Pan American Silver Corp (PAAS) 2006 Q1 法說會逐字稿

Good morning ladies and gentlemen, my name is [Marquita] and I will be your conference facilitator today. At this time I would like to welcome everyone to the Pan American Silver Corp first quarter 2006 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer period. [OPERATOR INSTRUCTIONS] It is now my pleasure to turn the floor over to your host, George Burns (sic) President and CEO.

Thank you operator, it’s actually Geoff Burns, President and CEO, but perhaps I’ll go to comedy in the future. Anyway, good morning and welcome to Pan American Corp’s first quarter earnings release and conference call. Joining me this morning here in Vancouver are Andrew Pooler, our Senior VP of Operations; Steve Busby, Senior VP Project Development; Robert Doyle, our CFO; and Michael Steinmann, our Senior Vice President of Geology and Exploration. They are here to help answer any questions you might have after I finish my opening remarks. As always and usual, all amounts I talk about will be in U.S. dollars.

With that, let’s get started. We are off to a great start in 2006 as we continue to deliver on the production, growth and financial commitments we made to you over the course of last year. Each and every one of our operating mines increased silver production in the first quarter of 2006 as compared to the year earlier period. On a consolidated basis, we had a new company record for silver production of 3.3 million ounces. Buoyed by this increase in production and higher silver and base metal prices, we recorded new records for mine operating earnings, for cash flow from operating activities, and for cash cost per ounce.

Mine operating earnings, a key metric in judging the profitability and operating performance of each of our mines, quadrupled to $18 million in the first quarter. Cash flow from our operating activities, excluding working capital adjustments, was almost $9 million, and our costs to produce an ounce of silver declined to their lowest level in the company’s history at $2.47 an ounce.

Let’s take a quick tour of each of our operations. Starting in Peru, our Morococha mine continues to improve with each and every quarter. silver production climbed to 735,000 ounces and cash costs were negative $1.85 per ounce, reflecting the impact of higher zinc byproduct production and record zinc prices. Zinc production actually rose by 36% in the first quarter to over 5,000 tons. The increased production at Morococha is a direct result of the investments we made last year in our mill, which have allowed us to steadily increase our throughput. When we acquired Morococha a little over 20 months ago, the mill was running at 42,000 to 44,000 tons per month. It’s now set to produce at 50,000 tons per month, and perhaps, if we squeeze, a little bit higher.

We have continued to aggressively explore our plus 11,000 hectare land package at Morococha, and currently have eight drilled rigs working on the property. You might recall that we added almost 30 million ounces to our reserve and resource base at Morococha in 2005. While we are not yet ready to fully update our resource base, I can assure you that we are going to meaningfully add to this total in 2006. Our goal for Morococha remains clear, we are planning to double production from the mine over the next three years.

At Huaron, also in Peru, we had a difficult year in 2005, costs had increased and production declined, largely as a result of the fact that we encountered some ore with particularly difficult milling characteristics. As a result, our zinc recovery suffered, and costs went up. It is great to be able to report that we have seen a dramatic turn around in the first quarter of this year at Huaron. Production in silver was up 6% to 934,000 ounces, and costs declined 22% to $3.69 per ounce. More importantly, we have rescheduled and rebalanced our ore extraction plans and expect Huaron to continue its first quarter performance throughout this year.

At Quiruvilca silver production increased to 609,000 ounces in the first quarter, and costs were only $0.92 per ounce. Pan American’s first, and perhaps most challenging mine, continues to be a meaningful contributor to our production and is generating in excess of $1.5 million per month in free cash flow.

Moving to Mexico, we are also very pleased with the performance of La Colorada. Our purest silver mine produced 797,000 ounces of silver in the first quarter, an increase of 16% as compared to last year. Cash costs remain stable at $5.76 per ounce, our plans to reopen the sulfite circuit remain on target, and as of last week we have filled the circuit with water, and intend to start producing sulfite ore starting in approximately 10 days time. With both the oxide and sulfite circuits running in tandem, we should see La Colorada produce 4 million ounces in 2006 at slightly lower cash costs.

The key to mining at La Colorada continues to be our ability to manage the water inflows underground. This is a battle we have been fighting for the last 18 months, and the reason we wrote down the value of this asset at the end of last year. I am happy to be able to tell you that we are now winning this battle, and have completed our main underground pumping installations and are handily managing the water. We have also refocused our explorations at La Colorada and have recently had some very encouraging results. I’m sure we’ll be able to share some very good news with you on this front in the coming months.

Overall we are right on track to achieve our forecasted 2006 silver production of over 14 million ounces, and with continued strength in base metal prices, should see our cash costs continue at the same levels as we have seen in the first quarter.

As important as achieving record results from our operating mines, we are moving ahead full speed with our growth plans, plans that will help diversify our production base and deliver fundamentally lower cost production. Plans that will see us double our production to 26 million ounces annually by 2008.

At Alamo Dorado in Mexico construction and mine development remain on schedule. We have been pre-stripping since August of last year in the open pit and are now starting to stockpile low grade ore in anticipation of plant start up. In fact, our mining fleet is performing better than expected, and as a result we are have now been able to hit our planned mining rates, but also able to utilize our own equipment to assist with other civil work on the site. This is a real cost saving. On the process side, the mills are in place, the leech tanks have been erected, the filtration plant and electro winning plants are going up, and within the next two weeks we’ll have connected both our main power line supply as well as our main process water supply. We are on schedule for startup in the fourth quarter of this year as planned, and perhaps as important, we are on our original capital cost estimate of $76.6 million.

This is a pretty amazing feat, given that construction cost inflation has been running at almost 1% per month since we started building in February of 2005. I have nothing but praise for the team that is building our next silver mine in Alamo Dorado; all this without recording one lost time accident since we started developing this operation.

In Argentina we are off to an excellent start at Manantial Espejo since acquiring the other 50% of this asset to own 100% and making the decision to proceed with the project’s development. We are permitted, we are financed, and we are building. We have already secured the open pit and hauling fleet, we’ve starting basic engineering, and the key personnel to take this project forward are being hired. Starting in 2008, approximately 20 months from today, this mine is expected to produce 4.3 million ounces of silver and 62,000 ounces of gold on an annual basis, and at these prices at a decidedly negative cash cost per ounce.

This will be Pan American’s biggest project to date, with a capital cost of just over $130 million, including the $18.1 million in value added tax, which is refundable. We have a long way to go at Manantial Espejo, but we have the support of both the local community and the province and federal governments, and with the right people now in place I am confident that we will deliver on our plans.

You’ve all seen the financial results, so I’m not going to go through them in detail. Revenue was up 57% to $45.7 million, mine operating earnings, as I previously mentioned, were $18 million. But we did record a loss of $2.8 million, almost exclusively as a result of the loss we recorded on our forward commodity contracts of $11.8 million. These contracts are primarily related to our zinc forward sales. As you may remember, we had been applying hedge accounting treatment to these forward positions, and only recognized the gains or losses from settling these positions against our actual zinc production when we physically sold the metal. Under the current accounting treatment we have now been forced to use, we have to value the entire forward book relative to the closing price of zinc at the end of the quarter.

This is somewhat confusing, even to me. Here’s a simple way to look at things. We realized a real cash loss on our program in the first quarter of approximately $5 million. In other words, we sold our zinc in the first quarter for less than we could have if we had sold it on the spot market. The balance of the loss relates to contracts which we will settle over the rest of this year. Excluding this unrealized portion, we actually had net income in the first quarter of $4 million. We will receive almost $1,800 per ton or $0.80 per pound, for the remaining zinc forward contracts we have in place, which is for 10,500 tons during 2006. This represents only 35% of our estimated zinc production for this year. The mark to market value of these remaining positions will continue to be recorded in income at the end of each quarter, and could go up or could go down, depending on what the price of zinc is. The company will sell the balance of its zinc, or 65%, at the spot price throughout this year.

Now there are two other things I’d like to touch on before I conclude my remarks and open the line for questions. The first is politics, and the second is the silver market. As a miner I feel a little undermanned to be talking about politics, but there is no question that politics are, and will continue to be, an important aspect of our ability to manage our business and deliver value to our shareholders. There has been much press over recent days about the developments in Bolivia under the leadership of Evo Morales. There is no question that the nationalization of the oil and gas industry in that country is cause for concern. The information I have received suggests that the mining industry in general is not a target for nationalization. But that information seems to be changing on almost a daily basis.

There is clearly uncertainty, uncertainty that we recognized a long time ago, and it is why we have managed our San Vicente investments in Bolivia the way we have. We’ve limited out investment, in fact it’s only $4.2 million at this point. We found a local partner who holds 45% of our operation. We have been generating cash flows in the country from some limited scale mining, which we have reinvested. We have a plant to expand the San Vicente, but we aren’t going to spend until we have greater certainty and until we are generating cash in country to pay for it.

On to Peru, where we do have significant interests. There has been a first round of elections in which Ollanta Humala, the leftist, came out in the lead with just over 30% of the vote. There will be a runoff between Ollanta Humala and Alan Garcia, who came in second in the first round of voting. This election is planned for approximately 30 days from today. It is important to note that Alan Garcia is comfortably leading in the polls at this point in time, and he is clearly the more moderate of the two candidates.

In any event, either man, should they win, will not have the support of the congress. The congress is determined by the results of the first round of voting, which were split widely across each of the different parties. My own view is that we won’t see the extreme things that we have seen in Bolivia or in Venezuela happening in Peru. Peru’s mining industry is long and well established, and represents almost 2/3 of the country’s gross domestic product on an annual basis. I do believe we may be subject to small tax increases, and I do believe that tax royalties that were implemented last year may be applied to more companies, tax royalties that we are already currently paying. But I am not concerned, not concerned at all, that our investments in Peru are at risk.

Lastly, the silver market. The ETF is a reality, it started trading just a few days ago, and today almost 32 million ounces have been sold in the ETF. Investment demand remains incredibly strong as does uses on the industrial side. In fact just recently Motorola has introduced a silver based antimicrobial coating to the handsets for its cell phones. Silver laden textiles are being introduced in such things as slippers, drapes, towels, again for antimicrobial purposes. We’ve seen the start of superconductor activities where silver is used in conjunction with ceramics, which could take off as much as 50 million ounces a year over the next decade, and we have still seen some decline in photography, but this has netted out with also declines in recycle.

Silver prices are at a 23 year high, only 40 minutes ago they were just above $14 per ounce, as we all know they’ve been very volatile, but certainly trending up, and I would expect those conditions to remain over the next two to three years.

In closing, we’ve had a great start to 2006. As I’ve mentioned, our forecast production is for 14 million ounces, and we are on track to achieve this. Our cash costs are at record low levels, and with base metal prices where they are we expect this to continue. Our cash flow and profitability will continue to go up, in fact much of the production performance we’ve seen in Q1 doesn’t even hit our financials until Q2 and Q3. This is a consequence of the fact that we produce concentrates, which are sold over time and priced into the future by our purchasers.

Our growth plans are on track. Alamo Dorado will start up in the fourth quarter of this year. Manantial Espejo is just getting going, but it’s off to a great start; 26 million ounces by 2008. That is our goal, with structurally lower cash costs and that is where we are going to get to.

Operator, questions.

[OPERATOR INSTRUCTIONS]

Our first question comes from Howard Flinker, of Flinker and Company.

It’s Flinker and I’d like to ask a question, or a couple. If you did not have the silver credits at Manantial Espejo, what would your cash costs, approximate?

I mean, not silver credits, zinc credits. You know what I meant but I said it incorrectly.

Sorry; Manantial Espejo would be gold credits.

Gold credits; OK, I forgot that.

That’s correct, yes. That would be – actually, we haven’t looked at that in this sense because it then becomes a tricky question of how to allocate the full costs between your gold, which should carry some burden of the costs as well as the silver -.

Right.

Offhand, if we were to split our costs on a 50/50 basis, -.

Right.

…I would suggest that our cash costs there would be in the $2.00 per ounce range. And gold would also be a significantly low cost production as well.

OK. Second, one, one thing that worries many of us, not only in Bolivia or Peru but Venezuela and Argentina, is, well, [Kirschner], who is also a buddy of Hugo Chavez. What are the rumblings you hear there about either higher taxes or higher royalties or – just – give us more, we want more!

[Two people talking]. …No problem; actually, we - we’re very, very comfortable in Argentina for a couple of very specific reasons. The first one is our location in terms of where we are in Argentina. We are in the province of Santa Cruz, which is probably one of the few provinces that actually has a mining industry [two people talking] – …that’s right. So that’s sort of number one.

But going directly to your question with respect to Kirschner, Kirschner is from the province of Santa Cruz - .

OK.

…And, as are many of his very closest advisors and cabinet ministers and we have had unbelievable support at the federal level, including – we just signed an agreement wherein the federal government, as well as the province, are going to contribute 1/3, 1/3 and us 1/3, to the building of a power line to the local community, which is right beside our mine, a little town called [Gubernador Grigores].

So, we’ve since seen support at the municipal level. This is very interesting. The Intendente in Gubernador, a small community of less than 3,000 people, has access to Kirschner. He can go in; he can see Kirschner and talk about specifics in his community as well as our project. It’s access that would be somewhat surprising. And it’s that tie between Kirschner’s sort of origins in that province and the support we’ve seen that make us very comfortable in Argentina right now.

What’s the tax regime for money in Argentina? What’s the royalty regime, right now?

That’s a fairly complicated question. I can certainly get back to you if you want to give me a call at [inaudible phrase] or if you want to give me a call after this conference call, I can give you a write-down of all the various - .

Give me a number.

It’s roughly 35%, all in, on a net basis. [Two people talking]. It’s not dissimilar from actually Peru, or Mexico, for that matter. [Two people talking]

35%?

…slightly higher, but not dissimilar.

That’s the taxes, or the taxes and royalties?

That would be the net of all the taxes, less tax credits, import/export credits, etc.; 35%, plus or minus.

OK. And is there an additional royalty, or not?

That’s inclusive of the royalties…

Oh, that’s all in. OK. So, just like, we could expect this in Africa or anywhere else; there’s a possibility that could rise, because that seems to be the movement around the world. Would you agree?

I would tend to agree. You certainly, you hope that logic prevails, but there’s no question that taxes around the world have been escalating.

Yes, and one point; you say you’re confused by the accounting on, on hedges. At the same time, you cite, “negative costs” in Manantial Espejo – I can’t say it well. They’re one and the same. So, if you understand one, you understand the other.

I certainly do understand them. I just find the accounting treatment that we’re using right now is not clear with respect to what we’re doing as a company and presenting that to our investors.

No, it’s not clear in both cases, actually.

Yes and [two people talking]…

I mean, no business can have a negative cost; there’s no such thing. But in the mining business, we somehow figure out a way to call it negative costs.

Fair enough.

That’s all I have. Thank you.

Our next question is from Haytham Hodaly, of Salman Partners.

Salman Partners, Haytham. Geoff, how are you?

Good Haytham, yourself?

I have just a few quick questions. Could you give us just a breakdown of your production forecast for this year? Where your production will be coming from, specifically?

The total that we’re anticipating is 14 million ounces or just slightly above. 4 million ounces is La Colorada, at Huaron you can pretty much take the first quarter and multiply it times four; similarly with Quiruvilca, Haytham, as well as Morococha. At the pyrite stockpiles we’re looking at somewhere about 650,000 ounces. We will see a little production, or are anticipating a little production from Alamo Dorado late this year in the neighborhood of 550,000 to 555,000 ounces and to a small degree some production from San Vicente. We saw some of that in the first quarter, about 80,000 ounces. We’re hoping to get that limited production going again, and might see as much as 400,000 to 500,000 ounces out of San Vicente. And I’m hoping, if you total all that up, I’m pretty sure you’re going to get over 14 million.

OK and could you maybe just go through, by 2008 now, how you would expect those to grow?

That’s a pretty detailed question, I’m more than happy to have Rob or someone respond to you.

How about this, how much do you expect from your major operations by 2008, what’s going to be your largest two or three contributors?

Well certainly Alamo Dorado at over 5 million ounces is number one; Manantial Espejo at 4.2 million to 4.5 million ounces; Huaron at almost 4 million ounces; Morococha closing in between 5.5 million to 6 million ounces; La Colorada continuing at about 4 million ounces; and then the pyrites pretty much at the same rates we’re seeing right now; and then San Vicente, depending on our development options there with respect to government, at somewhere between 1.8 million to 2 million ounces to our account.

That’s perfect, and you’ve recently come to the market, obviously done a financing, can you just outline what you’re seeing out there in terms of opportunities these days?

On the acquisition side Haytham?

Yes, that’s right.

In general, as you know, silver assets are very, primary silver assets are very rare in nature, and that hasn’t changed. What we have seen is a large, large escalation in valuations, which are making it, I’m going to say very difficult for us to aggressively pursue opportunities. As always, unless there’s some sort of ability to add value above and beyond some of the base assets that we’ve been looking at, it’s really hard to be paying two to three times the underlying value. So I guess there are still opportunities there, valuations are hard and we’re trying to exercise some discipline in our approach to looking at those.

OK. One final question I guess, Morococha and Manantial Espejo used to be a category which required higher silver prices. You’ve still got a couple of those deposits, if I recall, I’m assuming you do, stories like Hog Heaven and Waterloo, whatever happened to those?

We actually have, there’s probably three assets that we’re showing on our resource reserve book that certainly now have potential at these prices. The first, and what may be foremost opportunity with respect to the pyrite stockpiles, which we have a 50% interest in, in Peru. There’s over 100 million ounces of silver locked up in those pyrites. We actually have been doing a fair bit of work on the metallurgical side looking for perhaps a hydro metallurgical process to unlock the silver from the pyrite. It’s always been a function of the cost of doing that, but certainly at these prices the technology exists to make that a reality. So that’s the one we’re probably looking at hardest, of the three we have on our book.

The other two are Hog Heaven, which is in Montana, and Waterloo, which is in California. Both of them fairly large resources, and frankly Haytham, both of them we have not done much work on over the past several years, certainly since I’ve been with the company. But we will be, at these price levels we are going to start to have a look at those once again, because indeed at sort of 8, our initial estimates are sort of $8, $9 prices, all of a sudden the economics started to turn positive. So we haven’t done much yet, but it’s something we’re going to get to.

All right, thank you Geoff.

You’re welcome.

Our next question is from Mark [Murrow] of [Adar] Investment Management.

Hi, thanks for taking my question. If I exclude all the development mines in just like Peru and La Colorada, how can I look at the annual maintenance Cap Ex for those mines?

I have a pretty decent handle on those, why don’t we just go through them sort of individually. At Huaron, maybe the simplest way is to think about $1 an ounce between sustaining capital for equipment and between ongoing development, and that would exclude some projects that are more longer term in nature where we might be developing new accesses to lower parts of the ore body. But $1 an ounce is not a bad way to look at it, and indeed, that’s probably similar for Morococha. Quiruvilca is less, it’s a more fully developed mine and less capital requirements, probably in the neighborhood of $0.50 an ounce, maybe $0.60 an ounce on the silver side, so $1 million to $1.5 million in capital on a sustaining basis.

La Colorada has been relatively high over the first few years of its operation that should decline. I would again use something between sort of $0.75 to $0.80 an ounce in sustaining capital there.

OK and that’s ounce of production.

That’s correct, per ounce of production.

OK great, thanks.

You’re welcome.

[OPERATOR INSTRUCTIONS]

Our next question is from Ronald [Sheffelman] who is a private investor.

I tuned in late so you very likely have already covered this, but in a broad sweep I’ve been following the stock very closely and you’ve been buying like crazy sites that will accumulate silver in particular. Yet the stock in the last two or three days has dropped sharply and there’s no news to support that, no insider selling, etc. What’s happened here?

To a certain degree that’s a good question, Ronald. We’ve seen certainly very volatile silver prices over the last couple of weeks as well as, but still trending in the upward direction even though swinging sometimes $0.50 to $0.75 per day. In general we’ve seen, within our peer group, a decline across the entire, I’m going to say the entire silver sector, pretty much equivalent with what’s happened with our stock. On a couple of days we saw silver up sharply, yet none of our peer group, or ourselves, are actually following along with the price. So there has been, I’m going to say, what appears to be a short term sort of divergence between the stocks and the underlying commodity. I think part of that is directly related to some of the developments in South America. There are a couple of our peers who are very, very exposed in Bolivia. As I mentioned, we have a very small and limited exposure, and have been managing it on that basis for a while at San Vicente. And there have been, I think, maybe some concerns in terms of a couple of the other South American countries and I hope my comments earlier have, to a certain degree, calmed some of those concerns, at least as they relate to Pan American.

But I tend to think that that factor maybe more than anything has decoupled the price with the sector. My expectation would be, if we continue to see strong prices, continue from Pan American’s point of view of delivering excellent performance, I would like to think we’d see that share price moving again, up in tandem with the silver price.

When do you see that happening?

Ron I wish I had that crystal ball. I certainly see it over the long term, whether it’s next week or the week after, I can’t say. The market is a dynamic beast. Like you I follow the trends, particularly related to our own stock. I’d like to see that reestablished. I think that relationship will be reestablished, I can’t tell you when.

All right, thank you.

You’re welcome.

[OPERATOR INSTRUCTIONS]

Our next question is from Curt Beeler who is a private investor.

Yes, will you be doing any hedging against the dollar?

Relative to the two, I guess the three primary currencies we deal in; one is the Sol in Peru, the peso in Mexico and the peso in Argentina. We did put in a Mexican peso hedge in conjunction with the development of Alamo Dorado to protect against strengthening of the peso relative to the U.S. dollar, that has performed relatively well for us, although in reality over the sort of, I’m going to say 16 month period since we put that in place, there hasn’t been a huge swing in the relative valuations of those two currencies, particularly I’m guessing given the close trade ties between the United States and Mexico. We likely will look at doing another program; our business is not, in essence, in taking currency risks. Our business is in taking mining risks. So I think we’ll probably reinitiate a portion of that program going forward.

We are going to look at a similar program for the Argentine peso relative to our development of Manantial Espejo. The scenario there is somewhat different, inflation is quite high in Argentina right now and the peso has not really responded to that fact, which is a bit concerning, and it has been trading almost flat relative to the U.S. dollar. So we’re looking at that, but at this stage we haven’t decided whether or not to jump in, Curt. The last area is the Sol in Peru. So much of the Peruvian economy is tied directly to commodity prices, which are all quoted in U.S. dollars. The Sol has really traded in a very, very narrow range relative to the U.S. dollar over the last couple of years. I think our view is it’s going to continue to do so, so we aren’t likely to do anything on that front.

Thank you very much.

You’re welcome.

At this time there appear to be no further questions.

Thank you operator, and thank you everyone for joining us this morning. I’m very much looking forward to updating you again sometime in late July or early August when we have our second quarter results. We have a lot going on, prices are certainly buoyant, and I look forward to talking about even better results in about three months time.

Thank you. This does conclude today’s conference call, you may now disconnect.