Santacruz Silver Mining (TSXV: SCZ) is eyeing production growth in Mexico with a ramp up at its Rosario silver–gold–zinc–lead mine.
Located in Charcas, San Luis Potosi, the Rosario underground mine produced a total of 168,300 equivalent oz. silver in the second quarter at cash cost per equivalent oz. silver of US$22.72, inline with the company’s cost expectations.
All-in sustaining costs were US$25.39 per equivalent oz. silver sold, down 28.5% from the previous quarter, while operating costs grew 19% to US$132 per tonne. The quarter-on-quarter increase resulted from the company capitalizing development costs for a ramp and paying $450,000 for a mining consultant to implement a new mine plan. Removing the consultant fee lowers the operating costs to US$112 per tonne, relatively in line with the previous quarter.
As part of the access ramp development, Santacruz has set up underground drill stations and has planned a 4,000-metre drill program to test the mine’s depth in the fourth quarter. Rosario has only been drilled to a depth of 200 metres, leaving room for resource expansion.
The Vancouver-based junior forecasts cash and operating costs to drop in the second half of the year with the new mine plan and higher production levels and improved milling capacity at Rosario, putting it closer to generating positive cash flow.
Mine production averaged 270 tonnes per day during the quarter, with production expected to climb to 450 daily tonnes by the end of September.
Santacruz notes that starting in May, all the ore processed at its 500-tonne-per-day mill came from the Rosario mine. It has stopped processing third-party ore until it commissions a third ball mill, expected in early September. This should bring milling capacity to 700 tonnes per day.
Raymond James analyst Chris Thompson, who has a $1.50 target price and “outperform” rating on stock, believes Rosario’s development plans are on track. Santacruz has 5,200 tonnes of stockpiled ore to help feed the mill, he notes.
Along with higher throughput, Santacruz expects head grades to improve, as it will include less development ore with production going forward. During the June period, 70% of the 22,612 tonnes milled was from development, with the rest from production stopes. Average silver grade was 153 grams in the second quarter.
Santacruz says its primary production goal is to churn out 1.8 million equivalent oz. silver a year, starting in the third quarter.
For this year, Thompson predicts Rosario could produce 1 million equivalent oz. silver at cash costs of US$15.62 per equivalent oz. silver, pointing out costs should come down with the higher mill throughput.
For the first half of 2014, the mine generated 328,900 equivalent oz. silver at cash costs of US$23.77 per oz.
Sales for the six months totalled 270,600 equivalent oz. silver, with 148,800 oz. sold at an average realized silver price of US$19.76 per oz. in the June period. Quarterly revenue was US$2.3 million, with a net loss of US$1.6 million, or US2¢ per share.
Despite the loss, Thompson believes Santacruz “offers near-term cash flow through the Rosario mine and development upside through its portfolio of development assets.”
The junior expects to release a preliminary economic assessment (PEA) on its San Felipe silver–zinc–lead–copper project near Hermosillo, Sonora, shortly.
Thompson predicts the PEA could prove the project could produce 5 million equivalent oz. silver a year for at least seven years.
However, he cautions the company’s cash balance of US$1.9 million “is a concern,” but believes the estimated operating cash flow in the second half of 2014 and roughly US$7 million in value-added taxes “should provide relief.”
Santacruz is also exploring its Gavilanes polymetallic project in San Dimas, Durango.
Shares recently closed at 90¢ within a 52-week window of 67¢ to $1.45. The company has a $93-million market capitalization.
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