Mr. James Anderson reports
VANGOLD PEA OUTLINES 7 YEAR MINE LIFE
Further to the company's proposed acquisition of the El Cubo mine and mill complex (El Cubo) from Endeavour Silver Corp. announced Dec. 18, 2020, Vangold Mining Corp. has released positive results from its preliminary economic assessment for the combined El Cubo and El Pinguico project south of the city of Guanajuato, Mexico. Details of the PEA including the company's maiden mineral resource estimate will be provided in a National Instrument 43-101 technical report with an effective date of Jan. 31, 2021, and an issue date of Feb. 12, 2021, to be filed under the company's profile on SEDAR within 45 days. The PEA report is being prepared by Behre Dolbear & Company (USA) Inc., independent mineral industry advisers, with the assistance of other independent consultants.
James Anderson, chairman and chief executive officer, said: "Vangold's management believes that our proposed acquisition of El Cubo will prove to be a remarkable catalyst of growth for the company. Behre's PEA provides us with a high-level view of Vangold's plans to process material from both El Pinguico and El Cubo at a centrally located mill. This study is an important step in unlocking value for all stakeholders at our dual projects in Guanajuato."
All dollar figures are presented in United States dollars unless otherwise stated. Base case metal prices used in the PEA are $1,527 per gold (Au) ounce (oz) and $19.49 per silver (Ag) oz. These prices are based on long-term consensus average prices. A silver-equivalent (AgEq) price ratio of 1:80 (Au:Ag) applies throughout this news release to mineral resources and production.
Mineral resource estimate
- Total indicated mineral resources for the combined project are 718,655 tonnes grading 160 gpt (grams per tonne) Ag and 1.90 gpt Au, or 306 gpt AgEq, which equates to 7.2 M (million) oz AgEq using a conversion ratio of one oz of Au being equivalent to 80 oz of Ag.
- Total inferred mineral resources for the combined project are 1,453,000 tonnes grading 214 gpt Ag and 2.78 gpt Au, or 435 gpt AgEq, which equates to 20.4 M oz AgEq using a conversion ratio of one oz of Au being equivalent to 80 oz of Ag.
- Seven-year economics -- Behre prepared a discounted cash flow model for the combined project to determine the net present value (NPV), internal rate of return (IRR), initial capital and sustaining capital, and payback period. Cash flow estimates were prepared on an after-tax basis and in accordance with NI 43-101 standards of disclosure for PEA studies. The PEA considers a plan to ramp up to a 750-tonne-per-day (tpd) operation, with an initial mine life of 7.0 years. On an after-tax basis, the combined project generates a base case NPV (5 per cent) of $32.9-million and an IRR of 105 per cent, excluding El Cubo acquisition costs. Using commodity prices of $22.41/oz Ag and $1,756/oz Au, which are plus 15 per cent above the base case (yet still lower than current spot prices), the after-tax NPV (5 per cent) is $79.0-million and the IRR is 344 per cent. Behre calculates a base case payback period of 1.87 years.
- Operating costs -- Dividing Behre's total operating costs of $124.4-million by the life of mine (LOM) AgEq oz of 13.2 million to be recovered from the combined project, gives Vangold an operating cost per AgEq ounce of $9.42 over seven years of production, positioning Vangold's operation to be attractive in nearly all commodity price scenarios.
- Opportunities to grow and optimize -- Given that planning for the combined project has been advanced through the PEA stage within only a five-month period, numerous opportunities remain for growth and optimization. The most significant immediate opportunities are the potential to expand the company's mineral resources -- both at El Cubo and El Pinguico through exploration drilling and development, which is now continuing at El Pinguico. Other noteworthy opportunities include optimization of the surface stockpile metallurgy and recoveries, which the company remains confident can be improved during the mill's recommissioning process.
The reader is advised that the PEA summarized in this news release is preliminary in nature and is intended to provide an initial, high-level review of the combined project's economic potential and design options. The PEA mine plan and economic model includes numerous assumptions and the use of mineral resources. Mineral resources that are not mineral reserves do not have demonstrated economic viability. Furthermore, there has been insufficient exploration to allow for the classification of the inferred mineral resources disclosed herein as an indicated or measured mineral resource, however, it is reasonably expected that the majority of the inferred mineral resources could be upgraded to indicated or measured mineral resources with continued exploration. There is no guarantee that any part of the mineral resources disclosed herein will be converted into a mineral reserve in the future or that the PEA will be realized.
Mineral resource estimate
The mineral resource estimate used as the basis for the PEA was derived from Endeavour's previous technical report for El Cubo titled "National Instrument 43-101 Technical Report: Updated Mineral Resource and Reserve Estimate for the El Cubo Project, Guanajuato, Mexico" dated March 3, 2017, and amended March 27, 2018 (effective Dec. 31, 2016), by Hardrock Consulting LLC and computer models developed by Endeavour and Vangold's previous technical report for El Pinguico titled "NI 43-101 Technical Report for El Pinguico Project, Guanajuato Mining District, Mexico," dated effective Feb. 28, 2017, by Carlos Cham Dominguez, CPG, copies of which have been filed by Endeavour and Vangold, respectively, under their profiles on SEDAR. Behre has reviewed the information, estimation methods and the estimates in such reports and is of the opinion that the estimates are reasonable and can be utilized for the PEA, subject to certain adjustments including those summarized below.
El Cubo resource estimate
Endeavour's 2016 mineral reserves and resources estimate for El Cubo comprised 37 individual models. These models were developed for each vein or area using two different estimation methods, either a traditional manual polygonal method referred to in the technical report as a vertical longitudinal projection (VLP) or as a two-dimensional (2-D) polygonal method while the majority of the estimates were made using computerized three-dimensional (3-D) block models. Fifteen areas were estimated using manual techniques and 22 different block models were used for the computerized estimates. Based on long production experience and historic measurements, a density factor of 2.5 tonnes per cubic metre was used to convert volumes to tonnages. Behre considers this reasonable.
After subtracting Endeavour's total mine and mill production at El Cubo since Jan. 1, 2017, of 1,278,038 tonnes from the 2016 estimate, Behre estimates the remaining resources at El Cubo as follows, assuming Endeavour mined all proven and probable mineral reserves first and then the measured mineral resource followed by the indicated resource.
El Pinguico resource estimate
There are two stockpiles at the El Pinguico mine that date back to 1913 when the mine shut down during the Mexican Revolution; a surface and an underground stockpile.
Vangold's previous sampling of the surface stockpile including the digging of 10 pits by excavator and sampling near the top and near the bottom of the pits has been reviewed by Behre. From the sampling location map, the pits are scattered relatively evenly on the stockpile. Also, previous trenching and sampling by a private group were undertaken. Based upon the topographic survey and all the sampling data, Vangold estimates the surface stockpile contains approximately 175,000 tonnes to 185,000 tonnes with a silver grade of 67 gpt and a gold grade of 0.45 gpt. Behre has reviewed the work and is of the opinion that there has been sufficient work to classify this stockpile as an indicated mineral resource.
The underground stockpile at El Pinguico fills an old open stope area from level 4 to level 7 of the El Pinguico mine ranging from 25 metres to 100 m thick and occupying portions of the stoped out El Pinguico vein. At present, only the surface of the stockpile can be sampled. Vangold dug and sampled 20 shallow trenches some 0.5 m to one m deep. Part of the dump surface has been contaminated by rock fall from the overlying waste rock adjacent to the Pinguico vein.
Based upon three sampling campaigns, Vangold estimated that the underground stockpile contains a silver grade of 167 gpt and a gold grade of 1.66 gpt. The work by Vangold in 2017 confirming the historic grade estimates is reasonable. Since only the upper five m of the stockpile has been sampled, Behre has less confidence in the material below the 2017 trenching. It is assumed that this stockpile comprises low-grade vein material from development drifts, but Behre cautions that it could also include barren waste rock from development drifts. Behre has reviewed the sampling work in 2017 and is of the opinion that the underground stockpile contains potentially economic material in the upper portion, which has been sampled using modern QA/QC (quality assurance/quality control).
Behre recommends accessing level 7 and sampling the base of the stockpile via raises and draw points, which may increase the confidence in the entire stockpile grade. However, until that work is completed, Behre is of the opinion that only the top portion can be considered as resources and would classify the 25,600 tonnes certified in 2012 by Servicio Geological Mexicano (SGM) as an indicated mineral resource. The remaining mineral resources in 2021 at El Pinguico are shown in Table 14.2 below.
Mineral Resources that are not mineral reserves do not have demonstrated economic viability. There has been insufficient exploration to allow for the classification of the inferred resources at El Cubo as an indicated or measured mineral resource, however, it is reasonably expected that the majority of the inferred mineral resources could be upgraded to indicated or measured mineral resources with continued exploration. There is no guarantee that any part of the mineral resources discussed herein will be converted into a mineral reserve in the future.
At present, there are no mineral reserves at El Cubo or El Pinguico.
Preliminary economic assessment
Behre prepared a discounted cash flow model for the combined project to determine the NPV, IRR and payback period. The technical cash flow was prepared on an after-tax basis and was prepared in accordance with NI 43-101 for PEA studies.
Note: The cash flow model includes indicated resources for the stockpiled material at El Pinguico and indicated and inferred resources for El Cubo. Readers are cautioned that the PEA is preliminary in nature. It includes inferred mineral resources 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 the PEA will be realized. Mineral resources that are not mineral reserves have not demonstrated economic viability. The estimate of mineral resources may be materially affected by environmental, permitting, legal, title, socio-political, marketing and other relevant issues.
Key parameters integral to Behre's preparation of the cash flow model and determination of the NPV include:
- All results are expressed in U.S. 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 (NPV) are determined, assuming end-of-year cash flows.
- All costs and revenues reflect "real" or constant 2021 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.
The results of the preliminary economic assessment for the combined project are summarized in Table 22.1.
Cash flow model inputs reflected in the preliminary economic assessment include:
- Life of mine and production forecasts. The cash flow model incorporates a seven-year operating and development period in which the El Pinguico stockpile material and the El Cubo indicated resources are scheduled to be recovered in years one to three. Inferred resources are projected to be mined in years four to seven. At steady state, the monthly targeted production rate is 22,500 tonnes per month for an annual total of 270,000 tonnes per year mined and processed.
- Commodity prices and net smelter return. Behre used silver and gold price projections compiled by Consensus Economics Inc. in its January, 2021, Energy and Metals Consensus Forecasts survey. For the purpose of the PEA only, it is assumed that development will begin in April, 2021, and production will be initiated in October, 2021. The fiscal year in the cash flow model is modelled to begin on April 1. The Consensus Economics price forecasts for Q4 2021 through 2025 have been used for years one through five, respectively, and the Consensus Economics long-term price forecast has been used in years six and seven. The resulting average silver price is $19.49 (U.S.) and the average gold price is $1,527 (U.S.).
- The net smelter return (NSR) has been determined on the basis of refining and freight costs of $3.75 per ounce of silver and $138 per ounce of gold.
- Operating costs. Mining, processing and administration costs are based on the operating cost estimates summarized in Table 22.5 below.
- Development and capital costs. Development and capital costs associated with mine development and equipment and mill refurbishment are shown in Table 22.6 below.
Royalties. Vangold holds an option to purchase three underlying royalties covering its El Pinguico project from Exploraciones Mineras Del Bajio SA de CV (EMBSA) as more particularly described in the company's news release of Nov. 13, 2020. If Vangold exercises such option, EMBSA's sole remaining royalty at El Pinguico will be a 15-per-cent net profit interest over the existing surface and underground stockpiles.
- 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 key base case assumptions, Behre prepared a sensitivity analysis for each operating scenario/factor (in example, commodity prices, operating costs and capital costs) that could have a significant effect on the financial performance of the combined project. The following parameters were evaluated in the sensitivity analysis:
- 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 LOM review although, in reality, it is unlikely that each of the varied parameters would experience the same increases or decreases over the entire LOM. As such, the following sensitivity analyses present the best or the worst-case scenarios in the ranges evaluated and provide an indication of the relative effect that a specific operating parameter can have on the overall combined project economics.
Commodity price and cost sensitivities
Tables 22.8 and 22.9 illustrate the affect on base case cash flow resulting from variations in commodity prices and costs.
Table 22.8 commodity price sensitivity -- base case
Of the sensitivity factors reviewed, the base case cash flow was significantly affected by variations in the commodity prices. At a 25-per-cent increase in commodity prices, the resulting silver and gold prices are comparable with the average spot price in early January, 2021 ($25.90/oz silver and $1,867/oz gold). At a 10-per-cent decrease in commodity prices, the project demonstrates a positive NPV (5 per cent), NPV (8 per cent) and an IRR of 22 per cent. The silver and gold prices for this case are comparable with the three-year historical average prices ($17.55/oz silver and $1,477/oz gold).
Based on the results of the sensitivity analysis, the average NPV (5 per cent) breakeven price is approximately $17.20/oz of silver and $1,376/oz of gold (assuming a constant gold-to-silver ratio of 80:1). There is minimal difference in the breakeven price at a 5-per-cent or 8-per-cent discount rate.
At Vangold's request, Behre has also prepared a preliminary assessment of an alternative to its base case initial capital and development costs for mine equipment in which both El Cubo and El Pinguico would be mined using a contract miner -- readily available in central Mexico. In this scenario, only surface facilities, including substations, compressors and fans would be constructed, and all mine equipment and underground facilities would be furnished by a contractor. This alternative mode of operation would only be relevant to El Cubo as contractor services at El Pinguico are already part of the operating plan. The estimated mine capital cost for this alternative for the first year of operation is estimated at $3.0-million for the combined project at El Cubo and El Pinguico and $1.3-million for the increase in tonnage at El Cubo in the second year of operation. A comparative table of costs, cash flows, and values for the owner operated model versus the contractor model is set out in the attached table.
The advantage to the "contractor alternative" is the significant reduction in the initial capital and development costs (nearly $12-million); however, based on the single preliminary contractor quote received by Behre at the time of the PEA, the LOM operating and underground development costs are higher for this scenario than the base case. Additional quotations are needed to confirm operating costs. The resulting NPV (8 per cent) is lower than the base case at $20.3-million, but given the significant reduction in initial capital and development costs (about $12-million) use of a contract miner at El Cubo during the first few years of operation may be warranted while additional exploration work and definition drilling is completed at El Cubo and the El Pinguico underground stockpile. Conversion of inferred resources to measured and indicated resources and the identification of additional resources would increase the LOM, further justifying additional capital expenditures to move to an owner-operator scenario in later years.
The company has submitted a draft of the PEA report along with additional corporate and project budgeting information to the TSX Venture Exchange in connection with its proposed acquisition of El Cubo and looks forward to having its shares reinstated for trading shortly.
El Cubo transaction
The company continues to work with Endeavour toward closing the company's purchase of El Cubo in an expeditious manner. On Dec. 18, 2020, the company announced it had signed a binding letter agreement with Endeavour to acquire El Cubo. The El Cubo plant and tailings facilities are currently on short-term care and maintenance, and Vangold intends to restart the mill at approximately 750 tonnes per day using resource material from its surface and underground stockpiles at El Pinguico as a significant portion of its estimated throughput for the first 36 months of operation.
About Behre Dolbear
The PEA was prepared by independent mineral advisors Behre Dolbear & Company (USA) Inc., one of the oldest mineral industry advisory firms in the world, continuously operating since 1911. Behre specializes in performing impartial technical and strategic studies for mining companies, financial institutions, governments, and international agencies. Typical studies include resource and reserve reviews, mineral property valuations, due diligence studies for bankability and acquisition purposes, and independent expert reports for capital raisings and valuations.
Vangold's El Pinguico project
El Pinguico is a high-grade gold and silver deposit that was mined from the early 1890s until 1913. Toward the end of that period it was mined exclusively by The Pinguico Mines Company of New York, which has shares traded on the Boston and New York stock exchanges. The mining was done principally from the El Pinguico and El Carmen veins, which are thought to be splays off the Mother Vein or "Veta Madre."
The Veta Madre is associated with a mega fault that outcrops for 25 kilometres and is the most important source of precious metal mineralization in the region. Current geologic interpretation, based on regional mapping and projections from the Veta Madre developed at adjacent historic mine operations, suggest that the Veta Madre vein system may cross Vangold's property at depth, underneath the high-grade El Pinguico and El Carmen veins. Very limited drilling has been done on the property and no drilling has yet attempted to encounter the Veta Madre at depth. The intersection of these major vein structures are excellent exploration targets and may result in zones of significant size and grades.
Hernan Dorado Smith, a director of Vangold and a qualified person as defined by National Instrument 43-101 -- Standards of Disclosure for Mineral Projects, has approved the scientific and technical information contained in this news release.
About Vangold Mining Corp.
Vangold Mining is an exploration and development company engaged in reactivating high-grade past producing silver and gold mines near the city of Guanajuato, Mexico. The company's El Pinguico project is a significant past producer of both silver and gold located just seven km south of the city. The company remains focused on the near-term potential for development and monetization of its surface and underground stockpiles of mineralized material at El Pinguico, and in delineating silver and gold resources through underground and surface drilling on projects located in this historic mining camp.
We seek Safe Harbor.
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