Minefinders Celebrates Breaking into the Black

Ceremonial Blast (Video Clip 1)

Source: Analyst

The event validated 14 years of exploration and development including over 200,000 meters of drilling (510 core and 366 reverse circulation drill holes, not including 60 to 70 core/reverse circulation holes outside the reserve area). The Dolores open pit mine currently has 99.3 million tonnes of proven and probable reserves containing 2.44 million ounces of gold and 126.6 million ounces of silver. This was our third visit to the Dolores project since the completion of the road to Yepachic in early 2007. The dramatic improvement in infrastructure was impressive, including the expansion of narrow roads to broad avenues more than adequate for 100-ton Komatsu trucks, earthworks clearing room for crushers and processing facilities, and high-level leach pads. Minefinders has also been successful in relocating the citizens of Dolores to a new village and offering employment and a higher standard of living. The Dolores Mine is expected to produce in excess of 1.7 million ounces of gold and 64 million ounces of silver over a more than 15-year mine life.

We were again struck with the potential for expansion of the resource at Dolores. Mining began on the north end of the deposit and will proceed to the south toward the “dome” or “volcanic neck” which is the heat source responsible for mineralization at Dolores. The area surrounding the heat source is generally associated with higher silver to gold ratios, with increasing grades of gold from feeders at depth below the in-pit reserve. Economics are currently based on a final pit that is 2.3 kilometers in length and up to 800 meters width with mining occurring thru a vertical interval that approaches 500 meters. Additional resources are located in the area of the East Dike parallel to the resource, south and west of the designed pit, and at depth beneath the pit. We consider it likely that these resources will be combined into an integrated mine plan and economics in the future.

Mining and Production Summary

Minefinders began mining in November of 2007, following completion of the road which included moving ore and waste. We also visited the Dolores project in May of 2008, soon after they had begun trucking ore onto the leach pad to create the overliner. By June of 2008, they had moved over 7 million tonnes of ore and waste at a rate of over 100,000 tonnes per day (tpd) with processing and stacking capacity of about 12,000 tonnes per day. By October of 2008 they had moved more than 13.5 million tonnes and had stacked 650,000 tonnes on the leach pad with 425,000 tonnes of ore under leach. They completed their first pour of gold and silver dore´ (bars weighing about 65 lbs consisting of 6 % gold and 93% silver) in November of 2008. By the end of 2008, the Dolores mine produced about 3,093 ounces of gold and 57,378 ounces of silver (at an average price of about US$843 per ounce of gold and US$10.69 per ounce of silver).

Mining in North End of Pit (Video Clip 2)

Source: Analyst

The rate of crushing increased to about 13,000 tpd in January of 2009. By this time, ore on the pad increased to over one million tonnes, of which 950,000 tonnes were under leach. By mid-February of 2009, crushing increased to an average of 16,500 tpd with some days exceeding 21,000 tonnes per day. They expect to average 18,000 tpd in March. Minefinders is focusing on reaching full commercial production in its second quarter, which is defined as sustained average production exceeding 75% of design capacity of 18,000 tpd. On February 23, 2009, there was approximately 1.6 million tonnes of ore on the leach pad and 1.2 million tonnes under leach.

Crushing Circuit (Video Clip 3)

Source: Analyst

Minefinders reported production of about 2,700 ounces of gold and 50,000 ounces of silver in January 2009. By the time of our visit in mid-February, production had already exceeded the total production in January. They recently reported February production of 5,089 ounces of gold and 111,010 ounces of silver. Production is expected to accelerate with consistently crushing and stacking progressively higher tonnage of ore and improving leach rates.

Fine Ore Pile and High Angle Conveyor (Video Clip 4)

Source: Analyst

Minefinders reported that recovery rates of gold and silver were ahead of the leach curve model and exceeding expectations. While the leaching characteristics will settle at about 18 months into operation, clearly with the increasing volume of ore and time under leach, the rate of production of gold and silver should escalate rapidly. Management credits positive operating cash flow in February of 2009 due to strong metal prices and lower than anticipated operating costs. Cash costs are expected to decline to an average of $9.03 per tonne or to US$297 per gold equivalent ounce. The Dolores project benefits from producing both gold and silver and from low fuel costs in Mexico. The project consumes about a million litres of diesel fuel each month at a cost of about 7 pesos per litre. There are also currently about 250 employees and 260 contractors on site. They expect to have 300 employees on site at normalized operations with few contractors remaining. Operations have also benefited from a decreasing value of the Mexican peso.

Grasshopper on Leach Pad (Video Clip 5)

Source: Analyst

Assays taken from blast holes generally support the resource model. With increasing production and stacking rates, and with leaching exceeding expectations, it would appear that Minefinders may come close to its earlier production targets. Previously, Minefinders anticipated potential production of 128,000 and 129,000 ounces of gold in 2009 and 2010 respectively, and 3 and 4 million ounces of silver in 2009 and 2010 respectively. Considering that the mine was not in full commercial production at the outset of 2009, we suspect the earlier target for 2009 may be a challenge.

Dolores Reserve Estimate and Resource Potential

The resource model does not include 60 to 70 drill holes completed outside of the reserve estimate. Early in 2008, Minefinders released drill result highlights on its East Dike satellite target, located about 200 meters east, running parallel to the proposed Dolores open pit mine. The drill results confirmed the presence of a significant new high-grade gold and silver deposit. Intercepts included 41.2 meters at 4.07 grams per tonne (gpt) gold and 148.1 gpt silver, or 6.57 gpt gold-equivalent, and 83.8 meters of 2.01 gpt gold with 76.4 gpt silver or 3.29 gpt gold-equivalent. Ten individual intervals exceeded a 10 gpt gold-equivalent cutoff with a 1.52 meter interval grading 73.64 gpt gold and 723.7 gpt silver.

Gold-Silver Pour (Video Clip 6)

Source: Analyst

The East Dike deposit has a strike length of about 350 meters with good potential for expansion at least 50 meters to the north. The deposit is sloping moderately along the East Dike ridge, suggesting a possible side-hill strip with a low strip ratio. In addition to the East Dike deposit, we suspect there is good potential for expansion of the pit to the south in the direction of the historic village of Dolores, or underground below the proposed pit in the area of the “Central Dome.” There appears to be adequate drill results to form an underground mine plan, but more drilling will be required to the south in the vicinity of the village of Dolores. We suspect a drill program around the village will be organized later in the year, as production of the mine is stabilized and relocation is completed. Drilling and study should lead to growth in the identified resource. With the addition of a flotation mill, either production may be expanded or mine life may be extended.

Positive Community and Government Relationships

In June of 2006, Minefinders negotiated a comprehensive agreement with the Ejido for the long-term development and operation of the mine. The agreement provided compensation payments or relocation. Minefinders constructed a new village and infrastructure for the local community including electrical, water, and sanitation services that were previously unavailable. Minefinders also constructed a school, medical facility (with onsite medical professionals), a church and community center, as well as town offices.

Village of Dolores: Church and School (Video Clip 7)

Source: Analyst

In May of 2008 an illegal blockade was established on an access road to the Dolores Mine. Minefinders believes that a majority of the individuals were from outside of the region and included only a small group from within the local 221-member Ejido community. Though the project was on target to complete its first gold and silver pour in late June, Minefinders chose to temporarily suspend mine operations out of concern for the safety of its 600 employees and contractors. The blockades continued intermittently through August, when Minefinders received written guarantees from the state government of Chihuahua providing for ongoing safe access to the Dolores Mine, as well as a police presence onsite to assure no further disruptions of the mine operations. We estimate from the earlier targeted gold-silver pour to the actual pour, the blockaders extended start of production by about six months. The best course of action to reduce the risk of future blockades is to maintain a good working relationship with the Ejido and state and federal authorities.

Conclusion

We suspect that Minefinders may emerge among the other producing mines in the Sierra Madres as a consistent performer, surprising the mining sector. This will weigh heavily on optimizing mine production, potential for resource expansion and production capacity, and ongoing strong community relations. Despite a volatile and uncertain market, Minefinders should benefit from being unhedged, with stable or increasing precious metal prices, and moderating operating costs.

We find it to be quite interesting that the last time Minefinders traded in the current price range, metal prices were substantially lower, and the road to the project had not been completed. Minefinders presently has about 59.0 million shares outstanding and 75.3 million shares fully diluted. Currently, Minefinders has a market capitalization of about $352 million. We believe this is below its economic potential of scheduled operations let alone expansion potential. This also does not include the potential of Minefinders’ other exploration projects or their ability to acquire other assets in the near term. While we remain bullish on both gold and silver prices, the 2007 base case may reflect conservative long-term average price levels. The Pre-tax 0% NPV for the 2007 Base Case would suggest a share price of about $11.00 per share fully diluted. As Minefinders has reported reaching operating profitability, we suspect that there is good potential for share appreciation based on improving, stabilizing operations, and solidly joining the ranks of mid-tier precious metals producers.

Disclosure: The author is long MFN. An affiliate of the author's employer provides corporate advisory services to MFN.