Mr. Ralph Shearing reports
TELSON MINING CORPORATION ANNOUNCES POSITIVE PRELIMINARY ECONOMIC ASSESSMENT FOR THE CAMPO MORADO MINE
Telson Mining Corp. has released the positive result of an independent preliminary economic assessment study (PEA) prepared in accordance with National Instrument 43-101 on the 100-per-cent-owned Campo Morado mine located in Guerrero state, Mexico.
Campo Morado PEA highlights:
-
Pretax net present value (NPV) at an 8-per-cent discount rate of $81-million (U.S.);
- After-tax NPV at a discount rate of 8 per cent of $65-million (U.S.);
- Undiscounted cash flow before income and mining taxes of $114-million (U.S.);
- Undiscounted cash flow after income and mining taxes of $91-million (U.S.);
- Life of mine (LOM) of 12 years, with 9.7 million tonnes of potential mill feed at an average grade of 4.33-per-cent-zinc grade, 1.00-per-cent-lead grade, 0.78-per-cent-copper grade, 131.9 grams per tonne (g/t) of silver and 1.71 grams per tonne (g/t) of gold;
- Mining rate of 2,500 tonnes per day (tpd).
Jose Antonio Berlanga, director and chief executive officer, stated: "The positive preliminary economic assessment marks another significant milestone for Telson. It validates the positive economic value of last year's acquisition of the Campo Morado mine. We expect to improve the net present value of the mine in the short run by implementing several strategies summarized below and we will embark on a prefeasibility study designed to demonstrate the improvements in mining and milling that we are instituting. The PEA is based on historical operating costs incurred by the previous operator of the Campo Morado mine as Telson is still in the preproduction stage and it is too early to forecast any cost savings resulting from the changes we have implemented. Among the strategies we have identified as drivers of increasing the NPV are:
- "Cost reductions resulting from: (i) a reduced local work force. We are currently operating the mine and approaching similar output as the former operator with approximately 50 per cent of the previous work force. It should be noted that the former owner was focused only on zinc production and was mining three separate mineralized bodies at the same time which required additional personnel, services, equipment and infrastructure. We are focused on all metals and only mining one mineralized body at a time, such that we can operate with a smaller work force; (ii) a change from room and pillar mining to sublevel caving (see Section 16.3 of the PEA); and (iii) a reduction in haulage distance as a result of new egress portal being developed;
- "Conducting an aggressive exploration campaign designed to increase the mineral resources at Campo Morado;
- "Analyzing leaching processes to increase recoveries of precious metals from concentrate and existing tailings.
"While we look forward to optimizing the performance of the Campo Morado mine, we also wish to emphasize that our primary goal for 2018 is to build our new mine at our flagship Tahuehueto project in Durango, Mexico. We point out that we published a [National Instrument] 43-101 technical report preliminary feasibility study, Telson Resources, project Durango, Mexico, with an effective date of Dec. 6, 2016, and a report date of
Jan.
20, 2017 (see Tahuehueto PFS), based on a 550-tonne-per-day operation at Tahuehueto that assigned a pretax net present value, using an 8-per-cent discount, of $138-million (U.S.) and a posttax net present value using an 8-per-cent discount, of $77-million (U.S.) to Tahuehueto, such that the base case scenario NPV of both projects of the company, Tahuehueto and Campo Morado, adds to $218-million (U.S.) on a pretax basis and $142-million (U.S.) on a posttax basis. We are building a mill capable of processing 1,000 tpd at Tahuehueto and are also working on an updated PFS to reflect the improved economics of such an operation. We believe this will validate the upside potential of the economics of the company for our shareholders and look forward to a very exciting year ahead of us."
Description of Campo Morado mine and PEA
The Campo Morado project hosts several polymetallic massive sulphide deposits containing zinc, copper, silver, gold and lead mineralization. Five deposits have been extensively drilled: G9, El Largo, Reforma, Naranjo and El Rey. The project comprises a previously mined underground multimetal mine with infrastructure, installations and equipment capable of processing 2,500 tonnes of material per day. Farallon Resources Ltd. began mining operations at the G9 mine at Campo Morado in April, 2009. Nyrstar NV purchased Farallon and the Campo Morado mine in December, 2010, and continued mining operations at G9 mine with some production from the El Largo deposit until production was suspended in January, 2015, and the mine was placed on care and maintenance.
Telson Mining purchased the Campo Morado mine from Nyrstar Mining Ltd. and Nyrstar Mexico Resources Corp. in June, 2017, and restarted mining operations under a preproduction plan and initiated production of zinc concentrates in October, 2017. Telson intends to advance preproduction toward full commercial production during 2018. The purchase price of the Nyrstar Group subsidiaries that own the Campo Morado mine was $20-million (U.S.) of which $3.5-million (U.S.) has been paid and the balance of $16.5-million (U.S.) is due to be paid on or before June 13, 2018.
Mineral resource estimate
The current Campo Morado resources occur in five main mineralized zones: G9, El Largo, Naranjo, Reforma and El Rey. Within these main zones, 36 subzones of well-defined, massive and semi-massive sulphide deposits modelled in 3-D are used to constrain the resources. The boundaries of these subzones are delineated by geological and assay data from extensive drilling and underground excavation. The resource estimate is based on 1,541 surface and underground drill holes and the 33,523 assays obtained from them that intersect and occur within these mineralized zone models. The minedout volumes of the underground excavations of previous mining operations in turn deplete the resources. Two contiguous five-metre cube block models were used to cover this area. The overall combined resource of the five zones estimated by ordinary kriging is presented in the associated table. The tabulation is based on zinc equivalency that incorporates the contributions of zinc, copper, gold, silver and lead and metal recovery factors achieved at the processing facility on site. The effective date for the mineral resource estimates for the five individual main mineralized zones is Sept. 30, 2017.
CAMPO MORADO RESOURCE ESTIMATE 2017
Cut-off ZnEq ZnEq Tonnes Au Ag Cu Pb Zn
(%) (%) (g/t) (g/t) (%) (%) (%)
Measured
3.0 6.94 17,004,000 1.34 91 0.73 0.67 3.17
4.0 7.87 13,412,000 1.49 104 0.76 0.78 3.71
5.5 9.27 9,292,000 1.70 124 0.82 0.94 4.56
7.0 10.71 6,318,000 1.88 143 0.87 1.11 5.44
Indicated
3.0 5.78 16,848,000 1.25 85 0.68 0.61 2.25
4.0 6.62 12,324,000 1.42 99 0.72 0.73 2.68
5.5 7.94 7,335,000 1.70 123 0.78 0.92 3.31
7.0 9.32 4,086,000 1.96 151 0.86 1.12 3.94
Measured and
indicated
3.0 6.36 33,852,000 1.29 88 0.70 0.64 2.71
4.0 7.27 25,736,000 1.46 102 0.74 0.76 3.22
5.5 8.68 16,627,000 1.70 123 0.80 0.93 4.01
7.0 10.16 10,404,000 1.91 146 0.87 1.11 4.85
Inferred
3.0 5.03 3,316,000 0.98 76 0.52 0.58 2.10
4.0 5.85 2,152,000 1.11 90 0.55 0.71 2.54
5.5 7.27 988,000 1.32 116 0.64 0.92 3.20
7.0 8.75 416,000 1.52 148 0.76 1.10 3.78
(2) Zinc equivalent calculations used metal prices of $1.20/pound for zinc,
$2.80/pound for copper, $17/ounce for silver, $1,150/ounce for gold and 90 U.S.
cents/pound for lead and metallurgical recoveries of 70 per cent for zinc, 68 per cent
for copper, 38 per cent for silver, 25 per cent for gold and 60 per cent for lead.
The zinc equivalency calculation is as follows: ZnEq general equation equals Zn per
cent plus ((copper per cent times (Cu recovery/Zn recovery) times ((Cu $ per per
cent)/ Zn $ per per cent)) plus ((silver g/t times (Ag recovery/Zn recovery) times
(Ag $ per gram/Zn $ per per cent)) plus ((gold g/t times (Au recovery/Zn recovery)
times (Au $ per gram/Zn $ per per cent)) plus ((lead per cent times (Pb recovery/Zn
recovery) times ((Pb $ per per cent)/Zn $ per per cent)).
ZnEq equals Zn per cent plus ((Cu per cent times (68/70) times (61.73/26.455)) plus
((Ag g/t times (38/70) times (0.547/26.455)) plus ((Au g/t times (25/70) times
(36.97/26.455)) plus ((Pb per cent times (60/70) times ((19.84/26.455))
Where:
Au price -- $1,150/ounce; Au metal recovery -- 25 per cent;
Ag price -- $17/ounce; Ag metal recovery -- 38 per cent;
Cu price -- $2.80/pound; Cu metal recovery -- 68 per cent;
Pb price -- 90 cents/pound; Pb metal recovery -- 60 per cent;
Zn price -- $1.20/pound; Zn metal recovery -- 70 per cent.
(3) Capping to reduce statistically anomalous high values was applied to the updated
mineral estimate. All mineral resource estimates, cut-offs and metallurgical
recoveries are subject to change as a consequence of more detailed economic analyses
that would be required in prefeasibility and feasibility studies.
Capital and operating cost estimates
The project is a previously operating mine that is being brought back into production. Consequently, this PEA treats the initial capital investment as a sunk cost, and all subsequent investment is considered as sustaining capital expenditure.
Over the LOM period, sustaining capital is provided for as shown in the associated table.
SUSTAINING CAPITAL ESTIMATE FOR THE CAMPO MORADO MINE
Sustaining capital LOM total (000 U.S. dollars)
Development $25,500
Mill/concentrator 12,000
Tailings storage 10,000
Infrastructure (other) 10,000
Social responsibilities 12,000
Rehabilitation and
closure costs 3,200
Total 72,700
Operating cost estimates for the project are forecast on the basis of previous operators operating experience at the project, modified where appropriate to reflect increased throughput and proposed changes in the underground mining method.
Over the LOM period, operating costs are forecast as shown in the associated table.
OPERATING COST ESTIMATE FOR THE CAMPO MORADO MINE
Project operating costs LOM average USD/t milled LOM total
(USD/t) (000 USD)
Selling costs $23.52 $228,997
Royalties 2.97 28,896
Mining 32.78 319,190
Processing 24.72 240,745
G&A 14.76 143,744
Total operating costs 98.74 961,571
The LOM capital and operating costs as discussed in the PEA will most likely be further refined as Telson continues to bring the Campo Morado project back into production and continues to optimize the various costs at site.
Economic analysis
Micon has prepared its assessment of the project based on a discounted cash flow model, from which net present value (NPV) can be determined. A real discount rate of 8.0 per cent is applied to the base case cash flow.
The prices used in the cash flow projection are rolling average prices for each metal for the 12 months ended January, 2018, which Micon believes provide a reasonable estimate of project revenues for this PEA. The prices used are shown in the associated table.
METAL PRICE FORECAST
Metal Unit Price Unit Price
(USD/unit) (USD/unit)
Zinc tonne $2,954.70 pound $1.340
Lead tonne 2,346.40 pound 1.064
Copper tonne 6,274.20 pound 2.846
Silver troy ounce 17.08
Gold troy ounce 1,269.00
Since the project has already been constructed, initial capital costs are treated as sunk. However, LOM sustaining capital is estimated at $72.7-million (U.S.), mainly for underground development and expansion of tailings storage capacity.
Total cash costs over the LOM period average $98.74 (U.S.)/t milled. Costs incurred in Mexican pesos have been converted at the rate of 18.75 Mexican pesos/U.S. dollar.
Pursuant to the share purchase agreement dated April 27, 2017, between Telson and the Nyrstar Group, Nyrstar retains the right to receive a variable purchase price royalty on future zinc production on the first 10 million tons of ore processed by Telson when the price of zinc is at or above $2,100 (U.S.) per tonne (see Telson news release dated June 14, 2107, for further details). Telson maintains the right under the agreement to purchase 100 per cent of the zinc royalty at any time for $4-million (U.S.). Buyout of the zinc royalty to Nyrstar is assumed to take place prior to the cash flow period and is treated as a sunk cost. A 3-per-cent royalty payable to SGM on the NSR value of concentrate sales (before transport costs) has been provided for in the cash flow model.
This PEA is preliminary in nature; it includes inferred mineral resources that are considered too speculative geologically to have the economic considerations applied to them that would enable them to be categorized as mineral reserves, and there is no certainty that the PEA will be realized.
Annual base case cash flows and unit costs on a zinc equivalent basis are presented in a chart on the company's website.
UNIT COST ESTIMATE ON ZINC EQUIVALENT BASIS
LOM total USD/t milled Gross rev. Margin USD/lb ZnEq
(USD 000) (%) (%)
Mining $319,190 $32.78 28% $0.35
Mill/concentrator 240,745 24.72 21% 0.27
G&A 143,744 14.76 13% 0.16
Direct site costs 703,679 72.26 61% 39% 0.78
Transport, TC/RC 228,997 23.52 20% 0.25
Cash operating costs 932,676 95.78 81% 19% 1.03
Royalties 28,896 2.97 3% 0.03
Production taxes - - 0% -
Total cash costs 961,571 98.74 84% 16% 1.06
Capital expenditure 72,700 7.47 6% 0.08
Total production costs 1,034,271 106.21 90% 10% 1.15
At an annual discount rate of 8.0 per cent, the discounted cash flow evaluates to a net present value (NPV) of $65-million (U.S.) after tax. At an annual discount rate of 8.0 per cent, the discounted cash flow evaluates to a net present value (NPV) of $81-million (U.S.) before tax.
Owing to the absence of preproduction capital expenditures in the forecast period, no internal rate of return (IRR) or payback period can be determined.
Risks and opportunities
A summary of key risks and opportunities identified by the qualified persons is provided in the associated table.
RISKS AND OPPORTUNITIES
Discipline Opportunity Risk
There are a number of exploration
targets on the Campo Morado property
that represent an excellent upside
opportunity. They have the potential
Geology and to add to the resource base with
exploration further work.
A number of the mineral resource
assumptions for reasonable prospects
of eventual economic extraction
at the Reforma, Naranjo, El Largo
and El Rey deposits are based on
analogues to G-9, including
metallurgical recoveries and mining
methods. Actual data collected from
the deposits may vary from these assumptions.
There is a risk some of the measured
mineral resources at Reforma, Naranjo
and El Rey will not have the appropriate
Several drill holes with missing drill support until grade control drilling is
assays have been assigned zero grade. completed. The tonnages and grade for the
If this information is found, it will likely potentially recoverable pillars at G9 are based
have a positive impact on the grade on the assumption that a practical,
Mineral in the local area of economically feasible method can be
resources these drill holes. developed to mine them.
The mining sequence has been prepared on
an area-by-area basis and so there may be Evaluation is at a PEA level only.
an opportunity to improve the production Mining engineering may reveal planning
Mine plan grade profile in a more detailed plan. constraints not recognized in this study.
Subject to further testwork, leach recovery
of copper, gold and silver from reprocessing Expansion of storage capacity required
Tailings existing tailings may be possible. to accommodate material in the PEA plan.
Equipment for finer grinding is on site
but not yet installed.
The Campo Morado tailings have a high
precious metals content that may, in the future, Achieving planned plant throughput and
be reprocessed if an economically viable method recovery into concentrate may increase
Process for precious metals recovery is developed operating costs.
Telson has all of the infrastructure currently
Infrastructure necessary to operate the Campo Morado project.
Telson has all the current environmental permits
to operate. The communities and various groups
in the area appear to support the resumption
of mining activities. Security is good at the
present time, with a small military component
on site, and Telson has the support of all Environmental laws are tightened and
social groups or factions in the area. become more stringent as a result of
Environmental, Security should continue to improve as Telson Mexico's involvement in the Paris agreement,
closure, continues to demonstrate a longer term commitment NAFTA and various other free trade agreements.
permitting and to the area Security becomes unstable within the state
social
Project returns are sensitive to metal
Unit cost savings might be possible in prices and any change in NSR terms.
some areas at the planned higher rates of Any significant changes to the fiscal
Economics plant throughput. regime would affect the cash flow forecast.
About Telson Mining Corp.
Telson Mining is a Canada-based junior resource mining company currently in preproduction at two Mexican gold, silver and base metal mining projects and is advancing both toward commercial production, Campo Morado in the coming months of 2018 and Tahuehueto in early 2019. At the Campo Morado mine in Guerrero, Mexico, Telson has recommenced mining and processing operations with preproduction from mine development on a trial basis that commenced at an average 1,400 tonnes per day and is currently at approximately 1,900 tonnes per day during the recommissioning stage and intends to advance toward commercial production at full capacity of approximately 2,500 tonnes per day during 2018. Telson's Tahuehueto project, located in northwestern Durango state, Mexico, is currently in preproduction at approximately 150 tonnes per day utilizing a toll mill for processing and has entered a construction phase with a timeline to be producing on site in its own mineral processing plant capable of milling at least 1,000 tonnes per day in the first quarter of 2019.
Qualified persons
Eric Titley BSc, PGeo, of Titley Consulting Ltd., independent qualified person (QP) under the guidelines of National Instrument 43-101, prepared the mineral resource estimates and reviewed the geology and exploration disclosed in this news release. Christopher Jacobs CEng, MIMMM, of Micon International Ltd., an independent qualified person, reviewed the capital and operating estimates, and economic analysis. William Lewis, BSc, PGeo, of Micon, an independent QP, reviewed the environmental, closure, permitting and social aspects. James W.G. Turner, BSc (honours), ACSM, MSc, MCSM, MIMMM, CEng, of Micon, and independent QP, reviewed tailings, metallurgy, process and infrastructure section. Bruce Pilcher, CEng, FIMMM, FAusIMM (CP), of Micon, an independent QP, reviewed the mine plan. Each of Mr. Titley, Mr. Jacobs, Mr. Lewis, Mr. Turner and Mr. Pilcher has read and approved the contents of this news release. It should be noted that the above qualified persons are QPs for the Campo Morado project but not the Tahuehueto PFS.
Cautionary statement NI 43-101
The PEA was prepared in accordance with National Instrument 43-101 Standards of Disclosure for Mineral Projects.
Note
The PEA is preliminary in nature and includes inferred mineral resources that are considered too speculative geologically to have the economic considerations applied to them that would enable them to be categorized as mineral reserves, and there is no certainty that the PEA based will be realized. Mineral resources are not mineral reserves and do not have demonstrated economic viability. Calendar years used are for illustrative purposes. Some figures may not sum exactly due to rounding. Unless otherwise indicated the currency used is U.S. dollars.
We seek Safe Harbor.
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