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Date: September 14, 2009
Also see our blog on What is a Scoping Study.
Operator: Welcome to the MAG Silver Conference Call. Please be advised that this call is being recorded. I would now like to turn the call over to Mr. Gordon Neal, Vice President of Corporate Development. Please go ahead Mr. Neal.
Gordon Neal: Thank-you Teresa. I would like to welcome you all to our conference call today. We made an important announcement today and we'd like to talk about the last 6 months where we had a scoping study done by Wardrop and company with our joint venture partner Fresnillo. I emphasis this study and its results we are going to outline in a minute were solely for the Valdecañas vein and a stand alone development project on the property. There will be some forward looking statements, so I want to direct you to our web site if you have any questions about these forward looking statements. Thanks Dan, go ahead.
Dan MacInnis: Ah, good afternoon where ever you are. This morning we put out a fairly detailed press release on a scoping study that was initiated by the joint venture Minera Juanicipio on behalf of its partners, MAG Silver and Fresnillo PLC. MAG is 44% interest shareholder in Minera Juanicipio. Fresnillo is the other 56%. The study was carried out by Wardrop who had a mandate to the scoping study as a stand alone operation, not taking into account, any of the surrounding synergies. And let me begin with the next slide here. Just a moment, and it is the usual forward looking safe harbor statement here.
Minera Juanicipio, as I mentioned, is a joint venture company incorporated in December 2007. 54, ah, 56% Frenillo and 44% MAG. The operator is Fresnillo. Within the agreement it is a pro-rata expenditure at the same level as ownership, however, there is a super majority clause in the agreement that requires a 60% shareholder vote for annual budgets, capital costs greater than $500K US, feasibility studies, and go, no go decisions, so at the end of the day Fresnillo, is not able to just steam roll budgets through. It requires our co-operation going forward.
The Juanicipio joint venture is located right within one of the most productive silver trends in the whole world. Over 4B oz of silver has come out of the Fresnillo silver trend. We are within 5km of the world's largest primary silver mine and over the last few years there have been a number of significant new vein discoveries to the southwest of the main Fresnillo district and you are seeing the emergence of a new vein field which we refer to as the Juanicipio Saucito vein field down to the southwest of the joint venture. And I might add that the land positions you see there, the only ground that is under joint venture is the Juanicipio property itself. The rest we hold 100%. We control a very large land package around Zacatecas and again in a very historic and prolific silver producer with close to 1B oz of silver production. We control almost all of the ground around it and we have significant land positions within the district itself as well.
Next slide sets up the standalone scoping study Wardrop carried out. It is an independent world class engineering company retained by Minera Juanicipio last September on behalf of the joint venture to carryout the standalone joint mine-mill joint construction project based, independent of any other regional mining operations or related infrastructure. Restricting itself to entirely just the joint venture. Part of the study included the assumption that ramp access would be the best economical option. Some of the parameters that you need to be aware of is that all costs going forward here are in US dollars. The estimates are to an accuracy of +/- 35% mostly with respect to capital expenditures and contingencies and that sort of thing. Some of the metal prices used in here in one of their models was dated to the end of May 2009. And in the case of the base study, Wardrop utilizes energy and metal consensus forecasts in quarterly reports in order to calculate their price deck.
Next slide is the synopsis and in this case there were three scenarios in the report which will be filed in Sedar later today and probably will be available for viewing by tomorrow. We choose, there is a price deck that Wardrop uses as the base case, and it is using the ECM forecasts. It is about a $10.39 silver price. With in the study there is a 4 year trailing average which is the one we will focus on here. It is more in keeping with the US securities and Exchange Commission which is guideline 7 which the SEC staff interprets to be a 3 year trailing. This is the closest we can get to it. It takes silver into account at $12.32 an ounce. If you did actually use the 3 year average it would be over $13. To take the net present value at a 5% discount rate and the 4 year average silver price you are looking at net present value of $967M and MAG's share at 44% would be estimated at roughly $425M. The project will have a 2.2 year payback period. The pre-tax internal rate of return estimated at 48%. 3.6 year pre-development period. 12.6 year mine life at 2350 tonnes a day. Capital costs, including the pre-development period, estimated at about $217M. The operating costs US dollars, $48.28 per tonne milled. And the unit cost, life of mine for accountable silver is $1.77. In this slide you are looking at $2.56 which is the base studies using a $10.25 silver price. If you use a, I have slide later that explains that. If you use the $12.35 silver price, that unit price per accountable silver is $1.77. That is net of by-product credit, that is the gold and base metals and the treatment, transportation, marketing costs. Your smelter costs as well.
Project Economics, slide 7: the pre-tax, net present value estimates as I mentioned earlier, there are several price decks that were used, 3. We are focusing on the 3 year average keeping with the SEC guidelines. The Wardrop based study uses $10.59 silver. You can see gold at $581. Lead at $0.56 and zinc at $0.80. Then the current prices at the time of the study, when this was done was May 21st and you are looking at $937 gold and $14.23 silver and $0.61 lead and $0.65 zinc. The top line which I have highlighted which is a net present value of 5%, net present value discount rate, $967M, 48% internal rate of return and a 2.2 year pay back period.
Slide #8: is the same table just taking MAG's share, calculated at 44% going across the top line, the base case is $295 and current price is $469.
Slide #9: what we have here is net present value with various silver prices and discount rate and if you look at the middle line, net present value at 5% you can see that $10 to $15 there is almost a $400M rise in market cap, sorry, in net present value, and if you work that backwards you see roughly a $100M increase in net present value at a 5% discount rate for every $1 increase in silver price. So you can see the project is very sensitive to the silver price and that I'll demonstrate later that also has a strong effect on the cost, the unit cost. And at the bottom you can see the base case you range from an internal rate of return of 38.5% to 53% at a $15 silver and the of course the payback period in all instances drops as well. You can certainly get the sense that this is an extremely robust project and that is what we have always said. That is what grade will do for you. Taking the same table and basically putting it on a graph showing 5%, 8% and 0% net present value relative to the various silver prices and the net present value and it just demonstrates that as silver increases the net present goes up roughly $100M per dollar of silver.
Slide 11, the capital cost estimates, the three year, 3.5 year production period, pre-production development costs of $36.5M, pre-production equipment capital, $28.34M, a preproduction cost total of $65M. The mine production period is schedule is scheduled at 12.6 years, mine development capital costs $132M. Total capital cost which includes the pre-production estimate is $217M and MAG would be responsible for 44% of those costs going forward. Project economics, the pre-tax cash flow estimates based on the Wardrop study, you look at $1.2B accumulated pre-tax cash flow over life of mine.
Slide 13, is the cautionary note for investors regarding resources.
Slide 14 is the mining inventory based on a $42 net smelter return cut-off. These are Wardrop's numbers. You are looking at about 2.8M tonnes of 683 g/t silver and a total inferred resource of about 6.7M of just over have a kilo which has a considerable base metal credits in both categories. Mining methods, we are looking at two methods based on depth. Avoca long haul and a mechanical cut and fill (MCF). 41% of the deposit will be mined by long haul sloping at a dilution rate of 23% recovery would be in the 95% range. And again one of the reasons this project is so robust is its width. The average mining width for Avoca is 7.2m making it very amenable to bulk mining methods. Mechanical Cut and Fill, 60% of the deposit, 70% dilution and average mining width of roughly 4.8M and the tonnes per day are estimated a 2350. Operating costs estimates, mining, processing, G&A and site services combined, roughly $30M a year. Unit cost comes down to $42.22 US per tonne of ore milled. The metallurgical balance, or the recoveries, the bottom table distribution, the lead concentrate, you can see we are looking at about 95% recovery for the and 91% recovery for silver, 79% for gold and 77% recovery for the zinc. So that you can see that the base metal credits and gold credits, the recoveries are exceptional as well.
Next slide doesn't seem to want to come up, there we go, may have gone one too many, project economics again, we are looking at annual production, recovered silver over life of mine over the 12.6 years of roughly 177M oz. That averages about roughly 14M oz a year to the joint venture. MAG's share of that would be approximately 6.1M oz a year on an annual basis. The number that we really like is at the bottom. Unit cost per accountable silver net of byproduct credits and the smelter charges, we are looking at $1.77 an ounce based on the 4 year trailing average scenario.
Next slide takes all 3 scenarios and demonstrates that as silver prices increase the cost per unit the cost per accountable silver goes down. The 4 year average we are down to $1.77. We were at Wardrop the other day and we plugged in all of the metal costs based on Thursday's close and we have that down to about $1.19 based on today's metal prices. Again, this project is very sensitive to silver prices.
Slide 20, shows you a graph just demonstrating the annual production. You can see year 3 is a great year you'll produce about 18M oz of silver. Again the average is about 14 on an annual basis and MAG's share of that will be a little over 6.1M ounces averages over the 12.6 year mine life.
Mine Developments and Stoping Design again by Wardrop, the cross section looking north you can see it is a ramp access, the top of the ore body is about 350, 400m below surface extending down to about 800m below surface. And it was determined that early on in this one of the assumptions that the vertical access and a ramp access, a ramp was the better option. This is again the stoping design, again looking west along the strike of the vein and you can see the nature of the design.
The next slide, 23, is the mine development, site development, looking at a surface plan as you can see the mandate of the joint venture was too design the plan to be stand alone restricting itself entirely to the property and you can see there is facilities available there to build a mill, portal entry up there in the northeast corner of the project, failings disposal further down, and just to the east you can see location of the new Fresnillo shaft that they are developing for their overall Saucito project access, Jarillas vein and others.
Process flow sheet, very simple design. Lead circuit, zinc circuit, most of the silver will port to the lead. Recoveries as I mentioned earlier are world class and its a tried and proven method of silver recovery that Fresnillo and previous operators have been using here for well over 100 years. This is a, just to give you an idea of what it looks like, this is a grams map, if you like, a silver grade in grams per tonne times true width meters. It gives you a nice depiction of the bonanza zone, and this I might add is dipping longitudinal section coming at you at about 65 degrees. And it demonstrated the top and bottom, very well defined vein deposit.
And the final side here is just an overview of the Saucito Juanicipio vein field. It is obvious from the diagram that you can see the emergence of a new vein field to the southwest. The interesting thing about this is it is early stages. There are new veins being found out here on a yearly basis. The metal content, the metal endowment in these new veins, there are higher grade gold on the average and also higher grade base metals and you can see from the way that they are occurring at this stage they are trending off to the west. They are very consistent so that there is plenty of upside on the Juanicipio property to see extension of these veins and others discoveries going forward so the upside potential for the discovery of more veins here is quite high and obvious would affect any development plans going forward here. That pretty well wraps-up or sums up what I think is a good start for the joint venture in that our, Wardrop has again introduced an independent study, with ah, the idea of developing Juanicipio as a stand alone. It does not take into account any of the natural synergies that may or may exist with existing operations that are controlled by our partner Frenillo PLC to the east and to the north. And that this point here I will throw the conference into a Q&A mode.
Operator: thank-you.
Gordon Neal: Thanks very much everyone for joining our conference call. If you have any further questions or you want to get a hold of us, you can contact us via our e-mail on our web site, and Dan and I and Peter and Mike and Frank are here, we'd be, we're at the Denver Gold show, we'll get back to you as soon as we can. Thanks very much again.
MAG Silver
Yeh, I'll just reiterate that the report will be filed this afternoon on Sedar and should be up for viewing by tomorrow morning at the latest for that those that are looking for the details.Operator: I am sorry for the interruption gentlemen, we do have two questions. The first question is from Bart Jaworski from Raymond James.
Bart Jaworski: Good morning guys. Just wanted to see whether you could maybe shed some more light on the actual synergies between you and Frenillo in the region, would that be potentially a mill and what is the status of that on that side? Or perhaps road or some additional infrastructure?
Dan MacInnis: Ah, well, first of all just to make it very clear, the study that put this morning doesn't take into account any of that. And the synergy issues are the same issues we encounter during the valuation process of their intent to bid earlier in the year. Those issues were never resolved but it is not difficult to determine what some of those would be. One would be the taxes for example. Fresnillo has access to a lot of different tax credits as a major mining company based in Mexico and the joint venture would obviously accrue some of those as well. There are synergies amortizing capital costs over more ounces for mills and or shaft and ramp access. Things like that would need to be carried out. But this study doesn't address any of those and those issues are still out and may come up or become part of the next step which has been recommended by Wardrop, which is to take the project to a pre-feasibility study.
Bart Jaworski: And Dan, do you know the status of the Saucito mill at this stage or has that decision been made?
Dan MacInnis: Yeh, no, from what I understand, I've seen a press release, on it and I've also seen local newspaper in Zacatecas announce a $300M mill construction at Saucito and I believe that's already started to, started the pad which is not to far from the shaft. So that's already, hm, already ongoing. I think Fresnillo has already announced that as well.
Bart Jaworski: And that is by the Saucito shaft or by the...
Dan MacInnis: No, its by the new Jarillas, Madrono shaft
Bart Jaworski: Ok. Great. And the Jarillas shaft is that trending off towards Valdecañas or is that trending just toward Jarillas?
Dan MacInnis: Well, its a vertical shaft.
Bart Jaworski: Ok. And they are not splaying off it, ramping off at this stage?
Dan MacInnis: Not that we're, we're not privy to that information.
Bart Jaworski: Ok, thank-you very much.
Dan MacInnis: You are welcome Bert.
Operator: Thank-you. Once again, please press *1 on your telephone key pad if you have a question. The next question is from Peter Barry, a private investor. Please go ahead.
Peter Barry. Thank-you gentlemen. Ah, I was wondering what under the joint venture, ah, is there any obligation on Fresnillo's part to proceed? Or at what point would there be an obligation, to the next step, pre-feasibility and, ah,..
Dan MacInnis: Yeh, ahm, well, like any agreement it anticipates success and project going forward, ahm, there are provisions in the agreement to ah, you know, to ah, which is kind of what we are doing right now. We've taken the first step towards, ah, taking the project forward by completing the scoping study. The next step is obviously feasibility study. That is on the agenda for the next meeting. You can see from the economics that this thing is very very robust and would be a unprofessional if you like if this project were not to take the next step going forward. And the agreement does cover, ah, you, know feasibility studies, and the need to have one to have one to make the project go forward.
Peter Barry: What if, ah, the sort of, allow me some negative thinking, ah, [Dan, ok], ah, what if they stone wall you? What happens?
Dan MacInnis: Well there are provisions in the, there is, they have, well yeh, we have, I guess the best way to put it is we have a joint venture company. And it is governed by, like most joint venture companies, its listed and registered in Mexico and the directors of the operators have a fiduciary responsibility to the shareholders. Just like in any other public company. Or sorry, like in any other incorporated company. So they, ah, and there are provisions within the agreement as well, that you can't really park the project for any extended period of time. Then you have to turn the operation over the party that does not want to move forward. I'm sorry, to the party what wants to move forward.
Peter Barry: Right, and how long a process would be entailed in something as desperate as that.
Peter Barry: Ok. Thank-you.
You are welcome.
Operator: There are no further questions registered at this time. I would now like to turn the meeting over to Mr. Neal.
Mr. Neal: Again, thank-you very much for attending. We are at the Denver Gold show. And we will get back to you if you have any further questions via e-mail. And we are excited about this development in Mag's progress.
Operator: Thank-you. The conference is now over...
Use Talk Back or e-mail dennis@goldminerpulse.com to leave a comment.
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