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Establishing Solid Foundations for Next Mining Boom

George Greer - Pan American Silver
Senior Vice-President of Project Development

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Sat, 02/21/2015 - 17:42

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Q: How competitive are Pan American Silver’s projects in Mexico compared to your other projects in the region?

A: They are very competitive. The grade of our deposit at the La Colorada mine in Zacatecas is one of the highest grades at any of our projects. We are dealing with an average grade of 388 g/t of silver, with good levels of base metals, lead, and zinc grades as well. Additionally, the cost of working on projects in Mexico is very attractive. We maximize our resources within Mexico as best we can, which helps make our projects very competitive compared to some other countries. Overall, Mexico is probably one of the best countries for us to be investing in right now. I personally believe that the country has a very friendly and progressive environment. The people I have worked with here have been very easy for us to deal with. 99% of our success is down to our people, and the results we have a seen are a direct reflection of their dedication, hard work, and expertise.

Currently, our largest investment is the expansion of the La Colorada mine, which has been visited by banks, investor relations staff, and investment analysts over the course of the last 12 months. They are all very supportive of us embarking on this expansion project. Even so, lower metal prices are creating challenges at our other operations. The Alamo Dorado mine in Sonora and the Dolores mine in Chihuahua have to be very creative to remain economic during these difficult times. Nevertheless, we believe that continuing with these operations is the best course of action during the lower price cycle. We are working very hard to ensure a good return for our investors.

Q: In order to ensure that your investments will create value for your shareholders, what are your minimum criteria for advancing a project?

A: Generally, within the mining industry, the acceptable rate of return is between 10-15%. There are exceptions to that range though, particularly in countries that pose a significant political or social risk and where a higher rate would be required. Mexico is a very stable country that has always been supportive of mining, has quality resources, and offers reasonable labor and material costs, making a 10-15% rate of return more than acceptable.

Q: Given La Colorada’s long mining history, what benefits would an expansion bring to the company and its investors?

A: The La Colorada mine was owned by many different families prior to Pan American Silver acquiring it in the late 1990s. It was operating at a 200 t/d rate when we acquired it, and we increased that rate over time to the current 1,250 t/d, reaching an annual production of over 4.5 million ounces of silver. The expansion project will increase production from 1,250 t/d to 1,800 t/d, which is a big increase for a narrow vein, underground mine. The project will include an expansion of the mine to increase the production rate, the development of new levels in some of the ore bodies, the sinking of a new shaft, and the installation of a new hoist and headframe. The existing hoisting system and shaft is old and fragile and can only hoist a maximum of 1,250 t/d. The operators at the site do a great job keeping it running, but the inherent risk of a breakdown remains. We have already completed some pre-feasibility studies, we have defined a flow sheet that we like, and we have already started procuring some equipment for a plant expansion. Increased production means that we will need to raise the tailings dam, increase the capacity of our power line, and procure new underground mining equipment. The capital cost of the project is planned at US$137 million, spread out over four years. In 2014, our budget was set at between US$28-32 million, but this expected to increase to US$70- 80 million in 2015. The remainder will be spent in the following two years.

Q: Which role does new technology play in the capacity expansion from 1,250 t/d to 1,800 t/d?

A: A lot of the technology involved in the expansion will be standard, but there is certainly an opportunity to utilize technologies that are new to us. For example, the traditional way to develop shafts has been through drilling and blasting from top to bottom. Our new shaft is likely to be developed using large diameter, raise boring technology. In this manner, a few mines have recently developed lower cost shafts with a higher degree of safety. The technology for the La Colorada processing plant expansion will include a standard two-stage crushing and ball mill circuit. Obviously, we will also look to install the newest flotation systems and filter presses, as well as a process control (PLC) system that will help the plant run more efficiently, and ultimately secure higher recoveries. There is a very low turnover rate at La Colorada, and most of the operators and miners have been there since Pan American Silver purchased the mine. With the new expansion, we want to provide the team with the opportunity to perform even better with newer technology and equipment. Q: How has Alamo Dorado performed in relation to your original forecasts? A: It has performed extremely well. The mineral reserves were found to be better than expected once we started developing the open pit and discovered some higher grade zones. For example, we even produced 1 million ounces of silver in a single month during the hiatus of our mining, which was not even close to predicted in our original forecasts. Overall, on a project return basis, Alamo Dorado has probably been one of the best projects that Pan American has ever developed and mined. It paid back multiple times what we expected it to return due to the higher gold and silver grades that we encountered once we began mining. Again, our excellent team on site managing that operation contributed considerably to our success at Alamo Dorado.

Q: Dolores has one of the largest reported and probable silver reserves in the company’s portfolio. What are your expectations for this mine in the near future?

A: The Dolores mine will continue to be a large producer for us. We are currently producing approximately 16,000 t/d of ore, crushing it, and placing it on the leach pads. Our latest leach pad expansion has just been completed, the area is now lined, and there is adequate room for stacking of additional ore in the medium term. This has been a challenge in the past as it seemed we were always only months ahead of ourselves with our leach pad installations, but we now have clear sailing ahead of us for the next few years. Given recent lower metal prices, our team on site has been able to look at opportunities to reduce costs and make the operation more economic. We are evaluating the installation of a pulp agglomeration circuit. This new plant would process the highest grade portion of the ore that we mine, grind it finer, mix it with cement and water, and produce agglomerated balls of material up to three inches in diameter. We would then stack this agglomerated product on the leach pad with our existing ore. This will allow us to increase the recovery of gold by a minimum of 10% and the recovery of silver by up to 20% for that higher grade material.

Q: Is Pan American Silver looking to grow organically through the exploration of its properties, or through the acquisition of greenfield exploration projects?

A: Currently, as with most mining companies, we believe that the best opportunities are in proximity of our existing deposits, and within our existing mineral claims. Approximately seven years ago, we had about one year of reserves left at La Colorada. We now have more than 15 years of reserves, thanks to a successful exploration program at depth and along strike within the confines of our existing mineral claims at La Colorada. In light of this, we are looking to focus more on organic growth as opposed to the higher risk greenfields type of approach.

Q: What is Pan American Silver’s strategy for accessing the company’s required capital?

A: We are fortunate in that we have very little corporate debt and we had well over US$350 million available in our treasury as of September 2014. We are planning to fund our existing projects, the main one being the La Colorada expansion, directly from the treasury. We are not in a position where we have to go out to the capital marjkets. The best time to be spending money on a new project is when metal prices are lower, which allows us to then maximize the value and the project return when metal prices cycle through to the next high. I expect that our La Colorada project will deliver a very good return on investment, with higher metal prices in 2016, possibly providing us with additional long-term value.

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