McEwen plots out El Gallo’s next growth stage

A feasibility study for phase two of McEwen Mining’s (MUX-T, MUX-N) expanding El Gallo mine supports production of an additional 5 million oz. silver a year for seven years from the company’s mining complex in Sinaloa, Mexico. Permits to start construction and production are expected in the third quarter of 2013.

During the first six years the study forecasts average annual production of 5.2 million oz. silver and 6,100 oz. gold, at a cash cost of US$9.86 per oz. silver net of gold by-products, and including royalties.

Ian Ball — senior vice-president responsible for managing McEwen Mining’s exploration and development programs throughout Mexico, Argentina and Nevada — notes in an interview that management had estimated at its annual general meeting about two years ago that phase two would produce 5 million oz. silver a year.

“In a world where so many scoping studies come out with optimistic numbers, I think we did a reasonable job of managing expectations,” he says. “We were one of the few companies that accurately projected what production would be. There are so many cases where these go from a PEA to feasibility study, and production gets chopped by a third or a half.”

Over the life-of-mine, production is expected to reach 11.7 million tonnes of ore at 101.3 grams silver per tonne and 0.12 gram gold per tonne, for total recoverable silver and gold of 32 million oz. and 38,000 oz., respectively. Total operating costs are anticipated to be US$10.47 per oz. produced.

At US$25 per oz. silver and US$1,415 per oz. gold at a 5% discount rate, the after-tax net present value reaches US$118 million, yielding a 26% internal rate of return. Based on spot silver and gold prices of US$32 per oz. silver and US$1,700 per oz. gold, the after-tax NPV rises to US$248 million and the after-tax IRR to 44%.

Estimated initial capital expenditures — including a 14.4% contingency — would come in at US$178 million, with total life-of-mine capital expenditures forecast at US$187 million. The payback period on an after-tax basis would be 2.6 years at US$25 per oz. silver and US$1,415 per oz. gold.

In a research note, Adam Graf of Dahlman Rose says he has “marginally pushed back production and modestly reduced mineable grades,” but believes his model “still shows El Gallo to be an attractive project for the company.”

The analyst has a “buy” rating on McEwen Mining with a price target of US$7.67 per share, and an expected return of 74.2%. At press time in New York McEwen Mining was trading at US$4.32 per share within a 52-week range of US$1.96 to US$6.34.

McEwen management believes it can contain cost creep by sourcing quality, used equipment not permitted in the feasibility study, and by deepening its operating team so that the company can manage more of the project internally.

It also expects to extend the mine’s life. Ball says that “the reserve we used was 38 million oz. silver, but the total resource is actually 85 million oz. silver, so we’ll be looking over the next two to three quarters to convert some of that remaining resource into proven and probable to expand the mine life beyond seven years.”

The feasibility study was based on the El Gallo and Palmarito deposits, and the drilling that defined the resource was completed in April.

The El Gallo complex — along the foothills of the Sierra Madre mountain range — was discovered in November 2008. It includes the El Gallo and Palmarito silver deposits and the first-phase Magistral gold deposit, all within a 13 km radius.

Magistral is being commissioned, and is forecast to produce 30,000 oz. gold a year. The first gold pour for phase one is expected before October.

As of June 30, McEwen Mining had cash and assets of US$38 million.

At press time in Toronto the company was trading at $4.54 per share, within a 52-week range of $2.02 to $6.26.