SilverCrest CEO digs into La Joya PEA

SPOKANE, WA — When it comes to positive stories about juniors transitioning to producers over the past few years, not many stand out like Vancouver-based SilverCrest Mines (TSXV: SVL; NYSE-MKT: SVLC) and its staged build-out at the Santa Elena gold-silver operation, 150 km northeast of Hermosillo, Mexico.

After a US$65-million mill expansion at Santa Elena — which will see the mine humming along at 3,000 tonnes per day starting in January 2014 — SilverCrest will turn its eye to another potential mine at its La Joya deposit, located 75 km southeast of Durango.

In late October the company released a preliminary economic assessment (PEA) on La Joya’s starter pit, with a focus on limiting capital expenditures by mimicking the development at Santa Elena.

During Cambridge House’s annual Silver Summit, The Northern Miner had a chance to sit down with SilverCrest chairman and CEO Scott Drever to discuss the company’s measured growth strategy, as well as how La Joya is shaping up to be SilverCrest’s next success story.

According to Drever, the company set out a list of criteria for its PEA, which was driven by capital concerns and prevailing market conditions. SilverCrest determined it could boost La Joya’s value with a 10-year mine life, a 3-to-1 stripping ratio and development costs that provided realistic opportunities for internal fundraising.

“I think in these market-development decisions mostly centre on what you can realistically do. Obviously in this day and age the high-cost projects are in disfavour, and those kinds of things take that calibre of project development out of our wheelhouse.” Drever explains.

“We looked at La Joya, and it’s quite definable in how you can step back and do a smaller initial operation. And we really wouldn’t be where we are right now if we hadn’t gone with that initial step at Santa Elena because cash flows almost completely financed the transition into a conventional mill and underground mine. If we’ve done it once, we should know how to do it a second time,” he continues.

SilverCrest settled on a 5,000-tonne-per-day mine, which would produce 35 million payable equivalent oz. silver over a nine-year life — consisting of 19 million oz. silver, 53,000 oz. gold and 93 million lb. copper in concentrate — at cash costs of US$10 per oz. The development would cost US$141 million, and it features a 2.6-to-1 stripping ratio.

Assuming US$22 per oz. silver, US$3 per lb. copper and US$1,200 per oz. gold, La Joya would carry a US$93-million after-tax net present value at a 5% discount rate, along with a 22% internal rate of return and a two-year payback. The operation would generate US$343 million in pre-tax cash flow, including US$60 million annually over its first four years.

La Joya’s start-up phase will focus on its global inferred resource, which totals 127 million tonnes grading 23.5 grams silver per tonne, 0.22 gram gold per tonne and 0.19% copper at a 15-gram silver equivalent cut-off. SilverCrest’s initial high-grade pit would include 16.5 million tonnes averaging 51 grams silver, 0.21 gram gold and 0.34% copper, under a 60-gram silver equivalent cut-off.

“What the PEA does not cover is that the operation produces an extremely attractive copper concentrate. So I think there’s an opportunity there to finance on that copper,” Drever points out, also noting a large tungsten resource that could impact project economics. There are 97,600 inferred tonnes grading 0.055% tungsten and 0.016% molybdenum hosted in La Joya’s Contact zone.

“We haven’t addressed that tungsten in the resource, but it could also finance a lot of things. There’s an opportunity for an off-take there as well. We’re doing more metallurgy now, and we’ve got to see whether the tungsten will come out as a float, as gravity or as both. We need to see how we can fit that into the mill,” he explains.

Drever also points out two other areas where SilverCrest will look to optimize La Joya’s economics heading into its feasibility phase. The most important will involve infill drilling to upgrade inferred resources to the indicated category. The company’s data points are widely spaced and there are a number of areas classified as waste, which will likely become ore as drilling density increases.

The second initiative involves metallurgy, and centres on arsenic, bismuth and antimony content at La Joya that could carry smelter penalties. Drever explains that there isn’t much to be done about the bismuth and antimony, but SilverCrest is tweaking its metallurgical studies in a bid to manage any penalties imposed by the arsenic credits.

“We’ll see how the markets develop over the next six months, because our next moves at La Joya will really be discretionary in nature regarding expenditures,” Drever says, explaining that the company is in good financial shape due to a US$2.5-million-per-month cash flow from operations.

“We have a big capex program sort of winding down at Santa Elena. I’d like to see that complete, and get the mill up and running. After that we’ll look to see what we’ll do with La Joya,” he adds, speculating that SilverCrest could get drills turning on an infill program at the project by June 2014.

One issue that loomed large at the Silver Summit was a proposed 7.5% mining tax under discussion in Mexico’s parliament. Drever says the proposal is troubling news, and that a number of the company’s shareholders have contacted him with inquiries regarding potential impacts at Santa Elena, as well as the development schedule at La Joya.

“Royalties are always a concern, and over my 50 years of working in this business, I’ve been run out of so many countries due to adverse government-instituted conditions,” Drever says. “You’d think the politicians would learn from history, but when I look around the world I’m amazed that governments are so often unaware of unintended consequences.”

For now, SilverCrest is completing its ramp-up at Santa Elena and moving towards a development decision at La Joya, which it says could be in production by 2017. The company reported US$30 million in cash and equivalents at the end of June, and intends to self-finance La Joya with cash flow, debt and potential off-take agreements.

SilverCrest has traded within a 52-week window of $1.19 to $2.96, and closed at $1.69 per share at press time. The company has been on the rise over the past four months, as its shares have jumped 17%, or 25¢, since early July. SilverCrest has 108 million shares outstanding for a $184-million market capitalization.


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