MAG Silver approves underground development at Juanicipio

MAG Silver Corp. (MAG-T, MVG-N, MVG-X) has approved a US$25 million budget for mine permitting and underground development work at its Juanicipio project in Mexico’s Zacatecas state, a joint-venture with Fresnillo PLC (FNLPF-O, FRES-L).

If the required permits are received before the end of this year the joint-venture partners can start breaking ground on an underground decline in January 2013. The 18-month project spanning this year and next would involve expenditures of $10 million in 2012 and $15 million in 2013.

At the same time the joint venture partners have kept their original exploration budget this year at US$8.5 million.  The Juanicipio project hosts three identified high-grade silver (gold, lead and zinc) veins: the Valdecañas Vein, Juanicipio Vein and the Las Venadas.

“The advancement of the project with the cooperation of the joint-venture partners combined with the deposit’s current resources and exploration upside increases the attractiveness of the asset for mining companies, not just Fresnillo,” John Hayes of BMO Capital Markets wrote in a flash note to clients.

The multi-million budget includes the first 2,500 metres of underground development on the project, 44% of which is owned by MAG Silver and the remainder by Fresnillo, which is also the operator.

According to an updated preliminary economic assessment released in June, ramp access is the best and most cost-effective option for Juanicipio and primary access to the mine would be via a 14% decline.

The PEA demonstrated the project would yield a base case, after-tax internal rate of return of 43% and an after-tax net present value, at a 5% discount rate, of US$1.23 billion.  Payback is expected three years after plant start-up.

The PEA estimated that life-of-mine payable production would reach 153 million oz. of silver, 430,000 oz. gold, 361 million lb. lead and 584 million lb. zinc from producing lead, zinc and pyrite concentrates.

Over its estimated 14.8 years of mine life, Juanicipio is forecast to produce an average of 10.3 million payable oz. silver a year at total cash costs of negative US$0.03 per oz. silver, net of by-product credits. (MAG’s 44% ownership equates to about 4.5 million oz. payable silver per year.)

The PEA was based on an indicated resource of 5.7 million tonnes grading 702 grams silver per tonne, 1.9 grams gold per tonne, 2.2% lead and 4.2% zinc. Inferred resources add 4.3 million tonnes grading 513 grams silver, 1.4 grams gold, 1.6% lead and 3.0% zinc.

In his research comment BMO’s Hayes said the PEA “indicated the potential for an economically robust underground project and recommended further drilling and exploration work to upgrade the inferred resources and understanding of the deposit.”

Apart from MAG’s interest in the Juancipio project, the company owns 100% of the Cinco de Mayo discovery in northern Chihuahua state, about 199 km north of the city of Chihuahua. Cinco de Mayo is the most advanced of MAG’s five Carbonate Replacement Deposit (CRD) style targets in the country.

The Cinco de Mayo discovery was made in 2006 and in late 2009 MAG announced the discovery of a new zone of high-grade molybdenum and gold it named Pozo Seco in the western part of the project area. In August 2010 the company published its first resource estimate on Pozo Seco, with indicated resources of 29.1 million tonnes grading 0.147% molybdenum for 94 million lbs. of contained molybdenum and 0.25 gram gold per tonne for 230,000 oz of gold. Inferred resources added 23.4 million tonnes grading 0.103% molybdenum for 53.2 million lbs. of molybdenum and 0.17 gram gold for 129,000 oz. of gold.

The company originally budgeted $3.5 million this year for a 15,000-metre drill program at Cinco de Mayo (including Pozo Seco and Jose Manto). Since then it has revised its budget and expanded it to $9.6 million for the year. It expects to complete a first resource estimate by the end of the third quarter of this year and start a PEA for the property.

In mid-July MAG reported drill results from Cinco de Mayo. Exploration drill hole CM12-431 intersected four distinct and closely spaced zones of massive sulphide, returning 89 grams silver per tonne, 0.78 gram gold per tonne, 0.13% copper, 2.1% lead and 7.3% zinc over 61.6 metres, including 117 grams silver, 1.13 grams gold, 0.16% copper, 2.7% lead and 9.3% zinc over 31.9 metres and 139 grams silver, 1.38 grams gold, 0.11% copper, 2.6% lead and 11.8% zinc over 10.0 metres.

At the end of June MAG Silver had working capital of $13.0 million.  

At presstime in Toronto MAG was trading at $9.33 per share within a 52-week range of $6.17 and $11.46. It has about 55.7 million shares outstanding.