TSX-V: SCZ
(Photos and map courtesy of Santacruz Silver Mines Ltd.)
Overview
Recently I visited Santacruz Silver Mining Ltd.’s (TSX-V.SCZ) Rosario Mine development project in the State of San Luis Potosi, Mexico, which is bustling with construction activity. Santacruz is a new company that just went public on the TSX-Venture exchange in April, 2012 with a $20 million financing and portfolio of three past producing properties. Since this company is led by experienced management with a history of making discoveries and building new mines they are well poised for outstanding growth over the coming months and years.
Santacruz Silver has attained all of the permits required to mine and mill at Rosario so they are focused on bringing this mine into production by the first quarter of 2013. The company’s objective is to become a mid-tier silver producer by mining at least 5 million ounces of silver equivalent over the next 3 to 4 years from several operations. Their exploration target is to find over 50 million ounces of silver equivalent at each of their properties, so in addition to drilling at Rosario they are also drilling at Gavilanes in Durango and preparing to move a rig to San Felipe in Sonora.
Santacruz Silver is currently trading around C$2.00 per share, so with 67.7 million shares outstanding their Market Cap is about $135.5 million.
(Chart from stockcharts.com)
Management
Santacruz Silver’s CEO and Director Arturo Préstamo has a CPA degree from the University of Monterrey plus earned two advanced degrees from business schools in Mexico, and has over 9 years of executive and operations experience in the precious metals mining industry. Mr. Préstamo is the former Country Manager and remains a Director of Starcore International Mines, Ltd, which recently brought the San Martin gold and silver mine into production in Querétaro State.
The company’s COO and Director Francisco Rámos is a mining and metallurgical engineer with over 30 years of industry experience here and abroad. Mr. Rámos previously worked for the major mining companies Peñoles and Industrial Minera Mexico, S.A. de C.V. (Grupo Mexico’s IMMSA), and was a co-founder of Great Panther Silver Ltd.
During the site visit I also met the company’s Exploration Manager, Operations Manager, and Chief Metallurgist, who are Mexican nationals with decades of experience exploring, building and operating significant gold and silver mines and mills.
(Historic church at Labor de la Cruz Ejido)
Santacruz’s management has established a good relationship with the local community association, called an Ejido, and earned their social license to operate here as they have signed a 30 year land use lease agreement. In preparation for mine and mill construction they hired many locals to relocate cactus and vegetation to botanical storage sites, where they will be stored until reclamation as the environmental permit requires. Furthermore, Santacruz has helped women of the Ejido establish their own independent sewing company, and this new business has an agreement to make the uniforms for the Rosario project’s miners and mill workers.
(Workers from the Ejido relocating cactus from the mill site)
Rosario Project
Santacruz Silver’s Rosario mine development project is located about 110 km north of the city of San Luis Potosi, and approximately 13 km southwest of the town of Charcas in the State of San Luis Potosi. Because Charcas is a significant mining town with a population of over 20,000 people, the company can easily support their Rosario operation with local skilled labor, mining equipment, supplies and relevant infrastructure.
Grupo Mexico’s IMMSA Charcas complex operates three underground mines and a flotation plant that produces zinc, lead, and copper concentrates, which are enriched with silver. In the year 1573 economic mineralization was first discovered in this district and today IMMSA’s complex is the largest zinc producer in Mexico.
The Rosario project is comprised of two adjacent claims that total 500 hectares. During the 1980s the government’s Mexican Geologic Service (SGM) drilled 185 holes into several targets here. Unfortunately their 24,969 meters of core and data weren’t stored well so they were not usable for the NI 43-101 compliant resource estimate despite recovering numerous vein intercepts with mineralization.
Although this project has several shallow underground mine workings there are not any accurate production records. However, the adjacent picture of the original mine manager’s house at Labor de la Cruz Ejido has turrets with slots for rifles. This type of architecture implies that during the Spanish colonial era the district was producing enough silver from high grade veins to warrant protection.
This stone wheel at the Ejido was part of an Arrastra that was used to crush ore during Spanish operations. It was likely powered by a “burro” or donkey.
The metals of interest at Rosario were deposited by multiple stages of mineralization and alteration, and this system includes zones of low-sulfidation epithermal, mesothermal, and skarn geology. Most of the known mineralization occurs as two parallel veins that have an average distance between them of about 35 meters and follow two normal faults along a strike length of about 2.5 km. However, the property’s initial resource only includes a 500 meter long zone of both veins from surface to a depth of about 200 meters.
Santa Cruz Silver’s Denver-based consultants Gustavson Associates completed this project’s NI 43-101 compliant Preliminary Economic Assessment (PEA) report in December 2011. This report estimates that Rosario’s two main veins have a total Inferred Resource of approximately 6.3 million ounces of silver and 38.4 thousand ounces of gold. This mineral resource is contained within 1.03 million tonnes that have an average grade of 1.16 g/t gold, 190.4 g/t silver, 3.00% zinc and 1.38% lead (using 88.8 g/t silver equivalent cutoff grade with the conservative silver price of $17.50 per ounce).
Santacruz’s drill core shows that this vein system has consistently mineable grades across mineable thickness. Both veins dip between 45 and 70 degrees, and range from 0.4 to 2.5 meters wide with an average thickness of 1.5 meters. Consequently, the new Rosario underground mine design for the PEA recommends using the shrinkage stoping mining method to optimize production and grade control, plus mechanized cut and fill as needed.
Gustavson is presently working on updating the technical report to a Feasibility Study within the next few months. The current Rosario estimate is an Inferred Resource, and the next 43-101 report intends to upgrade this resource classification with additional engineering plus new in-fill and step-out drill holes from their ongoing exploration program.
Because of the nature of vein deposit geology, it is common to use the proverbial “drill for structure and drift for grade” approach towards mine development. Once enough surface holes have been drilled the next step is to excavate a “drift” along the vein so the geologists can sample and map it in detail. This exploration and development method can also generate some cash flow from milling the rock that is significantly mineralized.
In mid-September the mining contractors will begin construction of a new portal located between the 2 veins and begin mining a new rubber tire decline ramp. Contractors will also mine a shallow pit along a portion of outcropping veins in the fourth quarter of 2012 so there will be a stockpile of material ready to process for the mill start-up.
Santacruz received their final mine and mill operating permits for Rosario this May, so by mid-August they began construction of the power line and pouring concrete for the mill foundation. SCZ bought an entire used 500 tpd ball mill and crushing circuit from a Goldcorp Mexico subsidiary company for $800,000, and the machinery has already been delivered to Charcas. The only additional equipment this used plant required was banks of flotation cells because it was previously used with a Merrill Crowe process. All of this equipment including the new cells are now at Charcas.
The PEA calculates that underground production could begin at a rate of 150 tpd and increase to 450 tpd by the end of the first year as more shrinkage stopes come online. Over a 5-year mine life production would average about 2.2 million ounces of silver equivalent per annum.
Based on the initial Rosario resource, the PEA estimates that with a $10.86 million Capital Expenditure this mine could have NPV(10%) of $47.23 million and a Rate of Return (ROR) of 84%. This assessment uses average metal prices of $17.50/oz silver, $1,050/oz gold, $1.00/lb lead and $1.00/lb zinc. The Unit Cost is estimated to be under $6 per ounce of silver equivalent.
San Felipe Project
In addition to the Rosario mine in San Luis Potosi, Santacruz Silver is also actively exploring their San Felipe property in Sonora State, which is located about 130 km northeast of the capital city Hermosillo. This past producing silver property occurs next to the town of San Felipe de Jesus, which has a population of about 1,000. Existing infrastructure includes paved road up to the mine gate, power and water. Nearby gold and silver mining operations include Yamana Gold’s Mercedes Mine and SilverCrest’s Santa Elena Mine (which SilverSeek.com founder Peter Spina and I visited in May).
Santacruz has the option to purchase San Felipe from Hochschild Mining plc. This large Peruvian based producer previously explored three of San Felipe’s 8 known veins with 168 holes that total over 18,500 meters of diamond drilling. Numerous vein outcrops exceed 3 meters of width, and occur up to about 17 meters wide. Santacruz is evaluating this property’s Transversales vein area for near term open pit mining potential.
The property has many historic underground workings with targets that have not been drilled deeper than 200 meters. Between 1974 and 1991 approximately 207,000 tonnes of ore were mined underground at an average grade of 298 g/t silver, 9% zinc, and 5.5% lead from the property’s Las Lamas, Artemisa, and Cornucopia deposits.
In July the Santacruz announced San Felipe’s first NI 43-101 compliant resource estimate, which includes 3.9 million tonnes of Measured and Indicated Resources that contains 39 million silver equivalent ounces. An additional 1.5 million tonnes of Inferred Resource host another 11 million silver equivalent ounces (using a 75 g/t silver equivalent cutoff grade). This resource is based on 3 of the property’s 8 known veins, and 80% of this resource is at the La Ventana vein.
Gavilanes Project
Santacruz Silver’s third project, Gavilanes is located about 110 km west of Durango city in Durango State’s important San Dimas mining district. This region of the Sierra Madre Occidental mountain range hosts several world class mines including Tahuehueto, Cienega, Basis, and Tayoltita. Some members of SCZ’s technical team previously helped Goldcorp build the Tayoltita Mine, which is located 23 km southwest of Gavilanes. Goldcorp sold the mine to Canadian based Primero Mining Corp. in 2010, which produced 102,000 gold equivalent ounces in this San Dimas district in 2011.
Seven veins have been identified here but exploration has focused on the 2 main veins and a stockwork zone called El Hundido. Hochschild and Luismin (now Goldcorp) previously drilled 3,200 meters here with encouraging results, including the recovery of a 36 meter intercept that averages 322 g/t silver. The drill core is stored onsite and has been kept in good condition. This property also includes a 120 tpd Merrill Crowe and Cyanide plant that was built in 1984 and produced high quality precipitates.
Recently Gustafson visited this project to help Santacruz target holes for their current 6,000 meter drilling program. This will include following up on an historic drill intercept of more than 450 g/t silver across a true width of 2.5 meters at the Guadalupe vein. The consultants anticipate completing the first NI 43-101 compliant resource estimate for Gavilanes by the end of 2012.
Summary
Santacruz Silver Mines Ltd. went public on the TSX-V in April, providing investors with exposure to a portfolio of projects that are poised for rapid future growth. Having recently completed a $20 million financing they have sufficient capital to bring the Rosario mine into production by the first quarter of 2013, and continue developing their advanced San Felipe and Gavilanes properties.
The Rosario mill construction is on schedule to be completed in time for the mine to begin production by Q1 2013. Presently Rosario is also being explored by one drill rig, and the consultants expect to have its 43-101 report updated to a Feasibility Study with a new resource in the coming months. In July, Santacruz announced they have a 50 million ounce silver-equivalent resource at their San Felipe project, which is being prepared for the follow-up drill program. Meanwhile, the company is currently drilling at Gavilanes, where their consultants plan to complete a NI 43-101 compliant resource estimate by the end of 2012.
Santacruz Silver’s objective is to become a mid-tier producer by mining over 5 million silver equivalent ounces over the next 4-5 years. Their exploration geologists are also looking to find over 50 million ounces of silver equivalent at each of their three properties in 2013. Currently SCZ is trading around C$2.00 per share with 67.7 million shares outstanding so the company has a Market Cap of about $135.5 million.
Simon Russell is a mining and geological engineer with over 10 years of diverse experience. His background includes hydrology and environmental engineering, exploration geology, underground contract mining, mine engineering, project management, and mine investment analysis. Mr. Russell has worked for many different types of mineral projects across the western United States and internationally for investors, consulting firms, and both major and junior resource companies. Mr. Russell is not an investment advisor and this is not intended as investment advice. He and/or members of the GoldSeek group may or may not own shares in the companies reviewed.
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