Mexican Mining

[coach247]

Genco Resources


I will be posting this on my website this week. I am waiting on a return email from the president of Genco to verrify my info is correct, and hopefully update on the share structure since the PP was completed. Here is the text...

Research Report: Genco Resources

Friday, July 2, 2004.

I believe that Genco Resources represents an exceptional opportunity for precious metals investors to participate in the sector with current production, unhedged and fully leveraged to the possible rising prices for gold and silver, and robust exploration potential on their 100% controlled property in Mexico. Shares in this company can be acquired at an attractive price currently, due to the extended correction that has influenced the entire sector, and the lack of ongoing promotion. Very little information has been made available to the public regarding the exploration and development work underway at the company’s area of operations in Central Mexico, or of the potentially highly profitable operations. The key factor to successful equity investment in the precious metals sector is the ability to discover undervalued, fundamentally sound companies and acquire them late in the development stage when the risks are lowest, yet while they remain valued in the markets at levels befitting an early stage exploration project. Genco Resources fits the profile of such a company, and a sector recovery along with successful development of new resources will rapidly increase the market value of this company. I own shares of Genco Resources. – Mike Kachanovsky


Overview:

Office Address: 550-999 West Hastings, Vancouver, BC
Telephone: [phone]

Exchange Listing Symbol (TSX-V): GGC

Website: http://www.gencoresources.com/

Share Structure: Issued and Outstanding: 16,604,804
Fully Diluted: 18,871,804

Market Capitalization: $13.1 Million

Management:

At this early growth stage of development for the company, Genco appears to have the right mix of management personnel to both direct and exploit new exploration initiatives, and to provide experienced operational guidance for the mining operations. Board member Eduardo Luna has management experience with other Mexican precious metals producers Industrias Penoles and Luisman Mining. President Jim McDonald was a founding member of the management team of other junior exploration companies including White Knight Resources and National Gold Corp. Geologist Bruno Barde has been part of the discovery and development of several mines worldwide, including Mexico. It should be noted that the mine is well staffed with experienced and trained personnel.

Development Project:

On August 1, 2003 Genco acquired a Mexican mining company, La Guitarra Compania Minera for the issuance of share capital and cash. The principal asset of this company that came with the acquisition is the operating La Guitarra Mine, and the surrounding lands that comprise the Temescaltepec District. Located in the Sierra Madre Occidental Mineral Belt, considered by many to be the prime address for gold and silver development in Mexico, the property spans approximately 12,373 hectares. As is common with many other epithermal deposits, numerous gold-silver veins have been traced over a wide strike length across the property, with some of them running for several kilometers in length. These narrow veins commonly feature enriched zones of higher-grade material, and intermittent super-enriched “bonanza-grade” zones occur periodically. Although the property has seen continuous mining operations stretching back over 500 years, it is estimated that only 5% of the vein systems have been systematically explored using modern techniques.

Genco employed some modern exploration methods recently when they completed a follow up program of 3D IP surveying after a round of drilling at the San Raphael zone, southwest of the La Guitarra Mine. The drilling results were exceptional, indicating a new high-grade zone discovery, with assay results up to 33.01 g/t gold and 834 g/t silver intercepted over 8.2m. The results of the induced polarization program confirmed that the La Guitarra vein extends below a younger rock formation and could run for a length of over 7 km. Additional anomalies were discovered near the new San Raphael discovery zone, and to the northwest of the La Guitarra Mine. Encouraged by the close association of these anomalies with the mineralized areas of the La Guitarra vein, Genco announced another 2500m diamond-drilling program to test the potential for new mineralized zones and the results again featured narrow intersections of high-grade ore.

Vein swarms have been traced and mapped throughout the property and additional surveying and sampling is scheduled to continue to build the database for future drilling program targets. To the northwest of the La Guitarra mine, an abandoned mining shaft has yielded some very high-grade drill core intersections, and this area will be another priority target for future exploration activity.

Operations:

Production in 2002 consisted of 425,274 ounces of silver and 7,052 ounces of gold, from approximately 80,000 tons of ore. Recovery rates were relatively low, averaging about 82% for silver and 80% of the contained gold, recovered through a floatation circuit. Due to the prolific nature of the mineralization only limited exploration work was carried out throughout the life of the mine, to establish ore bearing zones to feed the mill. When the decision to sell the property was made by the former operators, no further funds were allocated to exploration, and the depletion of known ore bodies reduced the throughput at the mine to levels well below capacity. After Genco acquired the mine, operations resumed but only 20,338 tons of ore were processed up to January 31, 2004, well below the 330-ton per day capacity. Reported production of 140,703 ounces of silver and 1,370 ounces of gold (3535 gold equivalent ounces at 65:1 ratio) was achieved for net production costs of $1,578,071.00. With production costs averaging US $340 per ounce, La Guitarra can be considered a risky operation due to fluctuating ore grades and a low gross profit margin.

Despite the lower mine throughput since Genco acquired the mine, the company has achieved profitable operating results. The success of the project will depend on the ability of management to increase the throughput closer to the capacity of about 330 tons per day, and reduce the production costs on a per ounce basis, providing Genco with a greater margin to survive periods of low commodity pricing, while remaining fully leveraged to potential rising precious metals prices in the years ahead.

Genco believes that due to efficiencies that can be achieved through the upgrade of processes and technology at the mine, profitable operations can be maintained even with lower grade ore. Much of the historical production in the area was limited to the higher-grade portions of the deposits, and the remaining lower grade ore remains to be exploited. The potential for ongoing additions to reserves along the 15 km trend on their property holdings, like the newly discovered San Raphael zone, will result in substantially increased production levels and extend the mine life, while contributing higher-grade ore to the operation. It should be noted that La Guitarra is primarily a silver mine, and the most recent production figures show the ore processed averaged about 7 ounces silver per ton, far below the historical average grade of the ore which exceeded 9 ounces per ton. New discoveries of high-grade ore will thus yield an immediate improvement at the bottom line.

New development is focused towards completing a 4-meter by 4-meter decline at San Raphael to access the ore body discovered during the 2003 drilling program. It is estimated that by the fall 2004 mining in this zone will commence. Management is optimistic that throughput at the mill will increase to near capacity levels by the end of the 2004, while exploration activity is ongoing to identify additional ore bodies for future exploitation. The company is committed to proving up a 2-year reserve life.

The combined effects of increased efficiency in operations, additional ore production to near-capacity levels, and the processing of ore with overall higher grades, should result in substantially higher profitability for Genco during future quarters, and production costs that are more in line with the industry average.


Outlook:

Prior to the acquisition by Genco Resources, Luisman, a subsidiary of Wheaton River Minerals, operated the La Guitarra Mine. Due to the relatively low production levels and high operating costs, Wheaton River considered the mine expendable and thus Genco was able to acquire the La Guitarra Mine very cheaply. For the low acquisition cost of $5,000,000 payable in share capital they were handed the keys to a functioning mining operation and gained control of an appealing district to explore and attempt to identify new ore resources. The attractive terms of the deal, without the high capital cost outlay that would be required to establish a new mining facility, has resulted in Genco achieving the rare status of a precious metals producer with a market capitalization well below $25 million. Management’s ability to increase the efficiency of the current operations while discovering new high-grade zones of mineralization will define the success of the company in an uncertain commodity price regime.

The tightly held share structure and low market capitalization for a producing mining operation are a testament to the value in this play. With proven and probable reserves of 60,000 oz. Au and 784,000 oz. Ag, and inferred and indicated resources of 151,000 oz. Au and 36.7 million oz. Ag, the combined gold equivalent resource (65:1 ratio) approaches 800,000 ozs. Based on an exchange rate of 74 cents Canadian to the US dollar, this equates to an astonishingly low market cap to resource ounce of only $12.13, with the potential to add significant resources as further exploration activity is completed.

Capital resources are adequate to fund the operational and exploration requirements for several quarters. The company recently completed an equity offering to raise $1,146,000 in cash and additional funds will be added to the treasury as outstanding options and warrants are exercised. The only long-term debt obligations are the remainder of the acquisition costs which are payable in annual installments of US$ 500,000 and may be settled with the issuance of shares. The company holds marketable securities in the form of shares of Getty Copper Inc. which were received as payment for a property transaction in 2003. A $1.5 million line of credit is also available as required through a major Canadian bank.

While the current operations are profitable, the potential for increased profit is achievable and realistic. Cash flow from operations will fund increased exploration activity across the large system that could lead to major new discoveries of ore deposits. While the mine facilities cannot be expanded without significant capital expenditures to increase capacity, if the company is able to generate production levels to match the 2002 production of 13,600 gold equivalent ounces, still well below full capacity, and lower overall production costs, then the operations for Genco could generate as much as C$ 2 million in gross profits even at current gold and silver prices. The cash generated internally from operations should also contribute to fewer equity offerings to raise capital, and with a low share float, will result in higher upside potential capital gains for shareholders.

A final comment is appropriate regarding the future expectations for the performance of the precious metals sector. Many analysts have commented that the market is in the early stages of a long-term secular bull run for precious metals. During previous bull market episodes, the market value of junior gold and silver producers increased exponentially. Spot pricing for precious metals is notoriously volatile. Because Genco is has not entered into any hedging agreements for the forward sale of production at a fixed price, the company remains fully leveraged to any increases in spot prices. Various sector analysts have predicted substantially higher market pricing for precious metals in the years ahead, and if this should come to pass, shareholders of junior producers such as Genco Resources will be richly rewarded. The profitable operations, combined with a speculative frenzy in the sector, would position Genco as a very attractive holding for investors.

As are all such companies within the sector, Genco Resources must be considered a very speculative investment. A high degree of risk exists due to the volatility of commodity pricing, and the uncertainty that Genco will be successful in achieving their stated objectives to increase production and reserves. This company is suitable only for risk-tolerant, sophisticated investors able to accept extreme volatility and the possible outcome of a total loss of their investment value. The objective of investors in this sector is to identify those companies that offer higher potential rewards to offset the high levels of risk. Relative to the peer group of companies in the sector, Genco Resources can be considered attractive on the basis of a superior risk/reward profile, and the potential to create exceptional shareholder value in the years ahead. Investors who believe that 2004 represents the early stages of a secular bull market for precious metals should give consideration to acquiring shares in focused and profitable producering companies like Genco Resources.

cheers!

COACH247