VANCOUVER — A new mineralization body underneath the known silver zone could add years of mine life to the planned underground operation at the Juanicipio project in Mexico.
Juanicipio is a joint venture between Fresnillo (LSE: FRES; US-OTC: FNLPF), which owns 56% and is project operator, and MAG Silver (TSX: MAG; NYSE-MKT: MVG). During 2012 and 2013 the partners tested the project’s three veins with 40 new holes. The results added confidence to the model Fresnillo and MAG had developed for the upper Bonanza Grade Silver (BGS) zone, but longer holes also outlined a deep mineralization zone with less silver but more gold, zinc and lead.
Juanicipio is in the Fresnillo district of Zacatecas state, where mineralized veins often show this kind of zonation: silver-rich upper areas that transition into base metal-dominant lower zones. The resource within the three veins at Juanicipio — known as Valdecanas, Desprendido and Juanicipio — is now divided as such.
According to the updated estimate, the BGS zone now hosts 8.3 million indicated tonnes grading 601 grams silver per tonne, 1.7 grams gold per tonne, 2% lead and 3.7% zinc, plus 2.4 million inferred tonnes averaging 626 grams silver, 1.9 grams gold, 1.4% lead and 2.2% zinc. With the new estimate, 79% of the BGS zone resource has joined the indicated category, up from 57% before.
Underneath the resource, the Deep Zone offers 1.8 million indicated tonnes grading 93 grams silver, 1.7 grams gold, 1.4% lead and 2.6% zinc, plus 2.7 million inferred tonnes averaging 146 grams silver, 2 grams gold, 2.1% lead and 3.4% zinc.
David Sadowski, an analyst with Raymond James, follows MAG and issued a positive response to the new resource.
“While, as expected, the Bonanza Grade Silver Zone (BGSZ) was mostly unchanged, the new underlying Deep Zone (DZ) is a surprising bonus,” Sadowski wrote. “We believe incorporation of DZ at the back end of the mine plan will add five years of high-margin production without additional upfront capital — a big boost to project value. We see the resource as further underlining Juanicipio as the best undeveloped silver project globally.”
The metal value in the new Deep Zone stems almost evenly from silver, gold and zinc. Sadowski notes that the Deep Zone’s base-metal profile might attract more suitors for MAG, which the analyst believes is primed for a takeout.
“The high-grade, 301 million equivalent oz. silver resource [MAG’s share 132 million oz.] to us reaffirms the project as an unrivalled asset amongst undeveloped peers and raises takeout potential,” Sadowski said. “Given an increasing base-metal component, we see a wider suite of potential buyers.”
Fresnillo and MAG are driving a decline into the BGS zone at Juanicipio; 300 metres of development are complete. Plans for the decline come from the Juanicipio preliminary economic assessment (PEA), which came out in mid-2012.
The PEA outlined a high-grade underground silver operation producing 153 million oz. silver, 430,000 oz. gold, 361 million lb. lead and 584 million lb. zinc over a 15-year mine life. In its first five years the mine is expected to produce 15.1 million oz. silver annually, and over its lifespan the Juanicipio mine’s by-product gold, lead and zinc should more than cover the cost of silver production, putting its average silver cash cost at negative 3¢ per oz.
Using metal prices of US$23.39 per oz. silver, US$1,257 per oz. gold, US95¢ per lb. lead and US91¢ per lb. zinc at a 5% discount rate, the planned Juanicipio mine carries a $1.2-billion after-tax net present value and is expected to generate a 43% internal rate of return.
Juanicipio’s capital costs are pegged at $302 million, which means the mine should pay for itself in three years.
On news of the Juanicipio resource estimate MAG’s share price fell 51¢ to close at $7.51. The company has a 52-week share price range of $5.15 to $9.97, and 60 million shares outstanding.
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