Pan American Wins Dukat Mine Rights

Canada's Pan American Silver Company has joined with a local Magadan firm to win the license for Russia's largest silver deposit, pledging to return the Dukat mine to "its great days as Russia's largest silver mine."

Terms of the tender, awarded Monday, include paying $4 million in back wages to workers of the old Dukat mining company, which previously held the license, and another $1 million to winterize the mine, said Pan American chairman Ross Beaty.

To satisfy a requirement for a 30 percent Russian partner, Pan American joined with Magadan's Geometall Plus in a 70-30 joint venture to form Serebro Dukat, the actual winner of the tender.

Dukat is one of the largest silver deposits in the world, with official Russian estimates placing reserves at 477 million ounces of silver and 1 million ounces of gold.

Annual production starting in the year 2000 would be 14 million ounces of silver and 25,000 ounces of gold, the company said in a statement. Dukat will more than double Pan American's worldwide silver reserves from 315 million ounces to 649 million ounces, it said.

Beaty said there were no other bidders for Dukat, a circumstance he attributed to the limited number of international silver mining companies with both the appetite for risk and the financial backing for the project.

"The mine is not a simple mine. It will take a lot of money to make this work," he said, citing studies and new technology needed to get the mine in order. "There are not a lot of companies in the world that are willing to take on that kind of risk."

Beaty added that Pan American has the ready capital to meet financing needs without tapping equity markets. "Dukat is a project that fits us perfectly," he said.

Pan American expects to spend about $10 million on back wages, winterization, a feasibility study and other miscellaneous costs that may arise before financing can be lined up in about a year's time. Pan American and Geometall will then split financing costs equal to their shareholding in Serebro Dukat, he said.

The feasibility study, to be completed by May, will determine Dukat's financing needs, but Beaty said he expects the project to require between $120 million and $150 million.

As Geometall is responsible for 30 percent of the financing, the Magadan mining company has begun negotiations to sell 45 percent of its own shares to Western Pinnacle Mining Ltd. -- a Moscow-based, Vancouver, Canada-listed mining company largely owned by an Australian mutual fund.

Beaty said Western Pinnacle, traded publicly in Vancouver, would be a welcome addition to the joint venture.

The tender marks Pan American's third effort to bid for Dukat, with the two previous efforts aimed at buying a stake in the Dukat mining company rather than the license.

The first effort, in January, died when local authorities rejected its bid because there were no other bidders. Pan American re-bid in April and won but abandoned its claim to the local enterprise after it became clear that the company's liabilities made the deal uneconomical.

Foremost were the company's $80 million in debts, Beaty said, some of which included penalties on previous loans. "Nobody in the world would take on that liability," he said.

Russia's State Property Fund, in charge of selling the enterprise, was unable legally to waive any of the conditions, so shareholders in the Dukat mining company liquidated the enterprise -- a move that automatically sent the mining license for the deposit to the Natural Resources Ministry. The resources ministry held a new tender -- this time for the license -- and waived payment of debt obligations as a condition, Beaty said.

"This is the classic route that would take place anywhere in the world," he said. "It's a sensible, commercial basis for establishing the economic viability of the new mine, which is really what's going to drive economic growth in the region."

"We're going to build a mine that will go on for 30 years. ... We would like this mine restored to its great days as Russia's largest silver mine," he said.

As part of the most recent tender, Serebro Dukat must draw 90 percent of its work force from the old Dukat enterprise's former 1,200 employees, who have been out of work since the mine all but stopped operations in May. It will likely buy some of Dukat's assets, as well, but the bankrupt firm will not raise enough to pay its $80 million in debts, Beaty said.