Mr. James Anderson reports
GUANAJUATO SILVER PROVIDES UPDATED PEA FOR THE EL CUBO MINES COMPLEX
As part of a scheduled program to update its National Instrument 43-101 technical reports and resource estimates for all of its producing mines in Mexico, Guanajuato Silver Company Ltd. is presenting positive results from its new preliminary economic assessment of its 100-per-cent-owned El Cubo mines complex located in Guanajuato, Mexico, titled "Preliminary Economic Analysis -- El Cubo/El Pinguico Silver Gold Complex Project, State of Guanajuato, Mexico." The 2023 PEA was prepared by Behre Dolbear & Company (USA) Inc. in accordance with National Instrument 43-101, is dated June 23, 2023, with an effective date of Dec. 31, 2022, and is available for review on SEDAR and at the company's website. All dollar amounts are expressed in United States dollars.
James Anderson, chairman and chief executive officer, said: "Guanajuato Silver has grown significantly over the past two years through a strategy of acquiring older mines in the Guanajuato mining camp and the state of Durango and bringing them efficiently back into production. Because of the nature and swiftness of these acquisitions, most of the mineralized material at these mines were categorized as historical resource estimates. As previously announced, we have initiated a program to upgrade our existing resources and historical estimates to current resources (see Guanajuato Silver news release dated Feb. 23, 2023 -- "Guanajuato Silver Drills 6,981 g/t AgEq at San Ignacio and Prepares to Expand Production"); appropriately, the El Cubo mines complex is the first to be updated. We anticipate a current resource estimate for our San Ignacio mine to be completed later this year. The 2023 PEA replaces Behre Dolbear's previous preliminary economic assessment report issued on May 6, 2021, with an effective date of Jan. 31, 2021."
Mineral resource estimate
The upgraded mineral resource for the El Cubo mines complex as extracted from the 2023 PEA is presented in an attached table.
Mr. Anderson added: "This updated PEA envisions a six-year mine life; however, El Cubo has already demonstrated a production history that has extended well over 100 years. Our goal is to continually increase mineral resources through in-fill and exploration drilling to end each year with 125 per cent of the total resources that we started the year with; if we can achieve this, we believe that El Cubo can continue to be a significant silver producer for decades to come."
The mineral resource estimate used as the basis for the 2023 PEA was developed by Behre Dolbear using the Dec. 31, 2016, mineral resource estimate and computer models developed for El Cubo by Endeavour Silver Corp., El Cubo's previous owner, and Guanajuato Silver's Feb. 28, 2017, resource estimate for the El Pinguico property. Behre Dolbear has extensively reviewed and audited the primary drilling data, computer models, wire frames, estimation methods, and the previous estimates and the El Cubo mill production in 2021 and 2022 to help develop the estimate of the current mineral resources at the El Cubo mines complex.
Although Endeavour and Guanajuato Silver significantly increased the drilling and sampling data at El Cubo beyond the data in the 2016 database which has been used for the El Cubo 2023 PEA mineral resource estimate, such drilling was primarily exploration drilling on parallel vein structures and requires additional infill drilling to achieve a drill spacing adequate for an inferred mineral resource estimate. Accordingly, the results from such subsequent drilling by Endeavour and Guanajuato Silver have not been used in the calculation of the mineral resource estimate for El Cubo as of Dec. 31, 2022, in the 2023 PEA. The 2023 PEA includes a recommendation that targeted drilling should be completed to increase the mineral resource tonnage, classification and mine life prior to a prefeasibility study.
The remaining mineral resources at El Cubo, as of Dec. 31, 2022, total approximately 450,000 tonnes of indicated resources and 1.36 million tonnes of inferred resources. There is no certainty that all or any part of the mineral resources estimated will be converted into mineral reserves. Mineral reserves have not been identified for El Cubo or El Pinguico.
Preliminary economic assessment
Behre Dolbear also prepared a discounted cash flow model for the El Cubo mines complex, excluding El Pinguico, to determine the net present value (NPV), internal rate of return (IRR) and payback period.
Key parameters integral to Behre Dolbear's preparation of the cash flow model and determination of NPV include:
- All results are expressed in United States dollars.
- The analysis is based on a 100-per-cent equity basis. Specific business considerations, such as debt or equity financing and detailed tax strategies, have purposely not been included or analyzed in detail.
- All cash flows are determined on an after-tax basis.
- Net present values are determined, assuming end-of-year cash flows.
- All costs and revenues reflect real or constant 2023 dollars without escalation.
- The measures used in the PEA are metric except where, by convention, gold and silver content, production and sales are stated in troy ounces.
A summary of the updated preliminary economic assessment for El Cubo as at Dec. 31, 2022, as extracted from the 2023 PEA is set out in an attached table.
The following is a summary of certain cash flow model inputs reflected in the 2023 PEA. Readers should refer to the 2023 PEA directly for a complete discussion of these and other inputs.
Life of mine and production forecasts: The cash flow model incorporates a six-year operating and development period prepared on the basis of the diluted tonnages summarized in an attached table. At steady state, the average monthly targeted production rate is 36,250 tonnes per month for an average annual total of 435,000 tonnes per year mined and processed. The overall projected base case production is summarized in an attached table. Also shown in an attached table is the projected silver equivalent recovery with the addition of the gravity circuit at El Cubo at the end of 2022.
Commodity prices and net smelter return: The use of historical metal prices is a generally accepted methodology for modelling long-term commodity prices. For the 2023 PEA, Behre Dolbear used base case silver and gold prices of $23 (U.S.) per ounce (oz) of silver and $1,850 (U.S.) per oz of gold on the basis of the three-year rolling average of prices of $23.43 (U.S.) per oz silver and $1,849 (U.S.) per oz gold.
The net smelter return (NSR) was determined on the basis of, inter alia, revenues of 97.5 per cent of payable silver and gold content, less a treatment charge of $350 (U.S.) per dry tonne DAP, a refining charge of $1 (U.S.) per ounce of payable silver and $8 (U.S.) per ounce of payable gold per dry tonne of concentrate, and freight charges of 30,000 pesos per truck carrying 33 wet tonnes of concentrate containing 12 per cent moisture.
Operating costs: Average mining, processing and administration costs for six years of operations based on current experience at El Cubo are presented in an attached table.
Development and capital costs: The development and capital costs associated with mine development and equipment, new tailings facility, and facility improvements for the remaining mine life at El Cubo are shown in an attached table. Included in the sustaining capital costs is the construction of additional capacity in the tailings storage facility 3-B. The construction is scheduled to begin in 2023 and will be completed by 2026 at an estimated capital cost of $6-million (U.S.). The tailings facility includes a tailings filtration plant. The other sustaining capital costs include general improvements to the mine and mill.
Other costs and taxes: Other costs include:
- Mining rights tax: 7.5 per cent of EBITDA (earnings before interest, taxes, depreciation and amortization);
- Government fee on precious metals: 0.5 per cent of silver gross revenues;
- Workers profit share: 10 per cent of pretax profits.
These costs are based on the requirements of the Mexican government. Depreciation was determined on a straight-line basis for eight years as per Mexican tax laws. The income tax rate is projected at 30 per cent of operating profit (sales income or revenue less royalties, operating and other costs, and depreciation).
To determine the effect of changes in several of the base case assumptions, a sensitivity analysis was prepared for each operating scenario. Certain factors, such as commodity prices, operating costs and capital costs, could have a significant effect on the financial performance of El Cubo. The objective of the sensitivity analyses is to determine the effect of several varying key parameters, as a point of comparison with the base line results. The following parameters were evaluated:
- Discount rates ranging from 0 per cent to 10 per cent were applied to determine the effect on NPV.
- Commodity prices generally have the greatest effect on mining project economics. The sensitivity to changes in commodity prices was determined on the basis of a constant gold-to-silver price ratio of 1:80, which is consistent with historical data.
- The cash variable operating costs were varied to determine the effect on NPV.
- Both the initial and sustaining capital costs were varied.
In each case, the particular parameter was changed for each year during the life of the mine (LOM) review. In reality, it is unlikely that each of the varied parameters would experience the same increases or decreases over the entire LOM. As such, these sensitivity analyses present the best or the worst-case scenarios in the ranges evaluated. The purpose of the sensitivity analysis is to provide an indication of the relative effect that a specific operating parameter can have on the overall project economics.
Of the sensitivity factors reviewed, the discounted cash flow was significantly affected by variations in both the commodity prices and operating costs.
At the three-year historical average silver price of $23 (U.S.) per oz and a gold price of $1,850 (U.S.) per oz, the 5-per-cent NPV is $31.5-million (U.S.). At a 20-per-cent decrease in silver equivalent price, El Cubo continues to demonstrate a positive NPV (5-per-cent discount rate), NPV (8-per-cent discount rate) and an IRR of 85 per cent.
Based on the results of the sensitivity analysis, the average NPV (5-per-cent discount rate) breakeven price is approximately $18 (U.S.) per oz of silver and $1,440 (U.S.) per oz of gold (assuming a constant gold-to-silver ratio of 1:80). There is minimal difference in the breakeven price at a 5-per-cent or 8-per-cent discount rate.
Feed material from other sources
The base case cash flow model includes feed material from other sources as per Guanajuato Silver's plan of operation, including Guanajuato Silver's San Ignacio mine and VMC in Guanajuato, Mexico. If the additional material is not fed to the El Cubo mill, the base case NPV (5-per-cent discount rate) is reduced by 32 per cent from $31.5-million (U.S.) to $21.3-million (U.S.). If the projected recovery from the gravity circuit is included, the base case NPV (5-per-cent discount rate) is only reduced by 9 per cent. Behre Dolbear notes that it is unlikely that additional feed to the El Cubo mill will not be available as there are remaining mineral resources at El Pinguico, as well as potential additional material from San Ignacio and VMC. The mineral resources at El Pinguico have not been included in the base case cash flow model.
Shares for debt
Guanajuato Silver also announces that it has closed its previously announced shares-for-debt transaction totalling $47,250. The company has issued a total of 81,465 common shares at a deemed price of 58 cents per share in settlement of $47,250. The common shares are subject to a four-month hold period expiring Oct. 24, 2023.
About Guanajuato Silver Company Ltd.
Guanajuato Silver is a precious metals producer engaged in reactivating past-producing silver and gold mines in central Mexico. The company produces silver and gold concentrates from the El Cubo mine complex, Valenciana mines complex and the San Ignacio mine; all three mines are located within the state of Guanajuato, which has an established 480-year mining history. Additionally, the company produces silver, gold, lead and zinc concentrates from the Topia mine in northwestern Durango. With four operating mines and three processing facilities, Guanajuato Silver is one of the fastest-growing silver producers in Mexico.
Reynaldo Rivera, vice-president of exploration of Guanajuato Silver, has approved the scientific and technical information contained in this news release. Mr. Rivera is a member of the Australasian Institute of Mining and Metallurgy and a qualified person as defined by National Instrument 43-101 (Standards of Disclosure for Mineral Projects).
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