Trevali set to bring Santander back to life

Trevali Resources (TV-T) is getting set to bring the Santander zinc, lead and silver mine back into production – with a little help from its new friend, the metal-trading giant Glencore International.

Santander was a producing mine from the 1950s until 1985 when it was sold to a Peruvian company that subsequently went into chapter 11 bankruptcy in 1992.

Despite a lack of exploration on the grounds from 1992 until Trevali acquired the property in 2007, the site was blessed with solid infrastructure.

Trevali’s president and chief executive, Mark Cruise, says the original mining facility was, if anything, over-engineered by its original owner, New York-based St. Joe Lead Corp.

“This really was a no brainer,” Cruise says about the company’s decision to acquire Santander. “We knew we’d find something. We didn’t know how much obviously, but we expected that we would be successful.”

Originally, Trevali planned to build a 1,250 tonne per day plant themselves but some interesting geophysical results god management thinking bigger very early on.

Cruise explains that because the ore is strongly magnetic geophysical tests suggested that the mineralization was bigger at depth. That suspicion was confirmed when by only the second hole drilled on the property as it struck 28.4 metres grading 5.16% zinc, 3.66% lead, 90 grams silver per tonne and 0.12% copper.

Those assays got Trevali moving quickly as it began advancing its social and community programs and started to look for ways to get a mill built.

“By the first week in January 2008 we knew we effectively knew we had a mine,” Cruise says. “Our team has built other mines in our careers, and that kind of experience helps in finding the shortest route to production.”

The shortest route to production, in this case, meant talking to Glencore, one of the main players on the Central Peruvian polymetallic belt where Santander sits.

Glencore was already very familiar with Santander, as under its former configuration – The Marc Rich Group – it had purchased concentrate from the mine.

Interest from the world’s biggest metals traded was further spurred on by fact that it had a zinc mine 70-km down the road that had run out of resources.

Glencore and Trevali recognized that the 2,000 tonne concentrator plant at the site would fit well at Santander.

The plant is currently being dissembled and re-configured at Santander with production slate to begin in the fourth quarter of 2011.

To get the plant Trevali cut a deal with Glencore which Cruise describes as “straightforward.”

It calls for Glencore to serve as the designer, builder and operator of the mill, effectively turning it into a contractor at the project.

Trevali has an option to buy the plant from Glencore by making payments over the course of 4 years that total $12 million.

Glencore also gets a life of mine off-take agreement on the concentrate, to be purchased at market prices.

Excluding the $12 million Trevali would need if it wants to buy the plant, the company estimates Capex of $18 million on its end to get the mine into production.

That figure covers pre-stripping, underground development, pre mine, tailings, power….basically everything that is non-plant related.

While an economic study due out early next year will outline its plan more succinctly, the rough idea is to begin mining from an open pit at the north and south Magistral deposits. The pits would extend down to approximately 120 metres and would provide feed to the mill for roughly 2 years, after which ore would be taken from an underground mine.

Just how deep and how rich such and underground mine will turn out to be is open for discussion.

The three Magistral deposits are still is open at depth, and there are some other high potential targets that the company plans to drill off next year.

“It’s already a big system,” Cruise says, “and big systems tend to get bigger as you drill them.”

The company has two drill rigs line up to work the property as part of a 10,000 metre drill program to begin in January.

Between 5,000 and 6,000 of those metres will focus on the Magistral deposits while the remaining will focus on early stage targets that Cruise says look similar to magistrate

The expansion of the Magistral deposits and other exploration targets has Cruise confident that down the road the mill will have to be upgraded to 4,000 tonnes per day.

But such a bigger plant would require considerably more power, which can be an issue for many companies operating in the wilds of Peru’s Andes.

Here too, however, Trevali would appear to have all of its bases covered.

Along with the purchase of the Santander property in 2007 came a hydro electricity plant which generates power 12 months a year from a nearby mountain river.

While the plant currently only produces 1.5 MW, Trevali is in the midst of doing a debt financing for the US$22 million it needs to upgrade the plant to 10 MW capacity.

The 2,000 tonne per day mill would require between 3 and 4 MW of power, leaving the company free to sell the rest back to the national power grid. That means that while some if its counterparts are paying upwards of 14¢ per kilowatt hour for power, Trevali will be able to generate power at a cost of just 1.5¢ per kilowatt hour – and that is not including the cashflows that would be generated from selling power back into the grid.

As for specifics on project operating costs, they are hard to come by ahead of the preliminary economic assessment that is due out early next year.

Cruise did offer that Glencore has six similar mines in production, two in Peru, three in Bolivia and one in Argentina and that Santander would be in the same low cost range that those mines are.

The district itself yields mines that are producing from the US$20 per tonne to US$40 per tonne range

“We’ll be in that range,” Cruise says. “Somewhere in the middle.”

As for the breakdown of revenue generators, the company is expecting that 50% of cashflows will come from zinc production, with 25% coming from silver and lead respectively.

A resource update released at the beginning of November put 5.9 million tonnes grading 3.86% zinc, 1.35% lead, 44 grams silver and 0.08% copper into the indicated resources category and another 4.8 million tonnes grading 5.08% zinc, 0.44% lead, 21 grams silver and 0.07% copper in the inferred category.