La Colorada construction under way

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 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. Construction is expected to take about 10 months.

Production at the expanded rate is expected to begin in the third quarter of 2003 and will average 3.2 million oz. 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 US$20 million. Pan American Silver plans to finance 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 US$1-million instalments beginning in November 2004. The loan agreement does not require Pan American to hedge any silver production.

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

During the first three months of 2002, consolidated production from the three mines 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. The La Colorada mine chipped in 190,575 oz. silver at US$5.64 per oz. The high costs were attributed to poor availability of some of the older leased mining equipment.

Small-scale mining began at La Colorada began in early 2001, since which time more than 1.1 million oz. silver have been produced. The mine uses an existing mill to produce concentrates from sulphide ore and is now operating at the daily rate of 200 tonnes.

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

Plans call for the drill-testing of surface extension of the known oxide ore in the second half of the year.

Pan American finished of the latest first quarter with 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.

In May, the company 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 American Silver, 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 a revised deal unveiled June 19, each Corner Bay share will be exchanged for 0.385 of a common Pan American share plus 0.1925 of a Pan American warrant. Each whole warrant will allow the holder to buy a common Pan Am share for C$12 for five years. The warrants will likely be listed on the Toronto Stock Exchange.

Under the new plan, no provision is made for the creation and distribution of shares in a new exploration company.

With Corner Bay currently having 20.8 million shares on a fully diluted basis, Pan American is expected to issue about 8 million common shares and 4 million warrants.

To proceed, the deal requires a 50% approval by Pan American shareholders, whereas Corner Bay will need a 67% majority. Pan Am would be paid a US$3.4-million breakup fee if Corner Bay terminates the deal.

Alamo Dorado hosts 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 (T.N.M., May 27/02).