Pan American Silver Corp (PAAS) 2011 Q2 法說會逐字稿

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  • Operator

  • Hello, this is the conference operator. Welcome to the Pan American Silver Corporation's second quarter 2011 results conference call and webcast.

  • As a reminder, all participants are in a listen only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions.

  • (Operator Instructions)

  • At this time I would like to turn the conference over to Ms. Kettina Cordero, Coordinator, Investor Relations. Please go ahead.

  • - Coordinator, IR

  • Thank you, operator. And good morning ladies and gentlemen.

  • Joining me here today are 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, and our Vice President of Product Development, George Greer.

  • I would like to start today's call by reminding our listeners that this call cannot be re-produced or re-translated without our consent. And by indicating 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 law. All 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 were 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 manufacturers. We encourage investors to refer to the cautionary language included in the most recent news release dated of August 11, 2011. And as well as those factors identified under the captions which related to Pan America's business in the Companies form 40-F and other information from.

  • Investors are cautioned against contributing undue certainty or reliance on forward-looking statements. And the company does not intend or assume any obligation to update these statements or information, other than that required by law.

  • I will now turn the call over to Geoff Burns, President and CEO.

  • - President and CEO

  • Thank you, Kettina. Good morning, ladies and gentlemen. And welcome to Pan American Silver 2011 second quarter earnings conference call.

  • In addition to discussing the result of our most recently completed quarter, we are also going to use this opportunity to talk about the positive results of the preliminary economic assessment for the La Preciosa project that we jointly released earlier this morning with our [Oracle] Silver. Overall, we have some pretty interesting news to talk about today, so let's get started.

  • As it has become our standard format, I will first provide some general remarks about our second quarter results, before passing the call to Steve and Michael, who will provide more insight into our quarterly year-to-date operating performance, our development projects, and our Greenfield and Brownfield expiration programs. We will continue with Rob, who will provide some additional color to our record-breaking financial results. And finally, George Greer our Vice President of Project Development, has joined us for the call today to provide some additional detail on the PEA for the La Preciosa silver development project.

  • Before diving into the quarter, I am pleased to be able to confirm that yesterday our Board of Directors approved the distribution of our third cash dividend of this year, in the amount of $0.025 per share Canadian -- US, pardon me. The payment will be made effective on or about Tuesday, September 6, 2011 to holders of record of common shares, as of the close of business on Monday, August 22. Pan America continues to generate record cash flows on the back of robust silver and gold prices. And it is a real pleasure to be able to return some of this cash directly to our shareholders by way of a dividend. As important, is the fact that a current price level, the Company is comfortably able to do so, without jeopardizing our ability to fund the capital requirements we see coming at us for the development of our major growth projects in that Navidad and Argentina, and La Preciosa in Mexico. There is no doubt that over the next several years, this project will provide Pan American with a growth profile second to none.

  • Now, let's quickly look at some of our second quarter accomplishments. During the second quarter, we produced 5.6 million ounces of silver, at a cash cost of $9.19 per ounce, net of by-product credits. Although our silver production was right in line with our expectations, our cash costs were higher than we predicted. As you will hear shortly, and in more detail from Steve, the increase in cash cost was largely due to the increase of silver price. A number of these costs, royalties, production bonuses, [comeable] participations in San Vicente's, cash flows, are directly scaled to the silver price. Simply put, when the silver price increases, these cost increase as well.

  • Having said this, the margin expansion on the increases of her price is much, much -- greater than the impact on our costs. So yes, our costs were up, but our margins per ounces of silver were up far more.

  • Higher silver and gold prices have a hugely positive effect on our quarterly financial results. We delivered new records for revenue, operating earnings, operating cash flow, and net earnings. A clean sweep. Revenue surged to $232 million. MOD operating earnings jumped to $119 million, after adjusting for the mark-to-market a valuation of our outstanding warrants, our to adjusted earnings attributed shareholders for a Company record, $76.1 million, or $0.71 per share. And, had we been able to sell all the gold and silver we produced, we would have generated another $7 million in earnings, and another $0.07 per share.

  • Perhaps most important, our cash flow from operations reached a record $119.4 million, or $1.11 per share for the quarter. And allowed us to bank $64 million in the last three months alone. Simply put, the stable and diversified base of production we have worked so hard to build over the last five years, is delivering outstanding financial results of the back of higher precious metals -- prices. A pretty happy situation. And now, we are working diligently and aggressively to be able to deliver on the next leg of our growth, secure in the knowledge that we have the financial horsepower to deliver.

  • Now, over to Steve, who will run us through our operations. Steve.

  • - COO

  • Thank you Geoff. And good morning ladies and gentlemen.

  • Pan American Silver Corp was certainly benefiting from these -- record high precious metals prices, given our solid performing operations and incredibly exciting development projects. During Q2, our projects advanced very well and our operating teams, once again, managed some pluses and minuses, to essentially achieve our consolidated production target of 5.6 million ounces of silver.

  • Our operating costs in Bolvia and Argentina, include significant government royalty and terriff payments that are directly proportional to the silver price. To a lesser extent, we have faced cost increases for third-party copper concentrate treatments, employment costs as the mining-related job market becomes increasingly competitive, and certain raw materials, particularly diesel fuel in Argentina. These factors are contributed to escalating our quarterly cash cost to $9.19 per ounce, or about 23% above our target. Our Manantial Espejo mine in Argentina produced 960,000 ounces of silver, at a cash cost of $6.87 per ounce, compared to 976,000 ounces of silver, at a cash cost of $3.07 an ounce, the year before. The silver grade in the second quarter was about 15% below, and the gold grade was about 15% above our resource model projections, which are the types of variances that we have become accustomed to at Manantial since the start-up in 2009.

  • Based on our experiences so far, we are confident that these types of quarterly variations, eventually even out, as our overall resource model continues to be a good global indicator of the ore tons and grades at Manantial Espejo. Our record high silver price realization in Q2, up $38.10 per ounce, adversely impacted our cash cost, since the export terriff and royalties we paid move proportionately with the silver price. However, as Geoff indicated, we clearly benefit much more from the greater margins of these higher prices, despite having to share some of that increase with the government.

  • In addition, our cash costs were impacted by higher diesel fuel prices, which have increased from $0.75 per liter a year ago, to over $1 per liter currently. Employment costs have risen sharply, and we have incurred additional logistical costs, during Q2, to circumvent the travel disruptions caused by the Chilean Puyehue volcano eruption.

  • We expect to see a 20% to 25% increase in silver production with similar gold production and similar cash cost during the second half of 2011 at Manantia Espejo, compared to what we achieved in the first half. Assuming reasonably steady state, silver and gold prices.

  • Our largest challenges during Q2, were once again at our Peruvian operations. We made the decision in Q2 to temporarily stop mining our high grade areas at Morococha in the Yakima and [Morisalar] zones, that have been experiencing erratic grades in order to conduct additional reserve definition work, and enable optimization of the mine design. We are confident that these decisions will result in overall enhanced performance, once the mineralization in these areas are better understood, and we can bring these zones back into production late this year and into 2012.

  • As a result, Morococha' purchased fell to 412,000 ounces, and cash cost rose to nearly $17 per ounce for the quarter, compared to 706,000 ounces at a cost of $4.45 per ounce the year before in Q2. Two additional drill rigs have been mobilized to the cite to expedite this ore-definition drilling program.

  • Meanwhile, we were also in the process of stepping-up underground development rights, to open up other areas that can partially fill the short-term gap as we provide a longer-term contingency area of mining to overcome these situations. [Laurel] produced 678,000 ounces of silver at a cash cost of $14.47 in Q2, compared with 737,000 ounces at a cost of $13.61 the year before. We have been developing all of the services and ancillaries needed to increase our underground mine development rates and continue to expect that we will open up new mining areas later this year, to replace the low grade stopes that we shut down during Q1. In addition, we are realigning our contracting strategies at both Morococha and [Moron] to address the fierce competition for qualified minors that exist today in central Peru. And as such, we have been transferring expected number of the current contracting workforce to our payrolls, and purchasing additional equipment to ensure we can increase the mine development rates to the desired levels by year-end.

  • Elsewhere, [Caribelca] produced $228,000 ounces of silver at a cost of $19.77 per ounce in Q2, compared to 322,000 ounces of the cost of $8.01 in 2010. This mine continues to advance, also on it's interim reclamation projects. We expect to continue to mine profitably at [Caribelca], given these high metal prices. But, our reserves are clearly being depleted, and the quality of ore being mined is beginning to reduce.

  • On the political front, we are anticipating Peru's implementation of some sort of win-fault profit tax in the mining sector, now that President Humala has taken over. However, there still has not been any concrete details on how a new tax will be implanted, other than some limited discussions, suggesting they follow a system similar to what Chile had implemented.

  • Moving on to Bolivia, our San Vicente mine produced 897,000 ounces of silver at a cash cost of $12.85 per ounce during Q2, compared to 886,000 ounces at a cost of $7.49 the year before. As I've mentioned last quarter, we have excellent ability to make up for short-term disruptions at San Vicente, and we have more than caught-up our Q1 production shortfall, to put us back on track to achieve or exceed our annual production target. Our costs are being negatively impacted by the currently high silver prices, as the government royalty increases with increasing silver price.

  • In addition, as I mentioned in Q1, we have seen a dramatic rise in the cost for third-party smelting or refining, of our copper-silver flotation concentrates. And we expect this will continue with these high silver prices.

  • We have met with the high-ranking government officials of Bolivia, to try to understand their long-term objectives relative to our business in San Vicente, following the aftermath of the nationalization rumors that were -- was dispelled in May. While the government indicated their support for Pan American's business in Bolivia, and they have a strong desire to foster and actually enhance their poor image towards attracting foreign mining investments. They have also reaffirmed that they are preparing the new mining law, which is now scheduled to be released sometime this month. We will determine what it will take to adapt our business once this new law is established and understood. However, we are currently unaware of what the new law will actually contain.

  • Meanwhile, we are convinced as ever that our San Vicente mining contract in Bolivia stands as the model agreement the Bolivian government desires, throughout the country. And we remain optimistic that this will eventually solidify our business in Bolivia, aligned to the desires of the state.

  • Mexico continued to deliver exceptional results, and helped to make up the shortfalls in Peru. Alamo Dorado produced nearly 1.4 million ounces of silver, at a cost of $4.17 per ounce, and La Colorada produced 1.1 million ounces, at $7.16 per ounce during the second quarter, both well ahead of the expectations.

  • Last year in Q2, Alamo had a record-breaking production of 2.4 million ounces, at a cost of -- $2.36 per ounce, as we were mining a high-grade [fench] in our phase 1 [fifth]. Where as, La Colorada produced 932,000 ounces, at a cost of $9.04 an ounce.

  • We have approved a project to expand leach tank capacity at Alamo Dorado, and improve the silver recovery by 2% while trading the higher throughput rates that we have been a accomplishing. Our drilling out of Alamo Dorado to potentially expand into phase three continues, and we hope to have a resource model developed by the year-end. We are confident that face re-pit with the economic at these prices, adding at least one more year of life, and have already begun efforts to expand the mine fleet and enable mining in phase three, perhaps late this year or early into 2012.

  • We are confident that Alamo Dorado and La Colorada will continue to perform solidly, and offset shortfalls in other parts of the Company for the remainder of this year. On the project front, we jumped at the opportunity to secure the long-lead primary mill equipment for Navidad, by purchasing some never-used gear that had been bought for another mine development, which had been curtailed. Almost immediately after we completed our engineering work to determine the proper equipment sizing, this unique opportunity presented itself, and we purchased the gyratory pressure, the SAG mill, the ball mill, and a rubble cone pressure for the Navidad plant for $17.4 million, representing an $11.2 million savings in capital, compared to the estimates for use in the PEA. Not to mention, reduce delivery times -- for these types of equipment has been extending out to nearly two years today. There is a significant competition to purchase this type of equipment today, and we were very fortunate to have been at the right place at the right time, to secure this gear.

  • In addition, we significantly advance the engineering, the feasibility study, and the environmental impact assessment at Navidad, all the while, we mobilized the significant aid, by rushing in all bottled water, personal respirators, loads of air filters, to the residents of the area, following the significant ash fallout from the Chilean Puyehue volcano eruption. We are still targeting the fourth quarter this year to complete a fully -- full-feasibility study for Navidad.

  • The Morococha facility relocation project continues on schedule and on budget for a year-end 2011 completion. Building erections continue, and we are beginning to work on the interior spaces. Our operating group is already getting very excited to occupy these new facilities, and we believe this will leave to several improved efficiencies as the mine -- as many of these facilities are currently spread over a very large area of the mine.

  • Later in the call, you will hear from George Greer, who will provide an update to the La Preciosa project. So, with that, I would like to mention that once again, thanks to both the breadth and depth of our experienced and motivated operating and project development teams. We are successfully addressing many challenges. And remain in good position to achieve our full-year 2011 production guidance of 23 million to 24 million ounces of silver. We are, however, raising our full-year -- consolidated cash costs guidance to between $8.25 to $8.75 per ounce, due to the higher royalty cost we are experiencing in Argentina and Bolivia, as a result of the higher silver prices. The higher treatment and sculpting cost for our Bolivian copper-concentrates, and the continuing effects of cost escalations, particularly with respect to diesel to prices in Argentina, and employment costs in Argentina, Bolivia, and Peru.

  • We are also revising our forecast for consolidated capital expenditures from $121.2 million to $145 million. This increase reflects $17.4 million additional for the Navidad process equipment purchase, I described earlier, $5.4 million for the preparation of the feasibility study at La Preciosa, and $5.4 million for the evaluation and development of the phase three out as well as the additional leach tank capacities, to improve recoveries at Alamo Dorado. These are partially offset by lower capital expenditures, expected at the Morococha relocation project, primarily due to timing of commitments.

  • With that, I will now turn the call over to Michael's Steinmann for the expiration update. Michael?

  • - EVP, Geology & Exploration

  • Thank you, Steve. Good morning everyone.

  • Following my standard practice, I would like to start with the growth statistics for the last three months. This gives you a good idea about the advances and resources we are dedicating to our exploration programs. Compared to Q1, we increased in Q2 the Company-wide drilling by over 20% to a total of 37,330 meters. [Grand] exploration diamond drilling, amounted to a total of 27,730 metes, representing about 41% of our 129,000 meter animal program for reserve replacement. This puts the program nearly back on track after drilling shortfall during the first three months of the year.

  • Morococha nearly doubled the meters, from 2,910 in Q1 to 5,790 meters in Q2. La Colorada increased it's drilling by over 63%, to a total of 4,430 meters for the quarter, and Verone increased the program by 18% compared to Q1. The largest drill program was executed at Navidad with 9,600 meters followed by Manantia Espejo with 7,190 meters. Both times returned some spectacular results from the mutual holds. Navidad focused its in-fill extension (inaudible) program [Viseransa], (inaudible) deposits finalizing 72 holds. We also received sample results from [Varrant hill] which have been drilled at the end of Q1.

  • The longest intersection was in hold 15-80, which returned 144.5 meters containing 290 gram per ton silver. Other impressive (inaudible) were 32.6 meters, at 349 gram per ton silver in hole 15-82. And 16.85 meters at 381 grams per ton silver in all 15-83. Exploration and growth has already provided some spectacular results last quarter. And drilling in Q2 did not disappoint. For example, hole 16-93 intersected 25 meters at 944 gram per ton silver. And in hole 16-03 we hit 10 meters at 1,004 gram per ton silver, just to mention two.

  • (Inaudible) drilling at [Calside] Northwest, the northern most deposit of the Argentine mineral trend, returned 17 meters at 171 gram per ton of silver, and 90 meters at 199 grams per tons silver. Reissuing the importance and potential of this peripheral mineralization. Drilling continued at Navidad in Q3, and I'm sure there will be more exciting results reported at the end of next quarter. (Inaudible) -- in the far South of Argentina. Detailed mapping and surface sampling identified a large number of potential growth targets and our extensive land holdings. We concentrated on the [Debora-vein] a few kilometers to the North of our operations.

  • So far, we have identified a structure with over 400 meters of (inaudible). The vein shows the typical spotted distribution of high-grade mineralization with gold grades of up to eight grams per ton, and silver grades in the 100 gram to 150 gram per ton range. The vein is 2.5 meters to 4.5 meters wide, and will definitely be a target for further exploration efforts.

  • Drilling of the Northwest extension of the Maria vein returned very positive results. Which could lead to a small tick extension in the near future. The best bulk of 8.8 meters contains 32 grams of gold and 150 gram per ton silver.

  • Other intersects are 4.7 meters, that's 20.6 g of gold, and 4.3 meters of 1.5 grams of gold at 848 grams per ton of silver. La Colorada drilling results in Mexico have never been disappointed in the last two years, and last quarter was no exception. You may recall that we discovered to the East -- a 100 meter horizontal expansion of the NZ2 vein during Q1. Drilling, during the last quarter, revealed additional input results, and extended the structure even further.

  • We encountered vein-width of up to 5 meters, containing silver grades of 1,300 grams, to over 2,000 grams per ton. On top of that, the structure contains over 25% combined base metals. And as an added bonus, up to nearly one gram of gold. I believe there's a good chance we will have another year of production just in this area of the mine alone, and drilling will be intensified with an additional drilling rig.

  • The West end of our main vein -- [Condevaria] vein returned impressive results as well, which are a good indications of the potential vein extension to the West. Both of the base metals are less prominent than (inaudible) are prevailing, -- containing silver in the range of 400 to 750 gram per ton. I have no doubt that this [one] will be another important exploration target, for the remainder of the year.

  • Our Mexican Greenfield efforts are mostly focused on our land holdings around La Colorada as well as in our Lucita project in Sacapecas, which contains a large number of epiternal silver-gold veins. Surface sampling and mapping kept us extremely encouraged, and we drill this products in the next six months. As I mentioned at the beginning, the grow rates of [Waron] and Morococha increased substantially in Q2, and results have been very positive at both mines.

  • Drilling will be further intensified during the next six months, to assure our annual reserve replacement and exploration for new resources. I am extremely encouraged by the results of our exploration efforts so far this year. We have spectacular results, at Manantia Espejo and La Colorada, and some of the drill intersects encountered in Navidad are simply the best I have ever seen in my career. I have no doubt that they will add significant value to the project, and underline the incredible exploration potential of this deposit.

  • Now to Rob, for a financial review.

  • - CFO

  • Good morning, ladies and gentlemen.

  • Much like Q1 of this year, we had another record-breaking quarter from a financial perspective. As Geoff mentioned, we generated Company records for earnings and cash flow in addition to incurring another quarterly dividend. Attributable to earnings for the second quarter, were $112.6 million, which equates to $1.04 per share. And adjusted earnings, after taking out a $56.5 million mark-to-market non-cash gain on our warrants, were $76.1 million, or -- $0.71 per share.

  • Among operating earnings, were a record $118.6 million, which implied a 51% gross margin.

  • Operating cash flow before working capital movements, more than doubled from the comparable quarter of 2010 to a record $119.4 million. These strong financials are fueled by record realized prices for gold and silver, which combine to comprise 87% of our revenues for the quarter. Our average realized silver prices for the quarter were $38.21 on sales of 5 million ounces. And in gold, we sold almost 19,700 ounces at an average price of $1,500 per ounce.

  • We actually saw significantly less quantities of almost all that we produce, other than lead, as a result of timing of shipments, which is the main reason for the $11.9 million increase in inventory during the quarter, that you may see on our balance sheet. During the quarter, the Company increased its metal inventory balances by approximately 2,000 ounces of gold, and about 300,000 ounces of silver. Had these ounces, which were produced in Q2 2011, been sold at the average realized prices during the quarter, additional after-tax earnings of approximately $7 million or $0.07 per share, would have been reported. We should see the benefits from the sale of these additional assets in the third quarter as we reduce outdoor inventories.

  • Our Q2 earnings included a gain on derivatives of $36.5 million, in recognition of our mark-to-market movement of the Canadian dollar denominated warrants we issued as part of the Aquinine transaction as required by IFRS. While we exclude this gain in the calculation of our adjusted earnings, we do expect these to warrants continue to create volatility in our future earnings, which is caused principally by movement in our share price and volatility, and changes in the CAD-US dollar exchange rate.

  • Our effective tax rate for the second quarter was 22%, which is significantly lower than the 35% we would expect in the long-term, primarily due to the fact that the derivits of gain is not tax-effective. A detailed reconciliation of our effective tax rate can be found in section five of our Q2 MD&A. During the quarter w invested $15.3 million into non cash working capital accounts, and an additional $45.1 million in property, plant, and equipment, including $17.4 million to acquire another use processing equipment that is suitable at the Navidad project, as Steve described. That which we feel could be re-sold in the current market at variable terms, should we not proceed Navidad.

  • We ended up banking $63.8 million in the quarter, to take our cash and short-term investment balance to over $460 million. Our clean, debt-free balance sheet and strong cash flows put us in excellent position as we assess the financing alternatives available to us for the construction of Navidad and/or La Preciosa Our working capital position also continue to strengthen during the quarter, increasing by $85.4 million, most of which is reflected in higher cash and short-term investment balances.

  • Accounts receivable, also increased noticeably, due directly to the higher metal prices, and the result of an increase in the value of our shipments. As I mentioned earlier, we increased the inventory of DOREA and concentrated products due to the timing of shipments. We finished the quarter with a working capital position of close to $580 million. All-in-all, from a financial perspective, Q2 was another spectacular quarter, for Pan American.

  • With that, I will hand it over to George for some comments on the La Preciosa PEA.

  • - VP of Product Development

  • Thank you Rob. And good morning ladies and gentlemen.

  • Today I am pleased to be here, to discuss the results of the La Preciosa project preliminary economic assessment, which we have been working on for the past eight months. This assessment has been both challenging and rewarding, and I am very excited to finally be able to talk to in detail, about how we envision this project being developed. As you are aware, the La Preciosa project is a joint venture between Oracle silver and Pan American silver. We have been working together to develop the project to the point of completing a PEA.

  • The assessment is based as a standalone project, developed and operated on a joint venture basis, as per the current agreement between Oracle silver and Pan American. Over the past two years, we have spent approximately $15 million on further diamond drilling, metallurgical testing, and project engineering activities. We have contracted some of the best consultants into the industry to assist us with the assessment. Including, amongst others, Snowden Mining industry consultants, M3-Engineering and Technology, and Quantitative Geosciences.

  • In the past two years, we have drilled an additional 90,000 meters of exploration and infield holes, to help us better understand the nature of the mineral deposit. As such, let us start first with an update of the resources. Please note that all of these resources are expressed in terms of diluted resources. We have applied two cut-of upgrades, one for the open pit at 35 grams per ton silver, and the other for the underground mining at 85 grams per ton silver. Total indicated resource currently stands at 24.8 million tons, grading 142 grams per ton silver, and 0.28 grams per ton gold.

  • Inferred resources include an additional 15.2 million tons, at 96 grams per ton silver, and 0.17 grams per ton gold. The indicated resource now contains 113 million ounces of silver, and over 223,000 ounces of gold, where as the inferred resources contain nearly 47 million ounces of silver, and 83,000 ounces of gold.

  • Our base case production for the PEA is a 5,000 ton per-day -- metric tons-- predate processing facility, fed by concurrently operated underground and open pit mines. The underground mines will provide approximately 3,000 tons per day at the plant feed, with the remaining 2,000 tons per day coming from the open pit workings. We did evaluate the possibility of an open-pit-only mining scenario, however due to the narrow veins in the upper portions of the mineral zone, and the depth involved to get to the wider, more expensive ore zones, the open pit designed was reaching close to the -- upper practicality limit of open-pit mining nearing a 30 to 1 strip ratio.

  • Naturally, that mining plan did not return the most optimal economics, and it was subsequently decided to proceed with the combined underground open-pit approach, as it provided the far better economic return. The front end of the processing plant will be a conventional pressure, stockpile arrangement, followed by a segmental ball-mill combination, similar to the last three installations that we performed at Pan American silver, quite successfully. This will be followed by elite circuit and [meril grove] refinery, producing us gold, silver DOREA products similar to our La Colorada oxcite processing plant in Mexico. Tailings will be neutralized and deposited in a conventional wet-tailings facility, less than 2 kilometers distance from the plant.

  • In summary, based on our work to-date the project will produce the following economic results. Production of an average of 6.8 million ounces of silver and 11.8 thousand ounces of gold annually in products, at an average cash cost of $11.84 per ounce silver. a mine life of just over 12 years, and a pre-production capital cost of -- $270 million. Based on assuming prices of US $25 per ounce silver and $1,250 per ounce gold, the PEA indicates that the project will deliver the following economic results. An internal rate of return of 24.3%, with a net present value discounted at 5% of $315 million, and a project pay-back period of 3.3 years.

  • Using near-term silver and gold prices up $38 per ounce silver and -- $1,600 per ounce gold, respectively, the project economics would improve to an internal rate of return of 52.7%, with an NPB at 5% of $922 million. This would also have a project pay-back of 1.9 years. The project is expected to result in 800 jobs during the construction phase, and 500 permanent jobs once operations commence, which will contribute significantly to the local communities, particularly those [Ejito] communities in close proximity to the future operations. On that note, we have currently established very good relations with the local community, and have spent considerable effort in assisting them with community imprudent projects, as well as providing employment to some of the local people during the past two years.

  • At the present time, we are aggressively continuing with the project feasibility study, as well as beginning the permitting process, and the negotiations with local brand owners to purchase the necessary property, in and around the project sites. We are scheduling to have all of these activities complete by the end of Q2, 2012, at which time we will be in a position to make a decision on whether or not to proceed with the construction of the project. Once the construction decision has been made, it is expected to take approximate 24 to 30 months to construct and commission the plant. Assuming the results of the PEA are confirmed by the feasibility study, Pan American Silver will be well-positioned to successfully develop and operate the La Preciosa silver project, given our financial capacity, and perhaps more importantly, having just built and commissioned three new operations in the past five years.

  • I would now like to pass the meeting back on to Mr. Geoff Burns.

  • - President and CEO

  • Thank you, George.

  • You have know heard were we have been, the obvious question is what lies ahead for Pan America? Our strategy going forward has not changed. We are going to do utilize our core strength and expertise as an operating Company, to continue to focus on optimizing our planning operations to maximize our cash flow generating capacity and profitablity. We are going to continue to aggressively explore around our current assets to extend their mine lives.

  • Lastly, we are going to use our financial strength, and experience as mine-builders and developers, to bring Navidad and La Preciosa towards production decisions. And deliver the kind of growth that you have been accustomed to seeing in Pan America.

  • Before opening up the lines for questions, I would like to cover three more topics. The first is La Preciosa. After a number of delays, it is certainly rewarding to finally have been able to release the PEA for La Preciosa. As I said in our news release earlier this morning, it is a very interesting project for Pan American. At almost 7 million ounces per year on average, it has a solid production -- silver production profile, has a relatively long mine-life, and is located in a good mining jurisdiction, less than one hour's drive from our existing Mexican administration offices in Durango.

  • As the PEAs long-term silver price assumption of $25 per ounce, the economics are very compelling. At current silver -- prices, the project economics become extremely robust. We will be moving forward aggressively to complete a feasibility study, and to position ourselves for a construction decisions in the first half of 2012.

  • The second thing I am sure you are interested to hear about, is the status of the money launch in to-boot, where our Navidad project is located. That is the mining law that prohibits open-cut mining in the province. That mining law that needs to be amended before we can proceed with Navidad's development.

  • Instead of describing the current political situation in the province, I am going to refer you to a number of recent articles that have been in the press in Chubut. Articles that have been published within the last couple of weeks, that highlight comments made by the current Governor, Mario Das Neves, the Governor-elect Martin Buzzi, and the Minister of the Environment Juan Guaratano. These articles were published in the Provincias newspaper of Chubut, and begin on July 25. The debate about modifying mining law 5001 has clearly begun, and I'm extremely optimistic about the current discussion. I would ask you to review these articles, and form your own conclusions about the development of a new mining law in Chubut.

  • In the meantime, we will continue to work with the people of the central Miset, and of the government of both the local communities, and the province, and the federal government, in a completely open and transparent manner that will allow all the people of Chubut, and the government, to come to a well-informed discussion that we hope will lead to a very practical decision to allow for the responsible, environmentally sensitive development of Navidad in the central Missetto in Chubut.

  • Lastly, I would like to make a very brief comments on silver and gold prices. For the last several quarters, I have said that in my opinion, nothing has fundamentally changed over the past two and a half years, that would change the long-term investment appeal of silver and gold. Yet another quarter, and my view remains intact.

  • In a world of wash of government debt where the printing presses are now running 24-7 around the world, currencies are going to become less and less able to maintain their relative value and continue to be prone to the veracies of political pressures. Silver and gold, even at today's apparent lofty-prices, are going to look extremely appealing as long-term investments. In this environment, we will be able to deliver superior financial results, and growth, which should really make Pan America a very compelling value proposition.

  • With that, I now would ask the operator to open the line for questions.

  • Operator

  • Thank you, sir.

  • (Operator Instructions)

  • Our first question today comes from Chris Lichtenheldt of UBS securities. Please go ahead.

  • - Analyst

  • Good morning, just first a quick question on the cash cost guidance. That was increase slightly, and you sighted a number of reasons why they were higher cost. I was wondering if you might be able to break down the increase in cash cost guidance, between-- the higher silver prices that are causing higher royalties and higher treatment charges? And then secondly, and movement in bi-product prices or production assumptions?

  • And thirdly, the just most importantly, the true cost inflation on the ground, in terms of per ton. Just trying to understand exactly draws that. If you could help at all on that, that would be great?

  • - COO

  • Chris, this is Steve. We may have to get back to you on those details, I don't have them quite right at my fingertips. But I can say, in order of importance, by far our and away our higher silver price, and we are using in our forecasting for the rest of the year, the average price of Q3 -- or Q2 results, which was $38.10 an ounce, that is the biggest driver to the cash cost increase.

  • Second to that would be the higher smelting and treatment and refining charges in Bolivia. And then, following that would be the increased cost for employment between Bolivia, Peru, and Argentina. And then lastly, the diesel fuel price increase in Argentina. Those are the 4 main factors in order of importance.

  • - Analyst

  • Okay, that is really helpful, thanks. And just a follow-up on that quickly, did -- your using $38 -- and small change now, what were you using in the previous guidance?

  • - EVP, Geology & Exploration

  • Budget pricing $20.65.

  • - COO

  • Yes, budget price of $20.65 an ounce.

  • - Analyst

  • Oh, okay. I see. Alright, thanks a lot.

  • Operator

  • The next question comes from Norm Robbins, a private investor, please go ahead.

  • - Analyst

  • Hello Geoff, this is Norm Robbins, I am a private investor and a shareholder in Oracle. Do you have any interest in or plans to buy my shares from me?

  • - President and CEO

  • -- Norm you know that is absolutely not a question I can answer. We just released the results today, and are happy to talk about what La Preciosa looks like. We have -- our arrangement is, as you are aware, we can earn a 55% interest in the project, by bringing it in to production, and Oracle will retain the other 45%. Beyond that, I'm just not going to be able to comment.

  • - Analyst

  • Thank you, Sir.

  • - President and CEO

  • You're welcome.

  • Operator

  • The next question comes from Haytham Hodaly of RBC capital markets, please go ahead.

  • - Analyst

  • Good morning Geoff, I have got some shares you can buy as well from some other stock. But -- (laughter) Question on a -- just a couple of simple ones, the inventory buildup that we saw -- the 2,000 ounce of gold 300,000 ounces of silver, is that specifically related to certain operations, or is that just generally across the board?

  • - CFO

  • Yes -- actually the gold was almost entirely at Manantia Espejo, as you would imagine that is where most of our gold production comes from. And the silver was almost entirely at Alamo Dorado. And that's really just a timing of shipment issue. So hopefully, we will have a quarter -- the third quarter or the fourth quarter, where we will actually sell more than we produce. We have had inventory people left the last couple of quarters.

  • - Analyst

  • Okay, and is that a reasonable level that you have been holding for quite some time?

  • - CFO

  • It is the highest level we have had in -- actually at any point in time. So, yes, we do have to clean out the cupboard here, and hope that the third quarter is going to be -- better from a turning point of view.

  • - Analyst

  • Okay, perfect. Just since I have you, Rob, just a question. You talked a little bit about the effective tax rate, as a good explanation of the financials and the MD&A. What would your forecast effective tax rate be for the second half of this year?

  • - CFO

  • In an ideal world, without the noise of the warrants and FX movements, and withholding tax that we pay from time to time, we would expect it right in the mid-30s, as an effective tax rate.

  • - Analyst

  • Okay, and in the non-ideal world that we live in?

  • - CFO

  • Well, if there is again on the warrants, then it's going to be lower. And if there's a loss on the warrant, it's going to be higher. That's about as precise as I can be. I'm sorry.

  • - Analyst

  • Yes. So maybe using something like a 30% and just making adjustments there-after? What about with regards to the deferred -- component. I saw the deferred component of taxes has decreased quite a bit over the last little while?

  • - CFO

  • Yes. In this particular quarter, the third component was about $1.6 million I believe, on top of current of -- about $31 million. I can get back to you after the call with some detail on that, if you would like Hay.

  • - Analyst

  • That would be helpful. Thanks, Rob. Maybe just a question on La Preciosa, for George? Please remind me just in terms of the contract, you can earn 55% if I bring the project into production, but are you responsible for 100% of the CapEx? Or do they pay their pro-rated share?

  • - VP of Product Development

  • Yes, we are responsible for the CapEx on a 100% basis until we start first production. From that point forward operating costs and future capital cost sustaining are shared between the 2 groups on the 55%-45% arrangement.

  • - Analyst

  • Will you be able to recover your 45% of additional capital that you're paying on their half? Or is that just the cost of actually acquiring the asset?

  • - VP of Product Development

  • Well that would be coming out of the operating earnings in those years.

  • - Analyst

  • So in theory, you would get the majority of the operating earnings for the first few years until the capital is repaid out of 100% basis?

  • - VP of Product Development

  • No, of -- we would get our investment back through of course, the years of the operation. Through our share of the operating revenues.

  • - Analyst

  • Sorry no -- George, I guess what I'm asking is, is the 45% of the capital cost -- is that recoverable as well? Or is that Oracle paying that?

  • - President and CEO

  • We -- excuse me Haytham -- we pay 100% of the capital cost, the 45% carry is essentially us buying our way into the deposit.

  • - Analyst

  • Okay, that's what I was trying to get. Perfect. Thank you, Geoff.

  • - President and CEO

  • You're welcome.

  • - Analyst

  • Maybe, just another question on Navidad, obviously there was a preliminary assessment released by M-3 late last year. But we've obviously seen cost escalation. Have you looked to see -- what type of impact that some of the cost escalation could have on the capital cost of Navidad?

  • - President and CEO

  • We are going through that right now, Haytham, as we do the feasibility study. We don't have an update to that cost estimate. I can tell you that, that the decision to buy the equipment has helped that tremendously. So, we are hopeful -- that we can offset some of the cost escalation in other areas.

  • - VP of Product Development

  • Yes, there is going -- Haytham if I could add -- there is a number of obviously moving parts relative to going from the PEA at Navidad into a full feasibility, certainly will be re-evaluated on our capital cost estimate. We will be looking again in detail at our operating costs estimates. At the same time, I hope you heard loud and clear, some of Michael's numbers, with respect to the drilling we've done, particularly on Via Esparanza. We are talking, multi, multi-meters at over a kilogram of silver. And that is going to have an incredible impact on the project at economics, well beyond the change in potentially some of the inflation -- that we are seeing with capital and operating costs.

  • - Analyst

  • Good answer. One last question, sorry to hop around, back to La Preciosa. Was the $11.84 per ounce cash cost, did that include any kind of a royalty? Is there any royalties on this?

  • - President and CEO

  • Yes, it does include that. That is the all in standard calculation of cash cost, that is a gold by-product credits. It includes refining, royalties, all operating costs, including cite G&A. The Full Monty.

  • - Analyst

  • Perfect, and who is the royalty on the project table to?

  • - President and CEO

  • Actually, I'm not sure offhand. I don't want to give out a wrong answer. We have it included, but at the moment it just escapes me, who is entitled.

  • - Analyst

  • That's fine, thank you.

  • Operator

  • (Operator Instructions)

  • Our next question today comes from Ralph [Perfide] of Credit Suisse. Please go ahead.

  • - Analyst

  • Good morning, thanks for taking my question. With respect to Juaron, just wondering what grades you are encountering that in this silver-price environment, would lead you to shutdown that zone of production? And also, how much Alianza as part of the general mine plan at Juaron?

  • And sort of lastly, sort of on a forward basis, can we look at Juaron being more of a lower-tons higher grade deposit? Or do you imagine it coming back ever in which case, it would be vice versa?

  • - VP of Product Development

  • Thank you, Ralph for the question. That's a good question. The Alianza zone at Juaron is primarily a sink-zone. It was always considered to be a low-grade silver. We were kind of hoping to see around 3%, 3.5% types Zincs. And we were coming in something shy of 3%

  • But that, it really was not a contributor of silver, it did give us about -- I would say 10,000 to 15,000 tons a month of material off of that zone, because there was a long hole open-style mining. But it just wasn't giving us what we wanted, and wasn't really paying for we wanted to go. Primarily, we wanted to focus the effort that we were using in that area, into developing some more higher grade silver rigs zones, if you will. Or even potentially some copper zones. That looked pretty nice for us.

  • So it is really redirecting some of those efforts to things we feel are more profitable.

  • - Analyst

  • I see --

  • - VP of Product Development

  • Generally speaking, as we go forward, I think we are going to see a little bit -- well certainly for the rest of this year, lesser tons at the kind of grades we are seeing now, the higher 185 type silver grades. Going into the next year, we are hoping to open up more areas and start to claw-back on that 10,000 to 50,000 tons a month that we lost out at Alianza.

  • - Analyst

  • Great, perfect. Thanks very much. Geoff, I have to ask, we are sitting at a volatile silver market, and at this prices, they are still very robust. Has hedging the silver price come anywhere close to being higher on your priority list of the strategy? Thank you.

  • - President and CEO

  • No problem, Ralph. I guess, currently, we still have no intentions to hedge either our exposure to silver or our exposure to gold. Continues to as of today, still looks like a pretty wise decision, as we see gold climbing over $1,700 an ounce. And certainly we've seen silver over $40, but sitting at $37, $38, $39.

  • Having said that, as we move forward, and look at making significant capital investments in La Preciosa and also in Navidad. We would certainly once again have a very, very thorough discussion with our Board, if it makes any sense at that moment in time to protect some of that capital investment. But, as of today, no. We are still 100% and will continue to be 100% exposed to gold and silver prices.

  • - Analyst

  • Great, thanks for that. That's it for me.

  • - President and CEO

  • Thanks, Ralph.

  • Operator

  • There are no further questions at this time, I will hand the conference over to Mr. Burns for any closing comments.

  • - President and CEO

  • Thank you operator. And thank you everyone for joining us again this morning for our conference call and discussion of La Preciosa. And, all I can say is I look forward to seeing you in about another 3 months time with more news and more financial results. And hopefully some updates on how things are moving forward, particularly in Argentina. Thank you.

  • Operator

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