Image source: Getty Images.

Great Panther Silver (NYSEMKT:GPL) has a knack for resurrecting dormant precious metals mines and returning them back to their former glory. The company built its current Mexican mining business by acquiring past producing mines and returning them to production. It's hoping to replicate that success in Peru after announcing a deal to buy control of the dormant Coricancha Mine, which has been on a care and maintenance program since August of 2013, when the mine closed because of slumping prices. While the company still needs to spend more time and money to bring that mine back into production, it has the potential to be a significant growth driver for the silver miner.

Digging into Coricancha

Great Panther Silver initially set its sights on Coricancha, which used to produce gold, silver, lead, zinc, and copper, in 2015 after it signed a two-year agreement with the current owner that gave it the option to acquire the mine after performing substantial due diligence. The company recently completed its exploration and evaluation work, which provided it with enough confidence to move forward with the purchase of the Coricancha mine and associated mill complex. The company will only pay $100,000 at closing as well as an amount equal to cash on hand in Coricancha at completion. However, it has also agreed to pay an earn-out of up to $10 million over a five-year period after the mine starts generating free cash flow. These costs are on top of the several million dollars of options fees and evaluation expenses the company spent on the project over the past two years.

The company currently expects to spend another $25 million to bring this mine back into production over the next 12 to 18 months. However, with more than $50 million in cash and no debt, Great Panther Silver has the financial resources to meet this commitment. Once back online, the mine could produce as much as 3 million silver equivalent ounces per year, which would provide the company with a substantial production boost. For perspective, the company's current guidance is that its two operating mining complexes in Mexico will produce 3.9 million silver equivalent ounces, though that's down from its prior guidance of 4.0 million to 4.2 million ounces due to several temporary outages this year.

Image source: Great Panther Silver. 

Some much-needed diversification

Not only does Coricancha have the potential to be a significant growth driver, but it should add some needed diversification to Great Panther. As mentioned, the company currently operates just two mines, both of which are in Mexico. That concentrated portfolio has proven problematic this year after production problems at both mines caused output to come in below expectations. Last quarter, for example, production declined 12% thanks to lower ore grades at its Guanajuato Mine Complex -- which supplies nearly 80% of its output -- and two temporary shutdowns at its Topia mine because of a fatality and the untimely death of the mine's general manager. This drop in production came at a bad time because it caused Great Panther to miss the peak in silver prices for the year.

That concentration also puts Great Panther at a competitive disadvantage to rivals with more mines because they are better able to brush off unplanned outages. For example, Silver Standard Resources' (NASDAQ: SSRI) Seabee Gold Operation endured an unplanned power outage that lasted several days during the quarter. However, Silver Standard Resources overcame that issue because its two other producing mines delivered solid production during the quarter. In fact, Silver Standard Resources achieved record production in the third quarter.

That said, diversification does not solve every problem. Fellow Mexico-focused miner Endeavour Silver (NYSE:EXK) experienced a 29% decrease in silver production along with a 6% decline in gold production last quarter. The culprit was its Guanacevi mine, which has lagged behind the plan this year because of several issues, including lower ore grades than expected during the quarter. However, Endeavour Silver's other two mines are significantly ahead of plan, which led the company to increase its full-year production guidance from 9 million ounces of silver equivalent to 9.8 million ounces.

Investor takeaway

Two years ago, Great Panther Silver made a small bet on a dormant mine in hopes of finding a golden opportunity. That gamble appears closer to paying off now that the company is about to take control of the mining complex so it can bring it back to life. While the company has more work to do, and more money to spend, this mine has the potential to deliver significant future production. Further, it will add some much-needed diversification to reduce the miner's reliance on the Guanajuato Mine Complex.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.