Pan American in red despite higher output

Vancouver — Despite an increase in production, Pan American Silver (PAA-T) suffered a loss in the second quarter, reflecting a 26-year low for silver prices.

The company posted a net loss of US$2.8 million (or US8 per share) on revenue of US$8 million for the period, compared with a year-earlier loss of US$752,000 (US2 per share) on revenue of US$7 million.

For the first six months of the year, Pan American incurred a loss of US$4.4 million (US13 per share) on revenue of US$12.6 million, compared with a loss of US$1.5 million (US4 per share) on US$14.3 million in the first six months of 2000.

The poor results are attributed to weak metals prices and delayed shipments of zinc concentrate. The average realized silver price for the quarter, net of refining costs, was US$4.05 per oz., 8% lower than a year earlier. Similarly, the average realized zinc price, net of refining costs, was US42 per lb., down 18% from the year-ago quarter.

“Silver was down 13% from June 30, 2000, to June 30, 2001, and zinc is down 21% over the same period,” says Ross Beaty, chairman of Pan American Silver. “This downturn has had a profound effect on our profitability.”

Total silver production for the quarter weighed in at 1.7 million oz. an increase of 93% over a year ago. Zinc production increased by 18% to 7,197 tonnes, lead production jumped 114% to 4,567 tonnes, and copper production swelled 62% to 482 tonnes.

The increase is a result of limited production from the company’s Huaron and La Colorada mines, in Peru and Mexico, respectively. The quarterly cash cost per ounce of silver, net of byproduct credits, was US$4.12 (compared with US$3.13 a year earlier), while the total production cost amounted to US$4.87 per oz. (up from US$3.95). Pan American attributes the increase to lower zinc prices and higher-than-expected startup costs at the Huaron mine.

Huaron mine

Commercial production at Huaron began in April and resulted in a small operating contribution. Pan American states that full-scale production at 50,000 tonnes per month is now being achieved. To date, the mine has cranked out 687,000 oz. silver, 1,882 tonnes zinc, 2,286 tonnes lead and 210 tonnes copper. Huaron generated a positive operating cash flow of US$140,000 in June.

In early August, Pan American reached an agreement with a local Peruvian mining company for an exchange of about 2 sq. km of exploration ground near its operation plus an additional 90 sq. km with copper and zinc potential. Pan American gets US$200,000 in cash and 500,000 of the company’s stock, as well as the remaining 27% of Huaron shares not held by Pan American. This will be recorded during the third quarter as a US$2.5-million gain. As a result, Pan American now holds all of the Huaron mine and 690 sq. km of the surrounding property.

Meanwhile, the La Colorada mine added 229,610 oz. silver, 42 tonnes zinc and 90 tonnes lead to Pan American’s coffers during the quarter. The limited-scale operation met the company’s goals of generating sufficient cash flow to offset the holding costs and maintain an operating team until Pan American can justify building a larger mine. The company has reviewed the economics of a 750-tonne-per-day operation, and such a mine would appear to be profitable at today’s metal prices. The capital costs would come in at US$20 million, as opposed to the previously estimated US$31 million, for a 1,000 tonne-per-day operation.

“We are now discussing various financing options with our advisors,” says Beaty. “We do not wish to finance the project with any equity offering, and we are looking at different alternatives, such as debt or silver backed debt.”

Quiruvilca

Production from the Quiruvilca mine, in Peru, totalled 808,699 oz. silver and 5,273 tonnes zinc during the second quarter. This compares with 895,115 oz. silver and 6,112 tonnes zinc in the comparable period of 2000. The decrease is due to the company’s new policy of eliminating production from lower-grade stopes. The revised mining plan at Quiruvilca has reduced 100 contract labour positions.

“Operating costs per tonne continued to decline due to cost-saving measures,” says Beaty. “Unfortunately, our revenue decline was even greater, resulting in an operating loss for the quarter for the mine.”

Pan American’s goal for the mine is to break even during the last half of the year.

At June 30, Pan American had a working capital of US$2.7 million, which is largely the result of completing a US$9-million equity financing late in the second quarter. This was offset by US$1.3 million in debt repayments and capital expenses of US$1.6 million. At the end of the second quarter, the junior miner reported a cash position of US$8.6 million.

On the exploration front, Pan American, has signed an option to buy the high-grade Ocotlan silver-gold vein deposit, which supports a small-scale mining operation. Surface exploration is under way and a drill program is scheduled for late September.

At the Los Angeles gold project, near the Quiruvilca mine, Barrick Gold (ABX-T) has completed a drill program and is reviewing the results. Also in Peru, Anglo American (AAUK-Q) has entered into a joint-venture agreement to explore 290 sq. km. Anglo is required to spend US$3 million over four years.