La Colorada construction commences

With a US$10-million project debt facility in hand from International Finance Corp., Pan American Silver (PAA-T) has begun construction aimed at quadrupling production at its La Colorada silver mine in Mexico.

The expansion project will add a 600-tonne-per-day leach circuit to process oxide ore and will bring the mine’s total production rate to 800 tonnes per day. Production at the expanded rate is expected to begin in the third quarter of 2003, and will average 3.2 million oz. of silver annually at a total cash cost of less than US$2.70 per oz. over 13 years.

The expansion comes with a price tag of about US$20 million. Pan Am plans on financing the difference with cash on hand, which currently totals US$18.7 million.

The company will provide a corporate guarantee for the loan until financial completion, expected by mid 2004, and will repay the loan with semi-annual YS$1 million instalments beginning in November 2004. The loan agreement does not require Pan American to hedge any silver production. Construction is expected to take about 10 months.

Combined with the Huaron and Quiruvilca mines in Peru, the expanded production capacity at La Colorado will boost the company’s output to about 11 million oz. silver per year.

A feasibility study in late 2000 pegged La Colorado’s proven and probable reserves at 2.7 million tonnes averaging 458 grams silver and 0.53 gram gold per tonne.

In early 2001, a small-scale mine was started at La Colorada and has produced over 1.1 million ounces of silver to date. This mine uses the existing mill to produce concentrates from sulphide ore and is currently operating at a rate of 200 tonnes per day.

The company plans to drill test surface extension of the known oxide ore in the second half of the year.

During the first three months of 2002, Pan American posted a US$1.3 million (3 per share) loss, versus a year-earlier loss of US$1.5 million (5 per share). Operations generated a cash flow of US$1.6 million for the quarter.

Consolidated production amounted to 2.1 million oz. silver, 10,107 tonnes zinc, 5,441 tonnes lead and 669 tonnes copper, at a cash cost of US$3.84 per oz. silver and a total cost of US$4.63. Silver production for the year is forecast to reach 8.5 million oz.

In May, Pan Am bought back a 5% net smelter return royalty on La Colorada’s production for 390,117 shares worth US$3 million. The buy-back gave Pan Am a unencumbered 100% interest in the mine.

That same month, Pan Am, eyeing the 117-million-oz. Alamo Dorado silver resource in northern Mexico, agreed to acquire all the outstanding shares of Corner Bay Silver (BAY-T).

Under the proposed deal each Corner Bay share will be exchanged for 0.54 of a Pan American share, plus a quarter of a share in a newly formed exploration company managed by Corner Bay’s Peter Mordaunt. Pan American will own just under a 10% stake.

The deal, which has been endorsed by the boards of both companies, will see Pan Am issue about 11 million new shares, a 25% dilution to its existing base of 41.5 million shares outstanding, or 45 million fully diluted.

The deal is subject to shareholder approval. Pan American requires a 50% approval, whereas Corner Bay will need a 67% majority.

Pan Am would be paid a US$3.4-million break-up fee if Corner Bay terminates the deal.

Alamo Dorado is host to a near-surface resource of 117.5 million oz. silver and 447,700 oz. gold (or 142.8 million oz. silver-equivalent) in 79.6 million tonnes grading 45.9 grams silver and 0.18 gram gold per tonne.