Good economics for Pan American’s Navidad

With silver prices up nearly 40% in the last three months, the timing of Pan American Silver’s (PAA-T, PAAS-Q) preliminary assessment for its Navidad silver project in Chubut province, Argentina couldn’t have been better.

According to the scoping study, which is based on the assumption that a ban on open-pit mining in Chubut province will be lifted, 89.4 million tonnes of ore would be mined by conventional surface mining at the project’s eight separate deposits.

Of that total, 52.9 million tonnes are expected to be silver-copper ore with an average grade of 164 grams silver per tonne and 0.07% copper, while 36.6 million tonnes are expected to be silver-lead ore with an average grade of 151 grams silver per tonne and 2.26% lead.

The study outlines a mine life of 17 years with life-of-mine silver production of 275.5 million oz. at an average cash cost of US$6.96 per oz. silver, net of byproduct credits.

During the first five years, average annual silver production would reach 19.8 million oz. at a cash cost of US$6.03 per oz. silver, net of byproduct credits, with a peak year during that period of more than 23.2 million oz.

Navidad’s after-tax net present value (NPV), at a 5% discount rate, was calculated at US$524 million, assuming base case prices of US$18 per oz. silver, US$6,500 per tonne copper and US$1,950 per lb. lead. The internal rate of return (IRR) was pegged at 14% with a payback period of 5.5 years.

If a price of US$25 per oz. silver is used, the NPV climbs to US$1.16 billion and the IRR to 23.6%.

UBS analyst Chris Lichtenheldt, who holds a buy on the stock, wrote in a research note to clients that an IRR of 14.2% at US$18 per oz. silver did not represent “blockbuster returns.”

“While we believe these initial results could ultimately prove conservative given the project’s exploration potential and ongoing optimization work, today’s historically strong silver prices help make the project attractive,” he said. (Lichtenheldt’s model uses a silver price of US$22.25 per oz. for an NPV of US$550 million.)

But he cautioned: “While even this preliminary assessment represents upside versus our current estimates, we believe the market will remain reluctant to fully pay for Navidad until mining laws in Chubut endorse the project.”

The study envisages a conventional flotation processing plant that would operate at a rate of 15,000 tonnes per day producing silver-copper and silver-lead concentrates.

Navidad contains about 632 million oz. silver in the measured and indicated category and 119 million oz. silver of inferred. The deposit also holds more than 3 billion lbs. of lead.

At a 50-gram silver per tonne cutoff grade, resources stand at 15.4 million measured tonnes grading 137 grams silver (67 million oz. silver) and 139.8 million indicated tonnes of 126 grams silver (565 million oz. silver).

Inferred resources add 45.9 million tonnes at 81 grams silver for 119 million oz.

Pan American acquired Navidad in early 2010 and has drilled over 88,500 metres since then. The drill results will be folded into the updated resource model that is scheduled to be completed, along with the full feasibility study, sometime in the second quarter of 2011.

Average silver and copper recoveries to the copper concentrate are estimated at 77.5% and 56.5%, respectively, while the average estimated silver and lead recoveries to the lead concentrate are 33.8% and 75.5%, respectively.

Most of the water for the processing plant will come from recycled tailings water, while energy will be supplied from twin 330-kilovolt power lines that run about 100 km to the south.

Total capital and preproduction costs have been pegged at US$760 million.

In Toronto, Pan American Silver gained 82¢ on the study news to close at $39.15 per share.

Over the last year the company, which has producing assets in Mexico, Argentina, Peru and Bolivia, has traded in a band of $21.35-$39.29, with 107.2 million shares outstanding.