A syndicate of international banks led by International Finance Corp.
(IFC), the private sector arm of the World Bank, and the Export Development Corp. of Canada has agreed to provide US$60 million of the project’s anticipated US$86.8-million capital cost, as well as a US$6-million standby loan.
In conjunction with the project loans, the IFC has negotiated to buy a 10% direct interest in the project for US$4.9 million, and will buy a 5% stake in Pan American for US$9 million by way of a private placement. Pan American will be required to fund about US$12.9 million in further equity investments, as well as a provide a US$4-million cash deposit as part of a US$10-million cost overrun facility. The company currently has a cash position of US$15.6 million, with 28.7 million shares outstanding.
The loans are subject to documentation and several conditions, including Russian Central Bank approvals. The first draw-down is expected in September.
Pan American Chairman Ross Beaty says the production financing “is the culmination of great deal of work and a great deal of co-operation and support from the banking syndicate.
“The fact that we have had five different banks with five different credit committees in five different countries, all agreeing to the loan in very quick time, I think speaks for the quality of the orebody and the ability for us to have mitigated the main risk factors of doing business in Russia. This arrangement of financing, coupled with Pan American’s own equity investment, will be enough to see the project through construction and
completion sometime in the second quarter of 2000.”
Beaty expects the company will need to raise a further US$5-10 million in the short term.
The Dukat mine is 580 km northeast of the port city of Magadan and 36 km west of Omsukchan. The Kubaka gold mine, in which Kinross Gold has a 53% stake, is 400 km to the northeast.
Dukat operated from 1979 to 1995, during which time it produced an estimated 90 million oz. silver. The breakup of the Soviet Union triggered the mine’s insolvency in 1995, though sporadic production continued until 1998.
The 35-sq.-km mining licence is held by ZAO Serebro Dukat, which is owned 70% by Pan American and 30% by Geometall Plus, a Magadan-based mining company that also has a 25% stake in the Kubaka gold mine. Geometall Plus is an 85%-owned subsidiary of
Geometall Plus is being restructured into new entities, of which one, Geometall Dukat, will hold, as its sole interest, 30% of Dukat. Pan American
has agreed to provide short-term credit facilities to Geometall Dukat to cover its share of equity costs of mine development. This will culminate in Pan American’s acquisition of Geometall Dukat’s interest for US$14 million, payable by a combination of cash and shares over the next three years. This would lead to Pan American’s having a 90% direct and indirect interest in Dukat.
“We think this is a satisfactory arrangement for both of us,” said Beaty.
The leading member of Geometall Plus, Ilya Rosenblum, will join Pan American’s board of directors.
Pan American has spent US$18.2 million to date on the Dukat project, including acquisition costs.
Initially, the company considered developing a new mine, mill and processing facility that would produce silver dore on site, but higher-than-anticipated capital costs of US$212 million rendered this plan only marginally economic. A revised feasibility study, completed in late 1998 by Kilborn Engineering, concluded that the project would be economic if the existing mine and mill facilities were refurbished to produce silver concentrates. Total capital costs were lowered to US$89 million, and an internal rate-of-return of 22.5% is projected, based on a silver price of US$5 per oz., and a gold price of US$300 per oz.
Diluted proven and probable minable reserves are estimated at 10.5 million tonnes grading 755 grams silver and 1.54 grams gold per tonne, equivalent to 256 million oz. silver and 522,000 oz. gold. The geological resource, as published by Russian state agencies, totals 31.4 million tonnes grading 473 grams silver and 0.98 gram gold, equal to 477 million oz. silver
and 1 million oz. gold.
Ore will be processed at the existing mill in Omsukchan at the initial rate of 380,000 tonnes, ramping up to full-scale production of 750,000 tonnes per year within two years. Metal production, in the form of concentrate for export to overseas smelters, is expected to average 15.8 million oz. silver and 30,500 oz. gold per annum over a planned 15-year mine life.
Cash operating costs over the life of the mine are projected at US$1.51 per oz. silver (net of gold byproduct credits), with total production costs, including all taxes and royalties, pegged at US$3.54 per oz.
A contract for the engineering, procurement and construction management of the Dukat mine has been awarded to Kilborn Engineering and Adam Clark Construction. A complete management team has been put in place at Dukat. Site work will focus initially on weather-critical tasks of tailings dam remediation and winterization of mill and mine buildings, followed by underground rehabilitation and development to allow silver production to begin in the second quarter of 2000.
During the first quarter of 1999, Pan American’s Quiruvilca mine in northern Peru produced 703,648 oz. silver, compared with 673,466 oz. in the corresponding period in 1998. Byproduct metal production was 5,347 tonnes zinc, 1,515 tonnes lead and 254 tonnes copper. These amounts are less than
budgeted, owing to heavy rains and temporary power disruptions caused by a lightening strike on the electrical utilities main transformer during the quarter. As a result, cash and production costs rose to US$4.93 per oz. and US$5.87 per oz., versus US$2.84 and US$3.71 in the 1998 quarter.
The company expects the mine will have a better second quarter, even though the availability of power has been only about 90%. Production for the year at Quiruvilca is expected to be comparable with last year’s 3.1 million oz.
In Mexico, the mill at the La Colorada project is expected to enter construction in October. Situated in Zacatecas state, La Colorada is being developed as an 850-tonne-per-day underground operation capable of producing
4.5 million oz. silver annually, beginning in the second quarter of 2000. Cash costs are expected to be US$2.30 per oz. (net of lead and zinc byproduct credits), whereas the total production cost is estimated at US$3.87 per oz.
The company has completed a considerable portion of its 7,500-metre underground development program. Beaty says the veins are wider than expected and that grades are holding up. Several new high-grade veins have been discovered. The vein systems host a measured and indicated reserve of 1.6 million tonnes grading 530 grams silver and 3% combined lead and zinc. An additional resource is estimated at 1.6 million tonnes grading 646 grams silver and 4.8% combined lead and zinc.
In addition, an inferred resource of 1.1 million tonnes grading 236 grams silver, 6.3% zinc and 3.2% lead has been outlined from nine holes in a deep, high-grade replacement zone. Further drilling is planned on this deeper zone later in the year.
“We are pleased with the project and progress at La Colorada,” said Beaty. Ongoing funding needs at La Colorada are running at about US$500,000 a month. Beaty anticipates the company will need to raise a further US$15-20 million by fall to see La Colorada through to production.
In recent developments, Pan American signed an agreement with the Bolivian state mining company Comibol to acquire the rights to the formerly producing San Vicente silver-zinc mine in the southern part of the country. The company is treating the mine purely as an exploration project, with the objective of outlining the potential for a 5-million-tonne depo
sit grading about 400 grams silver and 5-6% zinc. The resource base is about 2 million tonnes.
The former mine operated from 1972 to 1993, during which time it produced about 1 million oz. silver and 15,000 tonnes zinc per year.
“We are acquiring a project with excellent exploration potential, with a lot of existing infrastructure, and if we are successful at increasing the resource base to the point where it can sustain a larger operation of 4
to 5 million oz. silver per year for about 10 years, then we will move the project in to development and then into construction in due course,” says Beaty.
Pan American is committed to spending US$600,000 on the project this year and has begun an initial 3,500-metre drilling program.
The company posted a loss of US$2 million (or 7 cents per share) in the first three months of 1999 on sales revenue of US$5.8 million, compared with earnings of US$91,000 on US$6.1 million in revenue for the 1998 quarter.
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