ECU Gold Mining- by David Morgan
Mining Research Company
Paris, France
Recent Share Price
Listed
Symbol
Issued Shares
Fully diluted shares
Mkt Capitalisation
52 Week range
Internet
CAN$0.36, US$0.24
Montreal
ECU
46.9 m
55.3 m
US$11.3m
US$0.32 - US$0.09
www.ecu.qc.ca
A NEW SILVER PRODUCER
ECU Gold Mining, Inc. is about to join the small group of profitable primary silver producers in the world. We think it has one of the most attractive risk vs. reward ratios in the precious metals mining industry.
The Company's Velardeña silver mine in central Mexico is scheduled to be in full production by the end of this year with an annual output of 2.3 million silver equivalent ounces. The current development program is fully funded and expected to provide an operating cash flow in excess of $5 million per year, equivalent to approximately 9 cents per fully diluted share. Projected mine-operating costs of $2.04 oz compare favourably with major competitors.
We believe the Company has the capability to achieve these production and financial goals.
ECU should then be in the unusual and advantageous position of a junior mining company with healthy cash flow. In a depressed precious metals mining industry, this should present excellent possibilities for future growth.
Completion of this years operating plan should justify a doubling of the share price. There is scope for significant further appreciation from: (a) more reserves and higher production (b) new ventures made possible by healthy cash flow (c) higher precious metal prices, particularly silver (d) scarcity value of a profitable silver producer (e) broader market exposure beyond the current limited investor base in Montreal and Paris.
David Morgan
March 1999
davidmorgan@usa.net
CURRENCY US Dollars
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Summary
ECU Gold Mining, Inc. is a Canadian mining company based in Quebec. Originally an exploration company, its focus was radically changed through the purchase of the Velardeña silver mine in Mexico from William Resources in 1997. The Company is now poised to become a profitable silver and gold producer. Most of its other assets have been disposed of in order to concentrate on Velardeña. Velardeña is a typical narrow vein underground mine with multiple vein systems. Preliminary mining and milling were resumed in early 1998 and operations are now being rapidly expanded towards commercial production. The near term target of 650 tonnes per day is planned to be reached before the end of this year. At this point the Company expects to be producing at a rate of 2.3 million silver equivalent ounces per year and generating operating cash flow in excess of $5 million.
The purchase and subsequent development of Velardeña was financed largely by a share placement to group of French investors led by Global Equities in Paris, and by a $2 million loan from IIG Capital of New York. Global Equities has also acquired the 30% Net Profit Interest originally retained by William.
It is proposed to rename the Company ECU Silver to better reflect its main activity.
Four reasons to expect a higher share price
ECU has demonstrated its commercial acumen in acquiring the Velardeña property at a distress price and advantageously financing the mine's development in a depressed market. Its technical capability has got the mine back into operation and on course for profitable production this year. The Company's fundamental strengths justify a significantly higher share price as outlined below.
1) Target production to be successfully achieved
Successful implementation of the current production plan year will establish Velardeña as a profitable silver and gold producer with a strong operating cash flow. This alone could justify a doubling of the share price.
2) Increase in ore reserves and production
There is good potential for additional ore reserves, which could extend mine life and support higher production. ECU is already considering raising the milling rate to 1000 tpd.
3) Cash flow will opens up growth opportunities
From the corporate point of view, ECU should soon be in the unusual and favourable position of a junior mining company with a healthy cash flow. This will open up many possibilities for acquisitions or new ventures, particularly if the mining market remains depressed. The Company has already demonstrated its ability to raise loan finance, even ahead of commercial production. With the backing of cash flow from Velardeña, quite sizeable financial commitments should be within its reach.
4) Higher silver and gold prices
The investment case for ECU Gold does not rely on higher metal prices but obviously that would be good for the share price. A rise in silver would be particularly significant as there is a dearth of good silver equities, and ECU should gain additionally through scarcity value. A change of 10% in the prices silver, gold, or both metals together would change estimated cash flow by 10.5%, 8.5% and 19% respectively.
Share Valuation
When the current development plan is fully implemented, the Company estimates that operating cash flow will be running at over $5 million per year. This amounts to approximately 9 cents per share (fully diluted) Depreciation rates have not yet been established and will depend, among other things, on reserves at year end but corresponding earnings could come out at around 5 cents per share. Taking a moderate P/E and price/cash flow ratios of 8x and 4x respectively, these numbers point to a share price of around 40 cents US.
On the same basis of a 650 tpd production rate and assuming a mine life of 9 years (based on 100% of proven and probable reserves, 50% of possible reserves and 25% of resources) the Net Present Value of the project, after royalties and tax could be in the region of 55 cents per share (at 5% discount rate).
These figures suggest that completion of the basic operating plan on its own could justify a doubling, at least, of the share price from current levels. Further mine and corporate developments could lead to substantially higher prices.
All the above estimates are based on gold at $290 per ounce and silver at $5.00 per ounce.
The Current Operating Plan
ECU is entering a key period in its build up to commercial production. The main activities scheduled to be undertaken this year are: -
a) Build up the underground mining rate and phase out the treatment of rezagas (broken ore from old stopes) and ore from surface dumps.
b) Increase mill throughput to 650 tpd.
c) Open up the San Diego mine and commence trucking ore to the Velardeña mill.
d) Complete the deepening of the Santa Juana shaft and the access ramp to the 17 level of the Santa Juana vein system.
e) Install the basic flotation plant at the mill and commence mining and treatment of sulphide ore.
f) Achieve a mine operating cash flow of approximately $500,000 per month.
The operating performance planned to be achieved by the end of 1999 is summarised below.
Tonnes milled
225,000 t.p.a, 650 tpd
Assumed metal prices
silver $5/oz, gold $290/oz
oxide 75%, sulfide 25%
Net revenue
$10.5 million
Average grade
silver 229 g/t, gold 3.1 g/t
derived approx.
silver 51%, gold 44%, lead 5%
Overall recovery
silver 73%, gold 76%
Mine costs
$ 4.7 million, $21/tonne milled
Silver recovered
1.2 million oz
Smelter costs
$ 1.2 million
Gold recovered
17,150 oz
Costs per silver equiv. oz
mine $2.04/oz, total $2.59/oz
Lead recovered
648,000 Kg
Operating cash flow
$ 5.8 million
Reasons to expect ECU to succeed
Over the years there have been many failed attempts to re-open old mines. The following questions and answers look at the key factors and indicate why Velardeña should not be another example.
Are the ore reserves really there?
Reserve estimates for Velardeña are based mainly on extensive and recent sampling of underground development, (which is more reliable than drilling for this type of deposit). Previous mining has demonstrated the continuity of the vein structures. An independent consulting company, Micon International, has favourably reviewed the resource estimation procedures and believes that the resources have a high probability of being upgraded to the higher confidence categories.
Is there an adequate mine life?
Proven and probable reserves are sufficient for just over four years of operations at the planned production rate of 650 tpd. This is not untypical for an underground mine and numerous operations have run for many years without ever having had more proven reserves ahead of the mill. Significant tonnage comes from ore outside reserves so effective reserve life is longer. The property has not yet been thoroughly explored by modern methods. Micon believes there is high potential for finding further ore.
Can the reserves be economically mined?
A considerable amount of mining has taken place at Velardeña in the past. ECU itself has been successfully mining and milling ore for over a year. Conventional mining methods are being used which have been proven to be effective and are well understood by the Mexican miners. All the current reserves are accessible from existing underground development. The mill has demonstrated good recoveries from oxide ore and test work has shown no complications likely to prevent successful flotation of sulfide ore.
The previous operator was unsuccessful. What is ECU doing differently?
The biggest problem before was very poor recovery of gold and silver in the mill. Modifications to the circuit and different use of reagents by ECU have already solved this problem and satisfactory recoveries have been achieved for more than six months. Other operating difficulties are being avoided by the hands on involvement of the technically experienced ECU top management together with a successful "Mexicanisation" of mine management. In the past, recruitment and retention of workers was hindered by doubts about the future of the mine, but ECU's commitment and adequate funding have now given the mine a local reputation as a good long term employer.
Has the Company the right management?
President, André St-Michel and vice-president Michel Roy both have degrees in Geology and masters degrees in Project Management with extensive experience in underground mining in Quebec and in corporate management. The President of the operating company, BLM Minera is a Mexican Mining Engineer with broad local experience and contacts.
Are operating cost estimates reasonable?
ECU is estimating total mine operating costs of about $21 per tonne, quite a low figure by international standards. But most of the Company's expenses are Mexican Pesos and the weakness of that currency greatly improves the cost structure relative to US producers. In particular, a major contributor is the moderate cost of skilled labour in Mexico which results in employment making up only 30% of total costs compared with over 50% for a similar operations in North America. A further 50% is accounted for by three items, electricity, mill reagents and explosives where unit costs are already known and a fair indication of consumption rates has been provided by nearly a year of pre-commercial operations. The only major activity not already tested in actual operation is the flotation of sulfide ore.
Overall the project is not highly sensitive to operating costs at current metal prices. A 10% increase in total costs would reduce operating cash flow by about 8%.
Will the production schedule be met?
The operating plan calls for a threefold increase in underground tonnage mined between now and July and includes the start of mining at the San Diego property where there is currently no equipment installed. A further 20% increase in throughput is scheduled for the second half of the year plus the commissioning of the flotation plant and introduction of sulphide ore. This is a demanding program but is backed by more than a year of preparation. Mining methods are conventional, mill operation has been proven and virtually all the extra equipment needed is already available. The most important uncompleted item is hiring and deploying additional underground miners. There are no new technologies involved in the project and one cannot see anything which might make the goals unattainable
Is the Company is adequately financed?
Most of the equipment needed for this year's production plan has already been paid for. Depressed conditions in the Canadian mining industry have enabled ECU to buy at bargain prices. After completing the remaining capital expenditure, ECU expects to have in excess $500,000 of uncommitted cash. Even if the program falls behind schedule, the operation should soon be producing a positive cash flow except in the case of exceptionally severe problems. Overall the Company is well cushioned against risk of financial crisis or emergency funding requirements during the build up to commercial production.
The only significant long-term liability is the $2 million loan (at 13%) from IIG Capital, which is repayable in instalments in the year 2000.
Financial Position
Details of share capital
Issued Shares (March 1999)
46.87m
Significant share holdings
Options: Directors, officers & employees
4.29m
Global Equities 32%.
Warrants: European Private Placements
3.41m
plus 30% Net Profit Interest
The International Investment Group
0.50m
Board :4.3%
Granite Group
0.20m
Full conversion of options and warrants would.
Total fully diluted
55.27m
bring in approximately $3.1 million
Net Profit Interest
A 30 % Net Profit Interest in the Velardeña mine is held by Global Equities. The NPI agreement provides for the payment of 30% of net profit, after expenses and initial costs as defined in the NPI Agreement, up to a total C$12 million, after which it reverts to a 2% NSR royalty. On current projections the NPI is not expected to be payable for several years. It would not be surprising if the NPI were converted to equity before then.
Other financial items
ECU has fixed assets of about $20 million and long term debt of $2 million. For accounting purposes the Velardeña project is currently in the pre-production phase and commercial production is likely to begin at the start of the 2000 fiscal year. Accumulated allowances should shelter the Company from tax for several years.
The Velardeña Project
Background
Mining in the Velardeña district dates back to early Spanish colonial times when high-grade ore was mined by hand and processed on a small scale by direct smelting. In 1888, the Velardeña Mining and Smelting Company consolidated many of the small operations. Velardeña was acquired by the Asarco in 1902 who mined it continuously until 1929 when the smelter was dismantled and removed. Subsequently the property returned to small-scale private ownership until its acquisition by William Resources in 1994. William made substantial investments in the property including extensive development to access the Santa Juana vein and the construction of a modern cyanide mill. But following disappointing operating results and corporate pressures elsewhere William agreed to sell its interest in Velardeña to ECU Gold in April 1997.
The Velardeña Property
The Velardeña Property is held by ECU Gold through its 93.4% owned Mexican subsidiary, BLM Minera Mexicana. It consists of the Velardeña Mine itself and the San Diego property about 9.5 km away.
The Velardeña district is located in the eastern Sierra Madre and lies within the main silver belt of central Mexico which contains some of the worlds largest silver producers.
The Company's property is about 95 km from the major industrial city of Torreon, which has a full range of support services, and is the site of a major smelter owned by Peñoles. Easy access is obtained by a paved highway and a 7km gravel road from the village of Velardeña to the mine site. The property is connected to the main electricity grid and water is supplied by a Company owned pipeline.
The Velardeña Mine
The mineralization at Velardeña is contained in a range of hills that rise from a broad valley. The main mine office, mill and tailings pond are located in a level area near the edge of valley. From there, 3km of steep and winding haulage road leads up to the main access to the underground workings, the Terneras Portal.
There are a considerable number of vein systems in the Velardeña property. Among those of current interest, the east - west trending Terneras vein has been extensively mined in the past and provides a good indication of the vertical and horizontal extent of the mineralised interval. Approximately parallel to the Terneras vein are the San Juanes and San Mateo veins, which together contain about 45% of the current proven and probable reserves of the mine. About 500 metres to the north lies the Santa Juana vein system which is the most important for current operations. It contains the majority of the reserves and will be the only area at Velardeña to be mined in the near term.
Mineralization at Velardeña occurs as relatively narrow, steeply dipping, high-grade silver/gold veins. The veins vary in width from thin stringers to more than two metres but are typically 20 to 80 centimetres wide. Widths of up to 8 metres are encountered in the chimney zones of the Santa Juana vein. The veins are continuous over long distances, 200 metres to more than 600 metres. Workings in the Terneras vein indicate that the mineralised interval is more than 500 metres high.
Access to these areas is via an adit from the Terneras portal. The main haulage passes through the Terneras, San Juanes and San Mateo vein systems and a 1200 metre crosscut extends to the 12 level of the Santa Juana workings. From there, an internal shaft gives access down to the 16 level and is currently being deepened to the 17 level where it will connect with an access ramp which extends down from the 15.5 level.
Mining is mainly by shrinkage stoping, the most commonly used method in narrow vein mines. The ground conditions in the mine are excellent, needing minimal support and backfilling is not required. Mexican miners are well experienced and skilful at this type of mining. (though management is gradually introducing some changes to enhance productivity). In addition to the typical narrow veins, The Santa Juana system also contains areas related to cross veins where substantially higher mining widths are possible, and irregular mineralised bodies known as chimneys associated with minor motions along the walls of the veins. The chimneys though not large are commonly very high grade and represent significant upside potential below the 16 level. (which is not reflected in the ore reserve estimates).
Broken ore from the stopes is removed through draw points and trammed to the shaft from where it is loaded onto three-ton rail cars and hauled out of the mine by electric locomotives. At the Terneras Portal, the ore is loaded into contractor operated trucks for transport downhill to the mill.
There are two principle types of mineralization at Velardeña, sulfide, which is the primary form of emplacement, and oxide which is the product of oxidation of sulfide ore by exposure to water and air. Normally, oxide ore occurs in the upper levels and sulfides at depth. In the Santa Juana area the oxide ore is found within limestones down to level 18 and near the Tres Aguilas fault, while sulfide ore predominates within the intrusive rocks and below level 18. The significance of the different ore types at Velardeña is that gold and silver in oxide ores can be recovered in the mill by straightforward cyanidation whereas sulfides require a flotation process to separate the metal-bearing sulfide minerals into a concentrate from which the precious metals can be extracted by smelting. Up to now, only oxide ore has been treated at Velardeña. Within the next few months, however, a flotation plant will be assembled and commissioned at the mill (the main items of equipment are already on site) and mining of sulphide ore will begin on the Santa Juana vein.
San Diego
The San Diego property is located approximately 9.5 km in a straight line from the Velardeña mill and about one hour drive by truck. From a geological point of view, the San Diego mineralised structures probably do not belong to the same hydrothermal system that resulted in the Velardeña mining district but they are similar in their along-strike and at depth continuity, their typical width and the fact that the veins crosscut both intrusive rocks and limestones. Unlike Velardeña, however, silver is the predominant value in the ore with comparatively little gold. Six main veins have been mapped on the property but workings were mostly restricted to the La Cruz and El Trovatore veins, which have been mined to a depth exceeding 200 metres. Both sulfide and oxide ore are present. Most of the mining in the San Diego area stopped about 15 years ago. The former treatment plant has been removed and at present there are no mining equipment or facilities in place. The site was previously connected to the electricity grid by a power line. The cables themselves have been removed but the pylons are still intact and it is reckoned that the supply could be reinstated at comparatively modest cost.
ECU is planning to move some mobile equipment to San Diego in the near future to open up the unmined extension of the La Cruz vein for production from the main adit level. This oxide ore will be trucked to the Velardeña mill, starting in April at 1000 tonnes per month and building up to 4000 tonnes per month by the end of the year. Projected recovered metal value is a bit less than from the oxide ore from Santa Juana but the product is nearly all silver.
Ore treatment
The processing plant at Velardeña is a conventional, modern, cyanide mill, originally constructed in 1992 for a mine in Canada and designed to treat oxide ore. William bought it in 1996 and re-erected it at Velardeña. The facilities appear in good mechanical condition and comprise a crushing and screening plant, ball mill, leaching tanks, a counter current decantation circuit and a Merrill-Crowe precipitation plant. The mill can currently treat over 600 tpd, and could be readily expanded to 1200 tpd, mainly by adding further grinding capacity. The final product is a silver and gold containing precipitate, which is sold to a smelter in Torreon.
To treat sulfide ore, a flotation plant is about to be installed. It will produce a precious metal bearing lead concentrate, which will be sold directly to a smelter. About 62% of the silver and 37% of the gold is expected to be recovered into the flotation concentrate together with base metals, predominantly lead. A further 25% of the silver and 42% of the gold from the sulfides will be recovered by cyanide leaching, giving a total recovery of 87% of silver and 79% of gold. These are significantly higher than the 65% recovery of silver and 75% recoveries of gold obtained by cyanide treatment of oxide ore, particularly in respect of silver.
However the charges made by the smelter for recovering precious metals from a flotation concentrate are substantially higher than the costs of treating precipitate from cyanide leaching. At current metal prices, smelter charges absorb just over 35% of the metal value in concentrate compared with only 4% for Merrill Crowe precipitate. These higher costs are significantly offset, though, by the higher precious metal recovery and the production of lead, which pays for about half the smelter charge.
Ore Reserves
The San Mateo and San Juanes veins at Velardeña and the San Diego vein systems are fairly straightforward planar features, continuous both along strike and at depth. The geometry of the Santa Juana vein system is more complex and includes irregular ore zones, or chimneys, crosscutting veins and zones where the veins split and rejoin.
The current ore reserve estimates are based on more than 4000 underground samples supplemented by data from 59 diamond drill holes put down by William. All the data has been collected by BLM in the last five years (under the ownership of William and ECU) and no older information has been used.
The independent consulting group, Micon, has examined the resource estimation and found them to be based on appropriately chosen industry standard procedures. Moreover, given the demonstrated continuity of previously mined ore at Velardeña, Micon believes that these resources have a high probability of being upgraded to the higher confidence categories.
The table summarises the current reserve estimates.
Velardeña
Tonnes
Silver
g/t
Gold
g/t
Ounces of silver
Ounces of gold
Proven & probable
824,171
237
3.57
6.280,660
94,607
Possible
1,072,123
342
3.05
11,789,906
105,144
Resource
767,507
200
1.19
4.935,736
29,368
Total
2,663,801
269
2.80
23,006,302
229,119
San Diego
Resources
532,240
265
0.48
4,535,164
8,215
Metal content
Silver equivalent
41,300,000
Gold equivalent s
712,000
Approximately 55% of the proven and probable reserves are contained in the Santa Juana vein system where the initial mining is taking place. The remainder is in the Terneras vein systems (Terneras, San Mateo and San Juanes). Sulfide ore represents about 60% of reserves in all categorie
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Disclaimer
Mining Research Companyhas been paid a fee to prepare this research report.
This offer is not, and should not be construed as, an offer to sell or solicitation of any offer to buy any securities. The information and opinions contained in this document have been compiled or arrived at by Mining Research Company from sources believed to be reliable and in good faith but no representation or warranty, expressed or implied, is made as to their accuracy, completeness or correctness
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