silver~pan am silver's peru mine

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    Pan Am Silver mine hangs in the balance

    By: Nicole Mordant

    VANCOUVER – Without a concerted jump-start for flagging base metals prices, a scenario few believe is on the horizon, Pan American Silver’s [TSX: PAA | Nasdaq: PAAS] Quiruvilca mine in Peru faces almost certain closure.
    Silver-zinc producer, Quiruvilca, has been Pan Am Silver’s problem child for the past two years. First knocked by a slide in silver and zinc prices to record lows in late 2000, it has more recently been hit by a decline in metal grades that mine management do not expect will reverse any time soon.

    “Mother Nature has not been kind to us and we simply cannot operate the mine profitably at current prices under the lower grade conditions at the operation,” says Chairman and Chief Executive, Ross Beaty.

    Total cash costs per ounce of silver at Quiruvilca were $5.20 in the first quarter, down on the $5.51 of Q4 2002 after some cost-scything initiatives but still well above the average silver price realized by Pan Am Silver of $4.37 [See results table at below].

    Although Beaty is optimistic about higher silver prices this year, he is less sanguine about base metals prices, which are the swing factor in Quiruvilca’s fate. Base metals are increasingly forming a bigger part of Quiruvilca’s revenue because as the mine’s veins deepen, they become more zinc-rich.

    “At some point we may have to take the hard step to close or sell off Quiruvilca,” Beaty said, adding that Pan Am Silver is currently considering all options and will report back to the market later this year.

    Analysts reckon a closure of the mine, located in the Andes mountains of northern Peru, is a more likely scenario than a sale. “In this market, it will be difficult to find a buyer,” says Barry Cooper, analyst at CIBC World Markets in Toronto.

    But a closure will not be easy. Not only are there large environmental costs and issues involved, there is also the social upheaval for workers and the community dependent on the mine, which is one of Peru's oldest mines. Pan Am Silver management have clearly been applying their minds for some time to a possible closure and draw some comfort from the fact that Quiruvilca is right next to Barrick’s mammoth Alto Chicamo gold project. It could help to cushion some of the economic shock to the region. A provision of $10 million has been made for future reclamation costs if the mine is closed.

    New COO, surprise earnings’ loss
    Beaty also made the unexpected announcement that John Wright would be stepping down as President and Chief Operating Officer in the middle of this year for personal reasons, although he would remain a director. Wright has been replaced by Geoff Burns, who was previously Chief Financial Officer at Coeur d'Alene, an Idaho-based silver producer. Last year Coeur reported a net loss of US$81million on revenue of US$94.5 million. Burns, who has a Bachelor of Science degree in Geology and an MBA, previously also held financial roles with Prime Resources Group and Homestake Canada. One analyst questioned whether top management would not now be too weighted by financial experts, while light on operational expertise. Beaty did also say that one or two engineers would be appointed later this year to assist top management. Another surprise was the appointment of Brenda Radies of Placer Dome as Vice President of Corporate Relations to replace Rosie Moore.

    A first quarter earnings loss also caught the market slightly unawares as analysts had been expecting a small profit. Cash costs for the group were higher than anticipated at $4.13 per ounce of silver (net of by-product credits), up some 7.5% on first quarter 2002. Beaty said cash costs were expected to decrease this year as La Colorado, Pan Am Silver’s Mexican operation that is currently nearing the end of construction, reached full production. The full start-up of La Colorado remains on budget and schedule for July.

    Pan Am Silver’s stock finished down 2.4% at C$9.47 on the Toronto Stock Exchange.

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