Pan American combines with Corner Bay in all-share deal

With its eye on the 117-million-oz. Alamo Dorado silver resource in northern Mexico, Pan American Silver (PAA-T) has entered into a preliminary agreement to acquire all the outstanding shares of Corner Bay Silver (BAY-T).

Under the plan of arrangement, which has been endorsed by the boards of both companies as “fair and attractive,” each Corner Bay share will be exchanged for 0.54 of a Pan American share, plus one-quarter of a share in a newly formed exploration company managed by Corner Bay’s Peter Mordaunt. The new exploration company will be armed with US$3 million of Corner Bay’s existing cash, and Pan American will own just under a 10% stake. Based on Pan American’s US$7.69 closing price on the day prior to the announcement, the deal represents a 53% premium over Corner Bay’s May 17 closing price of $4.26.

Pan American will issue about 11 million new shares to complete the Corner Bay acquisition, representing a 25% dilution to its existing base of 41.5 million shares outstanding, or 45 million fully diluted.

The proposed merger is subject to a 30-day due diligence period, receipt of positive fairness opinions, and approval by the shareholders of both companies. Pan American will require a 50% approval, whereas Corner Bay will need a 67% majority. Pan American has locked up the support of three principal Corner Bay shareholders owning a 16.4% stake. Should Corner Bay terminate the transaction or accept a higher offer, Pan American would receive a break fee of US$3.4 million. The deal is not expected to close until sometime in August or early September.

The primary asset of Corner Bay is its wholly owned Alamo Dorado silver project in the state of Sonora. AMEC Simons Mining & Metals is in the final stages of completing a feasibility study on a proposed open-pit, heap-leach operation. The study, originally due to for completion in the first quarter of 2002, was pushed back and is still in early draft form.

“We want to look at the study to see how we can enhance it, but we may not be able to do that in the next 30 days,” cautions Pan American Chairman Ross Beaty. “Our numbers for Corner Bay’s contribution to the greater Pan American will be somewhat more conservative than some of the earlier numbers published by Corner Bay.”

The project contains a near-surface resource of 117.5 million oz. silver and 447,700 oz. gold (or 142.8 million oz. silver-equivalent) in 79.6 million tonnes grading 45.9 grams silver and 0.18 gram gold per tonne.

Prefeasibility

A prefeasibility report, prepared in September 2000 by Tucson, Ariz.-based Mintec, used a high silver price of US$5.28 per oz. and a gold price of US$300 to model an open-pit resource of 50.2 million tonnes grading 63.8 grams silver and 0.23 gram gold, at a stripping ratio of 1.8-to-1. This is equivalent to 103 million oz. silver and 371,600 oz. gold, or 124 million oz. silver-equivalent.

Metallurgical tests by Metcon Research have shown that the Alamo Dorado silver mineralization is amenable to heap-leaching, with optimum recoveries occurring on material crushed to minus 3/8-inch. Recovery rates for the entire deposit average 65% for silver and 75% for gold. Higher-grade starter-pit material averaged 80% for silver and 87% for gold, following a 379-day leach trial.

The prefeasibility study envisioned a 15,000-tonne-per-day (5.5-million-tonne- per-year) operation producing an average of 7.1 million oz. silver and 30,300 oz. gold annually over a mine life of eight years. Capital costs were estimated at US$45 million, with life-of-mine cash costs projected at US$2.96 per oz. silver-equivalent.

“We are utterly focused on growth as a primary silver mining company, and Alamo Dorado is one of the few primary silver discoveries of the past decade,” says Beaty. “It ought to be capable of getting us to a production base of around 20 million oz. in the near future. There are no major operational hiccups or fatal flaws that we see at this stage.”

Pan American Silver operates three wholly owned underground mines: the centuries-old Quiruvilca silver-zinc-lead mine in Peru, the newly activated Huaron silver-zinc mine in Peru, and the development-stage La Colorada mine in Mexico. Together, the mines produced 6.9 million oz. silver in 2001, along with 30,894 tonnes zinc, 17,187 tonnes lead and 2,163 tonnes copper, at cash cost of US$4.36 per oz. silver and a total cost of US$5.03 (net of byproduct credits).

Yearly loss

The company ended 2001 with a loss of US$8.1 million (or 22 per share) and a cash loss from operations of US$2.1 million, compared with a US$45.9-million loss in 2000, which included US$47.2 million in writedowns against the carrying value on a number of properties; the largest, US$37 million, was against the Dukat silver project in far-eastern Russia.

For the first three months of 2002, Pan American lost a further US$1.3 million (3 per share), versus a year-earlier loss of US$1.5 million (5 per share). Operations generated a cash flow of US$1.6 million for the quarter.

Consolidated production during the recent quarter amounted to 2.1 million oz. silver, 10,107 tonnes zinc, 5,441 tonnes lead and 669 tonnes copper, at a cash cost of US$3.84 per oz. silver and a total cost of US$4.63. Silver production for the year is forecast to reach 8.5 million oz.

The company has engaged International Finance Corp. (IFC) to assist in arranging project debt financing for a portion of the US$19.1 million capital needed to expand the La Colorada silver mine to 800 tonnes per day from its current 200 tonnes per day. The mine will be capable of producing about 3.8 million oz. silver annually following the expansion. Pan American has already purchased a 600-tonne-per-day oxide mill, along with some underground mining equipment. The company expects to wrap-up the La Colorada financing in June. The construction period is expected to take about 10 months, at which point, Pan American would begin preparing Alamo Dorado for production.