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 Table 19.10: Accountable/Payable Metals Payable Metal Accountability Zinc Concentrates Lead Concentrates Zinc 85%, min. 8 units 3 Nil Lead Nil 95%, min. 3.0 units Silver Deduct 3 oz/dmt, pay for 70% of balance 95%, subj. min ded’n 50 gms/dmt Gold Nil 95%, subj. min ded’n 1 gm/dmt There have occasionally been efforts to institute changes to the zinc payable formula, as it is not representative of smelter recoveries, which run closer to 95-97%. While there is constant talk of a need for change, there does not appear to be enough momentum behind the miners’ efforts to implement it, so for the foreseeable future no change is anticipated. If however, such a change were to occur, smelters would demand compensation for the lost value (commonly referred to as ‘free zinc’) as it is a vitally important contributor to their profit margins. 19.4.3 Metal Prices Metal prices to be used in determining the payable value of the accountable metals in the concentrate (settlement prices) will be based on metal exchange quotations established during the applicable Quotational Period. Standard industry pricings for lead, zinc, silver and gold are based on the following: Table 19.11: Metal Pricings Payable Metal Exchange Quotation Zinc London Metal Exchange (LME) Average for Quotational Period Lead London Metal Exchange (LME) Average for Quotational Period Silver London Bullion Market Assoc. (LBMA) Average for Quotational Period Gold London Bullion Market Assoc. (LBMA) Average for Quotational Period 19.4.4 Treatment and Refining Charges As noted in Section 3, treatment charges, escalators/de-escalators and silver refining charges, if applicable, can be established by various means: Long-Term Frame Contracts Under long-term agreements, contract terms are usually established as part of a frame agreement, with annual negotiations taking place to establish the appropriate treatment and refining charges (TC/RCs) to apply to a given contractual year’s deliveries. Under most such 3 To be read as pay for the lesser of (a) 85% of the contained Zn in concentrates and (b) the Zn grade less 8% TWP Sudamérica S.A. Av. Encalada 1257 Of. 801, Santiago de Surco Lima 33, Perú (51-1) 4377473 Page 229
Pulacayo 1 000 t/d Phase I Feasibility Study - NI 43-101 Technical Report 090644-3-0000-20-IFI-100 agreements, very few terms are left undefined, with typically only the treatment charges, escalators/de-escalators and refining charges, as applicable, and any Quotational Periods subject to annual adjustment. Other terms, such as metal accountabilities and payment terms are typically fixed for the life of the contract. The annual TC/RC adjustment to be agreed under such long-term agreements is typically referenced off market benchmarks. As the zinc concentrate market tends to be relatively transparent with information regarding settlements readily available via market sources (merchants, press reports, industry analysts such as Brook Hunt or CRU, etc.), it has traditionally been fairly easy to establish the applicable annual benchmarks. Although these sources can also be used for establishing reference lead TC/RCs, as discussed above, the market for lead concentrates has become somewhat more opaque over the past few years so careful consideration should go into which references are chosen and how such references might apply under evolving market conditions. There is no consistent market structure for the duration of the TC/RCs agreed – they can be set according to various formats. For example, TC/RCs can be negotiated annually to cover 100% of the contractual year’s deliveries. Alternatively, terms can be fixed for two or three year periods (or longer). For annually negotiated agreements, and particularly where the agreement is tied to project financing, clear definitions as to how terms are to be determined must be set out in the contract. Under such agreements, failure by the parties to agree in any given year will subject the parties to a referee mechanism whereby an independent third-party referee (or referees) will determine the appropriate treatment and refining charges to apply to a given year’s contractual deliveries. Where there is no such referee mechanism, failure by the parties to agree terms in any given year will typically lead to a “holiday” i.e. the tonnage contracted for that year’s (or those years) deliveries will be cancelled. Medium-Term (2-5 Year) Contracts Essentially, TC/RCs under medium-term contracts can be established using TC/RC conventions as per the long-term agreements. However, it is uncommon to have a referee mechanism available for failure to agree on annually negotiated terms, such that failure to agree will lead to a contract holiday which will result in cancellation of that year’s (or those years) deliveries. Short Term/Spot Contracts Shorter term or spot contracts are usually negotiated basis prevailing spot market conditions. All contractual terms (TC, RCs, escalators/de-escalators, if any, Quotational Period, payment terms, etc.) are up for negotiation in such contracts. While many of these contracts are entered into with merchants or brokers, it is not entirely uncommon for a mine to deal direct with a smelter. Shortterm/spot contracts can be for single or multiple shipments but would typically be defined as deliveries, which are to occur within no more than a year of the agreement date. For purposes of the Feasibility Study, it is recommended that the following charges be used: TWP Sudamérica S.A. Av. Encalada 1257 Of. 801, Santiago de Surco Lima 33, Perú (51-1) 4377473 Page 230
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Pulacayo Project Feasibility Study - Apogee Silver

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