McEwen shifts course at El Gallo II – expansion on the cheap?

McEwen Mining outlines a possible third path for its El Gallo II silver-gold mine in Mexico.

McEwen Mining (NYSE: MUX) had said it is considering what to do with its El Gallo II silver-gold project in Mexico – specifically, how to finance the estimated $170 million capital cost or optimize the project’s scope to something within its means. Failing here, El Gallo II would certainly head to McEwen Mining’s back burner.

The main hurdles for McEwen Mining are this: it doesn’t have enough cash to build it on its own and financing markets are tough. Meantime, gold and silver prices continue to fall. Thus, in a conference call last week, McEwen Mining President and CEO Rob McEwen said that although the project was still moving ahead, with permitting in the works, construction might not start later this year as it has hoped.

Making deferral seem all the more possible was the uncertain future of McEwen Mining’s Los Azules copper-gold project in Argentina, now on the auction block. While McEwen hasn’t capitulated in the search for a buyer for Los Azules, he sounded pragmatic about the ongoing sale process: There’s interest, but a crowd isn’t swelling at the door.

In part, the problem here is that the appetite for undeveloped mega copper-gold projects is somewhat tepid and meantime there’s a glut of assets, some operating, up for sale. Thus juniors with large undeveloped copper-gold deposits for sale face stiff competition.

But a third path at El Gallo II may keep the project alive – neither deferral nor the $170 million Plan A. You might call it the mother of all mine optimization plans.

El Gallo II was, as outlined in a feasibility study late last year, to be a 5,000 tonne per day open-pit operation with milling and whole-ore leaching. It would exploit 38 million silver @ 101.3 g/t Ag and 46,102 ounces gold @ 0.12 g/t Au in reserves.

But in an update today McEwen Mining said it might forego a standalone operation completely, with a processing plant and whole ore leaching, and instead ship El Gallo II ore to El Gallo I, McEwen Mining’s operating heap-leach gold-silver mine about five kilometres away

The benefit of doing so comes down to a trade-off. Far less capital costs – expansion rather than new building – in exchange for what would likely be far lower recoveries. In the El Gallo II feasibility study last year McEwen Mining estimated it could get 84 percent silver and 83 percent gold recoveries in a standalone El Gallo II operation with whole-ore leaching.

However, put the same ore, trucked and crushed, on a leach pad at El Gallo I and the silver recoveries, based on McEwen Mining’s metallurgical testing, could drop by about a third to half that of standalone El Gallo II. McEwen stated that “early column tests returned between 45-62 percent silver.”

Thus El Gallo II – Los Azules sale or no – and terrible financing markets be damned – could still become a reality. For McEwen Mining the key question now becomes: Is the trade-off worth it?

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