Pan American trades Dukat for ducats (November 22, 2004)

Pan American Silver (PAA-T) has sold its 20% stake in the Dukat silver-gold mine in Magadan state in far-eastern Russia to OAO MNPO Polymetal for up to US$43 million.

Polymetal, which already owns 80% of the mine and acts as operator, has paid US$20.5 million up front, and is on the hook for up to US$22.5 million worth of contingent future payments. Those annual payments will be based on the yearly average silver price, and range from nil at silver prices less than US$5.50 per oz. to US$8 million at prices exceeding US$10 per oz. The deal allows early payment under certain circumstances, including any public offering of Polymetal shares.

Pan American originally acquired the Dukat concessions in 1996. A battle over the project erupted in late November 1999, when some mine-site assets, including the mill building, was auctioned off by creditors of the bankrupt mine. The project was suspended in 2000, and Pan American eventually settled for a 20% carried interest and wrote off its entire US$37 million investment in the project.

“Dukat was a difficult chapter in the company’s evolution and we are happy to bring it to a positive conclusion,” says Pan Am’s chairman Ross Beaty. “The US$20.5 million we have already received will be used for the construction of Alamo Dorado and Manantial Espejo [in Mexico and Argentina], two of our development projects, and of course we are always pursuing additional acquisitions.”

Pan Am says it will record a gain of US$20.3 million on the sale, net of transaction costs, in the fourth quarter of 2004. Future payments will be recorded as income as they are realized.

At the end of 2003, Pan Am’s share of proven and probable reserves at Dukat totalled 2 million tonnes grading 756 grams silver and 1.5 grams gold per tonne; measured and indicated resources were pegged at 750,000 tonnes of 489 grams silver and 1 gram gold. Polymetal reports Dukat overall reserve at 476 million oz. silver and 1 million oz. gold, and describes the deposit as the world’s third-largest silver reserve.

Pan Am says that Polymetal announced the commencement of production at Dukat in November 2002, but that no silver sales were recorded that year. In 2003, Polymetal reported production of 9.7 million oz. of silver and sales of 6.6 million oz.