Esperanza Resources’ (EPZ-V) shares are under pressure after the Mexican federal permitting authority or Semarnat denied the environmental impact assessment for its flagship Esperanza gold-silver project in Mexico’s Morelos state.
The company says that its environmental permit application — known as MIA in Spanish — was not approved because it did not meet the “NOM-155-SEMARNAT-2007” report that outlines environmental protection for leaching gold and silver ores. It says the MIA was dismissed because of discrepancies in describing the environmental climate of the Esperanza project, and more importantly because it included a preliminary hydrogeological assessment of the project.
“Clearly we are disappointed with this result, but the silver lining here is they have given us a pretty good road map of the areas that we need to address for the resubmission,” says Greg Smith, the company’s president and CEO.
He says that the inconsistent environmental climate came from the company describing the project location as a “semi-arid, mountainous region” in one section of the MIA, and as a “humid area with a lot of rain” in another. This is “an unfortunate error,” but “pretty benign and easy to remediate,” Smith says.
Advancing the project’s hydrogeological assessment will take longer. Esperanza, as advised by its consultants, submitted the MIA in hopes of receiving a conditional approval, with the condition being that it would do more engineering work for the leach pads before construction. Instead, Semarnat has withheld approval until Esperanza finishes its studies.
Esperanza and its consultants have initiated a “full post-mortem” of Semarnat’s decision to make sure the company can meet all of the requirements in its next application.
“We are going to be very, very dedicated in getting the additional work done on the project that needs to go into the new MIA, and getting a new MIA submitted,” Smith says. “We are not going to rush because we want to make sure we’ve got the highest chance of success. That will be our fairly singular focus.”
He says it may take between six months and a year to draft a new MIA, with approval taking another six to nine months if no other issues arise.
When asked how this might impact the project’s timeline, Smith says it’s too early to tell, but predicts it could push back production by six months.
The junior had previously estimated having all the permits in hand by year-end, with construction starting in 2014, followed by production a year later.
Smith says Esperanza still has to apply for land use and water exploitation permits for its namesake project before construction kicks off.
Located 110 km south of Mexico City and 70 km north of the prolific Guerrero gold belt, a revised 2011 preliminary economic assessment (PEA) envisions Esperanza as a 20,000-tonne-per-day open-pit heap-leach operation, producing 100,000 oz. gold a year over a six-year life.
The proposed mine has an after-tax net present value of US$165 million and a 35% internal rate of return, using a 5% discount rate and a gold price of US$1,250 per oz. Start-up costs are estimated at US$114 million.
While the company works on permitting it is also taking a hard look at Esperanza’s capital expenditures in an ongoing feasibility study.
In a recent corporate presentation, it says Esperanza’s initial costs contain “several components that can be leased, replaced with contract mining or staged.”
Smith says that “the PEA included a company owned mining fleet drilling and blasting, and what we are looking at doing is moving to contract drilling and mining and blasting, which is fairly common in Mexico and fairly competitively priced.” He adds that this would reduce capital costs and provide more flexibility in mining.
It would also push up cash costs, which Smith notes could be offset by incorporating the revised September 2012 resource estimate in the feasibility, adding that the project should produce more silver by-product than outlined in the PEA.
Esperanza contains 50.3 million measured and indicated tonnes grading 0.9 gram gold and 9.9 grams silver for 1.47 million oz. gold and 16 million oz. silver. It has another 7.9 million inferred tonnes of 0.66 gram gold and 10.9 grams silver for 170,000 oz. gold and 2.8 million oz. silver.
The company is also wrapping up its deal with Pan American Silver (PAA-T, PAAS-Q) to acquire the construction-ready La Bolsa gold project in Mexico’s Sonora state, along with two other exploration projects in Peru and Argentina.
As part of the deal, Esperanza will issue Pan American 50.9 million shares and 10 million warrants. In return, Pan American would buy another 20.6 million Esperanza shares at $1.70 apiece for $35 million, and provide a $15-million standby facility. The transaction, which gives Pan American a 48% interest in the company, is set to close by the end of August.
Once it does, Esperanza plans to begin building the fully permitted La Bolsa project out of its treasury and use the cash flows to build Esperanza.
“The two projects are sequenced quite nicely because the team we use to build La Bolsa could then be reallocated down to build the Esperanza mine,” Smith says, adding that La Bolsa could start production in the second half of 2014.
Smith, whose long-term objective is growing the company into a multi-mine precious metals producer, predicts that once it puts both La Bolsa and Esperanza into production, it could generate 150,000 oz. gold per year from the heap-leach projects.
“But in the near-term we have to focus on execution, and that is getting La Bolsa built and operating, and of course getting Esperanza permitted and ready for construction.”
The company closed June 18 at 61¢, losing nearly 24% since it announced on June 10 that its MIA for Esperanza was denied.