Pan American Silver commits to US$80M expansion at La Colorada

VANCOUVER — Pan American Silver (TSX: PAA; NASDAQ: PAAS) is ready to take its La Colorada polymetallic mine in the Chalchihuites district in Mexico’s Zacatecas State to the next level, after a preliminary economic assessment (PEA) proposed boosting the mine’s silver production by 64% over the next four years.

La Colorada’s expansion would involve building mine infrastructure, developing new mining zones to reach deeper, higher-grade ore and expanding its sulphide ore-processing plant. Pan American based its PEA on a reserve-and-resource statement at La Colorada from December 2012.

The mine hosts proven and probable reserves totalling 5.1 million tonnes grading 393 grams silver per tonne, 0.41 gram gold per tonne, 2.84% zinc and 1.53% lead. Indicated resources tack on 2 million tonnes averaging 268 grams silver, 0.32 gram gold, 0.76% zinc and 0.49% lead.

A 600-metre shaft will be built between the main Candelaria area — which contains La Colorada’s NC2 and HW veins — and the Estrella area that hosts the Amolillo vein. Construction on the shaft expansion is expected to start in early 2015, after underground development around the shaft bottom, with commissioning scheduled for late 2016.

Daily throughput rates at La Colorada would gradually rise from 1,250 tonnes to 1,800 tonnes by 2018.

Pan American ­produces doré bars from its oxide ore using a conventional cyanide-leach circuit, while sulphide ore is processed through a flotation plant that produces silver-rich lead and zinc concentrates. The expansion will focus on the sulphide plant, which will be upgraded with a new crusher and grinding mill.

President and CEO Geoff Burns noted in a release that La Colorada is set to become Pan American’s largest silver producer, and that the expansion plan carries “low risk” and “considerable economic potential at today’s silver prices.”

The expanded operation will have 10-year life, and require 100 mining personnel.

The mine is slated to produce 7.7 million oz. silver annually by 2018, with estimated cash costs falling by 39% over the period to US$6.10 per oz., net of by-product credits. According to production guidance La Colorada is expected to crank out 4.7 million oz. silver in 2013, at cash costs of US$10 per oz.

Assuming a US$19 per oz. silver price, Pan American’s expansion carries an after-tax net present value (NPV) of US$39 million at a 10% discount rate, with an internal rate of return (IRR) estimated at 22% and a 2.5-year capital payback period. If silver prices are US$25 per oz., the NPV increases to US$72 million, while the IRR jumps to 32% with a two-year payback period. The base case also assumes US$1,200 per oz. gold, US84¢ per lb. zinc, US95¢ per lb. lead and US$3.17 per lb. copper.

BMO Capital Markets analyst Andrew Kaip describes La Colorada as “a bright spot set against bleak metal prices,” and revised his target price on Pan American from $11.50 to $10 per share, due to an 8% drop in silver prices since BMO’s last valuation.

On Dec. 19, Kaip wrote that Pan American’s production profile is declining “notwithstanding the La Colorada expansion.” He adds that “a below-average IRR for [the company] reflects sensitivity to low metal prices.”

Pan American shares have traded within a 52-week window of $10.18 and $18.99, and closed down 11¢ at $11.70 following its La Colorada release. At press time shares traded at $13.42 apiece.

The company has 151 million shares outstanding for a $2-billion market capitalization, and reported a US$208-million cash balance at the end of September, after making US$34 million in operational earnings during the third quarter.