Minefinders Corp. Ltd. (MFN) Wall Street Analyst Forum March 27, 2008 9:50 AM ET
Mark Bailey - President and CEO
Minefinders is a development company just entering phase of production. We were an exploration company and we are in the process of completing construction of our Dolores mine in Mexico, in Northern Mexico in the State of Chihuahua. We've been mining since late October of last year; stockpiling ore and leaving ore in our benches and using the waste dropped to build haul roads. We're currently completing construction of our haul roads and our processing facility and that will be operational here in April.
We expect to start leaching in late April, pouring our first ore in May and then ramping up to full production probably in mid-summer and we expect to declare commercial production in the third quarter, and that will be at a sustained rate of 18,000 tones per day.
This is a standard disclaimer you’ve all seen. We're entering the space after a long proactive exploration development period through some difficult times. We discovered this deposit in 1996, and we have drilled well over 200,000 meters, drilling a 1000 drill holes, and done several different feasibility studies to decide how to best develop the project.
Right now we're looking at an open pit heap leach of 18,000 tons per day and we are looking to add a mill in about the year 2010. We are working out a feasibility study for that again. The mill improves our recoveries from high grading the pits, and then there are underground resources beneath the pit up to 200 meters deeper than the bottom, in peripheral structures such as East Dike, and north and south of the pit.
The underground type grades are anywhere from two to eight meters. It probably averaged 20 grams to 30 grams of gold and up to 1000 grams of silver. We have individual drilling ourselves over 100 grams of gold over (inaudible). So it definitely has robust deposits both as an underground and an open pit.
The company only has 29 million shares outstanding, and we have been successful raising over $250 million to do all this work. We are just finishing, as I mentioned, construction. Total capital cost is going to be about $175 million to $178 million to complete construction. We will spend about $190 million in total CapEx. But that additional money is operating capital, because we are operating.
We are ahead of schedule on mining, and we are behind schedule on processing, so we are capitalizing those expenses instead of expensing them against the ounces. So, it looks a little like it is a little higher than CapEx, but actually it's not too extreme. It has increased over a feasibility study.
The fully-dilutive position is really our options outstanding and our convertible debt. We will get a convertible debt. A few years ago with JPMorgan; $85 million, and that's convertible. If we pay that back instead of converting then we can take 7.2 million shares out of the 60 million fully-diluted.
We have a $50 million line of credit with Scotiabank. That we put in place last November. That gives us additional working capital for both our exploration operations which we would continue on other properties, and also for the operating capital to bring some positive cashflow at Dolores. We expect to be positive in August and ramp up very quickly with these current gold and silver prices to be cash positive and next year we anticipate realizing about $120 million to $130 million of net profit on Dolores.
The share structure: We are trading a little higher than estimated and it's about $13 a share now. We trade on both on AMEX and the TSX. But our market cap is still a little over $600 million. At the current prices the Dolores deposit has $3 billion of net revenue on it. So, it's undervalued relative to the value of the project.
This is just a peer comparison showing Minefinders relative to some other companies. In the sector we are trading at about $98 an ounce in the ground, a measure indicated gold equivalent. That’s a fairly reasonable price, I think, for investment purposes its certainly not be $1000 an ounce to get exposure to that amount of gold and silver.
Dolores is trading anywhere up to $400 an ounce in the ground. As an example, I think some of you may have seen the Barrick acquisition, where they bought out the rest of the Cortez Property and they paid somewhere in the order of $400 an ounce for M&N and about $250 an ounce for P&P. So we are certainly undervalued in that metric.
Production cost: Dolores life of mine is anticipated to be $297 an ounce of gold equivalent. We do almost everything in gold equivalent because we feel our silver and gold are about equal in value at Dolores. It is a gold-silver deposit and not one of the byproducts. If you net out the silver at $13 an ounce, the cash cost of the gold would be $32, and obviously at $18 an ounce, the cash cost would be negative. So, Dolores is an attractive asset in any metric you use, both in production cost and operations, and will be a very robust producer. Mine life for Dolores right now, if we don’t add the mill and don’t increase production, is 15 years; almost 16 years in the open pit.
We do intend to add a mill and increase our production from 18,000 tons a day to probably 22,000 to 23,000 tons a days with the addition of a mill. We need to shorten mine life and increase production over the life of the mine.
We purchased all new equipment in Dolores. Everything from the mining fleet down to our crushers and conveyors, and that is significant because we don’t expect to have maintenance issues or any sort of delays with major breakdowns of our rolling stock or our processing equipment.
We have a maintenance contract with Road Machinery who’s a Komatsu dealer, and they will maintain all of our equipment, providing service and maintenance. So we don’t expect to have any issues there either. And that’s a significant thing, as a small company, we have 90 maintenance people to take care of that equipment. It would have been difficult for us to find 90 qualified Komatsu maintenance people and hire them in time to be on site to maintain the equipment. Therefore, we did our contract with Road Machinery to take care of that.
This leach pad picture is ever-expanding. This is our first stage and it will continue to expand, eventually having five phases of leach pads which will hold about 99 million tons of ore. This is ready to go, and we are just waiting to get the over liner which will be some crushed material which you needs to put over the pad that you see in the foreground. We will have to walk out our radial stacker. Now radial stackers just sitting when the pictures are being taken and it was assembled outside out of the pad and not have to walk out on to the pad before we can start loading ore.
In hindsight, I wish I had assembled it in the pad and then just moved it to do the liner and it would have already been sitting there, but we didn’t. So we’ll have to put some over liner on the pads so they don’t tear it when they walk it out there. This will be radial stacked, all stacked, and no end downs, so there won't be any [compactor] from driving trucks out on to our leach pads.
The ponds here are lined; this is our pregnant solutions pond and our overflow pond in our facility site there. What you are looking at is really the crushing system coming down the hill from primary to secondary to tertiary and the conveying system backup and the fine ore stockpile is off to the right, then the material is conveyed up to the leach pad. Then solutions gradually feed down to the pregnant solutions ponds, and the building on the left side is the Merrill-Crowe plant where we recover and produce our [build arrays] for gold and silver.
This is a zinc precipitate, and because we have a lot of silver we have to use the Merrill-Crowe facility. You can see the amount of cut and fill that was required to level the site to build. But our biggest difficulty out there is going to build flat areas to construct all this, which is in the mountains, and it's not an easy place to lay out a plant facility.
As I mentioned, all of our mine fleet is new. With the trucks, we have 15,100 ton Komatsu trucks and two water trucks of the same size, front-end loaders with reason to tip right down and the large shovels which we have two of those. So we have all brand new fleets to move all of our material.
This is the pit, as I mentioned earlier. We started mining in October and ramped up to the end of the year; we've been stockpiling. All in all, we have about 600,000 tons of ore stockpiled. I think we are trying to leave as much ore in benches as we can, which is over in there. So we don't have to move it twice, we are using the waste rock for haul roads, to the crusher into haul roads to waste dumps, and then we're leaving as much ore in benches as we can. Then there is ore at the surface there, and then when we happen to go ahead to advance the benches, which we are stockpiling. So we probably had to move about 600,000 tons of ore to stockpile.
The advantage we had in the in the mining phase, is that Merrill-Crowe will have plenty of ore to start running through the processing facility. Once we start running that, we expect to ramp up the commercial production very rapidly, because we are ahead in the mining phase.
Again the crushers, we are looking up at the primary coming down to the secondary, but you can see the amount of earthworks and cut we had to do to build areas out there to add this facility exit us. It's been a challenge to put a site out in the middle of a mountain.
This is our fine ore stockpile. The conveying system coming out of the escape tunnel is complete now up to the leach pad and this has been commissioned. The conveying system and crushers are being dry-commissioned all the way to the fine ore stockpile.
We are going to have to crush 30,000 tons of material to fill up the base of that stockpile over the escape tunnel before we start putting ore on it. That will be our next commissioning phase. We need to crush that and then we need to put about 50,000 tons of material up on the leach pad through that over line before we can put the stack out there. All that is anticipated to be completed in mid-April, so we can start loading four on the pad in April, and placing an under leach. Then, we should be recovering gold and silver probably in early May now. We had hoped to do it in April, but everything seems to slip when you're doing an operation.
As you can see the amount of cut, we had to cut from the top of that hill to get down to a level enough area to put a stockpile on it. We had to cut along a rock in a way to make flat areas, so we can put it on our stockpile. That took a lot of time and fair amount of money.
This is just an oversight of the whole plant again. You're looking at the crushing system coming down. We did use topography, like we did in the old days, when we cleaned up a level of the [whole plant]. So we've come down from primary to secondary tertiary crushers on the site over there and then the screening plant and then the conveying backup to the stockpiles. All that's been commissioned outward and it's all been running and everything is ready for ore to go through it now, and again just the over site to bottom.
The picture here is the truck shop in our plant or office complex. In our permanent office we're currently using trailers on site. And the truck shop is being sheaved in. That will be our final physical structure being built, and that's major maintenance on our equipment. We don't need that right now because, as I said, all the equipment is new, so we just provide maintenance in the field where the equipment lies; we don't have to pull it in to the truck shop. Again, the solution ponds coming down are now lined. The gen sets off to the left there and kind of lined up thing, that's our power station. We generated power, and we are 92 kilometers from paved road here, and this is the camp operations. We are 110 kilometers from the nearest power station. We may put a power line out here when we put the mill in, but right now, we are running generators.
One of the biggest costs of operations is obviously fuel, but fuel costs in Mexico are not too bad. We have an off-road fuel charge per diesel, which only $0.53 a liter, probably half or a third of what most pay truckers pay. In Mexico, diesel fuel is subsidized by the government-owned agencies. It's kind of like having fuel and diesel oil in Saudi Arabia or some location where you have a single entity oil supplier. We don't pay tax because it is off-road fuel, and we are a distributor for [Pamex]. So, we have a distributor's license now to distribute diesel fuel.
There are a few graphs here just to kind of show what has happened. We have a peer economic model here in February. On the left you can see a 2006 reserve and the 2008 reserve. So each time we upgrade we kind of -- you need to add to this deposit, and it's still open. The underground has increased and the M&I is at over 6 million ounces of gold equivalent now.
Total reserves for Dolores: In the PMP category, it is at 2.4 million ounce of gold and 126 ounce of silver. The feasibility study which was completed in February 2006, the recoverable gold and silver as shown on the left, and on the right it is our 2008. It has increased our recovery, not by changing recoveries but by adding more reserves. So we are at over 3 million ounces of gold equivalents. These numbers were based at $600 and $10 of silver, so they are at different ratios.
Our cash cost has gone up as it has with everybody. In our feasibility study there was going to be about $288 an ounce gold equivalent to $297 now. The two dark columns there show that increase and if you look at the economics of that, the 2006 model, when we wanted to go ahead and build this mine, it is shown on the website on the right.
Our reserve model is $675 gold and $13 silver; the 2008 reserve. The spot price column there was based at $900 gold and $17 silver. That equates to about $1.6 billion profit on the property, and it just adds to $18 or $1000 gold we're are for pushing that -- $3 billion in revenue, coming of the property, we're going to spend about $900 million to produce that revenue.
This is our reserve base. We're pretty proud of this, I think, for one reason only. This is not because it's large, 999 tons, it is a fact that 57% of it is proven, and most people go to production with something in the order of 10%, 20%, 30% proven or as is probable. It's probably more risky than it's going to be there when the grades are going to be there, which proves they are much tighter defined and have a much better quality of ore. We have 57% of proven, and most of our resources are proven, which is significant. We don't expect to see any surprises when we mine this. So far, the bench grades and our stock upgrades are mimicking our flat model grades very closely. When we do feasibility of the block model, it's only an estimation. You're kind of guessing what the tons are going to contain in metal because you are applying grades to accentuate from drill holes.
Proven is currently drilled at 17 meters. We have a recovery in our heap leach; 72.5% for gold and 51% for silver. Silver is not a really good leach, and in heap leach, it doesn't recover that well. These are conservative numbers and we do expect them to exceed that, but these are the numbers we use in our economics. We do want to add a mill. We did feasibility with the mill originally cap and cost at that time, four years ago. It was going to be too much, so I took the mill out of it. I wish I had the mill right now, because the fuel price is so high, but we'll add the mill back in 2010.
The mill recoveries are 92% to 95% for gold and 90% for silver, so this has a major impact on our recoveries. Obviously if we can get the mill out there we'll start taking the high-grade out of the pit and putting that in the mill instead of heap leach pad and that's how it will have a total impact to overall recoveries of the deposit.
The market cap of the company is shown in the left. The model prices which again were down at 675 gold and $13 silver, and then the spot prices which were in this case we use $19 or $17 silver and $900 gold. That shows about $1.6 billion NPV at the project. The other spot, the model right there were 862 million NPV.
So exploration Dolores we continue exploring there. We are not exploring that right now, we stopped in January. We have a resource beneath the pit and we've drilled out somewhat in the surface to define it and bring it into reserve category we'll have to go underground and that's one of our plans is to put a decline down and go underground, drill the pit to develop that.
We've put out a news release recently on the east side, which is another high-grade structure. We had some intercepts there 80 meters of two grams of gold, 70 grams of silver and there are some high-grade in there meter and half of 73 grams of gold, 460 grams of silver. So the high-grade structures that were outside the pit and beneath pit will also be developed as an underground operation and once the mill is operational that material will go to the mill.
So we do have a fair amount of expansion potential at Dolores to increase the development. We have a group of other properties, a fairly large plain block in Northern Mexico. Our Northern Sonora property covers probably 60,000 hectares, and we had to take a new property about 75,000 hectares in Sierra Madre.
In Northern Mexico, we have three properties that we've been drilling on, and we also have a couple of hundred thousand ounces resource on it. We just completed a drill program to expand that and to get some core metallurgical test work, and we'll do our resource and reserve estimation on that and then decide what to do with that project. We have had offers from smaller companies to buy from us, put in production and we may look at doing that or we may do it our self.
The other two Planchas de Plata, and Real Viejo Silver projects, silver base metal. I believe, they are related to porphyry copper system. We are drilling on the Real Viejo right now, and there will be some good results coming out on that shortly. These are both big systems. We've found a lot of silver and lead zinc spread over large areas and we are still trying to figure out where the center of the system is.
We have a good team of exploration geologists, and now we have good team of development engineers and operators. So we will look to grow the company once Dolores is in production by evaluating the vast projects and possibly making some acquisitions of some smaller fish. I mean in this industry the big fish eat the smaller fish and that's one way to grow.
So we are not above doing that as we can find an opportunity and do a friendly deal with the company that has an asset that they can advance, because they don’t have the technical expertise, we have now then we’ll see if we can cut a deal with someone that would get us the second mine quicker than I think going through the long protracted grass-roots exploration discovery development phase. It normally happens in a mine that takes a quite few years. We still will do that, because that's where we had the most value, our discovery cost at Dolores to bring that to production probably on the order of $5 or $6 an ounce, so it's pretty cheap ounces, but it took us 14 years to go from discovery to production, so it does take a while.
The corporate responsibility, I mean we have been in Mexico since 1994, and drilling at Dolores since 1996. It’s a remote area in the mountains; it’s a long way from anywhere, and we had to improve it and build a new road, and took on a road from the State highway to get rig equipment out there. Previously, it was an 8 hour 50 kilometer drive, on a very bad road. We put in reservoirs and wind driven "everything"; this is will be a very safe environmental area and has already been.
We built a new community for the people, who do live out here, and there are some houses out there from the old mine, and we're relocating some of those people. They lived in the adobe huts with dirt floors with no drinking water and not electricity. There is new medical clinic on top left there, which now has a doctor and nurse, which has never been in this area. It's the first time ever and we took that over to the government, so they have provided us with a doctor and nurse. We paid to build it.
You see we built brand new houses in the village. These don’t have indoor plumbing, electricity, potable water from a well, instead of water that they used to get out of springs and a normal sewer system. We have opened a Church and formed a new community center and a new school, kindergarten grade school and satellite secondary school for the young people at Dolores.
And we create a lot of jobs. There is now over 600 contractors at Dolores since last year drilling the mine. We have 200 and some employees out there now operating the mine, eventually we had about 300 employees on site. There will be another 1000 jobs created in the region for further support.
We have bus companies that we formed with local people and nearby communities to provide bus services to our employees. We bought the buses, did a back deal to help the people who create businesses. We are creating sustainable businesses for various people in the region and hopefully they will go on be there after the mining is gone.
And we again have employees now and we take care of those with good accommodations on site near the gap at the bottom which are all set to build, which will house 300 employees and that pretty much appear to mean Minefinders. It is a success story and the fact that we are an exploration company that has now actually taken a property from grass root discovery to production and after, is a rarity in this business. Most exploration companies normally don't tend to do that, and very few are successful in finding a deposit, worth drilling.
Dolores is a large deposit. It has major indicated resources of over $3 million ounces of gold and 149 million ounces of. It still open at depth, so we expect to see a much better system than that, and it will be a long-life mine, which is a flagship project for a new company. We expect to grow ourselves into that mid-tier gap, and producers, and I think it will be very valuable for the shareholders. With that I can take questions.
Unidentified Audience Member
There were several, I would say the weakest area in the construction was the contractors. I wouldn't say we got the 18 from our various engineering firms that we hired and contractors. We have numerous contractors. There are 600 employees and with all contractor builds, it will be owner operated. So, we will have all their operational people, but to build we had to hire contractors for all the different phases and some are very slow. The quality of the work was not what we would like to see. We had to redo some of the work. That was done because if it wasn't done per engineering specs and are supervised by our construction manager who was not up to par.
So, that was probably the biggest difficulty, and I don’t think it's unique to us probably. I have talked to some other companies, and the issues we see in the industry right now are; there is a shortage of qualified engineers, qualified experienced people, because there is a real rush on quality people.
There are so many companies now and so many operations that there is a shortage of people to do the work. And we are at a remote area in Mexico, and we are a smaller company, I assume if we were a large company we probably would have got some of the more experienced, what we call the A Team engineers, and as a smaller company we were handed off at the, some would say the B and C team, I'd say more like the D and F team. But it's done. I mean the work is wrapped up here, and it's been a hair pulling greater experience for me. Any other questions?
Unidentified Audience Member
There are, the private companies in Mexico are mostly Mexican. We stake a lot of ground, which we like to do, that's open. We do have a few concessions that we've acquired from private Mexican families, who are small minors basically that they've had for 20 or 50 years, and we haven't done much with. So, we are not really acquiring the company, you do acquire the property from a Mexican mining entity, but they are not, I mean they are small, with a family run operations where they might have four or five people out there operating on a shoestring budget. We look at those and we stake an area here recently that had some internal claims that we liked, and we've negotiated to acquire those claims from the local Mexican private entity. There are probably some larger private companies in Mexico, but in the current you know price structure gold and silver and other commodities, it's getting more difficult to acquire the more senior Mexican operations, because they are doing quite well. And they work on a shoestring, so it's going to be more difficult to go convince someone like that who sell their asset to a public company or an outside company when they don't really need the money. They have a lot of money and it's hard to incentivize them to do a deal.
Unidentified Audience Member
All of Mexico is a challenge, you mean Mexico is one of the best geological places, and I am geologist so I know of what I speak, and it is very good geology and very unexplored. But all the states have their own difficulties. I like the Northern states, they are better developed and they seem to be more pro-mine, so we certainly like Chihuahua, Sonora, Zacatecas and Durango. We don't do much over in the coastal states like Guerrero and Sinaloa. They have got some very difficult problems over there with some of the Narco or the cartels. Mexico right now is in a very violent stage. There is a lot of war between the various drug cartels and a lot of murders go on, assassinations of policemen, gun fights in downtown Chihuahua between the various factions with machine guns. It is exciting time; it's a bit of the Wild West. If you want to understand what we've been doing for the last fifteen years, I encourage you to revisit "The Treasure of the Sierra Madre with Humphrey Bogart, because it is still there; we don't need no stinking badges! It hasn't changed a lot in remote areas. There are lot of guns and few shootings.
Unidentified Audience Member
I don't think the way to return it at base with our sunk capital. We've already sunk $150 million in the projects so including that in there, our internal rate of return I believe is 26% at the 675 gold and $13 silver. It's obviously better at current prices, which we haven't factored in our economics yet, so our best case is $675 gold and $13 silver, and internal rate of return is 26%, but I can give you an example. Our first full year production will be next year in 2009, this year we're only going to get half a year production. Our model, we're predicting producing about 125,000 ounces of gold next year, and 3.1 million ounce of sliver. At current prices we could net out 120,000 million ounces of gold free, so at a $1,000 gold, it's actually $1 million, so we expect to make $100 million plus in profit next year, and it will be consistent throughout the life of the mine. In fact, it will throw out a pretty good cash flow going forward.
Unidentified Audience Member
The ones that we are looking at do not have bankable feasibility level completed yet. They have resources, they have done drilling and they have resources that are indicated in some major that we are going to look at, we're looking at public data right now, we haven't gone any further than that, because we're trying to get it online in production then we'll look little closer. I would hope that they would have at least that. We can add once we have all the fuel details. Our goal is to take an advance junior exploration company that's having difficultly raising its price in this market, as good as it is. The junior companies are having very hard time, they are trading at market caps of $20 million or $30 million, stock prices of $0.50 to just less than a dollar and getting those leverage, no trading because the market has come down. It’s a surprise to me because you see that when you have thousands of goals the junior companies want to be through the roof. But they're not and they have a hard time raising the money. Some of the ones that we are aware of do not have the technical expertise to go much harder in both the exploration and the development. So we think there is an opportunity for us at our size, to step in there, maybe do a friendly deal and add our expertise to their assets. We obviously, we'll have mine and cash flow and do something that will benefit both shareholder groups and grow our company with a new mine.
If there is an asset out there, that's already got 1 million ounces inferred drilled out on it that will be attractive to use because we can fast track there to production by doing, putting five or six drillers on it, confirm it, and bring it to feasibility. And with our development team now we can put it in production with the equipment, so that's our goal. It's a quicker path to the second mine and then taking our discoveries at Planchas and La Bolsa into production because they still have through feasibility and we're still drilling on them, and that's going take us a few more years.
Any other question? Okay, thanks.