First Majestic - Reserves, who needs them

When I was younger and infinitely more intelligent (as I thought), I had a high regard for First Majestic Silver. As I’ve got older, fatter, stupider and lazier, I had ignored them for ages until they ‘rescued’ San Dimas from Primero’s incompetence.

However, what peaked my interest wasn’t San Dimas, that should make money unless you are truly incompetent, it was the disconnection between what they mine at the various operations and the published reserve grades at their various mines.

It is something that I had berated Pretium for at Brucejack, but First Majestic, with 6 operating mines (excluding San Dimas as it is new), you would expect that with many years of operation experience that they would be fairly good operators, and excluding a blip or two, be within 10% of the reserve grades on average.

For the charts below I’m using:

• Compiled production figures for 2016, 17, and 18 (to date) from FM’s MD&A’s
• Reserve grades from the Form 40-F. and from the First Majestic Website (link).

Let us start with the good:

Santa Elena

The stand-out mine, since the start of 2016 they have mining higher grades than reserves, which are skewed by a bit of very low grade oxide material.

A mine that works.....

However, we can see in 2018 they either got into an expected high-grade area or are high-grading the shit out of the deposit to keep themselves cash flow positive with sub-$15/oz silver prices. Will this screw them in a few years?

San Martin

One of their oldest and smallest operation producing ~2Moz Ag per annum.

A mine that almost works, goddammit!!!

But consistently within 10% of the reserve grades...

La Encantada

and now the wheels start to wobble.

Will they recover in 2018/19?

It has generally been ok, but the wheels fell of the wagon this year, with mine grades plunging by an ounce. It will be interesting if they can get the mine back on track.

La Guitarra

Their smallest and generally worse mine.

A general decline...

Always been crap, but a nice spike at the end to show that they were in panic-mode to keep the mine operating.

Del Toro

Del Toro, more like La Vaca Muerta.

Pathetic

Funny how they keep dropping the reserve grades every year, yet the mine keep churning away at ~150 g/t Ag. 

La Parrilla

The original mine, probably getting long in the tooth, probably best to take it out back and shoot it in the head.

Wow, what a piece of shit

It look like at their mines, and in particular Del Toro and La Parrilla, that First Majestic have a fundamental problems with the resource calculations. I could understand missing but a little bit (plus or minus 10%), but to consistently not make the grade at virtually all of your mines consistently over the last 2.75 years takes a special type of company. Christ, if you got any worse, you'll be Coeur....

When you looked a bit closer, you actually see that it isn't First Majestic rescuing San Dimas, it is San Dimas that will rescue First Majestic. Santa Elena is saving them at the moment, but with the high-grading going on, will the mine be fucked in a few years?

Defiance Silver - I couldn't release the San Acacio drill results as.....

“Ahh, I thought it was in my bag, but it looks like I’ve left it at home by accident!”

“My computer crashed and I didn’t save my work!”

“I’ve been busy with extra-curricular activities and volunteering work”

“I’ve been so ill over the past few days, so I haven’t been able to look at the drill results”

"My mom CEO and dad CFO got in a huge fight last night"

"I tried writing the release, but I failed to understand the results"

"I was in a hurry, so I mistakenly left my laptop in my wife’s car, and now she’s in the office across town"

Or the least likely option - tell the truth:

"We don't want release the results, because they are shit. We hit nothing, the structure wasn't mineralized and we don't want to tell you as you'll abandon us like rats leaving a sinking shit ship"

Quick San Acacio Time line:

• 31st October 2017 - commencement of 5,000m drill program (link)
• 28th Feb, 2018 - Identifies a Large target (link) - PDAC promo PR
• Prelim results from first 2000m of drilling - hit anomalous silver (i.e. nothing).
• Here we sit 174 days later, no results....

By my estimates, Defiance should have drilled ~3000m by now, so 60% of the program done, and no assays reported, might as well wait until the end of the program, and release a phase 1 summary PR....

Defiance Silver - San Acacio project

San Acacio is one of those projects that keep floating around and like one of those irritating dumps you have at your girlfriend's house that keeps bobbing up to surface to rear its ugly head.

Summary

Just avoid it.

• Defiance can't afford the property
• They can't raise funds to explore the property properly (just some token drilling in 2014/15)
• The resources are small (15Moz Ag) and low grade (182 g/t Ag).

However, I can't find anything except a summary assay table for the 2014 and 2015 drilling results, so here is a message for Defiance:

FFS, forget the YouTube channel, we're not interested in seeing old dudes pointing to churches or expansive panoramas of Rick Tschauder, what we want are some (any!) maps, like:

• A surface geology map - simple ones with big red lines saying "vein here"
• A map (or two) of where your holes are located
• Some geology sections - the Silver Standard sections are now nearly 20 years old

Even the most retarded junior exploco can give us a fecking map, so why can't you?

Technical stuff

Let us look at how the project has evolved over the years:

• Silver Standard (1996) Inferred Resources - 2.5Mt @ 182.4 g/t Ag = 14.5Moz Ag
• Defiance Silver (2015) Inferred Resources - 2.9Mt @ 181.9 g/t Ag = 16.9Moz Ag

Not much for nearly 2 decades of work for a 'high-grade' deposit located in a world-class silver district!

I've ignored the 'gold' credit as it is essentially nothing and will be lost either in processing or to the smelter.

I was surprised amused to read several PRs telling us how Defiance have been 'great' at reducing the property payments (2014 (link) and 2016 (link)). by pushing them all (almost $6M) back to 2018. I hope nothing happens to silver prices that could make it difficult to raise funds...

I've broken the technical part into 2 sections

1. The Rocky Bit

I've brought the Silver Standard data (DH, trench and UG samples) into 3D (link) to see if there is anything interesting, but as Defiance have kindly included absolutely nothing of any geological value in their press releases (not even a gaudy vein photo). so I can't tell you anything about the drilling from 2014 and 2015 except that a couple of holes hit some intersecting grades and the rest were crap.

The San Acacio project covers a big chunk of the Veta Grande (Big Vein) vein, one of the principal veins in the Zacatecas Mining District (historic production estimate >900Moz Ag and >9Moz Au).

white spots = drill-holes and tranches; red lines = veins

I've drawn on various veins and you can see that the majority of the drilling has focused on the NW corner of the property and only on the Veta Grande vein. A few holes were drilled to the SE, but they were crap (<50 g/t Ag).

We can plot a long section of the drilling data:

I've included some buffers around the historic drilling to show where there is not data - this is a useful tool for me to see where I can drill to get some decent results quickly

This is what we see:

• Silver is restricted to a narrow, near surface zone and:
• Deeper drilling below historic workings hit minor mineralization
• Drilling along strike to the southeast didn't hit anything
• The splay veins (Veta B and C) are small and low grade

So where are Defiance going to define more silver resources?

• Does the silver zone have a dip to the SE and that the drilling in this area didn't go deep enough?
• Are the other veins that cross the property any good? Some basic sampling/trenching would answer this.

2. The Money Bit

I normally calculate a quick $/tonne value for a project's resources to see how they compare against operating mines in the same country. This allows me to quickly see if the grades are good enough to support a profitable operation.


For this section I'm making the following assumptions:

• Silver recoveries will be 76% (San Acacio 2014 technical report)
• No credits from other metals (all the gold will be lost during processing or treatment)
• Mining costs will be~$80/tonne (at a hypothetical 1000 tpd), based on costs from:
• San Jose mine (2000 tpd) = $85.76/tonne (2015)
• Bolanitos Mine (1500 tpd) = $71.97/tonne (2015)
• Guanacevi Mine (1200 tpd) = $88.04/tonne

So how do the numbers stack up?

To calculate the value we do this:

(resource grade/31.1) x recovery % = recoverable silver grade in ounces/tonne

• ((181.9/31.1) x 0.76) = 4.44oz/t (recoverable silver grade)

Ore value = recoverable silver grade x $17.5 (a average silver price)

• 4.44 x 17.5 = $77.8/tonne 

So, if the mine was operating now, it would be losing a bit of money, but this estimate doesn't include Capex, development costs, sustaining capital etc.

From this you can do 2 things:

1. Calculate a break even grade for a project - calculate a grade where ore value = mining costs
• $80/$17.5 = 4.57 oz/t
• 4.57 * 31.1 = 142.2 g/t Ag (the break even grade at US$17.5/oz silver)
2. Or calculate a break even silver price for a project
• 80/4.44 = $18.01/oz

So at last month;s silver prices (thanks Janet), San Acacio would have been break-even at best.

Putting everything together, San Acacio has:

• A small low grade resource
• Low-moderate exploration upside
• A company with limited ability to raise funds
• Large property payment (~$6m) due in next 24 months

I can't see where Defiance can add significant resources, to get it to ~50M oz Ag, which will make it attractive to companies like Endeavour Silver or Santa Cruz that have recently acquired projects in the district.

If you want to invest in a junior silver exploration company. there are others that are better than Defiance.