Russian firm blocks Dukat

Another volley has been fired in the battle for the Dukat silver mine in the Magadan region of northeastern Russia: Russian-based Kaskol Group has cancelled a property lease agreement signed by the operation’s previous owners and the Canadian-owned subsidiary of Pan American Silver (PAA-T) and Western Pinnacle Resources (WPN-V).

The lease agreement included the mill and a package of fixed mine assets, all of which it bought in a surprise bid in November 1999. The “mining” lease is held by the Pan American-Western Pinnacle subsidiary, known as Serebro Dukat, and is not affected.

The protracted battle for the mine began late last year when Kaskol, a tea importer and aircraft parts manufacturer, bought the bankrupt mine’s mill and buildings from creditors for US$12 million. At the time, those assets were under a purchase option to Serebro Dukat through a lease signed with the previous owner. Pan American insists Kaskol’s assets have little value without the mining licence.

Kaskol cited civil law in its cancelation of the lease, stating it obtained control of the lease when it bought the property.

Kaskol says it will cancel Pan American’s lease on the property in three months. Pan American is adamant that the previous agreement is on “solid footing” and cannot be canceled.

For Pan American, the latest move by Kaskol is yet another obstacle in its attempt to return the mine to production. In January, Pan American launched proceedings in a Magadan arbitration court to have Kaskol’s bid overturned. A date for the hearing has not yet been set.

Kaskol says it plans to develop the silver mine for the benefit of the Russian region. “Before Serebro Dukat came to the mine, it was a working enterprise; now it is completely ruined,” a company spokesman states. However, Russia’s economic collapse hasn’t helped either.

Earlier this year, Pan American commissioned a study into the construction of a new mill that would eliminate the need for the current mill. According to the mining licence, the Dukat mine must be put in production by the end of 2001, though it contains provisions for delays. If the study, expected to be ready by the end of March, recommends the building of a new mill, development of the project could be delayed by up to six months. Such a delay would also mean additional costs for Serebro Dukat, which has already spent US$30 million at the past-producer, including US$5 million for the mining lease. Under current plans, the company will spend another US$75 million before commercial mining can begin.

Dukat has reserves of 10.6 million tonnes grading 755 grams silver and 1.5 grams gold per tonne. Pan American estimates yearly production will weigh in at 15.8 million oz. silver and 30,500 oz. gold.