Americas Silver gains momentum in transition to low-cost producer by 2018

VANCOUVER (miningweekly.com) – Bolstered by improving silver and base metals prices, junior miner Americas Silver is in the home stretch to deliver on a four-year turnaround strategy at its two operating mining complexes in Sinaloa state, Mexico and Idaho, in the US.

“We have significant intrinsic value that’s about to be realised,” CFO Warren Varga tells Mining Weekly Online on the sidelines of a retail investor presentation in Vancouver.

The Toronto-based company has operations in two of the world's top silver-producing areas: the Cosalá operations in Mexico, and the Galena complex in Idaho’s panhandle.

In Mexico, the TSX- and NYSE MKT-listed junior operates the 100%-owned producing Nuestra Señora silver/zinc/copper/lead mine, where it declared commercial production in January 2009, following development of the mine and commissioning of the Los Braceros processing facility.

The Cosalá area land-holdings also host several other known deposits and prospects including the San Rafael zinc/lead/silver project, and the El Cajón silver/copper deposit. These properties are near the Los Braceros processing plant and are accessible by road.

In Idaho, Americas Silver (formerly Scorpio Mining) operates the 100%-owned producing Galena complex it acquired through the business combination with US Silver & Gas in 2014. The Galena complex’s primary assets are the operating Galena mine, the mothballed Coeur mine, and the adjoining Caladay development project, in the Coeur d’Alene mining district.

NEXT CATALYST
The next big catalyst is to execute on time and within budget the fully funded San Rafael project before October.

“The completed project will significantly increase the company’s zinc and lead production, driving free cash flow and lower costs in the fourth quarter and beyond. We are aiming at transitioning to first-quartile silver cash costs and AISC [all-in sustaining costs],” Varga says.

The company is currently transitioning from the Nuestra Señora mine to the “attractive” San Rafael deposit by the end of the third quarter.

Construction of the San Rafael project started in the third quarter last year, costing a modest $18-million using existing mill infrastructure.

A prefeasibility study has projected an initial six-year mine life with an average yearly production rate of about one-million ounces of silver, 50-million pounds of zinc and 20-million pounds of lead. San Rafael will produce 3.2-million tonnes at average grades of 110 g/t silver, 4.3% zinc and 1.8% lead.

The project will generate average cash flow of about $2.5-million a month, or more, resulting in an internal rate of return of more than 100% at current metal prices.

The project received a significant confidence boost when Glencore extended a $15-million term loan to the company following a thorough due diligence on the project, which allowed the company to restructure part of its debt at better rates.

Having produced one-million ounces of silver, ten-million pounds of zinc and four-million pounds of lead in 2016, Varga says the Nuestra Señora mine will cease production in the current quarter, while El Cajón production will continue through to the start-up of San Rafael.

The company will also be weighing a mill expansion decision for San Rafael in 2018, based on actual operating performance and metals prices.

Varga stresses that the project life is expected to increase owing to continued exploration success in the area and conversion of existing measured and indicated resources.

Varga expects the company to have significant revaluation potential based on its upcoming catalysts and low cost profile compared with its peers.

COST DESTRUCTION
Varga notes that investors might not have caught much wind of the company’s activities over the past several years, as management was mainly concerned with chasing down costs at its two higher-cost operations.

Critically, Varga points out that management has reduced company-wide AISC by 70%, all while increasing silver reserves to 31.1-million ounces and extending the current mine lives beyond ten years at current prices.

Over the past two years, AISC fell 40% to $12.71/oz in 2016, while output increased 20% to 4.7-million ounces of silver equivalent. For 2017, these metrics are forecast to improve further, with silver AISC expected to range between $9/oz and $10/oz and silver-equivalent output expected to rise to between 5.5-million and 6-million ounces.

Since 2012, management has reduced Cosalá’s silver cash costs by 166% to around negative $7/oz expected this year, with AISC dropping 103% to slightly below negative this year.

Over the same time frame, Americas Silver has lowered the Galena complex’s silver cash costs by 52% to about $9.50/oz in 2017, and AISC fell by 54% to around $14/oz.

The Galena complex has recorded historic output of more than 250-million ounces of silver along with associated by-product metals copper and lead over a modern production history of more than 60 years.

The complex’s Coeur mine has been put on care and maintenance pending further improvement in the silver price.

Americas Silver produced 1.4-million ounces of silver and 24-million pounds of lead at the Galena complex in 2016.

The company is currently exploring high-grade areas of the Caladay development project. Exploration is under way at the western end of the 3400 Level, targeting new high-grade, high-tonnage silver/lead targets.

The company will also undertake further drilling to confirm the continuity of the 4900 Level 360/366 Vein and to extend and upgrade the resource.

EXPLORATION UPSIDE
At Cosalá, the company is surveying its large untested and prospective land position that is expected to underpin long-term operations and growth prospects.

Americas Silver is a significant concession holder in the Cosalá district, with holdings of over 21 000 ha, containing 27 historic mines with many attractive silver/zinc/lead targets, as well as high grade silver/copper targets.

Varga says the improved metals prices have enabled the company to spend more on exploration, with at least $2-million budgeted to focus on the San Rafael/El Cajón area, looking for silver/zinc/lead and silver/copper deposits this year.

Exploration will also entail infill drilling on Zone 120 (San Rafael) and testing new targets to the southeast to extend the silver/copper footprint

Meanwhile, Americas Silver has already set its sights on the next growth project, San Felipe.

Located 150 km from Hermosillo, with good road access, near power and available water, Hochschild Mining acquired the property in 2006 and invested $45-million before determining it was a noncore project.

Americas Silver then acquired an option for $7-million, with second payment of $8-million for land title due by December 15. A 2014 preliminary economic assessment by Santacruz Silver established a good baseline, Varga says, like San Rafael when it was acquired.

In 2017, the team will focus exploration efforts on increasing the land position, reviewing the resource estimate, advancing the permitting process and completing geotechnical studies.