Pan American Silver Corp (PAAS) 2007 Q2 法說會逐字稿

Good morning. My name is Jeannie and I will be your conference operator today. At this time, I would like to welcome everyone to the Pan American Silver Corporation second-quarter 2007 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 with great pleasure to turn the floor over to your host, Mr. Geoff Burns, President and CEO. Sir, you may begin your conference.

Thank you operator. Good morning, ladies and gentlemen, and welcome to Pan American Silver second-quarter 2007 earnings release conference call. Joining me today here in Vancouver are Steve Busby, our Senior Vice President of Project Development, Wayne Vincent, our Controller, and Alexis Stewart, our Director of Investor Relations.

I am planning on keeping today's call fairly brief. I will try to provide some color to our earnings release which we issued last night, and I'm going to ask Steve Busby to update our construction activities in Argentina and Bolivia.

From an operating perspective, if you'll pardon the expression, we had a rock-solid quarter. It was void of any amazing accomplishments and, similarly, without any significant issues. Don't get me wrong, there was and always is a plethora of issues to deal with in our operating mines, but that is normal operating and we worked exceedingly hard to deliver good second quarter results.

As I am sure you can imagine, I travel quite frequently, given the location of our assets, and I can recall being asked on numerous occasions what makes for a good flight and a good airline. For me, it is pretty simple. It is one where the plane takes off when the schedule says it is supposed to and arrives when it is supposed to arrive without incident. Our second quarter falls pretty much into that category. We told you at the start of this year what we are expecting to achieve and we updated you on our schedule at the end of the first quarter with respect to Alamo Dorado and this quarter, we have done almost exactly what we expected to do without incident.

We produce just over 4.2 million ounces of silver in the second quarter, 27% higher than in the second quarter of 2006 and a new quarterly production record for Pan American. In addition to silver, our zinc, lead, copper, and gold production were all higher as compared to the same period a year ago. This was exactly what we had planned.

You probably recall from our first quarter conference call that our commissioning efforts at the Company's newest silver mine, Alamo Dorado in Mexico, were taking longer than we planned, but that we believe that by the end of April that most of the startup issues have been resolved and that we were going to see steadily-increasing production. I am happy to be able to tell you that in April, Alamo Dorado produced 233,000 ounces of silver, in May 275,000 ounces of silver, and in June 348,000 ounces of silver. For the quarter, that is 856,000 ounces.

We are admittedly on the brink of attaining design capacity and production rates and I can say with confidence that we will achieve this in the coming weeks. Our guidance remains unchanged from the first quarter and we expect to produce 3.6 million ounces of silver in 2007 at a cash cost of close to $3.50 per ounce at Alamo Dorado.

Moving to our other Mexican operation, we achieved record performance at La Colorada, which was our second quarter's largest silver producer. After a bit of a slow start in 2007, our peer's silver mine set a new mine record for silver production. In its second quarter, La Colorada produced 1,035,974 ounces of silver, an increase of 13% as compared to Q2 2006 and up 21% over the first quarter of this year.

The oxide and sulfide mills combined demonstrated a processing capacity of over 1000 tonnes per day, well above the 800 tonnes per day we had hoped to consistently maintain this year and up approximately 50% from the 700 tonnes per day rate we were processing at the beginning of 2007. We are right on target to produce 3.8 million ounces of silver at La Colorada in 2007.

Cash costs at La Colorada for the quarter were slightly higher than we had hoped for at $7.20 per ounce, primarily reflecting a one-time $500,000 distribution for employee profit sharing. This profit sharing bonus is part of our continued effort to ensure that our employees share in the success of our company. As a result, relations with our employees remain strong and we have had no personnel losses at the mine in over six months.

Moving to Peru, at Morococha silver production for the second quarter was higher than forecast at just over 674,000 ounces. And cash costs were the lowest in the mine's history at negative $5.23 per ounce. This marked the fifth consecutive quarter of decreased cash costs, a benefit from high byproduct zinc production and excellent zinc prices. Morococha delivered a fine quarter and is on track to produce 2.7 million ounces for 2007.

The Huaron mine maintained its solid performance throughout the second quarter and increased its silver production as compared to the second quarter of last year to 949,500 ounces. Cash costs in the second quarter remained steady at $1.90 per ounce of silver produced.

In order to offset a planned decline in silver head grades, we increased the throughput at Huaron. The milling circuit has just set a new monthly tonnage record in July by processing 67,000 tonnes. Huaron should meet our 2007 forecast of 3.8 million ounces of silver.

At Quiruvilca, silver production for the quarter was 407,000 ounces at cash costs of $1.30 per ounce. As anticipated, production levels in the second quarter were similar to those in the first and we continue to encounter lower silver and zinc rates. We had expected to access higher grade ore below the 400 level as early as the third quarter of this year with the completion of our 400 level ramp development project. However, this project is running about four months behind as a result of low contractor availability, so we are likely to maintain similar production levels as we have seen in the first and second quarter over the course of the third quarter with some improvement in the fourth when ore from the higher-grade lower zones will be mined.

To round out our operations I will make a couple of comments on San Vicente's production before turning the call over to Steve Busby, our Senior Vice President of Project Development, who will talk about our expansion plans at both San Vicente and progress at Manantial Espejo. As many of you know, in early June we announced the purchase of an additional 40% interest in the San Vicente project in Bolivia, increasing our ownership to 95%. At the same time, we announced our plans to significantly expand production. Silver production for the second quarter from San Vicente was 173,634 ounces as we continue to mine in an extremely modest basis, processing at about 250 tonnes per day. Cash cost for the second quarter were $3.74 per ounce.

In order to extract the real value of the high-grade, long-lifespanned San Vicente ore body, we have started our expansion project, which will include construction of a new 750 tonnes per day processing plant and expansion of our underground mine working. The economic returns for this project are extremely attractive. We purchased the additional 40% interest for $9 million and for a relatively modest capital investment of $40.5 million, we will add almost two million ounces of silver production per year at a cash cost of $2.00 per ounce. At our reserve prices of $9.00 per ounce of silver, the project has an internal rate of return of 26% and a payback period of 2.5 years. At today's prices, the payback period is just over one year.

Do I like the political risk in Bolivia? Not so much. Do I like the project returns and potential? Very, very much.

I am going to turn the call over to Steve now to review our plans for San Vicente and Manantial Espejo. Steve?

Thank you, Geoff. We are well underway preparing for the construction of the expansion project at San Vicente and enjoy a lead start with significant advance already in detailed engineering and procurement activities. Total project expenditures to the end of June were $5.9 million and total commitments were $14 million. We have successfully staffed some of the key positions including our country President, our Operations Manager, and our Project Manager position.

The San Vicente expansion project is defined as building a new 750-tonne-per-day flotation plant at the mine site, expanding production at the mine to feed the new plant, building a new tailings facility, and upgrade the local infrastructure to support the larger mining operation. Once completed, the expanded operation will be capable of producing approximately 2.8 million ounces of silver annually on 100% basis at a unit cash operating cost of $2.00 per ounce net of byproduct credits for the first five years. As Jeff said earlier, this is an increase of two million ounces of silver per year over today's production rates.

This production will be contained in two marketable products, a copper-silver concentrate and a zinc-silver concentrate. The expansion project includes replacement of the existing mine hoist and head crane to provide safe access for miners and materials, as well as enhance production from the existing developed areas of the mine. It also includes development of an approximate 2300-meter underground decline ramp to provide access for rubber-tired underground mining gear, allowing for bulk mining methods on our larger and richer [littrel] vein deposit.

We have awarded a contract with an established mining contractor named [IESA] to initiate the ramp construction beginning next month and to train our miners in mechanized mining methods. We have engaged Lyntek Inc. to provide engineering, procurement, and construction management services to complete the construction of our new 750 tonne per day selective flotation plant. Lyntek is an engineering construction company headquartered in Denver, Colorado, and specializes in the design and construction of precious metal plants the size of San Vicente. Lyntek also has previous experience working in Bolivia. Lyntek has already secured most of the long-lead purchases and is preparing to begin construction in the fourth quarter of this year.

We are planning for several infrastructure upgrades, including upgrading our camp, installing a new, larger power line and building a reliable water system. Much of this is already well advanced. In addition, we are completing several local community projects, including enhancing the school and repairing the community center.

We continue to foster and sustain quality relations with the government and community who have been very supportive of our expansion projects. We enjoy being located within a community of dedicated miners and miner families who have established their life in the area for several generations. And we look forward to deploying this investment, which will benefit them, the area, the Bolivian economy and our shareholders. Our goal is to have this new plant facility operational by the end of 2008.

In Argentina our construction efforts at Manantial Espejo continued on schedule and on budget, achieving 33% overall project completion on $55.8 million of expenditure and total commitments of nearly $75 million by the end of June. During the second quarter, we have substantially advanced the underground and surface mine developments. We have achieved full concrete placement rates. We have advanced construction of the site's ancillary and infrastructure facilities and we have made good progress in completing several community infrastructure projects.

Specifically, during the second quarter, we have incurred no lost-time accidents at the site. We have advanced 222 meters to a cumulative 686 meters on two underground access ramps after overcoming some challenging ground conditions and significant water inflows.

Despite these challenges we are well within reach of our planned underground development schedule, particularly given excellent advance we have experienced over the last few weeks where we have already exceeded last quarter's development advance.

We have mined nearly 485,000 tonnes of material from our open pit development, of which more than 360,000 tonnes was used for tailings stamp construction and nearly 14,500 tonnes of low-grade ore has already been mined and placed in a stockpile. We have successfully completed our tailings stamp construction in July on budget.

We have poured approximately 1500 cubic meters of concrete primarily for the plant, leech tanks, truck shop foundations, which is essentially 25% of the total project requirements. We have also completed the first phase, 30-home housing construction project and advanced on the apartment and cabin projects in the local community Gobernador Gregores. These housing projects are crucial to support the total hundred 423 personnel currently working on the project.

Over the remainder of 2007, we expect to essentially complete the concrete works and begin steel erections in preparation for major equipment deliveries scheduled for early 2008. We also expect the crosscut and begin on vein development on our two underground mine areas, and also will move nearly 1.2 million tonnes of waste from our open pit mines. During these pit and underground development periods, we expect to accumulate over 150,000 tonnes of ore prior to plant start up and this ore will be stockpiled ahead of the crusher.

We remain confidently on budget and on schedule for mechanical completion in May of 2008 and expect commissioning to begin immediately thereafter.

This concludes my brief overview of our project advances. Now I would like to turn it back over to Geoff Burns.

Thanks, Steve. As you can tell, we are extremely active executing our growth plans. With Manantial Espejo scheduled to come onstream at the end of May of next year and San Vicente by December, we are clearly poised to see production growth at Pan American in 2008, 2009, and well into 2010.

With one exception, our record production in the second quarter translated into some record financial results. Cash flow from operations before working capital adjustments was the highest in the Company's history at $31.5 million. Revenues from metal sales were up 26% as compared to the corresponding period in 2006 to $79.2 million, and we are the second-highest we have ever recorded.

Cash costs were good at $2.61 per ounce of silver produced, and with increased profitability comes increased taxes, as we reported our highest tax provision ever at just over $10 million.

Finally, we had our second-highest quarterly net income ever at $18.5 million, or $0.24 per share. This was 23% higher than a year ago. Net income for this quarter was second only to income corded in the first quarter of this year when we included a $10 million gain from the sale of our interest in the Dukat mine. Excluding that gain, the second quarter was our strongest quarter yet in terms of earnings.

I realize that some of you were expecting even more from our bottom line. However, not unlike the first quarter, our earnings would have been stronger still had we been able to recognize into income all of our production. In our first quarter conference call, I noted that only 74% of our concentrate produced in Peru was shipped and recognized into sales, with the remaining left in inventory. And I was hoping that we would see some of this inventory sold down during the current quarter. While we managed to ship most of the second quarter's concentrate, we didn't see the inventory drawdown I was expecting and there are still 10,000 tons of concentrate we produced this year that hasn't been sold. It will be over the remainder of this year and this should add another 7.5 million to our bottom line in the third and fourth quarters. In addition, almost 400,000 ounces of Alamo Dorado silver production was unsold at the end of June, which we have now sold in the third quarter.

In summary, we had a very good quarter. We delivered record silver production, strong financial results, and made significant advances on our growth plans. Most gratifying was to watch Alamo Dorado ramping up nicely, achieving commercial production, and starting to make the positive contributions we have planned for. The La Colorada mine had a great quarter and our Peruvian mines continue to deliver at expected production levels.

As I said in my opening comments, we had a solid quarter. I can't say there are any amazing accomplishments, but similarly, we experienced no significant problems. As for our growth plans, I am satisfied with the construction progress at Manantial Espejo and San Vicente and look forward to seeing the startup of both these operations next year.

For me, the second quarter can best be summarized by saying we are delivering on our plans. Overall, 2007 is shaping up to be our most successful year. We remain on track to produce 17 million ounces. I see increased cash flows and earnings in the third and fourth quarters as we finally realize sales of our concentrate inventory and metal prices, particularly for silver, while more volatile of late, have remained extremely buoyant.

Thank you. And, Jeannie, I would like to ask you to open the floor for questions.

(OPERATOR INSTRUCTIONS). There appear to be no questions at this time. I would like to turn it back to Geoff Burns for any closing comments -- we do have a question coming from Haytham Hodaly, Salman Partners.

Hey Geoff, I couldn't let you get away without any questions. Just one quick question, just with regard to costs, were the costs -- obviously the costs in the second quarter were probably -- they were higher than the same quarter of last year even though, I think, if you look back byproduct credits were probably better now than they were then. What were some of the costs? I mean, I see a lot of Colorada costs are higher than expected or higher than you would like, put it that way. What are some of things you can do here in the next little while to bring some of those costs down?

Well, first of all, on La Colorada, yes, we were at $7.20 an ounce and we, as I said, we had a one-time sort of distribution of profit sharing that I don't expect to see again this year, so we are going to be back in the $6.50 to $6.80 range, which is pretty much normal for La Colorada and what I would expect going forward.

On a consolidated basis, our costs were higher than they were last year. The biggest influence is Alamo Dorado. If you look, Alamo Dorado during the quarter was just over $4.00 an ounce and now that it is a real contributor, that is essentially cost averaging us higher than where we were a year ago. I do expect Alamo's cost to come down as we see production ramping up further, you know, up to the sort of 400,000 ounce per month range, just slightly over, which is getting near capacity, and I see that coming down. So that should have a somewhat positive impact over the balance of the year. But in general, our costs are going to be somewhat higher with Alamo Dorado in there.

You are correct, Haytham, the byproduct credits have been better this year. That is really reflected at the Morococha where we saw minus $5.00, and $5.23 an ounce. In general, as I think you are probably aware, costs have, actual dollar expenditures to produce a tonne of material have continued to go up. We have seen probably in the first part of this year another 6% to 8% increase in those costs. That is stabilizing right now and, frankly, I don't see much we can do to combat that. We really have maximized what we can do on a productivity side. It is just the inputs across the board are higher and so I think what you are seeing right now, 260 I expect to be lower than that over the rest of the year, 230, 225, but that is where I think we are going to be.

230, 225. As consolidated for the whole, you mean?

Yes.

Let me ask you a couple of other questions since there wasn't that many questions out there. On the Alamo Dorado, you said run rate of eventually 400,000 ounces. That is contained metal a month. We are talking 4.8 million roughly for a year once up and running. Did you say 3.6 this year, is that --?

Yes, 3.6 this year.

And so is 4.8 a reasonable number for next year then?

Yes, 4.8 to 5 is where I think we are going to be. I think we should get over 400,000 ounces, but it is not going to be 500. It could be 410, 420, right around 400, so 4.8 to 5 million is a pretty reasonable number, Haytham.

Okay. And for San Vicente, we said the expansion will get it to as much as two million ounces, is that correct?

2.8.

2.8. Was that on a 100% basis or what was that?

That is 100%. We have got 95% of it now.

Okay. And then how long before you actually get to that 2.8? How long does the expansion take until it is effectively done?

It will be midyear 2009.

Yes, it will be -- December 2008 is our plan for construction completion. You can anticipate four to six months of startup. So I would say mid 2009, you will start to see full production rates.

So at an annual run rate at that point by about 2.8 million ounces.

You bet you.

And so this year, what are you expecting from San Vicente?

On a 100% basis, we are expecting about 650,000 ounces. So for the first quarter, we had 55% of that. Starting in June, we got 95% of that, so again, you need to do a little bit of math there to work the number.

No problem. Just with regards to one last thing on Quiruvilca, what is happening with the mine life there? I mean are we -- how many more realistically years do we have at these prices right now?

At these prices?

At these prices. Or even, let's say, what you think is fair, maybe $9, $10 long-term silver.

Right now, I think our PNP sitting out in front of us is right on five, six years today. There certainly is additional inferred resource. At these prices, that resource is clearly going to be economic once we have it drilled out, so at these levels, I mean, we are still looking at plus 10 years.

At Quiruvilca?

At Quiruvilca, that's correct.

Okay. So that's a huge change from where you were a couple of years ago when you were looking at closure.

Oh, 180-degree change. As you recall, in June of 2004 we were planning on -- we were planning on shutting it down.

Right. I remember that. That's perfect. Thank you, Geoff.

(OPERATOR INSTRUCTIONS). Kurt [Bueller], private investor.

Yes, what is your expected production and sale of concentrate for 2008?

This year we are looking at producing almost 130,000 tons of concentrate and next year that will ramp up slightly with San Vicente to about 135 to 140,000 tonnes of concentrate. Our expectation every year is that we will sell during the course of the entire year all the concentrate we produce. That's the same this year. We fully expect that the inventories that we built up in the first and second quarters will be sold in the third and fourth.

Okay. Thank you.

Craig West, GMP securities.

Hi Geoff. I'm sorry, I might have missed the very first few minutes of the call there, so forgive me if you covered this. I was just wondering if you could touch a little bit on exploration activities, and in particular, exploration at Morococha.

Okay. Actually I didn't make any comments this call on exploration. Now that you have asked the question, I will. As you know, we are planning, overall, in the Company planning on drilling almost 100,000 meters of diamond drilling this year, primarily at -- well, almost exclusively at our operating properties, of which almost half of that is targeted at Morococha.

I can tell you that right now, Craig, we have seven drill rigs turning. I can tell you that our program is on schedule. I can tell you that we have had some exceptional results, not dissimilar to last year, but I also can't give you the details of those results because at this point we have not done the full update to our reserve and resource statement and we are not planning to do that. We're thinking about doing that about mid year, but just given where we are at in the program, we have decided to defer that to make it an annual event much the same as last year. But I can say things are going very well in terms of our exploration efforts.

Okay. And what about the drift that is going down at Morococha? I mean there was some talk previously about it going through some grounds that was maybe prospective but previously unexplored. Any updates on that at all?

Oh yes sure. Yes, that is Manto Italia Sierra Nevada ramp. We have done there now -- I am just trying to search my mind for a moment -- I think we have gone through about 600 meters so far of that development. We did hit some pretty ratty ground early -- or late in the first quarter and through much of the second quarter, so our development rates were down to about a meter a day because we were putting in full-on ground support with steel arches and shockcrete, etc. We have gone through most of that ground now and we expect the production rate there to get up to back up to about three meters to four meters a day, which is normal.

So it has been a very slow progress. We are just getting through that ground and should be over the next four to five months hitting, as you described very clearly, some very prospective areas of our claim group and areas that have subsequently never been explored nor drilled and areas where we fully expect to intersect veins, but just because of the slowness of some of the ground conditions we ran into, we haven't quite got where we thought we were going to be.

That program, as you know, is still a two-year program and really is going to be the lifeblood of that asset once it is complete accessing the north as well as the west and southern areas of our claim blocks. As you probably know, Craig, the West and particularly the Southwest corner of our claim group is where our highest grades are in the [Yacca Mina] area, running 400 and 500 grams per ton.

So that's moving ahead. It is a little behind where we thought it would be, but I see it picking up now that we are back in some good ground and I do fully it still expect to run into mineralization that we haven't seen before.

Great. Thanks a lot.

Alexander Emery, Bloomberg News.

Yes, good morning Mr. Burns. You had mentioned that you didn't like the risk, the political risk in Bolivia. I was just interested to see how much concern there is with the government of Mr. Morales in the wake of what happened with Glencore's tin smelter and also the fact that apparently Congress there is preparing to raise taxes on mining company profits to 37.5% next month. I am just wondering how much of concern those two issues are?

Thanks, Alexander. I will deal with the second issue first. We have anticipated that tax increase and have actually, from a planning perspective, have built it into our cash flow and project economic models. So the economics that I gave earlier in the presentation indeed reflect that tax increase that has been proposed.

I might add that that tax increase has yet to go to Congress. I don't know how many drafts there have been and there has been a lot of different discussion. The numbers here are reflecting are the latest draft, but Evo has yet to take it for approval.

On the second comment, I am really not concerned. Glencore and their assets were a very unique situation in Bolivia. Glencore had purchased the assets the mining assets of the previous President, Goni, who unfortunately, or fortunately, I guess, ended up leaving the country for political reasons and so those assets were very much a target of Mr. Morales. I don't feel exposed at all in the same way. In fact, a partner of ours in this project is Comibol and we just met with Comibol literally two weeks ago, who gave their blessing to our expansion plan. The board members from Comibol will be out visiting our site. They are actually genuinely excited about the investment we are making in Bolivia.

So in terms of nationalization, I don't have a real fear of that. Bolivia is a tough place to do business, though, I make no mistake. If I could move assets around, I would perhaps gladly pick it up and move it to a different country. But I am -- while it is not the most comforting location, I am comfortable with our project.

Thank you. And just one last question, if I may. If that said, have you had personal reassurance then from the Bolivian government that your investment will be respected?

Well, other than I guess the assurance that we are getting from Comibol, which is the state mining company, no. Do we have a written piece of paper that says our asset will never be touched? No. And frankly, I would be surprised if anyone had a piece of paper that said something like that.

Thank you very much.

Robb Parlanti, Turner Investment Partners.

This is Marc Bianchi for Robb. We jumped on a little bit late and might have missed some prepared remarks on the inventory build and associated non-shipping of concentrate. I heard you comment that you expected to ship that for the second half of the year and there is associated earnings with that, but can you just comment a little bit more on what the reasoning for the delay and the shipment is and is that something to expect again next year? Is there a seasonality aspect to it?

Quarter-to-quarter, our concentrate movements can vary quite dramatically. Our production levels are pretty consistent, but we sell to traders and we sell directly to smelters and they control the shipment schedule because they put together economic quantities to ship. A ship, for example, each hull will hold either 5000 or 10,000 tonnes of concentrate and they are not going to load the ship until they have a full hold because they are going to pay for that hull whether they put one tonne in it or 10,000 tonnes in it. So we are a little bit at, I am going to say, their mercy with respect to the absolute shipping dates.

In terms of the shipping quantity throughout the year, yes, they are committed to take our entire production between all the different traders and concentrate -- our smelters that we deal with. So is there a seasonality to it? Not particularly. It really comes down to a number of factors, not just -- not in our control of where they are purchasing their concentrates from, when they got a ship coming in, where our material is in the production cycle. So you know, for example, in December of last year, we shipped about 30% more concentrate than we actually produced in one month, but I can't give you that month is going to happen again. I can't tell you that. What I can reiterate is our expectation is that in any given year that over the fullness of the year, we will ship all the concentrate that we produce.

Are there clients on a take-or-pay contract for this concentrate?

Well, they are committed to taking it and we have provisions that if they don't take it by a certain date that they have to provide us with provisional payments. So I guess that is close to a take or pay.

Okay. Thank you.

Marc, just to end, I'm just not concerned. It is not a concerning factor, as I said, over the balance of the year we are going to ship all that concentrate. It is just a timing issue that has hit us in the first and second quarter and it is going to reverse. It is going to reverse. That is the normal cycle for our business.

Great. Thanks.

Thank you. I would now like to turn the call back to Mr. Geoff Burns for any closing comments. Please go ahead, sir.

Well thanks, operator. Just one more time, I just want to thank everyone for joining us here this morning and to reiterate that I believe we had a very, very good second quarter and we delivered on the forecast that we had put forward and I very much look forward to updating each and every one of you at the end of the third quarter. Thank you.

Thank you. This concludes today's Pan American Silver Corporation second quarter 2007 earnings conference call. You may now disconnect your lines at this time and have a wonderful afternoon.