Writedowns take toll on Pan American

Vancouver — A writedown of US$37.6 million at its Dukat silver project in the Magadan region of far-eastern Russia, and a US$4.4-million charge against inactive properties pushed Pan American Silver (PAA-T) deep into the red during 2000.

Yet as the sun sets over Dukat it is shining on the company’s Quiruvilca silver mine in Peru.

“In 2000 we achieved a great deal,” says Ross Beaty, Pan American Silver’s chief executive officer. “We had record production from Quiruvilca, we acquired, financed and started construction on the Huaron mine [also in Peru], which will soon open and more than double our silver output, and we arranged construction financing for the La Colorada mine [in Mexico].”

At the troubled Dukat mine, Pan American retains a 20% carried stake but no control over the operation, and, in the third quarter, the company had to writeoff its entire investment. Diluted proven and probable minable reserves are estimated at 10.5 million tonnes grading 755 grams silver and 1.54 grams gold per tonne. The Russian firm Polymetall holds an 80% interest and is responsible for all future financial and management obligations.

“Our greatest frustration during the year was at Dukat,” says Beaty. “I remain disappointed at this outcome after three years of extremely hard work and heavy expenditures in that most difficult country, yet I remain optimistic that Pan American will recover at least some of its investment at Dukat while retaining exposure to positive development of that splendid orebody over the long term.”

In response to the continued low silver price, Pan American reviewed the carrying value of several of its inactive properties and decided to take a fourth-quarter writedown of US$4.4 million at its Lucita, Valenciana, Capoose, Minandex and Waterloo properties.

The company posted a loss of US$6.4 million (or 19 per share) for the fourth quarter and a loss of US$45.9 million (US$1.35 per share) for the past year. In 1999, Pan American incurred a fourth-quarter loss of US$1.8 million (US6 per share) and a full-year loss of US$5.8 million (US20 per share). Excluding the large writedowns, the junior lost US$800,000 in the recent quarter and US$3.1 million (US9 per share) in all of 2000. Revenue for the year rose 11.5% to US$29.9 million.

Exploration spending between 1999 and 2000 fell to US$800,000 from US$2.4 million. The company ended the past year with US$7.5 million in cash and US$1.8 million in working capital.

The Quiruvilca mine cranked out 3.61 million oz. silver in 2000, an 11.4% increase over the previous year. Byproduct production amounted to 24,462 tonnes zinc, 8,740 tonnes lead and 1,215 tonnes copper. Cash and production costs fell to US$3.20 per oz. and US$4.02 per oz., respectively, compared with US$3.55 and US$4.39 in 1999. Production during 2000 was the highest in the mine’s 76-year operating history, and production in 2001 is expected to continue at this rate. The mine contributed US$2.4 million in operating cash flow during 2000, an increase of US$400,000 over a year earlier.

“I believe today’s silver price of about US$4.40 per oz. is unsustainably low and will soon trend higher,” says Beaty. “Silver demand and supply fundamentals remain robust in all sectors, particularly the photographic sector. Silver inventories continue to be depleted and zinc inventories are also very low.”

He went on to say that, despite the low metal prices, Pan American Silver’s growth in low-cost silver production will place the company in a better position when prices rebound.

In Mexico, the company secured a US$27-million financing for construction of the underground silver project known as La Colorada. Pan American envisions a 1,000-tonne-per-day operation cranking out 4.2 million oz. silver annually over a 9-year mine life. Situated in Zacatecas state, the project hosts 6.72 million tonnes grading 419 grams silver per tonne.

Limited production at the mine began in early January, and ore is now being sourced from old surface stockpiles. Pan American expects that about 3,500 tonnes of ore per month will be processed at the existing flotation mill. Concentrates will be processed at the Torreon smelter, 300 km to the north, and the monthly output of silver is slated to approach 45,000 oz. Pan American expects to generate an operating cash flow and save about US$100,000 per month on care-and-maintenance costs. The total capital cost of developing La Colorada as a full-scale operation works out to about US$30.5 million. The average cash cost per ounce of silver recovered is estimated at US$2.69 and the average total cost per oz. of silver recovered is pegged at US$4.05. Based on a silver price of US$5 per oz., the after-tax internal rate of return is forecast to be 83%. In addition, the company recently discovered a new high-grade silver zone at La Colorada.

In September, Pan American began reconstructing the past-producing Huaron silver mine, some 300 km northeast of Lima. The company holds a 71.8% stake in the mine and hopes to crank out 4.3 million oz. silver and 18,000 tonnes zinc annually. Pan American acquired Huaron in March 2000 and completed a positive feasibility study last May. Project financing has been secured via a $12-million loan from Standard Bank, and construction started in September.

Situated in the central Andes, the property is accessible by highway and gravel roads from Lima. The mine entered production in 1912 and proceeded to crank out more than 220 million oz. silver until it was accidentally flooded in 1998. It has remained closed ever since.

Currently ore is being mined and stockpiled at surface, and mill production is scheduled to begin in April. Annual output is projected to be 4.3 million oz. silver and 18,000 tonnes zinc at cash and total production costs (net of byproduct credits) of US$3.46 and US$3.90 per oz. silver, respectively.

Proven and probable reserves stand at 6.16 million tonnes grading 252 grams silver per tonne, 3.59% zinc, 2.44% lead and 0.43% copper. Total resources stand at 13 million tonnes grading 239 grams silver, 4% zinc, 2.2% lead and 0.5% copper. The resource is based on a silver price of US$5 per oz. and a zinc price of US50 per lb.

The capital cost of restarting the mine is believed to be about US$12 million, including mine, mill, infrastructure, site costs and working capital. The internal rate of return, including the purchase price, is set at 33%.

Meanwhile, at the San Vicente property in Bolivia, Pan American has advanced the project to the prefeasibility stage. The total mineral resource there is 4.1 million tonnes grading 369 grams silver and 4.77% zinc. At last report, a scoping study was under way. Pan American hopes to advance San Vicente to the feasibility stage in 2002 or 2003.