Genco goes for efficiency at Temascaltepec

SITE VISIT

Temascaltepec, Mexico — This town’s name roughly translates as “the hills with thermal springs,” and although there are none here now, the thermal waters of millions of years ago were rich in silver and gold. Today, Vancouver-based junior Genco Resources (GGC-V, GGCRF-O) and the local community are reaping the benefits from those hot waters.

Temascaltepec is in Mexico state, within the Sierra Madre Occidental mineral belt, and mining in the area dates back to 1550, when gold and silver were found by the Spaniards.

The Temascaltepec district is underlain by Jurassic metasedimentary rocks that were intruded by Early Eocene granites. This package of rocks was in turn covered by andesites and rhyolites of Middle Eocene age. A regional southeast-northwest-trending epithermal quartz vein system hosting silver-gold mineralization intruded the sequence and was then covered in low topographic areas by Miocene basalt flows.

Spaniards mined the area until the Mexican War of Independence in 1840. American Rincon Mining operated here from 1910 to 1940, but the mines were shut down due to labour and regulatory problems. In 1972, the Mexican firm Compania Minera Tormex explored the Guitarra vein. This was followed eight years later by extensive diamond drilling and drifting.

Production began from the La Guitarra vein at 30 tonnes per day when Compania Minera Arauco was formed in 1990. In 1993, Luismin acquired Arauco and further developed the operation. Mill throughput peaked in 2000, when 113,809 tonnes were milled, producing the gold equivalent of 22,719 oz.

Wheaton River Minerals acquired the operation in 2002 when it purchased Luismin, and then spun off the mine and the Temascaltepec properties to Genco in 2004. That year, only 41,947 tonnes were processed though the mill, producing the equivalent of 9,286 oz. gold.

At the time of the purchase, proven reserves were 36,000 tonnes grading 2.65 grams gold and 303 grams silver per tonne, with probable reserves of 60,000 tonnes grading 2.97 grams gold and 390 grams silver. The mine was in decline with falling grades and increasing mill throughput. What Genco purchased was a 340-tonne-per-day mill, the La Guitarra silver-gold mine, and a land package that covered 123.7 sq. km. The land package hosts a series of classic epithermal vein systems that contain silver and gold mineralization, and a number of past-producing mines that exploited the veins.

The purchase gave the new owners an immediate cash flow and the possibility of increasing production with further exploration. Since the purchase, about 100,000 tonnes of ore have been mined, of which 30,000 tonnes came from the original reserves and about 70,000 tonnes came from areas not included in the original resource figures.

San Raphael I, II, III

Shortly after taking over the operation, Genco began an exploration program along strike of the El Guitarra vein and was rewarded with the discovery of the San Raphael zone. This success was followed up with the discovery of San Raphael II and San Raphael III, both to the southeast of the La Guitarra vein system and on strike with it.

Underground access to the La Guitarra and San Raphael workings is by ramp. This ramp is being extended to San Raphael II, which will take three to four months to complete. San Raphael III (beneath the basalt cap) awaits further exploration and development.

Mill feed in 2005 came from La Guitarra and San Raphael. With the development of San Raphael, mill throughput was increased at the beginning of May to 210 tonnes per day from 140 tonnes.

Little spending was needed to increase production — with a mill capacity of 340 tonnes per day, there is plenty of spare room in the processing plant. The mill runs seven days a week with 10-hour and 8-hour shifts each day. From 5 p.m. to 11 p.m. daily, the mill is shut down as a cost-cutting measure. Electricity rates during this time are about triple the rates during the rest of the day.

Recoveries at the mill are 89-90% for gold and silver. Previous operators recovered about 83% silver and 80% gold. Currently, Montreal-based engineering firm Bumigeme is studying ways of increasing recoveries and possible cost savings at the mill.

To cope with the increased mill production, seven new workers were hired. The entire operation employs about 140 people on-site.

Cut-and-fill mining is used to follow the veins, which range up to 5 metres wide, but have a tendency to pinch and swell. Mining and development is carried on with three shifts per day, seven days a week.

Over the past year, Genco upgraded the equipment at the mine to increase efficiency. Chief financial officer Wayne Moorhouse says the company needed reliable equipment before increasing production. The company acquired three new single-axle surface haulage trucks, and a 12-tonne low-profile haul truck that replaced old equipment. It also bought seven new jack-leg drills, an Ingetrol Explorer Plus MD exploration drill, a two-and-a-half yard scoop, and six new pickup trucks.

A ventilation fan system for the San Raphael mine was also purchased, and a water treatment plant built to treat the tailings water.

Moorhouse contends that these investments will pay for themselves in greater efficiency.

Other obvious recent on-site improvements include the lighting and whitewashed walls of the decline. The floor of the decline is covered by sand that is regularly maintained to reduce wear on vehicle tires. It also makes for a much smoother ride.

For the period ended December 31, 2005, the company had a net income of 3 per share compared with a loss of 2 per share at the end of 2004.

Successful as it has been on the mining side of its operations, Genco has also been aggressively pursuing a systematic exploration program to find more ore. With its large land package covering a zone of mineralized veins, past-producing mines and an area obscured by young basalts, exploration is being carried out at several levels. About $2.9 million has been budgeted for exploration and $1 million for development.

At the most basic level of exploration, veins are being located using historic maps. Surface expressions of these veins are being sought, particularly in the southeast part of the land holdings.

Known historic workings are also being investigated. The program includes the Santa Ana vein in the southeast portion of the property. The vein appears as a northwest-southeast-oriented ridge, and is pockmarked with pits, trenches, small shafts and limited underground workings carved out of the rock using hand steel. In the next month, roughly 1,000 metres of drilling in seven or eight holes will test several hundred metres of vein strike length for continuity and depth. Should the results prove economic, further drilling will be done.

At the same time, exploration and development work is being carried out on the Nazareno vein, about 3.5 km northwest of the La Guitarra mill. In the past, the Nazareno vein was mined via a shaft. After drill-testing the vein, a drift was started this February from the side of the hill below the shaft. The drift and two 100-metre crosscuts will allow for underground exploration and diamond drilling. The drift has intersected the shaft and will continue to probe the area where drill hole NAZ08-03 intersected 1,102 grams silver and 0.27 gram gold per tonne over 4 metres.

The objective of the program is to increase reserves and open up the area for future production.

Even more advanced is the Creston project. This zone of mineralization contains about 100,000 tonnes of ore-grade material and is only several hundred metres from the mill complex. It is being prepared for mining later this year.

Genco’s timing has been very lucky. The Temascaltepec operation was purchased when silver and gold prices were relatively low. The company didn’t need to spend a lot of money to make the operation profitable, and is now benefiting from near record-high precious metal prices.

Mindful of th
e fickleness of commodity prices, Genco is working on containing costs while, at the same time, increasing efficiencies and production, all financed through internal cash flow.