Bonanza Aztec Silver – Interview with with Genco in Merger with Silvermex (GGCRF, TSX:GGC)
By: Marco G.
September 30, 2010
http://goombarhsedge.blogspot.com
Introduction
Silver Mining in the Temascaltepec District of Mexico dates to pre-Columbian times of the Aztecs. Later, Spanish miners produced up to 10% of the total Silver output of Mexico, again from within this district. More recently, Genco Resources (GGCRF, TSX:GGC) have hit “Bonanza” grades in drilling their San Rafael mine in the 39,000 hectares of mineral rights of their wholly owned Temascaltepec Silver district. The early miners were limited by their manual techniques and only worked the exposed sections of very high grade veins at the surface. Genco Resources is the small Silver producer utilizing modern techniques in underground mining this Temascaltepec district.
This Mexican Temascaltepec Silver District is rich in Silver and stories. Following is an extract from a 19th century mining compendium:
Figure 1: Source - Historic Mines of Mexico, Charles Bunker Dahlgren, 1883, p 203
Note the many former mines in this area and the stories of mankind’s quest for Silver. Now this rich mining district belongs to Genco Resources.
Genco was a former $4 stock which had encountered myriad political difficulties that caused a slide in their share price over a period of time. Now, things may be well on the mend. Equipped with a new management, a NI 43-101 technical report and a feasibility study, Genco has seen a revival in its share price with the rising fortunes of the Silver price. Then suddenly on September 20th, 2010, Genco received a merger offer from Silvermex Resources (SLVXF, TSXF:SMR).
Interview with James Anderson, Chairman and Acting CEO of Genco Resources
The author was fortunate to catch the Chairman and Acting-CEO of Genco Resources, Mr. James Anderson while travelling, and he agreed to an interview about Genco and the Silvermex merger offer going forward. The following is verbatim from notes taken of the interview by telephone on September 29th,2010.
The author asked Mr. Anderson to start by giving some of the background behind Genco as to why an investor should be interested.
James Anderson: Let me start off this way, because I think it will frame things and perhaps lead us into more productive areas. We’ve got a situation here where as I’m sure you know and our readers should understand. I’ve progressively became more involved in the company, I started off as any shareholder would purchasing a block of stock, although it was a pretty large block of stock and it was my intent from the beginning, just to be a passive shareholder and not nearly as active as I became.
However through a series of events, I requested and might even say demanded a position on the board and then through a series of events became much more involved where today, I am Chairman and acting CEO. Now I will frame my outlook in this fashion and it may or may not be different from the way other people look at companies, but what we are doing right now and all we are doing right now and all that we’ve been doing, from the time that I’ve became actively involved in the company until now is building a foundation.
It becomes apparent to me looking in retrospect for quite a while, the company was concentrating on boosting its stock price from day to day and from week to week, and if it gained a penny, or a nickel or a dime, that was considered a victory but it was paying no attention to the foundation. What we are doing and all we have been doing these last months and years, and it may be frustrating for investors, but I think they should understand this, all we have been doing is building a foundation and I look at it in this fashion. I am not a mining person but I am a businessman and I know that you cannot build a great company without a good foundation, and all we have been doing is putting that foundation in place. The things we’ve accomplished… …. the thing about a foundation is that it is underground...
Marco G. : Laughs…
James Anderson: You can’t see the foundation…but it is very important to have it there, and if you have a good foundation, you can build a great house and it will last. If you don’t have a good foundation, you can build the best house in the world and it will simply collapse. The other thing about a foundation; there are many things about building a house, you can correct, you can correct the roof, correct the siding, you can correct the interior walls and so forth, but it is very difficult if not impossible to correct a bad foundation. So, we’ve essentially had to start over. There are different things that we have done that the market hasn’t given us any credit for, and I understand that because they are kind of unseen things you know, they are below ground things; we’ve ended the blockade, we’ve got the 43-101 out, we’ve completed the feasibility study, we’ve enacted many efficiencies, we’ve cut back our office space to half of what it was, our office staff is now bare bones. We‘ve got 3 paid employees in Vancouver, one consultant and one very part-time person.
I myself, have not taken a dollar from the company, I never have and I never will. I am getting my out of pocket expenses paid and I am working for options. We’ve cut back the Vancouver staff to the bare minimum. We’ve done the same thing in Mexico. All this is part of building a foundation.
One thing yet that we have to do, and this is the only thing that’s left, and then we’ll have the foundation complete. In Mexico right now, we have got good people running the mine, Louis Rey and his last name is spelled R E Y, as the mine manager, and he’s bringing the mine along. He’s a good, loyal honest person, he’s been there for years, he was the mill manager, we’ve made him mine manager. He attracted my eye a long time ago, as the very sort of person you want working for you. He was not part of the problem, he was always part of the solution, so we’ve advanced him. There are other good people down there, but they are the sort of people who can bring the mine along from day to day, he is not the person who can take this company to the heights that I believe it can go.
You see, in Mexico, on our lease block, we don’t have just one mine, which we are mining now, we are mining the La Guitarra mine and that mine has been mined for a very long time. It is an ancient lease block, we’ve got…when we bought it, it was something like 7,000 hectares and now it is up to 39,000 hectares because the scope of it just keeps expanding. (Following is a layout map of the Temascaltepec district owned by Genco Resources)
Figure 2: Genco Resources Temascaltepec Silver District. Note the Silver veins shown in red running for 14 kilometers.
In the center of our land package is a mineralized corridor over 14 kilometers long and 4 kilometers wide, we’ve only drilled about 5% of the known veins and so I mean it’s probably much more of an exploration story than a production story, although we are producing.
The mining in the district dates back over 400 years. It was probably a long time before that, because when Cortez got to Mexico, this was one of the mines that he began producing and we believe the Aztecs were there producing a long time before that, so it is not a flash in the pan. It is an ongoing story.
Yet of all the historic mines that are on this lease block only one, La Guitarra is producing. If you start in the south east you’ll look at Rincon, and at one time that was one of the largest Silver mines in Mexico. We’ve got Mina de Agua in that same area. We’ve sunk some drill holes there, we know that there’s ore there.
Then moving northwest, we’ve got a tremendous story under the basalt cap; there’s an entire 3 kilometers of length that simply hasn’t been produced, that’s potentially virgin ore. The reason is that, what they used to do, the Aztecs, and the Spanish, and even the previous operator Luismin, they would find the ore by surface expressions and they would find that, then they would follow it where ever it went.
Well, we’ve got this basalt cap, that before Genco no one’s ever mined under, because there is no surface expression of course, the basalt covers it. Well, we’ve sunk a few drill holes there, so we know the veins are there, but it’s not been fully drilled not anywhere near the extent that you need to drill it to fully understand it’s potential. There’s an entire 3 kilometers of potential virgin ore there and I don’t think anyone knows the extent of what we can gain there. One of the things that we are looking at is making that our next project, start mining in there. We’ve been de-watering it at this point and we are just about done.
Then continuing north-west, we’ve got La Guitarra, right around the mine, where we are mining now, there is an entire ramp, I shouldn’t say ramp I’ll say ramps plural under that mountain and various mines as you go along, there’s La Guitarra and from there you go into other areas. It goes under La Creston, which is the projected open pit area, it goes under San Francisco, it goes under Los Angeles, it goes under La Cruz which is a significant ore body and altogether to the other side of the mountain, we’re not quite out but we could punch through and that would do a lot of good for ventilation and so forth.
Then you go northwest from there, you’ve got Nazareno and you’ve got Coloso.
None of that has been mined in recent history, so I think you are beginning to get the picture. We need people there, who can handle a large complex mine you know and I don’t mean to diminish these people, it takes skill to keep a mine like La Guitarra going. We need skills far beyond that to get this project to its potential, so backing up a moment and then going forward with we are building a foundation yet. It would be foolish of us to go into these other areas without getting a proper foundation for it. But here’s the reason why I like Silvermex, these people are just tops for a company this size. They are a very small company and they only have a development project, they are not producing. I’ll use this analogy, they are like a farmer who has enough machinery for 10,000 acres but he doesn’t have a farm. Laughing…
Marco G. : Laughs…..
James Anderson: They need a project and this is the project that they like and for a very good reason. I’ll go into Silvermex for a moment. You’ve got the sort of people and you’ve got access to the sort of people who can take this where it should be.
Take a look at their board. You’ve got Art Brown for example, who was CEO, Chairman of Hecla until he reached retirement age and then he goes right into Silvermex.
Mike Callahan who headed Hecla’s Venezuelan division is President of Silvermex.
You’ve got a couple of board members who’ve I think was one of the founders of the present day Silver Standard in its present form, that would be Ken McNaughton. Then you have Joe Ovsenek, Silver Standard has undergone what you might say a reorganization, there’s been some changes at Silver Standard, but Joe’s still there and he’s one of the key people at Silver Standard and he’s on the board.
This is just kind of…I mean these are guys that can take a very small project with their experience and expertise and their contacts to make this a very large company.
And these people, Mike Callahan will be hands on, but it’s the contacts these people have, you might put it this way, you’ve got four or five people from Silvermex who are going to be key people, but that’s not the end of it. They’ve got, each of them maybe 100 contacts, so through this you’ve got access to maybe 500 hundred people.
These are not the sort of people you could otherwise access. I know people say, why don’t you go out and hire a CEO, sure we could do that, there are people who we could hire for CEO, and that’s been part of our efforts. It is not something that we haven’t thought of, we’ve been working on this for months, and we’ve interviewed many many people and we’ve interviewed good people.
The company the size of Genco can only hire into a certain level. I could toss out names, but you’re not going to get a Ken McNaughton. You’re not going to get Joe Ovsenek. You’re not going to get a Art Brown or Mike Callahan at a company this size unless you give away the store. And yet we’re not getting one of these people, we getting the entire team that’s coming in at one stroke.
Here’s another problem, for example we’ve tried to bring in the right person, that’s been one of our options, that’s one of the things that we’ve tried to do. I can see that we can get a person at a certain level, a person who can take La Guitarra and get it running efficiently but can we get the level of person and bring in the contacts that can take five or six or seven mines and get them all running and operating at once and feed them into an efficient stream and will have the contacts to bring in people bang, bang, bang as they are needed, and my judgment is no. We’ll get a good person, who can run a mine of maybe a million ounces, but I’ll be very cautious about the type of person we can hire, who’ll make that in the quickest time possible, what it should be and in my judgment is that we have to do it this way, and we are very fortunate to have this company there.
This company having a need for a project such as ours and the fact that these people who have a selection of projects would zero in on this company, I think that it says something about the quality of our asset. It’s one of these fits that I believe that two and two are going to be five, or six, maybe eight or ten or twelve. We’ve got the resource and now we’ve got the team that can move it forward, and beyond that, we are not stopping our discussions with Silvermex about what we’ve talked about to this point, there are specific identified people, if and when this merger is approved, that will be coming in immediately to move it forward.
We haven’t thought this thing through lightly, so going back to the beginning to kind of tie it up before I answer any other questions you have. This is the final building block in the foundation. When I bring in, I shouldn’t say I, it is too egotistical, but when we as a company bring in Silvermex, that’s the final block in the foundation. From then on we can begin building the house, I think our shareholders will be pleasantly surprised at how quickly that house can be built, once we have the foundation in place.
Marco G. : May I ask, did you approach Silvermex or did they approach you?
James Anderson: They initially approached me. Initially I had some of the same reservations that some of the people on our message board have been placing. But then I thought it through and it took me a couple of weeks to see it. Sometimes, things are just so obvious, that you just can’t see them. I started thinking that their great value is not so much their asset and they’ve got an asset that’s got value, I’m not saying that’s not the case, but we don’t really need an exploration project, not in our present form. But then I started to see it, and I started investigating their people and saw you know, it fits like a glove. And then not only have we got our asset but we’ve got their asset, that we can immediately go into once we’ve got Genco hitting on all cylinders. So from then on it started to fall into place very quickly.
Marco G. : Okay, that’s a great background and… lead in… too. Again, I am glad that I am talking to you. You can not get that kind …. this information elsewhere.
James Anderson: I’ll tell you something else too, that’s rubbed me a bit the wrong way. I read the message board of course and there’s just been a couple of posts that are irresponsible. I know that our investors can have different views on that and I respect that and I understand that. These are differences of opinion and I don’t claim to know everything there is to know about this. But there have been a couple of comments to the effect that what’s in it for Anderson besides what we see. I am quite disturbed about that and I’ll just simply say this. I own 17 and half million shares in this company. I own 11 million warrants combined, that’s almost 30 million shares. Every penny that this stock moves one way or another, it’s almost $300,000 dollars. To say or imply that there’s anything, that these people could pay me aside from stock value is absurd. I am doing this for the merit of the stock. I believe that it is there.
Marco G. : That’s great confidence. Having access to this information, I think shareholders and new shareholders would be quite interested.
James Anderson: I’ll say this, there are things that we could do, you know, day to day things, that might help the stock price a few pennies here and there, but I can’t emphasize this enough. I am not a trader! I mean, it doesn’t mean that I don’t feel bad about our stock price being so low, I do. Yet, I know you simply got to build the foundation. If you try to boost the stock price with nothing to support it, it is a house of sand. And I think we’ve proven that in the past. Even if you try to do that, I don’t think it would work. I am certainly no expert on how these markets work. Once you fool the market, building a house without a foundation, I don’t think the market is going to let you do it again. So I think it would be wise to do it different, I believe what we’ve got to do is build a foundation like what we are doing. We are almost there, if the merger with Silvermex is approved we will be there. I think our shareholders will be pleasantly surprised, because the house will go up quickly, in relation to what we’ve been through. Then I believe the share price will follow.
Marco G. : All right. May I then lead on to the next area for discussion. Where is the mine at presently?
James Anderson: You mean as far as production and such.
Marco G. : Yes.
James Anderson: Well, I don’t think I can speak beyond what is released publicly. We are producing. We are slowly making progress. I do have to emphasize the word slowly and I’ve explained this. We have people at a certain skill level. They can handle a mine of this size. It’s not going at lightning speed but we are slowly making progress down there. As far as the mill is concerned, the mill is in good shape. It always has been. It can handle all the ore that we can feed it. We not at full capacity yet, which would be 340 tons a day, 7 days a week. We are working in that direction. Right now, the bottleneck is mining. It’s not that we don’t have the ore ahead of us. I’ve covered that, we just have to get at it. We have to get the ramps and developments and so forth. We have to get our crews coordinated and we are working on it.
Marco G. : Okay, there is some question about moving forward to acquire more surface rights. Would you have any comments on that.
James Anderson: We have acquired some. Now here we go to the question of the open pit. The open pit in the feasibility study has identified the pit as La Creston. We’ve had different opinions on this as we’ve dealt with companies as we have dealt with Silvermex. Should we go into the open pit or should we not. Now, our feasibility study calls for spending approximately $150 million to develop this project including an open pit. That might get us to 4 million plus ounces a year, but it will take a lot of money to do it.
Now, we can develop underground at much less cost. I don’t think we can get to 4 million ounces, but we can do a lot more than we’ve done in the past. And it will cost us a lot less money than 150 million dollars. I don’t know that I can go into specifics here again, as it is not public information. For a relatively modest expenditure, with the Silvermex people; now this is going to take the right people and the right coordination. We couldn’t do it with the people we have right now. It would end up being one big mess. Not because they are not good people. You’ve got to have a certain skill level and a certain number of these skilled people to do this. Now if and when this Silvermex combination goes through, we believe we can expand production significantly for much more modest costs. Of course, when you do it in that fashion, you avoid an awful lot of dilution.
Marco G. : Dilution in terms of the stock float.
James Anderson: Yes
Marco G. : All right……..
James Anderson: Oh, you asked me about surface rights, maybe I went through that too quickly. We do not have the surface rights to the La Creston area. We have had discussions on this. We will get a lot more serious about purchasing those surface rights when we get a lot more serious about launching into that open pit. It may happen or may not.
Marco G. : Okay, fair answer. How about comments with the previous ownership of the Chief and sale to Andover.
James Anderson: I guess I’ll say this. It is obvious; that we’ve had some problems over that. $5 million dollars in Genco money was used to purchase the Chief stock. It was a significant cause of the proxy contest. We’ve been very, very fortunate to get any of that money back. It has been a long battle. We’ve got $700,000 that is due by the end of October, and its looking pretty good for getting that $700, 000. Assuming we get that $700,000 then we’ll have another $2,000,000 that is owing to us before the end of September a year from now. I’ll just say this about Chief, and I wish those people nothing but the very best, I hope they are very successful at Chief and I hope that they are very successful at Andover, because if they are, then we collect the rest of our money. Chief right now has got a large company Kennecott working on that property. It is one of those things, it could be very large, if they hit the right things with their drill holes or it could amount to nothing, I think we all know how exploration projects go. Right now, they are moving along with Kennecott. They‘ve done a good job of bringing Kennecott in and they were able to raise some money as I understand it on the back of that Kennecott interest. I’ll just put it this way, we want them to do well, we hope they do well, and if they do well we are going to collect the rest of our money.
Marco G. : All right. So what do you foresee now happening for the next couple of months till the end of the year and you’ve already outlined the good fit of Silvermex with Genco.
James Anderson: The focus right now is on getting things closed with Silvermex. I was in Toronto and New York last week with the Silvermex CEO Duane Nelson. I can tell you how encouraged I was in that trip. We went around to see major shareholders etc. There were doors opened to me that we’ve tried knocking on before with no interest what so ever. You know, you go around with people that are well known in the mining industry and have the connections that these people have; there was not a door that was not opened to us.
The comments that I heard at those meetings were just very favorable. Not only will these people want to work with us, not only are they sold on the merger, they want our business. That is something that will take us a dozen years as Genco alone to crack into.
The problem with Genco in my opinion has been this; we’ve released what I think is very good news over the last year. Ending that blockade was very good news. Getting our 43-101 where our reserves and resources went up by 4 times, I think that was very good news. Getting our feasibility study, I think that was very good news. The cost cutting we’ve done I think was very good news. Every time we’ve make a release like that, not only does our stock not go up, but it starts going down.
The reason I think is this, we’ve lost our creditability. We’ve spent years promising things that never came true. With a company, it is like a person who’s lost his credibility; you just don’t get it back any time soon if ever. It takes a move like this, a fresh face that’s coming in and taking over. That has come through Toronto and New York has confirmed to me that everything I suspected, that these people have credibility. You put these people in charge of Genco in a month. My sense of it is, in my opinion that you are going to start seeing things that we just haven’t seen previously at Genco.
Marco G. : Okay. Fair enough. We have the upcoming merger, the results of that ….in the press releases …the structure of the new company…so the date that we are looking for then is some time in November?
James Anderson: November 9 I believe is the present target date for a shareholder vote.
Marco G. : All right. We know you are very busy, and I want to thank you for taking the time to ….
Figure 3: 7 year chart for Genco Resources. Note the highs of $4 when Genco was previously producing.
James Anderson: Thank you. I want to close with this comment this analogy I use with people. Several years ago when our stock was at $5 a share, we were like the man who had cancer and didn’t know it. We looked well but we were really sick. Today, we’ve been through the cure. We’ve had the operation and the radiation and the chemotherapy. As a result, we look really sick, but we are well. Because we look sick, our stock is at 45 cents. The irony here is when we looked well but we were actually sick our stock price was high. Now that we look sick, but we are actually well, our stock price is low. We need help to bring us to that next level, because we are weak yet, we need help to realize the great value that is here in this company. I believe we have great ounces there, but without the help of the right people to get it out of the ground in the right fashion, I think we’ve seen plenty of examples of companies that have fallen on their faces at the critical moment and we don’t want to do that. The one thing that we’ve got to do now to complete the foundation is to bring in the right people and then I pass the football to them and they march it forward.
Marco G. : Well, that’s excellent, I am very happy you made the time to talk to me.
Analysis of Prospects Going Forward
The author usually selects prospective investments based upon macro trends. The large trend affecting Genco Resources here is the rising precious metals prices. It you are a previous reader, then you should understand my rationale for selecting a junior silver stock story. The author believes that Silver will outperform Gold in the next near while. The author also believes the best gains will be made in the junior mining stories.
Specifically, why the author became interested in Genco, was the reserves and resources reported in the NI 43-101 in January of this year. A summary of the report is in the chart following:
Figure 4: Genco Resources NI 43-101 Reserves and Resources. Total is about 200 million ounces in Silver equivalent resources.
That chart above gives about 50 million Silver equivalent ounces in reserves for mining and 150 million in resources that were inferred but not with the same certainty. Here is the link for the Genco corporate presentation from March 2010: http://www.gencoresources.com/i/pdf/CorporatePresentation.pdf.
The main driver behind the company and creation of value that the author looks for is the quality of management. Mr. Anderson fits the bill here, but what has just happened with the Silvermex offer simply just trumps the deck. The author is in full agreement, that the executives with Silvermex will certainly restore credibility with Genco shareholders.
As is usually the case, when in talking with people, you just get much more information than if you were reading the information from paper or off a website. It is all in the manner of the presentation and the subtle emphasis that this information comes forwards. In Genco’s case, this is indeed a long time high grade Silver mining district. The veins are there in a trend, some visible on surface and some covered with basalt. This speaks of huge potential, more so than the certainty expressed in the 43-101 document which only covers a portion of the area that has been properly drilled off. The rest is just my speculative potential.
The three yardsticks, that the author uses for measuring mining equities is increasing production, increasing reserves and great exploration results. From the interview, I believe there should be new production plans forthcoming following the merger for vastly increasing production. As to reserves, the area is just ripe for increased reserves with more drilling with the many possible mining areas feeding a central processing mill. As to the great exploration results, well, where should you drill when you are in a swarm of veins, some of which may carry bonanza grades?
Now the political issues that caused Genco’s share price decline over time seems to have been solved. This loss of confidence in Genco is not assigning any value to Genco’s reserves and resources and is certainly discounting their production capabilities. Genco seems to have much potential as a Silver and Gold producer, and especially with the introduction of a new experienced management team from Silvermex.
Summary
Investing in risky junior mining stocks is not for everyone. The author attempts to mitigate that risk by performing a lot of analysis and understanding the macro trends and the specific details behind each prospective company. In the author’s opinion, there can be no denying that the new company formed from Genco and Silvermex will have great management. Also, there can be no denying that the new company will have great reserves and resource potential. As for production and profits, that is yet to come, but astute investors may start to understand the large opportunity that is presented here.
The author is long Genco Resources - GGCRF, TSX:GGC
Important Disclaimer
The information and opinions contained within this document reflect the personal views of the author and should be viewed as food for thought and amusement only. The author may from time to time have a position in any of the securities mentioned. There are no guarantees of the accuracy, reliability or completeness of the information contained herein. Independent due diligence and discussions with one’s own investment and business advisor is strongly recommended. These writings are not to be construed as an offer or solicitation with respect to the purchase or sale of any security or as an endorsement of any product or service. We do not request or receive compensation in any form in order to feature companies in this publication. It is prohibited to copy or redistribute this document to any type of third party without the express permission of the author. This document may be quoted, in context, provided proper credit is given.
Figure 3: Silver moves since August 23rd, 2010. All indicators shown are bullish. The RSI is turning upwards. The price bowl looks poised for a break upwards. The volume is increasing, supporting the price moves. The MACD and STO are curling upwards.
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