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EXN.T Excellon swings back into profit as costs fall
POSTED BY: SALMA TARIKH AUGUST 12, 2016

Excellon Resources (TSX: EXN) is back in the black, after more than two years of losses.


The operator of the high-grade Platosa silver-lead-zinc mine in Mexico reported a second-quarter adjusted profit of US$900,000, or a penny per share, up from an adjusted loss of US3¢ per share, a year ago. Excellon last recorded a net profit of US$1.9 million, or US3¢ per share, in the first quarter of 2014.

The second-quarter adjusted earnings were ahead of the nil per share that Cormark analyst Graeme Jennings had projected, while cash flow per share of a penny met expectations. (The adjusted profit removed a US$5.4 million fair value adjustment loss on embedded derivatives and warrants.)

The return to profitability resulted largely from improved costs, Brendan Cahill, Excellon’s president and CEO, says in an interview. “We’ve seen mining costs per tonne go down by 50% or more, since the beginning of 2015, end of 2014.”

Cost per tonne mined and mill fell from US$481 in the fourth quarter of 2014 to US$242 in the second quarter of 2016.

The executive, a lawyer by training, also attributes the better costs to better management, lower input costs, and a stronger U.S. dollar. “In Canada, people talk about the benefit of mining with the Canadian dollar when you’re selling in U.S. dollar. In Mexico, that is even more of a benefit, where the peso has gone from 11 or 10-to-1 a few years ago to almost 19-to-1 now.

“So Mexico right now is a great place to operate,” Cahill says, adding the slump in oil prices has resulted in cheaper electricity. “We’ve seen prices per kilowatt hour drop from 14¢ in late 2014 to under 6¢ per kilowatt hour right now. When you compare that to the price in Ontario right now, it’s pretty impressive.”

Located in northeastern Durango State, the underground Platosa mine produced more silver and lead in the June quarter — up 25% and 28% — driven by improved grades and recoveries. Zinc output, however, fell 10% on declining grades.

The company’s sole producing asset churned out 368,568 silver-equivalent oz., up 8% from the earlier year period. That includes 227,826 oz. silver, 1.31 million lb. lead and 1.57 million lb. zinc. Grades averaged 536 grams silver per tonne, 5.09% lead and 6.31% zinc.

Of note, all-in sustaining costs per oz. silver dropped 21% to US$19.27, which included one-time costs associated with the ongoing optimization plan at Platosa. Once removed, adjusted all-in sustaining costs were US$15.27, more than US$2 below the average realized silver price.

The company processes all of the ore at its Miguel Auza mill, located 220 km away in Zacatecas, at roughly 160 tonnes per day. The 650-tonne-per-day mill runs half of the time, with Excellon seeking opportunities for the extra capacity, Cahill notes.

From there, Excellon transports Platosa’s silver-lead concentrate and silver-zinc concentrate to the port of Manzanillo, where a subsidiary of the Trafigura Group buys them at market price.

Production costs should further improve with the completion of the optimization plan to prevent water inflows, Cahill says, allowing the firm to increase underground production and development rates.

Excellon has been mining Platosa, containing several high-grade massive sulphide mantos hosted by permeable limestone, since 2005. It has been using reactive pumping to control water inflows, after the mine workings extended below the local water table in 2007.

Since the process was time-consuming and expensive, the miner in late 2014 retained Quebec-based firms Hydro-Ressources and Technosub to assess alternative water management solutions. They designed a proactive plan, currently underway, to install a system to pump directly from water-bearing faults, to eliminate the possibility of water entering the mine.

Once Excellon fully implements the plan, estimated to cost US$6 million, it should be able to dewater at a rate of 4 metres per month, Cahill says, adding initial results have indicated that the drawdown could occur much faster.

The deepest parts of the mine are 160 metres below surface, or 20 metres below the water table, meaning it would take five months to dewater, Cahill says, adding the installation of the new pumping system should take 10 months.

The executive notes all of the mineralization is ramp accessible, making mining at Platosa rather easy. “You need almost no ground support whatsoever. The rock is competent. As long as you can get rid of the major bottleneck, it is actually a beautiful little mine to be working in. It’s obviously exceptionally high grade as well, which makes things easier.”

Without specifying when the optimization plan should wrap up, Cahill reveals by year-end “we should be in very good shape.”

In the first half of 2017, the executive forecasts production could double to 4 million silver-equivalent oz., while all-in sustaining costs will halve to US$9 per oz. silver, on an annualized basis.

With the optimization efforts well advanced at Platosa, Excellon intends to resume its exploration efforts shortly. “The exploration story is wide open. We really haven’t done any resource expansion drilling since 2011,” Cahill says, noting once Excellon realized Platosa then had a 10-year mine life, it started looking for other high-grade manto mineralization and large Source-style skarn deposits. Excellon uses Source to refer to carbonate replacement deposit (CRD) mineralization, as Platosa falls within the prolific Mexican CRD belt.

In July 2012, the company discovered a Source-style deposit, 1 km from Platosa. But in the following year, the “market fell apart and we really ratcheted back on drilling since the Spring of 2013,” Cahill says.

Given Platosa’s current resource covers 56 hectares of the 21,000-heactare project, Cahill believes chances of finding more skarn and manto-style mineralization are high.

As part of its new exploration plans, Excellon aims to locate mineralization near the current infrastructure that’s above the water table, as well as find near mine targets for new mantos discoveries, and generate regional targets through the re-interpretation of geophysical and drilling data that were collected over the past decade.

Platosa’s current resource estimate includes 428 million measured and indicated tonnes grading 1,252 silver-equivalent grams per tonne for 17.2 million silver-equivalent oz. It has another 4,000 inferred tonnes grading 2,492 silver-equivalent grams. Based on measured and indicated resources, Platosa has a six-year mine life.

The company has enough cash to complete its optimization program at Platosa and exploration plans, Cormark’s Jennings notes. It exited June with $4.5 million in cash and marketable securities, and then closed an oversubscribed $15.2 million brought deal in July.

Commenting on the recent financing, Cahill says it is a reflection of the improved market and the company’s strong shareholders, which include Eric Sprott, Sprott Asset Management, Dundee Corporation and Blackrock Global Silver Miners ETF.

“So it’ll be interesting to see what we do next. It will be exciting.”

Since releasing its financials on Aug. 8, Excellon shares are up 54% to close Aug. 12 at $2.19.

“We expect to see Excellon to continue to be rerated as precious metal prices further strengthen and as operations continue to improve throughout the year from drier conditions and higher grades,” Jennings concludes. As of Aug. 9, he had a “buy” and a $2 target price on the stock.


http://www.northernminer.com/news/excellon-swings-back-profit-costs-fall/1003776382/