Pan American finds silver lining

Having recently acquired the past-producing La Colorada silver operation in Mexico’s Zacatecas state and a 70% interest in the world-class Dukat silver deposit in Russia’s Far East, Pan American Silver (PAA-T) is poised to break into the upper echelon of primary silver producers.

La Colorado could double the company’s annual output to 6 million oz.

silver by the year 2000, and Dukat has the potential to further increase Pan American’s attributable silver production to more than 16 million oz. a year by 2001.

Last year, the company’s 99.7%-owned Quiruvilca mine in northern Peru produced a record 2.8 million oz. silver, as well as 21,984 tonnes zinc, 5,581 tonnes lead and 1,281 tonnes copper. Cash operating costs came in at US$2.45 per oz. silver, net of byproduct credits, and total cost was US$3.79 per oz. The mine generated a profit of US$2.2 million in 1997.

Pan American acquired Quiruvilca from Asarco (AR-N) in 1995. Asarco retains a 20% net profits interest royalty.

The Quiruvilca mine has operated for more than 70 years. Current ore reserves stand at 2.9 million tonnes grading 248 grams silver per tonne, 5.68% zinc, 1.83% lead and 0.6% copper, enough for approximately five years of production at current levels. An additional resource is estimated at 2.2 million tonnes grading 212 grams silver, 4.9% zinc, 1.8% lead and 0.3% copper.

For the first three months of 1998, the Quiruvilca mine produced 673,466 oz.

silver, 4,749 tonnes zinc, 1,321 tonnes lead and 276 tonnes copper.

A 7.7% drop in silver production from first-quarter 1997 levels is blamed on difficult operating conditions resulting from heavy rain associated with the El Nino weather phenomenon. However, Pan American remains optimistic that it will reach its 1998 production target of 3 million oz. silver at a total cash cost of US$3.79 per oz. or better.

Cash operating costs in the first quarter averaged US$2.84 per oz. silver and total cost reached US$4.51 per oz. Approximately half of the mine’s revenue is attributed to silver, but higher silver prices were not enough to offset lower base metal prices.

Capital expenditures on Quiruvilca this year, including mine development and construction of a water treatment plant, are expected to total US$10 million.

In mid-March, Pan American concluded the purchase of full ownership in La Colorada following the completion of 5,975 metres of due diligence drilling and a positive in-house prefeasibility study on expanding mine production to at least 600 tonnes per day. La Colorada was purchased from partners Ramon Davila and Jaime Gutierrez, the sole owners of Minas La Colorada, for US$2.1 million cash, 304,000 shares and a 5% net smelter return (NSR) royalty that Pan American can pare to 2% by paying US$2 million within five years. Davila was recently appointed president of Pan American’s wholly-owned Mexican subsidiary, Plata Panamericana.

The Northern Miner recently toured La Colorada, which is situated in the historic Chalchihuites mining district of Zacatecas state, 130 km northwest of the state’s eponymous capital and 143 km south of the city of Durango.

The project is accessible from either city by paved highways, followed by 23 km of gravel road.

The mine project comprises six blocks of exploration and exploitation claims covering 1,025 ha in a basin-and-range setting on the southeast flank of the Sierra Madre Occidental. A further 208 ha of claims lie to the north of the mine site.

La Colorada is centred on a series of narrow high-grade silver veins (typical of the region) and lower-grade breccia pipes hosted in Cretaceous limestones and Tertiary trachytic volcanic rocks.

Epithermal mineralization occurs as veins filling dilational faults and as disseminations replacing breccia matrix in diatremes. The veins occur as mutiple growth veins, with or without fault breccia. Silver mineralization is in the form of argentiferous galena, native silver and silver sulphosalts.

While silver production has been recorded since pre-colonial times, the historic mining of an estimated 20 million oz. has come primarily since the turn of the century. Prior to Pan American optioning La Colorada in October 1997, the underground mine had operated at approximately 200 tonnes per day.

However, the worn-out state of the mining and milling equipment had rendered the operation unprofitable.

Much of the historic mining exploited the Candelaria vein system (which includes the No Conocida and Veta Dos veins), the Recompensa vein system and the Campana breccia pipe. There are, however, more than 30 veins and 13 breccia pipes identified on the mine property. The exploited veins typically averaged 600 grams silver plus 3% combined zinc and lead, while breccia pipes have historically averaged 80 grams silver and up to 5% combined zinc and lead.

The underground workings extend for 1.5-km in length and 250 metres in vertical depth.

Consulting firm Watts, Griffis and McOuat (WGM) completed an audit of the reserves in mid-1996 that estimated combined proven and probable vein reserves at the Candelaria mine and the nearby Recompensa mine at 1.1 million tonnes grading 486 grams silver (for a contained 16.7 million oz.) and 0.27 gram gold, plus 1.03% zinc and 1.11% lead. An additional inferred vein resource was estimated at 820,000 tonnes grading 520 grams silver, 2% zinc and 2% lead, while a breccia resource was inferred at 12.7 million tonnes grading 95 grams silver, 1% zinc and 2% lead.

WGM concluded that the property had reasonable potential for another 2 to 3 million tonnes grading between 400 and 500 grams silver. WGM had been hired by ConSil (CS-V), which had signed a letter of intent with Minas La Colorada in July 1996 to acquire the mine property for 4 million shares, the assumption of US$2.5 million in debt and a minimum expenditure of US$6 million to upgrade the mine facility. However, the proposed deal was terminated in August 1997 because ConSil was unable to arrange financing.

To gain more confidence in the reserve potential of Candelaria and to justify expanding production to over 600 tonnes per day, Pan American’s due diligence program included resampling of many of the underground workings and drilling of 14 underground holes into the Candelaria vein system and 18 surface holes into other vein targets.

The surface drilling encountered significant results in two new veins, while returning sub-economic grades in many of the holes.

All but one of the underground holes intersected significant silver mineralization, extending the Candelaria vein system by at least 200 metres in depth and 800 metres along strike.

The last hole of the due diligence program made a significant discovery.

Hole PIC-9, drilled vertically below the lowest mine level (295 metres below surface), intersected 63 metres grading 282 grams silver at a downhole depth of 174 metres, including 1,109 grams silver, 7.02% zinc, 6.17% lead and 0.29% copper over a true width of just under 6 metres near the top of the intercept (starting at 196.1 metres) and 681 grams silver, 2.42% zinc, 1.1% lead and 0.2% copper over a true width of 9.06 metres near the bottom (starting at 219.6 metres).

Jorge Islas, Pan American’s exploration manager for Mexico, said the hole appeared to have intersected upper and lower veins separated by a mineralized zone of stockwork and brecciated limestone. The mineralized section may represent a deeper high-grade zone much wider than most of the region’s silver veins, which average 1.5 metres in width. It is believed that the zone may mark the transition from epithermal mineralization to skarn mineralization in a manner similar to a zone at the San Martin lead-zinc-silver mine 30 km to the north.

As part of the ongoing 12,000-metre drilling program, several new holes have been drilled into this new zone, but they have been limited by poor intersection angles due to the location of the drill station. Work is in progress to develop new underground stations that will allow a better drilling pattern on the new zone.

Based on underground sampling and limited due-diligence drilling, Pan Amer
ican has calculated a proven and probable oxide reserve of 231,936 tonnes grading 454 grams silver (for a contained 3.4 million oz. silver) plus 0.25 gram gold. A further 385,643 tonnes of material is classified as possible and 710,000 tonnes as potential, giving a total oxide resource of 1.3 million tonnes.

A proven and probable sulphide reserve is calculated at 251,215 tonnes grading 545 grams silver (for a contained 4.4 million oz. silver), 0.35 gram gold, 1.33% zinc and 0.52% lead. An additional 440,260 tonnes of material is categorized as possible and a further 523,000 tonnes as potential, for a total sulphide resource of 1.2 million tonnes.

The resource calculations do not take into account the aforementioned new zone found in hole PIC-9.

Rosie Moore, vice-president of corporate relations, remains confident that Pan American will double WGM’s reserve numbers. “We wouldn’t have bought it if we didn’t think we could double the reserves.”

While the due diligence drilling verified the lateral and vertical continuity of the Candelaria vein system, the holes were too widely spaced to upgrade the material to a reserve category.

“What we’re doing in the current 12,000-metre program is primarily upgrading the Candelaria resource material from an inferred to an indicated category,” said Moore. Other objectives of the drilling program include further testing of the deep mineralization encountered in hole 9 and a limited amount of exploration drilling on the Recompensa vein, Amolillo vein and some of the breccia pipes.

Pan American completed an in-house prefeasibility study on upgrading and expanding the Candelaria mine complex, and constructing a new 600-tonne-per-day mill. The study was prepared with input from Beacon Hill Consultants and Agra Earth & Environmental.

Work to date has shown 600 tonnes per day to be the minimum economic size for a new mine at La Colorada, but a decision on the proposed size of the new mine will not be made until after the completion of the $2.9-million reserve development program now under way. The 6-month program involves 12,000 metres of drilling, 1,160 metres of underground drifting and some shaft rehabilitation work.

The prefeasibility study recommended that Pan American acquire La Colorada with the expectation that the operation could yield modest but positive results at a US$5-per-oz. silver price. The study concluded that the property could be returned to production as a primary silver mine by late 1999 at a relatively modest capital cost of US$21.5 million.

Cash flow projections indicate an internal rate of return of 8.1% on the total investment. If silver were to hit US$6 per oz., the rate of return would jump to 16.9%.

Utilizing cut-and-fill underground mining methods, a 600-tonne-per-day (210,000 tonnes per year) operation is forecast to produce 2.9 million oz.

silver annually over a mine life of 13 years at a cash operating cost of US$2.83 per oz. (net of byproduct credits and including the 5% NSR royalty).

Metallurgical testwork was performed by Vancouver-based Process Research Associates. The bulk of the testwork consisted of selective flotation tests on both the sulphide and oxide ore types, as well as gravity and cyanidation tests for the oxide ore. A clean bulk silver-zinc-lead concentrate can be floated from the sulphide ore, and a relatively high silver recovery (87%) is anticipated.

The initial testwork on the oxide material, using cyanidation, recovered up to 67% of the silver. Further testwork on five samples has since indicated oxide silver recoveries ranging from 71% to 93%. Pan American believes an ultimate recovery of 76% is achievable for the oxide ore.

The sulphide material is calculated to have a net smelter return of US$73.18 per tonne, while that of the oxide material is estimated at US$54.34 per tonne. Operating costs are projected to average US$40.93 per tonne for the combined oxide and sulphide ore.

The second phase of development is slated to begin in late 1998, following the determination of the size of the new mine/mill complex. The US$21.5-million development program will include the sinking of a new production shaft, expansion of the mine workings and the construction of a new mill facility and tailings pond.

Environmental studies now in progress are addressing such issues as the erosion of the old tailings dam, which can be repaired for US$400,000.

In the meantime, a bankable feasibility study on the past-producing Dukat mine in Russia’s Far East is scheduled for completion in July. The study is being prepared by Kvaerner Metals and GOT Engineering.

Last November, Serebro Dukat, a Russian company owned 70% by Pan American and 30% by Geometall Plus, won a tender to develop the Dukat silver deposit.

Geometall Plus is 45% owned by Western Pinnacle Mining (WPN-V).

Dukat lies 400 km north of the Magadan region’s eponymous capital and 300 km southwest of the Kubaka gold mine. Geological reserves and resources total 31.4 million tonnes grading 473 grams silver and 0.98 gram gold, equivalent to 477 million contained ounces silver and 1 million contained ounces gold.

The mine, open from 1979 to 1995, was a combined open-pit and underground operation. Ore was trucked 42 km to a processing plant where a concentrate was produced. The concentrate was then trucked, barged and railed over 10,000 km to a smelter in Kazakstan. High transportation costs were the mine’s undoing, and the operating company became insolvent by the end of 1995.

The bankable feasibility study is assessing the viability of developing an 730,000- to 930,000-tonne-per-year underground mining operation with an on-site mill that would employ crushing, grinding, flotation and electrowinning to produce silver-gold dor. Preliminary estimates of recoveries are 90% for silver and 95% for gold.

The US$150-million project is forecast to yield 14 to 15.5 million oz.

silver and 25,000 to 30,000 oz. gold per year over a mine life of 21 years at a cash operating cost of US$2 per oz. silver (net of gold credits and excluding royalties and refining charges).

Discussions with Russian authorities regarding tax levels, royalties and export arrangements are ongoing. Mike Westcott, a Vancouver-based mining analyst with Goepel McDermid Securities, stated in a research report dated May 8, 1998, that; “Under the current Russian system, taxes and royalties that would apply to the Dukat mine are excessive, equating to approximately 25% of net smelter royalties.”

In a research report dated April 30, 1998, St. James Securities analyst David Meyer wrote that Pan American assumed a 33.4% combined royalty and tax regime, in conjunction with a refining rate of 5.8% of gross revenue, for preliminary project cash flows that would yield an internal rate of return of 12% at a US$5-per-oz. silver price and a US$300-per-oz. gold price. If silver were to hit US$6 per oz., the internal rate of return would rise to 19%.

Pan American expects to commence underground development at Dukat by late 1998, en route to a fourth-quarter 2000 startup date.

In addition to Dukat, La Colorada and Quiruvilca, Pan American holds a portfolio of silver deposits containing an aggregate 249 million oz.

However, these projects would require silver prices of US$6 to US$9 per oz.

to be economic.

For the year ended Dec. 31, 1997, the company experienced a net loss of US$900,000 (or 4 cents per share), compared with a net loss of US$1.9 million (9 cents per share) in 1996. During the first three months of 1998, Pan American earned US$91,000 (nil per share), versus earnings of US$259,000 for the same period in 1997.

At the end of the first quarter, Pan American had US$32.6 million in working capital, including US$27.9 million in cash, and 24.6 million shares outstanding (27.4 million fully diluted).