Grandich's Blog

In this industry you see a lot of stories about mining projects and upside potential that may or may not deliver the goods. Well Farallon is a story that has not only delivered but they have delivered virtually on-time and on-budget. Farallon’s President & CEO Dick Whittington is starting to make a name for himself as one of the CEO’s that actually sets target and delivers results despite all the market turmoil over the past two years.

Mr. Whittington has successfully positioned Farallon as an emerging, low-cost, mid-tier mining company. To kick-start construction, Farallon undertook a heavily oversubscribed equity offering in the fall of 2006. Subsequently, in the spring of 2007, Mr. Whittington brought in Rothschilds and Societe General for a $30 million bank loan to finance equipment. Then, in the spring of 2008, when silver prices climbed significantly, Mr. Whittington signed a deal with Silver Wheaton worth $80 million for less than 10% of the G-9 mine’s revenue. Mr. Whittington used these funds to pay off the bank loan and complete construction of the G-9 Mine.  More recently a $30 million term loan with Credit Suisse was signed in the summer of 2009. This deal is a 4-year term loan at a 6.9% fixed interest rate that I believe, is lower than Teck’s recent loan rates.  Through these various transactions, Mr. Whittington has adeptly maneuvered Farallon through the financial machinations of taking an exploration play into an operating mine. For a relatively unknown junior mining company to pull all this off through the worst credit markets since the Depression, IMHO gives a huge vote of confidence in the G-9 mine and the Farallon management team.

All things being considered, Farallon’s management and specifically Mr. Whittington has been instrumental in bringing the G-9 Mine forward through a very difficult timing in the past two years.  There are a few exceptional CEO’s that come to mind in this industry and I believe that very soon the market can fully understand the many accomplishments of Mr. Whittington and start to “back the jockey”, as I did in New Orleans back in 2005, when Mr. Whittington coined the phrase “Mine by ‘09”. It is now 2009 and Farallon has a mine!

Farallon released its 2^nd Quarter Financial Results on August 12, 2009. This was a particularly significant event as it was the first quarter of full commercial production at the G-9 Mine in Guerrero State, Mexico. The results speak for themselves. In their very first quarter Farallon was able to generate positive cash flow from operations of US$5.7 million dollars. For a new mine to generate cash flow in the first quarter of production is a remarkable achievement. As well, the cash costs of US$0.39 per lb of zinc are in the lowest 40% of zinc producers worldwide and show that the G-9 Mine is a high-quality asset.

Further development is in the works at Farallon including ramping the mill up to 2,000 tpd by July 2010, which can increase the production of zinc on an annualized basis to approximately 160 million lbs of zinc. And with improving cash costs, the G-9 Mine can become one of the most competitive zinc mines worldwide. In tandem, Farallon is resuming exploration work on the property. As Mr. Whittington says Farallon did not stop exploration on the property because they exhausted all of the exploration opportunity – quite the opposite. The company simply drilled off sufficient resources to have a critical mass of resources sufficient to build a mine. Over the last year, the focus was to get job #1 done – that of building the G-9 Mine, then turn the exploration taps back on.

As a result, exploration is expected to start again in earnest in October. The target is to increase the tonnage of high-grade resource at the G-9 Mine by 2 million tonnes over the next 12 months and provide for a re-rating on the stock valuation going forward.   A review of Farallon’s exploration news releases prior to shutting down exploration last year is most interesting. Six news releases in six months, each with excellent results – results that many company’s dream of – including the highest grade intersections on the property to date, 5 metres of 31% Zinc and 4% Copper.

The G-9 Mine seems destined to become a significant cash flow producer. As well, with the very real potential for resource expansion and mine-life increases, the Campo Morado property is shaping up to be a world-class mining district. Farallon owns 100% of the Campo Morado property and management has taken an excellent approach to exploring, financing, and developing the G-9 Mine. With this solid record of management this property is well on its way to become one of the leading mining camps globally and with it, Farallon can achieve its goal of being a low-cost, mid-tier mining company.