A year ago, when Vancouver-based Pan American Silver Corp. (TSX-PAAS) acquired Minefinders Inc., also of Vancouver, it put Pan American on track to become the world’s largest primary silver miner.
The $1.2 billion deal gave Pan America control of two mines in Mexico, the largest silver-source country on the planet, and allowed the company to see a 30% increase in production last year.
Yet the move failed to excite shareholders. When the all-stock takeover was announced in March 2012, the Pan American share price dropped 10%. As of press time, it was still trading below a 52-week high.
Pan American paid $15.60 per share for Minefinders, a 36% premium on what the stock was trading at. It got the Dolores silver and gold mine in northern Mexico and the nearby La Bolsa property, a short-life gold mine which has yet to begin production.
Some questioned the premium paid for Minefinders – a company with just $241 million in annual sales – during an overall downturn in the silver market, but some analysts suggest a stock rally could be imminent.
“There has been a wrong call [on Pan American] for the last 12 months,” said Toronto-based Andrew Kaip, a mining analyst with BMO Capital Markets, which had helped broker the deal. Kaip has issued an “out perform” call on Pan American, while Salman has it ranked it as “a buy.”
“We have a [12-month] target of $22,” noted David West, precious metal analyst at Salman Partners of Vancouver. That would be a return to the price Pan American was trading at when the Minefinders deal was first reported in January 2012.
But, as Pan American COO Steve Busby says, there may be more to the Minefinders deal.
Low-cost producer
The open-pit, heap-leach Dolores mine has a 17-year lifespan and holds both gold and silver, Busby explained. When the value of the gold is taken into account, it is among the lowest-net-cost silver mines in the world, he said. Pan American estimates cash costs are in the range of $2.25 to $3.50 per ounce of silver recovered.
This year, Dolores is expected to produce about 3.3 million ounces of silver and up to 68,000 ounces of gold from the Dolores pit.
There is also a promising expansion that could add value, Busby said. Pan American is planning to add a milling system at Dolores that would boost recovery of the highest-grade silver. “We hope to announce this near the end of this year,” he said. Busby said there is also potential for underground mining that would extend the mine’s life. “There [are] a lot of high-grade zones beneath the pit.”
Side deal
Meanwhile, Pan American has inked a deal with former Minefinder executives to develop La Bolsa, the second property in the original deal. Greg Smith, former CFO at Minefinders, is now CEO of Esperanza Resources (TSX.V-EPZ), which owns the Cerro Jumil gold mine in Mexico.
Under a February 25 agreement, Pan American pooled two small gold mines it owns in South America with the La Bolsa mine and Esperanza’s Cerro Jumil under a $35 million partnership deal with Esperanza, which will develop the La Bolsa property.
“We will control 48% of the [Esperanza] shares, and we will have three board seats,” Busby said. “We think it’s a great way for our shareholders to get some value out of these [gold] assets, that, frankly, none were getting value for.”
Pan American, which will mine an estimated 25 million ounces of silver this year, up from 21.5 million in 2012, is now ranked as the second-largest primary silver producer in the world, behind Mexico’s Fresnillo PLC, which had an output of 38 million ounces last year. But Pan American could become the world’s largest, Busby said.
The company has eight silver mines in Peru, Mexico, Argentina and Bolivia, as well as the Navidad project in Argentina, one of the largest undeveloped silver deposits in the world. And Pan American is still in acquisition mode.
Busby said the drop in both mining company share values and silver prices has created a “favourable market for acquisitions. We are in a good cash position and we are hunting for deals. We are always on the hunt.”
As of press time, silver was trading at $28.75 per ounce on May 15 futures, down from a peak of $34.97 in September 2012 and off from the $33 per ounce a year earlier. Pan American shares were trading at $16.79.
