Pan Am Silver’s La Colorado Skarn project is large but manageable, BMO says

Pan American Silver’s (TSX: PAAS; NYSE: PAAS) La Colorada Skarn project in Mexico could mine 50,000 tonnes of ore a day to produce 17.2 million oz. a year of silver, according to a preliminary economic assessment.

The project in central Mexico’s Zacatecas state has an after-tax net present value of $1.09 billion at an 8% discount rate with an after-tax internal rate of return of 14%, the Vancouver-based company says in the report released on Monday. It would also produce 427,000 tonnes zinc and 218,000 tonnes lead annually for its first decade, it said.

Pan American envisions a sub-level cave mining method, conventional zinc/lead flotation processing plant and drystack tailings facility to produce “meaningful levels” of silver, lead and zinc, BMO Capital Markets says in a note on Tuesday.

“This is a large project for Pan American Silver but in our view it is a manageable size for the company to build,” mining analyst Jackie Przybylowski said in the note.

However, the analyst estimates $3.5 billion to build the project compared with the study’s $2.8 billion because of early-stage risks with at least three years to go before building.

“Our expected construction period 2027-2032 and production start in 2033 fits well with the depletion of the current La Colorada operation, which we anticipate in 2032,” Przybylowski said.

The unit operating cost including mine, mill and general and administrative costs averages $40.88 per tonne over the 17-year mine life, Pan American said. Estimates show sustaining capital at $951 million and cumulative after-tax cash flow of $5.7 billion. The study uses prices of $2,800 per tonne zinc, $2,200 per tonne lead and $22 per oz. silver.

2018 discovery

The La Colorada Skarn deposit, discovered in 2018, holds 95.9 million indicated tonnes grading 2.8% zinc, 1.3% lead and 31 grams silver per tonne for 94.4 million oz. contained silver, according to a resource update in September 2022. It has 147.8 million inferred tonnes at 2.3% zinc, 1% lead and 28 grams silver for 132.9 million oz. silver.

“Given the volume of base metals in the deposit, Pan American is assessing interest from base metal producers and other capable parties to explore long-term partnerships to develop this polymetallic project,” president and CEO Michael Steinmann said in the release. “Our objective is to provide investors with exposure to silver.”

Output from the La Colorada mine, which is above and beside the Skarn project and usually the company’s largest silver producer, fell nearly a third to 1 million oz. in the three months to Sept. 30 because ventilation problems shut the operation for 14 days. A new air shaft and surface fans should remedy the issue by mid-next year, the company said in November.

Overall, the company produced 5.7 million oz. silver and 244,200 oz. gold during the quarter. Silver production was at the low end and gold production was slightly below management’s guidance ranges.

The company suffered an armed robbery of concentrate from La Colorado on Oct. 5 and placed operations on care and maintenance for 10 days.

This year’s 40,000 metres of drilling at La Coloado Skarn wasn’t included in the study’s mine-life estimate and could, with continued drilling next year, grow the project, BMO said.

“We expect that the project will be further expanded and de-risked as development continues,” Przybylowski said. “Economies of scale could also be improved further. Pan American also notes that expanded sub-level cave and block cave mining methods will be evaluated in future studies.”