Despite resource estimate dud MAG on offensive over Fresnillo bid

Vancouver – The CEO of MAG Silver (MAG-T, MVG-X) Dan MacInnis still contends that a significantly slimmed-down resource estimate for its Valdecanas vein system on its 44%-owned Juanicipio joint-venture property in Mexico is hard to reconcile with a dueling Valdecanas resource estimate recently produced by Fresnillo (FNLPF-O, FRES-L), the owner of the remaining 56% stake in the joint-venture. Consulting firm Scott Wilson RPA had to recalculate the resource estimate following a clerical error for which it was responsible.

MacInnis has stated that he believes Fresnillo may be trying to undervalue the Juanicipio asset as the two companies lock horns in an increasingly unfriendly attempted takeover of MAG by Fresnillo that began in early December. And in a recent interview he maintains that Fresnillo continues to stymy MAG’s attempts to value its assets as part of that takeover bid – efforts which have been suspended as a result.

MacInnis says the suspension will remain in effect until MAG receives information it has requested so that it can not only explain discrepancies between the two company’s resource estimates, but more importantly, he says, value Juanicipio as per Fresnillo’s ongoing development plans for the property.

On Feb. 24 both Fresnillo and MAG announced two very different resource estimates for the Valdecanas vein system which lies less than ten kilometres west of Fresnillo’s namesake mine. Along with significant gold and base metal credits, MAG pegged Valdecanas at 3.88 million indicated tonnes grading 972 grams silver per tonne for 121 million contained oz. silver. It put an inferred resource estimate at a further 8.24 million tonnes grading 549 grams silver for 145 million oz. silver.

Meanwhile Fresnillo, presenting at the BMO Global Metals and Mining conference in Hollywood, Florida, released its own resource estimate for Valdecanas – one that was significantly lighter in silver oz. According to MAG, Fresnillo estimated Valdecanas at 2.14 million indicated tonnes grading 783 grams silver for 53.9 million oz. contained silver and 6.63 million inferred tonnes grading 601 grams silver for 128.1 million oz. silver.

With MAG’s estimate showing 125% more contained oz. silver in the indicated category than did Fresnillo’s, 54% more in the inferred category and grades 24% and 12% higher in the indicated and inferred categories respectively, the difference was then staggering enough that MacInnis made it clear what he thought Fresnillo might be attempting.

“MAG is deeply concerned that this appears to be yet another facet of Fresnillo’s strategy to keep MAG and its shareholders in the dark about the true value of the Juanicipio project, while Fresnillo attempts to acquire control of MAG through a lowball take-under offer that is not in any way reflective of the true value of MAG’s world class assets,” MacInnis stated.

But in the past ten days since a transposing error came to light requiring the recalculation of the Valdecanas resource estimate the differences between it and Fresnillo’s are hugely diminished.

MAG’s revised resource estimate pegs Valdecanas at 2.95 million indicated tonnes grading 879 grams silver for 83 million oz. silver and 7.21 million inferred tonnes grading 458 grams silver for 106 million oz. silver. In the indicated category the silver grade reported by MAG is now 12% higher than Fresnillo’s, not 24%, and the contained silver is 54% higher, not 125%. As for the inferred category the silver grade is 24% lower, not the previously reported 9%, and contained oz. silver are in fact 17.3% fewer than Fresnillo’s, not 13% superior.

Despite the heavily revised numbers MAG writes in its press release that “although the two estimates (Fresnillo and MAG’s) are closer as a result of the restatement, significant discrepancies continue to exist between the estimates…particularly for the indicated portion of the resource.”

However now that the resource estimates aren’t as drastically different, MacInnis agrees that the discrepancies might in fact stem from assumptions underlying each company’s resource estimate models, such as what qualifies as an inferred resource versus an indicated one.

“Yep, it could be as simple as that,” MacInnis says. “It could be a different search elipse or radius. It could be more or less reliability on geological continuity – all kinds of different parameters there…We’re not even sure if (Fresnillo’s resource estimate) includes part of the hanging wall vein or others. Who knows? We just don’t have enough detail to know whether (we’re) comparing apples and oranges.”

That issue, lack of details, MacInnis argues is part of a larger issue between it and Fresnillo as the latter attempts to buy all its outstanding shares. “It’s more than just the resource estimate,” MacInnis says.

When Fresnillo announced its offer of US$4.54 for all of MAG’s outstanding shares in December it triggered an asset valuation process required as part of Ontario Securities Commission (OSC) regulations pertaining to takeovers by insiders. Fresnillo has close to a 20% stake in MAG.

According to those regulations a valuation of the company being taken over at the cost of the company taking it over must be completed before it can send a circular to shareholders detailing its bid.

After Fresnillo announced its takeover intentions MAG began the valuation in December and as part of the process MAG sent an independent consultant on a site visit to Juanicipio in early January.

From that visit MAG says that it was clear Fresnillo was beginning to ramp up activity in anticipation of developing Juanicipio, “including construction of a head frame, significant underground development and a box cut heading straight for the Juanicipio joint-venture property.”

MAG says the consultant then requested Fresnillo provide engineering, geological and development information on its plans for Juanicipio, but when its independent valuation committee said Fresnillo was not providing MAG with it, MAG told the OSC that it was suspending the process until Fresnillo gave it the information it wanted.

MAG chairman and member of its independent committee on the valuation said in a statement: “To proceed in these circumstances would require MAG’s minority shareholders to decide whether to sell their MAG shares without the ability to assess the fair value of their company and, in the Independent Committee’s view, would be abusive of the Canadian capital markets.”

In response Fresnillo called the suspension an “inappropriate delaying tactic” and appealed to the OSC, a move that MacInnis says MAG followed by submitting its own arguments to the regulator which he says should make a decision on the next few weeks.

At issue is just what Fresnillo plans for the Juanicipio joint-venture and, therefore, how much the joint-venture is worth to MAG. MacInnis says that the committee wasn’t willing to make a “guesstimate” based on an inadequate understanding about what Fresnillo intends to do at Juanicipio. He notes that Fresnillo has stated publically it intends to develop the Valdecanas veins as part of a proposed Fresnillo II expansion project which would exploit a series of vein targets to the west and southwest of its existing Fresnillo mine.

“Yet they don’t make any of that information available to us or our shareholders – as to production schedules, mine design and planning, discounted cash flow – you know, all that stuff that you would normally like to have that would affect your net present value,” MacInnis says.

On its website Fresnillo says the Fresnillo II project would be roughly the same size as the existing Fresnillo mine and would double silver production there “within the next ten years.”

Fresnillo writes that the plan is for an underground mine with a 15 year mine-life, would include developing Valdecanas and that ongoing work “currently includes land acquisition, environmental studies, permitting, engineering studies and underground access.” To that it end it says it has purchased 1,800 hectares of land on which to build the mine and it is progressing permitting for a powerline.

“Basic engineering studies are complete and detailed engineering plans to build the surface facilities are scheduled to start during 2008,” Fresnillo writes.

At presstime Fresnillo had not returned calls for an interview.