How politics has changed the landscape at Los Azules

Friday, April 21, 2017

Changes imposed under Argentine President Mauricio Macri have been hailed for significantly improving the climate for miners in the country.

Key steps include the lifting of FX controls, resulting in a sharp devaluation of the peso, and the removal of import restrictions, which caused delays in the supply of equipment, according to Rob McEwen, chairman of McEwen Mining.

The business-friendly policies have also enabled McEwen to consider other options for the development of the Los Azules copper project in San Juan province, where the company plans to complete a feasibility study.

However, sharp wage increases and high headcounts remain a challenge in the country, McEwen says.

The company is also advancing studies at its El Gallo 2 silver project in Mexico, while considering a shift to sulfide from oxide ore processing at the El Gallo gold mine, in order to boost the mine life.

BNamericas: How do you rate Argentina as a mining jurisdiction?

McEwen: The political and economic climate has improved significantly. I'm encouraged but I'm cautious as there are mid-term elections coming up that might change some of the positives that have occurred.

I would like to get through that and for the party in power to stay in power.

BNamericas: How has that affected the outlook at Los Azules?

McEwen: The political changes have changed the landscape for us at Los Azules.

With the removal of the tax on concentrate exports we have been able to consider producing a concentrate rather than an autoclave and oxygen plant, and that's had a very significant impact on capex and projected operating costs.

We are working our numbers there and looking at returns. Our hurdle rate is a 20% post-tax IRR and a three-year payback, and we are getting close to that.

In Q1 we were drilling but we have demobilized now. We were looking at three large zones of mineralization to see if we could connect those. We think we may have.

There was an area of higher-grade material we were seeing if we could extend there. A lot of the results are out for assay right now.

We are also looking at the logistics and what is the right way in, though Argentina or Chile or both, and seeing if there is room to work with other miners in the area where we could have some common infrastructure to offset some of the cost.

The objective is to drive toward a feasibility study to improve the quality of information on the asset and get a better sense of the economics given the new circumstances.

BNamericas: Are you still considering a sale, and how would you value the property?

McEwen: We would consider a sale or joint venture.

Copper is improving, supply is being curtailed a bit. We look at proposals and weigh them. We don't have a fixed figure and we don't have any pressure on our balance sheet right now.

There has been some interest but I wouldn't say people are slamming down the doors.

BNamericas: What other important steps has the Argentine government taken?

McEwen: Dealing with the discrepancy in the currency was a big step.

There were also delays and restrictions on imports, as the government was trying to encourage secondary and tertiary industries and favoring them over imported goods.

You could get very long delays importing capital goods. If you are running on a critical timeline, such as building a project, it was a large contributor to the cost overruns experienced in the country.

When the government settled with their international creditors and made changes to the currency, they tried to roll out the welcome mat, making statements saying they are not going to change the rules of engagement.

That's good but you are looking at wage increases of close to 30% a year. If labor is 50% of your costs, you would see a 15% increase in costs.

So that's one of the issues. Staffing in Argentina is higher than you would see in many other places.

BNamericas: What is the situation with the El Gallo 2 project in Mexico?

McEwen: It's still under study. We started considering moving the location of the facility because we have found some satellite deposits.

We were looking at alternatives for equipment to see if we can lower operating costs and the threshold for putting the shovel in the ground.

We thought we needed US$21/oz silver, but we hope to be able to lower that number, to get to the 20% IRR and three-year payback. We will have some results out in the next few months.

BNamericas: What about the El Gallo mine?

McEwen: We are getting closer to the end of our known oxide ores. We will produce 50,000oz gold this year, and we are going to project about 20,000oz next year.

We have begun outlining a larger sulfide ore body, and are working on seeing if we can make a transition to sulfide ore.

We are looking at firstly reprocessing some of the heaps, where we think some earlier work left gold, and at the same time coming up with a plan for processing sulfide ores.

BNamericas: What is the current mine life?

McEwen: We will be done in 18 months, out of resources. There is probably another year of reprocessing the heaps and somewhere in there we will be looking at sulfides or will have found more oxides.

BNamericas: How quickly could a transition to sulfide ores be accomplished and how much investment would it require?

McEwen: That's a question I am asking right now. It would definitely entail more investment. I can't quantify how much at this point.

BNamericas: What are your thoughts on M&As?

McEwen: We have watched the majors start buying the juniors, by-passing the mid-tiers, so I think that's going to continue because the seniors got rid of their exploration plays in their quest to get rid of debt.

Now they are trying to get back into the game and they think the juniors are probably undervalued and a lot cheaper for them to acquire than something bigger.

Deals in Latin America are always possible and we are always looking.

About Rob McEwen

Rob McEwen is the chairman and chief owner of Toronto-based McEwen Mining. He is also the founder and former CEO of Goldcorp.

About the company

McEwen Mining has the El Gallo gold mine and El Gallo 2 silver project in Mexico, the Los Azules copper project and a 49% stake in the San José mine in Argentina, as well as projects in the US.

McEwen aims to become an S&P 500 company.