Pan American trades Dukat for ducats (November 29, 2004)

Pan American Silver (PAA-T) has sold its 20% stake in the Dukat silver-gold mine near Magadan 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 American Silver Chairman Ross Beaty. “The US$20.5 million we have already received will be used for the construction of Alamo Dorado and Manantial Espejo, two of our development projects. And of course we are always pursuing additional acquisitions.”

Pan American Silver 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. In the end, the company says it will more than recoup its initial investment in the project through the sale.

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. Dukat’s overall reserve is equivalent to 476 million oz. silver and 1 million oz. gold.

Pan American Silver says 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.

Meanwhile, at the wholly owned Alamo Dorado silver project in Mexico, Pan American is in the midst of a feasibility study, which is due for delivery in February. The project’s power supply has been secured, grinding tests have been completed, and a pilot plant is operating. The company has been granted exploitation and explosives licences, and construction is to begin in 2005.

A feasibility study in mid-2002 pegged proven and probable reserves at 35.5 million tonnes grading 68 grams silver and 0.3 gram gold per tonne. The study envisaged an open-pit mine and heap-leach processing facility. (Pan American Silver is considering adding a conventional mill to boost recoveries.) Capital costs, including a mill, were estimated at US$65 million. The operation is expected to produce up to 6 million oz. silver and 29,000 oz. gold annually over eight years. Average total cash costs are estimated at US$3.50 per oz. silver, net of gold credits.

In Argentina, an ongoing feasibility study of the 50%-owned Manantial Espejo silver-gold project is considering a combined open-pit and underground operation focused on the Maria and Karina Union deposits. Infill and extension drilling continues. The study will include a proven and probable reserve estimate and mine plan, when delivered in early 2005.

At last count, measured and indicated resources at Manantial Espejo amounted to 4.4 million tonnes grading 263.8 grams silver and 4.5 grams gold per tonne. Another 1.6 million tonnes of inferred material runs 259 grams silver and 3.7 grams gold. Initial scoping studies suggest that processing at the daily rate of 2,000 tonnes would produce 3.7 million oz. silver and 56,000 oz. gold per year.

Silver Standard Resources (SSO-T) holds the other half of Manantial Espejo. Pan American is managing the feasibility study and is project operator.

Pan American ended the recent third quarter with record earnings of US$3.3 million (or 5 per share) on record revenue of US$27.4 million. The impressive performance is due to increased sales and higher silver prices. A year earlier, the company lost US$1.2 million (2 per share) on US$11.9 million.

During the three months ended Sept. 30, silver production totalled just shy of 3.2 million oz., which represents a 45% increase over the year-earlier period. The increase partly reflects additional production from the Morococha silver mine in Peru, where Pan American acquired an 84% stake in early July. Cash costs during the period climbed by US20, to US$4.07 per oz., owing to higher costs at the La Colorada mine in Mexico.

La Colorada saw its silver production nearly double to 441,959 oz., after a US$20-million expansion, which began in late 2002. The mine resumed production at the beginning of 2004. A new mine plan has reduced dilution, increased silver grades, and opened up areas of ore with lower clay content to increase recoveries. Pan American Silver says it still expects La Colorada to meet its annualized production target of 3.5 million oz. silver at less than US$3.50 per oz., but not until early next year. In all, the company expects to produce 11.5 million oz. silver at less than US$4 per oz. in 2004.

At the end of September, Pan American Silver had cash and short-term investments totalling US$81 million. The company has “virtually no debt.”