As shareholders prepare to vote on the proposed merger between
Alamo Dorado lies in the foothills of the Sierra Madre, 67 km southeast of the town of Alamos, near the border of Sinaloa state. It is a greenfield project with no existing infrastructure or equipment, though Corner Bay recently bought a used crushing plant for US$250,000 cash and 850,000 shares.
The deposit, which Corner Bay discovered in 1997, contains proven and probable reserves of 35.5 million tonnes grading 68 grams silver and 0.26 gram gold per tonne, equivalent to 77 million oz. silver and 297,000 oz. gold. The minable reserves are based on an open-pit model with a stripping ratio of 1.08-to-1 and prices of US$4.60 per oz. silver and US$300 per oz. gold.
Two concessions cover a total area of 54 sq. km. One of these was subject to a purchase agreement whereby Corner Bay could earn a 100% interest by making a series of semi-annual payments totalling US$800,000, of which US$425,000 had been paid. Corner Bay has paid off the balance and now owns full title.
A bankable feasibility study completed in July 2002 by AMEC E&C Services envisions a 12,500-tonne-per-day (4.5-million-tonne-per-year) crushing and heap-leach operation capable of producing 6 million oz. silver and 29,000 oz. gold per year, or 7.9 million oz. silver-equivalent, over an 8-year mine life. Direct cash operating costs are projected to be US$3.25 per oz. silver-equivalent, with total costs of US$4.13 per oz. The capital cost is pegged at US$45.1 million.
A base-case scenario, assuming 100% equity financing and prices of US$5 per oz. silver and US$325 per oz. gold, would see an after-tax internal rate of return of 17%, with a payback of 2.8 years.
The management of Corner Bay has been trying to secure access rights to the Miguel Hidalgo water reservoir, which is 12 km away from the project site.
“If you don’t have water, you don’t have a heap-leach mine,” says Pan American Silver Chairman Ross Beaty.
There is some ground water at Alamo Dorado, but not enough has been sourced to feed a heap-leach operation.
Corner Bay’s initial request to draw 2.5 million cubic metres of water from the reservoir was turned down by the Mexican federal agency CAN, which owns the water rights. The company is currently negotiating with existing users that are not drawing their allocated amounts.
“So far we’re optimistic we’ll obtain water, but it is still an outstanding issue,” says Beaty. “We have until mid-November to remove this condition, and even then, we can extend the date if we have to, by mutual consent.”
Pan American is offering 0.3846 of a share and 0.1923 of a warrant for each Corner Bay share. The warrants entitle the holder to buy an additional share at $12 for five years. The boards of both companies have unanimously endorsed the offer. Both Canaccord Capital, which is acting as a financial advisor to Pan American, and Griffiths McBurney & Partners, Corner Bay’s advisor, say they consider the arrangement “fair, from a financial point of view.”
The Pan American board believes the takeover of Corner Bay represents an opportunity to acquire, at a reasonable cost, an advanced-stage silver project in a country where the company already owns one other silver mine, La Colorada, which is under development.
The Corner Bay board believes the plan of arrangement offers shareholders the opportunity to participate in a producing company that has good liquidity and is in a good position to advance development of the Alamo Dorado project, while offering upside in the price of silver.
Shareholders of both companies are set to cast their votes in the first week of September. Pan American will need a 50% simple majority of the shareholder vote, whereas Corner Bay requires two-thirds approval. “We have received no indication of negative views, so we expect [the proposal to merge] will be positively received,” says Beaty. With 43.2 million shares outstanding, the Corner Bay transaction would see Pan American issue a further 8 million shares and 4 million warrants.
Quiruvilca
Until 2001, Pan American’s source of silver production was its Quiruvilca zinc-silver mine in the province of Santiago de Chuco in northwestern Peru. Pan American acquired the centuries-old underground mine in 1995. During 2001, the company began production at its Huaron underground mine in the province of Pasco, central Peru, and started limited production at La Colorada in Mexico’s Zacatecas state.
Together, these 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 a cash cost of US$4.36 per oz. silver and a total cost of US$5.03 (net of byproduct credits). This compares with the 3.3 million oz. silver Quiruvilca turned out in 2000.
For the first six months of 2002, the three mines yielded a combined 4 million oz. silver, 19,579 tonnes zinc, 10,583 tonnes lead and 1,382 tonnes copper at a cash cost of US$4.11 per oz. silver and a total cost of US$4.92 per oz. Silver production for the full year is expected to be about 8 million oz.
Pan American ended the second quarter with a loss of US$1.2 million (or 3 per share), compared with a year-earlier loss of US$2.8 million (8 per share). This brings the loss for the first half of 2002 to US$2.5 million (6 per share), versus US$4.4 million (13 per share) in the initial six months of 2001. Despite an improvement in the silver price, the company’s bottom line has been hurt by depressed base metal prices for its byproducts, particularly zinc.
Operations consumed US$1.7 million in cash flow during the second quarter. Working capital at June 30, 2002, stood at US$17.5 million.
The Huaron mine is now regarded as the company’s flagship operation. “We had above-budget metal production, below-budget costs, and, generally speaking, a very happy story,” says Beaty, referring to the mine’s performance.
For the second quarter, Huaron produced more than 1.1 million oz. silver at a cash cost of US$3.64 per oz. and a total production cost of US$4.09. Byproducts consisted of 5,034 tonnes zinc, 3,422 tonnes lead and 482 tonnes copper. The mine contributed US$1.4 million in cash flow.
Expansion
Planning for the US$20-million expansion at La Colorada in Mexico affected the existing small-scale underground mining operation during the 3-month period. The mine produced 183,198 oz. silver for the quarter at a cash cost of US$5.01 per oz. and a total cost of US$5.65, compared with 229,610 oz. a year ago. In June, management decided to expand La Colorada to 800 tonnes per day from 200 tonnes after a US$10-million loan agreement was signed with International Finance Corp. The mine expansion is on track for completion in mid-2003. In the early years, La Colorada is expected to produce 3.8 million oz. annually. “This should be our lowest-cost and purest silver mine,” says Beaty, adding that La Colorada will be temporarily closed until mid-September to allow for underground renovations.
The company’s Quiruvilca mine continues to struggle in the face of low zinc prices. It tends to produce equal amounts of zinc and silver, though in recent months, zinc has dominated while silver grades decreased. Production for the quarter totalled 610,444 oz. silver and 4,344 tonnes zinc, versus 808,699 oz. and 5,273 tonnes zinc in the corresponding period of 2001. The cash cost per ounce of silver has climbed to US$5.62, against US$4.29 a year ago, while the total cost has risen to US$7.27 from US$5.25 per oz. in the comparable period.
“The mine continues to remain a problem for us,” concedes Beaty, “and it will stay like that as long as metal prices remain weak.”
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