Pan American Silver Corp (PAAS) 2006 Q2 法說會逐字稿

Good morning, my name is Eduardo, and I will be your conference facilitate today. At this time I would like to welcome everyone to the Pan American Silver Corp second quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS]

It is my pleasure to turn the floor over to your host, Russ Beaty, Chairman of Pan American Silver Corporation. Sir, you may begin your conference.

Okay. Thanks, operator, and good morning, ladies and gentlemen. Welcome to the Q2 Pan American Silver conference call. With me in Vancouver are Geoff Burns, Pan American's President and CEO, and all three of our Senior Vice President's, Rob Doyle, our Chief Financial Officer, Andy Pooler is the head of our Operations, Steve Busby, head of our Project Development, and Michael Steinmann, Senior Vice President, Geology and Exploration. As well we have Alexa Stewart, who is our new Director of Corporate and Investor Relations. Well, as can you see, we had a great quarter. Record cash flow, record earnings, record working capital. We are on target for record production in 2006 and we have record growth and progress, as we expect to double our production again in 2008. Every one of our mining operations is running well right now, and we are meeting or exceeding our budget estimates on all our mining operations and all our development projects. We have a happy story and it's a great time to be in the silver mining business. This morning I will open things up, turn the call over to Geoff for the operations and development overview, and then come back for an exploration update and review of silver markets, then well open the call to questions.

Well, our Q2 numbers speak for themselves. We forecast this performance at our first quarter conference call, and today I'm very pleased to forecast even stronger results in the third quarter, and likely the fourth quarter, even if silver and other metal prices remain static. Our stock price has been relatively weak since our first quarter results were announced in early May. Of course we were not alone in this, most major mining companies saw similar declines. But three things were specific to Pan American that I think had some impact on our weakening our share price, and I'm going to discuss each briefly here. Firstly, silver prices were weakened from $14 dollars an ounce in May to a low of around $9 dollars in June. Since then they have recovered nicely, and I think the outlook is excellent for continuing silver price strength in the foreseeable future, and I'll talk a little more about this later.

Secondly, a lot of investors were spooked by the political uncertainty in Latin America during the second quarter. New president's were being elected in Peru and Mexico, and a lot of negative noise came from the recently-installed president of Bolivia. Peru and Mexico, of course, are very important to us, but Bolivia is not. It's a tiny part of our story, comprising about 2% of our assets. Bolivia has been unstable for most of its 180 year history, and it is certainly a tough place to work. But our mine there is back in operation after we settled some issues with the Bolivian government, and we think it has good future potential. As for Peru and Mexico, pro-business presidents have been democratically elected in both countries and we are confident that positive wealth-creating foreign investment friendly policies will continue to be implemented there. Both countries have been very positive for Pan American, and we are certain this will continue. I want to remind all our shareholders that every country in Latin America is fundamentally different, and for the most part very positive to mining companies such as ours. The fears in the second quarter should now be replaced by relief, as stable pro-mining governments are in place for at least the next four to five years.

And thirdly, our first quarter financial results were quite disappointing to some shareholders, primarily due to the accounting change we had to make that required us to book very large non-cash losses for our zinc hedge possessions. These really obscured the cash flow and income generating potential of our operations. Well, we closed our hedges in full in late June, and, thus, we will not have any more impacts from this matter any further. Another financial detail in Pan American's accounts also served to make our Q1 numbers worse than they really were, which I will explain now. We sell our crude production in the form of concentrate that is trucked to a proved seaport and then it sits there until a ship picks it up to deliver it world smelters, be they in China, Europe or wherever. Our sales contracts provide that the contained silver and other metal is only priced two to five months after delivery to those smelters, so our quarterly revenue really reflects metal prices of the previous quarter ,as much as anything. Since the fourth quarter of 2005 prices were a lot lower than the first quarter 2006 prices, we showed lower revenue numbers than perhaps the market expected. That's why the second quarter was much better than the first quarter, and it's also why I can safely predict that all other things being equal, our third quarter numbers will beat our second quarter numbers. With these three issues solidly improved, I hope our shareholders will be really pleased with our financial picture today and in the future.

On that note, I'm going to turn the call over to Geoff Burns for a more detailed analysis.

Thanks, Ross. Before taking a brief tour around each of our operations, I would like to start by making a couple general observations about our operating performance in the second quarter. As Ross mentioned, each and every one of our mines continued the positive production trends that they established in the first quarter. Tons of ore mined and milled increased across the board and as a result, production at all our operations increased, as compare to the first six months of last year: Morococha, plus 12%; Quiruvilca, plus 4%; Huaron, plus 1%; and La Colorada, plus 20%. These results are especially pleasing, because to a large extent they represent the quantifiable, tangible returns from the significant investments we made in our capital and exploration programs in 2004 and 2005. While I don't see these kind of increases continuing, I do fully expect us to continue to produce at the levels we have seen in the second quarter over the balance of 2006.

Now for some quick highlights from each of our operations. Starting in Peru, our Morococha mine continued its trend of record-breaking performance. Morococha produced 772,000 ounces of silver in the second quarter. Cash costs were a negative $3.81 per ounce, reflecting higher base metal bi-product credits, particularly from zinc. Our silver production for the first half of the year was 1.7 million ounces, well above our forecast. As expected, both silver and zinc grades declined modestly; however, we more than made up for these decreases with increase throughput and better metal recoveries.

In our last quarterly call I mentioned we had just completed some improvements to our milling circuit, which we believed would allow us to increase throughput. This has happened, and we averaged close to 47,000 tons per month through the mill in the second quarter. We are working our way higher, and I'm happy to report that we reached almost 55,000 tons through the mill in July, up 20% as compared to a year ago. We have several major projects on the go at Morococha at the moment. We have continued to extend our Sierra Nevada ramp, which will become our primary ore extraction [holage way] and the primary access to the [Mantu Italia] and [Freeburg] ore bodies that we discovered last year. We are rehabilitating our central shaft, as well as the Volcano tunnel, which accesses the Buena Ventura ore block, the highest grade material in the mine. All of these steps, as well as a major engineering study that we launched earlier this year, are aimed toward achieving one goal, to double production at Morococha over the next three years.

At Huaron, we produced almost 900,000 ounces of silver in the second quarter, at a cash cost of $1.71 per ounce. Production at Huaron rebounded in the first quarter of this year and the trend continued in the second quarter, as it should for the balance of 2006. Similar to Morococha, we are working at quite a number of projects that we're on, most designed to increase efficiencies or facilitate cost reductions. But by far the most important of these projects is the mine deepening program that we kicked off. The program, which will take at least another 12 months to complete, will allow us to access new higher-grade and wider ore zones that we have never previously mined, and should set the operation up for continued solid performance for years to come.

Quiruvilca continued to be a reliable low-cost silver producer. Silver production for the second quarter was 583,000 ounces, bring half-year production to 1.2 million. Cash costs declined significantly to negative $1.07 per ounce, which is $1.99 less than in the first quarter and again, reflects the benefits of the mine's base metal production. Throughout the quarter, and for that matter for the first six months of this year, Quiruvilca has surpassed the Company's expectations in respect to tons mines and milled, and there is no reason that this performance will not continue going forward.

In Mexico, the La Colorada mine increased its silver production again. Our purest silver mine, La Colorada is our largest producer in the second quarter at 914,000 ounces, an increase of 23% as compared to the second quarter of last year. Cash costs remain stable at $5.50 per ounce. Our oxide plant continued to perform well, bringing year-to-date production to 1.7 million ounces. As described during our first quarter call, we recommenced mining and milling of sulfite ore in the second quarter. The sulfite plant has been restarted and while the throughput rate is slightly behind schedule, we are confident that we will be able to ramp up to the plant 250 tons per day capacity for the plant by the end of this year. We should see the La Colorada mine produce half a million ounces from sulfides in 2006.

With the pending start-up of Alamo Dorado, the recommencing of mining and milling at San Vicente less than a week away, we are right on track to receive our forecasted 2006 production of 14 million ounces of silver. With continued strength in base metal prices, we should see our cash costs continue at the same levels as we have seen in the first and second quarters. It was a solid, solid operating quarter and it should be more of the same for the rest of this year.

Now, let's look to our future, and delivering to you the growth that has become synonymous with Pan American. We have two major production projects that we are moving forward with, Alamo Dorado and Manantial Espejo. When completed, both of these new mines will help diversify our production base and deliver fundamentally lower-cost production. I am happy to be able to tell you that Alamo Dorado mine in Mexico is in the final stages of production. With 82% of the construction work complete, the project is still on budget of $76.6 million, and we still expect to start commissioning up the facilities near the start of the fourth quarter, right on schedule. Mining activities, which commenced last August are continuing, and the prestrip of the pit is almost completed. We have now stockpiled over 240,000 tons of low-grade material and are ready to start feeding the mill as soon as it's done. Construction of the Alamo Dorado mine has progressed this far without recording one lost time accident since we started construction and development. That's over one million man hours without significant injury.

In Argentina, construction of Manantial Espejo officially commenced in the second quarter. Basic engineering is well underway, site services are being established and most importantly, we have broken ground and started our underground ramp system for the exportation of the Maria vein. The project management team has been established and we're working closely with the provincial and municipal governments to move forward with the key infrastructure projects, the establishment of electric grid power and the building of the necessary accommodations for the permanent work force that will be arriving during the next 18 months. In January 2008, we plan to be producing at Manantial 4.3 million ounces of silver and 60,000 ounces of gold annually. Costs should be exceedingly low, particularly in view of the current gold price, which will be a bi-product to the silver produced at Manantial.

Finally, a quick comment about San Vicente in Bolivia. After a very protracted negotiation with Comibol, the Bolivian state mining company, we are back in production at San Vicente or will be within days, and once again, will be generating positive cash flows from this high-grade silver/zinc deposit. We are still refining our expansion plans for San Jacinto and I would expect it to be another six months before we complete sufficient engineering to make any further investment decisions.

That concludes my comments. Back to you, Ross.

Thanks a lot, Geoff. That was a good run through. I'll give you a few words about our exploration programs. As our shareholders know, we are right on schedule to continue our production growth from 12.5 million ounces in 2005 to over 25 million ounces in 2008, and that will make us, by far, the largest primary silver mining Company in the world. But we're now focused on organic growth in our silver reserves and resources rather than costly acquisitions in this expensive sellers market today. And we are having great success so far. We have over 24 drill rigs active at the present time, mostly at and around our existing operations. And I can report that we've already found new silver resources well in excess of what we have mined this year, and we expect this success will continue. Results are especially good at our Morococha, Huaron and La Colorada operations, as we discussed in our second quarter report. I could give all kinds details on specific vein intersections at Morococha and Huaron and La Colorada, as well as Quiruvilca, but I think it's not really the appropriate time to do that right now. Suffice it to say that Geoff mentioned in his comments the ingredients for our expansions and our continued development of those operations is well supported by our exploration discoveries so far this year.

Turning to silver markets for a moment, I was very pleased to see the positive silver fundamentals reported in the most credible independent silver survey available, The World Silver Survey published in May by Goldfield's Mineral Services, and we put up a summary of that report in our website. Industrial silver demand rose by 11% in 2005, and vastly overshadowed the small net silver use decline in photography. I say small net decline because there's less silver used in photography, less is supplied back to the market in the form of recycled photographic waste. And don't forget that silver is used in nearly every single digital product, including cameras; in the electronic systems and as a key ingredient in the camera body manufacturing process. Let's not forget the great new source of silver demand that began in the second quarter, the new ETF quoted on the AMEX. This is softening-up a lot of above ground inventory, and without doubt has had a significant positive effect on the silver price.

To finish off, I want to remind the investment world why Pan American Silver is such a compelling story today. We are a real mining Company. We own our mines and we control our destiny. We have outstanding levers to silver, both in terms of our reserves and resources, which exceed 630 million ounces of silver, and in terms of our rapidly growing silver production base. Our financial picture has never been healthier. Our operations have never run better. In fact, I am really pleased to report that we had another record month in July in terms of tons processed at our mines. We set -- as Geoff alluded to, we set new production records at both Huaron and Morococha in July again. Our development projects are on time and I'm so proud to trumpet, as Geoff did, on budget.

That speaks to the high quality of our management team and the reliability and believability of our forecasts. Metal prices continue to have a lot of wind behind them and silver is especially strong. It's a great time to be in the silver business, and we are now the preeminent silver mining Company in the business. I hope you understand why I feel so positive about our prospects. We'll be talking about Pan American in several places in September -- late August and September, as well, if any of you have a chance to come and hear the stories. We'll be doing a small road show through New York and Toronto at the end of August. And in September we'll be attending the Merrill Lynch investment conference in early September, the Silver Summit in Coeur d'Alene, Idaho, more for retail investors, in mid-September. And in late September, the Denver Institutional Investors Conference.

Well, I think I'll end -- after all that hoopla, I think I'll end now and open the call up to questions. Eduardo?

[OPERATOR INSTRUCTIONS] Thank you. Our first question is coming from Ian Alex of National Bank Finance. Please go ahead.

Good morning, gentlemen. With regards to the Manantial Espejo -- actually I just noticed here in the note, you have it. I was just looking where the capital projects, then you've got the update here. I apologize. Talk to you later, guys.

Thank you. That was an easy question, Ian.

[OPERATOR INSTRUCTIONS] Thank you, our next question is coming from Neville Dastoor of Canaccord Adams. Please go ahead.

Thanks. Hi, guys. Just in relation to the zinc hedging, I was wondering how you've accounted for it? It's, I guess. netted out of revenues as opposed to cash costs?

That's correct. Go ahead.

Yes, Neville, Rob Doyle here. Actually, the hedge is accounted for in the line item on the income statement under commodity contracts, so the loss for the quarter of $4.8 million incorporates the closing out of all of our hedge positions. It's actually not [inaudible] to revenue as it was in our previous treatments. Under our current treatment it's a one-line item on income statement.

And then the cash costs of $1.17 don't reflect anything --

That's correct.

Thanks.

[OPERATOR INSTRUCTIONS] Thank you, sir. There don't appear to be any further questions at this time.

Okay. That's fine. We'll close the call, unless you've got anybody else coming through. You may leave it another minute to allow people to gather their thoughts. Otherwise we --

Absolutely, sir. [OPERATOR INSTRUCTIONS] Thank you our next question is coming from Adrian Day of Adrian Day Asset Management. Please go ahead.

Yes, thanks. Good morning. I just wanted to ask a quick question, if I may. Which -- and this was a great quarter. [inaudible] the potentials that you've given us for growth is excellent, but which of your mines -- can you tell us which of your mines is most likely to close down first, so we can look at the depletion?

Well, let's look at each one of the mines, Adrian. Quiruvilca has been running continuously since 1926. Huaron has been running more or less continuously for 64 years. Morococha has been running more or less continuously for about 50 years. La Colorada's been in operation about 60 years. These are long, long life mines, even though traditionally and typically they have reserves lives of any where from two to five years in the proven and probably category ahead of them.. That's just the nature of underground mines. And it's a pet peeve of mine that Pan American is valued by many analysts and investors on the basis of its proven and probable reserves compared to, say, open pit company -- or companies with open pit reserves that, generally speaking, when they're mined out, that's all there is. Underground mines just go and go and go, as the mines gets deeper.

It's very much a function of metal prices, Adrian. At today's metal prices, I would say all of these underground mines have futures that are almost indefinite, with the possible exception of La Colorada. Because La Colorada, which currently has reserves for another few years, three or four years only -- five years? Yes, five years only. And La Colorada, we had a tremendous amount of difficulty with the hot water at depth and the amount of water. And the balance there is really one of operating costs, and metal prices, because if we have metal prices like we have today, we can justify higher-cost power or actually bring in lower-cost power with a significant capital cost. There are reserves there -- or resources there. There's lots of silver beneath the lowest level that we have reserves, but we haven't got them as economic reserves, because of the cost of pumping this water. That's a function of metal prices and so forth.

But at the current prices is La Colorada much more than five years, do you think?

Yes, La Colorada will be absolutely operating more than five years. I can say that without any hesitation. At current prices it'll be -- in fact, just talking about La Colorada for a second, again I'll go into the actual resources at La Colorada are very, very large at much lower grade. We have at least 50 million ounces, possibly closer to 100 million ounces of silver resources that, if we wanted to take all the resources that were there, without regard to economics, we would put 100 million ounces into our resource statement.

Okay.

But the fact is, La Colorada is a relatively high-cost mine the way we're mining it. Underneath the existing reserves at La Colorada is a very, very large zone of quite good grade silver, lead, zinc that we discovered when we were first drilling the property in 1997, 1998. We had some holes of -- I forget exactly what they are, 100 meters, 150 meters, with almost continuous silver, lead and zinc in them, with quite good grade that would be, certainly, economic as a large open pit mine. But once again, we're fighting hot water down there and lots of it, and we currently haven't got the power infrastructure to be able to mine that under today's conditions. We are thinking of bringing in power that would reduce the cost of power and that would, perhaps, make some of that economic, or maybe all of it economic. Those are the kind of upsides that Pan American has at certain of its operations. And because of today's metal price environment, we're looking at those quite carefully, because they represent wonderful growth opportunities for us, to take our production from 30 -- you know, 28, 25 or 26 million out there now, higher yet from our existing operations with minimal capital, minimum hassle. We've got all the infrastructure in place, the work force, you know, and those are the kind of opportunities that exist with an operating mining company that are low cost opportunities for shareholder wealth creation.

Okay. Well, great. That was a great answer, thank you.

Our next question is coming from Craig West of UBS. Please go ahead.

Good morning, gentlemen. Great results this is morning. Just one quick question on La Colorada and the start-up of the sulfite production there. Can you talk about what kind of base metal production you would like to see is there and maybe impact on cost?

Do you want to tackle that, Geoff?

The primary bi-product there, Craig, is lead. To a smaller degree, zinc coming out of there, so we do expect to see some bi-product credits on the up to 250 tons a day, we're going to be putting through that mill. So it will produce ounces with under current price conditions at significantly below the 550 an ounce we're seeing on the oxide side.

Okay.

If I were to give you an estimate right now, we're probably thinking somewhere in the 350 range for those ounces, given that dynamic.

Great, thank you. You mentioned very briefly the decline that's being driven there at Morococha to access some of the other areas. How far along has that proceeded and sort of what time frame are you thinking they would be reaching some of the newer areas?

That's a start-up. I'm going to say a project is going to two and one-half to three years to totally complete. That primary access is running east-west across a portion of our property, and then it's going to be heading due south across another very large tract of our claims. And ultimately, it's going to probably access about two-thirds of our ore zones at Morococha. We're talking about -- or thinking about equipping it with a conveyor system to speed extraction. So it's a very major project. In terms of actually accessing short-term production, we're probably a few months away from really getting to the -- we're actually already mining some zones around it right now, but getting to Mantu Italia, which is a very large zone for us, we're probably four to five months away from accessing that next mining zone.

Okay, so there has been some exploration in the areas between where the ramp is now and where it's going to end up? Or is there an area in there that hasn't been yet explored?

Actually, there's quite a large area that we're going to cross that really has had minimal exploration. The zone's close to the portal -- and this kind of makes sense, I believe -- we have explored and we have discovered some very significant reserves and resources. That's the location for the portal itself. But, yes, part of this is we are going to get some real good exploration kickers, I believe, as we continue to drive that ramp to the east and again to the south.

Excuse me. This is Andy pooler, Vice President of Operations. The ramp is a 4x4 meter ramp that we're going to run trucks out of. It will encounter probably seven or six ore bodies along the way while we get to our main target. Each advance of the ramp will increase the productivity of Morococha as it advances, at the tune of anywhere from 100 to 200 meters a month.

Great. Thanks, Andy.

And also, thanks to you, Craig, for your research report on Pan American. UBS put out a good report on a bunch of silver companies, and I was happy to see we were ranked number one in quality. That's a nice plug for you too.

Thanks.

Thank you. Our next question is coming from Jed Richardson of Sprott Securities. Please go ahead.

Hi, there. A quick question, just looking at -- maybe two. Just looking at the balance sheet, the short-term investments seem to have increased over the last couple quarters, and I was wondering if that was still all debt securities or if there were any equity investments in there?

It's all in high quality bonds, there's no equity exposure in that portfolio.

And you also mentioned that you weren't considering acquisitions right now because of the prices. Is there a si -- but, you hope to grow organically, is there a size that -- of production that Pan American kind of has a target for, or just kind of measured growth over the next few -- over the next few quarters, in excess to the new mines that you're bringing on?

Right. We do have a target, sort of a five-year target, we like to see our production going to 50 million ounces, and you don't get there easily by internal discoveries. So I, perhaps, didn't make a complete statement there. We are certainly focused and we have been for the last 12 to 18 months on internal growth. We have done a lot of work under or around our existing operations, particularly. We've launched generative programs in Mexico, Peru and elsewhere, all in Latin America so far. And we are -- those things generally take a lot longer to sort of realize material results from when you start at early stages. But we do observe that prices of interest in silver opportunities in terms of acquisitions are much higher than they were a few years ago, that's obvious. And generally speaking, we are not sort of compulsive deal makers. We don't need to make deals to grow strong and we don't need to make deals to have a great financial position, and our team is pretty well focused on the growth we've got in our pipeline. On the other hand, it would not be true to say we will not make new acquisitions, that we are not looking at anything. We are certainly -- we have been looking at really all opportunities because, of course, our intention is to be the preeminent silver producer globally, and you don't necessarily get there if someone else finds a great discovery that a third party may acquire. I would say we are looking at most good silver opportunities, much of -- many of these opportunities are much different when you take a look at them, the way we might, versus the promotional comments that are made to public markets, and that shareholders may -- or investors may focus on. And so value, there's very different reality sometimes between public valuations and real valuations to see a mining Company like ourselves, and that's true with any operating company looking at acquisitions. So we've been loathe to make acquisitions and haven't actually made one for over two years, really since we acquired Morococha. it's not to say we haven't had some false starts. We've tried a bunch. They didn't conclude for one reason or another and it's not to say we don't have a few in our pipeline right now that we're looking at. I hope that was a little fuller answer that -- that perhaps the question you posed.

No, that's great. Actually, just to add to that. You would -- any acquisition you'd make, you would -- Pan American would be the operator of, right? You don't want to set up a -- like a silver stream?

Right. Never say never. You know, there are -- again, it's value we look at as much as anything, and how it fits it with everything else we're doing, how it fits with our management side. Never say never, There are sometimes opportunities, but on the whole, I can certainly say our bias is toward projects that we would be operator on, and we are generally biased against the silverstream kind of deals. We think they're re not -- well, let's just say that we see disadvantages in acquiring silverstreams on all sorts of fronts, but I don't think I need to go any further than that.

All right. Great, thanks.

Thank you, our next question is coming from Michael Dudas of Bear, Stearns. Please go ahead.

Good morning, gentlemen.

Good morning, Michael.

My first question you handled very adroitly, the previous one on acquisition. But I have one follow-up to that, how do you look at external opportunity that is may be different than some of your peers?

The most significant -- and Geoff, chime in here -- the most significant thing I think that Pan American brings to the table as a buyer of opportunities is our skilled operating team. We are a mining company. There are very few mining company in the industry today with a track record of our group. Bringing in operations on budget, having it perform as scheduled, you know, we're very proud of that. And our team is deep and it's strong and it's particularly Latin American friendly. Almost all of our senior operators speak Spanish, we have a very good network in Latin America, operations obviously is in Mexico, for course, Puru, Bolivia, Argentina, and lots and lost of contacts elsewhere in Latin America. So we bring operational horsepower to the table, which is lacking generally in this market. We bring financial horsepower as well. We know the silver business inside and out. We know open pit operations, we know underground operations. We know how to produce [dorae], we know how to produce concentrate. Those are things that I think are -- should be attractive to companies that bring us opportunities. Do you have anything to add to that, Geoff?

Actually, Ross, I don't. I think, Michael, and you could go down the list of things you look for. Certainly reserves and resources. And I think the one thing unique to Pan American is we certainly are historically have looked at situations where applying that technical expertise can enhance the value. Obviously, we've been able to do that at Huaron. We seem to have been able to repeat that scenario very much so at Morococha. And that's something that we really look very closely at, because that's where you can create some significant value versus just paying full price for a very established mature situation.

Or paying a --

-- premium.

-- a very significant price. Enough said for [inaudible] silverstream, where you have no operating control, whatsoever. You pay for resources that may or may not be there. Those things are -- to me, they're not great ways to create wealth, but, you know, without borrowing a much higher silver base.

No, the numbers do speak for themselves on that front. My follow-up would be on zinc. I applaud you for taking care of the hedge in the second quarter, but review for us now, how you're thinking about -- I guess zinc at $0.74 was terrific, but zinc at $1.40. Is there a change in the focus on locking in hedging for this or other metals going-forward? Could you just elaborate a little bit on that, please?

Sure, it's a very thorny issue. And quite frankly, we are a splinter in our board. We have an interesting board, we have some real hard [expletive] operators, like John Wright, metallurgy engineer, John Wilson is a heck of a CEO of Placer Dome who's a mining engineer. And these guys, you know, they want to protect their cost structure. How you do that is you hedge when you've got an all-time record metal price, you know, you hedge this play. You think the odds are it's going to go down, not up. And in doing so, you protect your costs and you maximize your revenue. And you, you know, that is what a hedge is all about, and you protect -- you know, you protect the downside basically. And there's all kinds of ways to do that in the hedging world. You can buy min-max programs, you can buy puts. But at the end of the day, it's always a hedge. If the price of metal goes up, you look like a bum, and that's what happened to us in the first quarter, after we thought we were heroes and stepping in front of the zinc train last year and getting $0.72 cents a pound, an all-time high -- almost an all-time high at that time, then watching the price double.

So that's the -- you know, maybe the reasons to hedge. But we also have on our board a couple fund managers. Michael Larson runs Bill Gates' money, and Bill Fleckenstein, who's a contrarian fund manager and a very, very strong opinionated guy and a wonderful, wonderful board member. And both of those guys make the observation that the -- it's fine to hedge, you know, you do make -- perhaps if the metal price goes down, you make a financial gain. But what we also do in the -- in hedging on zinc like we did, and with the new accounting rules that were different than what they were when we actually entered into that hedge last fall, the accounting rules changed and we had to show these big non-cash accruals for the hedge losses, which for non-cash items, it really obscured our earnings picture. It obscured our cash generation potential. It obscured our earnings, when we had good earnings, but we had to throw these big non-cash losses in. And it did negative -- I would say it painted a more negative picture than it needed to and that cost us a lot. So when you weigh the benefits against the costs, it is a tough and thorny issue, which we have debated every single board meeting. We have a debate on this. And that's going to continue.

Now, lesser issues that are still hedges, but ones that are more easily explained are hedges, for example, on currency. We've hedged our Mexican peso risk against the dollar to mitigate significant changes in that set of currencies. We're now probably going to do the same thing in Argentina, once we have our costs more purely defined, to reduce the risk of a blowout on either side on the currency side against our budget. We have a real debate going on right now on our board whether or not to hedge gold. At current prices we can -- for example, [inaudible] going to produce about 70,000 ounces a year, 60 to 70,000 a year. We can get a floor of $600 today and all the upside above a $1,000 ceiling, $1,100, $1,200. That's something which we're -- you know, which we actually had a board meeting yesterday. We had a discussion about that. We're not going to do anything right now, because we think that the negatives of hedging gold currently are outweighed by the positives and that's where it came down, but it is a thorny issue. Never say never. I will not say we will never hedge think again. I will not say we will never ever hedge gold, but I will say we will never hedge our silver. Well never hedge our silver, because our silver gives our investors leverage. The second we hedge that, we take away that leverage and why invest in Pan American compared to something else, so that's one thing that is sacrosanct. We will not hedge our silver production.

Well, that's a very candid and complete answer. Thank you very much.

Thanks, Michael.

Thank you. [OPERATOR INSTRUCTIONS]

If there's no further ones, we'll wind her up.

Thank you, sir. That is correct, there appear to be no further questions at this time.

Okay. Let's bring the call to a close, and thank everybody -- thanks very much, everybody, for listening and attending this morning. Give us a call if you've got any further questions behind what we've done today.

Thank you, this concludes today's Pan American Silver Corp. conference call. You may now disconnect and have a wonderful day.