Pan American Silver Corp (PAAS) 2003 Q3 法說會逐字稿

Good afternoon ladies and gentlemen. Welcome to the Pan American Silver Corporation third quarter results conference call. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation. It is now my pleasure to turn the floor over to your host, Chairman and CEO, Mr. Ross Beaty. Sir, you may begin.

Thank you, operator and good morning everybody who is on the call. I want to introduce the group around the table with me here in Vancouver who will be answering questions after I finish with some introductory comments. Geoff Burns, Pan American's President and COO, Tony Hawkshaw, VP of Corporate Relations and CFO and our new Senior VP of Operations, Andy Pulver. It is the first time he's been on our call and I look forward to him participating in any questions you might have regarding operations.

Well, our third quarter results were good. We increased our silver production by 25% from 2002 levels and more importantly we decreased our cost of producing silver both in relation to 2002 by 13% and in relation to the second quarter this year by 11%. Our mining operations contributed 1.7 million to cash flow compared to a negative contribution last year and contribution of 1.2 million in the second quarter. These numbers reflect in the total cash cost for silver produced in the quarter from $4.53 in the third quarter of 2002 and $4.42 in the second quarter 2003 to $3.93 this quarter.

I would like to emphasize that these improved results are due mostly to operations improvements not just higher prices. Our Quiruvilca mine, in particular, generated positive cash flow in August in September for the first time in three years. This was a direct result of our closure of the north zone which had high costs and low grades. Quiruvilca is producing less silver now but at much better grades. The south part of the mine cannot carry the high fixed cost of the the mine for long nor the high level of sustaining capital. In our previously discussed scenario of closing the mine in mid 2004 remains most likely unless we see much higher silver and zinc prices in the next six months.

I would also like to remind our shareholders of our two other gold assets in the Quiruvilca area. First, we have some ground leased to Barrett Gold adjacent to its new Alto Chicama gold discover and we do expect to realize value from this land in the future and secondly, in October we agreed to convert our minority interest in the Tres Cruces gold deposit to a direct interest in the majority owner, New Oroperu Resources, a TSX public company traded under the symbol OROU on the TSX exchange. We will hold 3.5 million shares of Oroperu, about 20% of the company on a fully diluted basis plus retain a 1.5% net smelter royalty in the property and this deal gives us much better liquidity for our interest and long-term retained interest in the project which contains about 1.8 million ounces of currently defined gold resources. It will also give us a good vehicle to offer gold projects that we see that don't fit our silver strategy but which we feel has good potential.

Our flagship mine, Huaron, in Peru also had a good quarter, producing one million ounces of silver at $3.94 per ounce. This is lower than the second quarter and we expect it to decline further in the fourth quarter. This quarter, we kicked off the feasibility study into expanded production from Huaron and we're currently focused on three areas right now to decrease its cost further and to increase its production.

First, we're planning to replace one of the two mine contractors with our own miners. This will give us much better control over mining and should allow us to retain the contractor overhead and profit margin we now pay. Secondly, we're looking at ways to remove the ore haulage bottleneck that is restricting current production to about 50,000 tons per month. Reopening an existing shaft and porthole will enable this.

Third, and for me as an excursion geologist, the most exciting, we have just started a $1 million drilling program designed to increase the reserve base and provide a solid foundation for a major mine expansion decision in mid-2004. This program will include about 25,000 meters of drilling in surface and underground holes in the tremendously prospective Huaron mineralized system. Huaron is located in a world class mining district in central Peru and this is how we can best realize value from our large land position there. Shareholders may have seen our announcement a few weeks ago that we bought back the 3% NSR royalty held by others over Huaron. This purchase leaves the mine totally unencumbered for our shareholders to receive all the value of future production, particularly if we expand it as planned.

Our other operations in Peru, the small silver stockpile operation near Huaron, also performed very well during the quarter producing 233,000 ounces of silver at a cash cost of $2.17 per ounce. This is about 30% better than our projections earlier this year.

Moving to Mexico now; we completed the major mine expansion at our La Colorada mine in July, slightly ahead of schedule and below budget. However, our commissioning of the new 600 tonne/day oxide plant was seriously affected by record rainfall in August and September including one day where they received nearly 8 inches of rain in 24-hours of which 4 inches fell in 2 hours. This washed out all access roads and bridges to the mine and generally caused havoc all over the region.

I am, however, pleased to report that the mill is now operating at designed tonnage levels. We are now focusing on increasing silver and gold recoveries to planned levels as well as boosting ore production from underground. Costs and revenues are being treated as pre production expenses and will probably be capitalized until full production is attained at year end.

Our large Alamo Dorado silver development project also saw good progress in third quarter. We completed additional drilling to confirm the reserve model and provide samples for metallurgical testing into a combined mill and heap leech operation. This test work is now in progress and will provide the basics for an updated feasibility study early next year and subsequent production decision.

Good progress was also achieved at our Manatial Espeja project in Argentina during the quarter. We began a final 4,500 meter drilling program to enable to us complete a feasibility study in 2004 on a new mine. Initial results have been just excellent and work will now focus on engineering design, environmental studies and permitting work. The property is located in a great location in the middle of the Patagonian Plains and we are very enthusiastic about constructing a new silver/gold mine here as soon as possible. Manantial Espejo is simply a great project.

Lastly, our shareholders will have noticed our announcement this week regarding our San VIncente mine in Bolivia. After two years of leasing this mine to a local Bolivian company while metal prices were very depressed, we returned the project to active status at the end of October. We stopped mining activity there and we began a 7,000 meter drilling program and underground tunneling program designed to enable a feasibility study to be carried out in 2004 on development of this mine as a major new operation. Because we are already pretty stretched as a management team with three other projects at the feasibility stage and because of a lot of social and political turmoil in recent months in Bolivia, we decided to partner this project with the Bolivian company we have worked with for the last two years and so we auctioned a 49% interest to them in return for them funding the next $2 million of project costs. This work is now underway and I expect continuing good things from the project in the next year or so.

So to sum up, things continue to be very busy at Pan American Silver. We have four producing silver operations today and we have four project at the feasibility stage, all of which should be economic at today's silver price and all of which should result in new silver production in the near future. Our management team has been strengthened to meet the operational challenges at all these projects.

And on the financial front, we completed during the third quarter an $86 million convertible debenture financing to give us funds to execute our growth plan in the new year. We remain absolutely focused on delivering the best possible silver leverage of any company in the world to our shareholders and we have the projects, the people and the money to achieve this. We now have to put our heads down and execute our growth plans. I hope our shareholders are as excited as we are in management as we do this.

In speaking about silver, I believe silver today has better fundamentals than we have seen for a long time. Last week in New York, Gold Fields Mineral Services, a consulting company that works with the Silver Institute in compiling the silver statistics on an annual basis, GFMS gave us an update of the silver market so far in 2003 and it was very bullish picture. Demand is forecast to increase in 2003, led by a 5% growth in industrial demand even while jewelry and photographic demand show a modest decline. Digital imaging is causing the decline in photo sales but increase in demand for silver photographic paper on which images are printed.

So, the net effect is for flat demand growth looking out five years, not declining demand. I want to remind people that while Kodak made a very high profile announcement a few weeks ago to the effect that film sales in the U.S. are down sharply this year, I think their number was something like 14 or 15%, what, they didn't say is that film sales are up by 15% in China, 15% in India and 12% in Brazil.

On the supply side, silver mine supply looks to decline again in 2003 by 2 to 3% and sales of silver from Chinese stock piles appear to be down by about 20% this year. The silver deficit looks to be greater this year at about 85 million ounces, though some of this is being filled by producer hedging of byproduct silver production.

I confess to being puzzled as to why silver has actually under performed most other metal commodities this year. Base metals are up 35% this year on average and gold has slightly out performed silver, being up about 10%. But I do think silver will catch up as investors cycle out of the strongest base metals and into silver taking account of its very bullish demand/supply fundamentals.

Silver is indispensable. It is used in more diverse applications than any other metals, it's usage in thousands of industrial applications is rising sharply and its use as a monetary metal has persisted for centuries. When you see a metal that people need and want but whose supply is very limited, you will see a metal whose price rises over time. That is why I feel silver is a good investment, why silver mining is a good business and why the future promises good returns for anyone buying shares in what will soon be the world's largest primary silver producer. On that note, I will open the call to questions.

Thank you, sir. The floor is now open for questions. If you do have a question, please press the 1 followed by 4 on your touch-tone phone. If your question has been answered, you may remove yourself from the queue by pressing the pound key. We do ask that while you pose your question you pick up the handset to provide optimal sound quality. Once again that is 1 followed by 4 to ask a question. Please hold while we poll for questions. Thank you. Our first question is coming from Adrian Day of Global Strategic.

Good afternoon. Ross, you mentioned, you referred to the fact that management was stretched as being one of the reasons that you partnering in Bolivia. I'm just wondering if could you expand on that. How deep do you think your management is and do you have to hire more people, or how's it going?

Thanks, Adrian. The question really is, we don't want to extend ourselves too much. We think we are absolutely acceptably managed right now with the projects we have. We had a need for more people at the beginning of this year, and we spent a lot of time in the second quarter particularly looking for some additional people. I've already mentioned in the last quarterly comments call who we got; we've actually added three new people at the top, Geoff Burns, bringing a tremendous amount of financial skills to the company, of course, additional financial skills to the company, Andy Pulver, who has taken over as Operations Manager and who has quality mine experience and really, that's the type of company we are today and then a vunderkind engineer, Steve Busby, our new Senior VP of New Projects. So, Andy is running the operations, Steve is running the new development programs and between Geoff and Tony, we are keeping on top of the financial management needed to make sure we can continue our reputation of being thrifty and very cost effective company.

Now on the site levels, of course, we've got new teams or not new teams, we've got bolstered teams in Mexico with our new Alamo Dorado project and we have got a couple of new people in Peru but really, we have over 3,000 people in Peru already, Adrian, and we're very well managed down there. What we have to do now is build up a team at the Argentina project which is in the feasibility stage. So, we've spent a lot of time on bolstering our management to meet our growth project needs, we have done that now and we do not need additional people beyond where we are today.

Great. Thank you.

Once again, to ask a question, please press the numbers 1 then 4 on your touch-tone phone at this time. Our next question is coming from Steve Butler of BMO Nesbitt.

Ross, yes, you might find this slim pickings on the call because everybody is in Australia, except for me and Adrian.

But, anyway, I just wanted to ask a question, I joined the call a little late. Quiruvilca, is there a scenario here where this mine continues beyond '04 given what's happening to zinc or what would zinc have to do to turn your crank on Quiruvilca?

Well, obviously, Steve, we're watching the metal markets pretty closely and are very happy with where they're going. Quiruvilca does produce a lot of zinc, in fact, it's more of a zinc mine today than a silver mine. That's why it's sort of down the list of importance for us today compared to a few years ago. Given the need for sustaining capital costs to expand the tailings down, to do some equipment replacement to, deepen the mine further, you know, really you're looking at a need for zinc prices to go below about $1,000 per ton and a gain for what kind of a period can we predict this is going to happen. Those are the calls that have to be made and they're very, very tough calls. We really like where lead is right now. We produce quite a bit of lead at Quiruvilca as well, we really like copper but, you know, the driver is zinc and silver and it's the matrix of prices that are key.

You know, let's just say we're watching it very closely, we've already extended it somewhat next year, compared to what we had earlier thought about, you know, there is no question in the mine, the veins keep going to depth, it as really an economic call for us as to how long these prices will stay where they are, where they're likely to go. We lost a lot of money by making a call that they were going to improve before they did and that didn't serve us too well in 2001 and 2002. Don't know if that answers the question but we're certainly watching. Geoff, anything to say?

I think, Steve, just to reiterate, there's some pretty significant capital, too, that we would need to invest and it is a balance between looking at that investment and what returns we could expect on that investment given the metal price scenario. Right now, mid next year seems to be where we're at but, as Ross said we're watching it very close to see if there's a point which makes sense for us to add additional investment. Today we're not there, I can tell you right now the answer would be no but we're going to watch it carefully over the next few months.

Just a question relating to where on you speak in the press release about a million dollar exploration program commenced immediately or has been initiated as part of feasibility study to early '04. Are we expecting, that seems like a fairly quick initiation of a program to actually convert resources to reserves but do you think you can get that done here and still have a feasibility study due early '04?

Steve, let me take that one. I guess to a certain degree, the two items are independent. In the first sense, as Ross went through, there was really three things we're doing at the same time. Two of those things which are one replacing the contractor and two, expanding our accesses to the mine and to the zones we currently have defined, they are independent of the exercise on the drilling and our engineering on those two aspect are going ahead full tilt right now. In terms of --.

And, further, those can be implemented almost immediately, Steve.

Exactly. As soon as the engineering is completed, we can move forward with those decision to invest the capital in those two areas. On the exploration side, yes, it's a quick initiation, but I want to emphasize the size of the structure that we're dealing with. This is a highly mineralized system where we already had defined six million tons plus of resource.

So I think our efforts in that are very targeted to bring good pieces of that resource to reserve status and I think that can be accomplished in the four months that we have targeted.

Okay. And last question on the silver stock piles, you actually delivered great number of ounces, 250,000 plus ounces, annualized, that is over a million. What's the run rate looking for the silver stockpile sales?

By run rate, do you mean the life?

Well, let's say what would be your annual sales expectation next year, Ross?

Okay. The annual expectation for the silver stock piles is about 750,000 ounces a year, 700,000 to 750,000 ounce a year at a cash cost of just over $2 an ounce and it looks like, it's very much dependent on what the smelter asks to take, because they're our customer. We deliver the stockpile to them, then they smelt them immediately and pass according to the contained silver content. The deliveries this year had been far in excess of what we had budgeted at the beginning of the year.

The stock piles are very, very large and to the extent we can supply them more, if they need more, we have a limitless supply, almost a limitless supply to do that so we're hoping that they will take next year exactly what they took next year and allow this production to increase beyond what we expected last November.

One last question, Ross, before I stop hogging the phone is basically relating to wood preserve activities in the silver usage in that sub sector of bioxides. That seems like it's a pretty exciting prospect and the Silver Institute has estimated maybe 130 million ounces of silver could be consumed in wood preservatives but is that, in your view, a cost effective solution? I know it's a three-year study that's being proposed.

Right, that is an interesting question and just to introduce the subject more particularly to the rest of the people on the call, there has been a big research program started to look at the use of silver to replace arsenic in wood preservatives. Arsenic containing wood is now banned in many states of the U.S. and they have to find a replacement for it soon.

Silver has the advantage of killing bacteria but it doesn't kill people, it's nontoxic to mammals, it is a wonderful wonderful product when used in things like anti-caulking paint, wood preservatives, many, many applications, in large volume. So, it's a very exciting new use of silver.

I should mention that the silver usage in bioxides, this is called a bioxide, it kills bacteria is exploding. Silver is used in water purification, for example, is increasing rapidly in hospitals, in swimming pools to replace chlorine. Silver is used in clothing now to kill smell to kill bad smells, particularly silver, for example, the astronauts that go to outer space are all wearing silver socks because it kills the bacteria that causes the stink. In fact, a lot of clothing manufacturers now are making clothing that has silver contained in the fabric to do the same thing.

Silver is used in burn medicine on the increase, in gauze to kill bacteria in wounds, so it's a really big factor of new use and it's both real and it is in R&D in areas like wood preservatives. Silver also has some huge new applications, again in the R&D sector, in catalysts, in fuel cells and in superconductors. So there's quite a few things that are on the development block, as it were, using silver that again take advantage of its unique physical and chemical characteristics that have the potential to bolster demand in the future and certainly sucking up any silver that is lost through a diminishment in demand lost through digital imaging, for example.

I guess where I was, just the final on that one is that, is there an estimate of its cost? Do you think it can be a cost-effective solution for wood preservatives, is that the preliminary applications or is there nothing yet?

I'm afraid I can't give you any details, it's just starting R&D, so nothing commercial, nothing really being tested on a wide-scale basis where we can really find out whether this is, in fact, cost effective or not.

Thanks, Ross.

Okay.

As a reminder, to ask a question please press 1 then 4 on your touch-tone phone at this time. Our next question is coming from George Topping of Sprott Securities.

Hello there. Not everybody made it to Australia. Just on Argentina, on the scoping study, can you give us an idea of the initial scoping work? I know it's early days yet, but an idea of what capital and cash costs would be associated with that?

George, it's just too early to give details. We do have numbers but they're very, very preliminary and I'm afraid to say, I just don't think it's fair to talk about them at this stage. We will have numbers in, what, Andy, another six months, eight months?

Yeah, most likely in six to eight months, something to that nature.

I'd much much rather, George, talk about real numbers. We have definitely done a run, it's based on our best numbers but I'd rather not talk about them at this stage. Certainly they were absolutely strong enough to encourage to us get into a full feasibility study. It looks like an economic project as a lay down. While I'm on that subject, the real thing that shifted us early they are year was the new model we did on the silver resources there.

We had traditionally been looking at this as an underground mine and felt that the next stage would be to put a ramp down, go underground, drill it off, do all the work you needed to do to get to a feasibility study which was sort of a two-and-a-half-year exercise. When we did the new model we threw out an open pit over this and it looked to us like we could mine almost all the reserves object a very economic level as an open pit, so we decided to skip the underground ramp and tunneling program that we had planned and go straight to feasibility study as an open-pit operation. It's something that clearly will speed up the time frame by at least a year and save us the cost of going underground.

As I say, at the moment, it looks like a great, robust project, but we'd much, much rather have detailed numbers so we can talk about them with more safety, I guess, and security.

Right. Okay. Fair enough. Thank you.

Okay.

Thank you. Our next question is coming from John Stilley of UBS.

John?

He removed himself from the queue. As a reminder, to ask a question, please press the numbers 1 then 4 on your touch-tone phone at this time. Mr. Beaty, there appears to be no further questions. So you have any closing comments?

No, I don't. I would just encourage anybody that has questions they would like to have answered to call Brenda Radies here at 604-684-1175 and we will be happy to answer questions on a one on one. Thank you very much for joining us today. Bye bye.

Thank you. This does conclude's today's teleconference. You may disconnect your lines at this time and have a great day.