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First Majestic Tunes a Silver Guitar

By Christopher Barker - Nov 27, 2012 at 2:25PM

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An exclusive first-hand look at First Majestic Silver's latest acquisition.

What if there were a guitar that only you could hear? As much as you may enjoy the instrument's rich tones, you may find yourself wishing others could share the experience.

I thought I could hear the music from "La Guitarra" when I acquired shares of Silvermex Resources with strongly bullish expectations. But after hearing the instrument anew -- now more finely tuned by mine owner First Majestic Silver (AG 0.96%) -- I realize an entire symphony still awaited my detection. Now that I've returned from a recent tour of the La Guitarra mine, my aim is to ensure that investors can hear these harmonious notes.

Keep your ears to the ground
At just a fraction of the production scale of First Majestic's star attractions -- including the La Parrilla and Del Toro mines that I'll discuss separately in forthcoming articles -- it's all too easy for La Guitarra's music to go under-appreciated. From its current capacity of 350 tonnes per day, the mine will reach a still-modest 500 tpd during the first quarter of 2013. Meanwhile, the enhanced productivity behind each of those tonnes really strikes a chord with this cost-conscious Fool! Already, in just its first full quarter as the mine's operator, First Majestic has slashed La Guitarra's cost structure dramatically from $128 per tonne to $65 per tonne! With throughput expansion and other enhancements in the works, the company is targeting a cost of just $35 per tonne by roughly mid-2014. I have called First Majestic "the low-cost king of silver" with good reason.

That leaner cost structure takes major ore blocks within the La Guitarra structure that may have been deemed sub-economic by prior operators (particularly before this secular bull market for silver took hold), and renders them solidly profitable to mine. Some of these blocks include near-surface veins with mineralized widths of up to eight meters.

An antique scoop tram and its floral companions stand sentry over the mill at First Majestic Silver's La Guitarra mine. The mill's expansion to 500 tpd capacity is already under way, and a subsequent expansion to 1,000 tpd will follow soon after. Photo by Christopher Barker.

High-grade silver sulphides appear as grey and black bands through the quartz vein. Just a stone's throw from the mill, and right near the surface, ore blocks (now in production) like La Guitarra's LG vein help to support the operation's increasingly lean cost structure. Photo by Christopher Barker.

When you keep your ears to the ground at La Guitarra, you're listening not only for the sounds of silver-gold ore making its way through an expanding mill, but also for the hum of exploration drills that are identifying extensions to the known orebody. First Majestic is not relying on pre-existing resource estimates for the property, electing instead to begin with a clean slate. But this is the sort of clean slate where you begin with the knowledge that drilling will rapidly confirm the presence of many millions of ounces of silver equivalent as you work your way through the known deposit and beyond.

You see, First Majestic is no stranger to La Guitarra. Ramon Davila, First Majestic's phenomenal COO, served as vice president for mining operations at Luismin back in the early 1990s. Fools who have enjoyed my top pick in the gold patch this year -- Primero Mining (PPP) -- may recall that Luismin was the former operator of Primero's San Dimas mine before Goldcorp (GG) swooped in. As it turns out, Luismin owned La Guitarra for a spell, so Ramon Davila brought some first-hand knowledge of the asset to First Majestic's table. Additionally, Davila explained to me that First Majestic had evaluated La Guitarra as a potential acquisition back in 2006, but found the mine's owner at the time disinclined to strike a deal. So when First Majestic finally acquired the operation this year for a bargain valuation of $137 million, the company knew just the sort of melody to play on this guitar to unlock meaningful value.

A rumbling in the distance
As a long-term-oriented shareholder of First Majestic Silver, the prettiest notes I heard during my tour of La Guitarra related to portions of the vast 40,000-hectare property package beyond the core of operations at the principle La Guitarra vein.

To the northwest, First Majestic is following up on successful exploration conducted by Silvermex on a complex of veins with names like Nazareno, Coloso, Jessica, and Joya Larga (which translates bullishly as "long jewel"). Like some of the low-hanging fruit remaining within the main La Guitarra structure, much of this emerging mineral resource is near-surface and easy to mine. Prevailing silver and gold grades from recent drilling look very encouraging, and I look forward to reviewing an initial resource estimate on these nearby veins (and on the core orebody as well) during 2013. In the meantime, Endeavour Silver's (EXK 1.09%) exploration-driven expansion at Bolañitos offers, in my opinion, a fitting framework in which to consider the significance of this nearby vein cluster to the existing La Guitarra mine.

An overview of First Majestic Silver's property package at La Guitarra, featuring the Nazareno vein cluster to the northwest, and the historical Mina el Rincon area roughly 10 kilometers to the southeast.

I'll freely concede that prior to my visit, I had been blissfully ignorant of the existence of a historically significant, past-producing silver mine within the La Guitarra property package. And El Rincón was no two-bit operation! Run by an American mining company from 1910 through the late-1930s -- at a respectable throughput of 700 tonnes per day -- El Rincón was Mexico's third-largest silver producer over the period. Judging by the clear excitement of First Majestic's chief geologist Guillermo Lozano -- who was involved in the noteworthy discoveries of Goldcorp's Camino Rojo deposit and Silver Standard Resources' (NASDAQ: SSRI) Pitarilla project -- plenty of high-grade silver with a welcome gold by-product remains to be mined in this area.

Partial view of the El Rincón Mine during the 1930s. In its heyday, this was one of Mexico's leading silver producers.

The nearby and aptly named Mina de Agua ("mine of water") proved difficult for early miners to exploit, and in the early 1900s an adit was constructed from El Rincón to help dewater Mina de Agua. Along the way, this adit intersected a slew of closely spaced mineralized veins that have not been extensively mined. Due to the compacted nature of near-surface vein structures at El Rincon, Mina de Agua, and the swarm of veins between them, First Majestic Silver is beginning to mull the potential -- albeit in a very preliminary way -- for the construction of a second stand-alone mine within the La Guitarra property package. I am very excited to watch that potential unfold through further exploration and assessment, and I find the prospect wholly typical of First Majestic's proven prowess at unlocking substantial shareholder value through the acquisition of under-utilized or otherwise distressed mineral properties.

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Stocks Mentioned

First Majestic Silver Stock Quote
First Majestic Silver
$8.39 (0.96%) $0.08
Goldcorp Inc. Stock Quote
Goldcorp Inc.
Primero Mining Corp. Stock Quote
Primero Mining Corp.
Endeavour Silver Corp. Stock Quote
Endeavour Silver Corp.
$3.72 (1.09%) $0.04

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