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 Silver Price: 3 Years 2009-12 YTD $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 $0.00 2-Jan-09 2-May-09 2-Sep-09 2-Jan-10 2-May-10 2-Sep-10 2-Jan-11 2-May-11 2-Sep-11 2-Jan-12 2-May-12 Figure 19.12: Silver Prices: 2009 to Present 19.2.3 Zinc and Lead Concentrates Terms Outlook 19.2.3.1 Zinc Concentrates Zinc provides a perfect example of how different segments of a particular market can completely diverge. Although the metal market is mired in surplus, zinc mines are struggling to keep pace with smelter demand for concentrates. The result of this has been a tight concentrate market and low treatment charges for smelters, which may only worsen with the closure of the aforementioned mines in the coming years i.e. Perseverance, Brunswick, Lisheen, Century, Skorpion. The importance of concentrate supply and the pressure placed on growth in mine capacity is especially great for zinc due to a lack of growth in the secondary smelting sector. Although a large proportion of refined lead and copper, for example, is derived from scrap, zinc is almost entirely dependent on production from primary sources. This is a result of the difficulty and unprofitability of recycling zinc in most of its principal applications. Most notably, while galvanized steel by far the largest use of zinc, is widely recycled, it is used as steel scrap rather than contributing to secondary zinc production. While growth in Western World mine and smelter capacity is projected to stagnate, Chinese output will likely be key to determining the extent of market balances in any given year. Although China has invested heavily in zinc mining, most of its mines are small (less than 30 kt/y) and have combined zinc lead grades typically less than 10%. Furthermore, a substantial portion of newly discovered reserves lie in the remoter western provinces. Nevertheless, China continues to expand its zinc smelter capacity the result of which will be an on-going gap between domestic TWP Sudamérica S.A. Av. Encalada 1257 Of. 801, Santiago de Surco Lima 33, Perú (51-1) 4377473 Page 219
Pulacayo 1 000 t/d Phase I Feasibility Study - NI 43-101 Technical Report 090644-3-0000-20-IFI-100 mine supply and primary refined production, which will continue to necessitate significant concentrate imports. Combined with steady demand from western refiners, this strong global demand for concentrates can be expected to keep treatment charges in favor of the mines. 2012 zinc benchmark treatment charges were established in February with a settlement reached between Teck and Korea Zinc at a level of USD 191/dmt at a basis price of USD 2,000/t zinc, and escalated/de-escalated above/below this level. This represents a net drop of about USD 18/dmt from the 2011 levels which were set at USD 229/dmt at a USD 2,500/t basis price. As we look forward, despite the several planned mine closures in the coming years, most analysts are projecting a zinc concentrate market in a deficit to balanced position nearby but with a slight trend towards oversupply towards the middle of the decade. A key risk to this projection is, of course, Chinese production, which has proven to be capable of rapidly delivering into any supply gap particularly when price conditions provide the necessary support: Table 19.5: Zinc Concentrate Market Projected 000 mt con'd Zn 2008 2009 2010 2011 2012 2013 2014 2015 Concentrate Balance 0.32 0.28 -0.40 -0.13 0.19 -0.10 0.15 0.16 While treatment charges will vary year to year depending on market balances, going forward, consensus appears to be forming around long-term TCs in the range of USD 180 to USD 200 per dmt concentrate at a basis price USD 2,200 per ton Zn (USD 1.00/lb). Although there has been a movement over the years to eliminate the escalators/de-escalators, there does not appear to be enough sustained momentum behind this movement to suggest they will be eliminated any time soon. Having trended down to the current levels as agreed in 2012, based on the above balance projections, annual treatment charges are expected to trend within a relatively narrow band over the coming years. Accordingly, it is recommended that the following benchmark charges be used for the purposes of the Feasibility Study: Treatment Charge USD 190 per dmt concentrate at a basis price USD 2,200 per ton Zn TC Escalator/De-escalator +/-USD 0.03 per dmt for each USD 1.00/mt Zn price above/below USD 2,200/mt 19.2.3.2 Lead Concentrates Unlike the zinc and copper markets, where treatment and refining charges (both spot and benchmark) are generally consistent across a range of qualities at any given point in time, lead concentrate terms are considerably more variable, a factor which has led to a much less consistent and transparent market. In part this can be attributed to a wider range of qualities in the lead concentrate market but, more broadly, it can be attributed to the smaller overall size of the market and, in particular, the influence of China which currently accounts for approximately 45% of global refined lead production and which has become the single largest buyer of custom lead concentrates. TWP Sudamérica S.A. Av. Encalada 1257 Of. 801, Santiago de Surco Lima 33, Perú (51-1) 4377473 Page 220
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