Pulacayo Project Feasibility Study - Apogee Silver

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Pulacayo 1 000 t/d Phase I Feasibility Study - NI 43-101 Technical Report 090644-3-0000-20-IFI-100 LME alone (and with the SHFE sitting on another 330,000 tons as of 13 July 2012). Although a share of this inventory will likely continue to be used in financing deals, the scope of these deals is less than that for aluminum, the contango offered is lower, and the surplus is larger as a percentage of the market, fundamental features that can be expected to cap any price rallies. As a result, any gains foreseen in zinc prices nearby can largely be expected to be the result of broader macro-economic sentiment, which will drive the entire LME base metals complex. Zinc consumption has been strong, with global gains of almost 8% in 2011 and growth for 2012 to 2015 projected to average around 5% p.a. mainly due to expansion in galvanizing applications. China will continue to dominate this market, accounting for more than 40% of global consumption going forward, but other emerging markets are expected to support demand as well. In the developed world however, growth is forecast to be flat to marginal. Despite the zinc metal market being in considerable surplus, zinc mine/smelter demand remains relatively well balanced, with the consequential low concentrate treatment charges adding support to most miners who are still operating in a cash positive environment, and discouraging any production scale back. This relatively low treatment charge environment is expected to persist with, as noted earlier, the impending closures of some major mines in the coming years. And while growth in Chinese mine production has been substantial over the years, most of its mines are small (less than 30 kt/y) and, with diminishing by-product credits and combined zinclead grades typically less than 10% (and often below 5%), there may prove to be limits to this growth profile. Nonetheless, China’s smelting capacity continues to expand and, even after accounting for secondary production, the gap between domestic mine supply and primary refined production in China will continue to require significant concentrate imports (expected to account for some 20% of 2012 to 2015 smelter requirements). This is expected to keep the concentrate market in relative balance and hold treatment charges in a tight range around current levels. With low treatment charges and comparatively high metal prices supportive of continued mine supply, the two “markets” – zinc concentrate and zinc metal – are forecast to remain in divergence until at least 2014 to 2015. By then however, the impact of the various scheduled mine closures is forecast to begin feeding through into tightness in the metal market – an extended period to wait and unfortunately, a similar outlook that has disappointed several times in the past. Further detailed discussions of the zinc supply-demand projections will not be undertaken for the purposes of this report. Nonetheless, the outlook is based on market fundamentals largely in line with those set out in Table 19.1, views consistent with those shared by many zinc market analysts. TWP Sudamérica S.A. Av. Encalada 1257 Of. 801, Santiago de Surco Lima 33, Perú (51-1) 4377473 Page 213
Pulacayo 1 000 t/d Phase I Feasibility Study - NI 43-101 Technical Report 090644-3-0000-20-IFI-100 Table 19.1: Zinc Market Outlook (‘000 Mt Contained Zn) Source: UBS/Brook Hunt In an effort to attain zinc price projections independent of any individual outlook, zinc price forecasts were drawn from a number of different sources to achieve a consensus view. Detailed data is set out in Appendix I of this report however, to summarize, year by year projected consensus average annual zinc prices through 2016 are as set out in Table 19.2. Table 19.2: Zinc Price Outlook (USD/Lb) Year 2011 2012 2013 2014 2015 2016 Price, USD 0.99 0.97 1.06 1.20 1.20 1.13 The above projections compare favorably against a forward curve (as of 19 July 2012) in contango but relatively flat through to December 2015 (see Figure 19.10) which shows a spot (cash) price of USD 1,883/mt Zn (USD 0.85 per pound) and a forward price of USD 1,968/mt (USD 0.90/lb), well below the projections of the various analysts. TWP Sudamérica S.A. Av. Encalada 1257 Of. 801, Santiago de Surco Lima 33, Perú (51-1) 4377473 Page 214
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Pulacayo Project Feasibility Study - Apogee Silver

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