first majestic silver

The Ormetal Report

October 3, 1997

North America's only profitable pure silver play -

In the last silver issue, I mentioned FSR as a silver play worth watching. Since then, I had the opportunity to take a closer look at what they have to offer to investors in this market. I believe that I just found another great vehicule to participate in the coming silver bonanza. First Silver may not the only profitable silver producers these days, but it is most definitely the purest one. When this silver rally gets going for real, FSR will show what true leverage is.

First Silver Reserve Inc. is listed on the Resource Senior Board of the Vancouver Stock Exchange and should migrate to the Toronto Stock Exchange within the next few months. It meets all the requirements and management sees no reasons why it should not be approved real soon. The paperwork is in progress.

First Reserve has a market cap of C$38M with 35.3 millions shares outstanding currently priced at C$1.10. There are also some 2 millions options to buy stock at prices between 1.12 and $1.21 until year 2002 that are currently issued, as well as a smaller amount of 600,000 at $0.37 until April 1999, for a fully dilluted 37.9 millions shares.

FSR entered an agreement in December 1996 with the shareholders of Minera El Pilon S.A. de C.V., a private mexican corporation. The agreement called for FSR to issue 28, 745,000 common shares to acquire all the issued and outstanding shares of El Pilon. As a result, the former shareholders of El Pilon acquired control of First Silver. This was in fact a reverse takeover by El Pilon. The net results is that First Reserve is a canadian company that owns 100% of the San Martin silver mine, Jalisco State, Mexico.

Before I get into a detailed description of the mine, let me briefly talk about the philosophy of Timothy J. Ryan, President and Hector Davilla Santos, Chairman and CEO. Basically they both believe in the silver bonanza and think, like I do, that silver prices can only go higher in the years ahead. That is why their goal is to build up North America’s only profitable, publicly-listed, pure silver producer . Their objective is to distinguish themselves from polymetallic and silver-gold producers through the acquisition, development and production of additional silver properties and mines thereby providing maximum investment leverage to the price of silver. FSR also intend to get into joint venture on gold-silver or polymetallic deposits, but to get only the silver portions of the revenus or silver royalties after reaching appropriate agreements. In other words, First Silver view gold and other metals as contaminants to their pure silver strategy. You can’t believe in silver more than that! Mr. Davila Santos has been the owner and the operator of the San Martin mine since 1983, so you can bet he has a lot of experience in silver mining. Mr Timothy Ryan is a business man and has acted as a director of several canadian junior mining companies for the last 21 years. These two man should be able to get all the leverage possible from future silver prices.

As a newcomer in the public North American mining scene, First Reserve made two good moves to help establish its presence. They elected the reputable firm Coopers & Lybrand as their financial auditors. But more importantly, they appointed to the board of director Mr. Peter A. Crossgrove of Toronto. Mr. Crossgrove has extensive experience in the mining industry and is a director of Barrick Gold Corp,, Southern Africa Minerals Corp., Philex Gold Inc. and Band-Ore Resources. In addition, Mr. Crossgrove is a director of a number of financial, industrial and high technology companies in the USA and Canada.



The San Martin mine has been in production for 14 consecutive years. They are currently working on the steeply dipping Zuloaga vein from six levels. In 1996 the vein produced more than 2.2 millions ounces of silver. Operations have improved recently after the company installed new recovery equipment and the 1st quarter of 1997 came out at 654,604 ounces equivalent (including a small gold production of 1000 ounces a year). Management think that an annual throughput of 2.5 millions ounces should be maintained. To date, only 1.4 kilometers of the 5 kilometers long Zuloaga vein have been partially developed and it is only one of several parallel and intersecting mineralized veins within the area. Additionally, the mine property contains 15 known mineralized fault systems offering extensive potential for expansion and development.

The ore is process at a mill complex located 13 kilometers from the mine. The capacity of the mill is 600 tons per day for an annual total above 175,000 tons. Planning for a proposed expansion continued during the last quarter and discussions were initiated with sources of debt financing for the project which is expected to cost US$10 millions and will require 15 to 18 months to complete. A doubling of the current capacity is proposed.


Reserves and Potential -

Private mine operators in Mexico have never been concerned with reserves expansion. They were basically developing ore progressively and simultaneously to production. This is normal as private companies are not valued by the markets. As long as they had a few years of reserves in advance, that was good enough. But now that the San Martin is own by a public company which has an agressive strategic plan, development of reserves is a top priority. Therefore, for the first time, the mine is ongoing a continuous exploration program designed to increase both the proven reserves and the geological resources.

As of September 1996, the Mexican operators retained Pincock, Allen and Holt from Denver to evaluate reserves and resources which came out at a total of 14.7 millions ounces with 7.4M in the proven category, 3.2M in the probable category and 4.1M ounces in the possible category. No additional geological resources had been identified. In the first quarter of 1997 alone, First Silver drilled the current workings and increased the total reserves to 20M ounces of silver with more than 11M in the proven category. FSR also drilled a hole which intersected the orebody some 1 kilometer past the current workings (2.4kms into the Zuloaga vein). By extrapolation of what has been mined over the last 14 years, the company is confident that it now has a geological resource of more than 41.5M ounces of silver for a grand total of 60M ounces of silver. FSR’s management is convinced that the Zuloaga vein contains in excess of 100M ounces of silver and they intend to progressively prove them up. For now, drilling in the current workings area is continuing and a new reserves calculation will be available before the end of 1997.

In summary, total silver reserves and resources at San Martin, on one of the 15 veins in the system stand at 60M ounces of silver with this single vein being only 40 % explored. The average grade on the property is 12-13 ounces of silver per ton and allows some very low production costs. With the coming mine expansion, more than 5 millions ounces of silver will be produced per year. So current reserves are good for 4 years based on the new production rate. (8 years with the current rate).

Economics -

In 1996, the mine turned out a net profit of $2.4 millions or approximetely $0.07 per share. The 1st quarter ended March 31, 1997 came out at $759,592 on revenus of $4.2 millions. This profitability is remarkable given a realized silver price of only US$4.99 in the 1st quarter. Operating costs per ounce are the lowest in the industry at a level below US$2.60 per share. So it looks like profitability is almost garanteed for the several years to come, unless, of course, a major deflationary depression bring down silver prices dramatically. The company currently has more than $4 millions in current assets and some $2.7 millions in current liabilities. Long term debt stands at $3.3M. Current obligations are easily covered by incoming cash flows.

Technicals -

The stock resumed trading on the Vancouver Stock Exchange last February after a 3 months halt pending the review of the reverse takeover by the authorities. Upon reopening, it rapidly moved up to the C$1.80 level. This was at the time when the precious metals markets were still kind to us gold and silver bugs. Since then the stock corrected to a low of $0.65 this summer and is now trading in the $1.10-$1.20 area. There is currently very little volume and the stock looks highly illiquid. That is normal given the fact that the current float is less than 5M shares. More than 27M are restricted from trading untill February 1998 or held in escrow until sufficient cash flows are achieved. The owner of most of these shares is the current chairman Mr. Davilla Santos and I am told that there is no way he will dump these shares on the market when they become free trading. Still, there is no doubt that liquidity will improve gradually in the years ahead as the stock move higher on higher silver prices. The current trend is clear, and if silver continue to go up, this illiquidity in FSR will produce gigantic runs up.

Other Properties -

I mentioned earlier that First Silver Reserve has a strategic plan. Well it also includes the long term. And to that effect, FSR is looking for acquisitions. It has already acquired an option on the La Chica property some 200 kms N.W. of Guadalajara, Jalisco State where limited trenching there has located grades of 5 ounces per ton. A small exploration program budgeted at US$50K is in preparation.

At the San Martin mine, the company added an additional 167,500 hectares.

Finally, FSR purchased an option to acquire a 60% interest in the Palmarejo precious metals project located near Ameca in Jalisco State, Mexico. The project contains several hold workings.

First Silver Reserve Inc. is ready for the silver bonanza.

Gold is widespread in low concentrations in all igneous rocks.
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