McEwen extends El Gallo 12 years with new PEA

McEwen Mining (TSX: MUX; NYSE: MUX) has tabled a new preliminary economic assessment (PEA) that extends the life of its El Gallo gold-silver complex in Mexico by 12 years with low initial capital costs.

The mine produced 23,025 equivalent oz. gold in the first half of 2018, in line with its 2018 guidance of 32,000 equivalent oz. gold, but had stopped mining and crushing by the end of 2018's second quarter.

The new PEA outlines a two-phase development plan the company calls Project Fenix. In the first phase, McEwen would reprocess leftover material from the heap-leach pad at El Gallo through a conventional carbon-in-leach process at a throughput rate of 5,000 tonnes per day. That phase would run until 2031, concurrent with the second phase.

Phase two involves processing new ore from several satellite deposits within 10 km of the El Gallo processing plant, including El Gallo Silver, Palmarito, El Encuentro and Carrisalejo.

During phase two McEwen would process ore from the higher-grade silver deposits - mainly El Gallo Silver - at a maximum rate of 3,250 tonnes per day. The company would use conventional flotation technology followed by leaching and zinc precipitation. It would then use the carbon-in-leach plant from phase one to continue leaching the flotation tailings in an attempt to maximize silver recoveries.

Gold produced at McEwen Mining's El Gallo gold-silver mine in Mexico. Credit: McEwen Mining.

McEwen aims to build the new processing plant 6.5 km from the El Gallo Silver deposit. It will need to build a haul road connecting the two, as well as an electrical substation and power line. The company is working on the electrical and power line design, which it aims to finish this year.

The company initially announced slightly different PEA results in May. The original announcement detailed a 10-year mine life extension, with 2% more equivalent ounces of gold recovered.

"In the time between the announcements we revised the evaluation model with our engineering group," McEwen's new president and chief operating officer Chris Stewart says in an interview with The Northern Miner. "It's a bit more conservative, with a higher level of confidence.

"The changes resulted in about 2% lower gold-equivalent ounces being recovered, but our grade was bumped overall by 2.6%, which resulted in stronger economics for the project."

Stewart joins McEwen after a year and half as CEO of junior explorer Treasury Metals (TSX: TML; US-OTC: TSRMF), which is developing its Goliath gold project in northern Ontario. Before that he was vice-president of operations at Kirkland Lake Gold (TSX: KL; NYSE: KL) for 2.5 years, and helped lead the turnaround of the Macassa gold mine, which Kirkland leveraged to acquire St. Andrew Goldfields in 2016.

In 2017, Kirkland produced 194,237 oz. gold grading 15.2 grams gold at Macassa.

Project Fenix would produce 17.2 million tonnes grading 1.2 grams gold equivalent for 563,000 recovered equivalent oz. gold.

The project contains 13 million measured and indicated tonnes grading 77 grams silver and 0.39 gram gold for 32.27 million oz. silver and 161,000 oz. gold in optimized pit shells. It also has 5.67 million inferred tonnes at 27 grams silver and 0.81 gram gold for 4.97 million oz. silver and 148,000 oz. gold.

The project has a US$60-million, after-tax net present value at a 5% discount rate and a 28% after-tax internal rate of return. The company estimates phase one would cost US$41 million and phase two US$30 million, with cash costs of US$704 and US$857 per equivalent oz. gold for each phase.

Operations at McEwen Mining's El Gallo gold-silver mine in Sinaloa, Mexico. Credit: McEwen Mining.

Stewart says McEwen has already begun the permitting process for expansion. He says the company will present to the Mexican government in September.

"We should have a couple rounds back and forth with them to respond to their information requests, and we have a target right now of approval by the end of first-quarter 2019, which is well ahead of when we're looking at actually moving ahead with the project," Stewart says.

The company is working on a feasibility study for the El Gallo that it aims to finish by June 2019.

The current complex consists of the El Gallo and Palmarito silver deposits and the Magistral gold deposit, all located with 13 kilometres. It poured first gold in September 2012 and achieved commercial production in January 2013. In 2017 it produced 1.23 million tonnes grading 2.07 grams gold for 46,400 oz. gold and 18,600 oz. silver, or 46,694 equivalent oz. gold at a 75:1 gold-to-silver ratio.

The company recently reported strong second-quarter financial and production results, largely building on last year.

It produced 36,959 oz. gold in the second quarter of 2018, up from 22,191 oz. gold a year ago. While the company's second-quarter silver production fell slightly to 772,432 oz. silver from 779,487 oz. silver last year, it still reported a 45% increase in equivalent oz. gold year-over-year to 47,258 oz. gold.

The company has US$19.2 million in working capital, down from US$47 million a year ago, but no debt. It reported a net loss of US$5.4 million in the second quarter of 2018, which is US$3.7 million more than a year ago.

Meanwhile, McEwen is continuing construction at its Gold Bar mine in central Nevada. It says all major equipment and bulk materials are purchased or already on-site, and expects to finish construction in late 2018.

It is targeting commercial production at Gold Bar by the first quarter of 2019. McEwen expects to produce 197,000 oz. gold at Gold Bar over the mine's first three years.

"Rob McEwen's vision is to qualify for inclusion in the S&P 500," Stewart says, "and to do that we need to grow five times from where we are today while assuring we create value for our shareholders every step of the way, and I think I can help them achieve that vision, based on the experience I've had.

Shares of McEwen Mining are valued at $2.62 within a 52-week range of $2.33 to $3.64. The company has an $888-million market capitalization.