Pan American looks to Minefinders

Driving down cash costs, generating immediate cash flows and building itself into the world’s largest primary silver producer sound like good enough reasons for Pan American Silver (PAA-T, PAAS-Q) to table a friendly takeover bid for fellow precious metals miner Minefinders (MFL-T, MFN-X).

The cash and equity offer is worth $1.5 billion and represents a 36% premium for Minefinders shareholders based on both companies’ closing price on Jan. 20. While the deal lets Minefinders shareholders choose from 0.55 of a Pan American share and $1.84 in cash, or 0.6235 of a Pan American share, or just $15.60 in cash, the cash portion taps out at $176 million. 

The key to the deal from Pan American’s perspective is grasping Minefinders’ Dolores gold-silver mine in Mexico. Thanks to strong gold credits the heap-leach mine has ridiculously low silver cash costs of negative $11.62 per oz. By acquiring the mine Pan American’s pro forma 2011 cash costs would be driven down to US$5.96 per oz. from US$8.75 per oz.

But lowering costs is only one side of the story; boosting cash flow is the other. With the key to Pan American’s future growth lying with its Navidad silver project in Argentina, the company could well use a steady stream of organically generated cash flow.

Navidad has the potential to become a world-class silver mine but development has been held up due to a reluctance to embrace open-pit mining. The situation, however, seems to be improving with the recent announcement by the Argentine minister of mines that a permit for Navidad could be issued in the next six months.

The project has 15.4 million measured tonnes grading 177 grams silver equivalent per tonne, 139.8 million indicated tonnes of 147 grams silver equivalent, and 45.9 million tonnes at 97 grams silver equivalent in inferred.

If the permit comes in, and construction gets underway, the considerable cash flows from Dolores could help fund Navidad while ensuring that the company’s dividends continue to get paid.

And from the way Pan American’s chief executive Geoff Burns spoke on a conference call, the company looks set to wring every bit of cash out of Dolores that it can.

The best way to do it, Burns says, would be to build a mill at what is currently just a heap-leach operation. A mill could bolster silver recoveries to 80% from 50% and gold recoveries to over 90% from their current 65% levels. Dolores turned out 3.6 million oz. silver and 74,000 oz. gold in 2011.

“We’d still run the heap leach at similar rates as today and we’d add the mill for incremental production on top of that,” Burns says of the possible expansion. “There’s more studying to do but we would focus on it because it looks to us to be an incredibly good opportunity.”

With the possible expansion at Dolores, the construction of Navidad and Pan American’s other key development project, La Preciosa in Mexico, the combined company is targeting 65 million oz. silver production by 2015 – enough to make it the world’s largest primary silver producer.

In total the takeover would bring Pan American’s number of operating mines up to eight, with over half of current production coming out of Mexico.

The remaining 21% would be from Peru with 15% coming from Argentina and 12% from Bolivia. Going forward, however, those numbers will tilt more towards Argentina as evidenced by the country holding 67% of combined resources thanks to Navidad.

In Toronto on Jan. 23 – the day the bid was announced – Pan American shares were off 10% or $2.62 to $22.40 on 2.22 million shares traded, while Minefinders was up 22% or $2.56 to $14.06 on 4.16 million shares traded.