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TABLE OF CONTENTS Dec 31, 2012 - Jan 6, 2013 Volume 98 Number 46 - 0 comments

Silver Standard targets Pitarrilla

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By: Salma Tarikh

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-Q) president and CEO John Smith says his company is now “getting the chance to really get going with building the things that we want to do.”

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

A recent feasibility study envisions Pitarrilla as a large, open-pit operation producing 15 million oz. silver in its first 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, behind 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 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 47 km from the plant site.

“It has good accessibility, 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, would 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 is 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 lb. lead and 1.6 billion lb. zinc over the mine’s life.

Life-of-mine annual output would average 10 million oz. silver, 18 million lb. lead and 51 million lb. zinc, based on reserves. 
The cost to build the mine is slated at US$741 million, with US$404 million in sustaining capital. Anticipated cash costs net of by-products are 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 rate and base-case metal prices of US$25 per oz. silver, US90¢ per lb. lead and US95¢ per lb. zinc.

The economics are better 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 the IRR to 21.2%.

For the base-case, recouping initial costs would take 7.5 years after commercial production.

Smith says the company increased Pitarrilla’s silver reserves by adopting an open-pit mine plan.

The mine’s reserves stand at 479 million oz. silver, marking a 400% increase over the 2009 estimate. From this, 128 million oz. from 43 million tonnes grading 91.5 grams silver would 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 be converted to reserves to increase the mine’s life. 

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

Asked if the company would sell its Pretium stake to fund Pitarrilla, Smith says that “I like Pretium because it gives us exposure to gold, which I think will go higher, and it gives us exposure to prospectivity for [Brucejack] . . . 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 Pretium in 2010.

Smith says that the company would consider financing Pitarrilla through 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 work on the remaining surface access rights and project optimization.

Commercial production is estimated to begin three years later.

Silver Standard 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 to wrap up permitting 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 building the two around the same time.

Aside from these 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 to $18.14.

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Equipment at Silver Standard Resources' Pitarrilla silver project in Mexico's Durango state. Source: Silver Standard Resources
Equipment at Silver Standard Resources' Pitarrilla silv...

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