Pan American Silver Corp (PAAS) 2010 Q2 法說會逐字稿

Hello, this is the Chorus Call conference operator. Welcome to Pan American Silver second quarter conference call and webcast. As a reminder all participants are in listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask question.

(Operator Instructions).

At this time I would like to turn the call over to Mrs. Kettina Cordero, Coordinator of Investor Relations. Please go ahead, Mrs. Cordero.

Thank you, operator, and good morning, ladies and gentlemen. Joining me here today are our President and CEO, Geoff Burns; our Chief Operating Officer, Steve Busby; our Executive Vice President of Geology and Exploration, Michael Steinmann; our Chief Financial Officer, Rob Doyle.

I would like to start this conference by reminding you that this call cannot be reproduced or retransmitted without our consent and by pointing out that certain of the statements and information in this call will constitute forward-looking statements and forward-looking information within the meaning of applicable securities laws. All statements, other than statements of historical fact, are forward-looking statements. These statements reflect the Company's current views with respect to future events and they are necessarily based upon a number of assumptions and estimates that while considered reasonable by the Company are inherently subject to significant business, economic, competitive, political and social uncertainties and contingencies.

Many known and unknown factors could cause actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements and the Company has made assumptions and estimates based on or related to many of these factors. We encourage investors to refer to the cautionary language included in our most recent news release, dated August 11, 2010, as well as those factors identified under the caption, Risk Related To Pan American's Business in the Company's most recent Form 40-F, and annual information form. Investors are cautioned against attributing undue certainty or reliance on forward-looking statements and the Company does not intend or assume any obligation to update these forward-looking statements or information, other than as required by law. With that, I will turn the call to Geoff Burns, President and CEO.

Thank you, Kettina. Good morning, or depending on where you are, good afternoon, ladies and gentlemen, and welcome to Pan American Silver's 2010 second quarter earnings conference call. As has become our normal call format, I will start the call with some very brief general comments about our second quarter results. Then Steve and Mike will provide a more detailed discussion of our activities at our mines, our development projects and with our exploration programs. Rob will then discuss our financial results and how we have continued to enhance our cash balances as we prepare for the development of Navidad.

Before jumping into our results, I would like to mention that I am happy to tell you that our Board of Directors approved our second semi-annual cash dividend in the amount of $0.025 per share. This dividend will be paid on Tuesday, September 7th to holders of record of common shares as of the close of business on Monday, August 23rd. While I know it's a modest dividend, it is a pleasure to know your Company has matured to the point where we can comfortably distribute a portion of our profits back to you directly in cash.

Now to our results. By all measures, Pan American delivered another solid quarter. We produced 6.9 million-ounces of silver in the second quarter, 18% higher than the second quarter of 2009, and a new quarterly Company record. Much of this record was compliments of our Alamo Dorado mine, which had a terrific quarter, alone producing 2.4 million ounces of silver, our San Vicente, La Colorada, Manantial Espejo and Morococha mines also had good quarters, producing pretty much as expected. The one dull spot in our portfolio was our Huaron mine, which continued to struggle, with lower than forecast production and higher cash costs. I'm sure Steve will provide more commentary on the situation at Huaron, but I know we have just about turned the corner at this long-life operation and I'm fully expecting a significant improvement in its performance over the balance of this year.

Our second quarter gold production was a very respectable 21,000 ounces. A decline from the record levels we achieved during the first quarter of the year, but very much as planned. This was in line with our expectations. However, our consolidated gold production is still on track to make 95,000 ounces for the full year. Our zinc, lead and copper production was also basically right on plan, as lower than expected zinc production from Huaron was fully offset by increased zinc production from San Vincente.

Year-to-date we produced 12.4 million-ounces of silver, and 49,000 ounces of gold, which puts us right on target to achieve our annual forecast of 23.4 million ounces of silver for 2010. Our cash costs declined by 6% from a year ago to $5.64 per ounce, net of byproduct credits. While down from a year ago, this is slightly higher than I was expecting, given the current price environment for our byproduct credits and largely reflects some of the inflation we have been seeing on our per ton operating costs as well as the impact of the difficult quarter at Huaron. I would hope to see our cash cost for the balance of the year comfortably beat our annual forecast of $5.90 per ounce, given today's price environment and the expected improvements that I will see at Huaron.

Our operating results in the quarter translated nicely into strong financial performance. Revenues increased 32% to $147.3 million. Mine operating earnings increased 117% to $51.1 million. Adjusted net income increased to $21.1 million or $0.20 per share. Cash flow from our operating activities, before changes in non-cash working capital items, increased 16% to $42.9 million or $0.40 a share. Our working capital position increased to $322 million at the end of the quarter, of which $238 million was in cash and cash equivalents. Lastly, we continued to steadily progress on the development of our Navidad silver project in Argentina and the La Preciosa joint venture project in Mexico.

In summary, record production, improved financial results and excellent progress on our development projects, a pretty darn good quarter, I would hazard to say. With that, I would like to turn the call of to Steve, who will present a detailed account of our operations and project development activities.

Thank you, Geoff and hello to everyone. It's my pleasure to provide you a report on our Q2 2010 mine operating performance and project development advances. We continued to focus on sustaining solid production from our seven operating mines, while advancing the necessary studies on our growth projects. To begin with, I would like to make a few comments relative to our operations in Peru, where the Quiruvilca and Morococha mines continue to perform as planned, and we continue efforts to bring the Huaron mine back up to its full operating potential.

You may recall that we had suspended the mechanized mining stopes in January this year, and had faced delays in getting our new 180 level developments advance, both due to encountering more challenging ground conditions than we had expected. I am pleased to report today that we have successfully completed the extensive redesigns that satisfactorily address the poor ground conditions which has allowed us to restart the more productive mechanized method in several stopes that we're on during July. We expect to begin seeing steady performance improvements at Huaron over the remainder of the year.

During Q2, Huaron produced 11% more ounces of silver at 11% higher cash operating cost as compared to Q1. Over the balance of the year, we are now expecting steady improvements and are forecasting 1.7 million ounces from Huaron at a cash cost of less than $9 an ounce, 30% lower than what we had seen during the first six months of this year.

Meanwhile, the Quiruvilca and Morococha operations continued to deliver solid performances and we do not foresee any change to this for the remainder of 2010. It was particularly satisfying to report in June that we had reached agreement with our neighbor at Morococha, Chinalco which permits coexistence of their Toromocha mine development with our sustained and uninterrupted Morococha operations. Under the terms of this agreement, we are advancing studies that will allow us, with some financial support from Chinalco, to construct a modern and efficient milling circuit in the next five years, while moving the balance of our facilities out of the way for the planned Toromocha development.

In addition to the mill construction studies, we're also progressing civil works on the relocations of certain offices, camps and ancillary facilities aimed at being completed by the end of 2011. All of these relocations will provide certainty to sustaining the operating results we are currently enjoying at Morococha for a long time to come as well as opening the door for considering significant mine productivity and efficiency enhancements. Overall, our Peruvian operations produced 1.7 million ounces in Q2, which was essentially the same production as in Q1, at a cash cost of $9.29 per ounce. We are forecasting a 10% improvement in our overall Peruvian operations production Q3 driven by the performance improvements in place at Huaron while continuing solid performances at Quiruvilca and Morococha.

In Argentina, our Manantial Espejo mine produced 976,000 ounces of silver, at a cash cost of $3.07 per ounce with over 14,000-ounces of gold produced during Q2. The gold production fell from the incredible 21,800 ounces produced in Q1, primarily due to mine sequencing where we had taken advantage of the opportunities to access higher gold grades in Q1 ahead of our original annual schedule. On a year-to-date basis, we remain confident that we'll produce around about the same levels of silver and nearly the same levels of gold for the rest of this year and expect that trend to continue.

In Bolivia, our San Vincente mine again performed above expectations in Q2, producing over 840,000 ounces of silver for the Company, at a cash cost of $7.88 per ounce, rapidly becoming a cornerstone in our portfolio of solid, long life operating mines. We continued to see steady state production from San Vincente and expect this to remain the same for the remainder of the year. We also believe there is upside potential to enhanced mill throughputs for which we are making some modest investments in additional mining equipment so that we can take advantage of this. In addition, we are seeing some excellent exploration upsides that Michael Steinmann will be discussing later in this call.

In Mexico, we took advantage of some favorably dry conditions that allowed us to bring forward high grade silver ore from the bottom of our Phase I pit at Alamo Dorado about a year ahead of schedule, producing a breathtaking 2.4 million ounces of silver, at a cash cost of $2.36 per ounce during the second quarter. This level of production shattered our own expectations as well as the previous quarterly production record for the mine of 1.7 million ounces. La Colorada also had a steady state operating quarter, producing 932,000 ounces of silver at a cash cost of $9.04 per ounce. With the rainy seasons now under way in Mexico, we are expecting overall silver production from our two Mexican mines to average around 1.9 million ounces of silver at a quarterly cash cost of approximately $8 per ounce for each of the remaining two quarters of this year.

Our project development teams are enthusiastically advancing studies at the La Preciosa joint venture project in Mexico, and the world class Navidad project in Argentina, while at the same time advancing the Morococha plant and relocated infrastructure projects I previously described. At La Preciosa, the infill drill program is essentially complete, and we are now stepping out to test some exploration targets that could potentially expand the large silver resource. In addition, we have completed the field work on the geotechnical studies and are analyzing various mine plan alternatives suited for the deposit geometries and geomechanical stabilities. These studies, along with some others, are fundamental in advancing the preliminary economic assessment of this exciting project.

Work at our Navidad project in Argentina continues to advance extremely well, despite encountering some severely cold winter weather conditions. We have gained valuable understandings in the mineral modeling and the metallurgical characterizations of the various deposits that make up this large silver prospect. In particular, we have found significant opportunities in separating and treating three basic metallurgical ore types, which include ores that generate high value silver flotation concentrate that grade between 20 to as high at 80 kilograms per ton of silver. We also have ores that generate typical lead flotation concentrates with moderate to high silver content and we have high pyritic ores that can generate typical lead flotation concentrates as well.

All of these ore types appear to have a zoning of oxidation from the surface, which will yield somewhat reduced flotation performances when processing near surface ores. We are taking the time necessary to fully understand the distribution of various ore types and the effects of oxidation zoning to adequately build our mine plans and economic models. This program should culminate in our first scoping study in the project sometime in Q4 of this year.

In addition, we are making excellent progress in advancing the preparation of the environmental impact assessment, and expect to have this assessment completed by year end. We are extremely optimistic about this project and feel the understandings we are gaining will substantially strengthen our ability to deliver enhanced economics when we complete the scoping study. We have spent $17.4 million on the Navidad project through June of this year, and currently have nearly 200 people working on site. The majority of which are local hires. We forecast similar spending levels for the remainder of the year as we complete the preliminary economic assessment on the project.

In summary, we remain on track to achieve our annual consolidated silver production guidance of 23.4 million-ounces and comfortably beat our full year forecasted cash cost of $5.90 per ounce while continuing to advance our exciting development projects. I'll now turn the call over to Michael Steinmann for the exploration update.

Thanks, Steve. Good morning, ladies and gentlemen. As you all know, exploration drilling is the main tool to increase resources in our operations and development project. In order to be successful and make new discoveries, the drilling had to return positive results and I will talk about those later. But the drill activity by itself is an important measure for our exploration efforts and will hopefully lead to substantial success in the coming quarters.

In Q2 we drilled a Company record of over 83,000 meters, a 37% increase from Q1. This includes over 33,000 meters at the Navidad project, mostly executed for infill, metallurgical and condemnation drilling. Drilling at our operations and projects added up to 144,500 meters for the first six months of 2010, which is nearly 80% of our 183,000 meter program for the year. This increase relative to our initial program is mostly due to an important increase of about 50,000 meters at the Navidad project. The additional drilling at Navidad includes infill drilling which was not anticipated in the initial budget as well as metallurgical, geotechnical and condemnation drilling to advance the project. The drill programs have also been expanded at La Colorada and San Vincente as they returned exceptional results in Q1 and Q2.

Looking now at our operations. I would like to start once again with La Colorada. You may recall, that we enjoyed exceptional results from the east extension of the NC2 sulphide vein in the last 12 months, resulting in a large reserve increase at the end of 2009. Although we know that the vein continues, we could only drill a few holes in this zone during Q2, as we were waiting for new underground drill chambers. This drill excess has been developed in the last few months and drilling of the NC2 sulphide resumed.

Meanwhile, we drilled on the vertical and horizontal extension of other veins like Amarillo, [Reta Dos] and NC3, and again enjoyed exceptional results. Extensions of these minor veins are certainly smaller than the NC2 vein but nonetheless, the results are impressive. Width of up to 3.7 meters, returned multi kilogram of silver grades in many of the drill holes. Like in the deeper part of the NC2 vein, these structures are reaching the sulphide zone and carry substantial lead and zinc grades as well. Combined, base metal grades vary between 3% to 14%.

Drilling at Manantial Espejo slowed down in Q2, due to the southern hemisphere winter. Exploration of the main Maria vein and parallel hanging and footwall structures continued and returned in many holes high silver and gold grades. But our main target for the rest of the year is obviously the newly discovered northwest extension of the Maria vein. As I mentioned during the last quarter call, we drilled 12 holes to date and discovered over 700 meter extensions of the most important structure at Manantial Espejo.

Drill spacing stands currently at 100 meters and a lot of exploration and infill drilling is required to turn this discovery into reserves. In order to take full advantage of the spring and summer drill season, we will transfer one rig from Navidad to Manantial Espejo at the end of Q3. I will hopefully be able to share with you some new and exciting results towards the end of the year which will translate into a resource and reserve increase at Manantial Espejo. Drilling at all our other operations is advancing as planned and I am convinced that it will this year once again more than replace the reserves demand during 2010.

I would like to spend some time talking about the development projects at La Preciosa and Navidad. Drilling advanced well at La Preciosa during Q2. We finalized over 19,300 meters on the main Martha vein, and on the new Nancy and Orita targets. Year-to-date, we drilled 34,700 meters, up to 50,000 meter annual program and should be able to finalize the drilling in September or October. This should allow us to complete the PA during the fourth quarter of 2010.

Infill drilling of the Martha and the other known structures returned the expected results. Only a few assets are currently available from the Nancy and Orita veins, but we are waiting for the results in the coming weeks. At this time, drilling continues to the north of the Martha vein in order to expand the current resource base at La Preciosa.

Drilling at Navidad is advancing with incredible speed due to easy access and good ground conditions for drilling. As I mentioned at the beginning, we completed over 33,000 meters in Q2 at Navidad, as a combination of infill, metallurgical, geotechnical and condemnation drilling. Although there are many targets available, and we identified already 11 additional zones for drilling, exploration of new RS is currently not our priority as we are defining the current large resource. I would like to pass you now on to Rob for the financial review.

Thanks, Mike. Good day, ladies and gentlemen. Our financial results in Q2 2010 reflected the continuing trend of strengthening operating results with mine operating earnings of $51.1 million, more than double the $23.5 million for the comparable quarter of 2009 and 39% higher than Q1 2010 mine operating earnings.

The solid operating results were driven by strong quarterly sales of $147.3 million, which benefited from record production of silver and significantly higher realized metal prices compared to a year ago. As strong as our sales were in the quarter, due to the timing of shipments, we were unable to sell about 700,000 ounces of silver produced in the quarter. And as we entered the third quarter with relatively large silver inventories, which are now available for sale. The exceptional operating performance at Alamo Dorado that Steve described combined with continuation of high margin tonnage from San Vincente resulted in a further expansion of our margin per ton in Q2.

Our average margin per ton of all mills has gone from about $40 in Q2 2009 to $60 in the first quarter of this year, and was $74 in Q2 2010. Our net income for the period was $18.3 million, or $0.17 per share. However, our statement of operations for Q2 did contain a few items that are worth further discussion. Firstly, the Company took the decision to provide for the full amount of our receivable from Doe Run Peru and raise the doubtful debt provision by a further $3.3 million in the quarter. Secondly, we paid $3.7 million in withholding taxes from the large one time payment of intercompany interest from Mexico to Canada in the quarter as part of our internal funding activities.

Thirdly, our earnings in Q2 did benefit from foreign exchange gains of $1.6 million, on revaluation of our monetary assets and liabilities to current exchange rates and also from a gain of $1.3 million on our base metal hedge book as both lead and zinc prices drifted lower during the quarter. Excluding these items, our adjusted income was $21.1 million which equates to $0.20 per share. 16 of the past 17 quarters have been profitable for Pan American.

As background to the Doe Run Peru receivable provision, the La Oroya smelter began experiencing severe financial difficulties during the first quarter of 2009 when it was not able to draw on its credit facilities, causing the complete closure of the smelter in June 2009. In recognition of these circumstances, the Company established a doubtful debt provision in Q2 2009 of $4.4 million, and in addition recorded a charge of $0.6 million for reclassifying the remaining receivable balance from current assets into long-term assets.

With the additional provision recognized in Q2 2010, we have now fully provided for the $8.7 million that Doe Run Peru still owes us. We haven't been able to sell our complex concentrates to other buyers since Doe Run Peru defaulted, and the current complex concentrate market terms are quite comparable to the terms we had with Doe Run Peru. However, sales of the Company's stockpile material remain halted as Doe Run Peru was the only buyer of this material.

$3.7 million withholding tax expense was the main factor that pushed our effective tax rate in Q2 2010 to an unfortunate record high of 49%, much higher than our long-term expected effective rate in the lower 30% range. The other main item that pushed up the effective tax rate in Q2 2010 was our conservative assumption that the exploration and project development expenses at Navidad and La Preciosa of $8.8 million will not be tax effective.

Moving to the balance sheet, our working capital increased by $19.2 million compared to the first quarter as a combined result of increasing our cash and other current asset balances by $35.4 million, offset by an increase in current liabilities of $16.2 million. We banked another $22.3 million in the quarter, and receivable balances increased by $9.7 million as a result of timing of shipments from Peru and Bolivia. As I mentioned earlier, our silver inventory and [spay] inventory balances also increased to the tune of about $7 million. The increase in current liabilities was primarily a result of the withholding tax payable in Mexico and some seasonal increases in supplies.

We finished the quarter with a solid working capital position of $322 million, with a current ratio approaching five to one and cash and short-term investments of $237.7 million, and no debt. That leaves us financially well positioned to fund our growth projects. From a cash flow perspective, Q2 cash flow from operations before working capital movement was $43.4 million, that is about $0.41 per share, a jump of $6 million from Q1 2010. We invested $17.4 million in property, plant and equipment during the quarter including $7.6 million that was capitalized on studies required to support the preliminary economic assessment at Navidad. Repatriations back to Canada amounted to $42.7 million during the quarter. With those comments, I'll hand it back over to Geoff.

Thank you, Rob. For fear of being repetitive, I would again like to emphasize our current strategy. We are going to focus on optimizing our current operations to maximize our cash flow generating capacity and profitability. Obviously, Huaron will be a primary recipient of our attention over the balance of 2010. We're going to continue to aggressively explore around our current assets to extend their respective mine lives.

As Michael and his exploration team has shown, there's no question that the best exploration potential we see is within the shadow of our own head frames, and we are going to continue to keep our project development teams exceedingly busy as we push forward on the development work at both the La Preciosa and Navidad projects. These two projects, particularly Navidad, are key to Pan American's future growth. As Steve mentioned and we disclosed in our Earnings Release, these are critical for our future.

The one thing we haven't discussed and I'm sure most of you are keen to hear about is the status of the mining at Chubut, where our Navidad project is located. If you had followed my commentary since we announced our acquisition of Aquiline last October, you'll know that I was hoping to see an amendment to the mining law to allow open pit mining by the middle of this year. Obviously that hasn't happened, which is somewhat disappointing. However, I will share with you that I had an opportunity to sit down at meet with the governor of Chubut, Mario das Neves, several weeks ago in late June while he was in New York marketing a provincial bond issue. While I'm certainly not at liberty to reveal the details of that discussion, I will say that I know the government is completely aware of our progress and schedules for the development of Navidad, and I remain absolutely confident that the needed amendment to the current mining law that will allow us to proceed will be introduced before the end of this year.

As we mentioned in yesterday's release, we are extremely focused on our efforts to communicate to the local communities, the general public in the province and the media in Chubut, the positive social and economic benefits that the environmentally responsible development of Navidad can bring. As Steve has already mentioned, in the prefeasibility and feasibility stages alone, we are already employing almost 200 people, predominantly from the local communities, and are planning to spend in total almost $40 million on these activities. I would end this commentary by saying that the government in Chubut and the governor are very aware of the current and potential long-term economic benefits of Navidad's development.

Before opening the call to questions, I would like to make a very brief comment on silver and gold prices. In my opinion, nothing has fundamentally changed over the past year and a half that would change the long-term investment appeal of silver and gold. We are reminded almost daily of the frailty of governments and their abilities to manage their own currencies and their debt levels. There will be more currency deflation in a race to see who can devalue the quickest to bolster their economies. I continue to contend that in a world where currencies are going to be less and less able to maintain their relative value, that silver and gold are going to look very appealing as long-term investments to hold. With that, I would now ask the operator to open the lines for questions.

Thank you, Mr. Burns. We will now begin the question-and-answer session.

(Operator Instructions).

The first question is from Haytham Hodaly of Salman Partners. Please go ahead.

Good morning, everybody.

Morning, Haytham.

Just a couple of quick questions. Huaron, obviously you had a little bit of difficulty, lower grades and recoveries. What are you seeing for the back half of the year?

Yes, Haytham. This is Steve. We're projecting overall we are seeing an increase in grade already in July and the throughput has definitely come in July with the active long hole stopes we brought on. Overall for the rest of the year we're forecasting 1.7 million ounces out of Huaron at a cash cost of just under $9 an ounce.

Perfect. And then I'm going to ask a similar question on Alamo Dorado given the strong results we're seeing there.

Alamo Dorado with the rainy season, we backed out of the lower part of Phase I pit. We are enjoying some pretty good grades out of Phase II. It's not all going to fall apart on us. It's still going to be looking pretty good. We're projecting for the second half, somewhere close to 2 million-ounces of silver and the cash cost probably in the neighborhood of I'd say something less than $6 an ounce.

Okay. Then Manantial Espejo, we saw some higher costs experienced there. I think it said with grades coming down and some of the fixed cost structure and some lower gold grades. What do you see happening there?

On a cost per ton at Manantial Espejo we're performing just as planned. We feel pretty good about it. What we saw on the cost per ounce basis was really driven by our gold byproduct credit, and we didn't produce nearly as much gold in the second quarter as we did in the first quarter. We expect to see kind of the average of those two quarters, if you will, for the second half of the year. Now, the distribution changes according to how we mine because we have both underground mines and open pit mines, and the underground mines is where we derive a lot of the high grade. So as we develop those mines we're kind of in and out of that high grade. So, the best I can say is the second half will look similar to the first half on an average basis.

Okay, that's great. Another question, I think you're forecasting for 7,300 tons of copper contribution for the year. Can you just give us the big numbers on that like what's the breakdown on that? I think there's three or four assets that contribute.

Sure, Huaron's about the biggest. It's close to 1,500 tons. And then Quiruvilca -- well, Morococha would be second, at over 1,100 tons, 1,000 tons to 1,100, Quiruvilca's about 800 tons, San Vincente's about 300 tons. We make a little bit at Alamo Dorado as a byproduct as well.

Okay. Perfect. And question I guess with regards to tax rate, effective tax rate, it was mentioned that it was high in the first half of the year. What are you seeing -- I guess what's a reasonable number to use for the second half for the full year all together at this point?

Rob Doyle here. The tax rates we hope in -- well, I can run quickly through them. Argentina's 35%, Peru's 35.6%, Bolivia's effectively 37.5% and Mexico's 30%. So most of our income is coming out of Mexico, but if we continue to assume that our exploration expenses on the projects will not be tax effective in a rate this year in the 35% range is probably what I would guess at.

Sorry, is that for the full year you're saying or to the second half?

That would be for the second half.

Second half. Okay. Then I guess similar question just with regards to the deferred component. I think we saw 14% was deferred in the first half. I think historically it's been up in the high 20s. Not sure what you're thinking for the second half.

I think it would likely a repeat of the first half.

Okay. Perfect. That's all I have for now. Thank you.

(Operator Instructions).

Next question comes from Chris Lichtenheldt of UBS. Please go ahead.

Hi, guys.

Hi, Chris.

First, just you mentioned a little bit about the cost, you're seeing some inflation pressure. Can you discuss maybe a little bit what in percentage terms your mining and processing costs have done relative to maybe last year or the beginning of this year?

Sure, Chris. This is Steve. We're seeing both in Peru and Mexico about a 20% increase on a unit cost per ton between last year's Q2 and this year's Q2. Not far off of what we budgeted, maybe a 4% to 5% higher than what we had planned. What we're seeing in Manantial and San Vincente, because they were both startup quarters last year, we're actually seeing lower cost per ton this year than last year and both of those are right in line with what we expect.

Okay, but there's still I assume some inflation going on in absolute terms.

We have inflation, but you can't compare it to last year because it was the startup quarter so the costs were abnormally high. So I think Peru and Mexico are good indicators of what's happening in the mining industry, about 20%. I think we're seeing that amongst our competitors. And I think in Argentina we know that inflation rates are running about 20% annually as well.

Chris, that would also include the relative change in the valuation of the currencies, right, both the Peruvian sol as well as the Mexican peso have gained roughly speaking about 8% to 9% in value against the US dollars and we're rolling that in with the inflation numbers.

Right. Okay. So you're talking US dollar terms in all these?

You bet.

The 20%? Okay. That's helpful. Thank you very much. Secondly, development and exploration costs over the next couple quarters, can you give us some sense of what those might look like?

On a development side, on Navidad and La Preciosa, very similar, in the second half as we saw in the first half.

Okay, and they made up the vast majority of the reported $8.8 million of costs I think; is that right?

That's correct.

Okay. Great, thanks. And then --

Sorry, Chris. I was going to say one other thing that maybe hasn't come through as clear as it could have, is we are sitting on from this quarter about 700,000-ounces extra of silver inventory that did not come through our current quarter's results. I know it's -- we disclosed that very clearly in our MD&A but it just struck me right now that there's quite a bit of -- that was Alamo -- a lot of that Alamo Dorado production and with the low cost there is a fair piece of profit tied up on our balance sheet that would have come through had Alamo's production been a little more central weighted in the quarter versus having such an outstanding June.

I see. So most of those ounces in inventory are from Alamo? So higher margin relative to the rest of the --

That's correct.

And, you'd expect those to come through maybe third quarter or over the second half equally?

No, should be -- well, it will be third quarter, it's normally about sort of about a six week inventory turn.

Okay. That's good info. Thanks a lot. Lastly, just going to ask on the -- you mentioned a couple times the cash balance and the balance sheet in general is in pretty good shape. Is that intended solely for La Preciosa and Navidad or are you still looking potentially at other opportunities? Any comment there would be helpful.

Chris, we're always, as you know, we're always looking for good value opportunities to grow the business and certainly having the cash levels and the working capital levels we have without any debt puts us in a pretty advantageous circumstance should something come to our attention that is worthwhile. In the interim, while we continue to look for those opportunities, and rest assured as I've said before, we know our sector very well and we know what the opportunities might be. In the interim, yes, we are going to marshall those cash balances, and it would be a very happy position to be in when we make our construction decision at Navidad and La Preciosa to have the internal cash to fund those developments. So, that is not lost on me and I hope it's not lost on our shareholders either.

Yes, definitely doesn't hurt to have the cash. But would you also consider -- would you ever consider producing assets or are you still primarily focused on development.

In terms of our search, if I could give you the ideal asset that we would be looking for today, it would be an in production asset that for whatever reason was potentially challenged on valuation, be it where there's an upside on reserves that perhaps hasn't been identified or some operating difficulties that perhaps we may be able to bring some expertise in to improve. I think that would be -- fit most nicely with where we are right now. Frankly, with La Preciosa and Navidad as well as the project Steve described, in terms of relocating some of our facilities at Morococha, we have a pretty full plate on the development side. So today, a producing asset would be a nicer fit, in my opinion.

Right. Okay. That's great. Thanks a lot.

You're welcome.

Next question comes from John Bridges of JPMorgan. Please go ahead.

Morning, everybody. Just a -- you've given us a little bit more guidance on what you've actually sold. Have you got a hard number of the payable ounces to attribute to your revenue number?

John, we certainly do. I just don't have it in front of me, I'm sorry. So I can certainly provide that to you after the call.

Yes, it's just a bit difficult otherwise because there's a disconnect between your production data and the financials.

Through the inventory, you're correct, John.

Okay. Best of luck in Argentina.

Okay. Thanks, John.

Your next question comes from Andrew Kaip of BMO Capital Markets. Please go ahead, sir.

Hi, good morning.

Hi, Andrew.

Hi. Look, just a couple of questions. One, regarding the relocation of infrastructure at Morococha, can you give us a sense of what your capital spend for the remainder of this year and for 2011 would be?

Sure Andrew, this is Steve. We're looking at -- we spent about $2.1 million on the project first half of this year. We're now hot and heavy in the civil construction and we're buying buildings and things for the second half. We're looking at somewhere around $12 million to be spent. Now keep in mind, we're being partially funded there by proceeds from Chinalco from the agreement. So far, we received $6 million from Chinalco and we should see another $6 million before we get all these facilities relocated. All right.

So the $12 million, is that spread over the next 12 months?

It's probably going to be heavy weighted in Q4. This is for this year, for the remaining six months, it will be heavier weighted in Q4 than Q3 and it will continue on into spread out for the rest of next year, probably in similar levels.

Okay. Thanks. And then the second question I have is just the timing on both the engineering studies for La Preciosa and Navidad. Sounds like we'll see scoping studies on both those projects sometime during the fourth quarter. Specifically with La Preciosa, I'm wondering when should we expect engineering to move towards the feasibility stage?

Well, I think -- hi, Andrew. I think the first step is clearly to complete our PA. We have just recently completed -- very recently completed our geotechnical work and geomechanical work, which now has to be rolled into a scoping study level mine plan and mine design. I think that's going to us at least a couple of months to complete that exercise which will give us internally a preliminary economic. At the same time, you're aware that we're now as Michael said hitting very hard a couple of exploration targets that we would really like to have some definition on before we push through the PEA. So timing wise, I see it is going to take us into the fourth quarter to complete all that work and have it in a format that we can put out to the public comfortably with our joint venture partner and I don't see us moving to the engineering phase until after that for a feasibility study.

So really, we should be looking at 2011 as being that period where you'll move towards engineering?

Absolutely, yes.

All right. That's it. Thank you.

Thanks, Andrew.

(Operator Instructions).

We have a follow-up question from Haytham Hodaly of Salman Partners. Please go ahead.

Thanks, operator. Just some housekeeping matters. G&A guidance for the rest of the year without stock-based compensation?

It should be a repeat of the first half. So Q2 was a little higher but if you blend the two together, the first two quarters together, that's what we're expecting for the second half.

I'm not sure if you said this. I may have missed it. Your CapEx breakdown for the full year -- or I guess what is your full CapEx budget for the full year?

The CapEx budget was provided in the MD&A. It was 49 for the year, but then we've -- that was before we increased the spending at Navidad. In Q1, MD&A we did provide an update on that CapEx forecast. I believe it was up to about 65 for the year.

Okay. Perfect. Thank you.

Just one point of clarification. The number I gave you on G&A is inclusive of stock based comp. I know you asked exclusive. I'm sorry, you just have to back out the stock based comp out of the --

No worries, I've done that. It's all good. Thank you.

Next question comes from John Tumazos with John Tumazos Independent Research. Please go ahead.

Your diversification among almost a half a dozen Latin American countries is very wonderful. There's so many companies springing up, almost 100 for example in the Sierra Madre district of Mexico and a lot of opportunity for consolidation in Mexico or Peru or Argentina. Do you have any guidelines as to your maximum asset or resource exposure to any one country or philosophies about country diversification? Do you just pick the mines based on the mines and the geology?

Interesting question, John. I guess my -- in a basic concept, we're very comfortable in Peru. We're very comfortable in Mexico. Even with some of the recent issues relative to security, that seem to be growing a little bit. And I would not be at all opposed to looking at assets in either of those countries and not worried about the percentage that it may weigh us more towards Peru or more towards Mexico.

Bolivia is a bit of a different animal. I think we're in a pretty good location in Bolivia relative to some of I'll call them political hot spots. I'd have to be very selective in looking at assets in Bolivia before making an additional investment there.

Argentina I'm getting more and more comfortable with. I guess I have to be in some respects relative to the magnitude of the assets we now have in Argentina. But they are rapidly -- it's a bit provincially specific, but they are rapidly becoming a more mining oriented country. It doesn't hurt to have Barrick announce basically a mega project development in Argentina in the multi-billion dollar range.

So I guess as a general rule, okay with Mexico, Peru. Comfortable with Argentina, less so in Bolivia. Outside of the Americas I start to get, perhaps a little more nervous, when looking at Russia and China, I just don't think Pan American, at this point in time, would be very comfortable in moving into either of those jurisdictions.

Thank you.

Thanks, John.

There are no more questions at this time. I will turn the call back over to Mr. Burns for closing comments.

Thank you, operator. Ladies and gentlemen, thank you for joining us today and I very much look forward to our next update post our third quarter results. Likely in mid-November. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.