ECU Silver Mining Inc: Ready for prime time
For an investor looking to establish a portfolio of junior mining companies in Mexico, the choices seem to come in only two sizes: too big or too small. A handful of established juniors with large defined deposits and significant production dominate the sector, bearing market capitalizations above a billion dollars. Further down the food chain, there are dozens of juniors operating at modest production levels, working small deposits, or exploring early stage projects in the hopes of defining an economic deposit. Many of that group have fully diluted market caps of under $10 million, and liquidity is often an issue preventing larger positions to be bought or sold without moving the market.
One company that presents an attractive option in the middle of the range is ECU Silver Mining Inc. This rapidly growing corporate upstart was itself a tiny junior just a couple of years ago. Exploration success and strong management combined in large measures to propel the company to where it now stands, and there are reasons to be encouraged that the best is yet to come.
Michel Roy, president and CEO, can take a lot of the credit
for the outstanding performance of the company. An experienced geologist with a
long history of consulting work at operating mines throughout the
In 2004 ECU committed to a strategy to build a stronger foundation as an operating business, and since that time production, revenue, and cash flow have been increasing on a quarter over quarter basis. The internally generated cash flow has been channelled back into exploration and infrastructure development to enable the next round of improvement. A steady stream of positive exploration results have been released, and entirely new veins have been discovered in this prolific system. The geologists managing the program have also been able to locate the extensions of existing developed veins on the other side of a fault structure that displaced the entire structure over 200 metres laterally, and 50 metres in depth. This work recently allowed the company to report an updated resource estimate, compliant with the standards mandated by NI43-101 requirements, for a deposit of 7.7 million tonnes (in the indicated and inferred categories) amounting to about 100 million ounces silver equivalent resources.
There is no other junior mining company in Mexico that is able to report an estimated resource above what ECU has defined to this point, for an underground mine currently in operation. That mineral inventory is even more impressive when considering that the high base metals values in the deposit were not even included in the calculation. The total reported estimate would enable the company to operate at full capacity for over 20 years even if not one new tonne of ore is discovered in the future.
Combined, the large defined resource of high-grade ore, plus
the extensive underground development completed to open access points for
production, have provided the company with operating stability and the luxury
to contemplate rapidly increasing the capacity at the mill and recovery
plant. Current average daily production is averaging about 300 tonnes per
day. Michel Roy recently stated that an increase in production to
approximately 1300 tonnes per day would generate up to $70 million in cash flow
per year, a number that would establish the company among the elite junior
miners in
Despite a history of several hundred years of past production from a number of mines at the small property, the Velardena Project is considered a challenging environment for a modern mining operating due to the characteristically narrow veins widths of the deposit. Extremely high grading sulphide deposits in these veins often averaged grades above a thousand grams of silver per tonne, along with up to 12 grams per tonne gold and high percentages of lead and zinc. The veins are frequently only tens of centimetres wide, ranging up to a metre or two at their widest points, but extending through a remarkably continuous strike length of a kilometre or more in many cases.
As the company has advanced development at depth, it has reported steadily higher grades of gold and silver across wider vein intersections, and the veins are converging. A recent discovery of stockwork mineralization was encountered across a width of over 30 metres in the lower levels of the mine. Stockwork mineralization is a zone bearing a number of closely spaced veins, along with veinlets and finely disseminated lower grade material which can be extracted in bulk, subject to lower cost mining methods. This new zone represents an additional resource of more than a million tonnes of ore that will be economic to mine at current metals prices.
In addition, recent drilling extending to the deepest levels ever tested at the property has encountered wide intervals of skarn mineralization. Skarn is best described as a type of deposit where the host rock has been ‘cooked’ under immense heat and pressure generated by a nearby intrusive of molten rock. Metals contained within the intrusive combine with the host rock to form entirely new minerals, often in zones extending across very wide intervals of relatively continuous, lower grading material.
Only a few test holes have been drilled to depth so far but the results are very encouraging. Skarn intervals in the range of 90 metres have been reported, and if those mineralized zones can be shown to extend to greater depths and laterally across a significant strike length, then an enormous tonnage of new resources will be proven up. A great deal of exploration work remains to be completed, so ECU recently purchased a drill to ensure greater control of its aggressive exploration program.
Given that the grades of the mineralization, in both the epithermal vein systems near surface and the skarn deposit encountered below, have continued to increase as they extend the exploration to depth, there is reason to speculate that the richest zones for the project are yet to be discovered. Other nearby mines in the district have demonstrated that skarn deposits can continue to several hundred metres in depth, and the early success achieved by ECU to this point would suggest that the upside potential for Velardena could amount to a monster discovery of over 10 million gold equivalent ounces. This would represent the greatest new discovery in the country in decades.
I was able to visit the project for the first time in 2005, and again toured the property in the spring of 2006. What impressed me was the extensive new development that has been completed in such a short time. Underground workings have been extended to reach several newly discovered vein systems, opening access points on several levels to ensure greater flexibility for operations and supporting higher rates of production. Surface infrastructure has also been improved, including the construction of a metallurgical lab built on site, and a larger tailings pond. New equipment has been purchased and installed to improve the efficiency of the mill and recovery plant. A process for a gold pyrite recovery circuit has been developed and will soon be in operation that will allow for increased production capacity, yielding significantly higher gold recovery, and generating stronger revenues that will greatly improve the bottom line.
With a fully diluted share structure adding up to about 220 million shares, ECU currently supports a market capitalization above half a billion dollars, which is higher than I would like as a value buyer. However, when one takes into consideration the strong growth prospects, there remains considerable room for further gains. The asset value alone for the company if a major skarn system is proven up would justify a multiple of the current share price. Considering the excellent track record of success to date, and the documented mineral inventory that assures long-term production stability, the risk exposure going forward is sharply reduced. As such, ECU presents an excellent opportunity for strong performance in the Mexico Mike Portfolio, and I add a $10,000 allotment to the holdings.