Pan American, Orko part ways on $300m Mexican silver project on cusp of deadline
With a feasibility deadline imminent, Pan American has droppped the big La Preciosa silver project in Mexico. Now it's back in junior Orko Silver's court.
Author: Kip Keen
Posted: Thursday , 05 Apr 2012
HALIFAX, NS (MINEWEB) -
It's the end of the road for Pan American Silver (TSX: PAA) on the La Preciosa silver project owned by Orko Silver (TSX-V: OK). Orko said on Thursday the silver mining giant had told it that, per terms of a joint venture agreement, Pan American would not finish a planned feasibility study of La Preciosa and, in doing so, it would drop its option to earn 55-percent of the project, which holds over a 100-million-ounces silver in indicated resources .
While bullish on the project just half a year ago, Pan American cited project economics that didn't "rate" high enough for it to fit in its silver portfolio, according to Orko's press release.
For one analyst who covers Pan American for TD Securities the news on La Preciosa was welcome. In a note to clients on Thursday Daniel Earle was blunt. "The news comes as a relief to us," he said.
Three years ago TD Securities warned the joint venture looked onerous for Pan American, Earle said. "In a note sent to clients April 14, 2009 we raised a number of issues with the project (moderate size, high cost, etc.), and the terms of the joint venture, whereby Pan American had to fund 100 percent of the capital costs for 55 percent of the production, were not reasonable in our view."
That the joint venture deal was unreasonable was "evident" last year, Earle said, after Pan American and Orko released a scoping study of La Preciosa. In that scoping study Pan American and Orko outlined a silver mine, with a 12-year mine life, seven million ounce silver a year production, $11.84 per ounce silver in total cash costs and a $270 million initial capital cost. As for economics Pan American and Orko estimated La Preciosa would generate a 24-percent internal rate of return assuming $25 per ounce silver and $1,250 per ounce gold.
Back then, however, Pan American sung a vastly different tune about the project than it did today. In a prepared statement just over six months ago Geoff Burns, Pan American president and CEO, issued an upbeat message about La Preciosa and its place in Pan American.
"La Preciosa is a very interesting project, with a solid silver production profile, long mine life and it's located in a good mining jurisdiction, less than an hour's drive from our existing Mexican administration offices. At the PEA's long-term silver price the economics are very compelling; at current silver prices the project is extremely robust. We will be moving forward aggressively to complete a full feasibility study and to position ourselves for a construction decision in the first half of 2012."
Of course one shade that was brighter back then was the price of silver, which in August 2011 was trading either side of $40 per ounce, not the low $30 and high $20 per ounce range it has been trading within lately.
In stark contrast to the comments he made last year on the scoping study, Burns is quoted in Orko's latest press release as stating: "After completing almost three years of exploration, engineering and project development work, we have come to the unfortunate conclusion that our continued participation in the La Preciosa project is unlikely to generate a rate of return that meets Pan American's internal economic hurdle rate."
What has changed in the six-month long or so interim between then and now - just weeks away from a deadline for the delivery of a feasibility from Pan American - is not clear. Pan American had not responded to a request for comment as of presstime.
While Pan American sounded down, Orko crafted a cheerful statement about losing its partner on La Preciosa, which boiled down to: all the merrier, more La Preciosa for us then. Orko President and CEO Gary Cope, who could not immediately be reached for comment, stated in a press release, "We are very excited about regaining 100 percent ownership of the La Preciosa project and developing it into a large primary silver mine."
Cope noted Orko had reaped three years and $18 million worth of work on the La Preciosa project by Pan American. He said that Orko management believed there were improvements to be made on the August 2011 scoping study.
Among other things, Orko suggested resources for the feasibility study could grow and that "would significantly change the mine design." In other words, La Preciosa could get bigger and better.
Orko also noted that it had already signed up potential suitors to take a closer peek at La Preciosa. Referring to a digital data room it created three years ago, Orko said it "is currently updating the files in response to recent requests from other mining companies to review the project's technical information. Furthermore, confidentiality agreements, including standstill clauses, have recently been signed and site visits are to be scheduled."
But still, while Cope may claim excitement at having all of La Preciosa back at home, there is no doubt that with Pan American gone - and along with it a commitment to cover capital costs - Orko finds itself facing more risk on the project than it has in years. Chiefly, Orko faces the prospect of sourcing project funding in a miserly financing market.
That was perhaps how some investors saw it on Thursday as Orko's shareprice took a precipitous drop after it released news about the end of the La Preciosa joint venture. Late in the trading day Orko shares were down 32 percent on heavy trading volume.
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