Mining, Developing & Exploring

Operations / Peru / Morococha

Morococha (92.2% Ownership)

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Project Description and Location

The Morococha mine is an underground silver mine located 137 kilometres east of Lima in the province of Yauli. Mining has taken place on the Morococha mine and nearby areas such as Casapalca and Cerro de Pasco for more than 100 years. The nearest city is La Oroya, approximately 38 kilometres to the east. The area of the concessions owned by Pan American covers 12,192 hectares, and there are an additional 106.2 hectares of concessions held with different third party participations.

History

Mining began in the region around the Morococha mine before the 1500s, and production has been continuous in the district since the late 1800s. The former owners of the mines that comprise the Morococha operations conducted only minimal systematic exploration in the district. Most of the older exploration efforts were limited to underground development along strike of known structures, which was immediately followed by stope development and mining. The Morococha district has excellent exploration potential owing to the prevalence of carbonate units favourable for replacement mineralization as well as significant vertical extents of known mineralization. As a result, drilling was not typically part of the exploration efforts. Prior to Pan American’s acquisition of the property, little effort was given to the exploration and economic evaluation of areas that were not immediately adjacent to the existing mine workings. SMC utilized both surface and underground diamond drilling only to test for potential economic mineralization in the various veins, replacement mantos, and skarn bodies. Once the presence of economic mineralization was confirmed, the vein or manto was accessed by underground crosscutting and drifting for further exploration. None of the historical drillhole data is used in the current estimation of mineral resources and mineral reserves at Morococha.

Between 1915 and 1918, much of the district was reorganized and incorporated into the Cerro de Pasco Mining Company (“Cerro de Pasco”). By 1924, Cerro de Pasco was producing at a rate of 1,500 tonnes per day from primarily copper ores containing 6% copper. Between 1929 and 1934, Cerro de Pasco excavated the 11.5 kilometre long Kingsmill Tunnel, successfully dewatering all of the Morococha district mine workings above the 4,020 metre tunnel elevation. The Kingsmill Tunnel is still in use and is a vital feature of the Morococha mining district.

In the 1940s, the Gubbins family began operating mines in the Morococha district through Minera Santa Rita S.A. and Minera Yauli S.A., which were subsequently consolidated in the late 1990s into SMC. Cerro de Pasco continued to operate in other areas around the Morococha district until 1974, when its mines were nationalized by the Peruvian government. Production from the Cerro de Pasco mines in the district continued under the Peruvian national mining company, Centromin, until 2003, when SMC acquired these operations from Centromin through privatization.

On January 20, 2004, Pan American entered into an agreement with 14 individuals, estates and companies, all of whom were arm’s length to Pan American and are members of the Gubbins family or entities in which members of the Gubbins family hold beneficial interests (the “Morococha Vendors”), to purchase 92.014% of the voting shares of Argentum, a sociedad anónima organized under Peruvian company law, for $35,425,390 in cash. Argentum acquired, through a corporate restructuring undertaken under Peruvian company law, the Anticona and Manuelita mining units and related infrastructure and processing assets from SMC. At the time of acquisition, Argentum held in its treasury as cash, all profits earned by SMC’s Anticona and Manuelita mining operations since November 1, 2003. The transaction was subject to regulatory approval and a number of conditions, including: (i) the completion of the corporate restructuring; (ii) the listing on the Lima Stock Exchange of 100% of the shares of Argentum, including those issued in connection with the corporate restructuring; and (iii) our successfully undertaking a public bid for not less than 92.014% of the voting shares of Argentum through the Lima Stock Exchange.

On February 24, 2004, Pan American entered into a further agreement with the Morococha Vendors to purchase all of the issued and outstanding shares of Empresa Minera Natividad S.A. (“Natividad”), a corporation organized under Peruvian company law which holds mining concessions and operations that are complementary to the Anticona and Manuelita mining units, for $1.5 million in cash. Closing of the acquisitions of Argentum and Natividad occurred contemporaneously in August 2004, with effect as of July 1, 2004 and in 2005, Argentum amalgamated with Natividad. Argentum made all necessary applications for delisting its shares from the Lima Stock Exchange and the delisting process was completed in 2006. In addition, Pan American Peru continues to acquire the labour shares in Argentum when able to do so. The labour shares were created as a means through which workers would be able to take part in our success (but do not afford the holders of such shares influence over our decision-making, as they are non-voting), and are held either by current workers, former workers or by third parties who have bought labour shares in the free market.

Geology and Mineralization

The host rocks for the mineralization in the Morococha district comprise a 2,000 metre thick Palaeozoic to Mesozoic aged sequence of schists, volcanic rocks, and predominantly carbonate sediments cut by a series of Upper Tertiary aged intrusions. The structures that account for the majority of the vein mineralization in the Morococha district trend predominantly northeast to east-northeast.

The structural setting of the area is dominated by shallowly northwest plunging folds, the most important of which is the anticlinal feature referred to as the Yauli Dome, which trends north-northwest and divides the district roughly in half. The Mitu volcanics outcrop in the core of the dome, with Pucará limestones on the east and other sediments on the west. Continued compression apparently gave rise to early northwest trending shears, and the uplifting effect of the intrusion of quartz monzonite stocks produced an arching of the Yauli Dome and an associated phase of tension faulting generally perpendicular (NE-SW) to the axis of the anticline. This latter set is the most heavily mineralized set of fractures and accounts for the majority of fault hosted mineralization in the Morococha District.

Vein mineralization formed along the dominant system of northeast trending tensional faults. With the exception of an agglomerate unit in the upper Mitu Group and the sedimentary breccias in the upper and lower Pucará, the Mitu volcanics, Anticona diorite, and much of the sedimentary sequence are good vein hosts. Mineralization associated with the veins is mostly fracture filling in nature except in some carbonate hosts where irregular replacement can take place in the wall rocks.

Replacement manto mineralization is generally restricted to receptive stratigraphic horizons where favourable lithologies are intersected by mineralized veins or are proximal to pre-mineral intrusives. Some of the mantos are less stratabound in character, occurring as structurally controlled irregular chimneys within generally favourable stratigraphic horizons.

Intrusive contact related skarn bodies are common in the favourable portions of the Pucará, generally in areas of pre-mineral, contact related silicification and/or calc-silicate alteration. For the most part these skarns are generally small and irregular, with disseminated rather than massive sulphide mineralization.

Mineralization at the Morococha mine includes epi-mesothermal silver-lead-copper-zinc veins and bedded silver-base metal replacements or mantos (which together account for the majority of the past and present economic mineralization at the Morococha property), intrusive-sediment contact skarns, and the quartz porphyry-hosted Toromocho disseminated copper system. The size and geometry of individual ore shoots are lithology and structure dependent. Shoots range up to 400 metres in length with some traced up to 800 metres down plunge. Economic widths in the veins range from 0.5 metres to more than 6.0 metres. Vein width averages in the district are on the order of 1.2 metres.

Replacement manto mineralization is generally restricted to receptive stratigraphic horizons where favourable lithologies are intersected by mineralized veins or are proximal to pre-mineral intrusive rocks. Mantos can have a significant strike extent where the veins are closely spaced, and can range from less than one metre to up to 12 metres in width.

Ore and gangue mineralogy is similar in veins and mantos but it varies considerably across the property. Sphalerite, galena, and chalcopyrite are the most important primary minerals for zinc, lead, and copper and silver is generally present as freibergite (silver-tetrahedrite) or argentiferous galena. Gangue generally consists of quartz, calcite, barite, and rhodochrosite, the latter having a strong correlation with higher silver grades.

As with most of the large Peruvian polymetallic deposits, Morococha exhibits a distinct lateral and vertical metal zonation. A central copper zone centered on the Toromocho copper deposit grades outward through a lead-zinc-minor silver zone and then into an outermost zone that is richer in silver but still containing significant lead-zinc content. There is also a distinct trend for higher silver grades at higher elevations on the west side of the Morococha mine. Individual silver assays of greater than 2,200 grams per tonne are not uncommon above 4,800 metres above sea level, and greater than 300 grams per tonne silver ore grades also are common in the outer silver-lead-zinc zone above the 4,400 metre elevation. In veins that have been mined over significant vertical extents, silver grades tend to decrease as zinc grades increase with depth. The hydrothermal alteration present at Morococha is typical for central Peruvian zoned polymetallic deposits.

Mineral Resource and Mineral Reserves

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

Morococha Mineral Reserves 1, 2, 3

Reserve Category Tonnes (Mt) Grams of Silver per tonne Contained Ag (Moz) % Zinc % Lead % Copper
Proven 2.7 188 16.3 4.32 1.32 0.47
Probable 2.7 206 18.1 4.06 1.31 0.69
TOTAL 5.4 197 34.4 4.19 1.32 0.58

Notes:

1. Estimated using a price of $22 per ounce of silver, $1,850 per tonne of zinc, $1,950 per tonne of lead and $6,800 per tonne of copper.

2 .Mineral Reserve estimates for Morococha were prepared under the supervision of, or were reviewed by, Michael Steinmann, P.Geo., and Martin G. Wafforn, P.Eng., as Qualified Persons, as that term is defined in NI 43-101.

3. Tonnes are shown for 92.2% of the Morococha property. Through our subsidiary, Pan American Peru, we have a 92.2% interest in the Morococha property.

Management estimates that the mineral resources at the Morococha mine, as at December 31, 2013, are as follows:

Morococha Mineral Resources 1, 2, 3

Resource Category Tonnes (Mt) Grams of Silver per tonne Contained Ag (Moz) % Zinc % Lead % Copper
Measured 0.8 150 3.9 3.57 1.31 0.41
Indicated 1.1 202 7.4 3.37 1.45 0.54
Inferred 8.0 209 53.9 5.11 1.45 0.43

Notes:

1. These mineral resources are in addition to mineral reserves. Estimated using a price of $22 per ounce of silver, $1,850 per tonne of zinc, $1,950 per tonne of lead and $6,800 per tonne of copper.

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

3. Tonnes are shown for 92.2% of the Morococha property. Through our subsidiary Pan American Peru, we have a 92.2% voting interest in the Morococha property.

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.

Mining and Processing Operations

Underground mining operations at Morococha consist primarily of typical overhand cut and fill, shrinkage, and mechanized room and pillar methods using tailings or waste rock for backfill where needed. Holes are drilled in the mining face using jacklegs or jumbo drills which are loaded with explosives and blasted between shifts twice per day. During, 2012 sub-level long hole mining became more important as a mining method. In this method, blast holes are drilled between sub-levels developed 10 to 15 metres vertically apart. Slushers are used in the cut and fill and shrink stopes and scoop trams are used in the room and pillar stopes, long hole stopes, and some of the wider cut and fill stopes to transport the broken rock to chutes that report to levels with track haulage. Locomotives transport the ore in rail cars from the chutes to one of three shafts for hoisting. Highway dump trucks then haul the ore from the shaft coarse ore bins to mill stockpiles. In addition to the three main shafts, some ore is also transported from certain sectors of the mine to stockpiles using scoop trams. The mineral reserves comprise estimates from approximately 129 different structures distributed throughout the Morococha property. Typically stopes from 25 of these structures are in production in a given year.

The Yauli (also referred to as the Manuelita), Maria and Central production shafts provide access down to the Kingsmill drainage tunnel level at an elevation of 4,020 metres above sea level. The Central shaft is located approximately 1.5 kilometres west of the Maria shaft and 2.5 kilometres west of the Yauli shaft. The Maria and Central shafts are equipped with above ground head frames, hoists, and ore bins. The Maria shaft has a single split drum hoist with two skips, each with a 2 tonne capacity. The Central shaft is larger with two split drum hoists. One hoist is fitted with two 3.5 tonne production skips and the other is used for personnel and materials. The Yauli shaft is equipped with two 2.6 tonne skips and its collar is located beneath the surface. Ore from the Yauli shaft feeds into chutes from where it is then transported in rail cars by a small locomotive to an adjacent subsurface truck loading facility. The three shafts have a combined capacity to support production schedules in excess of 700,000 tonnes per year.

The current mine life based on the existing proven and probable reserves and the current production rate extends for over 8 years. The mine has been in operation for much longer than this and there remains excellent potential for exploration to extend the mine life beyond this period.

There are two process plant facilities on the property, approximately five kilometres apart, only one of which is operational. The Sacracancha plant was the primary milling facility used by the previous operators of the mine until the acquisition of the Amistad plant which is currently the only process facility in use. Some of the processing equipment from the Sacracancha plant has been removed to be used at other Pan American Peru plants. The Amistad plant has conventional selective flotation facilities capable of producing individual copper, lead, and zinc concentrates, which are then shipped to third party smelters for final refining. The tailings from both plants are deposited sub-aqueously in the Huascacocha tailings lagoon which is adjacent to the Morococha mining operations. The facility contains tailings storage capacity for over 15 years. The Huascacocha tailings lagoon has been used for tailings disposal since 1960. Other discharges to the lagoon from historic tailings deposits that are currently owned by MCP and third parties are substantially neutralized by the Morococha tailings deposition. The resulting water quality discharged from the tailings lagoon is compliant and PAS maintains a discharge permit from the Peruvian National Water Authority.

Throughout 2013, Morococha processed 573,295 tonnes of ore, producing 2.4 million ounces of silver, 2,700 ounces of gold, 15,200 tonnes of zinc, 3,800 tonnes of lead and 2,000 tonnes of copper. Metallurgical recoveries for the year averaged 88% for silver, 33% for gold, 83% for zinc, 74% for lead and 72% for copper.

In 2013, sustaining capital expenditures at Morococha totalled $18.7 million.

Activities in 2014

In 2014, we anticipate producing 2.50 to 2.60 million ounces of silver, 1,800 to 2,000 ounces of gold, 14,000 to 15,500 tonnes of zinc, 3,800 to 4,000 tonnes of lead and 1,780 to 2,080 tonnes of copper.

We expect Morococha’s capital spending in 2014 to be significantly lower than in 2013, at only $9.0 million, as the intensive multi-year mechanization and development efforts are largely complete. The majority of capital expenditures in 2014 are planned for sustaining the mine, including crosscuts and ventilation raises, additional reserve definition drilling and overhaul of equipment. The remaining expenditures will go towards advancing a mine deepening project for $0.8 million and metallurgical testing to refine future plant flowsheets for $0.5 million.

Environmental

In October 2003, the Peruvian government passed legislation requiring active mining operations to file closure plans within twelve months of the date of passage of the legislation. Administrative rules associated with this legislation which laid out detailed closure requirements, including bonding and tax deductibility of reclamation and rehabilitation expenses, were promulgated in October 2005. These rules required detailed closure plans and cost estimates to be compiled by a certified third party consultant by October 2006.

In August of 2006, PAS submitted a comprehensive closure plan for the Morococha mine to the MEM in accordance with that ministry’s regulations. The closure plan was prepared by third party consultants registered with the Peruvian authorities as qualified to present closure plans to the MEM. The closure plan includes a summary of the proposed closure scheme for each of the major areas of impact such as mine water, tailings areas, waste rock dumps, plant site infrastructure, and underground mine. A detailed cost estimate was prepared based on our and the consultant’s experience with closure works and experience with other projects in Peru. As required by the MEM, the costs were summarized in three phases: concurrent closure, final closure and post closure. PAS presented the latest modification to the closure plan on 20 December 2012.

Peruvian legislation sets out the progressive implementation of new, stricter water quality limits both for discharges and receiving waters by the end of 2015. An “Adaptation Plan” which demonstrates compliance of the Huascacocha lagoon discharge with the new limits was presented to the MEM on 3 September 2012.

PAS completed an Environmental Impact Assessment for the relocation of Morococha’s Amistad concentrator and associated facilities that was necessary due to the development of MCP’s Toromocho copper project. The EIA was approved by the MEM on 15 June 2010 and PAS completed construction of a new camp, offices, warehouse and workshops at the new plant site in 2012, in accordance with the terms of the approved EIA.

The most significant environmental liability identified at the Morococha mine is the mine’s potential share of the cost to operate the Kingsmill Tunnel water treatment plant. The Kingsmill Tunnel is an 11.5 kilometre long underground opening excavated between 1929 and 1934 to dewater the Morococha district mine workings above the level of 4,020 metres above sea level. The water treatment plant was built and is currently being operated by MCP to treat the 1.5 to 1.8 cubic metres per second of water draining from the Kingsmill Tunnel into the Rio Yauli. Morococha’s share of the cost was defined by a hydrogeological study completed in 1997 which apportioned responsibility for the costs of constructing and operating the treatment plant as follows: (i) Centromin (72.2%); (ii) our Morococha operations (12.3%); (iii) Soc. Minera Puquiococha (8.5%); (iv) Soc. Minera Austria Duvaz (4.9%); and (v) Minera Centrominas (2.1%). Subsequent to the apportionment of costs, it appears that in connection with the acquisition by MCP of the mining concessions near Morococha, MCP assumed the cost of the construction of the Kingsmill water treatment plant.

The treatment and operating costs for the water treatment facility are directly proportional to both constituent load and flow determined in the 1997 study. The distribution of responsibility stated in the 1997 study has been accepted by all involved parties. Our potential share of the responsibility for treatment of the baseline flows, 12.3%, was included in the terms of its purchase of the applicable mining concessions. As a purchase contract entered into during 2003 between Empresa Minera Natividad S.A. (“Natividad”) and Argentum establishes that the purchaser is responsible for incremental flows in those concessions, subsequent studies in 2004 were carried out to further characterize the baseline flow conditions in order to establish benchmarks for the determination of responsibility for potential future increases. The results of this study estimated that 38.46% of the baseline flows were derived from Natividad and Corona concessions now under our control. We have challenged this estimate but our challenge was not accepted. The scope of the study and the resulting recommendations exceeded the terms of the study and presented conclusions that conflicted with previous conclusions and the terms of Pan American’s purchase of the applicable concessions. We have included the estimated costs for 12.3% of the operations of the water treatment facility in its closure and reclamation estimates.

A closure cost estimate for Morococha was prepared according to State of Nevada approved SRCE methodology in 2011 and is updated every year. The current present value of closure expenditures at Morococha has been updated as at December 31, 2012 to approximately $8.3 million.

Health and Safety

In May 2006, a formal safety audit was conducted at the Morococha mine by a third party consultant and Pan American’s Director of Health and Safety. In October 2006, supervisory safety training was conducted at the Morococha mine by a third party consultant. Follow-up audits were conducted in 2007, 2010 and in 2011 by Pan American’s Director of Health and Safety and safety managers from our other operations. During 2013, personnel employed at Morococha attended a total of approximately 134,300 hours of training.

Operating highlights1

2013 2012 2011
Tonnes milled 573,295 535,086 483,104
Silver million ounces 2.4 2.1 1.7
Zinc tonnes 15,165 11,925 10,676
Lead tonnes 3,769 3,601 3,050
Copper tonnes 2,026 1,502 1,522
Gold ounces 2,650 2,840 1,691
Cash cost per ounce2 $17.56 $23.48 $16.11

1. Production and cost figures are for Pan American’s 92.2% share only.

2. 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; Cu $7,000/tonne; Au $1,200/oz.

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