SHARES STRONGLY UP/DOWN this week 19/12/05 (Master RSI)

Minews Story Date: December 23, 2005

The Advance To Silver Production By Minco Should Not Cloud Its Zinc JV With Falconbridge in Ireland.

By Stephen Clayson

Minco is hoping to add a bit of silver lustre to its share price by setting in motion the construction in Mexico of its first mine, something which would open a new chapter in the company’s history. Minco listed on AIM in 2001, when it was focused on exploration for zinc in Ireland, but since then the company has tended to assign primary emphasis to the acquisition and development of an assortment of silver assets in Mexico.

The most advanced of these assets, the Laguna Zacatecana silver tailings project, is now approaching the financing stage, and this might mark the beginning of a rewarding ride for Minco’s shareholders. It has to be said at this stage, however, that the decision by Matthew Dorman, the chief executive, to jump ship and join Monterrico Metals, may introduce a degree of uncertainty over the next few weeks. Roger Turner, the chairman of the company, is clearly disappointed by this turn of events, but is also confident that a new chief executive will be found.

The Laguna Zacatecana project essentially consists of a lake full of colonial era silver mine tailings which, given the lesser level of technology available to those who created them, still contain substantial silver, gold and mercury, with silver predominating. Mining would take the form of a dredging and pumping operation to transport the tailings to an onshore processing plant.

A bankable feasibility study on the Laguna project was completed earlier this year, envisaging US$21.6million of capital expenditure being required to establish an operation capable of processing some 1.3million tonnes of material per annum. This would equate to an annual output of 3.49 million ounces of silver equivalent for the first four years of the project’s intended life of seven years, dropping to 2.16 million ounces for the last three.

According to the study’s projections, the Laguna project has a net present value, discounted at 10%, of between US$24million and US$30million, and an internal rate of return of between 46 and 54per cent. These two sets of figures respectively assume metal prices of between $7.25 and $7.75 per ounce for silver, between $425 and $475 per ounce for gold, and between $625 and $650 per flask for mercury, so are reasonably conservative.

The economics of the project hence seem fairly satisfactory, especially so given that relevant current metal prices exceed even those modelled in the feasibility study as the best case. Though it is unclear how these prices will fare over a seven year project life, it should be remembered that the outlook for silver, by far the chief constituent of the project’s output, currently seems a highly positive one.

There are a couple of further notably positive aspects of the Laguna project. Firstly, Minco believes that drilling in the environs of the lake may result in the discovery of significant extra resources, as could the exploration of other known silver tailings dumps nearby. Secondly, the local community and politicians are reported to be very supportive of the project, not only for the local economic benefits that it would create, but because it will entail the remediation of what is held to be one of the most environmentally polluted sites in Mexico.

What Minco needs to do now is to procure the necessary finance to construct the Laguna project. Roger Turner reports that a number of options are under consideration, encompassing the typical spectrum of debt and equity blends, but also an unusual silver loan arrangement. Minco is aiming to be production ready at the Laguna project by the end of 2006, so news on the raising of the required finance could be expected soon.

Minco’s second main project in Mexico is Minera Sisa, a high grade, vein type silver deposit, of which the company has the option to earn up to 90%. Silver was produced from Minera Sisa on a minor scale until 2003, though not by Minco, which believes that the project has much more potential. The company has undertaken some initial exploration work on the property, including some preliminary drilling, and is now gearing up for a more comprehensive programme. Minco intention is to have completed definition drilling of Minera Sisa by the end of 2006, with the project potentially being production ready by 2008, assuming that prior indications are thought to be encouraging enough.

Minco is also interested in expanding by merger or acquisition in order to drive itself rapidly towards mid tier silver producing status. In accordance with this strategy, Minco may target for acquisition companies with silver assets that could potentially provide near term production, particularly in Mexico. Minco feels that in addition to the synergies it could derive from the acquisition of further Mexican assets, its sharp focus on production means that might be able to develop such assets more effectively than their present owners. Laguna is not seen as a company maker, but the cash flow should make it easier to finance this expansion.

The Pallas Green zinc project in Ireland may be a relic from the past, but recent drilling results, allied to the present price of zinc, mean it certainly cannot be ignored. Last week the company announced that its joint venture with Falconbridge had come up with some excellent drilling results. Terence McKillen, director of exploration and business development declared, “These are the most exciting drilling results in Ireland since the discovery of the Lisheen deposit in 1991.The two additional drilling results are from discoveries over 2kms apart. This increases the possibility of two separate zinc deposits of economic potential. Both areas require more drilling. This will be done in 2006 with a very aggressive follow-up programme of at least 20 drill holes using three or four rigs.” Falconbridge would have had to agree such a bold statement in a press release, so the Irish activities of the company should not be overlooked.