The cat-and-mouse game involving the large Dukat silver deposit in Far Eastern Russia is finally over. Russian-based Polymetal will acquire an 80% interest in the project and assume operatorship, leaving Canadian junior
“This agreement represents the best resolution possible under the circumstances,” says Ross Beaty, Pan American’s chairman and chief operating officer. “I am pleased to have this matter behind us so that we can focus on increasing our Latin American silver production.”
Under the agreement, a new company will be created to hold the mining licence and assets of the Dukat project. Pan American will have no control over mine development, and Polymetal will fund all ongoing expenditures.
“We will have strict protection against any form of dilution of that 20% interest,” says Beaty. “We will also be represented on the board of directors of the new company, thereby ensuring that we have access to the financial and operating conditions of the new company.”
Pan American wrote off its US$38-million carrying value for Dukat in the quarter ended Sept. 30. The company’s 20% interest in the mine will be counted as cash flow from the operation.
The battle over the project began in late November 1999, when a package of fixed-mine site assets, including the mill building, was auctioned off by creditors of the bankrupt Dukat mine. The winning bidder was the Kaskol group, a Russian builder of machinery and aircraft, which paid US$12 million for the package.
“We did not expect that anyone would have the interest in spending considerable money on a group of assets that had no real value without the mining licence,” says Beaty.
The mining licence was held by Serebro Dukat, ownership of which was shared 70% by Pan American and 30% by
Pan American Silver sought legal options and commissioned a study into the construction of a new mill. The company’s legal sorties were unsuccessful and it was determined that the construction of a new mill, though technically and economically feasible, would have added up to US$30 million to the project’s capital costs.
“What we hadn’t counted on was that these people were quite serious about going after the whole project with the goal of operating the mine,” states Beaty. “Obviously we would have had to fight this well-backed Russian company every step of the way, and we had neither the stomach nor the desire to incur that extra financial risk.”
In April, the Kaskol group, which lacks mining experience, transferred its interest in the project to Polymetal, which proceeded to develop a US$15-million plan to re-commission the Omsukchan refinery, where ore from Dukat would be treated. According to the Russian-based group, the refinery would have the production capacity to produce silver alloy, eliminating the need to export silver concentrate.
“We would like to confirm that we are ready to implement our plan of reconstruction of the Omsukchan refinery, as well as the project to develop the Dukat gold and silver deposit,” says Sergei Nedoroslev, Kaskol’s president, who, together with Polymetal Director-General Alexander Nesis, recently addressed the press at a conference in Moscow. “We are going to do that, relying on our own organizational, economic and financial resources.”
Pan American spent US$38 million in its effort to return Dukat to production, including the US$5 million it paid for the mining licence. The company said another US$75 million is required to finish the project.
The project had already met most of Russia’s regulatory conditions and was given a 4-year permit to export concentrate.
Dukat has reserves of 10.6 million tonnes grading 755 grams silver and 1.5 grams gold per tonne. Pan American estimates annual production will yield concentrates containing 15.8 million oz. silver and 30,500 oz. gold.
Meanwhile, at the company’s 72%-owned Huaron mine in the Cerro de Pasco district of Peru, construction has begun, and production is expected to get under way by March 2001. Pan American reports that Standard Bank of London provided it with a US$12-million extendible loan facility to cover the mine’s US$10.1 million capital costs. The mine first entered production in 1912 and cranked out more than 220 million oz. silver from 70 known veins before operations were halted in April 1998, owing to the flooding of underground workings.
“The Huaron mine fits well with our goal of low-cost production and increasing our revenue leverage to silver,” says Beaty.
Production at the underground silver-zinc mine is estimated to be in the range of 600,000 tonnes per year, yielding 4.3 million oz. silver and 18,000 tonnes zinc-in-concentrate. The forecast operating cash costs are estimated at US$3.46 silver per oz. (net of byproduct credits).
Proven and probable reserves at the Huaron underground mine are estimated at 6.16 million tonnes grading 252 grams silver, 3.95% zinc, 2.44% lead and 0.43% copper per tonne, or 50 million contained ounces silver.
The mine is part of a 80,000-ha land package that is said to have excellent exploration potential. Says Beaty: “Our objective at Huaron is to get the mine and mill producing, explore the land package for additional reserves and proceed to a fifty-to-sixty per-cent expansion of the mine within two or three years.”
The mine has a 12-year reserve base and a 22-year resource base. Beaty believes the Huaron operation will complement the company’s Quiruvilca silver mine in northern Peru. “This will allow us to operate two mines with the same overhead and the same administration in Lima.”
Meanwhile, in central Mexico, Pan American has completed a positive bankable feasibility study at its wholly owned La Colorada silver mine.
The study envisages a 1,000-tonne-per-day operation with a mine life of at least nine years. Mining during the first five years will focus on oxide ore, from which Pan American expects to extract 4.2 million oz. silver and 4,000 oz. gold in dore bars. During the sixth year of production, the mine is expected to produce silver in lead and zinc concentrates, as well as in dore bars. Life-of-mine cash costs are pegged at US$2.25 silver per oz. (net of byproduct credits), whereas production costs will likely total US$3.52 silver per oz.
Proven and probable underground reserves weigh in at 2.21 million tonnes grading 498 grams silver and 0.42 gram gold per tonne. Historic tailing stockpiles contain 510,000 tonnes grading 115 grams silver and 1 gram gold per tonne.
The inferred portion of the resource tallies to 440,000 tonnes grading 482 grams silver and 0.32 gram gold.
The total mineral resource, audited by MRDI Canada, stands at 6.7 million tonnes grading 419 grams silver, 0.31 gram gold, 1.73% zinc and 1.04% lead. Pan American believes there is ample opportunity to extend the mine’s life through development and exploration.
Total capital costs for the new mine are estimated at $26 million, which includes US$8.1 million for mine development, US$7 million for mill construction, US$1.1 million for working capital, and a US$2.3-million contingency allowance. The feasibility study estimates an after-tax internal rate of return of 25% and an undiscounted net present value (after capital payback) of US$38.5 million. These calculations were based on a silver price of US$5 per oz., a gold price of US$300 per oz., and assumed 100% equity financing.
“Technical representatives from four different banks have toured the property, and already we have received one offer for financing,” says Beaty. “We expect the other banks will be giving us their term sheets soon.”
Pan American hopes to begin construction at La Colorada in January 2001, with startup slated for the fourth quarter of 2001.
At the end of June, Pan American had US$10.5 million in working capital, including US$6.1 million in cash.
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