Mining, Developing & Exploring

Operations / Mexico / La Colorada

La Colorada (100% Ownership)

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Project Description and Location

The La Colorada mine is located in the Chalchihuites district in Zacatecas State, Mexico, approximately 156 kilometres northwest of the city of Zacatecas and 99 kilometres south of the city of Durango. The La Colorada mine is comprised of three separate underground silver mines covering an area of approximately 2,864 hectares.

History

The first known mining in the Chalchihuites district began during pre-colonial times, when indigenous people produced silver and malachite. The village of Chalchihuites was founded during Spanish colonization in the 16th century and intermittent exploitation of the mineral deposits in the area continued. By the 19th century the Spanish mines were operating continuously, producing on the order of 30 million ounces of silver and 39,000 ounces of gold district-wide. The War of Independence curtailed production from this and many other silver producing areas between 1910 and 1920.

In 1925, the Dorado family operated mines at two locations on the La Colorada property. From 1929 to 1955, Candelaria y Canoas S.A., a subsidiary of Fresnillo S.A., installed a 100 tonne per day flotation plant and worked the old dumps of two previous mines on the La Colorada property. From 1933 to the end of World War II, La Compañía de Industrias Peñoles also conducted mining operations on a single breccia pipe on the property. From 1949 to 1993, Compañía de Minas Victoria Eugenia S.A. de C.V. operated a number of mines on the La Colorada property.

In 1994, Minas La Colorada S.A. de C.V. (“MLC”) acquired the exploration and exploitation claims and surface rights of Compañía de Minas Victoria Eugenia S.A. de C.V. Until
1997, MLC conducted mining operations on three of the old mines on the La Colorada property at a rate of approximately 150 tonnes per day.

Historically, exploration has been in the form of development drifting on the veins. Prior to our ownership, 131 diamond drill holes had been drilled for a total of 8,665 metres.

In 1997 we entered into an option agreement with MLC, during which time we conducted exploration and diamond drilling programmes as part of our due diligence reviews. We resampled four of 14 drillholes completed by MLC, and the results of these samples form part of the database of samples we use for the estimation of mineral resources and reserves. We acquired the La Colorada mine from MLC in April 1998 and have focussed our production on the Candelaria, Estrella, and Recompensa mines. No activity takes place at the Campaña mine.

Geology and Mineralization

The La Colorada property is located on the eastern flanks of the Sierra Madre Occidental mountain range at the contact between the Lower Volcanic Complex and the Upper Volcanic Supergroup. The La Colorada property lies 16 kilometres southeast of Chalchihuites and 30 kilometres south-southwest of Sombrerete, two mining camps with significant silver and base metal production from vein and associated skarn deposits, such as at the San Martin and Sabinas mines.

The oldest rocks exposed in the mine area are Cretaceous aged carbonates and calcareous clastic rocks of the Cuesta del Cura and Indidura formations. Overlying the calcareous rocks is a conglomerate unit containing clasts derived mostly from the sub adjacent sedimentary rocks. In the Chalchihuites district this unit is of Early Tertiary age and is referred to as the Ahuichila Formation.

Most of the outcrop in the mine area is represented by altered dacite of the regional Lower Volcanic Complex. The stratigraphically highest rocks in the mine area are felsic tuffs correlated with the Upper Volcanic sequence. These tuffs unconformably overlie the trachyte along the southern property boundary.

Thirteen breccia pipes have been mapped on the surface or in underground workings. The pipes are round to ovoid in shape, up to 100 metres in diameter, and can extend vertically more than 400 metres below the surface. The breccias contain clasts of limestone and trachyte, often mineralized, in an altered trachyte matrix. Clasts of vein material have been found in the breccias suggesting that the pipes postdate the vein emplacement.

East to northeast striking faults form the dominant structures in the project area and controlled the deposition of mineralization by acting as conduits for mineralizing hydrothermal fluids. Most of these faults dip from moderately to steeply to the south. Stratigraphic contacts are displaced from ten to over a hundred metres lower on down-dropped blocks.

The La Colorada mine is a typical epithermal silver-gold deposit, with a transition in the lower reaches of the deposit to a more base metal predominant system.

There are three separate active mines on the property, including the Candelaria, Estrella, and Recompensa mines. The main structure at Candelaria strikes generally east west. The west part of the vein is referred to as HW and the east part is referred to as NC2, and there are a number of off-splits from these veins. The Estrella Mine includes the Amolillo vein, which is a split from the HW vein, and the Palomas vein, which is a split from Amolillo. The Recompensa mine produces from the Recompensa vein; Erika, which is a split from the Recompensa vein; and the Yuri replacement body, which lies between Erika and Recompensa.

Four dominant styles of mineralization are present at La Colorada, including breccia pipes, vein-hosted mineralization, replacement mantos within limestone, and deeper seated transitional mineralization. A local analogy of this type of deposit is the San Martin Mine, where epithermal veins were mined earlier in the mine life before turning to skarn mineralization hosted by the same limestone unit found at the La Colorada Mine.

Mineralization in the breccia pipes generally has lower silver values and elevated base metal values. Mineralization is associated with intense silicification and occurs as disseminated galena and sphalerite with minor chalcopyrite and bornite. Sulphides are found in the clasts and the matrix.

Most mineralized veins on the property strike east to northeast and dip moderately to steeply to the south. Veins occur in the dacite and limestone units and cut across the bedding and contacts with little change in the width or grades of the vein. Mineralized widths in the veins are generally less than two metres, but may be wider in the presence of a surrounding halo of replacement or brecciated material. The HW Corridor at the Candelaria mine strikes east-west and dips moderately to the south, with true widths of approximately up to 15 metres, but most of the economic mineralization is located in quartz veins, which are on average one to two metres wide. In some cases vein fillings consist of quartz, calcite, and locally barite and rhodochrosite. Where the veins are unoxidised, galena, sphalerite, pyrite, native silver, and silver sulfosalts are present. The major mineralized veins are strongly brecciated and locally oxidised.

Manto style mineralization is found near vein contacts where the primary host rock is limestone. This style of mineralization was previously mined at Recompensa and is also present in areas of the Candelaria Mine. The mantos appear to be controlled by thrust faulting adjacent to the veins, and can form bodies up to six metres wide. Most commonly, they occur in the footwall north of the steeply dipping vein, but depending on the orientation of the fault they can occur in the footwall, the hanging wall, or both. The mineralogy of the mantos is characterized by galena and sphalerite with minor pyrite and chalcopyrite. Gangue minerals include quartz, rhodochrosite, pyrolusite, and other manganese oxides.

The deep seated transition mineralization, also known as NC2 Deep at the Candelaria mine, consists of both vein type mineralization and more diffuse stockwork and breccia zones. There appear to be seven distinct zones within the transitional zone, and these can be sub-grouped into three main categories: vein mineralization, including the down dip extension of the HW and NC2 and veins in the hangingwall and footwall of both; a peripheral stockwork vein zone that envelopes the NC2 structure; and sub-horizontal mantos-like stockwork zones in the NC2 hangingwall.

Deep drilling in 2009 and 2012 has defined a restricted manto replacement body at the 1,000 metre level and remains open to depth. This newly defined mineralization has lower silver-gold grades and higher lead zinc grades. It is adjacent to the known vein system which continues at that depth.

The current mineral resource and reserve currently comprises vein and manto hosted mineralization. The NC2 and HW Corridor veins at the Candelaria mine are economically the most important and contain over 40% of the mineral reserve and resource ounces of silver. These zones are characterized by a broad mineralized shear within limestone containing one or more quartz veins parallel to the orientation of the shear. The majority of the silver mineralization is found in the quartz veins which range from 2.0 to 2.9 metres wide. The HW and NC2 structures provide nearly 90% of the mine’s current production, on the order of 950 tonnes per day of both oxide and sulphide material. The two veins have a combined strike length of over 1,500 metres.

The NC2 vein is the most important source of sulphide silver mineralization and contains 29% of the mineral resource and reserve ounces of silver. It is a narrow, one to seven metre wide mainly sulphide and partly oxide vein with a strike length of over 900 metres. It is open to the east where it is cut by a trachyte dyke, and has been confirmed by drilling and drifting to continue in both width and grade on the other side of the dike. The down-dip exploration potential is significant. In 2012, we drilled a hole that intersected the vein 400 metres below the current probable mineral reserves. There are a number of other splits from this vein.

The HW vein, also at the Candelaria mine, is a one to two metre thick vein with a strike length of over 1.1 kilometres. The HW Corridor consists of four structures. Two structures are brecciated-altered zones in the hangingwall of the HW vein, named the HW-footwall and HW-hangingwall. The other two structures of the footwall side are named FW and Intermedia 3 and are controlled by a broad mineralized shear in limestone containing one or more quartz veins parallel to the orientation of the shear. The majority of the silver mineralization is found in the quartz veins which average two metres wide but can widen up to six to seven metres at the intersections with the HW vein.

At the Estrella mine, the Amolillo oxide/sulphide vein is located 500 metres north of the NC2 and HW vein complex and approximately along strike to the east of the Recompensa vein. The vein lies mostly within dacite host rock and limestone at depth, and has an average width of 1.5 metres and a strike length of approximately 900 metres. We currently produce about 125 tonnes per day of oxide material from this vein along a 400 metre strike length. Our drilling results in 2012 indicate that the Amolillo vein could be key to a possible mine expansion. To date, we have drilled 23 holes into the vein, 16 from surface and seven from underground. The first phase of drilling intersected the vein 245 metres below the deepest mining level, and expanded the lateral extension to the east and west by 500 metres for a total of 900 metres of current strike length.

The Recompensa mine contributes the fewest silver ounces to the mineral resources and reserves. The main zones being exploited are the Recompensa and Erika veins and the Yuri manto replacement body located between the two veins. The Recompensa and Yuri are located more than a kilometre northwest of the NC2 and HW vein complex. The vein mineralization averages about 1.8 metres wide in the economically mineable zones, and contains a minor amount of oxide but mostly sulphide material. Erika is a hangingwall split from the Recompensa vein and is relatively narrow at an average width of 1.0 metres in the economically mined zone. It contains only sulphide material.

Mineral Resource and Mineral Reserve Estimates

Management estimates that the Proven and Probable mineral reserves for the Alamo Dorado mine, as at December 31, 2013, are as follows:

La Colorada Mineral Reserves 1, 2, 3

Reserve Category Tonnes (Mt) Grams of Silver per tonne Contained Ag (Moz) Grams of Gold per tonne Contained Au (Koz) % Zinc % Lead
Proven 2.4 406 31.2 0.31 23.5 2.47 1.35
Probable 4.1 378 50.2 0.39 51.9 2.35 1.30
TOTAL 6.5 388 81.4 0.36 75.4 2.39 1.32

Notes:

1. Estimated using a price of $22 per ounce of silver, $1,300 per ounce gold, $1,850 per tonne of zinc and $1,950 per tonne of lead.

2. Mineral Reserves for La Colorada have been prepared under the supervision or were reviewed by, Michael Steinmann, P. Geo., and Martin Wafforn, P. Eng., as Qualified Persons as that term is defined in NI 43-101.

3. Lead and zinc grades shown are the average for the deposit. However, the base metals are only payable in the concentrates produced from the sulphide ores and not in the doré produced from the oxide ores.

Management estimates that mineral resources at La Colorada, as at December 31, 2013, are as follows:

La Colorada Mineral Resources 1, 2, 3

Resource Category Tonnes (Mt) Grams of Silver per tonne Contained Ag (Moz) Grams of Gold per tonne Contained Au (Koz) % Zinc % Lead
Measured 0.4 164 2.2 0.15 2.1 0.65 0.40
Indicated 1.7 255 13.8 0.29 15.7 0.83 0.51
Inferred 2.9 265 24.5 0.42 38.8 2.17 1.34

Notes:

1. These mineral resources are in addition to mineral reserves. Estimated using a price of $22 per ounce of silver, $1,300 per ounce gold, $1,850 per tonne of zinc and $1,950 per tonne of lead.

2. Mineral resource estimates for La Colorada have been prepared under the supervision, or were reviewed by, Michael Steinmann, P. Geo., and Martin Wafforn, P. Eng., as Qualified Persons, as that term is defined in NI 43-101.

3. Lead and zinc grades shown are the average for the deposit. However, the base metals are only payable in the concentrates produced from the sulphide ores and not in the doré produced from the oxide ores.

 

Mineral reserve estimates are based on a number of assumptions that include metallurgical, taxation and economic parameters. Increasing costs or increasing taxation could have a negative impact on the estimation of mineral reserves. There are currently no known factors that may have a material negative impact on the estimate of mineral reserves or mineral resources at La Colorada.

Mining and Processing Operations

La Colorada produces oxide and sulphide ores from the three separate Candelaria, Estrella and Recompensa underground mines. During the years between 2003 and 2010, oxide ore accounted for 65% of the total tonnes processed and that ratio is now decreasing as we mine deeper in the system. In 2011, sulphide ore accounted for 58% of the tonnes processed and we anticipate that in the next few years sulphide ore will account for nearly 80% of total tonnes processed due to depletion of the oxide resource. The oxide resource is expected to be fully depleted in 2016, although we may discover additional oxide resources to allow some additional continuation of oxide ore production. Considerable exploration success during the year has extended the life of mine plan. We currently anticipate that the mine will operate beyond 2021.

The mining method used at all three mines is cut and fill stoping. This method allows for improved ore recovery and selectivity from irregular, steeply dipping veins. Ground support is provided by backfilling the voids created by mining with development rock or mill tailings as the ore extraction advances.

Cut and fill stoping begins at the bottom of the ore zone and works upward in horizontal slices that follow the strike, dip and width of the ore zone. Ore extraction begins by cutting a 2 metre thick slice from the bottom of the ore zone and removing the broken ore from the stope. As each successive slice of the stope is taken, the void below is backfilled to support the side walls and to provide a stable working platform for mining the next ore slice.

The cut sequence begins with drilling the mine face. Working on a platform of the ore broken in the previous advance, miners use jacklegs and stopers to drill blast holes into the ore in the mine face above the work platform. After drilling, blasting agent is loaded into the holes, and the material is broken and dropped to the floor below. This material then becomes the working platform for advancing the next cut. After blasting, and after the atmosphere in the stope has been ventilated and is determined to be safe, roof support is completed by removing loose rocks from the newly exposed area and installing rock bolts. The fill sequence is completed by bringing in backfill material and placing it in the void created by ore extraction. The advancing face of the backfill material is separated from the ore to limit ore dilution.

Either hand held drills or electric hydraulic jumbo drills are used for development mining to access the ore, depending on the size of the excavation required. The mine currently has sufficient ore development ahead of stoping to provide flexibility for planning and scheduling.

Ore extracted from the Candelaria Mine is hoisted approximately 450 metres to the surface through the El Aguila Shaft. Two different 300 tonne capacity bins are used to segregate sulphide from oxide/mixed ore. Once on surface, the ore is dumped into one of two 200 tonne capacity ore storage bins according to material type. The ore is removed from the bins and hauled to the appropriate mill crusher stockpile by 12 tonne capacity surface haul trucks. The hoist system is capable of delivering approximately 900 tonnes per day to the surface. When required, Candelaria ore can be hauled up to the surface using one of the mine access ramps.

Ore extracted from the Estrella and Recompensa Mines is hauled to the surface by an underground mine truck fleet and stockpiled on the surface near the mine portals. The ore is then reclaimed from the stockpile and hauled to the appropriate mill crusher stockpile by the surface haul trucks.

The operation currently produces around 400 tonnes per day of oxide ore and 670 tonnes per day of sulphide ore. Each type of ore is processed through separate circuits which share a single crushing plant. Material mined from the transition zone between the oxide and sulphide zones is typically treated as oxide ore for processing. The daily processing capacity of the oxide plant is 650 tonnes of ore and the capacity of the sulphide plant is 750 tonnes.

The oxide plant comprises a conventional cyanide leach plant consisting of crushing, grinding, leaching, Merrill Crowe zinc precipitation and on-site refining to produce precious metal doré. Doré bars produced at La Colorada typically contain 98% precious metal, primarily silver, and 2% impurities. The sulphide plant is a conventional flotation plant comprised of crushing, grinding and selective lead and zinc froth flotation circuits to recover precious and base metals into separate lead and zinc concentrates.

Tailings from both plants are delivered as slurry to a lined tailings storage facility. Tailings from the sulphide plant are directed as required to a hydraulic backfill plant for re-use underground as backfill in the stopes. Tailings from the oxide plant are placed in tailing facility number six. We completed a fourth expansion phase in 2008 and are currently undergoing a further dam raise. Approval was received for tailings dam number 7, for tailings from the sulfide plant, was received in 2010 and construction was completed in 2012.

In 2013, La Colorada processed 448,659 tonnes of ore, producing 4.6 million ounces of silver, 2,600 ounces of gold, 6,800 tonnes of zinc and 3,300 tonnes of lead. Metallurgical recoveries at La Colorada have been relatively constant over the past 6 years, with an average silver recovery of 90% in 2013.

Capital expenditures totalled $13.6 million in 2013.

Activities in 2014
In 2014, La Colorada is expected to produce between 4.85 and 4.95 million ounces of silver, between 2,600 and 2,800 ounces of gold, between 6,500 and 7,000 tonnes of zinc and between 3,100 and 3,500 tonnes of lead.

In December of 2013, our Board of Director’s approved the La Colorada expansion project, which started in January 2014 and will increase the mine’s annual silver production by approximately 67% from 2013′s 4.6 million ounces to approximately 7.7 million ounces by 2018. The expansion project’s main components include a new 600-metre deep shaft and hoisting system, the development of new mining zones, the expansion of the mining fleet, the expansion of the sulphide treatment plant to approximately 1,500 tonnes per day, the expansion and upgrade to the mine’s dewatering and ventilation systems, the expansion of the tailings storage facilities and the construction of a new 115 Kv powerline. In 2014, our project team will focus on detailed engineering, mine development and on preparations to start constructing the new shaft and plant expansion in 2015.

Capital expenditures at La Colorada are expected to largely increase from the $13.6 million in 2013. During 2014, we anticipate incurring $40.0 million for capital expenditures, inclusive of $32.0 million related to the expansion project. The remaining $8.0 million for the existing operation includes equipment repairs, replacements and upgrades, underground ventilation systems and mine-site exploration.

Environmental

An EIS and risk assessment on the La Colorada property was submitted to Mexican environmental authorities in early March 1999. The EIS described the impact of proposed development and mining activities and provides conceptual plans for closure and remediation. The EIS was approved by the Mexican authorities in November 1999 and renewed late 2010. The new permit is valid for five years.

La Colorada has voluntarily participated in the Mexican Environmental Protection Authority’s (“PROFEPA”) “Clean Industry” Program which involves independent verification of compliance with all environmental permits and the implementation of good practice environmental management procedures and practices. The mine obtained its first certification in 2008 and has been re-certified every two years since, with the most recent certificate awarded on 10 August 2012.

The main environmental focus at the La Colorada property is the stability of the tailings facility and mine water discharges.

A closure cost estimate for La Colorada was prepared according to State of Nevada approved SRCE methodology in 2011 and is updated every year. Pan American has estimated the present value of the final site reclamation costs for the La Colorada property to be approximately $4.0 million.

Health and Safety

A formal safety audit was conducted in December of 2006 at the La Colorada mine by a third party consultant and Pan American’s Director of Health and Safety, resulting in an update of all protocols and procedures. Subsequent audits are conducted annually by Pan American’s Director of Health and Safety and safety managers from some of Pan American’s other mines. In 2008, La Colorada was the recipient of the prestigious “Casco de Plata” award for the best safety record during 2007 for underground mines in Mexico with in excess of 500 employees. In 2010, La Colorada was again the recipient of the “Casco de Plata” award for excellent safety performance in 2009. During 2013, personnel employed at the mine attended 33,400 hours of training.

Operating highlights

2013 2012 2011
Tonnes milled 448,659 419,591 404,533
Silver million ounces 4.6 4.4 4.3
Zinc tonnes 6,759 5,599 4,466
Lead tonnes 3,324 2,766 2,388
Gold ounces 2,579 3,578 4,104
Cash cost per ounce1 $9.43 $8.64 $7.74

1.Net of by-product credits. For purposes of calculating 2013′s cash costs, the Company used the following price levels for its by-product production: Zn $ 1,850/tonne; Pb $2,100/tonne; Au $1,200/oz.

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