The company offers strong growth that is highly leveraged to silver. It has the one operating mine in Peru, Quiruvilca, and plans to bring two other mines into production: La Colorada in Mexico and Dukat in Far Eastern Russia. As a result, the Vancouver-based outfit expects to boost silver production to more than 19 million oz. by 2001 from 3 million oz. in 1998.
For these and other reasons, Cooper recommends Pan American as a buy, with a target price of $12. The stock has been trading at $8.70-8.25 within a 52-week range of $15.75-7.35. Working capital at the end of 1998 was US$15.3 million, including US$10 million in cash. There are 28.6 million shares outstanding.
Recently, the company raised $32.8 million through an equity financing of 3.9 million units priced at $8.40 each. A unit consists of one share and half a warrant. One whole warrant entitles the owner to buy an additional share at $9 until Feb. 19, 2001. The syndicate of Canadian investment dealers that took down the financing included Goepel McDermid, CIBC Wood Gundy Securities, First Marathon Securities, TD Securities and St. James Securities.
The proceeds will be used to develop La Colorada as an 850-tonne-per-day, underground and milling operation capable of producing 4.5 million oz. silver annually starting in 2000.
La Colorada lies 130 km northwest of the city of Zacatecas in north-central Mexico. Pan American concluded the purchase of the past-producing mine in early 1998 for $2.1 million, 304,000 shares and a 5% net smelter return royalty, which can be reduced to 2%. Since then, the company has carried out underground development, reserve definition drilling and exploration drilling.
Prior to Pan American’s optioning of La Colorada, the mine had operated at 200 tonnes per day, but the worn-out state of the mining and milling equipment had rendered the operation unprofitable.
Mineralization at La Colorada is hosted in classic epithermal silver-lead-zinc veins typical of the region. Other styles of mineralization include transitional, replacement and breccia.
The vein systems host a mineral resource estimated at 3.2 million tonnes grading 599 grams silver, 2.4% lead and 2.4% zinc, including measured and indicated reserves of 1.6 million tonnes grading 539 grams silver and 4.8% combined lead and zinc.
In addition, an inferred resource of 1.1 million tonnes grading 236 grams silver, 3.25% lead and 6.3% zinc has been outlined from nine holes within a deep, high-grade replacement zone.
Lower-grade silver mineralization is known to occur in numerous breccia pipes. A 1996 study by Watts Griffis & McOuat concluded that the breccias contained a resource of 12.7 million tonnes grading 95 grams silver, 2% lead and 1% zinc.
Pan American plans to construct an 850-tonne-per-day mill on-site rather than incrementally add to the existing 200-tonne-per-day infrastructure. Assuming annual production of 302,000 tonnes averaging a diluted grade of 530 grams silver and 3% combined lead-zinc, La Colorada is forecast to produce 4.5 million oz. silver per year at a cash cost of US$2.30 per oz. (net of lead and zinc byproduct credits) and at a total production cost of US$3.87 per oz.
The total capital cost for the project is estimated at US$28 million. The project has an internal rate of return of 24% based on US$5 per oz. silver and US45 cents per lb. zinc.
The mine shaft and hoist have been rehabilitated, and a 3,700-metre program of underground development and reserve-definition tunnelling is in progress. Basic engineering has been awarded to H.A. Simons International, and the tailings design, to Agra Engineering. An environmental impact study is under way and conditional operating permits are expected by May. Mill construction is expected to last 10 months.
Analysts Chris Kwan and David Neuhaus of TD Securities (USA) rate Pan American as a speculative buy for its low-cost silver exposure, with a 12-month target of $13.25. The duo believes market fundamentals are positive for silver, citing critically low levels of warehouse inventories for much of the latter half of 1998. “Due to the solid fundamental demand and supply conditions for the silver market, we believe silver may be the first metal to break out of the slump that has hit all industrial metals and precious metals,” the analysts write. Their 1999 price target for silver is US$5.25 per oz., with a long-term forecast of US$6 per oz.
The TD analysts’ speculative buy rating highlights the added risks involved in bringing the company’s Dukat project into production by the end of 1999. The project is expected to require about US$89 million in debt and equity financing. “Given the current state of affairs in Russia, we acknowledge this will be a formidable, but not unachievable, task,” state the analysts.
Pan American recently reached an arrangement with the International Finance Corp. (IFC) to arrange financing for Dukat. The IFC will seek a technical, environmental, financial and legal appraisal of the project and prepare a term sheet outlining the proposed financial structure. Pan American says financing arrangements are on schedule to allow for a construction decision in the second quarter of 1999.
The Dukat mine is 400 km northeast of the city of Magadan and 36 km west of the town of Omsukchan. Kinross Gold’s (k-t) Kubaka gold mine is 400 km to the northeast.
The 35-sq.-km mining licence is held by ZAO Serebro Dukat, which is owned 70% by Pan American and 30% by Geometall Plus, a Magadan-based gold mining company that also has a 25% stake in the Kubaka gold mine. Geometall Plus is controlled by Western Pinnacle Mining (wpn-v), which owns a 74.4% position.
The Dukat deposit was discovered in the mid-1960s and placed in production in 1979. Although 80% of the production came from open-pit mining, more than 140 km of underground tunneling exists. The ore was concentrated at a mill in Omsukchan and transported by truck, barge and train to a smelter in Kazakstan, more than 10,000 km away. After the breakup of the Soviet Union, the operating company became insolvent and production ceased in 1995. The mine’s total silver production is estimated at 90 million oz.
In November 1997, Pan American and Geometall were awarded the Dukat licence in an open international tender for US$5 million. The former has since invested US$12 million in the operation.
In excess of 60 veins and mineralized structures are identified within the deposit. The veins are typically north-striking and subvertical, ranging in width from centimetres to tens of metres for an average of 4 metres.
The geological resource totals 31.4 million tonnes grading 473 grams silver and 0.98 gram gold per tonne, with proven and probable minable reserves estimated at 10.5 million tonnes grading 755 grams silver and 1.54 grams gold. The reserves translate into 238 million contained ounces silver and 464,000 contained ounces gold.
In August 1998, a bankable feasibility study by Kvaerner-Davy and GOT Engineering called for the development of a new mine, mill and processing facility that would produce silver dor on site. However, higher-than-anticipated capital costs of US$212 million rendered this plan only marginally economic.
A supplemental feasibility study, completed in December 1998 by Kilborn Engineering Pacific, was based on a revised development plan that focused on refurbishing the existing mine and mill facilities to produce concentrates. Capital costs were lowered to US$89 million, including US$9 million for working capital and US$9.9 million in contingency allowances. Additional sustaining costs to the year 2014 are projected at US$42.3 million.
Ore will be processed at the existing mill in Omsukchan at the annual rate of 380,000 tonnes per year, increasing to an annual 750,000 tonnes by the end of the second year. The silver concentrate will be trucked to Magadan for shipment to an offshore smelter. Production will average 15.8 million
oz. silver and 30,500 oz. gold per year over a minimum mine life of 15 years. The cash operating costs over the life of the mine will average US$1.51 per oz., net of gold byproduct credits, with total production costs, including all taxes, estimated to be US$3.54 per oz.
The updated study projects an internal rate of return of 22.5%, based on a silver price of US$5 per oz. and a gold price of US$300 per oz. This compares with a 10.7% rate of return shown in the August feasibility study, which used US$5.50 per oz. silver and US$325 per oz. gold.
Pan American’s Quiruvilca mine in northern Peru produced a record 3.1 million oz. silver, 22,415 tonnes zinc, 6,142 tonnes lead and 1,060 tonnes copper in 1998, compared with the previous year’s 2.8 million oz. silver, 21,984 tonnes zinc, 5,581 tonnes lead and 1,281 tonnes copper. Mill production for the year was 537,705 tonnes grading 206 grams silver, 4.62% zinc, 1.33% lead and 0.34% copper. Severe weather conditions between February and April of last year are to blame for a rise in cash costs to US$3.78 per oz. silver, with total production costs at US$4.56 per oz., versus US$2.45 and US$3.21 in 1997.
Proven and probable reserves stand at 3.1 million tonnes grading 218 grams silver, 4.9% zinc, 1.7% lead and 0.5% copper. An additional 2.6 million tonnes are categorized as possible.
For the year, Pan American lost US$6 million (or 24 cents per share) on sales revenue of US$30.2 million, compared with a loss of US$900,000 (4 cents per share) on US$27.8 million in 1997. The company attributes last year’s loss to higher exploration expenses, general and administrative costs, property writedowns, higher operating costs and lower investment income.
In addition to Quiruvilca, La Colorada and Dukat, the company holds a portfolio of “out-of-the-money” silver deposits in the U.S. and Canada. The TD analysts note that should silver make a sustained rally above US$7 per oz., these projects may be developed.
“Some may view these assets as a call on silver prices, with no foreseeable expiration date,” state the analysts.
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