Positive PEA for Pan American and Orko’s La Preciosa

Better late than never, joint venture partners Pan American Silver (PAA-T) and Orko Silver (OK-V) have released a long-awaited preliminary economic assessment (PEA) for their La Preciosa epithermal silver-gold project in Durango, Mexico.

The JV partners had originally hoped to have released a feasibility study and made a production decision for the project by the end of 2010, but decided to push back the timeline to allow for further drilling and metallurgical testing. They then scheduled the release of a PEA for year-end 2010 or early 2011, but pushed it back once more in order to more fully examine different mining methods.

The companies have now decided on a combined underground and open-pit mining scenario to access the 18 mineralized vein structures found on the 32,000-hectare property. Using a 5,000-tonne-per-day plant comprising primary crushing, grinding and cyanide leaching, Pan American and Orko plan to produce roughly 6.8 million oz. silver and 11,800 oz. gold each year for the project’s approximate 12-year mine life. With preproduction capital and development costs estimated at $270 million, La Preciosa has a 24.3% internal rate of return (IRR) and an after-tax net present value (NPV) using a 5% discount rate of $315 million. The calculations assumed metals prices of $25 per oz. silver and $1,250 per oz. gold.

Pan American controls a 55% interest in the project under the terms of a 2009 joint venture agreement, with Orko retaining a 45% interest carried to production.

Discussing the study in an Aug. 11 conference call, Pan American’s vice-president of project development, George Greer, told investors, “This assessment has been both challenging and rewarding. Over the past two years, we have spent approximately $15 million on further diamond drilling, metallurgical testing and project engineering activities, and we have contracted some of the best consultants in the industry to assist us in the assessment.

“We did evaluate the possibility of an open-pit-only mining scenario, however, due to the narrow veins in the upper portions of the mineral zone and the depth involved to get to the wider, more extensive ore zone, the open-pit design was reaching close to the upper practicality limit of open-pit mining, nearing a 30:1 strip ratio.

“Naturally, that mining plan did not return the most optimal economics, and it was subsequently decided to proceed with the combined underground, open-pit approach as it provided the far better economic return.

According to the PEA, underground mining costs are estimated at $31.49 per tonne of ore while open-pit mining is only $1.45 per tonne of ore, plus another $1.11 per tonne of waste. A 30:1 strip ratio would then create open-pit mining costs of around $34.75. Using a combination of the two methods, total mining costs can be lowered to $26.60 per tonne.

Factoring in processing costs of $16.64 per tonne of ore, as well as general and administration costs of $2.57 per tonne of ore, total average operating costs for La Preciosa are estimated at $5.81 per tonne. In all, cash costs per oz. of silver produced are forecast to be around $11.84, net of byproduct credits.

Cash costs for Pan American’s seven producing silver mines in the Americas averaged $9.19 per oz. silver in the second quarter of 2011, net of byproduct credits.

Commenting on the assessment in a prepared statement, Geoff Burns, president and chief executive officer of Pan American, said: “La Preciosa is a very interesting project, with a solid silver production profile, long mine life and it’s located in a good mining jurisdiction, less than an hour’s drive from our existing Mexican administration offices. At the PEA’s long-term silver price the economics are very compelling; at current silver prices the project is extremely robust. We will be moving forward aggressively to complete a full feasibility study and to position ourselves for a construction decision in the first half of 2012.”

Orko’s president and CEO, Gary Cope, also noted in a prepared statement that, “At metal prices of $38 per oz. silver and $1,600 per oz. gold, [La Preciosa] has a net present value of over $900 million and generates an internal rate of return o 52.7% with a payback period of less than two years.”

Along with PEA came a new mineral resource for the project, which was last updated in 2009. The new estimate represents a 45% increase in tonnage but a 17% decrease in silver grade, leading to a 20% increase in contained silver ounces. It also accounts for a 14% increase in gold grade leading to a 65% increase in contained gold ounces.

Total indicated resources now stand at 24.8 million tonnes grading 142 grams silver per tonne and 0.28 gram gold, containing 113 million oz. silver and 222,000 oz. gold. Inferred resources add another 15.2 million tonnes grading 96 grams silver and 0.17 gram gold, containing 46 million oz. silver and 83,000 oz. gold. Life-of-mine average silver and gold recoveries are estimated at 86% and 78%, respectively.

The La Preciosa project is located 84 km by road from the city of Durango, in north-central Mexico. A new 9.7-km-long road will need to be built to improve access to the site, as well as a 41-km-long power line leading to a substation located northwest of the project. Water required for mining operations is expected to be sourced from a new water well located about 7 km east of the project.

A major next step will be securing all the necessary surface rights to the project, which the JV partners expect to complete within the next six to nine months. They will then be able to apply for environmental and mining permits, a relatively quick process in Mexico compared with other jurisdictions in the Americas, allowing for construction to potentially begin in the second half of 2012.

A technical report for the La Preciosa property describes mineralization hosted in Tertiary-aged gold- and silver-bearing epithermal quartz veins, with barite and lesser quantities of base metals such as zinc and lead also present. The project’s three major vein and vein-breccia systems are exposed on a series of hills and ridges, separated by flat-floored valleys roughly 800 metres wide.

Investors seemed nonplussed by the PEA’s numbers on a volatile day for the markets, as the price of gold dropped US$27.80 to US$1,767.60 per oz. and silver retreated 65¢ to US$38.64 per oz. Shares of Orko, meanwhile, fell 16¢ to $2.45 on 566,000 shares traded, while shares of Pan American slipped 40¢ to $28.87 on 387,000 shares traded.