VANCOUVER (miningweekly.com) – Diversified miner Americas Silver is being cautious not to add too much silver to its zinc and lead production profile at a time when prices for the precious metal languish between the $16/oz to $20/oz level.

“We are being very disciplined to not add too much new silver production to our portfolio, given the low current price for the precious metal. It does not help to produce more but only make a buck or two per ounce,” president and CEO Darren Blasutti told Mining Weekly Online in an interview.

According to him, the company’s silver-equivalent production has gone up by about 60% since about 2012, in spite of its more recent strategic step away from silver, in favour of zinc and lead production.

“We are all silver bulls, but we want to see silver production that can make money. We have taken the company’s focus away from silver in the current market to leverage higher base metal prices and we are scheduling our production accordingly,” he said.

Blasutti noted that the company is “very lucky” to have control of two types of orebodies – high-grade silver that tends to be more narrow-vein based at its Galena Mine Complex, in Idaho, and in Mexico, where it has the Cosalá Operations that comprise the Los Braceros mill and includes the new San Rafael mine and El Cajón project. The company is also earning a 100% option on the San Felipe silver/zinc/lead project from Hochschild Mining.

Since about 2012, prices for zinc had risen about 80%, while lead had risen 30% and silver went down 54%.

Blasutti is a silver bull and believes in the precious metal’s strong fundamentals. “It’s gold on steroids,” he said, noting that silver prices might start showing some life if the current silver-to-gold production ratio of about 90:1 gets back down to the traditional level of about 60:1.

Further, he believes that silver is bound to follow any run-up in the gold price, but it is currently languishing on account of gold trading in a “bed” between $1 200/oz and $1 350/oz for several quarters. Also, there is little supply discipline when the silver price falls, since 90% of silver output is secondary production, he noted. There has also not been any significant investment interest, while industrial demand remains stable.

According to Blasutti, the company’s silver output had actually fallen from about 3.5-million ounces of silver from the company’s two assets in 2012; to about 1.8-million to 2-million ounces this year. “But our base metals production is up tenfold on lead and zinc. So, at current prices, we will be in a strong position to pick up on the silver business, but if I’m wrong, we’ll still end up being a profitable silver producer," he said.

Americas Silver has spent the past three years changing over to the base metals view, and Blasutti said it was a challenging and capital intensive time to develop lead and zinc stopes at Galena. But, with all the money now spent the company will be able to “switch on” silver production of about 800 000 oz almost instantaneously.

‘GAME CHANGER’
Americas Silver in December declared commercial production at the San Rafael operation. Here it had discovered silver/copper mineralisation on the eastern side, which was not previously part of the resource.

Drilling started in the second quarter of 2017 and the company was immediately rewarded with intercepts such as 61 m of 412 g/t silver equivalent, which signalled the discovery of a new deposit called Zone 120. It is a high-grade silver/copper skarn on the edge of the San Rafael property, which is more like a disseminated orebody, Blasutti explained.

“It was unusual and we followed up on that, giving us three major hits, which we followed up with another $3-million programme this year. To give perspective, we drilled out 3.5-million tonnes in one drill season with 12 drills. We are now expanding that and have shifted the focus about 150 m along strike and widened it up quite a bit,” he noted.

The company expects to complete drilling of the deposit by June 30, which is its effective date for resource and reserve reports, with a view to publish a resource estimate early in September. It will continue to undertake technical and economic studies on Zone 120 to consider development options in 2019.

“We want to build that resource from about 3.5-million tonnes to about 5- or 6-million tonnes. Once one reaches that threshold, you’ve got an orebody. Right now the average grade for underground mining in Mexico is about 230 g/t silver and that is a very high grade, even in this environment, and miners are making money. But with grades of 412 g/t of silver equivalent, it provides us with significant future upside. Since the deposit is located next to existing infrastructure and a mill, our capital cost to get into production will be minimal.”

Blasutti believes Zone 120 can make a lot of money for Americas Silver, if it is brought on line in a rising silver price environment. Even at a relatively small 1 000 t/d scale, one is talking about producing in the region of three-million ounces of silver, given the high grade, Blasutti commented.

“Zone 120 will allow us to make real returns, which is one thing our industry does not do too well. Several of our silver competitors produce millions of ounces of metal at costs of about $15/oz to $16/oz, leaving them with hair thin margins. When one adds into this equation the cost to discover, drill, permit, build and operate mines, it does not seem to make sense to us to make $0.50/oz of silver in the current environment,” he stated.

SILVER CYCLE
“When we see silver prices go up, then we can bring on the silver production to make some substantial money. The market is looking at us and expecting a lot of free cash flow, but they are wondering where is the silver production. That is the optionality that Zone 120 provides – it provides us with profitable, really high-return growth, even at these silver prices. And if we get the market just right, getting the asset into production in the next couple of years or so, when silver might prop up, we are set for an exciting time,” Blasutti said.

“We will be able to get from about two-million ounces of silver to about six-million ounces in two to three years, without raising equity. As the plan crystallises around Zone 120, people will start to understand the value of our company,” he added.

Blasutti noted that Americas Silver is looking to a record year on several fronts, with internal projections calling for about $30-million of free cash flow this year at spot prices, which translates to about $20-million on the balance sheet.

“Combined with our year-end cash balance of $9-million, that gives us about $29-million at the end of 2018. We expect record revenues, profits, earnings before interest, taxes, depreciation and amortisation – all in a lousy silver price environment. And next year, we expect financials to grow again. Whatever our cash flow is this year, it’s going to be about $10-million higher next year at similar prices, while our capital intensity is expected to come down,” he noted.

This will be driven by San Rafael ramping up to nameplate capacity, while the company’s capital intensity falls. “In 2019/20, we will still have growing high-grade silver production, dovetailing into growing lead/zinc production through to 2020.

Americas Silver has about 123-million ounces of silver across all resource categories and about 30-million ounces in reserves, and then about a billion pounds of lead and 700-million tons in zinc resources. That excludes the San Felipe project, where the company recently reported strong exploration results that lifted zinc and silver by 258% and 236%, respectively, in the indicated mineral resource.

“Our goal is to produce 15-million silver-equivalent ounces by 2021, while we are currently standing at about eight-million ounces.

“By the end of 2018, we’re going to show a growth story unparalleled anywhere. When you’re quadrupling your silver production in two to three years, with very low capital, and combined with a fully repaired balance sheet, that’s where our competitive advantage lies,” Blasutti said.