US$1.01 to US$1.05 zinc, it’s a marginal project, we can still make money at it, but there are other factors that have come into play here that forced our company to make decisions on whether to keep this thing running, or shut it down,” said Telson president, Ralph Shearing.

The company says it experienced a work stoppage after an extended scheduled shutdown for maintenance at the mine. A large component of the mine’s employees and trucking contractors declined to continue working at Campo Morado due to issues within the local community that pressured and intimidated the workers.

The closure has directly affected over 300 employees at the mine, in addition to numerous businesses and contractors in and around the city of Arcelia.

Guerrero state is one of many others in Mexico that has seen higher crime rates and violence linked to organized crime drug cartels. It has a “Level 4 — Do not travel” advisory from the U.S. Department of State.

Earlier this year, Telson reported incidents of concentrate theft from trucks hauling the product from the mine to the port of Manzanillo. When the concentrates arrived at the warehouses of the company’s offtake partner Trafigura, assays showed lower grades than when the material left the mine site. Telson concluded a criminal operation intercepted certain concentrate trucks in transit, removed some part of the Campo Morado concentrate load, and replaced it with lower-quality concentrates. The company estimated the thefts impacted the yearly cash-selling value of between US$2 million and US$3 million.

“At the end of the day Campo is there, and we can start it back up,” Shearing said. “We’re also working on the precious metal recoveries there, they’re a bit challenged — we’re only getting 15% gold recoveries. Tests have shown that that can be vastly improved, so we hope to get that finished up over the next little while.”

With the possibility of a Campo Morado restart down the road, Telson has also updated tailing leach studies that evaluate the potential recovery of residual gold and silver. A study done in 2013 for prior mine owner Nyrstar, evaluated a Leachox process on the tailings, and showed that recoveries up to 65% gold and 81% silver were possible.

Telson says it has a lot of concentrate stored on-site, and will look at methods to monetize it by taking it to its offtake partner’s warehouse.

In the first quarter of 2019, Campo Morado produced 9.7 million lb. zinc, 1.5 million lb. lead, 212,692 oz. silver and 895 oz. gold-in-concentrate, and returned a mine-operating profit of $3.1 million for the company.

Telson purchased Campo Morado from Nyrstar in April 2017 for US$20 million in staged payments. Nyrstar, one of the world’s largest zinc smelting groups, bought the mine for US$405 million in late 2010 from Farallon Mining, as it looked to boost its own-sourced zinc production.

Telson Eyes Gold

Telson now has its sights on becoming a precious metals producer, with its wholly owned Tahuehueto mine in the Sierra Madre mineral belt of northern Durango state, which is nearing production.

“We have really shifted our focus to our gold project, Tahuehueto, which really has been the company’s main focus all along,” Shearing said. “It is a very well-mineralized and robust project. We have a prefeasibility out, and we’re building the mine — we’re 70% complete.”

Telson’s president also said that “we’re six months away from having it completed, but we got stressed on cash flows from Campo, so our whole funding plan was based on getting a certain amount of money out of Campo operations to supplement the money we already had with Trafigura. We’ve come up a little short, but we’re working right now with a Mexican bank, and they have agreed to terms.”

Telson Mining’s Tahuehueto project site in Durango, Mexico. Credit: Telson Mining.

Initially acquiring Tahuehueto in 1997, Telson has undertaken numerous rounds of drilling, in addition to underground development and bulk sampling, leading to a 2016 prefeasibility study. The report tabled probable reserves of 3.3 million tonnes grading 3.4 grams per tonne gold, 41.8 grams per tonne silver, 0.35% copper, 2.2% zinc and 1.2% lead. Measured and indicated resources (inclusive of the stated reserves) at the project are 6.1 million tonnes grading 2.5 grams per tonne gold, 42.8 grams per tonne silver, 0.3% copper, 2.2% zinc and 1.2% lead.

Based on the modelled 790-tonne-per-day underground mine and 550-tonne-per-day processing mill producing lead, copper and zinc concentrates, the prefeasibility study showed robust economics. Post-tax net present value (using an 8% discount rate) came in at US$70 million, with a 33% internal rate of return and three-year payback, based on conservative base-case metal prices of US$1,180 per oz. gold, US$16.70 per oz. silver, US$2.65 per lb. copper, US92¢ per lb. zinc and US87¢ per lb. lead.

Telson says it is looking to size up its Tahuehueto operation to 1,000 tonnes per day.

In late 2017, the company secured a US$15-million loan facility and offtake agreement with Trafigura — the same company to which it has sold its Campo Morado concentrates. The loan and offtake agreement sees Trafigura buying 100% of the operation’s zinc and lead concentrates through to the end of 2022.

While the company awaits closure of its financing to complete the Tahuehueto build, it has been processing ore from underground development on an external toll-milling basis since 2018. In the first quarter of 2019, toll-processed preproduction ore yielded Telson US$896,000 from concentrate sales. First-quarter toll production came in at 168 tonnes lead concentrate grading 39% lead, 6% copper, 80 grams per tonne gold and 840 grams per tonne silver, plus 218 tonnes zinc concentrate grading an average of 44% zinc, 9 grams per tonne gold and 68 grams per tonne silver.

Employees enter underground workings at the Tahuehueto project. Credit: Telson Resources.

Average recoveries achieved in first-quarter 2019 toll milling, were 81% for gold, 86% for silver, 90% for lead, 60% for zinc and 88% for copper. Preproduction mining has yielded 21,613 tonnes of mineralized material.

The company also announced that another 5,000 tonnes of preproduction ore from Tahuehueto is being shipped for toll milling over the next couple weeks, with the concentrates produced to be sold to Trafigura under its offtake agreement. Funds from the sale are earmarked to finance ongoing mine development and construction.

Telson shares were recently at the 25¢ level, with a 52-week trading range of 63¢ to 17¢. After the Aug. 14 announcement of placing Campo Morado on care and maintenance, the company’s shares dropped as much as 39% to the 17¢ level. Based on Telson’s 139.6 million shares outstanding, the company has a $35-million market capitalization. The company reports that management and directors own 55% of the shares outstanding.