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Santa Fe Gold nearing production of silver-gold in New Mexico By : Mike Niehuser |
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We recently visited Santa Fe Gold Corp.’s Summit Silver-Gold Mine located in southwestern New Mexico near Duncan, Arizona and its processing facility in Lordsburg, New Mexico. This was our fourth visit to the project over the past three years and we are pleased to see the project reaching production as we previously envisioned. We were again impressed with the preparation for production and the excess capacity for the mill to exceed scheduled production. Considering the recent turmoil in the credit and political markets, the timing of the Summit Mine moving into production during a period of increasing precious metal prices, and moderating operating costs, could not have been better for Santa Fe shareholders.
The Summit Mine, with its processing facility in Lordsburg, is Santa Fe’s most advanced asset. The project consists of a silver-gold resource in the Steeple Rock Mining District north of the city of Duncan Summit Mine, near Duncan, Arizona (the Summit Mine – video clip http://www.beaconrockresearch.com/SFEG.summit.htm), on the Arizona/New Mexico border; a mill site near Lordsburg, the site of a previously operating mine (the Banner Mill site – video clip http://www.beaconrockresearch.com/SFEG.lordsburg.htm); and the Banner Mill, a 400 tpd flotation mill relocated from Winston, New Mexico (with potential for expanding capacity to 800-1,000 tpd). Santa Fe acquired these three assets, successfully reopening, expanding and extending the former "Hansen decline," and relocating and reassembling the Winston Mill at the Banner site near Lordsburg.
Santa Fe management originally had planned to engage a contract miner, but as contractor prices peaked in early 2008, they opted to mine the project themselves. More recently, the company has benefited from falling base metal prices and the reduction in regional base metal mining activity. They have found an abundance of available skilled and unskilled labor. Even with the additional required capital investment in essential equipment to operate the mine themselves, the Summit Mine is coming in under budget, and with potentially lower costs over the scheduled life of the project. Work on the Banner Mill has been completed and ore has been stockpiled at the mill, ready to commence production. Operations should commence upon completion of the upgraded tailings dam, in early 2010. The transition from an exploration company to a precious metal producer during a period of rising precious metals prices has been positively received by investors.
The Summit Silver-Gold Project
Santa Fe (previously known as AZCO Mining Inc.) gained 100% of the Summit silver-gold project in May of 2006 through its acquisition of the Lordsburg Mining Company (LMC) for $1.3 million. LMC, a wholly owned subsidiary of Santa Fe, included assets at the Summit Mine site consisting of the drilled silver-gold deposit located on117 acres of patented mining claims and 600 surrounding acres of unpatented mining claims in Grant County, New Mexico. At that time, assets included another 257 acres of patented mining claims, and a mill site including operating permits near Lordsburg, New Mexico. The acquisition also included a ball mill and 400 ton-per-day flotation plant located in Winston, New Mexico. Santa Fe created the project from these assets and has since relocated the mill to the Lordsburg mill site to process ore sourced from the Summit silver-gold deposit.
Santa Fe raised $13.5 million in December of 2007 and commenced construction in February of 2008. Santa Fe has since acquired crushing equipment including a screening plant and conveyor system, and increased its land position in Lordsburg in July of 2008, for $841,500. This included real property consisting of 70 patented and five unpatented mining claims and assignments of mineral leases covering 17 patented and 6 unpatented claims. This expanded Santa Fe’s land position in Lordsburg to a total of about 1,500 acres (2.3 square miles) comprising the core of the historic Virginia Mining District. Construction has proceeded as scheduled and the project appears to be coming in under budget. All essential equipment has been acquired and key personnel positions filled.
Interestingly, since Santa Fe expanded its land position at Lordsburg, the adjacent unpatented land to the east has become the subject of exploration interest to Entrée Gold Inc. (AMEX: EGI), who recently discovered the first deep copper porphyry in the Virginia Mining District. According to Santa Fe management, the Virginia Mining District has historic production of copper, gold and silver exceeding $1 billion if valued at current prices. While Santa Fe has enlarged its land position in the Virginia Mining District, and though the area is enjoying new interest in exploration, management remains focused on optimizing production and expansion of the precious metal resource of the Summit silver-gold project.
The Summit Project Resource Overview and History
The Summit silver-gold deposit is located in the Steeple Rock Mining District, New Mexico, which has significant historic gold, silver, and base metal production. Power is generated on site, with adequate water available near the mine site. The deposit is accessible by an improved gravel road northeast of the town of Duncan, Arizona, and 57 miles northwest of the Lordsburg Mill site via US Highway 70. Management has entered into a trucking contract, and established an ore transfer area in Duncan, to transport ore from the mine to the mill. They plan to load returning trucks with crushed rock from their Lordsburg property for road and mine site improvement. Mine and mill construction has passed critical milestones and the company is now focusing on optimizing work flow and reducing costs.
The Steeple Rock Mining District produced metals from underground mining of epithermal vein systems dating back to before the 1860s. The first recorded production was from the nearby Carlisle property, which operated from 1880 to 1897. Smaller projects operated up until the 1990s, when they then closed due to low metal prices. It is estimated that the district produced 148,000 ounces of gold, 3.3 million ounces of silver, 1.2 million pounds of copper, 5 million pounds of lead, and 4 million pounds of zinc. In the late 1970s, 30,000 tons of mineralized material was shipped from the Summit deposit to an El Paso smelter, providing an excellent source of direct shipping silica flux grading 0.102 ounces per ton gold and 4.95 ounces per ton silver.
Approximately $8.5 million of exploration work was carried out at the Summit property from 1984 to 1992 by Inspiration Mines, NovaGold Resources Inc., and Biron Bay Resources, Ltd. Over 104,000 feet of drilling was completed at Summit and the surrounding property. Seventy-eight thousand feet of drilling was directed at the Summit structure itself, which included 88 core holes. Prior to recent expansion of the "Hansen decline" the project included 1,550 feet of underground workings. Based on past drilling, estimates of mineralized material have ranged up to two million tons.
Biron Bay Resources Ltd. estimated a drilled resource of 939,000 tons grading 0.152 ounces of gold per ton and 11.95 ounces of silver per ton, implying roughly 148,000 ounces of contained gold and 11.2 million ounces of contained silver. This is a historic resource not compliant with Canadian National Instrument 43-101 standards or qualifying as reserves according to the U.S. Securities Exchange Commission. While historic resources are not to be relied upon for investment purposes, we suspect there is good potential for expansion typical of other high-grade precious metal underground mines. The resource cannot be fully understood without additional detailed drilling and/or underground development, which are planned in conjunction with production.
Chapman, Wood and Griswold Pre-Feasibility Study
In April of 2007, a pre-feasibility study was completed by Chapman, Wood and Griswold, Inc. (CWG), consulting and mining engineers and geologists headquartered in Albuquerque, New Mexico. CWG used a mineable resource estimation for the study of 758,000 tons grading 10.28 ounces of silver per ton and 0.143 ounces of gold per ton. This estimation was adopted from a previous estimation, and represents an in-place, diluted, mineable resource with a minimum six-foot horizontal width, based on results of assays from core holes and samples of underground workings. All high assay values were cut to 45 ounces of silver and 0.45 ounces of gold per ton.
The study estimated that at production of 120,000 tons per year, the operation would produce revenues of $130 million, with net income of $70 million (assuming metal prices of $650 per ounce gold and $13 per ounce silver) with metallurgical recoveries of 80% to 85%. Operating costs were estimated at $76.65 per ton. With total estimated capital costs of $13.4 million, it was anticipated that project financing could be paid back in eighteen months of the mine’s seven year mine life. Significantly enhanced economics can be expected to result from the current higher metal prices.
The veins within the dominant structures on the Summit property can be traced for several miles along strike with widths that range up to 100 feet. Mineralized outcroppings of the Summit vein can be clearly seen at surface. The Summit structure has gold and silver mineralization which is epithermal in style and consists of silver sulfides and electrum, or native gold, along with lesser pyrite, sphalerite, and chalcopyrite. Drilling to date shows the main mineralized body at Summit extends 1,500 feet in length and 1,000 feet in depth, with widths averaging 10 to 15 feet. Limited drilling outside of the main mineralized body, along extensions of the main vein and on parallel veins, also has intersected good grade mineralization, suggesting potential for adding to the resource drilled to date. Preliminary metallurgical testing suggests recovery of approximately 86% from crushing, grinding and flotation.
Santa Fe holds operating permits for underground mining at the Summit project. The permit at the Lordsburg Mill site has been modified as required to resume operation. In October 2009, Santa Fe received a final necessary permit to expand the tailings dam and construction is underway. Upon completion of the tailings dam expected by year-end, management anticipates commencing production in early 2010. They note that they have received strong local public support and that local government officials appear to be quite keen to see the project come into production to offset declines in employment at surrounding base metal projects. The Summit property is subject to net smelter return royalties capped at $4 million and to net proceeds interests on sales of unbeneficiated mineralized rock with an end price of $2 million. While the political support in New Mexico for new projects sometimes can be problematic, the Summit Mine and Lordsburg Mill are the sites of significant historic mining activities buffered by rolling hills. In addition, Lordsburg is located in an area of New Mexico that is economically dependent on and desirous of mining activities.
Processing at the Banner Mill will be accomplished through conventional crushing, grinding, and flotation at a planned rate of 400 tons per day. With the addition of another ball mill and thickening tank, capacity could be expanded to 800 to 1,000 tons per day. Historically, until the 1970’s, the site hosted an operating mine and processing facility. It has excellent access to infrastructure and labor. In addition to processing minerals from the Summit project, the Lordsburg facility has potential to process ore from other deposits in the area that Santa Fe might acquire and also to provide custom milling services. The potential may also exist for sale of silica flux material to nearby copper smelters. In addition, as part of its expanded land position at Lordsburg, Santa Fe acquired an operating aggregate rock pit which had provided aggregate for various private and public works projects in the area. Recently, aggregate taken from Santa Fe’s quarry at Lordsburg supplied material for construction of the fence on the border with Mexico.
Partial Sale of Gold Stream to Sandstorm Resources
In September of 2009, Santa Fe completed an advanced sale of a portion of its gold production for a $4 million cash payment, plus a minimum of $400 per ounce, to Sandstorm Resources Ltd. (TSX VENTURE: SSL) to provide essential working capital. The agreement with Sandstorm includes 50% of the first 10,000 ounces of gold produced, and 22% of the gold thereafter. Silver production is excluded from the agreement. Santa Fe also has the option to increase the size of the Sandstorm financing by $1.0 million. The production is limited to the gold resource at the Summit Mine, providing upside if other resources become available for processing.
Santa Fe has benefited from stable and increasing precious metal prices, and moderating operating costs due to a combination of declining fuel costs and base metal prices, increasing the availability of equipment and labor. The pre-feasibility study was completed in mid 2007, while operating and capital costs were increasing but had not yet peaked. As we had anticipated, silver and gold prices have risen significantly and stabilized at levels over the metal price assumptions utilized in the study ($650 per ounce gold and $13 per ounce silver). Delays in production resulted in increased working capital requirements. However Santa Fe took advantage of the extra time by developing its own mining team thereby reducing operating costs as compared to using a mining contractor. It also expanded the tailings dam, clearing the way for increasing capacity and extending the operating time horizon.
Santa Fe Moving Into Production at Record Gold and Silver Prices
We believe the model in the pre-feasibility to be a reasonable estimate and base-line for the Summit Mine. Our model includes a price for gold of $1,000 per ounce and silver of $15.00 per ounce, which is below spot prices. We have also increased our assessment of operating costs to $83.22 per ton, which includes a 10% buffer over the pre-feasibility report. As silver contributes more than gold to revenue, the model is more sensitive to silver than to gold prices. Despite the partial sale of gold production to Sandstorm, our model suggests an IRR of 108.5% over a seven year mine life, a 0% NPV of $91.5 million, and an 11-month payback. Should precious metal prices remain at this level or increase, we suspect that the resource calculation may be increased and mine life extended. Santa Fe also has a significant tax loss carry-forward of about $47 million, so the project enjoys a significant tax shelter. We anticipate revenues from the mine will commence in the first quarter of 2010 and build to full production over the following two quarters.
We would anticipate precious metal prices remaining within the current trading range for at least the next couple of quarters. As anticipated, Santa Fe appears to have adequate cash on hand and availability through the Sandstorm financing to reach commercial production in 2010. Santa Fe is in an excellent position to advance toward profitable operations, which should be well received by the market and investors, and also create opportunities by establishing its identity as a new precious metal producer in the Southwest.
We anticipate that Santa Fe, once in production, may have additional opportunities to expand its knowledge of the Summit resource, which may significantly expand the mine life and optimize operations. In addition, when in operation, we suspect that the company should have opportunity to acquire potential targets within trucking distance of the Banner Mill. As the Banner Mill has additional capacity with relatively modest capital investment, the potential for either contract milling or increased production from additional resources should improve the project’s economics and investment profile to investors.
Mike Niehuser
Mike Niehuser is the founder of Beacon Rock Research, LLC which produces research for an institutional audience and focuses on precious, base and industrial metals, and substitutes, oil and gas, alternative energy, as well as communications and human resources. Mr. Niehuser was nominated to BrainstormNW magazine's list of the region's top financial professionals in 2007. Mr. Niehuser was previously a senior equity analyst with the Robins Group where he was a generalist and focused on special situations. Previously he was an equity analyst with The RedChip Review where he initially followed bank stocks but expanded to a diverse industry range from heavy industry to Internet and technology companies.
Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. It is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed herein are those of the author and are subject to change without notice. The information herein may become outdated and there is no obligation to update any such information. The author, 24hGold, entities in which they have an interest, family and associates may from time to time have positions in the securities or commodities discussed. No part of this publication can be reproduced without the written consent of the author.
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