Pan American Silver Corp (PAAS) 2010 Q3 法說會逐字稿

Hello, this is the chorus call conference operator. Welcome to Pan American Silver Corporation's Third Quarter, 2010, results conference call and webcast. (Operator Instructions) At this time I would like to turn the conference over to Mrs. [Catina Cordero], Coordinator, Investor Relations. Please go ahead, Mrs. Cordero.

Thank you, operator and good morning, ladies and gentlemen. Today our president and CEO, Geoff Burns is joining us from Toronto. I am joined here in Vancouver, by our chief operating officer, Steve Busby, our Executive Vice President of Geology and Exploration, Michael Steinman and our Chief Financial Officer, Rob Doyle. I would like to start this conference by reminding you this call cannot be reproduced or transmitted without our concerns 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 the applicable security laws.

All statements other than statements of historical facts are forward-looking statements. These statements reflect the Company's current views of perspective 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 business, economic, competitive, political, and social uncertainties and contingencies. Many known and unknown factors could cause actual results, performance or achievements could 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. Encourage investors to refer to the cautionary language in our most recent release dated November 8, 2010 as well as those factors identified under the caption risk related to Pan American's business. In the Company's most recent form 40F and (inaudible) information form. Investors are cautioned against a 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, Catina. Good morning, ladies and gentlemen and welcome to Pan American Silver's 2010 third quarter earnings release and conference call. As has become the normal call format, I will start our call with some very brief general comments about our third quarter results then Steve and Michael will provide a more detailed discussion of our activities in our mines, our development projects and with their 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 directly into our results, its with great pleasure that I would like to mention that the board of directors approved a doubling of our annual dividend. Starting with the recently completed third quarter, we will move to a quarterly cash dividend distribution of $0.025 per share from what was previously semiannual distributions. Our third dividend of 2010 and first quarterly dividend will be paid on or about December 1st, of this year to holders of record of common shares as of the close of business on November 19th. It's indeed gratifying to be in a position to comfortably distribute an increasing portion of the growing prosperity back to you directly in cash.

Now to our results. Pan American delivered a solid third quarter. We produced 6.2 million ounces of silver in the third quarter at a cash cost of $6.08 per ounce. Our third quarter goal production was a very respectable 21,300 ounces in line with our expectations. Our zinc, lead and copper production was slightly below plan largely due to lower than forecast throughput at the Huaron mine. This indirectly hurt our cash costs which were a little higher than we thought they would be due to the lower than expected by-product credits.

Year to date, to the end of September, we produced 18.6 million ounces of silver at a cash cost of $5.41 per ounce which puts us right on track to comfortably meet and in all likelihood surpass our annual silver forecast of 23.4 million ounces at a cash cost of $5.90 per ounce. Our consistent operating results translated nicely into outstanding financial performance during the third quarter. Trying not to steal too much of Rob's thunder, as I know he is all set to review with you in detail our third quarter financial results in a few minutes, I would like to mention a couple of key financial metrics. First, silver prices averaged over $18.60 per ounce during the third quarter which allowed our cash margins to expand to almost $12.70. The highest levels we have experienced since the first quarter of 2008. With silver prices now bouncing off $28 per ounce, our margins have literally exploded in the last several weeks.

Second, our cash flow from operations before changes in noncash working capital items was $50.7 million or $0.47 per share. And lastly, we had net free cash flow and banked $51 million to bring our working capital position at the end of September to over $360 million. I think it's safe to say we delivered some very fine financial results in the third quarter. I will now turn this call over to Steve who will be presenting a detailed account of our operations and our project development activities. Steve?

Thank you, Geoff Good morning, everyone. It's my pleasure to provide you a report on our Q3, 2010, mine operating results and project advances. We remain on target to meet or exceed our 2010 consolidated operating performance forecast and project development advances. I would like to thank all of our dedicated and hard working employees and contractors for overcoming their day to day challenges and executing their duties so well. These people are the backbone of our organization and continue to demonstrate their superior skills with sustaining and growing our business successfully.

As I had predicted last quarter, our Huaron mine improved has shown significant improvements in production and costs following the restart of our mechanized mining operations and increasing production from the recently opened and higher grade 180 level in the mine. During Q3 Huaron produced 823,000 ounces of silver, 12% greater than Q2 at cash cost of $11.71 per ounce, 14% less than Q2. I expect to see continued improvement at Huaron in Q4 as we get this operation back on track to its normal long-term lower cost and stable production profile. Quiruvilca mine produced 288,000 ounces at a cash cost of $9.40 during the third quarter.

Favorable metal prices have allowed us to continue profitable operations at Quiruvilca while we accelerate certain reclamation projects in the areas apart from the current mining activities. Our Morococha mine contributed 693,000 ounces at a cash cost of $4.20 during Q3 right in line with our forecasts. We spent $3.1 million on silver works preparing for the relocation of our primary surface offices, shops, labs and camps in 2011 according to the agreement we signed with our neighbor Chinalco. Furthermore, we have recently completed the legal work required to obtain the rights to mine the extension of the Silver Ridge Point of Ventura vein that was included in our agreement with Chinalco.

We are currently completing mine plans to develop and mine plus 600,000 tons of 351 gram per tens silver grade ore that we know already exists at this extension of the Point of Ventura vein. In addition, we are preparing an exploration program in this new area. Our Manantial Espejo mine in Argentina produced one million ounces of silver at a cash cost of $3.65 during Q3. In line with our production forecast, albeit at 16% higher cost as we continued to feel the effects of the country's sustaining double digit US dollar inflation rates and our lower gold grades compared to Q3, 2009, both of which had raised our cash costs. We are evaluating a number of interesting cost saving initiatives that will be rolled into our 2011 mine plan and we will report that in the early part of the new year.

Further north in the province of [Chebut], also in Argentina, we are busy advancing our Navidad project development activities. We invested nearly $12 million in Navidad during Q3, where nearly 180 people are working on site. We have been extremely busy completing the in field drill program, metallurgical testing, tailing facilities jude technical studies, environmental impact analysis and preparing the preliminary economic assessment which we will issue before the year end. I would be remiss in my comments about our operations in Argentina if I did not mention that we are saddened by the sudden and unexpected loss of the former president of the country, Mr. Nestor Kirschner an avid supporter of mining and we wish offer our deepest condolences to Madam President Christina Kirschner and their family.

Our San Vincente mine in Bolivia produced 676,000 ounces of silver at a cash cost of $8.99 per ounce during Q3 of 2010, which was approximately 10% below our production and 26% above cash cost forecast due to mine development and stoep sequencing, as well as the anticipated tendency for the mine grades to trend toward the average reserve grade of the deposit as the high grade stockpiles we had built for mill start up are now largely depleted. Over all our operating costs have been exceedingly stable in the low inflationary environment that exists in Bolivia today and the operation is settling into a steady state mode reasonably well.

We are very excited about our continued exploration successes and feel San Vincente has become yet another consistent, profitable and long term asset for the Company. Our Alamo Dorado mine in Mexico, has yet another outstanding quarter in Q3 producing 1.8 million ounces of silver at a cash cost of $2.98 per ounce well above the forecasted performance thanks to continued benefits achieved from altering the mine sequence during an extended dry weather condition experienced earlier in the year.

We actually had stock piled some of the high grade ores from the extended dry season and we have a little bit of this material left to process during the fourth quarter. At the La Colorada we produced right on plan at 912,000 ounces of silver at a cash cost of $8.67 per ounce. We have additional underground mine equipment arriving during Q4 which will allow us to kick up mining rates going in to early 2011. This higher mining rate will be included in our 2011 production forecast which we will release early in the new year.

It was particularly gratifying for me to have reported in early October that we have been named recipients of the prestigious [Cosco de Plata] safety awards for both the Alamo Dorado and La Colorada mine in Mexico. This is reflection of our employee's continued commitment to the highest standards and their primary dedication to safety. I would, again, like to take this opportunity to congratulate each of our Mexican employees and contractors on this tremendous achievement. We have also advanced our preliminary economic assessment at the La Preciosa project during Q3 and in $2.7 million on infill and exploration drilling, metallurgical testing geo technical studies, environmental baseline studies and advancing a preliminary economic assessment which we aim to complete by year end. Our thinking is that the mine plan for this project will consider both open pit and underground mining methods as one of the last steps in completing the PA is the definition and identification of the critical ground support systems we will need to execute in the underground mine.

To summarize, our silver production was in line with our consolidated forecast achieving 6.2 million ounces at an average cost of $6.08 per ounce and our projects advanced according to plan as we spend a total of $17.5 million during Q3. We are solidly on track to meet or exceed our annual consolidated performance targets of producing the 23.4 million ounces at a cost of $5.90 per ounce while continuing to advance our exciting development projects and completing preliminary economic assessments for both the Navidad project in Argentina and the La Preciosa project in Mexico. With that, I will now turn the call over to Michael Steinman for the exploration update.

Thank you, Steve. Good morning, everybody. Our exploration activities were impressive during Q3 and for the first nine months of the year. In Q3 alone we completed over 83,600 meters of diamond drilling which included 33,400 meters of Navidad and nearly 20,500 meters of La Preciosa. Looking at the period of January to September of this year, we drilled a Company total of nearly 228,600 meters, which includes over 84,000 meters of in field, metallurgical drilling at Navidad and nearly 55,200 meters of in fill and exploration drilling at La Preciosa. This is a Company record and due to the substantial increase programs at La Preciosa and Navidad far ahead of the 183,000 meters initially planned for the entire year.

From January to September, our current operations completed a total of 83,900 meters of ground field exploration and reserve and resource replacement drilling. The program was 74% complete at the end of the quarter and right on track to complete our 2010 plan for 113,000 meters of drilling. I hope that you can appreciate the large drill programs like these return far too many individual interesting results to be discussed in detail during this call. But I would like to mention some of the most exciting discoveries we made during the last quarter.

Within the past several quarters, our La Colorada mine enjoyed the most exploration success. We discovered lateral and vertical extensions to all the major structures, either Sulphide or in a few places as oxide ore.. Sulphide of NC 2 and NC 3 vein extension returned the highest grades with an average well above 1,000 grams per tons of silver together with high lead and zinc grades. Many drill holes returned samples of 2,500 up to 4,000 grams per ton. Expansions of the [Deritados] and [Condelora] oxides are not far behind with average grades in the 70 to 800-gram per ton (inaudible) range. (inaudible) in somewhat lower grades in Australia and [Reconpenseavein] oxide.

Over all I expect again to see substantial resource increase at La Colorada when we calculate our research at the end of this year. (Inaudible) returned very exiting explore raise results. The first stage of our drilling efforts were focused on immediate reserve editions, both (inaudible) operations and the results will be reflected in the year end reserve division. I expect more than 100% resource replacement at Manantial Espejo adding at least one more year of life to one of our most profitable mines. Drilling continues to the northwest extension of the main Maria vein where we have identified some potential open pit material along 470-meter long vein extension.

One deeper drill hole intersected about 200-meters below surface, a split of the Maria vein to 1,300 grams per ton silver, and 2.7 gram per ton gold over a width of nearly four meters. The fact that it discovered potential open pit and under ground mine (inaudible) underlies the important potential of this recent discovery. Besides the immediate ground fill exploration for resources and reserve addition, we started a more regional exploration program on our large, over 25,500 land package around Manantial Espejo. There are literally hundreds of vein chiles on the property and our current program is focused on target identification for next year's drill program.

Ground fill exploration at Huaron, operations are advancing as planned and I am confident that new discoveries will again, more than replace what we have mined during 2010. As is our standard practice, the new reserve estimations will be done as of 31st of , December, 2010, and published in February of next year. Both our development projects are advancing very well. La Preciosa finished the third quarter nearly 20,500 meters of diamond drilling for a total of 55,200 meters since January. We drilled about 10% more than planned finishing most in fill and exploration drilling for this year. The results will all be integrated in a PA which should be completed and released toward the end of this year.

Navidad had an incredible busy third quarter with total of over 55,200 meters of in field, metallurgical and combination drilling. This is a great achievement and an important step toward completing our P.A. before the end of 2010. In fill drilling was completed over large parts of deposit geological as well as structural interpretations are being finalized. I'm very much looking forward to exploring areas surrounding the primary deposit next year, based on our new and more detailed understanding of the Navidad style (inaudible). I would like to pass it on to Rob for the financial review.

Good morning, ladies and gentlemen. I will keep my comments relatively brief this quarter and rather let the numbers speak for themselves. With the improving price environment for the metals that we produced combined with the solid operating performance you have come to expect from Pan American, our Q3 financial results were in a word stellar. We reported record sales of $161.3 million which was a 36% increase over the record sales from a year ago. Mine operating earnings were record $60.6 million. 75% higher than mine operating earnings from a year ago and 18% higher than they were last quarter.

Net income was $28.8 million which equates to $0.27 per share. 66% increase as compared to the third quarter of 2009. Cash flow generated from operations before working capital movement $50.7 million or $0.47 per share which was a 17% jump from one year ago and Q2, 2010. The strong cash flow from operations allowed us to bank $50.7 million in cash and short-term investments during the quarter. In addition to the $2.7 million we paid to shareholders as a dividend. As strong as our sales were in the quarter, we were not able to sell 4,000 ounces of gold produced in the quarter, and that's into the fourth quarter with the relatively large metal inventories of about two million ounces of silver and 15,000 ounces of gold. A happy situation given our prices of precious metals have increased since the end of the third quarter.

Relative to Q3, 2009 sales increased by $42.7 million. 89% of that increase was due to higher realized prices with the balance due to creases in quantities of silver and zinc sold. Price adjustments from sales booked in prior periods, only amounted to about 0.6 million in Q3, 2010. The increase in sales was partially offset by higher cost of sales which increased by 25% with depreciation staying relatively similar. The net result was that mine operating earnings jumped by 75% to $60.6 million for a gross margin of 38%. Our effective tax rate in Q3, 2010 was 37% which is somewhat higher than our long-term expected effective rate. The main reason for that was our conservative assumption that the exploration and project development expenses at Navidad and La Preciosa of $9.8 million will not be tax effective.

Moving to the balance sheet. Our working capital increased by $38 million during the quarter as combined results of increasing our cash and short-term investments by $50.7 million and our inventory balances by $5.9 million offset by an increase in current liabilities of $15.2 million. We finished the quarter with working capital of $360 million and cash and short-term investments of $288 million and no debt.

Besides our excellent financial performance that was driven by consistent operating results and higher metal prices, I am very pleased to report that after a longer than anticipated delay, we have finally started to receive recoveries in Argentina. During the third quarter we received $3.3 million in recoveries. Subsequent to the end of the quarter have been able to collect an additional $5.9 million. With that, I'll hand it back to you, Geoff for closing comments.

Thanks, Rob. I would again like to emphasize the current strategy. We are going to focus on optimizing our current operations to maximize the cash flow, generate capacity and profitability. We will continue to aggressively explore around our current assets to extend the mine lives. As Mike and his exploration team have continually demonstrated, there is no question that the best exploration potential and the best value additions are to be found where we are already mining.

And we are going to continue to keep the project development teams busy as we push forward on the development work at both La Preciosa and Navidad. These two projects, particularly Navidad are without question key to Pan American's future growth. The one thing we haven't discussed and I'm sure you are most keen to hear about is the status of the mining law Chubut where the Navidad project is located. We have focused a great deal of effort over the last several months on sharing our activities and plans with the local communities around Navidad.

Our transparent style appears to be working and we are clearly gaining local support given the recent favorable declaration issued by the mayor of the central plateau region reaffirming that group's intention to positively support the development of Navidad and in general decide on the development of their natural resources in order to improve the life in their communities. We are confident that we can garner significant support for the Navidad project and necessary mining law reform by openly disclosing and discussing with the local communities and the provincial government the results of the preliminary economic assessment and the environmental responsible development plan we are preparing.

The Navidad project can become a welcome catalyst for reversing the steady population decline experienced the past few decades in Chubut central plateau bringing significant prosperity to the people of that region. I remain absolutely confident that the needed amendment to the current mining law that will allow us to proceed with Navidad will be forthcoming. However, given the unfortunate and unexpected passing of the former president and the head of the [Pariness] party, Mr. Nestor Kirschner and the unavoidable introduction of a degree of political volatility and the significant countrywide debate that surrounded the passing of the Glacier law at the national level, I now believe the most likely timing of the introduction of the law will be after the provincial elections which take place at the end of March of next year.

This is still consistent with the planned completion of our feasibility study and should put us in a good position to make a construction decision in the spring of 2011. Before opening the call to question, I would like to make a very brief comment on silver and gold prices. Last quarter, I said that in my opinion nothing had fundamentally changed over the past year and a half that would change the long-term investment appeal of silver and gold. I indicated that I believe there would be more governmental intervention in the financial markets that would lead directly to currency deflation. I must confess that even I did not anticipate the QE2 program and the profound effect it had on the prices of hard commodities and precious metals.

I continue to contend that in a world where currencies are going to become less and less able to maintain their relative value, prone to the vagrancy of political pressure, that silver and gold, even today at what seems like lofty prices are going to look extremely appealing as long-term investments. In an environment like this, precious metal companies like ours here at Pan American provide a compelling value proposition. With that, I will now ask the operator to open the lines for questions.

Thank you, Mr. Burns. (Operator Instructions) First question from Steven Butler of Canaccord Genuity

Good morning, Geoff and guys congratulations on the results. Navidad 55,000 meters in the quarter alluded to infield net and condemnation drilling, how much of that in fill drilling, Michael, is related to inferred conversion or is it simply the M&I infilling for reserve purposes, thanks.

It's -- most of it is M&I infill drilling. There is some in the surroundings very close to deposits that added the inferred to the M& I. I think it's too early for me to talk about details in numbers but most of it is M&I infill.

Sure. As you give thoughts to the silver price, I can't remember. I have to look up the scoping study done before the previous owner, Aquiline, but what is the thought, guys, on silver prices for minable resource or reserve purposed as you go toward year end and implications it may have for the previously scoped mine resource at Navidad?

Why don't I make a comment on the price, then perhaps I'll let Michael comment on the effective price on the size of the resource and the amount of material that ultimately might end up in our mine plant for the PEA. Last year, Steve, I believe we calculated reserves -- our reserves internally at Pan American, at $13 silver price. That clearly appears to be a far too conservative assumption given what we are seeing going on in the silver market today.

We probably look more to analyst consensus, long-term pricing when looking we're looking at very long-term development projects. I think the last time we looked at that pricing deck, the average price came out to about $16, which again seems quite low relative to what we are seeing today. I suspect that when we get right into the detail that we will probably at least for the PEA, which is a number of weeks out, maintain that consensus pricing number at about $16.

Obviously we will try to sensitize at least the financial metrics to something that more closely approaches what we are looking at today. I would like to see, while I'm still incredibly bullish on the price, I would certainly like to see the silver price settle-- not settle so much but at least maintain its current position for a number of months before we go through a process of rerunning the entire resource estimate at an even higher price. Michael, maybe you can add something to that?

Yes, Geoff, no problem. Of course with the high prices now, higher prices in the future, that will have a positive impact to our future reserves or at the moment still resources at Navidad. If you look at the (inaudible) portion of the total resource, it's not that large.

At the moment we have a large part (inaudible) indicated already at $16. But there is a lot of positive (inaudible) results in the surroundings that we are picking up and will follow-up in the next years which are lower grade but much higher silver price. It will be interesting exploration targets for the future.

Thanks, guys. For the record, my long term silver price is $17.25 respecting higher peak silver in the near term. Thanks.

(Operator Instructions) There are no more questions at this time. I will turn the conference back over to Mr. Burns.

Thank you, operator. Ladies and gentlemen, thank you very much for joining us here this morning for our third quarter earnings release conference call.

I look very much forward to continuing to see buoyant silver prices although I confess a little bit that even I have been surprised by the rapidity with which silver has moved over $28. And, I hope you can join us in February next year when we bring you our fourth quarter results and forecast for 2011. Thank you.

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