Guanajuato Silver (GSVR) - Technical Analysis

Guanajuato Silver Company Ltd is engaged in the exploration of mineral projects in the Guanajuato region of central Mexico. The company is currently producing silver and gold from its El Cubo mine and mill while advancing the restart of the El Pinguico Mine nearby. Both projects are located within 11km of the city of Guanajuato, which has an established 480-year mining history. 

Merlin Marr-Johnson caught up with James Anderson, CEO, and Chairman, along with Hernan Dorado Smith, Director, and COO, Guanajuato Silver.

Mr. Anderson has over 19 years of experience in the financial services industry as a retail broker, investment banker, and manager with several Canadian investment firms. These include First Canada Capital Ltd., Research Capital Corp., and Majendie Securities Ltd., where he was instrumental in the financing of numerous small-cap public companies in the mining exploration and development industry. James then went on to build a career in mining exploration, serving as the CEO of NuLegacy Gold Corp. from 2012 until April 2019. He currently serves as a Director of Orestone Mining Corp. James pursued his graduation from the University of Alberta. 

Mr. Smith has been a Director at Guanajuato Silver since 2017. He is a 5th generation mining engineer and possesses 15 years of underground and open-pit mining experience. He has in-depth knowledge of the El Pinguico mine in Guanajuato, Mexico. He has worked with several mining companies on major projects including New Gold at its Peak Mine, Australia and Rainy River, Canada; Pan American Silver at Navidad, Argentina, and La Preciosam Mexico. His educational credentials include a degree in mining engineering from Universidad de Guanajuato in 2003 and an Executive MBA from Escuela Europea de Negocios, Salamanca in 2013.

Company Overview

Guanajuato Silver is a mining development company engaged in reactivating past-producing silver and gold mines near the city of Guanajuato, Mexico. The company was founded in 1978 and is headquartered in Vancouver, Canada. Obras Mineras El Pinguico SA de CV, CanMex Silver SA de CV, Rwenzori Copper & Nickel Limited are the company’s subsidiaries. It is listed on the Toronto Stock Exchange (TSX-V: GSVR) and the OTC Markets (OTCQX: GSVRF).

Last year, Guanajuato Silver purchased the El Cubo mine and mill from Endeavor Silver Corp. for $15M. For the mine’s purchase, a Definitive Agreement was signed between Guanajuato Silver and Endeavor Silver Corp. in April 2021. This is a silver and gold mining operation. The company refurbished the mill and restarted mining in August. The company brought the plant back into operation in September and sold its first concentrate in October. It is rare for a mining company to bring a project back into production within a 6-month timeline. The company was able to stay on track with its timeline and budget. It is currently looking to ramp up production. 

The company has 3 different ore sources, namely the Villalpando, the Santa Cecilia mine, and the Pinguico mine. The Pinguico mine is located near the processing plant. The Santa Cecilia mine is located 2km away from the plant, while the Villalpando asset is located 8km from the plant. The company is processing an average of 30,000t/month. The supply is split roughly 33% between the 3 sources, however, the feed is variable depending on the campaigns and ore availability. The processing plant has a capacity of 45,000t/month, though the company is keeping the supply at 30,000t/month as a way to focus on quality rather than quantity. 

The El Pinguico mine can easily provide a 1,500t/day supply. Meanwhile, the Villalpando and Santa Cecilia assets are underground mines with richer values. The company cannot slop the mill with that amount of ore, hence the decision was made for a 30,000t average monthly production. 

El Punguico is considered low-hanging fruit by the company as the material on the surface is the stockpile. Before processing began, it was a 185,000t supply that could be removed using an excavator and loaded into a truck. This led to a sub-$5 mining cost which is significantly lower. 

Notably, the 3 mines have different ore sources containing silver and gold. The 3 different ore sources come from the same matrix. The company has the option to blend the 3 materials at the same time and in the right proportions. This leads to really good recoveries and concentrated grades. 

All 3 mines are known to be epithermal systems with reasonably high-grade quartz presence, a typical characteristic for central Mexico. At Santa Cecilia, the veins being targeted are transversed. These veins run 90 degrees to the main northwest structures at Villalpando and are higher in gold content compared to other deposits. This higher gold content enables the company to attain varying levels of the value proposition which can be 60% silver and 40% gold, or 50% of each. The company can output different grades based on material blending from the 3 ore sources. 

Material reconciliation is done on a bi-weekly basis and at the end of the month when the circuit is closed and a final reconciliation is done. If a geologist finds a low-hanging fruit potential in one of the mines, it is put through the system and a small campaign is carried out. 

At the end of each month, the company closes the circuit and reconciles everything that has been through the system. This allows the company to put the equipment under maintenance for 1-3 days based on the preventive maintenance schedule. At this point, the company has the concentrate which can be used to trace back the grades and recoveries across different ore bodies. 

Each time the company has a new, different ore or material that hasn’t been tested for a particular area or different vein, it is put into the system by itself. Prior to this, the company’s metallurgical team carries out a metallurgical investigation. This test work is carried out to ensure that the lab and the plant are in optimal conditions. As soon as the industrial trial is done, the company starts blending different materials from various veins. 

Mining Methodology

Guanajuato Silver utilises 2 different mining methods. The first one is the mechanised cut and fill where the veins are over 2m-2.5m thick. In case the vein thickness is below 2m, the company utilises resue mining. Resue mining is similar to cut-and-fill however, it is focused on extracting only the richer material. Once the material has been extracted, the hang wall and footwall are blasted so that the field is ready for the next lift. This allows for the extraction of high-grade vein material with around 10%-15% operational dilution. 

The company has found that these mines need a lot of work on the narrow veins. As the operation is based in Mexico, the miners are highly-experienced with narrow vein mining. If a vein that was 1m thick goes to 2.5m-3m, the company switches from resue to mechanised mining, which is followed by around 2 cuts and pinching. Following this, the mining technique is switched back to resue. The cut-and-fill resue allows for blending as soon as the phase is reached. 

Guanajuato Silver paid $15M for the El Cubo asset. Notably, Endeavour Silver had paid $200M for this asset back in 2012. The previous owner spent about $35M on building the plant which was recently refurbished. The previous owner built the plant too early for the El Cubo mine as it was looking to run a 45,000t-50,000t/month operation. 

Since this asset is a typical high-grade narrow vein system, it results in a lot of dilution. The previous owner’s average stope width was about 2.4m. On an average vein, it comes out to 1.4m. This means that a lot of material needs to be put through the plant.  Guanajuato Silver is more selective with its grades. This can lead to better grades, but at the same time, the cost per tonne is higher than the previous operator. However, the company anticipates that its cost per ounce will be significantly better and will help drive profitability. 

The company’s PEA (Preliminary Economic Assessment) for the El Cubo mine had a $24M CapEx (Capital Expenditure) to return the mine into production. The company was able to achieve this milestone with one-third of the cost. 

Notably, the PEA was based on the operation from 25,000 feet. The company believes that the $9.42 operating costs in the PEA per ounce of silver equivalent are too low. In the model, the company has been unable to achieve this price point. In the internal model, the company is looking to drive the costs to $12-$13/oz over the next 12 months. The asset is currently in the stabilisation mode and the company has the resources and the team to achieve the target operating costs. The consistency in operating costs and silver market prices provides consistency in local jobs along with confidence for shareholders and team members. 

ESG Component

Guanajuato Silver is looking to develop a business operation that is sustainable from both a mining and an environmental perspective. The company is looking to limit the material taken out from the epithermal system as it's challenging to keep converting new discoveries and material into a resource category.

The company is looking to develop a sustainable operation. The El Cubo mine has seen historic mining operations for the past 200 years. According to the PEA, the El Cubo asset has a 7-year mine life. However, the company anticipates that El Cubo will be producing gold and silver for up to 50 years. 

Ongoing Operations 

Guanajuato Silver is looking to have 12 months of mineable resources by the end of 2022. By the end of next year, it plans to have 2 years of mineable resources available. At the end of the following year, the company is looking to have 3.5 years' worth of mineable resources, and so on. It plans to take 60% of the inferred resource and add it to the mining plan. At the same time, the company has 25,000m drilling planned for 2022. This will enable it to carry out infill drilling while also finding new ore which can be added to the inferred category. Following this, the company plans to carry out the conventional mining processes on both M&I (Measured and Indicated) and inferred resources to add new supply as the existing supply depletes. 

The company currently has 3 drill rigs turning. According to last month’s press release, the company has plans to carry out 22,000m drilling in 2022. This drill program is likely to be expanded to 25,000m as the company has identified additional targets. 

One of the drill rigs is employed at the Villalpando mine which is working in an infill and expansion capacity. The other drill rig is employed in the Santa Cecilia area. This mine was under-explored by the previous owner as the narrow veins weren’t deemed important to provide enough tonnage. As per the company, this asset features some of the best grades at El Cubo. The drill operations at Villalpando are expected to commence within the next week.

The third drill rig was purchased by the company last year and has been employed at El Pinguico ever since. This asset offered promising results in 2021. In 2022, drilling is being carried out at an area further north in the mine. The company has planned 8 drill holes over the course of the next 2.5-3 months. It is important to note that in Mexico, drilling from the surface requires a permit, while drilling from underground does not require a permit. 

Guanajuato Silver has another access at the El Pinguico mine. This old access was used for historic mining. The company is planning to carry out drill operations here. To drill this old access region, the company purchased a custom-made drill rig for this particular mine and aims to reach a 500m-700m drill hole in the old workings. 

In 2021, the company promoted its ability to drill Veta Madre. Notably, Veta Madre has a history of producing 1.2Bn silver ounces over centuries. The company anticipates that the structure will close onto the Pinguico ground where it comes in contact with the Pinguico vein system, an exciting drill target. 

Over the last 12 months, the company has come up with different ideas to drill this region. However, this drill operation was put on hold as the company was focused on bringing El Cubo back into production. The company anticipates that it will acquire the drill permits for Veta Madre in the next 60 days. The company plans to drill the holes at the surface from the southernmost part of its claims boundary. This is because the claims angle south and east towards Veta Madre, bringing the company’s claims close to the structure. 

The structure itself is a regional feature that is visible for 30km. The old mines of Valenciana are located about 10km to the north. Notably, These mines were responsible for producing 40% of all the new silver in the 1700s. 

Cash Position 

Guanajuato Silver is looking to carry out operations in a cash efficient manner. The company is currently EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) positive. Over the course of the next 2 months, its revenue will cover all the OpEx (Operational Expenses) and CapEx for 2022. The company has a $7.5M outstanding loan. As silver prices keep rising, the company expects to address the loan as well. This is the only area where the company would need to add additional capital. It is currently in discussions with the lender for a loan extension. This would ease up the pressure on the company’s cash flow for the time being. 

The company is currently feeding 30,000t/month into its processing plant. The plant currently has 15,000t-20,000t/month excess capacity through the mill. The company is looking to process third-party ore through toll milling or by purchasing raw ore. Utilising the excess capacity to process third-party ore can be profitable, depending on the grade. 

Ever since the company started accepting third-party ore, it has been approached by several minors. The company’s operation is currently in the stabilisation phase and it is looking to develop a potential business strategy through the third-party ore as it has the spare capacity.  To ensure safety and ESG compliance, the company assesses the mineralogy, geology, and safety practices along with other metrics before processing third-party ore. 

Guanajuato Silver believes that the shares are grossly undervalued. In 2021, the company’s share prices performed materially better in the marketplace outside of a real discovery story. Last year’s share performance can be credited to the fact that the company was able to deliver on time and within budget. The company is now looking to consolidate its gains on the mining front while simultaneously working towards a resource expansion and a discovery at El Pinguico. It is looking at potential expansion at the El Cubo asset while driving the consolidation for the mining business at Guanajuato. 

Grade Variations

From a geological perspective, the company has found significant grade variability. This is because the grades in thermal veins are dependent on the plunges. The company is looking to better understand the variability in grades to ensure quality control. It has collected cheap field samples at 3m intervals. This has led to the understanding of the working phase while also providing insight on areas where the material has cut-off grades. The collected data is then utilised for backfilling. This allows for the extraction of the broken material, which can serve as a revenue generator in the future.

From a metallurgical perspective, the Santa Cecilia mine has a free gold component. The Metrological Investigation Department is assisting the company in finding ways to increase recoveries at Santa Cecelia. The current recoveries are 80%, and the company is aiming for 1%-5% improvements. It has a strong focus on the investigation and R&D (Research and Development) components of its mining business. 

To obtain control over the material variability, the company collected channel samples at every 3m intervals. It built a lab in November last year. By December, the company was able to process about 150 samples. At its current capacity, it can process 400 samples daily. This enables the company to process information in real-time and has greater control over operations. 

It is important to note that Guanajuato Silver’s entire operational team is Mexican. In fact, half of the staff in Canada is Mexican Canadian as well. It has also provided jobs to the mining school graduates who directly started working at the company post their education. The company is proud of its Mexican team which is 100% operational and is delivering. It is well-supported by the board, the management team, and the operations team along with the investors in Canada and Mexico. 

To find out more, go to the Guanajuato Silver website