The closing date of the merger between
In early September, shareholders of both companies approved the proposed merger, which will see Pan American issue 0.385 of a share and 0.1925 of a warrant, representing 8 million shares and 4 million warrants, to acquire Corner Bay and its key asset, the Alamo Dorado silver project. A whole warrant will entitle the owner to buy a share of Pan American for $12 over five years. Pan American has 43.2 million shares outstanding and is trading around $9.20.
The Alamo Dorado project contains 77 million oz. silver and 297,000 oz. gold in a proven and probable reserve of 35.5 million tonnes grading 68 grams silver and 0.26 gram gold per tonne.
A bankable feasibility study completed in July 2002 by AMEC E&C Services concluded that a 12,500-tonne-per-day (4.5-million-tonne-per-year) crushing and heap-leaching operation could produce 6 million oz. silver and 29,000 oz. gold annually, or 7.9 million oz. silver-equivalent, over a mine life of eight years. Cash costs are estimated at US$3.25 per oz. silver-equivalent, with total costs pegged at US$4.13 per oz. The project will cost US$45 million to build.
Corner Bay has struck a conditional water rights agreement with a local agricultural co-operative to draw water from the Miguel Hidalgo reservoir, 12 km from the project site. The water rights cover a sufficient quantity of water, under any circumstances, to run the proposed heap-leach operation. The agreement is in the process of being ratified and is making its way through the approval process on local, regional and federal levels.
“It is essential that we have a water supply for the new mine we propose to build at Alamo Dorado, and we simply have to go through the lengthy approval process under Mexican laws and regulations to ensure this,” says Pan American Chairman Ross Beaty. “The timeline is beyond our control and that of Corner Bay. We’ve had good support from the Mexican authorities and I hope the process will be completed soon. It has taken much longer than any of us expected but there is little we can do about this.”
In the meantime, Pan American continues to be affected by low metal prices, especially at its Quiruvilca zinc-silver mine in northwestern Peru. During the third quarter of 2002, the company wrote down the carrying value of Quiruvilca by US$15.1 million after concluding that it was unlikely to recover its investment at current metal prices.
“We’re doing our best to limit operating losses,” says Beaty. “At these prices, Quiruvilca simply cannot make money.”
An underground narrow-vein mine, Quiruvilca does not lend itself to modern mechanized mining. It is labour-intensive and, at the end of 2001, was directly employing 670 people and 756 contract workers.
The mine produced 594,463 oz. silver and 4,622 tonnes zinc for the third quarter at a cash cost of US$5.20 per oz. silver, net of byproduct credits, and a total cost of US$6.97 per oz. Production for the first nine months of the year totalled 1.9 million oz. silver and 13,854 tonnes zinc, plus 5,070 tonnes lead and 771 tonnes copper, at a cash cost of US$5.04 per oz. and a total cost of US$6.62 per oz.
Despite efforts to reduce costs, mine revenue has declined as a result of lower metal prices and a drop in silver grades as the more silver-rich veins in the upper parts of the mine are depleted and production comes from the deeper, zinc-rich veins. The company is examining all options regarding the mine’s future. Quiruvilca has been in operation since 1925. Pan American assumed operatorship of Quiruvilca in late 1995 when it acquired Asarco’s 99.7% interest in the mine.
Peruvian laws make it difficult to close a mine, either temporarily or permanently, notes Beaty. The laws dissuade companies from temporary closure by requiring that the mine’s workforce be kept on the payroll, which makes for expensive care-and-maintenance costs.
“If it’s a permanent closure, you’ve got to then start closing the mine down and doing things that are irreversible,” says Beaty. “That’s not terribly sensible because the mine has long-term reserves, and the veins are wide open to depth.”
At the end of last year, proven and probable reserves stood at 2.7 million tonnes grading 4.59% zinc, 1.67% lead and 0.46% copper, plus 192 grams silver per tonne, equilvalent to 17 million oz. silver.
The Quiruvilca mine lies within 15 km of
Option agreement
Pan American holds ground under option to Barrick, 3-4 km away from the discovery area. Barrick has spent more than US$1 million exploring the Los Angeles package and, since optioning the property in April 2000, has paid Pan American $200,000 in cash. The option agreement calls for annual payments of US$100,000 until 2005 and US$200,000 per year thereafter, plus annual exploration expenditures of at least US$500,000.
Barrick can purchase the 35-sq.-km property by reaching a production decision and by paying US$5 per oz. of proven and probable gold reserves defined in a feasibility study.
More recently,
Much of the contained gold is refractory in nature, requiring costly processing. After incurring exploration expenditures of US$4.5 million, Battle Mountain deemed the project uneconomic and handed it back to Pan American and Oroperu in December 1999.
In light of today’s higher gold prices and the Laguna Norte discovery, the Tres Cruces project was reactivated. A restructured New Oroperu first struck a deal to acquire Pan American’s half-stake by agreeing to spend more than US$1.7 million over 42 months and issuing 1.5 million shares to Pan American over 30 months. Once New Oroperu fulfils the option agreement, Pan American will receive additional shares to hold a 20% interest in the company, while retaining a 2% net smelter return royalty.
Separate deal
New Oroperu then struck a separate deal with Barrick, which can earn an initial 65% interest in Tres Cruces by spending US$1.7 million over the next 40 months and carrying New Oroperu through to a production decision. In addition, Barrick will make cash payments totalling US$700,000 over 42 months and US$250,000 per year thereafter.
Pan American reported a net loss, including the writedown, of US$17.4 million (or 40 per share) in the 3-month period ended Sept. 30, 2002, versus an income of US$700,000 (2 per share), after a US$3.5 million unusual gain on the sale of land, in the third quarter of 2001. Excluding the writedown and unusual gain, Pan American lost US$2.3 million (5 per share) on revenue of US$11.2 million for the quarter, compared with a loss of US$2.8 million (7 per share) on US$13.8 million in revenue a year earlier.
Silver production from its three operations totalled more than 1.7 million oz. for the third quarter and 5.7 million oz. for the first nine months of 2002, compared with 2.1 million oz. and 4.8 million oz. in the year-earlier periods. Cash operating costs during the third quarter were 12% higher than a year earlier, coming in at US$4.53 per oz. silver, net of byproduct credits. For the 9-month period, cash costs improved to US$3.87 per oz. silver, with total costs of US$4.67 per oz., compared with US$4.28 and US$4.98 per oz. a year earlier.
Operations generated US$1.2 million in cash flow in the quarter. Investing activities at La Colorada in Mexico consumed US$3.2 million, and financing activities consumed US$1 million, including loan repayments of US$600,000. Working capital, including cash of US$18 million, stood at US$13.7 million at the end of the period.
Huaron mine
The Huaron silver-zinc mine in Peru operated well during the 3-month period, having produced 1.1 million oz. silver, 5,285 tonnes zinc, 3,338 tonnes lead and 471 tonnes copper at a cash cost of US$4.17 per oz. silver and a total cost of US$4.63 per oz.
“Huaron is proving to be a great mine, generating positive cash flow even at today’s depressed prices,” enthuses Beaty, “and it has a tremendous potential into the future.”
The company is proceeding with a US$1-million underground expansion program at Huaron that will increase production nearly 10%, while pushing the mill to 55,000-56,000 tonnes per month by late 2003. The mine contributed US$2.8 million in cash flow during the first nine months of this year. Proven and probable reserves at the beginning of the year amounted to 6.7 million tonnes grading 252 grams silver, 4.6% zinc, 2.4% lead and 0.5% copper, equivalent to 54 million contained ounces of silver.
The expansion at La Colorado in west-central Mexico is about a third finished. The company is beefing up the existing 200-tonne-per-day production by adding a 600-tonne-per-day cyanide leach circuit to process La Colorado’s oxide ore. The US$20-million expansion program will boost annual production to 3.8 million oz. silver for a minimum of 10 years. The mine expansion is on track for completion by July 2003.
Operations at La Colorada were temporarily halted for six weeks in the third quarter to allow for expansion work. The mine produced just 54,999 oz. silver in the quarter, versus 225,468 oz. a year earlier. Production resumed in September. La Colorado contains proven and probable reserves of 40 million oz. silver in 2.7 million tonnes grading 458 grams silver and 0.53 gram gold.
“La Colorada should be our lowest-cost operation when it commences, even at current silver prices,” says Beaty.
Two deals
Earlier this month, Pan American signed two deals with Volcan Compania Minera, a Peruvian zinc miner, regarding two large silver-bearing stockpiles adjacent to Volcan’s Cerro de Pasco operation in central Peru, 36 km from Huaron. Pan American bought a contract to supply silver-rich dump material to a nearby smelter.
The company expects to deliver 46,000 tonnes annually, representing 500,000 oz. silver at an estimated total production cost of less than US$2 per oz.
“It’s like having a small mine for about a 10-year life,” explained Beaty.
The deal is expected to generate a cash flow of about US$1.4 million a year. Pan American is paying US$4 million for the contract in the form of company shares.
The second deal gives Pan American a 4-year right to acquire the entire sulphide stockpile at the Cerro de Pasco operation, which is estimated by Volcan to contain 26 million tonnes grading 227 grams silver, equivalent to a 189-million-oz. resource. Pan American can earn an initial 60% interest by spending US$2 million on the project over three years. The company will then have a year in which to increase its interest to 100% by paying Volcan US$3 million.
Pan American’s immediate plans are to conduct definition drilling to confirm resource estimates, followed by metallurgical studies to determine a commercially viable solution to recover the contained silver.
“If we can find a metallurgically viable and economic method of recovering the silver, this should give us a long-life, large, pure-silver operation,” says Beaty.
On the exploration front, Pan American has resumed drilling at the 50%-owned Manantial Espejo gold-silver project in southern Argentina. The project is a joint venture with
Pan American has also begun drilling on six or seven targets at the Ocotlan project in Mexico.
“We remain committed to finding new silver mines, not just acquiring them, and will continue these efforts into 2003,” say Beaty.
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