In the fourth quarter of 2000, Pan American Silver Corporation approached the International Finance Corporation (IFC) for 100% funding on an ambitious $27.5 million project to overhaul the La Colorada silver mine in Mexico. It was turned down because of unstable silver prices and a production hedging requirement. Pan American went back to the drawing board and returned with a scaled down ? $20 million ? version. The idea was for IFC to provide a £10 million project debt facility, with Pan American providing the rest in cash. No hedging was required. It was a winner ? loan agreements were signed on 17 June 2002.

Actual financial close of the loan is expected during the third quarter of 2004. Until then Pan American will provide a corporate guarantee. The 6.5-year debt will be serviced in semi-annual installments of $1 million beginning in November 2004, after a 2-year grace period. An equity offering in March earlier this year was a fully marketed deal, raising $16.5 million ? the expected requirement ? fully subscribed. CIBC World Markets, investment dealers, National Bank Financial and Canaccord Capital acted as lead underwriters.

The first and stalled approach to the IFC for financing gave a clear message to Pan American's investors, says Rosie Moore, vice president of corporate communications, Pan American: ?The financing was to be syndicated to two commercial banks ? who would have required hedging. At that time silver prices were dubious so we were not keen.?

She continues: ?We would not have been able to give investors the best price, so we ran the project from the ground early on before doing a feasibility study and coming up with this financing as an option.?

Kent Lupberger, manager of mining investments at IFC, says: ?We were trying to put together a financing loan on our part as well as syndicating to banks. At the time, given the amount of debt involved and larger project scope, hedging was preferable. But the cost of this was unacceptably expensive for us. The key thing was reducing the scope of expansion and debt financing.?

It was decided that running the mine, which Pan American acquired in March 1998, from the ground and expanding it this way would reduce project costs. Work has already started on increasing production four-fold, adding yet another asset to Mexico's silver production base. The country currently tops silver production worldwide, beating off competitors such as Australia, Peru and the United States. It is hoped that production will start to increase in early 2003. Once running at full capacity, this will position Pan American as the world's largest pure silver producer.

Silver prices are steadily recovering from earlier instability, reaching a high of $5.15 per ounce five years ago and presently standing at about $4.90 per ounce. However, it is still regarded as the least volatile of the precious metals, and has not suffered a drop below $4 per ounce for nine years ? it dropped to $3.50 per ounce briefly in 1993. Worldwide exploration for silver has dropped by 60% in the last five years, although this is now recovering in line with prices and demand.

The bulk of silver produced from the La Colorada mine will be used for coins, electronics, photography and industry. A small proportion is used for jewellery, although this is now also on the increase.

Drilling in late 2000, as part of a bank feasibility study, showed reserves of 2.7 million tonnes of ore, out of which grades 458 grams of silver per tonne and 0.53 grams of gold were found. The small-scale mine has so far produced about 1.1 million ounces of silver. The mine's production life expectancy is 13 years. Design and engineering is the responsibility of HA Simons and Agra Engineering.

Output from the mine consists of concentrates from sulphide ore from the existing mill and is operating at a rate of 200 tonnes per day. The expansion will increase this to 600 tonnes per day using a leach circuit, which extracts the silver from the ore. This expansion is expected to average about 3.2 million ounces of silver per year. Total cash cost for the mine life will be less than $2.70 per ounce.

As part of the debt facility, the IFC will oversee remediation of the environment surrounding the mine. IFC's Lupberger said: ?We're not only involved in the financing. When we get involved, we take a broad role. We ensure banks comply with all social and environmental policies. We look for ways to increase local development.? He continues: ?All our projects require a mine reclamation and closure programme (MRCP). We have put aside $150,000 for this as a funding mechanism.? Although the IFC went to $10 million for this project, it has a total per project limit of $100 million.

Remediation and maintenance of the site is complex. Atmospheric environment, surface water resources, and groundwater resources need to be taken into consideration, as well as minimizing dust and land disturbance.

This co-operation between the IFC and Pan American is not the first time the two have met. Two years ago Pan American signed a mandate letter with IFC for a $60 million debt financing of the Dukat mining project in Russia.

Pending Pan American drawing on that loan, the mine was acquired by an outside party. This was a disappointment for the company, but it has recovered and has a strong foothold in the industry.

Pan American's Moore says: ?We have the largest proportion of our revenue in the mining industry from silver. Most other mining companies' silver production accounts for 10-15% of their revenues. Pan American gains 63% of its revenues from silver.?

Other mines under the control of Pan American include the three wholly-owned flagships ? the Quiruvilca mine, northern Peru, now running at full capacity, and the Huaron mine, in central Peru, which set up operations in April and reached commercial production in May. The third is La Colorada.