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 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
Pulacayo 1 000 t/d Phase I Feasibility Study - NI 43-101 Technical Report 090644-3-0000-20-IFI-100 and then to USD 1.50 to +USD 2.50 per payable ounce, the latter typically being won on spot or distress business 1 . With regards to overall settlements, two of the recognized “benchmark” agreements set in 2012 were as follows: Table 19.6: Two of The Recognized “Benchmark” Agreements set in 2012 San Cristobal- Korea Zinc/Nyrstar Cannington - Korea Zinc/Nyrstar TC USD 300/dmt @ Pb basis price of USD 2,100/mt USD 275/dmt flat Esc/De-esc +4% > USD 2,100/mt Pb Nil -1% < USD 2,100/mt Pb Nil Silver RC USD 1.50/oz @ Ag basis price of USD 31/oz USD 1.50/oz flat Esc/De-esc +4% > USD 31/oz Ag Nil -1% < USD 31/oz Ag Nil While both qualities can be similarly categorized vis a vis lead and silver grades and both settlements represent increases over the 2011 agreements in the order of USD 75 to 100 per ton of concentrate, the owners (Mitsubishi Corp and BHP, respectively) selected different means of achieving their pricing objectives in 2012. As we look forward, Western smelters are expected to remain well supplied, supporting the argument for sustained high charges. Nonetheless, there are several factors, which may influence the direction of charges, and particularly those for complex, high precious metal bearing concentrates: Restart plans for the La Oroya smelter have stalled and the company is now under government controlled liquidation. Both the plant’s owner (Doe Run) and the government refuse to invest the money necessary to upgrade the facility and, specifically, construct a sulphuric acid plant. The extraordinarily high spot silver refining charges witnessed in recent years (USD 2.50 to USD 5.00/oz) have been extremely profitable for most Western lead smelters. This has led to an investment in plant infrastructure and specifically with numerous increases in silver refining capacity (e.g. Korea Zinc-Onsan; Teck-Trail; Berzelius-Stolberg) which can be expected to result in increased consumption of complex precious metal bearing concentrates by these facilities thereby somewhat offsetting the impact on the market of any ongoing La Oroya closure. As noted earlier, Glencore appears to be moving forward with the restart of its Porto Vesme, Italy lead plant with the goal being to treat complex, precious metal bearing concentrates. However, they are also rumored to be pushing for the closure of 35% owned Xstrata’s Belledune lead smelter in New Brunswick. Any deferral to the restart at 1 While western smelter silver refining charges have risen, they have remained somewhat more constant and considerably lower, particularly under long-term contracts. TWP Sudamérica S.A. Av. Encalada 1257 Of. 801, Santiago de Surco Lima 33, Perú (51-1) 4377473 Page 222
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Pulacayo Project Feasibility Study - Apogee Silver

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