Pan American Silver Corp (PAAS) 2008 Q3 法說會逐字稿

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  • Operator

  • Good morning, ladies and gentlemen. Thank you so much for standing by and welcome to the Pan American Silver third quarter 2008 earnings conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded today on Thursday, the 13th of November, 2008.

  • I'll now turn the conference over to Mr. Geoff Burns, President and CEO. Please go ahead, sir.

  • - President, CEO

  • Thank you, operator. Good morning, ladies and gentlemen and welcome to Pan American Silver third quarter earnings release conference call. Joining me today here in Vancouver are: Steve Busby, Chief Operating Officer, Michael Steinmann, Executive Vice President, Exploration and Mine Geology, Rob Doyle, our Chief Financial Officer, and Katina Cordero, our Coordinator of Investor Relations. Before I ask Steve, Michael and Rob to update you on our mining operations, our development projects, our exploration programs, and our financial condition, I would like to start by making some general comments about our performance during the third quarter, and some observations about the current environment.

  • What a difference a few months can make. When we last spoke at our second quarter earnings release call on August 13th the Dow Jones Index was 11,532. Today it's 8283, down close to 30%. The NASDAQ composite was 2428. Yesterday it closed at 1499, down 38%. And the economies around the world have moved with alarming speed from growth to recession. The effects of the global financial crisis have and I dare say will continue to wash through the economies of the world, but its impacts have been particularly and in business terms instantaneously severe for the mining and commodity producers.

  • [Base metals] prices have slumped, oil prices have plunged and precious metals prices have not been immune to the contagen. Most importantly to Pan American the silver price was a very comfortable $14.68 per ounce on August 13th, just three months ago. And this morning it opened at not nearly so comfortable at $9.23 per ounce in New York. We are living through and a part of an amazing economic upheaval that has captured the global economy with the speed of the Internet. Where the unthinkable has become the accepted, where the basic principles of supply and demand and ultimately price are being upended, and where common sense has been overwhelmed with fear and government intervention. I could continue to talk about the changes we are all reading about and seeing around us every day, and I can tell you it is extremely easy to lose focus and lament about what was just a few months ago. But that's not the purpose of this call and that is not what is Pan America's mantra.

  • The purpose of this call is to keep you, our shareholders, informed about your Company's plans, not only to cope with this change and upheaval, but to continue to thrive and grow, how we are responding to this challenging and difficult environment, how quickly we are retooling and modifying our business plans and how we will adapt will be the measure of Pan American's future success. Before I describe some of the steps we have already implemented and other measures we are still planning to take, we should review our most recently completed quarter. While there is no question that our financial results were negatively impacted by the sharp decline in base metal and silver prices that started in the middle of the third quarter and gathered speed towards the end of September, we still increased our silver production to 4.9 million-ounces. We generated net earnings for a 10th consecutive quarter. We delivered a respectable $22.7 million in operating cash flow. We have maintained a healthy working capital position, with no debt, are in the midst of starting our newest and lowest cost silver and gold mine, Manantial Espejo. We discovered a fabulous new high grade vein system at our Morococha mine in Peru.

  • In short we continue to do what we do best, build, commission, explore for and operate mines profitably and completed the third quarter extremely well-positioned to continue to deliver growth and take advantage of the strategic opportunities that are becoming more prevalent. With that, I'm going to turn things over to Steve, Michael and Rob who will provide some additional detail and commentary on our operations, development projects, exploration programs and financial condition. Steve?

  • - COO

  • Thank you, Geoff, and good morning, ladies and gentlemen. As Geoff has mentioned, the recent and rapid deterioration of the metal markets, combined with the preceding and unprecedented cost escalations, has presented us with some significant challenges. We are assessing and adjusting our mine operations quickly in order to preserve our strong financial position and production profile. These assessments and adjustments are being carried out now and will be incorporated into our 2009 operating plans and budgets. We enjoyed another solid quarter where our operations produced 4.9 million-ounces of silver, right on plan, despite having significant disruptions at some mines that were entirely offset by better than expected production from other mines.

  • This performance highlights one of Pan American Silver Corp's strengths, where a multimine portfolio allows typical pluses and minuses of individual mining operations to balance out. This strength will soon be enhanced with even further as we bring on our Manantial Espejo mine in Argentina and our San Vicente mine expansion in Bolivia during the coming months. Our operating costs for the quarter were well above plan at $6.61 per ounce, primarily due to slightly lower production of base metals and reduced prices. In addition, our costs were negatively impacted by higher energy costs at our Huaron mine in Peru which alone contributed nearly $0.33 an ounce of additional costs to our overall Company-wide cash costs. We were also contending with lingering impacts from this year's raw material and labor cost escalations.

  • However, we believe these escalators will begin moving in our favor as the effects of the global economic crisis begin to sweep through the industry suppliers. Pan American's quarterly performance was led by our record breaking silver production of 1.7 million-ounces from our Alamo Dorado mine in Mexico, which continues to enjoy an outstanding year, exceeding all of our expectations. While we expect to see another strong quarter at Alamo Dorado to close out this year, it is important to comment that we will be forecasting somewhat reduced grades and silver production in 2009, as we sequence between our current Phase I high grade pit into the Phase II pit layback yielding lower grades for the next year and a half. Our unit cash operating costs at Alamo Dorado finished the quarter about 7% higher than we had planned at $4.42 per ounce, primarily due to some serious raw material shortages, particularly sulfuric acid, leading to cost escalations. We expect this situation will turn in our favor very soon, given the recent nearby mine curtailments.

  • The La Colorada mine in Mexico also had another solid quarter, producing over 980,000-ounces of silver. The unit cash operating costs increased to $8.70 per ounce, impacted by the previous and sustained raw material escalations and the strong Mexican peso. We are taking measures to try and claw back some of these cost escalations and have already seen favorable weakening of the peso. We are expecting continued stable performance at La Colorada, for the remainder of this year. Our Peruvian operations delivered 1.9 million-ounces of silver production for the quarter, slightly behind target after being impacted by a seven day labor disruption at Morococha and a five and-a-half day products disruption at Huaron following an unexpected [pinion] shop failure on our primary mill. Cash operating costs for the Peruvian operations was $7.37 per ounce, almost double our target, due to the reduced base metal by products production and value as well as the very high energy cost increases we have been experiencing at Huaron.

  • We've already seen significant relief in the power supply costs at Huaron as the rains have begun in Peru. Our Peruvian production was led by the Huaron mine, which produced 894,000-ounces of silver, pretty close to plan. We are reassessing the long-term deepening project at Huaron in light of the current metal prices, to allow quicker production from higher grade zones, while deferring some of the more expensive and extensive developments. The Morococha mine produced 557,000-ounces of silver during the quarter, which was below plan following the June labor disruptions that spilled over into July. All of our employees and contractors continued to work normally since returning to work in mid-July. We are also reassessing our long-term developments at Morococha in light of the downturn base metal prices and will be adjusting our mine plans there accordingly. Our Quiruvilca mine improved silver production to 355,000-ounces, as we continued to advance on certain key underground mine developments. We are expecting about a 10% improvement to production from our Peruvian mines in the last quarter of 2008, at a higher cash operating cost due to the lower base metal prices, offset to some degree by cost savings particularly in the Huaron energy and also in the favorable currency exchange movements.

  • In Bolivia, our San Vicente expansion project continues to advance on schedule and on budget. While we continue to produce [in ores] at a nearby mill. The total milling program produced 246,000-ounces of silver at a cost of $9.08 per ounce, above the $7.58 per ounce cost anticipated primarily due to the lower by product prices. Our grades have improved dramatically during the quarter, as we begin developing on the new and exciting Litoral vein getting ready for the starting of our new mill in the early part of next year. We are expecting an equally strong quarter of production to finish off the year. Total project capital expenditures to the end of the quarter were $54 million, with the project nearing 80% completion. We expect to achieve mechanical completion of construction by year-end, and begin commissioning of this new plant the first quarter of 2009.

  • I am very pleased to report today that we are turning and grinding mills at our Manantial Espejo project in Argentina and are within days of feeding our first ore to the circuit. We expect to begin producing silver and gold bars in December, some six months delayed from our original projection for the year, primarily due to the previously reported electrical theft as well as some extreme category five class hurricane wind disruptions that have negatively affected contractor productivities. Largely as a result of these delays, combined with a continued cost escalations, we now estimate our capital cost to complete the project at $225.4 million, which includes $27.5 million of recoverable [vat] tax payments and more than $10 million of additional mine development expenditures, as we have continued to mine in advance of the plant start-up.

  • The additional mining will reduce future operating costs, in addition to allowing us access to higher grade ores earlier than had originally been planned. We now have a very comfortable 300,000-ton ore stockpile ahead of the mill in addition to significantly more ore tons immediately accessible in the open pits and underground faces, all awaiting the plant start-up. We remain confident Manantial Espejo will significantly enhance Pan American Silver's production profile with its anticipated 4.1 million-ounce average annual low cost silver productions, and 60,000-ounce gold production once steady state production stabilizes in mid-2009. In addition to several cost saving initiatives which will be described later, we are carefully assessing all of our mine plans and adjusting them to adapt to the current metal market prices. We have also cancelled all discretionary capital projects. However, we are not making any decisions which will impact our expected production profiles. The results of these initiatives will be quantified once our 2009 operating budget is finalized.

  • In conclusion, we expect to deliver another equally solid quarter to end this year, forecasting the production of 4.8 million-ounces of silver at a cash cost of around $7 per ounce. Therefore, our full year 2008 forecast remains at 18.8 million-ounces of silver at a cash cost of $5.70 per ounce, with a long-term outlook of higher production and lower cost as our Manantial Espejo low cost production comes into the mix and we begin to reap the benefits of our cost saving initiatives. This concludes my overview of our mine operation and projects advances. I'll now turn the call over to Michael Steinmann for the exploration update.

  • - EVP, Exploration & Mine Geology

  • Thank you, Steve, and good morning. As Geoff and Steve explained, these are challenging times and as a consequence we have made some changes to our exploration plans, especially in the greenfield program. I'll describe some of these changes in a moment. But would like to share first some of the exploration highlights we had in the last quarter and in the first nine months of 2008. Between our brownfield and greenfield exploration programs, we have completed a total of 76,600-meters of diamond drilling during the first nine months of the year, which is all part of our plus 100,000-meter drill program for 2008. The underground exploration at Huaron keeps returning excellent results especially in the Huaron and Morococha veins. Where we discovered high grade intersects over some exceptional width of up to nine meters in some cases.

  • As usual, in many veins of Huaron, the samples carry high silver but also substantial lead and zinc grades. There is no doubt that the low metal prices will have an impact on the upcoming year end statements especially in the higher zinc reserves of the mine. But I am confident that we will still be able to replace what we have mined in 2008 at Huaron with new reserve additions, if metal prices stay close to current levels. On October 15th, we published results of 26 surface and four underground drill holes from the discovery at Morococha. Only 1.7-kilometers of the main shaft and is accessible in the uppermost levels by a ramp. Lower elevations will be accessed by the Sierra Nevada ramp which will pass in the future only 100-meters away from the vein. One of the best drill holes intersected the vein over 5.1-meters at 949-grams silver per ton and 9.7% zinc. At a time of the press release, we had drilled only 150-meters down deep and 800-meters strike length of this 2.5-kilometer long vein. Two of the most recent intersects encountered the vein to the west of the existing drill holes at 3.5-meter width, at 121-gram per ton silver and 7.9% zinc, and below the 400 level with 3.4-meter width at 540-gram per ton silver and 4.4% zinc.

  • This last drill hole confirms the down deep extension of now over 200-meters. Proving also discovered five sub parallel veins and two splits. Five of these seven additional structures returned silver grades of more than one kilogram per ton and in extreme cases over 5.6-kilogram and up to 14% zinc. The intersected widths vary from 0.6 meters up to 4.6 meters. Also the [upshoots] of this vein seem less continuous and more (inaudible), they're definitely important exploration targets and highlights the immense potential of this prolific exploration area. I'm very confident that these high grade discoveries will add substantial resources to Morococha at the end of the year and will help replace the mine resource in 2008. Our brownfield or on-site exploration efforts remain largely in place in order to follow up the success we had at Huaron, La Colorada and Morococha. But I am sure you noticed in our press release that we have made some changes to our greenfield programs, reducing or deferring most of our early stage projects.

  • We will maintain our important land position in Peru and Mexico and keep the most promising option contract. The exploration space has gone through a fundamental change in the last four to five months due to the market turmoil and difficulties in raising capital to explore, many advanced stage discoveries held by others have stalled. Fortunately, we have available liquidity and decided to defer our own greenfield efforts and have a close look at advanced projects held by others. We will try to negotiate mutually beneficial arrangements with the current owners in order to advance the most promising of these discoveries. Please, Rob, now for your financial review.

  • - CFO

  • Thanks, Michael, and good morning, everyone. Our financial results in Q3 2008 were impacted by sharply lower base metal prices as zinc and lead prices declined by 45% and 39% respectively, relative to the comparable period of 2007. Silver prices have also declined significantly as compared to the prices we enjoyed in the first half of 2008. The price declines have two obvious impacts on our financial results. Firstly, and in spite of an increase in our silver production, our sales have declined by 10% relative to Q3 2007, and by 24% relative to Q2 2008. Included in Q3 sales was a negative $2 million final price adjustment to concentrates that had been provisionally priced in Q2 and finally sold at lower prices in Q3.

  • The second obvious impact of lower prices is seen in our cash costs as we utilize revenues from our base metal production as byproduct credits against the cost of producing silver. These credits declined by $4.87 per payable ounce in Q3 relative to the comparable period of 2007. And as a consequence, our cash costs climbed to $6.61 per ounce in the third quarter. However, in spite of the adverse effects of declining metal prices, we still generated positive results in the third quarter. Our mine operating earnings were $15.5 million, net income of $6.4 million or $0.08 per share, adjusted net income for the quarter was $11.3 million or $0.14 per share. Cash flow from operations was $22.7 million. Our statement of operations for Q3 included a gain on commodity and foreign exchange contracts of $3.7 million, of which $3.3 million was realized. Making up this number was a gain of $5.4 million on our base metals and silver fixing books offset by a loss on our FX hedge book of $1.7 million. Loss on our FX book was a result of the strengthening year's dollar against the Peruvian sole and the Mexican peso. In addition to the loss in our FX book we also incurred an unrealized foreign exchange loss of $2.9 million in Q3, which was as a result of cash and other working capital balances held in currencies other than US dollars at quarter end.

  • Our income tax expense for the quarter was $6 million, which was an effective tax rate of 48%. That effective rate was well above our expectations, given the tax rates prevailing in the jurisdictions in which we generate taxable income. We had to reverse $1.4 million of tax loss carry forwards in Argentina from our future income tax estimate as this amount had been incurred and benefited in previous periods. Moving to the balance sheet, our working capital decreased by $47.1 million during the quarter, as we invested heavily in our two development projects, Manantial Espejo and San Vicente. We spent $33.6 million at Manantial Espejo, that's inclusive of $4.1 million of refundable vat, and $14.2 million at San Vincent during the quarter. In addition, we invested $12.3 million on capital projects at our existing operations. These capital expenditures were partially funded from cash flow from operations of $22.7 million, and the balance from our working capital.

  • We finished the quarter with a solid working capital position of $167.4 million at the current ratio of 3.3:1 and cash and short-term investments of $90.9 million. We have no debt and are fully funded to complete our construction projects where expenditures are declining rapidly. Most importantly, our strategy continue to generate positive cash flow interest operations at current prices and are well-positioned financially to weather these turbulent times. In addition to our own liquidity and capital resources, we closed a $70 million, four year revolving credit facility in early October with Scotia Bank and Standard Bank as joint lead arranger. The purpose of this facility is for general corporate purposes, including acquisitions. The facility has an interest margin ranging from 1.25% to 2% over LIBOR based on the Company's net debt to EBITDA ratio. This facility has been structured as an accordion facility and we could increase the facility up to $100 million by receiving additional commitments from other banks if we decide to do so. As of today, we have not drawn on the facility, nor do we have any current plans to do so. I would like to take the opportunity to commend both Scotia and Standard for delivering on their commitment to us in the face of unprecedented turmoil in the credit markets. With those comments, Geoff, I'll hand it back to you.

  • - President, CEO

  • Thanks, Rob. Now let me highlight for you some of the comprehensive measures we have taken in response to the current metal price environment. We have reduced our workforce company wide by over 500 employees and contractors. I have asked all our senior executives to take a 10% wage rollback. As Michael just described, we have deferred almost all of our greenfield exploration programs and significantly reduced our brownfield exploration. As Steve describes described, we are revising our mining plans to increase mine ore grades across all our operations. We cancelled our discretionary capital expenditures. We are reducing or eliminating the use of external consultants and contractors and where elimination is not an option are requesting that chargeout rates be reduced. We are reviewing all of our major supply and service contracts, again, requesting price adjustments.

  • In general, we are reviewing every dollar we spend to ensure we are getting immediate value in return. These measures and many additional measures that I have not described will reduce our costs, and they will do so without and I repeat without compromising our production objectives. Simply put, the things that are in our control that we can change are being changed and restructured.

  • I would like to share with you today a segment from a letter I sent out on Monday to all the employees in Pan America, in Vancouver, in Peru, in Argentina and Bolivia: We have managed our Company very conservatively, so we enter this difficult period in solid financial condition. We have the necessary resources to complete and start up our Manantial Espejo mine in Argentina and our San Vicente mine in Bolivia, and we have no bank loans to pay back. With the startup of these two operations and with the steps we are taking today, I am confident that our Company will not only survive this period, but will be again able to thrive and grow. My fellow employees, you have shown in the past that we can do the difficult things and be a better and stronger Company as a result. But we will need to work together as a team now that more than any time in the past four years, and with your full support and cooperation we will reduce our costs, we will increase our productivity, without compromising our commitment to safety. And as a team, we will reclaim our prosperity for the good of all our employees, our families, our communities and our shareholders.

  • Before opening the lines to take questions, I would like to make at least a few short comments on the silver market, the silver price, and the equity markets in general. There is no question that the silver price has been under severe downward pressure, as I mentioned earlier in the call, silver opened at $9.23 per ounce today. And as a consequence, the silver equities, Pan American included, have also been hit hard over the last three months. However, even with the reality of a 38% decline in the silver price since our last conference call, there are many reasons to be extremely optimistic about the future price. Ill advised government bailouts have driven worldwide government debts to epic proportions. Numbers have quickly gone from millions to billions, and now are in the trillions of dollars. Eventually, as the presses hum 24/7 to print money, I contend that the fundamental value of silver and gold will again be recognized, and those same bailouts will undermine the very value of the paper currencies and the economies those governments were trying to protect.

  • Investors in the silver and gold ETS seem to agree. Silver ETS has continued to grow and as of yesterday held more than 216 million-ounces. Unlike the hedge funds that are on a daily basis, liquidating their paper silver and driving prices down, the physical investment market remains very strong as prominent investors are accumulating physical silver and gold during these turbulent times. I personally -- we believe they will be handsomely rewarded for their foresight. In closing, I'd like to assure you that Pan American will continue to do what we do best. We will adapt our business to the current environment and we will thrive and grow. We have the team with the skills and the experience to do so. Thank you. And I would ask the Operator to now open the lines for questions.

  • Operator

  • Thank you, sir. Ladies and gentlemen, we will now begin our question-and-answer session. (OPERATOR INSTRUCTIONS) Our first question is from the line of [Ankash Igerwald] with JPMorgan. Please go ahead.

  • - Analyst

  • Good morning, Geoff, everybody. I have two questions. First, on Morococha, the grades have been declining there quarter-over-quarter now. Is this simply because of the mine planning that was done during high metal prices earlier this year or are there any other reasons? And then the second question is a more broader question in terms of that. In the current extreme market environment and given your relatively stronger balance sheet position, how do you see your role of developing into a possible consolidator in the industry?

  • - President, CEO

  • Okay, thanks, Ankash. I think I'll let Steve handle the first question and I'll take on your second one when he's done.

  • - COO

  • Yes. Regarding the Morococha grades, we've had to readjust our mining operation this year away from what we had planned due to a variety of reasons. One being ground conditions. We encountered some worse ground than we had anticipated in some of the mining areas and also in some areas we didn't quite see the grade that we had expected. And as a result, we've adjusted and redirected our mine to other areas, which did indeed bring us lower grade ores for the year. We do anticipate going back into these higher grade ores and also with a new addition of (inaudible) we're expecting some higher grades from that area as well. So our future does project a turnaround of those grades going forward.

  • - President, CEO

  • All right. Thanks, Steve. In terms of being a consolidator, Ankash, clearly there are a number of other companies that have been hurt fairly badly on their share price as well as their business plans have come under great question with lack of liquidity. And we're very aware of the companies in our sector who are in some difficult situations. And we're going to continue to look at those very carefully. We're not going to act irrationally or too quickly. I think it behooves us to again show some discipline, look for potentially the best fits with Pan American, the best opportunities to deliver value back to Pan American shareholders and we will be talking to some of those players over the coming months.

  • - Analyst

  • Okay. Thank you very much and good luck.

  • - President, CEO

  • Thank you, Ankash.

  • Operator

  • Thank you. Our next question is from the line of Edmund Tan with [Surfside Investors]. Please go ahead with your question, sir.

  • - Analyst

  • I have a number of questions. First question is apparently so important that I'd like to devote that -- I'll address that first. In "The Financial Times," Monday, October 20th, there was a full page article proclaiming a viewing revolution, 3-D cinema poised to hit the screen. A number of big players are investing money in what they call the silver screen where they are going to open up anywhere from 30,000 to 50,000 screens, have a number of 3-D films already online awaiting these screens and these screens with impregnated with silver in order to achieve the 3-D process. Katzenberg says that the 3-D cinema is going to be the revolution in film of the future. I would like the Company to address the possibility of the plethora of silver screens that are about -- that are online for construction to affect silver in general and then I'll go into my other two questions.

  • - President, CEO

  • Edmund, it's Geoff Burns. You have some information that, I'll be frank, that I am not aware of. I did not see that article, and in the new developments for silver technology, 3-D viewing screens have not being something that had been brought forward by the silver institute as a future use of silver. Having said that, your description sounds -- the potential sounds incredibly appealing and I certainly hope that the prognostication that you brought forth comes to pass.

  • - Analyst

  • I would refer you again to "The Financial Times" article, Monday, October 20th, full page article, on page number 18. So I would appreciate it very much if when I speak to you in the future you would have armed yourself with the possible impact on our Company of this new development, so that I'll appreciate your attending that. The second question I have is the possibility of the wave of nationalizations throughout South America as witnessed Bolivia, Venezuela. How will that possibly affect the ability of these countries to operate under force measure in order to impact the viability of the Company such as Pan American?

  • - President, CEO

  • I guess first of all, Edmund, I'm not aware of a wave of nationalizations. The most current news that I can recall is a description coming out of Venezuela of an attempt to take over the [Los Christinas] development project. As far as Peru and Bolivia go, there have been to date no nationalizations of any mining activities, so I'm today very comfortable that we're not exposed in any dramatic fashion to a sweeping wave of government intervention or government takeover. I think it is fair to say that the governments particularly in some of the poorer of the developing countries, like Bolivia, certainly they are hungry for cash to continue to run their programs, but in general, they haven't demonstrated to this point a great desire to take over businesses that they have proven to the past that they are ill equipped to run. So I have -- continue to hope that we do not see a sweeping spat of nationalization.

  • - Analyst

  • Vis-a-vis that, if we look at the Venezuelan model, the Venezuelans are calling in a Russian company to operate with cash and with personnel. In other words, we may be witnessing a world play where Russia is coming in on the originally what was ostensibly an American [hegemony] in South America. We see now that as a at tit for tat with Georgia and Ukraine and what we're doing over there that Russia is coming in on our doorstep and offering to run these companies with their own personnel, with their own money. Can you comment on that?

  • - President, CEO

  • Edmund, I'm going to try and keep my comments to things that directly affect Pan American and our future. Russia, Georgia and Venezuela have very little impact on our business plan at this point.

  • - Analyst

  • Okay. The third question is reference was made to the fact that paper -- that ETFs in silver are doing all right. Since Pan American is a paper holding of many of us, that immediately strikes a discordance. We don't have, or we're not into the gold and silver or into Pan American paper. Can you reflect on the connection between the buoyancy of the silver market, the ETF, vis-a-vis the stock price of Pan American Silver?

  • - President, CEO

  • Well, certainly the price of silver is directly reflected in our -- the price of our shares and as silver has declined, so has the value and the trading price of Pan American stock. The disconnect that I was referring to is that physical demand for silver remains incredibly bland. As I mentioned, the ETF has continued to grow which is a physical purchaser of silver. If you were today to try and order silver coins from the US mint, you would not be able to get them because the US Mint hasn't been printing them for a while because they ran out of silver. If you ordered coins from other small refiners, or excuse me, minters around the country, you would be put on a wait list that approaches three to six months. So it is surprising to me that there is a clear disconnect between the demand and the price as it trades and has been trading in New York. And it clearly in my view points to the trade of paper silver between -- in the futures markets between players who have no interest or no desire to ever see physical, and until that paper trade dwindles, and I believe it will, as hedge funds finally remove themselves from the commodity, I think there is real reason to be optimistic about future silver prices.

  • - Analyst

  • What is your time frame for such an occurrence, hypothetically?

  • - President, CEO

  • That is probably the most difficult to comment on, Edmund. It also relates to the -- what I believe is a false strengthening in the US dollar. The two are very highly related. The flight to cash has driven the US dollar to levels it hasn't seen for quite a number of years. That will unwind, in my opinion, as will the paper trade decline around the silver price.

  • - Analyst

  • I see -- I'm sorry.

  • - President, CEO

  • Edmund?

  • - Analyst

  • Yes?

  • - President, CEO

  • It's time for us to let some other questioners have their turn.

  • - Analyst

  • May I call you at some future time?

  • - President, CEO

  • Yes, you can. Please do so.

  • - Analyst

  • How do you spell your last name, please?

  • - President, CEO

  • Burns. B-U-R-N-S.

  • Operator

  • Thank you. Our next question is from the line of Daniel Earle with TD Newcrest. Please go ahead with your question, sir.

  • - Analyst

  • Hi, Geoff or Rob, if you can just answer for me, can you talk about the changes in FX rates and what sort of an impact you see from changing rates going forward?

  • - President, CEO

  • I'm going to -- there's two aspects to that question, Daniel. I'm going to let Rob talk about our FX book and I'm going to talk about the direct impact. We've seen the Mexican peso essentially devalue relative to the US dollar from about $10.50 to as low as $13.5 in recent times. I think it's in the $12.5 range today. Approximately 40% of our costs are paid in Mexican pesos for labor. So if you say we've had a 25% devaluation of the Mexican peso, I think some relatively simple math and you would expect our costs should decline by about 10%. Multiplying 40% times 25% and that should appear without us doing any change to our business plan. We've seen -- we're seeing similar changes in Peru, although the devaluation of the sole relative to the US dollar has been less marked. That is the impact I see on a go-forward basis on the cost side. As for -- we do have a hedge book of some degree for both soles and pesos. I'll let Rob comment on that.

  • - CFO

  • Sure. We've been essentially buying both those currencies ahead of time and that we do actually continue them, as Geoff described. As of the end of September we had about just a little over $70 million worth of Peruvian sole brought forward at rates somewhere in the lower $2.8 range and about close to $20 million worth of pesos brought forward at about a $10.60 range. Obviously from a mark-to-market perspective with the dramatic devaluation of those currencies at the end of the third quarter, that gave rise to the mark-to-market unrealized losses that we recorded in our books. In addition to that, we also do hold some cash balances in currencies other than US dollars and so accounting convention dictates that we need to fair value those holdings at each balance sheet debt. We are holding a fair amount of our excess cash in Canadian dollars and as the Canadian dollar has weakened against the US dollar that gave rise to an additional loss which we recorded in the third quarter.

  • - Analyst

  • Okay. Great. And can you talk about the same on the metal side, the hedge book?

  • - CFO

  • Sure. As of the end of September, we had -- our zinc book was down to about 7,500-tons of zinc sold forward at prices around $2,500. That represents about 20% of our production through the balance of 2009. And similarly, with lead, we've sold forward roughly about 20% of our production at prices between $1,900, $2,100. So obviously as those price -- as the price of zinc and lead decline, then the mark-to-market on those books improves.

  • - Analyst

  • Okay. Great. And then final question here. On the discretionary capital spending that you've cancelled, how much do you expect to save?

  • - President, CEO

  • Daniel, we're in the process as Steve mentioned of putting together our full 2009 and long-range plans and I'm hesitant to quantify the absolute magnitude of not only our employment changes, but our exploration changes and capital changes until we've gone through that process. And we're literally about 10 days away from finalizing those budgets. It will be significant. I mean, we have been spending at Huaron, our capital budgets were around $11 million for 2008. At Morococha, closer to $14 million. At La Colorada, about $10 million. So going forward, my expectation would be that we would see budgets of less than half of that amount in 2009.

  • - Analyst

  • Great. Thanks so much.

  • Operator

  • Thank you. Our next question is from the line of Steven Butler with Canaccord Adams. Please go ahead.

  • - Analyst

  • Geoff, you just indicated to Dan I think that you might not get too specific about putting the magnitude on the cost savings. Appreciate the efforts that you're making. But maybe I could ask a question about the labor in terms of what percentage is labor of your overall mine site costs for your several operations.

  • - President, CEO

  • On average, I mean, it varies a little bit, Steven, between underground and open pit. Our underground operations are narrow vein and by default much more highly labor intense. But a 40% number is a good average on a corporate-wide -- or a Company-wide basis to use on labor and we did just in essence cut our labor force by just about 10%.

  • - Analyst

  • 10%, it's 500.

  • - President, CEO

  • That's correct.

  • - Analyst

  • Plus the major savings on the head office. Just kidding.

  • - President, CEO

  • Huge.

  • - Analyst

  • A little levity is always required in these times. Geoff, the other question or maybe for --

  • - President, CEO

  • Crying.

  • - Analyst

  • Pick you up out of the ashes. But Rob, a question for you in terms of -- you mentioned the $2 million repricing of previously booked recognized [con] sales. How do we -- did you give us some perspective or maybe with respect to either what you ended up achieving as a realized price for your major metals in the fourth -- sorry, in the third quarter I should say. And/or asked another way what have you provisionally priced your receivables at at the quarter? We will I assume will also be subject to negative swings in revenues in the fourth quarter.

  • - CFO

  • That is correct. With silver and the base metals declining further in October and November, if things stay the same then we will be recorded negative sales adjustments of provisionally priced third quarter sales that are priced in the fourth quarter. I can give you those realized prices, Steven. For silver, we have reached $15.48. This is what the average realized price is in the third quarter.

  • - Analyst

  • Okay.

  • - CFO

  • Silver was $15.48. Zinc was $21.79. Lead was $19.41. Those were all well above the average because of the benefit of our hedge books. Copper was right around the average of $77, $74. And gold came in at [$681].

  • - President, CEO

  • However, our provisional pricing adjustments would have been based on the September 30th closing prices, not on the realized averages during the quarter.

  • - CFO

  • That's correct. From memory, it was right around $13 is where we were provisionally priced.

  • - Analyst

  • Sorry. So the prices you attained and realized including the benefits of hedging, Rob. Are these prices, therefore not necessarily the prices which you carry concentrate sales receivables into the fourth quarter, not necessarily; correct?

  • - CFO

  • That's correct. So the provisionally priced metal is marked to market at September 30th at the closing prices on September 30.

  • - Analyst

  • Okay.

  • - CFO

  • The prices I talked about are cash realized.

  • - Analyst

  • Great. So maybe could follow up with you later maybe to get a sense of metals content or volumes I think is provisionally priced. I guess I can simply pick up Bloomberg, September 30th pricing, just wouldn't mind knowing the volumes, that's all.

  • - CFO

  • Sure. Absolutely. Give you a call after.

  • - Analyst

  • Thanks very much.

  • Operator

  • Our next question is from the line of Haytham Hodaly, Salman Partners. Please go ahead, sir.

  • - Analyst

  • I'd like to also get those volumes that would be very helpful as well. Just two or three quick questions, just simple ones. Your exploration budget then for Q4, your expensed exploration, do you expect that to decrease from levels seen in Q3?

  • - EVP, Exploration & Mine Geology

  • This is Mike. Well, yes, sure, especially the greenfield part will obviously decrease. We are keeping going on with some projects, which are immediately important for our 2009 production. The same obviously for the brownfield project. Everything is concentrating on 2009 and early 2010 production. But the spending will decrease, yes.

  • - Analyst

  • So $1.5 million in between, maybe $1 million in Q4 sort of thing?

  • - President, CEO

  • Haytham, our overall exploration budget and a portion of that exploration is allocated within our operating costs and only a portion appears as a greenfield is what you see as a separate line item on the income statement. Our annual budget for exploration including those two items is about $13.5 million for 2008. Divided roughly evenly between the four quarters, which would be in the neighborhood of about $3 million a bit per quarter. I think you could safely assume that we'll save half of that number over the balance of the year.

  • - Analyst

  • Okay. Fair enough. Next question, just with regards to CapEx outlook for Q4. You gave us your budge budgets for the year for Huaron, Morococha, La Colorada, etc. And I do appreciate that. What do you see as your final number for Q4 in terms of budget expenditures right now?

  • - EVP, Exploration & Mine Geology

  • For all, counting Manantial Espejo, San Vicente?

  • - Analyst

  • Yes.

  • - EVP, Exploration & Mine Geology

  • Through the whole thing. I don't have that number handing in front of me at the moment, but perhaps if you could give Rob a call after the meeting, I'm sure he could give that to you.

  • - Analyst

  • I'll do that. And the only other thing I just would ask, your G&A now that you made these cuts, are you going to see a hit because of severance, all kinds of stuff or is that committed to the mine level or the corporate level?

  • - EVP, Exploration & Mine Geology

  • Yes, the -- we will be incurring some indemnity expenses for sure in the fourth quarter as we deal with the layoffs. My estimate on the magnitude of that between all our operations is probably in the $1.5 million range. How we account for that has -- we haven't yet put our thought process to that, whether we'll segregate it as a separate line item, whether we'll put it in G&A or whether we'll leave it at the operating level.

  • - Analyst

  • Okay. That's great. Thank you.

  • - EVP, Exploration & Mine Geology

  • You're welcome.

  • Operator

  • Thank you. Our next question Fridays the line of Craig West with GMP Securities. Please go ahead with your question.

  • - Analyst

  • Thanks. Just a couple of quick questions. Maybe -- I don't mean to beat this to death, but just on the costs there and increase in guidance for full year 2008, trying to make sure I have the right feel for where that increase in cost is coming from. You made one comment about increasing energy costs I guess at Huaron, $0.33, is that an ongoing impact going forward that we expect to see? Why no impact at Quiruvilca with that?

  • - COO

  • Yes. This is Steve. I can answer that one. At Huaron, we have a different power supply contract that's a newer contract than we have at either Morococha or Quiruvilca. That contract is subject to marginal power rates in the country. When the power supply capabilities fall below what the hydroelectric dams can deliver and the gas turbines can deliver, they start to fire up diesel generators, and you generally have to pay depending on the contract the marginal power rate. We were subjected and we all under our contract to 100% of that power under that rate. What we're seeing is this month that marginal rate is dropping back. They're shutting down diesel generators, they're firing back up the hydroelectric dams. We expect dramatic decreases in that $0.33 cost during the fourth quarter.

  • - Analyst

  • So I guess if that's a chunk of Q3 then and reducing impact going forward, the bulk of the increase in guidance is due to just the decline in base metal pricing then?

  • - COO

  • That's correct.

  • - Analyst

  • Okay. The other question I guess is more specific to Peru in general. You made some comment about some slowdowns at Morococha due to labor interruptions. There was some news that came out at random through the last couple months about disruptions and some protesting that was taking place. Any impacts at all there? Any other sort of I guess whisperings of labor unrest that you at times see across Peru and any impact there on your operations?

  • - President, CEO

  • Yes, Craig, Peru in my opinion is going to go through a fairly difficult period going forward. 65% of their GDP is mine or mining related. And I was just down there a couple weeks ago and unfortunately the country had not seemed -- had not in my view didn't look prepared for what was about to happen with respect to how the mining industry was going to respond to lower prices. We've seen just this week in addition to our own announced layoffs at our operations, the [run] mining company has laid off people from the smelter. Vulcan Zinc Company has laid off people at [zeratapasco] and pulled back on their exploration. [Chasapalta] another mining Company located on the central highway as well as [Glencore] have all kind of simultaneously announced measures and steps to respond to current pricing environment. And I think it is going to send a bit of a shock wave through labor markets in Peru because I truly don't believe that the government had properly or -- I shouldn't say properly, had started to prepare their populace for the likely results. I think it has the potential to be disruptive.

  • There's just no question that when a wave of layoffs hit a population that there is the potential for labor disruption as well as strike action. To this point, we haven't had a strike. Things are at least as of today responding and operating normally at Huaron, at Morococha, at Quiruvilca. But there are in the background meetings going on with the national unions, etc., and there will be in my expectations some response. The severity and duration, that's a bit of a who knows. But I think we've done the best we can to manage the expectations of our employees and I hope if there are disruptions they will be short-lived. There is a risk there at the moment.

  • - Analyst

  • That's helpful. Maybe kind of continuing along the lines of the smelting contracts that you've got, any major changes that you've seen there quarter-to-quarter? Is there anything in your contracts that a dramatic change in metal prices can trigger some renegotiation? Any way -- when do you have contracts coming due for sort of renegotiation or resigning with the smelters?

  • - EVP, Exploration & Mine Geology

  • Most of our major contracts are in place through the end of 2009 and are actually good contracts relative to the current market. The current markets are changing dramatically as you would expect, as the availability of material becomes less and less certain. So we're moving from projected surpluses into potential deficits in a hurry and so we are monitoring the market, but at this point in time we don't have a lot of material available to go to smelters with for the time being, anyway.

  • - Analyst

  • Okay. Can you give us sort of a number that you hit in the quarter then for treatment charges per ton and refining there or --

  • - EVP, Exploration & Mine Geology

  • That's a pretty detailed question. Varies across contracts by --

  • - Analyst

  • Rule of thumb or a general number that you have on average for the quarter or numbers again?

  • - EVP, Exploration & Mine Geology

  • Be happy to walk it through with you in more detail after the call. I think that would be better.

  • - Analyst

  • One final question then. Manantial Espejo, you mentioned the potential for a little bit of cost creep there on the CapEx side. Can you just remind us again how much has been spent to date, how much needs to be spent and how much has been committed?

  • - President, CEO

  • Yes, give me one second. As of today, we spent $210 million our estimate to complete is $225 million.

  • - Analyst

  • Okay.

  • - President, CEO

  • So we have approximately $15 million more to go and the majority of that or a big chunk of that is really operating costs, prereceipt of our first expected revenue, while Steve mentioned that we were anticipating pouring our first [doray] in December it is very unlikely that we'll see any payment for that metal produced until January, so we still have a number of weeks of basically full operating costs to cover from -- until we get a sustainable revenue stream.

  • - Analyst

  • Do you get the vat back all at once or is that an over --

  • - President, CEO

  • It will take -- it comes back as we export our [doray] product. So it's likely going to come back in -- our estimate at the moment is over about a year's time.

  • - Analyst

  • That's it from me. Thanks for your time.

  • - President, CEO

  • Thanks, Craig.

  • Operator

  • Thank you. Our next question from the line of David Christie with Scotia Capital. Please go ahead with your question, sir.

  • - Analyst

  • Good morning, guys. Just quickly. Wondering if you could give me the price assumptions you're using for your guidance for the year for Q4? Like your metal price assumptions to get your cost guidance?

  • - President, CEO

  • Oh, that was -- I mean, the $7 an ounce for Q4 is based on current metal prices.

  • - Analyst

  • So using $720 gold and $9.25 silver?

  • - President, CEO

  • Yes. The key aspect on the cost side is obviously the base metal prices and that's $1,150 per ton zinc and $1,300 per ton lead is what we've used.

  • - Analyst

  • Okay. Perfect. And is there any chance of getting the payable or sold metal you had in the quarter as opposed to the contained?

  • - CFO

  • I can certainly give you that number. I don't have it in front of me now. We have that number and I can certainly provide it to you.

  • - Analyst

  • That would be great as well as the concentrate what you were talking about earlier. You have no TCRC re-negotiations at 2009, but you're at terms still at today's market?

  • - CFO

  • That's right. That's across most of our products.

  • - Analyst

  • Good. That's it for me. All of my other questions have been answered.

  • Operator

  • Thank you. (OPERATOR INSTRUCTIONS) Our next question is from the line of [Kurt Beler], a Private Investor. Please go ahead, sir.

  • - Private Investor

  • Yes. Has there been any consideration given to share buyback with the hopes of reissuance two or three years down the road?

  • - President, CEO

  • Hi, Kurt. At this point in time our primary focus is going to be to get Manantial up and running, look at our plans under the new metal price environment and ensure that we have adequate and sufficient liquidity on a go-forward basis. Our second goal with that liquidity and with the facility that we recently put in place is to look for strategic opportunities to grow the business. I believe that second objective is by far the best way we can create additional value for Pan Am shareholders in the long term. There are and I believe continue to be some very, very valuable opportunities for us to participate in, if we maintain our financial health, and at this stage we have not considered investing our liquidity in a share repurchase.

  • - Private Investor

  • Okay. Thank you.

  • Operator

  • Alright. Thank you. (OPERATOR INSTRUCTIONS) Mr. Burns, there are no further questions at this time. Please continue with any closing comment.

  • - President, CEO

  • Well, thanks -- thank you, ladies and gentlemen, for joining us this morning. I look forward to reporting to you again early in January, when we can talk even more definitively about some of the actions we've taken today. And I would just like to repeat, I am confident that the measures we've taken and the team we have in place will allow us to not only to survive these turbulent times, but also to thrive and continue to grow. Thank you.

  • Operator

  • Alright. Thank you, ladies and gentlemen, this does conclude the Pan American Silver third quarter 2008 earnings conference call. This conference will be available for replay after 11:30 eastern time today through November 20th at midnight eastern standard time. You may access the replay system any time by dialing 1-800-406-7325 or 303-590-3030. Enter the access code 3931521. We thank you very much for your participation, and you may now disconnect. Have a very pleasant rest of your day.