PAN AMERICAN SILVER CORP. (TORONTO:PAA & USA: PAAS)
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A MINING COMPANY FOCUSED EXCLUSIVELY ON SILVER
Business Summary
Production from Pan-American wholly-owned primary silver operations in 2002 was 7.8 million ounces of silver -- a 12 percent increase over that of 2001, and more than double the production of 2000. Consolidated total cash costs per ounce of silver production were $ 4.16 net of by-product credits, a 5 percent improvement over the prior year.
In Peru, the Huaron mine successfully completed its first full year of production in 2002 and yielded 4.5 million ounces of silver. A ten percent ramp-up in Huaron's production began in late 2002 and silver out-put for 2003 is projected to be 4.9 million ounces. During 2002, silver output from the Quiruvilca mine in Peru was scaled back further to 2.5 million ounces due to low metal prices. Also in Peru, in November Pan American acquired small but very low cost production from silver-rich stockpiles near Huaron. Silver output from the stockpiles totaled 0.1 million ounces in 2002 and is expected to average 0.5 million ounces per year in 2003 and beyond.
In Mexico, small-scale production continued at the La Colorada mine, yielding 0.6 million ounces, while construction of a major expansion began in July. Construction to date is on schedule and budget. Full-scale production should begin by July 2003, which should result in 2.3 million ounces of silver output for the year 2003, increasing to an average of 3.8 million ounces of silver per year thereafter.
Steady state production from these operations should result in at least 10 million ounces of silver production in 2003 -- a further 28 percent increase over 2002's output. In addition, Pan American recently took control of the Alamo Dorado project in Mexico through the acquisition of Corner Bay Silver that closed in February 2003. Metallurgical testing and permitting work will be followed by financing and construction of a mine at Alamo Dorado, which is expected to produce 6 million ounces of silver and 30,000 ounces of gold per year beginning in 2005. This production base will solidify Pan American's standing as the largest primary silver producer in the world.
Pan American now controls the reserves and resources of more than 743 million ounces of contained silver. Active exploration projects and property holdings in major silver-rich regions of the world give Pan American a solid pipeline of future development projects.
Recent News: Pan American Purchases the Morococha Silver Mine, Peru
Pan American Silver Corp. has signed a binding agreement with a number of individuals, subject to regulatory approval and other conditions, to purchase for approximately $ 35 million 92.014% of the voting shares of Compaņia Minera Argentum S.A. ("Argentum"). Argentum will acquire, through a split- off process from Sociedad Minera Corona S.A., the Anticona and Manuelita mining units and related infrastructure and processing assets ("Morococha").
Morococha is located in central Peru 150 km northeast of Lima. Historically, the operation has produced approximately 3.5 million ounces of silver annually, together with significant amounts of by-product zinc, copper and lead, at a cash cost, net of by-product credits, of below $ 3 per ounce of silver. Morococha is located only 80 km from Pan American's 4.5 million ounce/year Huaron silver mine, which is also an underground vein mine producing silver-bearing concentrates.
Morococha hosts a very large and prolific network of veins and replacement bodies within a mineral rights package covering 6,648 hectares of historically productive and highly prospective concessions. The mine has proven and probable reserves of 9.2 million ounces of silver, measured and indicated resources of 5.7 million ounces of silver, and inferred resources of 40 million ounces of silver.
The addition of Morococha is immediately accretive to Pan American's silver production, cash flow and earnings per share, and will reduce the company's consolidated cash and total operating costs per ounce of silver produced. The new production will increase the company's 2004 silver production forecast from 10.1 million ounces to 13 million ounces and will reduce forecast cash costs to below $3.50/oz, bringing anticipated total costs to less than $4/oz for the year. The acquisition will increase Pan American's annual Peruvian silver production to over 10 million ounces and will allow many administrative synergies with the company's other two Peruvian underground mines and its Lima administrative office.
Based on an extensive technical due-diligence review, Pan American plans to carry out stepped-up mine development and mill upgrades to enable sustained long-term production averaging 3.9 million ounces of silver annually at a cash cost of below $ 2.50 per ounce.
According to Pan American Chairman and CEO, Ross Beaty, "Morococha is a rare opportunity low-cost, long-life and in Peru, a great mining country where we already have an important presence. It is an excellent addition to Pan American's assets and will help us achieve our mission of becoming the world's leading primary silver producer in the near future. This acquisition is a perfect fit with our existing Peruvian asset base and is immediately accretive by every measure. I particularly like the mine's great exploration potential, which we intend to evaluate aggressively."
Silver Fundamentals
The silver price in 2002 averaged $ 4.60 per ounce, an increase of 4.5 percent from the average
US dollar price in 2001. However, since the US dollar depreciated against most international currencies in 2002, the silver price remained unchanged, or decreased, in many local currencies around the world. The gold price, on the other hand, rose by 24.7 percent during 2002. Silver rose with the gold price initially but stuck at about the $ 4.80 level while gold continued rising through early 2003 to a high of $ 390. While silver did not rise as much as gold did during the year, it outperformed nearly all base metals. This result perfectly demonstrates silver's dual use as both an industrial metal and a precious metal, and highlights one of its greatest strengths -- the diversity and breadth of its demand. Of all precious metals, silver is considered by many to have the strongest likelihood of a long-term sustained price rise from present levels.
The most important factors affecting silver's performance in 2002 were: on the negative side, 1) poor industrial demand due to the continuing global economic slowdown; 2) poor harvests in India that reduced Indian jewelry demand; and 3) continuation of large government silver stockpile sales from China; and on the positive side, 1) lower mine production of silver; 2) lower Chinese stockpile sales than in previous years; 3) depletion of some industrial stockpiles built up in 2000; and 4) the return of significant investment demand for the first time since 1990. Once again, silver usage in photography increased, with only limited impact from digital imaging. For the twelfth consecutive year, silver demand outstripped silver supply from mines and scrap sources by about 55 million ounces. The accumulated silver supply deficit since 1992 is now more than 1.3 billion ounces.
In 2002, Pan American's Chairman and CEO, Ross Beaty again headed up The Silver Institute, a Washington-based organization representing worldwide silver miners, manufacturers, bankers, traders and other entities involved in the global silver market. The Silver Institute publishes the authoritative annual World Silver Survey, a compendium of silver demand and supply statistics produced by Gold Fields Mineral Services Ltd., an independent London-based consultancy. The Institute also seeks to stimulate silver demand. In early 2002, a mission from the Silver Institute visited China to meet with senior officials involved in the silver market as part of a multi-year campaign to assist authorities in increasing domestic Chinese silver demand and to lobby for greater transparency in the country's silver holdings and sales. This mission was very productive. The Silver Institute then co-sponsored the first Chinese Silver Conference in Huhot, Inner Mongolia in September, and plans to co-sponsor future silver conferences in the country in order to increase the profile of silver and its many uses in one of the world's largest markets.
Since 1999, China has emerged as the single most significant factor in the silver equation -- and, from our standpoint as a large silver producer, a most challenging factor. The Silver Institute estimates that the Chinese government disposed of more than 225 million ounces of silver inventories since 1998. Statistics for 2002 are not yet finalized, but it is thought that China is now more price-sensitive in its silver sales. Certainly, Chinese inventories are much smaller than they were in 1998 and it is thought by some experts that they will be completely exhausted at the present rate of sales by mid-2004. This will be hastened by any increase in domestic silver demand. Longer term, increased industrial and jewelry demand in the country's growing economy, coupled with the predicted lowering of the Chinese mine supply, should result in China's current silver surplus changing to a net silver deficit within a few years.
Technical Considerations
It has taken more than ten years to complete this important turn-around, but now that it has been achieved, the stage is set for further price increases to the US 9-dollar level, for starters.
A consolidation may be needed at this point after the important break-out above the resistance level at $ 16. Nevertheless, once the silver price starts moving again, we are confident that the share price of PAA will also see further price advances.
Our recommendation: Buy!
Peter Zihlmann
www.pzim.com
investment@pzim.com
forex@pzim.com
February 18, 2004
Disclosure: The author has not been paid to write this article, nor has he
received any other inducement to do so. The author is a shareholder in the
company and will benefit from any increase in the company's share price.
Disclaimer: The author's objective in writing this article is to invoke an
interest on the part of potential investors in this stock to the point where
they are encouraged to conduct their own further diligent research. Neither
the information, nor the opinions expressed should be construed as a
solicitation to buy or sell this stock. Investors are recommended to obtain
the advice of a qualified investment advisor before entering into any transactions
in the stock.
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