MINERA ORCA S.A. BANKABLE FEASIBILITY STUDY FOR THE LA ... · resource model and estimate, and to...

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MINERA ORCA S.A.

BANKABLE FEASIBILITY STUDY FOR THE

LA LAGUNA SILVER PROJECT

ZACATECAS STATE, MEXICO

Ancient church in Zacatecas, Mexico

Ian Ward, P. Eng.

October, 2005

Minco, La Laguna Zacatecana BFS Exec Oct26-05 1

Minco Plc

La Laguna Zacatecana Project, Bankable Feasibility Study

Executive Summary Minco Plc (Minco) has acquired, through its subsidiary Minera Orca S.A de C.V., the extraction licence for the silver-rich Pedernalillo tailings deposit located near the city of Zacatecas in Mexico. Minco also obtained some of the previous studies for the deposit, which were conducted during the last 25 years. Minco commissioned Micon International Ltd (Micon) in 2004 to undertake a feasibility study for the deposit based on a proposed extraction rate of one million tonnes per year. This study showed robust economics for the project, and further drilling was conducted until the end of 2004 to improve the resource. In 2005, Minco commissioned Micon to update the resource model and estimate, and to conduct a final or bankable feasibility study for the project. Micon’s recent work is the subject of this report. The tailings deposit lies within and around a depression, which is presently filled by water as a manmade reservoir, and surrounded by agricultural land. Several previous studies estimated the resource to be in the range of 6 to 9 million tonnes of solids containing in the order of 85-100 grams of silver per tonne, plus gold and mercury. Minco’s extraction licence granted by Conagua, the Mexican authority responsible for water resources, limits the extraction essentially to the deposit which lies within the boundary drawn 50 metres outside the lake’s high water mark. Parts of the deposit outside this boundary are owned by private landowners or cooperatives (ejidos), with whom Minco has also secured an agreement to sample and process deposits if economically viable. This has presented unique challenges both to the definition of the resource and to selection of an extraction scheme. The deposit is located in central Mexico close to the state capital city of Zacatecas, at an elevation of 2200 metres (figure 1). Zacatecas is an historic mining centre, famous for its silver production which commenced under Spanish rule during the 16th century. Numerous silver mines were in production throughout the colonial period. The predominant silver extraction method used by the mines was the “Patio” process, where silver ore was finely crushed then roasted with copper sulphate and salt, prior to the extraction of silver by amalgamation with mercury. Unrecovered silver, in several mineral forms, together with gold and mercury, were rejected as solid tailings, usually to the nearest watercourse. Through stream action and flood events, the tailings were deposited in a large area to the east of Zacatecas, often in wide shallow deltas. During the last 100 years or so, a number of small plants have been operated to reclaim and process surface tailings deposits, all generally using a vat leaching concept. The Pedernalillo deposit accumulated in a natural depression which also receives several streams. In 1836 a dam was constructed to retain water in the depression for agricultural use, and since that time the tailings have been largely below the water level. The depth of water above the tailings is typically 0.5 to 2 metres.


Figure 1-Project location

The results of previous exploration showed that silver-bearing material was located in two areas of the project. One area was located in the northwestern portion of Laguna Zacatecana, and the other was in the bed of the lake itself. Previous exploration activities in 1995 used a vibratory sonic drill rig that was supported on a custom-built raft. Due to the success that was achieved in 1995 this method of drilling was again selected for the 2004 program, which was conducted in two phases. The execution of the drilling program was completed under the supervision of contract staff employed by Minera Orca S.A de C.V., and monitored, except the later in-fill drilling, by Micon. Drill core of HQ, NQ, and BQ diameters were used to optimise sample recovery. The programme comprised 3,208.02 metres that was drilled between May and December 2004. The maximum depth of penetration was in drill hole 401 that achieved a depth of 16.2 metres. Drill core samples were sent to the preparation labs of either SGS


Limited located in Tampico, Mexico or BSI Laboratories located in Durango, Mexico. The samples for assaying were forwarded to the SGS-XRAL facilities in Toronto, Ontario and BSI laboratories located in Reno, Nevada. The Micon mineral resource estimate reported herein provides an update of the interim resource estimate, prepared in 2004 by Mining Exploration and Geosystem Associates (MEGA). The Micon estimation methodology uses a three-dimensional (3D) wireframe model of the mineralised sediments constructed from interpretation of the drill hole date made in cross section. The 3D wireframe is imposed on a 3D block model into which silver, gold and mercury values are interpolated from drill hole data using the Inverse Distance Weighting method. The 3D wireframe constrains the interpolation. The 3D mineral resource block model forms the basis of the mine planning study that determines the portion of the mineral resource model that will be extracted during mining operations and hence the La Laguna project ore reserve. The proprietary geological modelling software Surpac Vision version 5.0K was used for this and all other modelling work. The model is illustrated in Figure 2 and Figure 3. In the former, the vertical scale is exaggerated by six, to illustrate the thickness variation in the grade shell.

Figure2: 3D View Showing Location of 20 g/t Ag Grade Shell and Drill Holes.

Micon notes that in the northern area of the submerged section of the deposit, holes end within mineralised sediments as the limit of the drilling method is reached.

4M

inco, La Laguna Zacatecana 4

BFS Exec O

ct26-05

Figure 31: Plan View Showing Location of 20 g/t Ag Grade Shell and Drill Holes.


Mineral Resource Estimate All material within the mineralised zone is considered to be part of the mineral resource and thus no block cut off was applied. Block tonnage is determined by multiplication of the block volume by the bulk density of 1.40, density determined by testwork completed by SGS laboratories in Ontario. The Resource Estimate for the mineralised zone as at September 2005 is presented in Table 1

Table.1: Summary of La Laguna Mineral Resource

The mineral resources have been classified according to Code of the Joint Ore Reserves Committee of The Australasian Institute of Mining and Metallurgy, Australian Institute of Geoscientists and Minerals Council of Australia (JORC). Mining production by dredging will begin with the lake-based resources and then move to the land-based resources, which are low lying and can be dredged as a continuation of operations in the lake. Initial production will begin in the highest grade portions to the north and north-west of the lake area in order to provide the best material early in the mine life. The mineralised zone in the lake area is better defined by a greater density of exploration drilling as compared with the land based area. The lake area is thus dominantly Measured and Indicated resource material whilst the land based area contains a proportion of Inferred material. With the lake material being mined first, time becomes available for further drilling in the land based area to upgrade these resources to higher categories during exploitation.

Tonnage Grade Ag Contained Grade Au Contained Grade Hg Contained(t) (g/t) Silver (kg) (g/t) Gold (kg) (g/t) Mercury (kg)

558,583 54.56 30,474 0.29 161 341.07 190,515


7,371,074 59.08 435,482 0.31 2,289 315.97 2,329,071


7,929,657 58.76 465,956 0.31 2,450 317.74 2,519,586


1,246,558 66.67 83,111 0.34 430 261.45 325,912

Total Measured and Indicated

Inferred

Indicated

Measured


MineSched scheduling software was used to create the production schedules presented herein. MineSched is a mining scheduler developed using Surpac Vision software, and allows the scheduling of the resource block model created in Surpac with or without a mine design or geotechnical data. An anticipated mining rate of 1,300,000 ore tones per annum has been selected, and with dredging during an average of 20 hours per day to allow time for dredge movement and servicing. A maximum mining depth of 12 metres was applied, which represents the maximum practical mining depth of the dredging machines being considered. Mining dilution was considered to be negligible largely due to the fact that the bulk of the drill-holes ended in mineralisation. Dilution calculations based upon areas where drilling had revealed waste found that dilution would be between 0.5 and 1% of the total mining volume. Therefore, for the purposes of the scheduling, mining dilution was not considered. A composite view of the planned mining sequence by periods is shown in Figure 3.

Figure –3 Mining Sequence

The production plan is contained within the cash flow calculation. The mineable reserves are a total of 8,624,837 tonnes, containing an average of 60.243g/t Silver, 0.315g/t Gold and 320.468g/t Mercury. Approximately 10.4% of the reserve is based on inferred resources, as these inferred blocks are difficult to isolate


in the mine planning process and would be extracted while mining material from measured and indicated blocks. A summary of the annual production employing this conceptual mining plan is presented in Table 2.

Table 2- Mine production plan

Metallurgical testing on composite samples from the 2004 drilling was conducted in 2004 by Process Research Associates (PRA) laboratory in Vancouver, Canada. Initial work evaluated leaching with ammonium thiosulphate, which had been successfully used by PRA during test work on Zacatecana samples for the 1996 studies. Subsequently, PRA showed that improved silver and mercury recovery was obtained with a leachant containing calcium thiosulphate, as is presently manufactured by and used by the local vat leaching plants. After optimising extraction, later tests were conducted to determine minimum reagent dosage and optimum leach time. In 2005, Minera Reyna del Pacifico (MRP) was commissioned by Minco to conduct a new testing program and to develop processing design criteria, using new composite samples from the most recent drilling. MRP investigated ammonium thiosulphate leaching processes and found that, at high levels of reagent addition, enhanced silver and gold extraction could be obtained. MRP also tested, with assistance from suppliers, several dewatering processes including filter presses, thickeners and clarifiers. A program by DOL-Eimco determined that optimum dewatering was obtained by filter presses with a projected tailings residual moisture of 34%, which could be handled as a cake for “dry” disposal. Subsequently, testing by Outokumpu in Canada, showed that a high rate thickening process with a reasonable flocculant addition could yield slurry densities of above 50 percent solids by weight. In order to resolve the metal extraction level and leaching conditions, PRA conducted a new program in 2005, with a composite similar to the one tested by MRP in Mexico. PRA confirmed the metal extractions obtained in the 2004 program, and was able to demonstrate reduced reagent (calcium thiosulphate) consumption. The calcium-based reagent is considerably cheaper than purchased ammonium-based reagents, so the former reagent scheme was selected despite the somewhat reduced metal extraction. Optimum conditions and metal extraction established in testing to date are shown in Table 3.

Parameter Unit Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 TotalTonnes t 1300000 1300000 1300000 1300000 1300000 1300000 824837 8624837

Silver content g/t 75.383 76.509 70.424 59.065 53.524 40.602 38.104 60.243Silver contained kg 97,998 99,461 91,551 76,784 69,581 52,783 31,430 519,588

Gold content g/t 0.406 0.416 0.341 0.323 0.298 0.199 0.172 0.315Gold contained kg 528 541 443 420 388 259 142 2,721

Mercury content g/t 421.084 309.892 225.843 380.827 358.070 293.142 216.367 320.468Mercury contained kg 547,410 402,859 293,596 495,076 465,491 381,084 178,467 2,763,983


Table 3-Metallurgical Testing

Ag Au Hg Feed sample content g/t 64-75 0.30-0.50 330-400 Metal extraction as tested % 72-79 37-45 85-91 Selected metal extraction % 75 40 85 Leach time, hours Hours 6 Calcium thiosulphate level Kg/t 11.1 Calcium thiosulphate consumption Kg/t 3.5 Copper addition Kg/t 0.05

The reagent consumption in testing is a basic value, but the overall solution balance requires disposal of excess solution containing reagents, which must be replaced. The total reagent consumption after solution losses is therefore approximately twice the test value. During project development and engineering, a pilot plant program is recommended to more accurately define reagent quantities required for stable operation with recycling solutions. The proposed processing plant will be located on the east shore of the lake and receive slurry pumped from the mining area to a grinding mill to reduce lumps of clay, and then will be pumped to a large surge tank to buffer the fluctuating feed from the dredge and to allow continuous plant operation during dredge downtime. From the tank, slurry will be pumped to a thickener to obtain maximum rejection of transport water, which will be returned to the lake. Slurry pumped from the thickener at a controlled density and rate, together with recycled barren leach solution and fresh reagent addition, will flow to a series of three agitated leach tanks providing 6 hours residence time. The leached slurry then will flow to a series of three counter current (CCD) thickeners to effect separation of the metal-rich solution from the solids. Barren solution will be used for washing in the CCD units.The resulting slurry will then be pumped to the tailings storage area at the maximum slurry density, approximately 40% solids. Solution draining from the tailings will be recycled to the process and the excess treated, to attain regulatory standards, prior to returning to the lake. The metal-rich (pregnant) solution will be clarified and the metals precipitated by addition of copper dust in a Merrill Crowe type circuit. Depleted or barren solution will be recycled to the process. The precipitate, collected in a filter press, will be acid leached to remove copper before drying and calcining under vacuum to recover mercury. After mercury removal, the silver/gold residue will be melted with fluxes and poured into doré bars. As part of the study, Golder Associates Ltd (Golder) was engaged to evaluate tailings disposal sites and schemes. The original objective was to design a storage facility to accept up to a total of 9 million tonnes of solids. Two remote sites and one site on land adjacent to the lake, where Minco has negotiated possible purchase of 49 hectares, were compared. Golder considered storage of either settled slurry or filtered solids. None of the available sites was capable of storing the total volume as slurry and to date filtering has been found to be impractical in testing. Golder recommended the site near the lake as the most suitable and determined that the negotiated area


could contain up to 3.3 million tonnes. Extension of the purchased land would be required to store the ultimate quantity of tailings, estimated by Golder to be an additional 55 hectares. Golder’s estimates of material quantities and cost to establish the containment are included in the capital cost estimate. An environmental baseline study and impact assessment study have been completed, by a Mexican consulting firm (COREVI), which meet all Mexican norms and requirements. They have been approved by regulatory authorities, followed by issuance of an operating permit to Orca. Critical components of the studies are:

• the identification of the effects of the project on the existing population and agriculture.

• the identification of baseline mercury levels in the existing water and solids in and around the lake.

• prediction of improvements to the lake environment after removal of the tailings.

• prediction of water quality and volume returned to the lake.

• mitigation of the effects of the tailings storage system.

Based on the present estimated resource and after allowing for process recovery, the life of mine production over the seven years of project life is estimated as follows (Table 4):

Table 4- Life of Mine Production

Production Unit Quantity Unit Quantity Tonnes processed Tonnes 8,624,837 Silver production kg 389,691 koz 12,529 Gold production kg 1088 koz 35 Mercury production kg 2,349,386 flasks 68,109 Silver equivalent koz Equiv 20,451

The equivalent silver production includes the relevant value of the associated gold and mercury production at the prices used in the economic evaluation. Operating costs are estimated based on the manning list, estimates of consumables and power consumption, and applying local unit costs determined by Minco and Minera Reyna del Pacifico based on published information and an industry database. Life of mine operating costs are determined as shown in (Table 5):


Table 5- Operating Cost

Area $/tonne $/Ag oz equivalent Labour 0.75 0.32 Mining and process consumables 5.97 2.52 Power 0.63 0.27 Metals refining and shipping 0.53 0.22 Permits and water cost 0.19 0.08 Total 8.06 3.40

It is estimated that 58 persons will be employed at the operation, including a resident expatriate manager. Capital costs for initial development and deferred works are estimated based on the equipment selection, the design of the plant and infrastructure, and utilising local costs and labour rates supplied by MRP. The total pre-production capital cost is estimated as $21.653 million. The estimated cost is based upon supply of all new equipment with the exception of the ball mill, for which an adequate availability of good, used units appears secure. Deferred capital cost of tailings dam building provides a further cost of $13.569 million. Main elements of the capital cost are shown in Table 6.

Table 6-Capital Cost

Area Pre-production k$ Deferred k$ Direct construction cost 13,421 0 Indirect and owners cost 5,821 0 Tailings structures 2,411 13,569 Closure cost 0 2,000 Salvage allowance, earnings 0 (3000) Total 21,653 12,569

The construction period, after project commitment, would be about 12 months. Delivery of certain major equipment items may be as long as 10-12 months from date of order. A lead time of 2-3 months for initial engineering and equipment purchase, prior to construction start, should be allowed. This assumes new equipment is purchased throughout. The identification and purchase of certain items as used equipment could significantly improve the schedule. Project economics are determined by the schedule of metal sales revenue and costs incorporated in a cash flow model, before taxes. Metal prices close to current values are used in this evaluation as the base case:

Silver $US 7.25 oz Gold $US 425 oz Mercury $US 650 flask

Significant inputs and results of the cash flow calculation, attached at the end of this section and summarized in Table 7, are:


Table 7- Project Cash Flow

Parameter Unit Value Tonnes processed LOM Million tonnes 8.625 Metal revenue $US million 148.271 Operating cost $US million 69.525 Initial capital $US million 21.652 Deferred capital $US million 12.569 Cash Flow total before tax $US million 44.525 NPV at 10% discount rate $US million 23.919 NPV at 10% discount rate $US million 32.628 IRR % 45.9

The project is robust and warrants continued development. A summary of the key project production and economics is attached at the end of this section. The project is most sensitive to variations in metal prices or metal recovery. The life of mine (LOM) cash flow is least sensitive to initial capital cost (Table 8).

Table 8- Sensitivity Values

Parameter Variation LOM Cash Flow $M Base case 0% 44.525 Metal recovery +10% 58.897 Metal recovery -10% 30.152 Metal prices +10% 59.352 Metal prices -10% 29.697 Silver price +10% 53.608 Silver price -10% 35.441 Initial Capital cost +10% 42.600 Initial Capital cost -10% 46.449 Operating cost +10% 37.572 Operating cost -10% 51.477 Break-even silver price $US/oz 3.70

Micon recommends that the project be advanced to detailed engineering and construction. Tasks that Minco should authorize immediately to ensure a timely start to production include:

• A short pilot plant testing program to confirm process reagent consumptions under recycling solution conditions and to provide engineering data.

• Negotiation for additional land requirements.

• Negotiation for permanent project power supply.

• Selection of engineering consultant for EPCM role.

• Selection and ordering of long delivery equipment.


LAGUNA STUDY RESULTS: MICON INTERNATIONAL OCTOBER 2005 Micon Oct 2005

Reserves tonnes 8,624,837silver koz 16,705

Production rate (tonnes) Daily 3,560Annual 1,300,000

Project Life (years) Lagoon tailings 6.60

Metal Grades (g/t) Silver 60.24Gold 0.32Mercury 320.47

Metal Prices Silver US$/oz 7.25Gold US$/oz 425Mercury US$/flask 625

Metals Recovery (%) Silver 75%Gold 40%Mercury 85%

Revenue / Tonne (US$) Silver 10.53Gold 1.72Mercury 4.94

Total revenue/tonne 17.19Ave Annual Metal Production Silver (ozs) 1,889,721

Gold (ozs) 5,277Mercury (flasks of 34.5 Kg) 10,273

Silver Equiv Ozs 3,084,651Operating Costs (US$/tonne) Operating Labour 0.75

Operating Supplies 5.97Power 0.63Metal refining and shipping 0.53Water Use and Permits 0.19

Total operating cost US$/tonne 8.06Operating Profit Per Tonne US$/tonne 9.13Pre Production Capital Cost (US$) Direct construction 13,421,000

Indirects and owners cost 5,821,000Initial tailings dam 2,410,720

Total preproduction capex 21,652,720Ave Annual Gross Revenue (US$) 22,363,719Ave Annual Operating Profit (US$) 11,877,326Ungeared Pre Tax Total Cash Flow (US$) 44,524,553Payback (years) 2Net Present Value US$ 5% 32,628,000

10% 23,919,000Internal Rate of Return (%) 45.9

Issued Micon International LimitedIan Ward October 26-2005

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