Pan American Silver Corp (PAAS) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen. My name is Pam, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pan American Silver Corporation third 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] Thank you. It is now my pleasure to the turn the floor over to your host, Mr. Ross Beaty, Chairman. Sir, you may begin your conference.

Thank you very much, operator. Good morning, ladies and gentlemen, and welcome to Pan American Silver's third quarter conference call. First, I want to say apologies to, for fouling up the time a little bit. We changed it last night to this morning. We originally planned to do it on Monday morning. We thought it was better to give color to the news release more quickly than three days later.

The reason we originally thought we would delay it is because I am actually speaking today from the beautiful, historic silver mining town of Alamos in Mexico, where yesterday our full Board of Directors met here in person to review our quarterly results, projects, operations, and plans. And right after this call ends, our Board and all our senior managers will head out to the Alamo Dorado, our newest silver mine, to participate in its official inauguration.

Along with the Board and our senior management team, we will congratulate the whole 600-person strong Alamo Dorado construction team for their amazing success at bringing the Alamo Dorado mine into production on time and on budget. I will talk more about this later.

So because we have the inauguration happening today, we had our Board meeting last night, we decided we would put this call together today instead of delaying it until Monday. Around the table with me today are Geoff Burns, Pan American Silver's CEO; Andy Pooler, our Senior VP of Operations; Michael Steinmann, Senior VP, Exploration; Rob Doyle, our Chief Financial Officer; Alexis Stewart, Director of Investor Relations; and Joe Phillips, the President of our Mexican Operations, to whom we owe so much regarding Alamo Dorado's great record.

As well, there are seven mining analysts here who have, who we invited for the Alamo Dorado opening, and tomorrow we're all going to go for a tour of our other Mexican mine, the La Colorada mine. I am very honored and pleased that all of these analysts have come here, and we hope to have a pretty nice couple of days with them. I am not going to regurgitate here everything we said in the Q3 announcement today. The results speak for themselves. We will be available to answer questions after this call, but right now I am going to make some comments to fill in some cracks and, hopefully, pre-answer some questions you my might have.

Starting with the financial and operating results, records across the Board once again. I stated in our Q2 conference call that I expected better results in Q3. We delivered on these. Quite frankly, I expected even better results, and we would have achieved them but for a few things.

Firstly, we couldn't ship all of our planned lead concentrate in Peru at quarter end because of a sudden, and sudden port stoppage there that delayed things a few days right at the end of the quarter and delayed the shipment into early October, so we couldn't book the shipment in October. It was a significant value shipment.

Similarly in Mexico, a high value silver shipment was delayed into October. Together these would have added around a couple of million dollars to Q3 earnings and will be now reflected in Q4. We also had a couple of one-off expiration charges totaling about $2 million which will not recur in Q4.

For example, we wrote off a Peruvian exploration property for $0.5 million and we had one-time charges in Bolivia of about $1.5 million. Let me say now we expect even better results in Q4, all things being equal. Having said that, Pan American Silver is now covered by nine analysts, new research reports came in during the quarter from Bear, Stearns, UBS, Merrill Lynch, and Blackmont Capital. We are very proud of these fine firms covering us, especially when they all recommend the stock as buys. Many of their mining analysts are with us today.

I think the range of earnings estimates for Q3 for us were a low of $0.19 per share to a high of $0.26 a share on the upper end, and we reported $0.22 per share right in the middle. In addition to having among the largest silver production in the silver sector today, especially by a true silver mining company, at 3.2 million ounces of silver in Q3, we also produced at the lowest cash cost. Each ounce is produced for $1.57, significantly below every other company in the sector.

Having said that, our actual operating results did increase in Q3, and this reflects the real world today of escalating costs for our main purchases, rails, consumables, wood, labor, and power. As well, the currencies in the prime countries we work in appreciated against the U.S. dollar during the quarter, Mexico and Peru. Some of these costs will stay high. Some will decline in the future. We know that already.

For example, shipping costs for our concentrates are significantly lower today than they were a year ago. We don't expect that's going to return to the high rates we had a year ago. Another big cost for us, in particular in Peru, is electricity. This year we are just stuck into some very, very high spot rates. But starting in January '07, we expect a material reduction in power costs as we get into a long-term contract. Rates will decline, for example, from $0.18 per kilowatt hour we're paying today to only $0.06 per kilowatt hour. This will save us $3 million to $4 million next year alone just in power.

You may also note that even though we enjoyed record mill throughput at our Peruvian operations, our grades declined a bit, especially at Morococha and Hauron. At Huaron, we simply mine from lower grade areas, as planned, and our grades should return to normal grades in Q4 yet with more tons, so we should expect significantly more silver production in Q4.

In Morococha, our mill throughput has expanded by 50% in the last year-and-a-half or last two years, and has simply outpaced our underground development to feed the mill the kind of average grade ore we've been supplying at lower tonnage rates. This has resulted in our need to access our low grade surface stockpile.

This clearly brings the average grade down, but we're catching up with underground development, and this should bring our grades right back to normal very soon and certainly we'll be producing much higher silver grades in 2007 from Morococha when we catch up and access higher grades underground, and this will peel per-ounce costs at Morococha at or below today's levels, which are already extraordinarily low at minus $5 per ounce. Of course, we're heavily benefiting from the high zinc prices of today, record high zinc prices and our high zinc production at Morococha, which is reflected as an offset to our costs as by product revenues.

At $12 silver, Pan American Silver is a great earnings and cash flow generator. We expect to produce just shy of 14 million ounces this year. Alamo Dorado will add 5 million ounces of silver per year starting imminently. We should produce our first doré within the next couple of weeks. We're setting new tonnage production records in Peru, especially at our Morococha and Huaron operations, as I mentioned, and we are budgeting higher silver production in 2007 at those mines.

When our Manantial Espejo silver mine comes on stream in Argentina, it is high volume construction right now, in early 2008 we will be producing annually about 25 million ounces of silver. And if our cash costs remain where they are today, we should very significantly increase both earnings and cash flow.

That is our growth right in front of us. These are from mines that are financed, permitted, and either in production or in construction.

I want to say a few words about our exploration programs and results. With 25 drill rigs active, and with promising results on many fronts, I can assure our shareholders that we will have a material increase in our reserves and resources this year.

A few details. At Huaron, there will be a major increase in reserves since we are generating outstanding exploration results by drilling at depth below the lowest existing mining level. At Huaron, there are dozens of veins that are wide open below that level and with our drilling now we're intersecting excellent new silver, lead, zinc grades, with all of those veins we're drilling now at depth. This will materially increase our reserves there.

At Quiruvilca, while our silver drilling hasn't been particularly spectacular this year, we have discovered a significant new gold zone that will be the focus of much work in 2007. At Morococha we have 10 drills churning right now, and already know, again, that we'll have a major increase in our proven and probable reserves at that operation. And at our La Colorada mine in Mexico, we have found this year a rich new high grade silver vein called [amaleo], and a 200-meter extension to our high grade NCP vein.

In addition, we plan an aggressive exploration program in 2007 of the deep zone we found in 1998 at La Colorada that we have really had on ice since then, and in those days we had very keep holes and expensive drilling to access this new zone, whereas now we actually mined quite a bit deeper and we're able to access the deep zone from underground thus saving us a lot of drilling costs from drilling from surface.

All of these discoveries come at our major operating mines where all of the infrastructure is in place to extract maximum value from them in the years to come. Huaron, for example, now has assured mineralization for more than 15 years of mining at today's rates.

As for silver prices, I again say it is easy to make a bullish case for silver going higher. Endemic weakness in the U.S. dollar, amazing demand growth in Asia and elsewhere, massive investment interest in the new silver ETF, all of this is, represents new silver demand. Of course we can't forget zinc. Pan American will produce over 40,000 tons of zinc this year, or 88 million pounds, as our second most important metal. Zinc is hitting new highs every day and it is very, very nice for us as our main by product. In 2007, we expect to produce over 45,000 tons of zinc metal.

I am going to close on, for us, a real high note. I can't say enough about our team here in Mexico responsible for bringing on the Alamo Dorado mine on budget and on schedule. We announced the project capital costs in February 2005, and we are essentially right on that number today. This is an incredible achievement, and I think it speaks to the quality of our people and the strength of our forecasts. We do what we say we'll do. With that, I think I'll open the call to questions, and thank you again for joining us.

Thank you. [OPERATOR INSTRUCTIONS] We will pause for just a moment to compile the Q&A roster. [OPERATOR INSTRUCTIONS] Sir, there appears to be no questions at this time.

I am sorry. One moment, please, operator. Operator, we have one question from the room, one question is here from the room, [John Dudey]. John?

Yes, Ross. You've been doing some work in a small mine in Bolivia. Can you give us any current update on what the political situation is there vis-a-vis mining?

Sure. The question is what is the political climate in Bolivia, and probably by extension Peru, where we have operations active and where there has been some political uncertainty in the last little while. Regarding Bolivia, the first thing I want to say is that our San Vicente mine represents 2% of our assets. It is an important asset to us, but it is not terribly material in the big picture. We like San Vicente because it is a high grade standard milling, easy milling, very nice deposit. We have done a lot of work there over the years to explore the project and expand the reserves.

In Q3 we began producing again from San Vicente at a relatively small scale, at just a couple hundred tons a day, and we are milling the ore at a custom mill about 45 kilometers from San Vicente. The mining and the milling operation has gone on without any delays, without any issues, and it is very profitable today, so we're very pleased to have it up and running again.

At the same time, we're working on a feasibility study and detailed engineer to go build a new mill right onsite at San Vicente in the next couple of years. So we've been working hard there, and we've been working more or less as we intended to despite a lot of noise. There has been a lot of political noise, and a lot of our shareholders seem to get worried and fussed and investors get fussed and worried by all the noise. It is not terribly friendly noise.

The President has been talking about nationalizing the mining industry and taking away rights and doing all sorts of investor unfriendly things, foreign investor unfriendly things. We've just kept our heads down, and we have a very low capital exposure in Bolivia, but we do like the operation and over the long-term we think Bolivia is going to be as good a mining country as it has been for the last 150 years.

The last announcement by the President Morales was that he was going to defer any real tax on the mining industry into 2007, it is not terribly reassuring to us, but again, I think there is a lot of pressure against him doing any dramatic changes to the Bolivian industry.

There are a couple other foreign companies working in the mining sector in Bolivia with vastly larger investments and projects at risk than ours, and I think they'll be taking the lead on, I think, pressuring the Bolivian government to try not to do any draconian action that would be really negative to the whole global mining industry vis-a-vis investments in Bolivia. It is a difficult country to work in. I've said that before, and I will certainly say it again, but with our project it is a relatively straight forward project, relatively low capital costs, low capital exposure for us, and yet it should be a solid producer for many, many years to come.

I would also remind our shareholders we only own 55% of San Vicente. In fact, our net interest there is even less because we do have a joint venture with the Bolivian government mining company where they actually take 37.5% of the cash flow off the top before we split it with our existing joint venture partner. It is not by any means a significant operation for us, yet as I said we like the place.

In Peru, it's quite different. In Peru, there was a lot of noise earlier this year and it turned out to be just that surrounding the election. President Garcia has entered power in July. He is turning out to be a fine President with excellent policies. So far in his tenure, he is encouraging foreign investment, he's brought a very strong cabinet into power in Peru, and it is a very mining friendly, very foreign investment friendly cabinet. We expect great things from Peru. We're contributing to the Peruvian economy ourselves.

Our tax burden in Peru is quite high, and we're paying a lot of taxes, and as you probably saw we accrued $8 million in the third quarter for income taxes, and most of that was in Peru.

We also have workers' participation requirements where we have to give the workers 8% of the pre-tax profits, and so our workers are receiving those payments right now because we are so profitable, and it is kind of nice in a way. It is not so nice to have to pay it , it but it is nice to pay it to the workers.

After all they're part of the reason we're generating such good results, and in these good times there is lots to go around. So we are making those payments happily. In terms of Peru, things have stabilized. There is no noise at all that is unfriendly to mining, and I think we're -- we've been in Peru for many, many years and will be there for many years to come, very happy participants in the Peruvian mining sector.

Sir, we do have a question from the line.

Okay.

Your first question comes from Randall Stevens. Please go ahead.

Yes, can you hedge forward any of your production?

No, we don't. We have no hedge positions outstanding right now at all. We did hedge some zinc last year. We closed that out in June this year completely, and we are unexposed in every way. We have a small program where we sell our silver as soon as we produce it, rather than wait for the three to five months that it gets priced under smelter contracts, but that's not, properly speaking, hedging.

Thank you.

Okay.

[OPERATOR INSTRUCTIONS]

We have one more call here from the room, operator. Go ahead.

Okay.

You mentioned the mill at Morococha has been doing so well and [INAUDIBLE] you mentioned the mine needs some time to catch up and, obviously, opening more mining areas. Can you talk a little about the timing for that, how long will you need to access some of this low grade stockpile?

Sure. Andy?

Yes. This is Andy Pooler, Senior Vice President of Operations. We should see grade rated bonds from development into the higher grade areas, which we call the [Yakimina] area of Morococha in the first quarter of 2007. At such time, we'll rely a lot less on the stockpile of which we're currently processing about 3,000 tons a month.

Thanks, Andy.

Question coming from [Brian Benheim] of [Benheim] Trust Management. Please, go ahead.

Can you just elaborate a little bit on the income tax charge this quarter you just referred to? Was that a catch up charge from previous in the year, or was that all from the third quarter and do you expect that to recur in coming quarters at the same rate?

Rob Doyle here, Chief Financial Officer. Brian, most of that charge was a current charge based on our taxable income generated in, from our Peruvian operations during the quarter. So I would expect that it is going to be at that kind of level going forward.

Thank you. Congratulations.

[OPERATOR INSTRUCTIONS]

We've gotten off lightly today, operator. I guess we'll close and call it that, and I thank everybody for joining us today. This call will be taped, and if you have any further questions, call us up in Vancouver on Monday morning.

Thank you. This concludes today's Pan American Silver Corporation third quarter 2006 earnings conference call. You may now disconnect and have a pleasant day.