Pan American Silver Corp (PAAS) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Pan American Silver second quarter results conference call. I would now like to turn the meeting over to Mr. Ross Beaty, Chairman and Chief Executive Officer. Please go ahead, Mr. Beaty.

Okay. Good morning, everyone who's on the call here today. I have to say that it feels quite strange to be having this conference call today, here for me; I'm sitting here on a Redwood stump beside a pay phone on a campground in Northern California while I'm on a camping holiday with my family. But of course, our need to communicate with our shareholders and interested parties on our second quarter results takes priority. So I must segue from holiday to work for this important job.

I can, however, report that Pan American is in good hands, and with a number of people on the job. On this call from our Vancouver head office are Geoff Burns, our President and COO; also Tony Hawkshaw, our CFO; and Brenda Radies, our vice President of Corporate Relations. And they will be available during the call to answer questions, and of course, after the call if necessary.

I would summarize our second quarter financial results as okay, but not great. We certainly did better than we did in 2002 despite much slower silver prices this year than last year. But we continue to be really affected by poor results from our Quiruvilca Mine in Peru, and that was the main reason we could not perform better numbers.

So I'm going want to start with Quiruvilca, and tell you what we're planning there to improve it. As that mine deepens, it is becoming more zinc rich and less silver rich. But as well, the grades are declining while costs increase, since the distance to haul the ore to the mill increases. We have dramatically reduces cost at the mine due to tremendous efforts by our workers there. But we continue to sustain significant operating losses.

At the end of June, and to take effect during the third quarter, we closed the north end of the mine, which was the farthest away from the mill and the highest cost area of the mine. This will decrease our production from about 40,000 tons to about 26,000 tons per month. But it should allow a breakeven operation at current prices. It is palpable, though, that we will be forced to close the mine in mid-2004 if metal prices do not rise significantly.

So we're working on a closure plan that will allow us to rehabilitate the mine over a five to ten-year period at a cost of about $12 million, which we fully accrued for at the end of 2002. If we close Quiruvilca, we will lose about 2.5 million ounces of silver production, but it is very high-cost production, and we simply cannot keep producing there at (ph ) a (ph) reasonable prospect of profitability. I can report that we had a very good month at Quiruvilca in July, relative to the last three months, and this should allow us to report better results in the third quarter.

Our other three operations, including two in Peru, were much more satisfactory. Huaron produced 1.2 million ounces in the quarter. Costs there were higher than budgeted due to problems with underground equipment availability, but we expect this to be only temporary, and for third quarter results to be on-track. We are very pleased to have initiated a comprehensive review of the potential to expand Huaron, and take advantage of the large reserve and resource base there. Huaron has reserves for about ten years of mine, and resources for about the same.

So we have begun a drilling program to convert resources to reserves in an engineering program to examine the capital costs in expanding the mine by 25 percent or so. This would increase silver production at Huaron to over six million ounces per year, and partly make up for the potential lost production from Quiruvilca. Much more importantly, though, the expansion should reduce operating costs per ounce at Huaron and really improve its profitability. We hope to have this work completed by the end of this year, so we be into (ph) implementing (ph) in 2004.

Our third operation in Peru, our small silver stockpile operation generated excellent cash flow during the quarter, and much better than we had budgeted.

Moving to Mexico, we were very pleased to report at the end of June that our La Colorada mine completed its 300 percent expansion ahead of schedule, and below the $20 million budget. It is now in the commissioning phase, and production is ramping up to the 800 ton per day level, which will enable full-year (ph) production of about 3.8 million ounces, at a cash cost of less than $3 an ounce. The most important part of our plan to double production to 20 million ounces per year by 2005 is to advance the Alamo Dorado property to construction phase next year, and full production in 2005.

In the second quarter, we started work on an updated feasibility study to review using the mill instead of a heap leach (ph). To process the ore, and we hope to complete this work by about October. We are doing a little more drilling, some more metallurgical work, and of course new engineering to determine capital costs. Our guess right now is that this project will increase the capital costs there to about 60 to 65 million, but drop operating costs per ounce considerably, thus making it a more profitable operation using the mill. We will have a lot more to say about this plan later this year, when we have the full numbers available to us.

Our two other silver development projects were also active in the quarter, and will remain so in the balance of the year. Manantial Espejo, Argentina, where we initiated feasibility stage work, (indiscernible) for a new mine, and at at San Vicente in Bolivia.

So you can see we remain very busy, very focused on growing our Company, increasing our silver production, but in doing so, decreasing our operating costs, and improving our profitability, even at the current silver price. To do this requires an excellent pipeline of silver projects, and we have that, with four projects now at the feasibility stage. It also requires capital.

And I remain somewhat astonished at the speed, success and market acceptance of the $86.3 million convertible debenture financing we completed in July. In fact, our share price has risen nearly 25 percent since the deal was announced, and this is most unusual. We now have the capital to implement our aggressive growth strategy, and generate what should be very good operating results in the future. Of course, this growth also dramatically increases our leverage to higher silver prices, which is an essential mission.

Our growth strategy also requires experienced and focused management. And I am really pleased to announce the addition to our senior management team of two senior engineers who will lead our company's operations and projects into the future. Steve Buzby has joined as Senior Vice President, Development and Technical Services. Steve has an outstanding pedigree as a mine builder, and will lead our team on the Alamo Dorado project, particularly, along with Bill Post (ph), who is President of our subsidiary we have in Mexico. And Andrew Puler (ph) will be joining Pan American Silver in September, as Senior Vice President of Mine operations. Andrew (indiscernible) mines while VP of Operations at Amax (ph) Gold, and more recently, three mines with Greenstone (ph) Resources (ph) in Central America. The addition of these two fine engineers completes the process begun in early 2003 of beefing up our senior team. Now it's time to get to work and let results speak for themselves.

And finally, what about silver? Well, of course, if you look at the actual numbers, in the second quarter, silver prices were lower than the second quarter results -- prices in 2002. Silver averaged 4.59 this year compared to 4.71 in 2002. But as you all know, the prices that took off in late July and reached about $5.19 before sliding back down to today's level. Clearly, the price is responding to the strong fundamentals, mostly increased industrial demand prospects, and partly to funds buying and funds selling. It is impossible to predict where the price will go on a daily basis, but we like the trend this year so far, and we expect it will continue in the future.

I completed my two-year term as President of the Silver Institute in July. But, I want to mention one current initiative that is being worked on that might help stimulate silver investments (indiscernible) considerably. Many of you will know that the gold exchange rate of security is about to be launched by the World Gold Council. And we in the Silver Institute believe there exists good potential in the silver market for an exchange traded silver security which could really enhance the ownership of physical silver by investors. We will clearly watch the gold example, and I will keep you posted on our efforts in this area.

And with those comments, I would like to open the call to questions. We have our group in Vancouver, available as well, and if we can (inaudible), we will try to answer questions that may exist from any participants today. Thank you, very much, again, for joining us.

Terrance Orsland (ph) with TSO (ph ).

Good morning, everybody. Thanks for the presentation, Ross. Could you just summarize the proceeds that you're going to use the debentures (indiscernible), in terms of major components, the next year or two? And how much is going to be left behind?

Absolutely. Geoff, do you want to tackle that one?

Sure, Ross. I can do that. The primary one, Terry, is obviously going to be the Alamo Dorado project. As Ross just mentioned, our current estimates subject to finalizing the feasibility on the mill option is somewhere in the neighborhood of U.S. $60 to 65 million, including working capital. So that's, by far, the largest single use. After that is our Huaron expansion plan, which, as Ross mentioned, we're looking to implement in early 2004.

Our scoping studies indicate a capital cost there of between 11 U.S. to $12 million for that project. I guess the final piece is that we do have a couple of small pieces of debt at the moment. We're looking very carefully at the economic benefits of potentially bringing those down. We're not likely to move in that direction, Terry, until we have our full numbers on both the Huaron expansion and the Alamo Dorado construction.

(indiscernible) component for those, though. It's got to be fairly small I assume, right?

Yeah, it's very small, Terry.

So obviously, (indiscernible) some time before you (indiscernible) the numbers and look at the exact -- how much is going to go through. And are you impressed with the fact that the over-allotment (ph) was taken, there Ross, and Geoff?

We were pleased it was taken. We were not terribly impressed because, of course, the stock did well and the convertible debenture traded above the issue price, and it would have been quite surprising to not have it taken down. But, we were, again pleased -- very, very pleased with the market's acceptance of the deal. We liked the deal ourselves a lot; of course, that's why we did it. We were looking at having a domination of debt and equity -- conventional debt and equity to fund our growth platform. And with the convertible debenture, that's obviously taken away the need for both. We also think the terms are excellent. And of course, it leaves us open to just about any other kind of financing. If we really see another project that we need to do anything else next year, we are quite free to do other things. Not that we have anything planned right now. So we were very pleased with it, and continue to be today.

Ross, you're close to -- Geoff (indiscernible) -- close to the situation in Peru -- just back to the fiscal issues. Is there anything going on--? There were a lot of rumors about -- in June -- revitalizing the royalty issue; and the whole government was kind of uptight about taxation (indiscernible) in Peru. Looking at it, is that (indiscernible) political stuff than practical?

Peru is still undergoing some -- I would say difficult times right now. They are faced with a revenue crunch. Some of the basic industries are still suffering, and mining's very much a part of that. There's a lot of mines in the country that are still under quite crisis conditions, because it's the low base metal prices that have been prevailing for the last couple of years. And (indiscernible ) isn't terribly strong. Tourism isn't as strong as it used to be.

So, it's got a lot of needs for revenue. And they look to some of the industries to help fund those needs. Happily, there's an awful lot of big Peruvian companies that join in the lobby against -- what we think are regressive forms of taxation, such as royalties. And they've been able to convince the government that those aren't terribly clever ideas. We expect that is going to continue. And it's the usual trade-off between governments that have sources of revenue and needs for revenue.

Last question. The silver -- the exchange rated options -- or the exchange rate securities -- could you go over that -- how it's going to work for silver, and what impact may have on Pan American, and trade. Mostly, (indiscernible) need for those to be successful in the marketplace?

Right. Terry, at this (indiscernible), it's just at the idea stage. We're looking at the pluses and minuses; and we're looking really at the gold example very carefully. Because we think the same exact thinking can apply in the silver market. The basic idea is that there would be a security that people can buy very easily that would represent physical silver. And to the extent that it could be traded very simply on an open market, it will be something that will stimulate investment demand. And this could, because of the very small amount of physical silver available in inventory, relative to total -- relative to, for example, gold industry -- this could sop (ph) up any surplus of inventory and have a very dramatic near-term effect on the silver price.

So clearly, and much more so than, I think, the gold example. So we're looking at what's going on World Gold Council initiative closely. That will be coming, I guess, into the market very soon. And, to the extent that it can be copied in the silver example, where (indiscernible) real close look at doing that.

Legally, and practically, how long do you see before the thing can be implemented?

Oh, Terry, at least six months.

At least six months. Yeah, yeah. That's it. Thanks, guys. Thanks, again.

Brian Christie with Canaccord Capital.

Good morning, guys. Ross, I'm just wondering -- can you maybe give us an update on Manantial Espejo -- when you expect the underground work will get underway. And kind of maybe a time line there?

Well, Brian, you might have miss this. But we had quite a significant development at Manantial about three months ago -- silver standard ourselves kind of (indiscernible) management meeting where we looked at the latest (indiscernible) model. We floated a (indiscernible) on it; looked at the open potential -- the open pit mine -- most of the resource, and whether it would be done more economically or less economically than underground mining.

And we were quite pleased to see that most of the resource there -- about 80 percent -- can be taken out with an open pit, at much, much lower cost than underground. And it was so impressive to us, we decided to go ahead and basically (indiscernible) done in the original plan to underground, which would cost about $3 million before we get to sort of the feasibility stage work that we still need to do there.

Instead of that, we are proceeding directly into the feasibility stage work that's needed to scope out the economics of actually building the mine there, you know, saving (ph) a couple of years from what we originally thought of earlier this year. So we're moving into permitting work, (indiscernible) mission drilling, a little bit more surface drilling this winter. And we will move into engineering cost estimates next year about this time, and try to get this wrapped up in the next 18 months or so.

So we can go ahead and get to the feasibility study by then. This will cost much, much less than we'd originally budgeted, and save us, as I said, about a year or so in our time line. So that's -- we're not going to be doing an underground program. We're going to go straight into the feasibility work directly.

Have you got an expenditure level there, Ross?

Yes, the expenditure for the next 18 months or so is budgeted at about 2.8 million, which will be shared 50/50 between Pan American and Silver Standard.

And you're going to capitalize that I assume, or --?

I think we're going to capitalize it, yes. I think we are expensing that work right now. And, it will be capitalized to the extent it's at feasibility stage, I think. Geoff, is that correct -- or 20?

Yes, that's correct. Once we get to the feasibility stage, we will start to capitalize the cost.

At this time, there are no further questions registered. I would now like to turn the meeting back over to Mr. Beaty.

Very good. Well, I think if there's no further questions, we will call the meeting to an end, and thank everyone for joining us today. Of course, there'll be others who attend by -- (multiple speakers) --

I'm sorry for the interruption, Mr. Beaty. We do have two questions that just queued up.

Well, let's answer them. We've got time; so, go ahead.

Peter Strubby (ph) with Strubby Associates. Please go ahead.

Ross, you're -- more than anybody else that I know, follow the Chinese -- both the Chinese marketing efforts in India and their production. Have you seen any recent indications in what they are doing over there, whether they are building inventory or whether they're increasing sales, or they have any changes in their strategies?

Peter, do you mean in China or in India, when you say they?

No, I mean basically in China because of their major exports into India.

Okay. For the last four years, China has exported very, very large quantities of silver from government reserves held by the People's Bank. The total, we think, has been about 250 million ounces from virtually zero, prior to 1999. Happily, last year, they exported much less than they had in the previous three years; and we expect this year, they'll export less again. So, we are seeing changes in the flow of silver from China to the extent that it's much less than it has been recently. The flow of silver from China went almost entirely into India, which has this big silver demand for investment purposes in jewelry and silver by the India people.

So, rather than that silver going into India from Europe and the Middle East, as traditionally has been the flow, silver was entering India from China. And, we have seen some change in that. There is a return to the silver flow from the Middle East and India (indiscernible) -- pardon me -- in Europe to some degree; but there is still Chinese silver going into India on quite a large scale.

I think that the Chinese silver inventories are dramatically depleted. And I think, further, Peter, that they will dry up very significantly -- very much -- over the next year or so. I think there's another year or so of exports available in China,. But, much, much -- very -- as I said, very depleted stockpiles are there. And further, Chinese domestic demand has increased considerably in the last couple of years, as they use more silver for industrial demand internally. And now, the Chinese internal demand is more or less equal to Chinese mine production. And so, that's not going to create any more surpluses as they have existed for the last ten or 15 years. I hope that answers some of that question.

That's very good, very helpful, Ross. Thanks, a lot.

Trevor Turnbill (ph) from BMO Nesbitt Burns.

Yeah, hi, Ross. We were just looking at the Huaron, and you'd mentioned that the scoping study -- you've got kind of a ballpark of 11 to 12 million in CapEx coming. Do you have any feel for how the operating costs -- to what degree those might be improved upon?

We certainly have some back-of-the-envelope numbers. Geoff, Do you want to take a stab at that?

Sure. Right now on a cost per ton basis, I'll take it down to a cost per ounce -- on a cost per ton basis, we're seeing somewhere just right around $40, $39 per ton. That's all in including transportation, etc., for concentrates. We're looking at a decrease in the cost of about $8 U.S., per ton. That translates -- and now turning that into a per ounce basis -- very quickly, as Ross said, we're doing about 50,000 tons to 55,000 tons per month. We're looking at going up to 75 to 80,000 tons a month. So, you can fairly quickly do the math. If you're saving $8 a ton on 75,000 tons a month, times twelve months, you can start to run some numbers and get a feel for why we're so excited about this particular project.

On a per ounce basis, on a normal case, we should be 3.65, 3.70 per ounce, net of byproduct credits at Huaron. This project will clearly take us below $3, if we can make it happen as our initial study -- as our initial look -- has said.

Great. Thanks, Geoff. Great. Thank you, very much.

At this time, there are no further questions registered from the phone lines. I would now like to turn the meeting back over to Mr. Beaty for any closing remarks.

Okay. Very good. I think we will wind it up there. People who want to use this phone are going to be happy that I'm getting off. And I would like to thank everyone on the call. Thank you, very much, Geoff and Tony and Brenda for being here this morning as well. And if you have any questions, don't hesitate to call any of those three people in Vancouver at 684-1175, areas code, 604. So, thank you, again, for participating, and have a good day.