Battle for Dukat project heats up

An arbitration court in the northeastern Russian region of Magadan has agreed to hear a case aimed at overturning Moscow-based Kaskol Group’s winning bid for assets of the Dukat silver mine. The ruling is welcomed by Pan American Silver (PAA-T), which wants the auction ruled invalid.

On Nov. 30, 1999, Kaskol was declared successful in its US$12-million bid for the assets — including the property, mining equipment and the mill — which were auctioned off by creditors of the previous owners. However, the development and mining licence is held by Pan American, through its Russian subsidiary, Serebro Dukat, and Pan American insists the assets have little value without the licence.

Nonetheless, Kaskol says it intends to develop the deposit. “Now our main goal is to prepare the facility for production and begin to develop the enormous potential of this great mine,” says company president Sergei Nedoroslev. “Kaskol’s activities are guided by a necessity to resume production at Dukat [in order to] help solve some acute social and economic problems of the [local] Omsoukchan district and the Magadan region in general.”.

Kaskol will be assisted by MNPO Polymetall, which has experience managing and developing mines in the region.

Meanwhile, Pan American Silver has commissioned Kilborn Engineering to study the feasibility of constructing a new mill, which would eliminate the need for the old mill.

“We’re looking at getting around the Kaskol issue completely by building our own mill or renovating another building,” says Rosie Moore, Pan American’s vice-president of corporate relations.

The Kilborn study is due in late March. If construction is deemed economic, development of Dukat could be delayed at least six months.

The licence-holder, Serebro Dukat, is owned 70-30 by Pan American and Western Pinnacle Resources (wpn-v), respectively. According to the licence, the mine is required to be in production by the end of 2001, though there is a clause allowing for delays. However, an unnamed Moscow-based analyst says it is unlikely Serebro Dukat will be able to complete the terms of its agreement.

Moore disagrees: “We have full confidence that our licence is in full compliance and that we will be able to get the project up and running under the guidelines dictated.”

Earlier studies had considered developing a new mine, mill and processing plant capable of producing silver dore on site. However, higher-than-anticipated capital costs of US$212 million rendered this plan only marginally economic.

A feasibility study, revised by Kilborn in early 1999, concludes that the project would be economic if the existing mine and mill facilities were refurbished to produce silver concentrates. The study envisages capital costs of US$89 million, an internal rate-of-return of 22.5% based on a silver price of US$5 per oz., and a gold price of US$300 per oz.

Reserves at Dukat stand at 10.6 million tonnes grading 755 grams silver and 1.5 grams gold per tonne. Pan American predicts annual production of concentrates containing 15.8 million oz. silver and 30,500 oz. gold.

So far, Pan American has spent US$30 million in its efforts to return Dukat to production, including the US$5 million it paid for the mining licence. Another US$75 million is budgeted to finish the project, which has already met most of Russia’s regulatory conditions, including a 4-year permit to export concentrate.