Pan American Silver Corp (PAAS) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Pan American Silver Corp 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 your questions following today's presentation.

It is now my pleasure to introduce Mr. Ross Beaty, Chairman of Pan American Silver Corp.

I first of all want to apologize. The operator has delayed this through a technical problem. But anyway, we're going to get going here. Good day, ladies and gentlemen, and I will start the Pan American Silver Q3 conference call now.

As you can all see, it is a great time to be in the silver business, and our Q3 results are, as you can see, reflective of this. Today I am actually speaking to you from a very small village at the very bottom of South America in Southern Patagonia in Argentina, near our Manatial Espejo development project, that we expect will be built into one of our new mines in a couple of years. I am here to meet with Argentine officials and community leaders to explain who we are and what our plans are, and to understand how to work with Argentina to make development of Manatial Espejo successful for all stakeholders.

Also on this call is Geoff Burns, our President and CEO. Geoff is in Lima today -- Lima, Peru. And he is going to Bolivia this afternoon where he will meet with our project team there, our partner EMUSA and government officials to discuss the expansion of our San Vicente mine. With Geoff in Lima are our two Senior Vice President, Steve Busby and Andy Pooler, who manage our projects and operations respectively.

We had our Q3 board meeting last Friday in Lima, and a successful tour by the Board of Directors to our newest Peru mine, the Morococha operation. And in Vancouver we have on this call Brenda Radies, our Vice President of Corporate Relations, and Rob Doyle, our CFO. We will all be here to answer any questions you may have on our Q3 results, although Geoff, Andy, and Steve may have to depart early to catch a plane where they are going.

Pan American Silver is and has always been a busy company. We set out on this journey to build the world's preeminent silver mining company ten years ago. It was an easy thing to state that objective in 1994. It is quite a different thing to implement it. Not only because mining is inherently a tough business, where unfulfilled objectives are common, but also because silver is so hard to find as a primary metal. So silver mines are extremely rare and silver mining companies are, therefore, so hard to build.

But we have kept our heads down, our minds and energies focused, and we have achieved our objectives. We now operate six silver mines, four in Peru, one in Mexico, and one Bolivia. Our production this year will be over 11 million ounces of silver, and we are targeting over 15 million ounces next year. This should make us the largest primary silver mining company in the world. We have three growth projects as well, which we expect will boost our silver production to nearly 25 million ounces by 2008.

We are well financed, with over $80 million in cash and virtually no debt. We hold over 800 million ounces of silver reserves and resources, and as you can see from our Q3 results, we are profitable, with growing cash flow, and we expect our cash costs to decrease as we build our new mines, and this will further increase our cash flow. So I am very, very pleased with our story to date, with our ten year history, and I am very excited about our future.

Needless to say, our greatest asset is our people. We had a big transition in our management team last year, and our new senior team has really let us shift into a higher gear this year and the results speak for themselves as to the success of our new team's efforts. Of course the real horsepower of the company is at all levels - our miners, contractors, suppliers, accountants, lawyers, technical experts and financial managers. Today, we employ nearly 5000 people, and our strength is rooted in the talents of every one of these people.

I am not going to repeat right now what we announced this morning regarding our Q3 results. They are self-explanatory. But I will try to fill in some holes to pre-answer some questions you might have. Obviously, things are going very well for us. Our one problem child over the last year has been our La Colorada Mine in Mexico, where we have experienced lower-than-expected results for a host of reasons -- some due to bad luck, such as the record rainfall last fall, and some due to just plain mistakes. I am pleased to report, though, that we think we have addressed most of the problems and that our results in the future should be much better.

In May, we brought on a new mine manager, Mr. David Drips, who really has spearheaded these changes. Our monthly employee turnover has gone from up to 20 percent to virtually zero today. Our safety record has improved dramatically as well. For example, our last three months have been accident free. We changed our mine plan in July, and while this resulted in expected higher cash costs in the third quarter, we are now seeing higher grades in the mill and better recoveries, and these results will translate into lower cash costs in Q4 and next year. As I said, our cash costs were expected to be high in the third quarter. In fact, we produced at lower cash costs than we had originally budgeted.

So La Colorada was a drag in Q3 on otherwise excellent performance at our other mines. But we are seeing steadily increasing silver production there and continue to forecast production in 2005 of over 3 million ounces at a cash cost below $4 an ounce. In fact, we hope La Colorada a year from now will demonstrate the kind of successful turnaround that we have seen at our Quiruvilca Mine in Peru.

A year ago, Quiruvilca's cash costs were nearly $5 an ounce; in fact, for the first half of last year, they were well over $5 an ounce. Today, they are $3.34 an ounce, and in fact, Quiruvilca is our most profitable mine. This is a spectacular turnaround that we see continuing for a long time.

Our flagship Huaron mine in Peru produced steadily in Q3, while we continued work on our planned expansion there in 2005. We had record tonnage production at Huaron in Q3 and expect this to continue to grow in coming months as we develop a new access to the underground and increase our mining areas.

In the third quarter, we acquired our third large mine in Peru, the Morococha Mine, where we generated excellent operating results, as you can see, and began a major drilling and underground tunneling program to better evaluate the property's truly outstanding exploration environment. We have already discovered a new, very high-grade silver vein at Morococha and we are really excited about making this new mine our most profitable asset.

In Argentina and Mexico, our Manatial Espejo and Alamo Dorado projects are advancing well, and we hope to complete full feasibility studies in each projects early in 2005, leading to production decisions. Of course, we will not embark on building new mines at both of these properties simultaneously. But we should be able to advance one into construction early in 2005 and the other later in 2005, to the extent that we have all of our ducks in a row to make competent and professional construction management decisions.

On the financial side, we are in excellent condition. We are generating strong cash flow that will support our growth and we have an outstanding balance sheet, with $80 million in cash and no debt, to support our ability to finance our new mine. We are also seeing some interesting new opportunities, as more junior companies explore for silver, and we hope to be the senior partner of choice for the most successful of these companies.

I said earlier this year that Pan American Silver is firing on all cylinders. I can say it today with even more force and assurance, and I expect this will continue for a long time. One of the main reasons for this lies in my conviction that we are in a new price environment for silver with a sustained price over $6 an ounce. This is due to endemic U.S. dollar weakness; to synchronize growth all over the world, despite slowdowns here and there; to a secular shift of investment funds held by global investors away from stocks and bonds and into all metal commodities, including silver; and to more or less static silver mine supply growth looking out to at least 2008. These are profoundly bullish fundamentals and it is easy to make a strong case for sustained high silver prices in this environment.

I am really pleased that our tenth year can be marked by such good results and I am fully confident that our next ten years will be even stronger. We have 35,000 tremendous shareholders today, who have supported our journey in our first decade. I hope they will enjoy the next journey as we travel into our second decade beginning next year. And with these comments, I will now open the call to questions.

Thank you. (OPERATOR INSTRUCTIONS) Haytham Hodaly of Salman Partners.

First, I just want to congratulate you. It's very nice to see a profitable quarter finally, and you have done a great job; you have persisted. But more importantly, can break down, Ross, for next year, 2005, what your -- obviously you're giving out a number of roughly 15 million ounces of contained metal. Can break that down for me and maybe just throw in what type of cash costs you're projecting in your budgets?

Brenda, can you do that while I just grab a presentation that we've got here, and I'll be right with you in just a minute, Haytham. Brenda, can you tackle that while I'm away from the phone for a sec?

What we are looking forward to do is, obviously, these are contained metal amounts as well. We're looking at let's start in Peru. We are looking at Morococha of 3.5; Quiruvilca at 2.2. We're looking at Huaron of 4.5 And the pyrite, right now we're putting in about 700,000, again because you know that there's some flex in that and we are not positive as to what the -- because it is taken from Doe Run gets to dictate what they take, so there's always some flex in those numbers. But between 7 and 8000 for the pyrite.

Then at La Colorada, we're looking for full-year production of 3.5 million. We're also looking from San Vicente to have something in the order of -- and we're still working through our budget process, so I'm going to give a bit of a broad range -- it's between 0.5 million and 1 million ounces, but hopefully to the high side, 1 million ounces.

Could you throw in some cash costs in some of those? Just what your forecasts are.

For Morococha, the cash costs for next year --

Actually, Brenda -- Haytham, with all respect, it's a little premature because we're in our budget process right now. What we have been saying, assuming 41 cent per pound zinc price, because of course, by-product revenue is important, our estimate as of midyear this year was $3.53 per ounce total cash costs for all 15.2 million ounces of forecast production. We're going into the budget process right now. We have our budget meeting in early December, where we will fine-tune those costs. Some operations a little bit lower than that; some of it will be a little higher. And of course, this is a number that change until then. But we should have pretty good budget numbers by December. They will be in that order, though.

Perfect. That's great; I appreciate that. With Huaron at 4.5 million ounces, is that sustainable going forward?

Is that what?

Sustainable at that level?

Oh, yes. Huaron has a -- right now, it has a 20-year mine life, including the resources. And what we are doing is we're doing a big drilling program, as you know, to move resources into reserves, so we can justify expansion of tonnage, in fact, at a greater rate than 4.5 million ounces even.

Ross, one silly question. Obviously with silver over $7, we start to look at potentially what happens when the gold price plunges above 450, 430, 440, people start to look at hedging again. I would assume there are no plans in your outlook to do any kind of silver hedging, is that correct?

Let me be clear -- very, very crystal clear. We have never hedged. We are currently unhedged, and we have absolutely no plans to hedge in the future, zero.

Perfect, that's what I thought. Thank you.

Terry Ortslan of TSO & Associates.

Brenda or Ross, could go over the base metal (indiscernible) next year on the basis of the silver production you have, just to complete Haytham's question?

Rob, can you tackle that question?

Sure. Base metal production, you're looking at for zinc payable metal, we're talking about somewhere around 45,000 tons of payable zinc. Lead is going to be right about 22,000 payable tons, with copper roughly around about 5000 payable tons of copper.

Thank you. And Ross, obviously, your competitors are all talking about inflationary cost pressures. Are you seeing any (indiscernible), because obviously you are getting great results here. Where are the pressures and are you augmenting them?

There's two parts to the answer to that question. The first is, inflationary pressures are pervasive in our industry for capital costs, particularly, and in fact, operating costs. We are quite protected in Peru, our main operations, from creep-in in CapEx because these operations are running really well and there's no great capital needs -- any real material capital needs where we would see an impact on inflationary increases in capital costs.

And in terms of operating costs, we are quite closely tied to the U.S. dollar in both Mexico and Peru, so we don't see great exchange-related cost creep either in our major cost component, which is our labor force. In terms of energy, there is modestly higher prices. Mexico's quite protected because they are such a big producer of energy. And in our Peru mines, much of our power comes from hydropower, so we are insulated from the oil and diesel cost increases, because we don't have operations that use diesel power. So we are rather well protected on our existing operations from inflationary pressures right now, and similarly for foreign exchange-related cost pressure.

On the new projects, though, it is true there is definite cost creep happening. For example, Manatial Espejo and Alamo Dorado, we are doing the final feasibility studies now. In the case of Alamo Dorado particularly, we inherited a feasibility study and in 2001 -- that was done in 2001 or 2002 that Corner Bay did, looking at a heap leach operation. And if we did that feasibility study again, for sure, capital costs would be 15 or 20 percent, which is typical for the creep in that kind of operation. However, we are going to the doing a mill, so our capital cannot be compared to the capital costs from 2001. It will be a new number. And we are trying to offset some of the creep by -- the truck fleet, for example -- by looking at a fleet of used trucks, which we might actually buy quite quickly here to cover off that particular component of capital cost.

So there is definitely a cost creep. It is offset in some cases by depreciation of the -- for example, in Argentina, the peso is depreciating against the U.S. dollar, which is the right way to go, not appreciating; and the Mexican peso has been more or less static with the U.S. dollar. But there will be some creep in the capital costs and some creep in the operating costs for sure in those operations. We will have final numbers, we hope, at the end of Q1 next year for both the projects and we will just see how serious it is.

Luckily, of course, most of our operations are up and running. And in focusing on production in the late '90s, in moving away from just being an exploration company or a resource holder, to become a much larger producing company, we took the bet that silver prices would increase in the near future. And we perhaps were a little bit -- they did not increase as quickly as we had expected. We thought that they would be over $6 by the end of the decade last decade, and they were not. And of course in 2000, 2001, and early 2002, silver was really, really on the floor, along with all other metals.

But happily, we have stayed very true to our focus. We continue to work on expanding our production. And now we're seeing the fruits of that focus, without having any effect on our budgets due to the current inflationary world that we see ourselves in in terms of capital costs. Our mines are built. They're running well. We don't have those capital costs in front of us. We have them behind us.

Great answer, Rob, thanks. Again, on broad terms, you have strong views about silver markets in general speaking and all the gossip (ph) as well. How do you read the market in the short-term?

It is always a hard market to call in the short-term really, Terry. Silver is quite volatile. It has all the characteristics of the intermediate metal or the schizophrenic metal, as I often like to call it, between gold and base metals. Base metals can be much better protected; I think even in the short-term they can. Gold is a very difficult metal to predict and silver is sort of in the middle. And of course because it is such a thinly traded metal, it is a very small market. It is about 1/10 the size of the gold market and the base metals markets, so it's a very, very volatile metal in the sense that a little bit of money coming into it and a little bit of money leaving the market has a big impact on the price.

And that is why I tend to make my protections medium-term, a couple of years out, a year out, a couple of years out, and even long-term, which is why I think the fundamentals are so good that the long-term is very solid for silver. I cannot tell you what silver is going to be trading at next week or tomorrow or in the next hour.

This morning on the conference call, they indicated to everybody's surprise that the palladium consumption in China just about doubled within a year or so -- in fact, it already has. What's the latest -- I mean, obviously, the favorite topic being China and silver, what's the read on that one? In the past, they were supplying the markets from their stockpiles. Where do they stand now?

China, with think, has pretty well depleted its mountain of stockpiled silver built up in the 1990s. We think the People's Bank of China has sold all or the lion's share of the silver. It is not an overhang anymore. It is not the threat. And if they had anything left, I think by now they would have sold it completely. So I think that big mountain of overhang is over, finished.

And the good news is that demand in China has exploded in silver, and now there's more internal demand in China for silver than there is internal production. Even though production has gone up quite bit, demand has gone up much more quickly. And what was a surplus in the 1990s of silver from mines that had to be exported or stored as inventory is now a deficit. So China has added to the global silver deficit, and that's one of the reasons we're seeing such strong prices now.

I should mention that the largest component, we think, of Chinese silver demand today is actually industrial. It is in the electronics and electricity sector where silver, being the best conductor of electricity, is used in almost all components, electrical components, computers, batteries, cell phones. And, for example, flat screen TVs use a tremendous amount of silver. These are very topical and very current industrial goods, manufactured goods use a lot of silver, and that's what's driving the sharp growth in demand for silver in China.

Looking out into the next five or ten years, I see gigantic growth in jewelry and silverware in China because there is virtually zero silverware demand and silver jewelry demand in China right now, since silver has not been fashionable. And originally it was gold in China, but the last five or eight years, platinum has taken over as the hot metal for young Chinese women particularly, who tend to drive the fashion industry for jewelry, and they have tended to follow platinum. And that's why platinum, which was in hardly consumed at all in China ten years ago, China is now the largest platinum market in the world and it is all for jewelry, and the numbers you just mentioned are absolutely representative of that.

We are hoping that there is going to be a move out of platinum -- it's a white metal -- into the other white metal that's so much cheaper and equally beautiful. It takes a better shine; it is more lustrous; it is more easy to work than platinum. And if we can convince the young Chinese women, particularly, that it's fashionable and beautiful, hold on to your hats, because we see a gigantic demand in China for that particular sector.

Ross, I haven't heard you so excited for a long time.

Since last quarterly call?

Last question. Capital cost numbers range for next year, please.

We cannot give you a number because the big drivers for that are going to be whether we build Alamo Dorado or Manatial Espejo or both. We are virtually certain to continue on our expansion at Huaron. We are virtually certain to be expanding San Vicente in Bolivia. Those are relatively low CapEx projects. But the big ones are -- the range of monies is between 70 million to 100, 110 million for those two projects, and there's a lot of variables in that, of course, times two. So that is a very big number. We are fully financed to build one of those right now; in fact, we could build both of them with a little bit of debt or gearing or even another financing if we wanted to go that way. But we have not made the decisions to build either of them yet, and when we do, you can add that number to our CapEx budget. It's completely covered with our cash flow.

That's great. That's done, and the decisions for that, you will be making when, in the first quarter sometime?

Decisions will be made -- the first, second quarter next year, first half.

Thanks for your time, thank you.

Ross, just to let you know, your crew in Lima has departed.

(OPERATOR INSTRUCTIONS) There appear to be no further questions. I will turn the floor back over to you for any further remarks.

Okay, while I am making the final comments, we are certainly here to answer questions, so if anybody does have any further questions, by all means, call. You won't be able to get us if you call Vancouver, though, except Brenda or Rob Doyle, because the rest of the management team will be traveling for the next week to our various operations. But we will be back after that and we are accessible, so I certainly encourage anybody to call, if they have detailed questions, at our office number in Vancouver. So I think that's all I have to say personally. Brenda, do you have anything you would like to sign off with, or Rob?

No, I think we are good here.

Okay. Are there any other questions, operator?

No, sir. No further questions.

Very good. We will call it a day and thank you very much for joining us today.

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