Orko Silver Corp. (CVE:OK) said Thursday that Pan American Silver (TSE:PAA) (NASDAQ:PAAS) has decided not to forge ahead with the terms under their joint venture agreement for the La Preciosa silver property in Durango, Mexico, allowing Orko to retain 100 percent of the project.
Pan American Silver provided notice to Orko that it has decided not to deliver a feasibility study before the April 13, 2012 deadline set out under the agreement.
As a result, Pan American relinquished its right to earn a 55 percent interest in the La Preciosa project, one of the world's largest primary silver deposits.
"We are very excited about regaining 100% ownership of the La Preciosa project and developing it into a large primary silver mine," said president and CEO of Orko, Gary Cope.
"With over $18 million in exploration and development expenditures funded by Pan American, there has been significant progress in developing the La Preciosa project over the past three years.
"We anticipate having an updated resource estimate in hand later this month or early in May and the AMEC preliminary economic assessment in late July. We identified a number of areas in the preliminary economic assessment of the project released Aug, 2011 that we believe offer opportunities for improving the economics of the project.
"AMEC will be exploring those opportunities in the current study. The new PEA will be based on work completed on the project since that time. We thank Pan American for their contribution and partnership and we look forward to developing La Preciosa."
The last PEA in August 2011 was favourable, Orko said, as results showed an after-tax net present value of US$315 million at a five percent discount rate and a 24.3 percent after-tax internal rate of return, assuming conservative prices of US$25 per ounce of silver and US$1,250 per ounce of gold.
Pre-production capital and development costs were estimated at roughly $270 million.
The project showed estimated production of 6.8 million ounces of silver per year, and 11,800 ounces of gold, over a mine life of 12 years. Cash cost per ounce of payable silver, a measure used to assess a company's ability to generate cash flow, was calculated at $11.84, net of gold by-product credits.
Orko has already hired Americas Limited (AMEC) to complete an updated preliminary economic assessment on the project, which is expected in late July, the company said, which Orko believes will improve on the economics released last August.
Orko said that though Pan American's drilling has been "quite successful" in delineating significant mineral resources on the property to support the 2011 PEA report, it believes drilling was terminated pre-maturely for the feasibility study.
Additional drilling is therefore still required to allow a feasibility study to be completed that will have a more meaningful result, Orko added.
The mineral resource in the 2011 preliminary economic report included around 30 percent inferred resources, and because Pan American did no further drilling of these resources since the last PEA, they would have had to treated as waste in the feasibility study.
"In addition, many of the vein structures were still not drilled out such that the veins are open ended and further drilling would likely result in additional resources that would significantly change the mine design," Orko explained in its statement.
Orko, which will now take over as operator on the site, has around $12 million in cash and short-term investments and is well funded to continue to advance the project.
As Pan American was advancing the project towards feasibility, a number of engineering studies are done or are close to being completed including metallurgical studies, environmental impact assessments and geotechnical testwork. More work will be required before a feasibility study can be completed, however.
The current data will be returned to Orko and included into the AMEC preliminary economic assessment and will also form the basis for a full feasibility study by Orko.
Further details on the additional work required, costs and schedule of the feasibility study will be announced after the completion of the AMEC PEA report, Orko said.
President and CEO of Pan American, Geoff Burns, commented: "After completing almost three years of exploration, engineering and project development work, we have come to the unfortunate conclusion that our continued participation in the La Preciosa project is unlikely to generate a rate of return that meets Pan American's internal economic hurdle rate.
"As a consequence, we have decided to relinquish our right to earn a 55% interest in La Preciosa. We thank Orko for the positive relationship that we have developed as partners and wish them good fortune with La Preciosa going forward."
Orko said that it is currently updating files in its digital data room in response to recent requests from other mining companies to review the project's technical information. Confidentiality agreements, including standstill clauses, have recently been signed, with site visits to be scheduled.
The project now contains 113 million ounces of silver in the indicated category, and a further 46 million ounces in the inferred category. In addition, the deposit contains over 222,000 and 83,000 ounces of indicated and inferred gold, respectively.