Dec '13/Jan '14

The secret to longevity

As the expansion of SilverCrest Mines’ Santa Elena operation nears completion, the discovery of three additional vein systems has added more value and potentially more years to the mine

By Correy Baldwin

In early 2011, Vancouver-based SilverCrest Mines announced a three-year expansion project to its flagship Santa Elena silver and gold mine in northern Mexico. Now as the expansion nears completion, the discovery of three additional vein systems have added more value and potentially more years to the mine.

SilverCrest has named its newest vein deposits Tortuga, Cholugo and Cholugo Dos. “A cholugo is kind of like a Mexican raccoon,” explains Eric Fier, SilverCrest president and COO. When a group of bankers first visited Santa Elena in 2008, they saw several cholugos roaming the site, and the name stuck. “It’s our mascot now,” he jokes.

Fier has every reason to be jovial. Not only is SilverCrest’s Santa Elena expansion project nearly completed, but early tests suggest the new veins have greatly increased the deposit size, as well as the life of the mine. Previous estimates had the expansion project adding six years of mine life, but SilverCrest now suggests this will be extended to at least eight. And, opportunities for further discoveries remain high.

The expansion project itself is transitioning Santa Elena from an open-pit heap leach to an underground and mill operation, which includes a 3,000-tonne-per-day conventional countercurrent decantation processing facility. “We always planned to expand, always planned to have a mill,” says Fier. “It was just the timing and the financing that was required. We’ve actually been in expansion mode since the day we started the open-pit heap leach.”

Mining within its means

SilverCrest first became interested in the site in 2005 and obtained full ownership in August 2009. In 2010, the company developed the open-pit mine, as well as mine facilities and infrastructure including a leach pad and a crusher. By the end of 2010, SilverCrest had mined its first 335,880 tonnes of Santa Elena and the mine was in full commercial production by July 2011. Once the project began generating cash flow in late 2010, the company began looking at expansion plans.

The transition from heap leach to mill made good economic sense. When SilverCrest was funding the project for construction in 2009, both silver and gold prices were lower than what they are today. An open-pit with a mill would have cost an estimated US$80 million to finance, so a heap leach approach, at US$20 million, was the obvious choice. “The phased approach worked out to be a very good business model,” says Fier. “We’ve been able to generate cash flow and roll it back into the mine without going back to the market to do the financing and share dilution, which is good for our current shareholders.

“Recovery rates for the 300-day leach cycle on the pad are around 67 per cent gold and 35 to 40 per cent silver,” says Fier, “leaving a lot of metal in inventory on the leach pad. At today’s metal prices there’s over $100 million worth of recoverable gross value on the pad, which we plan to reprocess through the new mill. The leach pad itself will pretty much pay for the mill construction.”

“Room to make money”

Fier expects the transition from open pit heap leaching to mill processing to occur in the first half of 2014, with underground production starting up in the last six months of the year. The mill should be processing a blend from the underground mine and the leach pad by December.

“Our operating costs are anticipated to be below US$8 per silver equivalent ounce for this year, beating our market guidance of $8.50. All-in costs are around US$13. So with silver at around US$22, we have a lot of room to make money,” he adds.

The expansion project will have total capital costs of around US$82 million and total operating costs of US$282.2 million, averaging US$11/ounce of silver equivalent over the next eight years.

Production for 2013 is expected to be around 2.4 million ounces silver equivalent, rising to 3.5 million ounces in 2014 as SilverCrest ramps up. In total, the expansion will produce 12.12 million ounces of silver and 262,739 ounces of gold.

SilverCrest secured a $40-million line of credit with Scotiabank in the summer with the end of the expansion project in mind. “It’s a safety net, depending on what happens to the markets,” says Fier, adding that the connection to the bank provides the project with added credibility. “We put it in place in case we needed money by the end of this year, and it’s not looking like we’re going to need it.”

The already favourable resource estimates are now set to be updated as the newly discovered vein systems are analyzed. The new deposits – all discovered since SilverCrest released its expansion prefeasibility study in July 2013 – are connected to the main deposit.

The geology of the site is ideal, says Fier. “At the Santa Elena main mineralized zone, the deposit itself is quite continuous. We’re definitely blessed with the widths. At the surface, it’s 25 to 30 metres wide, and underground is averaging 13 metres wide. This is a low-cost bulk mineable deposit.”

By November, the company had advanced the underground ramp more than 1,800 metres. The underground mine schedule described in the July prefeasibility study would begin with the mining of long hole stopes and move to cut and fill stopes later in the life of the mine. Stope width would average 13.4 metres.

Policy change

In September, Mexican President Peña Nieto unveiled plans for major tax reform, including a proposed mining tax of 7.5 percent, plus an annual royalty of 0.5 per cent for sales of gold, silver and platinum. Fier explains that the legislation is still being debated and, whatever its final form, likely would not come into place until sometime in 2014. “We’re going to see where that all falls,” he says. “We’re still trying to understand what can and what can’t be deducted. We’re in holding pattern right now.

“It will of course impact our bottom line. But significantly? We’ll wait and see,” he notes. The real risk, he says, is the impact the tax reform could have on future investment into Mexico. “I don’t mind paying a bit more in taxes if you get the support and services from the government,” he says. “And I’m all for taking some of that money and rolling it back into the communities. We’re already assisting local communities at a cost, so I’m all for that. The worry I have is that they establish a tax and it goes into a general fund and no one sees any services or any community development out of it.

“There are several communities within 60 kilometres of the site, and we’re the largest employer in that area,” Fier adds. Although around 100 to 150 positions for the expansion project are being contracted out, a further 200 positions make up a more permanent workforce. “We currently hire over 80 per cent of our employees from within about 20 kilometres of the mine site, and 99 per cent are hired within the state of Sonora.

“It’s an agricultural area, so these guys know machinery, they know irrigation, they know piping, and wiring,” he points out. “It’s not a stretch to bring in local people and train them to run the mine.”

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