[Update] Silver Standard sees bright future at Pitarrilla

After repositioning Silver Standard as a well-funded firm with a strong management team and a sole operating mine in Argentina, Silver Standard Resources’ (SSO-T, SSRI-N) president and CEO John Smith says, “Now we are getting the chance to really get going with building the things that we want to do.”

One of those projects is the wholly-owned Pitarrilla silver deposit in Mexico that the company discovered through grassroots exploration in 2002.

A recent feasibility study envisions Pitarrilla as a large open-pit operation, producing 15 million oz. silver over its initial 18 years, placing it among Mexico’s largest open-pit silver mines.

“If Pitarrilla had been in production today, it would rank third and second on annual production and reserves respectively, behind (Fresnillo’s) Fresnillo and (Goldcorp’s) Penasquito,” CIBC analyst Barry Cooper writes in a note.

“It’s a lovely project because it’s in a location that is quite accessible,” Smith says. Located some 160 km from the city of Durango in Mexico’s Durango State, Pitarrilla is near infrastructure, with a paved road going within 47 km of the plant site.

“From that point of view it has good accessibility and the techniques that we are using to mine are fairly standard, and the processing facility that we are building is well tried and tested,” Smith says. 

The pit, which contains both oxide and sulphide ore types, will be mined in five phases, starting with the Breccia Ridge and Cordon Colorado zones.

The plant will use leach and flotation circuits to process the two ore types to produce silver doré along with zinc and lead concentrates. The daily mill throughput is expected to vary between 16,000 tonnes of float/leach ore and 12,000 tonnes of direct-leach ore. 

“Extracting a combination of oxide and sulphide ore types in quite common in silver/gold deposits,” Cooper states. However, he cautions that processing the two ores in alternation could become difficult, especially early in the mine life.

Over the project’s estimated 32-year life, the Vancouver-based firm expects to extract 1.1 billion tonnes of material and 157 million tonnes of ore at a 5.6-to-1 strip ratio. 

Silver Standard forecasts Pitarrilla will deliver 333 million oz. silver, 582 million lbs. lead and 1.6 billion lbs. zinc over the mine life.

Life of mine annual output should average 10 million oz. silver, 18 million lbs. lead and 51 million lbs. zinc based on reserves.

The cost to build the project is slated at US$741 million, with US$404 million in sustaining capital. Anticipated cash costs net of byproducts is US$10 per oz. silver.

Compared to a 2009 prefeasibility study, which contemplated a small underground mine at the Breccia Ridge zone, start-up costs have more than doubled, but the economics have also improved.

On an after-tax basis, Pitarrilla boasts a net present value (NPV) of US$737 million and an internal rate of return (IRR) of 12.8%, using a 5% discount and base-case metal prices of US$25 per oz. silver, US90¢ per lb. lead and US95¢ per lb. zinc.

The economics appear more robust if spot prices of US$34 per oz. silver, US99¢ per lb. lead and US87¢ per lb. zinc are applied, pushing the NPV to US$1.7 billion and IRR to 21.2%.

For the base-case, recouping initial costs should take about 7.5 years after commercial production and at spot prices less than four years.

By adopting an open-pit mine plan, Smith says the company was able to substantially increase Pitarrilla’s silver reserves.

Reserves stand at 479 million oz. silver, marking a 400% increase over the 2009 estimate. Of which, 128 million oz. from 43 million tonnes grading 91.5 grams silver will be directly leached, while the remaining 351 million oz. from 113 million tonnes at 96.5 grams would be processed through flotation/leach.

The project contains 260 million tonnes grading 83 grams silver for 695 million oz. in measured and indicated. Smith points out this could later on be converted to reserves to increase the mine’s life. 

Silver Standard ended the third-quarter with US$353 million in cash, and BMO Capital Markets analyst Andrew Kaip estimates the company’s 20% stake in Pretivm Resources (PVG-T, PVG-N) is currently worth around US$260 million.

Asked if the company will sell its Pretivm stake to fund Pitarrilla, Smith said, “I like Pretivm because it gives us exposure to gold which I think will go higher and it gives us exposure to prospectivity for that particularly project (Brucejack)… For me it’s a valuable product. We’ll keep going forward with our stake in it, and at the time we need cash, we will sell it to get the cash to do what we have to do.”

(Silver Standard sold the Brucejack and Snowfield gold projects to Pretivm in 2010.)

Smith states the company will first consider financing Pitarrilla through a combination of cash on hand, debt and a potential joint-venture. It intends to make a construction decision on the project in 2013.

Meanwhile, the firm plans to submit an environmental impact assessment (EIA) in the first half of next year and continue working on the remaining surface access rights and project optimization.

If all goes well, commercial production is estimated to begin three years later.

Standard Silver’s is also advancing its high-grade San Luis gold-silver project in central Peru.

With feasibility work completed and an EIA approval in hand, the company is working on wrapping up the permitting process and community negotiations.

“San Luis is another nice project if we can get a good step forward in 2013. It’s another one we will be very happy to go about,” Smith comments.

The project is envisioned as a 400-tonne-per-day underground operation, with an average annual output of 78,000 oz. gold and 1.86 million oz. silver over its 3.5-year mine life. Start-up costs are estimated at $90 million.

The company aims to build San Luis before Pitarrilla, but may end up constructing the two around the same time.

Aside from those two projects and the Pirquitas mine in Argentina, Silver Standard holds eight other assets in development and exploration stage in Canada, the U.S. and Latin America.

Silver Standard recently closed at $14.39, within a 52-week range of $10.18–$18.14.