Quiruvilca drives Pan American in first quarter

Higher production at its Quiruvilca silver mine in northern Peru combined with lower exploration expenditures enabled Pan American Silver (PAA-T) to reduce the size of its net loss in the first quarter, compared with the corresponding period of 1999.

During the 3-month period ended March 31, Pan Am lost US$737,000 (or US2 per share), versus a loss of US$2 million (US7 per share) in the year-ago period.

Revenue between the two periods surged 27%, to US$7.3 million from US$5.8 million, while exploration spending plunged to US$383,000 from US$550,000.

Production at Quiruvilca soared 30% to 915,404 oz. silver from 703,648 oz., and byproduct production consisted of 5,859 tonnes zinc, 2,066 tonnes lead and 304 tonnes copper — a slight improvement over year-ago values. Cash costs for silver (net of byproduct credits) fell to US$3.41 from US$4.93 per oz., while production costs slipped to US$4.21 from US$5.87 per oz.

Operations at the Dukat silver mine in Russia remained suspended during the recent quarter. Pan Am is trying to resolve issues surrounding the purchase of the mill property by the Russia-based Kaskol Group. In February, a Russian government commission reviewed Pan Am’s mining licence and declared it was in good standing.

Ross Beaty, Pan American’s chairman, says the company is currently considering various options. These include continuing to negotiate with Kaskol, pursuing court action, building a new mill, and soliciting a joint-venture partner to help with financing.

The mining licence requires that Dukat be put into production by the end of next year. If negotiations with Kaskol fail, Pan American may construct a new mill, which would cost an additional US$25 million.

To date, Pan American has spent US$30 million on development expenses. Diluted proven and probable minable reserves are estimated at 10.5 million tonnes grading 755 grams silver and 1.54 grams gold per tonne.

Meanwhile, in Mexico, MRDI Canada has finished auditing a mineral resource study of the silver project known as La Colorada. The study incorporates a new high-grade silver zone discovered during the first quarter. To date, 21 holes have defined the zone over 400 metres in length and to a vertical depth of 220 metres, with the mineralization open in at least three directions.

The total measured, indicated and inferred resource now stands at 6.72 million tonnes grading 419 grams silver and 0.31 gram gold per tonne, plus 1.73% zinc and 1.04% lead. An internal feasibility study is expected by the end of May.

Situated in Zacatecas state, La Colorada could support an 850-tonne-per-day underground operation capable of producing 4.5 million oz. silver annually, beginning in the second half of 2001. Preliminary cash costs are estimated to be US$3.20 per oz. silver; capital costs, US$28 million.

All permits are in place and construction can begin as soon as financing has been arranged. “We hope to make a production decision during the fall of this year so that construction can commence in the late fall or early winter,” says Beaty. To date, the company has spent about US$15 million at the project, including acquisition costs.

Pan Am recently acquired a 71.8% stake in the Huaron silver mine, 300 km northeast of Lima. The project comprises more than 80,000 ha in the centre of Peru’s famous Cerro de Pasco district. The mine 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. Pan Am believes the acquisition will enable it to nearly double its Peruvian silver production by 2001 to nearly 7 million oz.

The mineral resource at Huaron currently stands at 13 million tonnes grading 239 grams silver, 4% zinc, 2.2% lead and 0.5% copper.

Pan Am plans to use the existing infrastructure to put the mine back into production at the annual rate of 600,000 tonnes by the end of this year. The silver producer expects the project to crank out 4.3 million oz. silver and 18,000 tonnes zinc per year at cash costs of US$3.35 per oz. silver (net of byproduct credits) and production costs of US$3.68 per oz.

“We hope to have the mine up and running again by November or December and producing for a full year next year,” says Beaty.

Capital costs

Total capital costs are slated at US$10.1 million, which includes US$2.4 million for in-mine rehabilitation, US$2.4 million for repairs, US$1.5 million for preproduction costs, US$750,000 for tailings stabilization and US$700,000 in working capital. Standard Bank London has offered financing to cover these and other costs. The loan facility is non-recourse for up to US$12 million at a the London Inter-Bank Offer Rate plus 3.25%.

In addition to the Huaron mine, Pan Am’s concessions include several known satellite mineral occurrences, as well as many exploration targets.

The Vancouver-based company can earn its interest by issuing 1.8 million shares to the Peruvian company that holds 100% of the deposit. The vendor will also receive a 2.16% net smelter return royalty after production of the first 4.3 million tonnes of ore. An unnamed representative of the vendor will also receive 700,000 ten-year stock options at a $4 exercise price.

In Bolivia, exploration is continuing on the San Vincent project. The most recent phase of underground sampling and tunneling was finished in April. A resource estimate is expected by late June.

In Mexico, Teck (TEK-T) dropped its option agreement on Pan Am’s Lucita property, near Zacatecas, owing to poor drill results.

In Peru, Pan American signed an agreement granting Barrick Gold (abx-t) development rights to certain concessions in return for annual exploration expenditures of US$500,000 plus annual cash payments of US$100,000 for the first five years and US$200,000 per year thereafter.

At the end of March, the corporation had US$13.9 million in working capital.