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La Colorada

OVERVIEW

La Colorada is an underground polymetallic silver mine located in the Sierra Madre mountain range in Zacatecas, Mexico, and was acquired by Pan American in 1998. Silver, gold, zinc, and lead mineralization is present as epithermal veins, breccia pipes, mantos, and lime stone replacements in three main zones known as Candelaria, Estrella, and Recompensa. The mining method used throughout is cut and fill stoping.

Oxide and sulphide ore is treated in separate oxide and sulphide plants. The oxide plant comprises a conventional cyanide leach plant consisting of crushing, ball mill grinding, leaching, Merrill-Crowe zinc precipitation, and on-site refining to produce silver and gold doré. The sulphide plant is a conventional flotation plant comprised of crushing, ball mill grinding, and selective lead and zinc froth flotation circuits to recover silver, gold, zinc, and lead into separate lead and zinc concentrates. The daily processing capacity of the oxide plant is 650 tonnes and the capacity of the sulphide plant is 750 tonnes.

An expansion project was approved in December 2013 to increase the overall production rate of the operation to 1,800 tpd by the end of 2017. The expansion project, which started in 2014 and is expected to be complete by the end of 2017, involves the construction of new mining infrastructure, including a new 600 metre deep extraction shaft with a capacity for hoisting ore and waste of 2,300 tpd as well as serving as the main access to working areas for mine personnel and additional underground development to extend the operation to deeper levels. The sulphide ore processing plant will be expanded to 1,500 tpd from the current capacity of 750 tonnes per day. The expansion plan also includes the installation of a new 115 kV power line connected to the national electricity grid.

OPERATING UPDATE

In 2014, silver production at La Colorada rose to a record 4.98 million ounces, 9% higher than in 2013, making La Colorada our largest silver producer. The production increase was due to higher throughput and an increase in average silver grades which were achieved using additional equipment acquired as part of the mine’s expansion project.

2014 gold production of 2,600 ounces was similar to 2013 production due to lower average gold grades and a 3% decrease in gold recoveries due to mine sequencing. Increased sulphide ore throughput had a positive effect on base metal grades and recoveries, which led to record annual zinc production of 7,700 tonnes and lead production of 3,700 tonnes, 14% and 13% greater than 2013 production, respectively.

2014 cash costs, net of by-products, were $8.14 per silver ounce, the lowest in the Company, and a 14% decrease from 2013 cash costs. Lower cash costs resulted from a 9% increase in silver production and a 17% increase in by-product credits driven by record base metals production, which was slightly offset by lower realized gold prices and gold production.

La Colorada’s 2014 all-in sustaining costs per silver ounce sold (“AISCSOS”) decreased by 10% to $10.90 from $12.14 in 2013 due to lower production costs, higher by-product credits and an increase in payable silver ounces sold.

LA COLORADA EXPANSION PROJECT

The La Colorada expansion project commenced in January 2014 and is expected to increase the mine’s annual silver production by approximately 67% to approximately 7.7 million ounces by 2018. The 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 power line.

In 2014, we invested $17.9 million on the La Colorada expansion. The majority was spent to purchase new underground mobile mining equipment, to advance project related underground mine lateral development, on engineering work and equipment purchases for the plant expansion, on new community infrastructure, procurement of the new production hoist, camp and site infrastructure expansions, as well as to fund indirect project costs. Work on the expansion project advanced on track during 2014.

2015 FORECAST

La Colorada is expected to produce between 4.90 and 5.00 million ounces of silver, similar to 2014 production. 2015’s processing rates are estimated at between 1,260 and 1,275 tonnes per day, with sulphide ore from the Candelaria mine zone comprising 60% of the total mine production, similar to 2014’s ore distribution. Oxide ore feed is expected to contribute the remaining 40% with the majority coming from the Estrella mine zone. Base metals by-product production is expected to be consistent with 2014 production.

2015 cash costs per silver ounce of $8.50 to $9.25 are expected, an increase from $8.14 per ounce in 2014, primarily due to minor production interferences expected from the new shaft excavation project, which will somewhat reduce underground mine productivity. This is expected to be partially offset by Mexican Peso devaluation.

In 2015, sustaining capital expenditures at La Colorada are expected to decrease from 2014 to between $11.0 million and $12.0 million and are expected to be allocated as follows: $7.2 million for mine related capital, the largest components being a mine discharge water treatment plant (primarily sediment removal), a ventilation raise, and equipment rehabilitation; $1.4 million in development exploration; and $1.1 million in processing plant capital.

AISCSOS at La Colorada for 2015 is expected to be between $10.95 and $11.70 per ounce, in-line with 2014’s AISCSOS.

In addition, capital expenditures relating to La Colorada’s expansion project are expected to total between $75.0 million and $80.0 million in 2015. Activities programmed for 2015 include underground mine development and additional equipment purchases, work on a new power line, as well as the expansion of site infrastructure. Key milestones planned for 2015 include completing the physical excavation and detailed engineering for all shaft works, installing the new hoist, fabricating and installing a new headframe, advancing the lining and equipping of the shaft, and completing construction of the new plant sufficiently that commissioning can be completed by mid-year 2016. The new hoist and new shaft installations are also targeted for completion by mid-2016.

Mineral Reserves and Resources

Management estimates that the Proven and Probable mineral reserves for the Alamo Dorado mine, as at December 31, 2014, are as follows:

La Colorada Mineral Reserves 1, 2, 3

Reserve Category Tonnes (Mt) Grams of Silver per tonne Grams of Gold per tonne % Zinc % Lead
Proven 3.0 427 0.33 2.65 1.46
Probable 3.8 364 0.37 2.26 1.29
TOTAL 6.8 391 0.35 2.43 1.37

Notes:

1. Estimated using a price of $18.50 per ounce of silver, $1,250 per ounce gold, $2,000 per tonne of zinc and $2,000 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, 2014, are as follows:

La Colorada Mineral Resources 1, 2, 3

Resource Category Tonnes (Mt) Grams of Silver per tonne Grams of Gold per tonne % Zinc % Lead
Measured 0.3 153 0.13 0.59 0.33
Indicated 2.3 222 0.23 0.71 0.48
Inferred 3.4 251 0.51 3.02 1.77

Notes:

1. These mineral resources are in addition to mineral reserves. Estimated using a price of $18.50 per ounce of silver, $1,250 per ounce gold, $2,000 per tonne of zinc and $2,000 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.

Technical Report
HIGHLIGHTS
Name La Colorada
Location Zacatecas State, Mexico
Mine Type Underground
Ownership 100%
Products Silver and gold doré, silver rich lead and zinc concentrates
Capacity 1,250 tpd
Deposit Type Epithermal veins, breccia pipes, mantos, and replacements
Location