Silver was hit harder, in percentage terms, than gold by the precious metal price decline over the past few years, falling from a high of almost US$50 per ounce in 2011 to a low of less than $15/oz in 2015. That decline, coupled with an ill-timed increase in taxation, hit Mexico’s producers hard, leading to capital expenditure cuts, shelved expansion plans and a freezing of development projects as survival became the name of the game.

This year has seen the silver price turn a corner and, as it is now approaches $18/oz mark, producers can once again think about growth.

Mexico’s silver endowment is catnip for the ever-decreasing group of primary producers. About 30% of production originates from the increasingly rare primary silver mines, which can still be found in Mexico.

“Primary silver deposits are getting fewer, particularly those that can run up to 500g/t silver. The average is probably about 200g/t silver for a vein deposit, while an open-pittable project could be as low as 90g/t silver,” Brent Cook, publisher of Exploration Insights, told Mining Journal.

Mexico became synonymous with silver after its production overhauled that of Cerro Rico in Bolivia during the Spanish Colonial times. It continues to be the world’s largest producer having churned out 189.5 million ounces in 2015, a slight increase over the 186.3Moz produced in 2014, according to GFMS Thomson Reuters, representing about 18% of the world total.

Mexico’s silver is largely produced from a 1,000km-long belt that stretches through the Sierra Madre spine of the country to Sonora. At the northern end are the carbonate replacement deposits (CRD) that Mexico’s copper industry exploits, but that have also provided some 35-40% of the country’s historical silver production.

Today, 72% of production is generated from just three states: Zacatecas (41%), Chihuahua (17%) and Durango (14%) and silver makes up the country’s third largest metal by value, representing 19.5% of the MP196.97 billion pesos (US$10.59 billion) of metals produced in 2014, behind gold (27.0%) and copper (20.9%), according to mining chamber Camimex.

The primaries 

Tahoe Resources, Fortuna Silver and Silver Standard Resources have all recently picked up gold deposits due to the scarcity of decent silver ones. In fact, the reason primary silver producers still exist is down to a particular subset of investors willing to back them, although opinion differs on the importance of the primary silver producer classification.

“Being a primary silver producer is a little less important than it used to be. Our shareholders are more concerned about cash flow and profit margins than which commodity we are producing. There are very few quality silver assets available so if we see a gold project that has good fundamentals and provides value for shareholders then we wouldn’t just walk away from it,” Robert Archer, Great Panther Silver CEO, told Mining Journal.

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“Primary silver deposits are getting fewer, particularly those that can run up to 500g/t silver”

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“I started the company 14 years ago as a silver company and while some other companies have picked up gold assets we are sticking with silver and I don’t want to change that,” Keith Neumeyer, CEO of First Majestic Silver told Mining Journal.

Still, Mexico hosts most of the primary silver producers including London-listed Fresnillo, Pan American Silver, First Majestic Silver, MAG Silver and Great Panther Silver.

Recent cover

The majority of Mexico’s large silver deposits were discovered within 150 years of the Spanish Conquest as they outcropped. Many of these occurrences turned into mines and are still operating to this day, such as in Guanajuato where the motherlode or Veta Madre – some 24km long and up to 198m wide – was discovered in 1550.

Now, a new era of exploration is underway using modern technology provoking a reinterpretation of the country’s geology and producing significant new discoveries, such as Juancipito in Zacatecas. “The most important geological unit in Mexico is the one that says ‘recent’ cover. A lot of research has been done in the past 35 years to develop exploration techniques for silver that seem to work. I continue to believe that bringing exploration technology to explore through the cover in Mexico has the potential to make big rewards as evidenced by Juancipio and El Cinco,” Peter Megaw, chief exploration officer at MAG Silver, told Mining Journal.

Juancipio is a joint venture between Fresnillo (56%) and MAG (44%) that at an estimated processing rate of 2,650 tonnes per day will produce an average of about 10Moz per annum of silver, making it the country’s third largest silver mine. “It will be one of the most important silver mines in the world once it gets into production. It will also be the highest grade operating mine in the world as the Bonanza zone grades over 600g/t silver,” said Megaw.

Juancipio is emblematic of the new exploration paradigm. Fresnillo originally had the property, building three mines within sight of it, but dropped the asset during the 1990s as the area was not considered of interest due to the recent cover. When MAG Silver was created in 2002, Juancipio was one of its initial properties.

“We had a rethink about the geology compared to how Peñoles [before it spun out Fresnillo] saw it and after we made the discovery, Peñoles recognised that we were right and that they should not have dropped the property,” said Megaw.

The upside at Juancipio is enormous with the discovery of the Valdecañas Deep area, underneath the main orebody. “When we drilled the Bonanza zone at Juancipio, the resource calculation had a 100g/t silver cutoff. We recognised from additional drilling there was a significant volume of mineralisation below that at less than 100g/t silver, but we were not sure that we had reached the bottom so we put in some deep holes to define it but they stayed in ore. The vein also went from 7m to 22m wide and the grade came back over 100g/t silver,” said Megaw.

Valdecañas ore could allow production to be increased beyond the planned 2,650 tpd throughput level, according to Megaw.

“Fresnillo next door has built two 3,000tpd nominal capacity mills at its Saucito facility, yet it processes 8,500-9,000tpd, some 50% more throughput, so there is potential for incremental development.”

There is also exploration upside potential on the JV property as Megaw thinks some of the veins Fresnillo already mines at nearby mines continue onto the property. “We also have targets to the west and south where virtually no exploration work has been done although there is the same style of alteration at surface that continues for 8km to the west and 15km to the south,” he said.

Majors

Fresnillo is Mexico’s largest silver producer and saw production increase from 38.2Moz in 2011 to 43Moz in 2015 as it works towards producing 65Mozpa by 2018. It has two underground silver mines (Fresnillo and Saucito) and an underground gold-silver mine at Cienega.

Since listing in London in 2007, exploration has seen silver reserves almost double to 2 billion ounces and gold resources triple to 35Moz. It currently invests US$50-75 million a year on this front, which has provided a pathway to achieve its growth targets of producing 65Mozpa of silver by 2018 and 750,000ozpa of gold, the latter of which it reached in 2015 with the acquisition of the remaining stake it did not hold in the Penmont joint venture.

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“I continue to believe that bringing exploration technology to explore through the cover in Mexico has the potential to make big rewards as evidenced by Juancipio and El Cinco”

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In addition to Juanicipio, Fresnillo is about to start phase one of its greenfield US$515 million San Julian mine development on the Chihuahua/Durango border, which it is in the process of adding a flotation line to that will produce 10Mozpa of silver and 40-45,000ozpa of gold. “This is quite a good project in terms of its production cost that will be around $7.77/oz and will give us a good push towards our objective of reaching 65Mozpa production,” CEO Octavio Alvidrez told Mining Journal.

In Zacatecas, the company is also investing in organic growth such as its Pyrites plant in the Fresnillo district that will process flotation tailings from old mines and current tailings from its Fresnillo and Saucito I and II operations adding 3.5-4.5Moz/y of silver at a cash cost of $2.50/oz to the group profile.

At Fresnillo, as the silver grade decreases, lead and zinc grades are increasing so the company is expanding the flotation plant from 8,000 to 9,000 tpd to process the base metals and bring silver production up to about 23-24Mozpa.

Expansion is also a focus for Pan American Silver, which has three mines in Mexico, as it looks to increase production and bring costs down, according to CEO Michael Steinmann. The main focus is the Dolores and La Colorada operations, where the company is investing US$250 million to expand production.

At La Colorada it began building a new shaft last year that should be fully operational later in 2016, while a new sulphide plant will be starting up soon to expand silver production from 4Mozpa to about 8Mozpa. 

“Our proven and probable reserves have grown 300% over the past seven years and we have over 90Moz of reserves at La Colorada, the largest base at any of our operations, and at a very high grade of over 400g/t silver,” Steinmann told Mining Journal.

At Dolores, the company is adding an underground mine to the openpit. “We will start to mine at 1,500tpd underneath the existing openpit and the large orebody extension that was discovered to the south,” said Steinmann. It is also building a pulp agglomeration plant that will be finished in about a year to treat underground material and high-grade ore from the pit. “It has a 5,600 tpd capacity and will increase the recoveries of gold and silver considerably,” he said.

The company continues to look at acquiring other assets. In February it took an option to earn a 75% interest in the Promontorio Mineral Belt silver properties for cash payments totaling US$8 million over four years, spending US$8.0 million in exploration and development expenditures and investing C$2.0 million (US$1.5 million) in project owner Kootenay Silver.

Primero Mining is also picking up new ground at its San Dimas mine in Durango, Mexico’s fourth largest silver operation at 8.3Mozpa. In June, it added over 30,000ha to its land position, which should enable it to replace mined produce and continue operating for many more years, according to CEO Ernie Mast.

“We expect to find similar mineralisation as at San Dimas and at the Ventanas area some 30km away. This area fills the gap has a favorable rock horizon under the volcanic capping,” he said of the new land package.

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“The past five years have been pretty challenging for the sector and we have reduced our costs to a point that is right for the business”

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The company’s main focus this year is to get its San Dimas mine back up to the past production levels after implementing the Six Sigma processing methodology and additional safety measures following a string of employee fatalities. The company has started a mill expansion at its 3,000tpd Tayoltita mill and is installing a backup crushing and screening circuit so operations are not impacted during the wet season to do just this.

New spring

Great Panther Silver is recovering the spring in its step as prices increase and it prepares for future growth. The Guanajuato and San Ignacio mines at its Guanajuato Mine Complex (GMC) each supply about 50% of the feed to its 1,100tpd plant. Having increased production 30% in 2014-2015 by bringing San Ignacio on line, the company plans to increase its resource base and, possibly, look at a plant expansion, CEO Robert Archer told Mining Journal.

“There are outlying projects within trucking distance of the plant that could provide additional material. We put a lot of this work on the back-burner due to the fall in the silver price, but we are getting this going again,” he said.

At Mexico’s largest silver producing mine, Peñasquito, production is expected to reach 22-24Moz of silver in addition to up to 580,000oz of gold this year. Goldcorp, which owns the mine, expects to make an investment decision soon on a plant to leach pyrite concentrate from the zinc flotation circuit tailings, recovering gold and silver that would otherwise report to the tailings facility. If approved, it is expected to be in production by the end of 2018.

The silver price rebound has allowed First Majestic Silver to recover from the hardships of the lean years.

“The past five years have been pretty challenging for the sector and we have reduced our costs to a point that is right for the business. We had to decrease production at three of our six mines and canceled all investment in Mexico apart from the minimum amounts of exploration and development. Silver over $17/oz makes a big difference for us,” said CEO Keith Neumeyer.

Production is expected to come in at 13Moz of silver this year, but a recent C$50 million raising will help optimise its operations.

That said, it will be some time before the company thinks about expanding production or adding another asset like Santa Elena that it acquired from SilverCrest Mines in 2015 to its base. “It will be 18-24 months before we can think about investing in anything else,” said Neumeyer.

That “anything else” includes the La Luz and Plomosas development projects, both in historic mining districts that would require at least US$100 million each to bring into production.

Government

While the space in Mexico is looking much more positive now, president Enrique Peña ruffled more than a few feathers just after taking office in 2012 when he announced a new royalty regime.

This saw the implementation of a 7.5% royalty on net profits before tax and a 0.5% royalty on net revenue. This came to pass at, “exactly the wrong time,” said Spears, corresponding with the fall in metals prices, but it was not extremely burdensome given that companies can deduct tax from things like the cost of holding land and mining claims.

Tax is a hot issue for Primero. In June, the company notified the government that it intends to submit a claim for international arbitration, pursuant to Article 1119 of the North American Free Trade Agreement (NAFTA).

This dates back to a ruling in 2012 when, after reviewing the company’s file for over a year Mexico’s tax authorities ruled Primero’s taxation would be based on its realised silver price rather than the spot price. This took into account the fact production from its San Dimas mine is subject to a streaming agreement, which means Primero receives much less than the spot price for each ounce it produces.

However, in February Primero received notice from the tax authority stating it wanted to rescind this rule and tax it on the spot price. The streaming company has no physical or legal presence in Mexico and does not pay tax in Mexico on its portion of the silver production, the authorities argued.

“We filed notice that we intend to challenge this under NAFTA rules that protect foreign investment on the basis that if Mexico gives a foreign investor a ruling and the foreign investor invests heavily in the country, in part because of that ruling, the government cannot then take that ruling away” Primero’s Mast said.

Primero is currently in a 90-day period the NAFTA arbitration process stipulates for the parties to talk and try to reach an amicable agreement prior to it accepting to hear the claim.

Not high enough (yet)

The silver price has not recovered enough for Silver Standard Resources to develop its Pitarilla project yet, but following the acquisition of Claude Resources and its Seabee gold operation in Canada, it is looking to reconfigure it as an underground mine, taking advantage of the underground expertise that came with this deal.

“We are looking at a smaller capex, smaller throughout operation that would have higher grade and a higher margin,” said John DeCooman, Silver Standard’s vice president of business development and strategy.

McEwen Mining is going through a similar process at its 4-5Moz El Gallo project in Sinaloa that is permitted for production and would be economically feasible at US$24/oz silver, according to a 2012 feasibility study.

Stefan Spears, head of special projects for the company, said it was working on revising this study, taking into account falling contractor and engineering costs and an optimised flow sheet.

The company is doing an internal scoping study based on $18/oz silver that will be ready later this year, which will see increased grades and margins. “It is already permitted so we can move it quickly into development,” he said.

If the silver price continues to run, McEwen will not be the only one to start moving quickly in Mexico. This is a country with an abundance of silver opportunities.