Pulacayo Project Feasibility Study - Apogee Silver

Pulacayo 1 000 t/d Phase I Feasibility Study - NI 43-101 Technical Report
090644-3-0000-20-IFI-100
Historically, quality differentiation in the lead concentrate market was largely addressed by the
smelters through the imposition of penalties (as it continues to be with zinc and copper) and,
occasionally, adjustments to payable metals. China’s expanded influence however, has had a
notable effect on the market, particularly for high silver-bearing lead concentrates, which are not
well suited to Chinese smelters for the following reasons:
17% VAT on silver bearing lead concentrate imports
No VAT rebate on silver metal exports
Negative London/Shanghai silver price differential
Combined, these three factors have resulted in a negative arbitrage in the silver price, which is
currently in the order of USD 4 to 5/oz.
As a consequence of changing dynamics, today’s lead concentrate market can effectively be
segregated into three sub-categories:
1) Clean, high grade (+/-60% Pb) concentrates (e.g. Doe Run/Missouri)
2) Medium-grade (+/- 50% Pb), complex concentrates (e.g. Red Dog)
3) Complex, high precious metal bearing concentrates (e.g. Cannington, San Cristobal,
various Peruvian/Mexican, Greens Creek)
With precious metal prices and, in particular, silver prices projected to remain strong, the greatest
growth in output of lead concentrates is expected to be seen in the latter complex, high precious
metal bearing category, although the expected closure of Doe Run’s Herculaneum, Missouri
smelter at the end of 2013 can be expected to free up some 120,000 tons of contained lead in
clean concentrates (approximately 200,000 tons concentrates). While declining silver prices have
somewhat supported the economics of importing silver-bearing concentrate into China, the
decline has been nowhere near adequate to offset the effect of Chinese tax policies and the
continuing, although narrowing, negative London/Shanghai silver arb noted above. Nonetheless,
unless and until regulatory and tax policy changes are forthcoming in China, these qualities will
remain best suited to western smelters, the result of which may be an ongoing smelter
‘bottleneck’ for such materials.
As with the zinc and copper markets, annual contract negotiations take place between the major
miners (e.g. Cannington, San Cristobal, Red Dog, etc.) and western smelters in late- Q4/early Q1
of each year and such settlements typically set a frame of reference for other market
transactions. However, unlike these other markets, as a result of the aforementioned market
segregation in lead, there is no longer any single identifiable lead benchmark, with mines and
smelters agreeing terms (treatment charges, escalators/de-escalators, if any, and silver refining
charges) based on the specific characteristics of the individual concentrates (notably silver levels)
and the market outlooks and objectives of the individual players involved in the discussions.
Historically refining charges for silver in lead concentrates of USD 0.30 to 0.35 per payable ounce
were standard in the market. However, as western smelting capacity migrated to China and new
high silver mines such as San Cristobal and Penasquito came into production, the
aforementioned bottleneck for higher silver lead concentrate emerged due to the Chinese
limitations. This was amplified with the 2009 closure of Doe Run’s La Oroya, Peru lead smelter, a
facility specialized in the treatment of complex concentrates. As a result, silver refining charges
jumped from the USD 0.30 to USD 0.35 per payable ounce level to USD 0.50 per payable ounce
TWP Sudamérica S.A. Av. Encalada 1257 Of. 801, Santiago de Surco Lima 33, Perú (51-1) 4377473
Page 221