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TABLE OF CONTENTS Jul 7 - 13, 2014 Volume 100 Number 21 - 0 comments

Pan American Silver defers Dolores expansion

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VANCOUVER — Adding an underground operation and a pulp agglomeration circuit to the open-pit Dolores silver–gold mine in Mexico would improve recoveries, boost throughout, increase free cash flow and cost only US$105 million to implement — funds that owner Pan American Silver (TSX: PAA; NASDAQ: PAAS) already has on hand.

However, in today’s cautious financial environment for miners, even those qualities are not enough to green-light a project. Instead, Pan American will spend the next year getting a better handle on the  expansion’s details.

Dolores is an open-pit, heap-leach silver–gold mine in Chihuahua state that has been in operation since 2008.

Pan American acquired the mine in 2012 when it took over Minefinders, and the silver-focused miner was soon investigating opportunities to expand the mine.

A new preliminary economic assessment (PEA) has outlined how the expansion could take shape. Pan American would develop an underground mine to access high-grade resources located beneath and to the south of the open pit’s planned floor. The underground operation would use open stoping to kick out 1,500 tonnes of ore per day for 12 years.

The process plant at Dolores would also expand with the addition of a pulp agglomeration circuit, which could  enhance recoveries from high-grade ores. The 5,600-tonne-per-day circuit would increase the daily ore throughput at Dolores to 20,000 tonnes from 16,500 tonnes.

More importantly, the processing circuit would improve recoveries from high-grade ore by 19% for silver and 13% for gold. The concept is to crush, grind, thicken, filter and mix — or agglomerate — high-grade ore with reagents that can liberate precious metals before the highly mineralized ores are mixed with the lower-grade rocks. Then the entire batch would be heap leached.

According to the PEA, the expansion would boost average annual silver production to 5.04 million oz. from 3.65 million oz., while annual gold output would climb to 148,000 oz. from 111,000 oz. Over the mine’s lifespan the ex­pansion would increase total production to 58.4 million oz. silver and 1.62 million oz. gold, from the 44.7 million oz. silver and 1.25 million oz. gold expected from the current operation.

The project carries a US$104.5-million price tag, of which US$69.7 million is needed to build the pulp-agglomeration facility and US$34.8 million to fund under-ground mine development.

The expected incremental cash flow generated by the expansion bears a US$90-million after-tax net present value (NPV) and generates a 33% after-tax internal rate of return (IRR), using metal prices of US$22 per oz. silver and US$1,300 per oz. gold, and an 8% discount rate. At US$19 per oz. silver and US$1,200 per oz. gold the expansion NPV dips to US$66 million and IRR to 27%.

Despite what Pan American describes as “very attractive rates of return,” Pan American plans to spend another US$3–5 million over the next year to further optimize the expansion project, including more drilling to delineate Dolores’ underground resource.

Burns pointed out that Pan American only achieved steady operation at Dolores several months ago, and the company would like “to see it operate with the current con­figu­ration for a longer period before introducing further investment and changes.”

Pan American is reconciling the project’s reserve estimates with actual mining results to develop a reliable resource model, which is the foun­da­tion for its expansion.

Burns says the expansion offers its best returns starting in 2017, when the open-pit mine reaches its high-grade zone. Pan American would like to have the agglo-meration circuit working by then.

“It is a difficult choice to defer our construction decision on such a highly economic project, even at today’s prices, particularly given our ability to finance the project with our own balance sheet. But taking into account the reasons I’ve outlined and our ability to mean­ing­fully reduce the project risk further, this is the most prudent course of action,” he said.

Some aspects of the expansion will certainly go ahead: the installation of an electrical  substation and 110 km power line connecting Dolores with the electrical grid in Chihuahua; and the expansion of the leach pad.

On news of the Dolores PEA and delayed investment decision Pan American shares gained 25¢ to close at $16. The company has a 52-week trading range of $10.18 to $17.41, and 152 million shares outstanding.

Pan American operates seven mines in Mexico, Bolivia, Peru and Argentina, which in 2013 produced a record 26 million oz. silver and 149,800 oz. gold.

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Pan American Silver's Dolores silver-gold mine in northern Mexico. Credit: Pan American Silver
Pan American Silver's Dolores silver-gold mine in north...

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