Pan American Silver Corp (PAAS) 2005 Q2 法說會逐字稿

Good morning and welcome to the Pan American Silver Corporation Second Quarter 2005 Earnings 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, Geoff Burns, President and CEO, sir you may begin.

Thank you operator, and welcome ladies and gentlemen. Joining me today are Rob Doyle, our CFO; Andy Pooler, our Senior Vice President of Operations; Steve Busby, our Senior Vice President of Projects and Brenda Radies, our Vice President, Corporate Relations. They are here to help answer any questions you might have, after I finish my opening remarks. As always, all the amounts I'm going to talk about are in U.S. dollars, and with that let's get started.

You all have the number available to you, so I am going to focus on a few key points of the operations and then review the status of our projects. We had a very good quarter, and most importantly we delivered all the commitments we made after the first quarter. We increased production at all our operations relative to the first quarter. We reduced our unit cost and we approved on every single financial metric. Our silver production was 3.1 million ounces up 24% from 2004, and plus almost a 100,000 ounces as compared to our first quarter. Our zinc production was up, our lead production was up, and our copper production was up.

We had mine operating earnings of 3.1 million, up almost 38% or $700,000 from the same period a year ago. Our cash flow from operations was 3.4 million before adjustments for working capital, which is about $1.1 million per month after paying for our G&A and all our exploration activity. And we had net earnings granted very small, but a huge improvement from the $2.8 million loss we experienced in Q1. In addition, we had significant exploration success at Morococha, Alamo Dorado construction is moving ahead full steam, and finally we have just decided to proceed again with our sulphide production at La Colorada, and which you will see that come back on stream over the balance of this year and into early 2006.

We still have a lot of work to do to generate sustainable profits, but I think this turnaround quarter demonstrates our focus and commitment. We are in a very different cost environment than we were a year ago. In June of 2004, crude oil was still $125 a barrel, Peru had not yet introduced a 1% net smelter oil, royalty and all mineral production and Pan American was still using loss carry forward to offset income taxes and worker participation. We have experienced a same cost creed as a rest of our industry. And as a result of profits today, versus the same period of last year are lower. But we have our cost under control, and we expect to see the financial benefits of the improvements that we have implemented to get there through the remainder of 2005 and even more so in 2006.

Our star improved for the quarter was Morococha, which is rapidly becoming our best asset. We are extremely pleased with the mines performance, and we think the news is just going to keep getting better. When we bought the mine last year, we thought there was enormous amount of untapped potential, and I am very pleased to be able to say that we were right. We had some growing pains over the last couple of quarters, as we integrated the mine into our proving operations. But these issues have been resolved, and we expect this quarter's performance to continue over the balance of this year and beyond.

We produced almost 700,000 ounces of silver at Morococha in Q2 at $2.78 per ounce. As many of you have seen from our news release last week, we have had tremendous success with our exploration program at Morococha, and there will be more to come adding almost 4 million tons and 21 million ounces of silver to the reserves and resources is no small feet. But more importantly, the new ounces are contained in mentors, which are larger and wider than the veins we have been mining. This makes a much lower cost and therefore higher value. To put things in perspective, at our current mining rate of about 600,000 tons per year we've added 6.5 years of new ore.

We are continuing to drill through the remainder of the year, and we expect to continue to add reserves and resources with that drilling. Clearly, once we have defined the size of the new resources, we'll put on our engineering hats and determine and what is the best mining rates to use at Morococha. We have got a lot to think about but please watch the space. In my view, this is going to be our next most significant growth opportunity at Pan American. Huaron is still on excellent long life asset for us, but it's a tough mine , it requires consent management attention to unlock its value.

One area we are looking very hard at right now is the metallurgy. From a mining perspective, we are doing very well. We're moving up the production rates to almost 56,000 tons a month. Like the order we’re now in is metallurgical different than that which we’ve experienced before. We’re seeing slightly lower zinc rates and more significantly lower zinc recoveries. This has reduced our by-product metal production and has had the effect of raising our cash production costs. We have an intensive metallurgical test program underway right now to try and get a handle on this problem.

We also expect it to be alleviated somewhat in the second half of the year as we reach the [alliance] zone which is higher grade and hopefully better recovery. Quiruvilca had a good quarter. You might recall that only 18 months ago we almost shut down this asset; we now expect it to be fully back on track where it has been over the last several quarters for the remainder of the year, producing good ounces at low cash costs with positive cash flow. We’ve just completed installing a new conveyer system underground, which should help relieve some of the baldness we experience particularly in the first part of the second quarter. At our pyrite stock -- stockpile operations, the Doe Run's smelting company has been buying less than they had a year ago.

As you recall, this is effectively a surface trucking operation, and the ounce is sold from they are solely at the discretion of Doe Run. Right now we don’t see their off take increasing, so we'll probably sell less than the 960,000 ounces we forecast at the beginning of the year. Likely in the 750,000 ounce range, but still at very low cash cost and very, very profitable. Moving to Mexico, we were very pleased with the performance of La Colorado. They had record production this quarter for silver. A 57% increase over the same period last year, yet only mining 9% more times. The more selective mining methods that we introduce are working. And the oxide mill is now running above design capacity.

We have also just approved the commencement of the stock piling of sulphide ore. That is going to be processed through the sulphide plan that we are commencing to bring back on line. We should be able to produce an additional 900,000 ounces of silver a year from the sulphide material, and we are expecting the plant to start up in some -- in early February of 2006. These sulphides should come and that silver from the sulphide should be produced at about $2.20 an ounce, which will immediately have a positive impact on our bottom line.

The Colorado had a tuff start up. But this complete turnaround is a testament to the quality of the mining operations group, you have a Pan American. It was also a very productive quarter on our project front. First and foremost Alamo Dorado. We are off to a great start and we are continuing to make excellent progress on time and on budget. The key for us has been securing the major pieces of equipment. As some of you may know with the mining boom over the past few years, lead times a major equipment can be up to 18 months and prices are escalating weekly. However, all a far critical items have been secured and all the key members of the operating team are now in place. I was just down this side a couple of weeks ago. We’re digging ground for the process plan, the lab, the admin buildings; we’re erecting the truck shop and warehouse. Our mining fleet is being delivered, we’re pioneering the main hall road to our open pit, and we’re just getting going on our main power line. It’s damn exciting. We are in for construction mode. We’ve got a long way to go, but I can't wait to see us pouring silver there in about 15 months time. We are continually on target to deliver a completely feasibility study at the Manantial Espejo in likely early the part of the fourth quarter. Right now, our focus is on finding ways to optimize the economics. We think there are some opportunities on power and infrastructure. But as I am sure you can appreciate, we can't say too much at this time. I will say that we think there is more resource potential on this property, and a team is reviewing all the geological modeling in data to look for opportunities to add to the current measure and indicated resources.

Turning now to Bolivia, we’re fortunate that the recent instability there has not had any effect on our San Vincente project, and in fact during the quarter we finally signed an agreement with Comibol, the state mining Company to recommence production as San Vicente. We have also devised a better operating plan, one that should increase San Vicente's production and profitability. Our strategy there has been simple. We’ve attempted to minimize our out risk investment there and utilize the cash flow from the mine to wrap up production. San Vincente is a great silver ore body, it had great in access of 450 grams per ton and plus 2.5% zinc.

Right now, as I just mentioned we have resumed mining and our stock planning or while we look at refurbishing that PS mill, which is an old mill that is already on the site. Our review show that this is much better option than toe-milling that same ore else where. We expect that we will be able to increase our production from San Vincente for almost 2.6 million ounces a year at much lower cost. As a result of this new plan, we are deferring until 2006, the production we thought we are going to get this year, which was about 735,000 ounces of silver. But as I said, we should see these ounces and more at a much lower cost. This in conjunction with the change in the delivery schedule at our pyrites is going to affect our consolidated production for this year. We are now forecasting approximately 12.5 million ounces of production down from the 13.5 we previously had talked about.

Finally, just a few words on the silver market. While our prices have settled a bit in July, the second quarter overall was a continuation of the volatility that we have seen over the past two years. Today, silver is $7.11, this is a great price for Pan American. During the quarter Gold Fields Mineral services released the annual source survey, and reaffirmed the Borg case for future silver prices. Despite the rising for silver prices, fabrication demand held up very well in 2004, and investment demands saw a major jump. The silver ETF is expected to fill that demand in June, excuse me and in June Barkely filed a registration statement with the SEC to launch that product. The timing of when it will get going is now in the hands of the regulators. And I think the view is, that it should be a smoother process than the gold ETF went through about a year ago.

On the supply side, scrap supply is declining, and we have significantly lowered government sales, particularly out of China. We did see a rise in mine supply, but as Gold Fields said, they don’t believe it will have much impact.

And with that operator, I would like to open the floor to questions.

Thank you. The floor is now open for questions. If you have a question you press the “*” "1" on your touchtone phone. If any point your question is answered, you may remove your self from the queue by press the "#" key. We do ask that while you pose your question that you pick up your handset to provide optimum sound quality Once again that is “*” "1" on your touchtone phone at this time. Please hold while we poll for questions. Your first question is coming from, Haytham Hodaly with Salman partners.

Of course it’s Haytham. Jeff how are you.

Hi, good. Haytham your self.

Couple of questions, just on the income statement, what was the investment in other income of 990,000?

Rob perhaps you could take that question.

Sure, the bulk of that is just the returns that we get on our treasury assets and on our cash position. There was some small other incidental income, just some sale of some assets in Peru but you know very small, the bulk of it really is just interest income.

How much what's the interest you get on those assets, cause I calculated if it's somewhere around 3% only about 150,000 to less than 200,000 of that would be interest income for the quarter?

Well, our effective interest rate is round about averaging on about 3.5%, that’s interesting, perhaps I can juts get on the line with you after, and then go with the calculation.

Sure that will be great. One more question to Geoff. Alamo Dorado you spent, how much have you spent to date so far out of the full CapEx?

I think we are at this stage in around $10 million Haytham.

Okay. And then in the second half you said 33.5 in the news release, and so what does that leave for next year?

Well we are still tracking to a full cost about 76.5 million including the start up working capital as well as our inventory purchases for mine supplies etcetera. So do the math there and that's what should be left for next year.

Just refresh my memory Geoff on the method of financing this?

On the financing is coming from our cash reserves, we are not doing anything new on financing, so we have the cash available to do it.

Okay fair enough. Thank you.

Thank you, once again if you do have a question you press “*” "1" on your touchtone phone at this time. Please hold while we poll for questions. Your next question is coming from Ian Howat, National Bank Financial.

Good morning Geoff.

Good morning Ian how are you doing?

Not bad. Do you see any risk that when the silver ETF comes out that even though it may increase silver demand providing another silver investment alternative for investors that may take some interest in all your shares themselves?

Good question Ian. I think by opening the ETF, what you do , I’m hoping that what it's going to do is provide a investment at a broader range of people can purchase than just what we found has been in the sort of silver equities per say. There is no question that there is going to be an obvious choice between Pan Am's stock per say and buying silver ETF, and that will take, I’m guessing, that will move some investors to the ETF. But I’m hoping that it actually, what it does is going to expand the market for silver investors versus just take that market which currently does exist and divide it into smaller parts.

Okay. And just -- I think you’re sort of what you see is your silver production growth profile over you know from this year ‘06 and ‘07.

I don’t have the absolute details but let me just give you this and you can confirm with Brenda maybe later. I mean Alamo Dorado is going to come on stream in the fourth quarter of next year, that’s going to add you know 5 million ounces a year over at least an eight year life or longer. Manantial Espejo at this stage if we hit everything we’ll have the feasibility study of the fourth quarter, it would be sort of an 18 month construction starting in January, so 18 month in sort of 2007 we'd see Manantial coming on our 50% would add about another 2 million ounces of silver and above 40,000 ounces of gold, so add that to our current production profile and guess that one big unknown is what we're really going to end up with at Morococha. I don’t even want to speculate it at numbers at this point of time, but there is now question given the discoveries that we've made that we need to look at what the correct production rates are, and it's not going to be 50,000 tons a month of throughput which is where we were getting to right now. It's going to be something significantly above that. But I just don’t know, you know, I don’t want to speculate what those numbers might be.

And if you find significant more or are there any limitations on the ability to process it or on the storage of tailings?

There is certainly nothing on the stores of tailings, the tailings goes into vast Qi-Kocha lake which has been the tailings deposit very long before we arrived on the scene and that probably has a 20 year capacity, at least with some very modest dam raises. So there are no issues there. The real issue is, if we are going to change the capacity we have another plan already on site that we’re not using called [Socrakancha] the question is whether we would look at re-establishing, processing at that plan or look at putting in something brand new with the latest technology. So there is -- I don't see a limitation on that there may be a capital investment is required but certainly not a limitation.

And one last question. So you have enough cash available for Alamo Dorado on the preliminary numbers for Manantial Espejo do you have enough money as well or would you have to raise some debt.

What we would have to do, yeah we will have to do some financing there Ian it’s -- at this stage its way to early to know whether we would look at that or whether we’d look at equity. We are going to continue to generate some positive cash flow from our operations during this period of time. So, the answer is we won't have enough from that to cover the full construction costs. We will have to do something.

Okay. Thanks very much Geoff.

Ian just the last thing. The other part to add to the production profile is going to be the sulphide production that’s coming on at La Colorado starting February next year and as we’ve said I think in the release it's about 900,000 ounces a year in addition to what's coming out of there right now.

Okay, thank you.

No problem.

Thank you your next question is coming from Stuart Robinburg (phonetic), which is a shareholder.

Yeah hi. I would like to know this a very general question. How come you are starting selling silver retail like this you’d say and I haven't heard much about that since that began and I'm wondering what effect that has if any?

Okay, Stewart I guess real quickly. The last discussion I had with the Northwest Territorial Mint, she was actually minting the coins and selling them on. We'd sold about 250,000 ounces since we have really kicked that program off. I guess it was about April of this year. Just I know, we are not -- we're supplying the silver and selling it to the Mints who are then selling it on for retail. So we're not in the actual collection on the retail that the Northwest Territorial Mint is looking after that. But about a quarter million ounces so far and demand has been very good. I don’t know what you expect over the balance of the year, but we are getting good sell demand right now.

Okay, well I bought some of the product and I was very happy with it.

Oh excellent.

That’s right.

Thank you very, Stuart, excellent, bye, bye.

Thank you. Once again if you do have a question you may press “*” "1" on your touchtone phone at this time. Your next question is coming from Haytham Hodaly with Salman Partners.

So Geoff just have a follow-up. The -- just the cost looking at the Huaron here going forward, what realistically do you think you would be able to getting down to eventually once all the problems are sorted out?

Yeah, right now I am I am looking at above 4.25 is what I think we are going to see at Huaron. In terms of actual dollars expenditures say we haven’t seen a cash of the door in terms of operating has not gone up very much at all. It’s actually been very minimal. What you are seeing the biggest impact or two impact one is the zinc byproduct credit, recoveries have fallen there from almost the 80% level down to the low 60, so that has had a real impact almost 70 cents an ounces at Huaron is a loss of that byproduct credit. So we’re hoping that the Mint testing we've got going on right now and a little bit of reconfig on the mill is going to get that 70 cent back for us. The second impact is we’re seeing lower production, and we are going to see production up to as I said averaging above 56,000 tones plus over the next quarter which should see our production go up about 10% above where it is right now, in that neighborhood. Put those two things together I think 4.25 is the number your looking at.

Okay. Geoff what was realized price for silver over all this quarter?

Rob can you take that one for me I don’t have that number right in my head.

Sure as Geoff said, I’ve got a year-to-date number of 705 as I realize price for the quarter it was actually right around the average but which I think was somewhere on 715 I believe.

Yeah it’s very right. Okay, just and one more thing Rob your calculation does work. I was actually excluding in the short-term investment so that does make up most of difference on an earnings perspective.

Okay sure if there is any follow-up on that I will be that able to go through the calculation.

No that’s perfect. And one more question, one last question for Geoff. Geoff how do you think your stock should be valued, based on what metrics?

It is [annuity], what you're supposed to tell me what metrics or key

No, no I have my own, I’m just – what you think I mean is it more of an option proxy evaluation methodology you think people should be looking at, or is it truly based on fundamentals?

I mean there is no question that . We are not valued like a base metal company where you take net asset value at discount. I mean that's just not part of, part of the way the silver assets are being valued. I think there is an option value and there is got to be an option value in the share price. I think it's a combination of that option value in addition to being at the table to provide that option value every quarter. And making production and grow on your productions. So when I look at our valuation I look and what I focus on, on the operating side are those things that everyone focuses on, is what is our cash flow, what are our cash [crops], what is our production. And to that I think you add the option value of where silver could be going.

Thank you Geoff, appreciate it.

No problem.

Thank you. As a final remainder, if you do have a question, you may press “*” "1" on your touchtone phone at this time. There appears to be no further questions. I would now like to turn the floor back over to management for any closing remarks.

Thanks operator. Well everybody thank you much for joining us today. I very much look forward to talk to you again in probably late October at the end of the third quarter to give you a further update on where we are going with Aloma Dorado, how we are making out of Menantial and some additional progress on our operations. Thanks again.

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