Pan American Silver Corp (PAAS) 2012 Q2 法說會逐字稿

Good morning. My name is Kyle and I'll be your conference Operator today.

At this time I'd like to welcome everyone to the Second Quarter results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session.

(Operator Instructions)

Thank you, Miss. Cordero, you may begin your conference.

Thank you, Operator. Good morning, ladies and gentlemen. Welcome to Pan American Silver's Second Quarter 2012 earnings conference call.

Here with me today are Geoff Burns, President and CEO; Steve Busby, Chief Operating Officer; Michael Steinmann, Executive Vice President of Geology and Exploration, and Rob Doyle, Chief Financial Officer. Before Geoff takes over I would like to remind our listeners that this call cannot be reproduced or retransmitted without our consent. And to indicate that certain obvious 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 aren't 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 news releases from August 14, 2012 as well as those factors identified under the caption risks related to Pan American business in the companies Form 40 F and information form. Investors are cautioned against attributing undue uncertainty 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.

I will now turn the call over to Geoff.

Thank you, Kettina, and thanks everyone for taking the time to join us on the call this morning. I'm going to start with an overview of our second quarter results. And then pass the call over to Steve, Michael, and Rob, for a more thorough description of the highlights of our operations, development projects, exploration programs, and financial performance.

I'm happy to report that we had a very good second quarter from a production perspective and we just released some excellent news from our exploration programs. However, as a consequence of the number of items including a build up of unsold silver and gold inventory and a sizeable repricing adjustment, our short-term quarterly financial results lagged our operating performance. Rob will describe these items in more detail in a few minutes but suffice to say that all things being equal, we should see our financial results catch up to our solid operating performance over the balance of the year.

We produced 6.4 million ounces of silver in the second quarter. This was the second highest silver production total in our companies history. We also produced 32,000 ounces of gold, a new company record.

As we discussed during our last call in May of this year, our cash costs increased to $11.85 per ounce net of by-product credits, basically right in line with our full year guidance. We realized average sales prices of $29.53 per ounce for silver which was 23% lower than the $38.21 we realized a year ago and $1,622 per ounce of gold, about 8% higher than a year ago. Base ore prices for zinc, lead and copper were also lower as compared to the Second Quarter of 2011.

In spite of the down trend in prices, we still managed to generate very respectable mine operating earnings of $56 million and net earnings of $44 million or $0.29 a share. Our operating cash flow for the quarter, before changes in working capital, was $35 million or $0.23 a share. We closed the quarter with over $770 million or a near $770 million in working capital of which $520 million was cash in the bank. Not quite the financial results we were expecting, given the production quarter we delivered but decent. And I fully expect to see a significant improvement in Q3 driven largely by a sell down in the silver and gold inventories that we built during Q2.

In keeping with our stated intention, and returning value directly to our shareholders, I am pleased to announce that yesterday our Board of Directors approved a 33% increase to our quarterly dividend and approved the payment of our third quarterly dividend of the year now in the amount of $0.05 per common share. This is the third increase to our dividend since was introduced in 2010 and it now stand the at $0.20 per share per year. The dividend will be paid on or about Monday, September 10th to holders of record as of the close of business on Monday, August 27th.

As we previously announced and consistent with the theme of returning value, we restarted our share repurchase program in late May having stopped the program late last year during the period of time that was required to complete the acquisition of Mine Finders. We continue to firmly believe that the current market price of the Company's common shares does not reflect the underlying value of our operations, our properties, and our future growth prospects. We have now completed this program. Perhaps one of the few -- or perhaps even the only mining company to have announced a share repurchase program and actually then executed it.

In total, we repurchased 5.4 million Pan American common shares returning almost $125 million to our shareholders. We fully intend to apply the TSX in early September to renew and restart this program as soon as the 12 month limitation on our first program expires.

I'd now like to turn the call over to Steve to review our operations and development projects. And I'll be back later to make some comments on Argentina, our strategic direction, and some summary observations about the silver market and what I see for Pan American over the balance of the year. Steve.

Thank you, Geoff, and good morning. It is my pleasure to report further details on our second quarter 2012 operating results and project development advances.

Once again, Pan American's unique geographically diverse portfolio of operating mines has proven effective in offsetting challenges with opportunities to deliver growth in production, yielding our second highest quarter of silver production and a record setting quarter of gold production at cash costs in line with our targets. As Geoff mentioned, our consolidated silver production for the quarter was 6.4 million ounces at a cost of $11.85 an ounce net of by-product credits including the production of 32, 244 ounces of gold.

The strategic acquisition of Mine Finders has substantially bolstered our production from the geopolitically and economically secure country of Mexico where we produced collectively 3.3 million ounces of silver greater than 50% of our total at a cash cost of $5.46 per ounce. The transitioning of our newly acquired Dolores Mine in Mexico is proceeding exceedingly smooth. And we have our project development teams deployed at the mine constructing heat leach pad number 3 that will provide security at production while we begin to evaluate a number of opportunities to increase profitability from this wonderful long life asset. The Dolores Mine successfully delivered 924,000 ounces of silver at a cost of $2.06 per ounce net of 15,270 ounces of gold by-product credit.

Meanwhile, La Colorado continued its solid reliable performance producing 1.1 million ounces of silver at a cash cost of $8.38 per ounce compared with the same 1.1 million ounces at a cost of $7.16 the year before. We are extremely excited about the opportunity to begin to investigate substantial expansion opportunities at La Colorado given the incredible exploration success which Michael will expand on a bit later in the call.

We have expanded our waste stripping at Alamo Dorado to access some western pit ore extensions that were discovered late last year. And although we encountered some unexpectedly hard sulfidic ores during the quarter, we managed to produce 1.3 million ounces of silver at a cash cost of $5.50 per ounce.

Without doubt, we have been challenged by the many obstacles and distractions that currently exist in Argentina, a country that is facing severe inflation and all the economic uncertainties that come along with it. In the face of this uncertainty, coupled with the recent headline project capital blowouts, we are proceeding extremely cautiously with our businesses in Argentina on all fronts. On the production front, our Manantial Espejo Mine produced 880,000 ounces of silver at a cash cost of $15.46 per ounce compared with 960,000 ounces at a cost of $6.80 per ounce the year before.

Stringent importation, revenue repatriations and currency restrictions along with the severe inflation have all impacted our business in Argentina. And our teams are spending an inordinate amount of their valuable time trying to manage these realities in a safe and prudent fashion. On the project front, we spent $6.6 million advancing the Navidad project, substantially completing the feasibility study and the environmental impact assessment which we are now placing on hold for the time being pending a positive advance in the provincial mining law reform which Geoff will touch on later in this call. We intend to hold the project in a build ready state for as long as it takes and anticipate reducing expenditures over the next six months to around $1 million per quarter moving into 2013 unless conditions change beforehand.

Despite the incredible robustness of Navidad, I am at the same time disappointed by the draft law but conversely very thankful we are not in the midst of full scale construction facing these types of capital blowouts being reported in the region. I am impressed that the resiliency of the Argentine people who know from experience that this turbulent time is only temporary in nature and an overall correction is likely forthcoming. In the meantime, we are hunkering down to weather the times in the best possible fashion we can while maintaining our incredibly strong profitability outlook for the brighter days that lie ahead.

Despite a seven and four day union lead work stop age to dispute our 2011 employee profit-sharing results at our Peruvian Huaron and Morococha Mines respectfully -- respectively, we produced 652,000 ounces of silver at a cost of $18.95 per ounce during the quarter at Huaron compared to 678,000 at a cost of $14.47 the year before. At Morococha, we produced 525,000 ounces of silver at a cost of $24.32 per ounce compared with 412,000 at a cost of $16.98 the year before as we incur additional underground development expenses to offset previous year shortfalls at substantially reduced by-product credit prices.

We spent just under $2 million during the quarter completing the infrastructure and ancillary facility relocations at Morococha and look forward to commissioning these new state-of-the-art facilities. In a bitter sweet transaction for Pan American, we successfully sold our Quiruvilca Mine during the quarter to a company who is attracted to the base metal production opportunities. Quiruvilca was Pan Americans first operation and had provided sustained production results for the Company for nearly 17 uninterrupted years.

Prior to the conclusion of this transaction, Quiruvilca contributed just over a hundred thousand ounces of silver production at a cost of $41.91 per ounce for the quarter. Our employee disputes were successfully resolved during the quarter and we are solidly on track to deliver our forecasted production for the rest of the year at both Huaron and Morococha in Peru.

In another seemingly turbulent environment, I'm extremely pleased with the solid reliable performance at our San Vicente Mine in Bolivia which produced nearly 928,000 ounces of silver at a cash cost of $18.21 per ounce inclusive of our substantial increased payment to our joint venture partner, the Bolivian Government, following our capital recovery period. This compares to 897,000 ounces produced at a cost of $12.85 an ounce the year before. We have a solid operating team at San Vicente, who along with our communities nearby is strongly and voicefully supporting our businesses in Bolivia.

In conclusion, we remain focused on delivering against our full year 2012 guidance of collectively producing between 24.25 million to 25.5 million ounces of silver at a cash cost between $11.50 and $12.50 per ounce net of by-product credits. All the while, reshifting our project development focuses in light of the unusual and unsettling uncertainties that currently and temporarily exist in some of the jurisdictions we operate in.

With that I'll now turn the call over to Michael Steinmann for the exploration update.

Thank you, Steve. Good morning, everybody.

I'm sure most of you have seen our Press Release this morning with the exploration updates for La Colorada and Waterloo. And you can imagine that I'm very excited to talk about the excellent results in more detail.

All our geology and exploration teams worked hard during the last quarter completing 53,475-meters of drilling in our Brown and Greenfield projects. For the first six months of the year, we stand at 45% completion rate for our company wide annual drill program of nearly 200,000-meters. After we drilled the total of over 89,500-meters from January to June, I'm convinced that we'll be able to complete the entire program by December.

Let's have a look at some of these results and start with La Colorada. At this cost quarter after quarter during the conference calls some of the impressive results from La Colorada. Most of them came from HW and the MC2 veins which are currently responsible for 88% of our daily ore production. Exploration of these structures added substantial new reserves and resources in the last three years.

We are currently mining at 468 level on the MC2 vein and at 498 level on the HW vein. But the deepest drill hole intersected the MC at level 1008, more than 1,000-meters below surface, returning 707 -- sorry -- 378 grams of silver and over 14% combined lead and zinc over a width of over 0.6-meters. By the way, our current proven and probable reserves are only reaching down to 600 level.

The 2012 campaign is focused on the Amolillo vein located about 500-meters northwest of HW/MC2 structures. Amolillo is currently producing 125 pounds of oxides per day from the 245 and 275 level along the 400-meter strikeline. Drilling is targeting a potential lateral and vertical mineral resource and mineral reserve expansion.

Today the total of 23 holes have been drilled, 16 from surface and 7 from underground for a combined total of 9,643-meters of diamond drilling. The first phase drilling intersected the vein down to the 520 level, 245-meters below the deepest mining level and expanded the lateral expansion of the east to the east and west by over 500-meters. Drill results are exceptional from both oxide and sulfide mineralization. Impressive sulfide intersections were encountered in OS0412 which return a true width of 2 meters 41 containing 1,750 grams silver, 0.63 gram per ton gold, 3.01% lead and 6.7% zinc.

Whole U2012 returned two meters and 62-centimeters containing 1,096 grams per ton silver, 1.38 gram per ton gold, 2.76% lead and over 4% zinc and sulfide mineralization. Oxide intercepts are also very impressive, as an example, whole U4812 returned two meters 41 of true width containing 840 gram per ton silver and 1.15 gram per ton gold and whole S5512 returned 465 gram per ton silver and 0.38 gram per ton gold over a true width of 3-meters and 43. Please have a look at the complete table of rule results in the appendix of the press release or in our website where you will also find a map and a long section.

I'm sure you will understand why I'm excited to incorporate these results in the December 2012 mineral reserve and resource update. We will step up our drill efforts at Amolillo for the rest of the year hopefully reaching our goal for a substantial reserve and resource addition at La Colorado which could lead to future mine and mill expansion.

Waterloo is the next project I would like to discuss. The project is located 16-kilometers northeast of the town of Barstow, in the Calico mining district of San Bernardino County, California. The silver barite mineral property covering 769 Hectors consist of 18 patented and 20 unpatented mining claims, 100% owned by Pan American. The former owner of the project, Asarco outlined in the 60's, a historic resource on the property of over 100 million ounces of silver based on 181 RC drill holes. This historical estimate was prepared prior to implementation of NI43101 and cannot be relied upon.

We decided to evaluate the potential of the property and started a first phase drill campaign this year. So far we completed 11 vertical RC and 4 short diamond drill holes for a total of 1233-meters. Mineralization is outcropping or close to surfacing most locations.

Much more work is needed on the geological importation but the deposit could represent a sedimentary exhalative style or SEDEX with mineralization dipping 20 degrees to 25 degrees to the southwest. The main sections contains four holes about 50-meters apart. Hole 12007 intersected 108-meters at 181 grams per ton silver, including 36-meters at 285 grams per ton silver right at surface.

Hole 12008 also intersected 108-meters containing 143 gram per ton silver including a shorter interval of 62-meters at 194 gram per ton silver. 12006 returned 94-meters at 109 gram per ton silver including 26-meters at 170 gram silver and hole 12009 intersected 106-meters at 120 grams per ton silver including 40-meters containing 166 grams per ton silver. Further to the northwest intersections are somewhat narrower but still reaching down hole length of 34 meters to 80-meters. They compare very well to the historic drill results from Asarco and in some instances are even higher grade.

Drilling will continue with the second phase in order to confirm the historic mineral resource. Waterloo is well on its way to being Pan Americans new development project and we will increase exploration efforts including metallurgical test work, continued RC and diamond drilling, geological mapping and geophysical surveys. I promised you a busy exploration year for 2012 and I believe that we delivered so far impressive results and many of them will be included in the resource and reserve updates over the coming six to eight months.

Now to Rob for a financial review.

Good morning, Ladies and Gentlemen. As Geoff mentioned, while Q2 was a respectable quarter from a production standpoint, the financial results were not what we had come to expect.

Our adjusted earnings after adjusting for gains on derivatives, the sale of Quiruvilca, transaction costs and FX losses were $17.1 million or $0.11 per share, significantly lower than the adjusted earnings of $75.4 million for Q2 2011 and the $60.6 million from the previous quarter in 2012. Mine operating earnings were $56.3 million or 53% decline from a year ago. And cash flow from operations before working capital changes were $35 million, a 71% decrease from the $120.5 million in the comparable quarter last year.

So what were the factors that lead to the deterioration of our Q2 results relative to year ago? First of all, our earnings, like the entire mining industry have been reporting recently, were negatively impacted by the drop in most metal prices from a year ago. Our realized silver price of silver dropped by 23% while base metal prices have seen declines between 10% and 20% over the same period. The notable exception to this trend was gold with our realized prices up 8% over the comparable quarter of 2011.

Secondly, the drop in silver and base metal prices also caused a $9.6 million downward adjustment to sales in Q2 2012 relating to shipments that had been provisionally priced in Q1 2012 under our numerous concentrate contracts. These price adjustments were particularly severe for our lead and copper concentrates which contain high grades of silver. The combination of these two factors resulted in a decline in our revenues by 13% from Q2 2011 notwithstanding that volumes of silver and gold sold during Q2 2012 increased by almost 400,000 ounces and 6,300 ounces respectively.

The third important explanation for the disconnect between our operating and financial results in Q2 2012 was the fact that we built up a huge precious metal inventory. In total, our silver and doray inventories increased by 0.7 million ounces and gold adoray increased by almost 6,000 ounces. This build up of precious metal inventory was concentrated at Manatial Espejo and at Dolores.

In the case of Manantial Espejo, uncertainty regarding regulations over the repatriation of funds back into Argentina resulted in the Company not exporting doray for a period of approximately six weeks prior to quarter end. We now have clarity on the timing of repatriations acquired under Argentine law and have recommenced doray shipments. We fully expect to normalize inventory levels at Manantial Espejo over the coming months.

At Dolores, the build up of precious metal inventories resulted from a change in the commercial process upon the integration of the mine under Pan American's Management. We do not anticipate any further delays in sales of Dolores and would expect that sales volumes would approximate production volumes each period. All in all, we calculate that approximately $8 million of pre-tax earnings is captured in this inventory that was produced during the quarter but will only be released once sold.

The fourth factor is again an industry wide phenomenon, that of cost escalation. Ignoring the impact of Dolores and Alamo Durado for a moment, we have seen a 7% increase in our average cost per ton at our other mines in Q2 2012 over costs from a year ago. Our budget expectations were for a 9% increase in average cost per ton.

Now there were some specific factors during Q2 2012 which skewed our average costs higher, most notably at Alamo Dorado where throughput rates were challenged by harder than expected ore as Steve has mentioned. Incorporating the high tonnage production from Alamo Dorado results in a 16% increase in our average consolidated cost per ton for Q2 2012 from a year ago. Over the course of the remainder of the year, we do expect to be able to hold our costs at our original forecast. The higher production costs that you see on our income statement compared to Q2 2011 were the combined effect of more sales volume by about 9% on an equivalent cost basis and the cost escalation just described.

Lastly, and as expected, higher levels of depreciation attributable to the Dolores mine were evident in Q2 2012, thereby reducing our overall mine operating earnings. Dolores contributed a gross margin of 16% for the quarter which, when combined with the other factors I have mentioned, resulted in a reduction of our consolidated gross margin to 28%.

Moving on to other noteworthy items that impacted earnings in the quarter, we did recognize a gain on the sale of Quiruvilca of $11.2 million during the quarter as we concluded our strategic review process by determining that the best course of action was to sell the line to a local Peruvian company, Southern Peaks Mining. The gain is made of an up front proceed payment of $2 million subject to various adjustments, plus the release of net liabilities associated with the mine. Not included in the calculation of the gain is any future benefit we may receive from an interest that we retain in the mine through -- at our election either at 2% net return royalty on all saleable metal subject to certain price thresholds. Or secondly, the price difference between $23 per ounce of silver and the market price on 50% of Quiruvilca future payable silver production for an applicable period provided however such payments will be kept at $3 million in any 12 month period until such time as Quiruvilca generates $25 million in EBITDA.

G&A costs for the quarter came in at $6.1 million which was about $1.5 million up from a year ago and above our normal run rate. The overage is attributable to the timing of several expense items as well as an overall increase in the level of corporate activities since the mine plans transaction. We do expect that our G & A expense will reduce over the balance of the year and anticipate average in the range of $4.5 million to $5 million per quarter. Our effective tax rate for the second quarter was 36% which was slightly higher than the 30% to 35% we expect in the long term.

Moving to the balance sheet, we saw a $32.9 million increase in inventories on account of the build up of precious metals I mentioned earlier and current liabilities decreased by $22.6 million as we paid down our tax and other accruals. These were the two main items making up the non-cash working capital movements for the quarter. Cash and short-term investment balances ended the quarter at $520 million with working capital at a solid $768.8 million.

And finally, as Geoff touched on, we resumed our share buy-back program during the quarter spending $23.5 million to buy-back and cancel 1.3 million shares. Subsequent to the quarter end, we have completed the approved program by purchasing an additional 0.5 million shares spending $7.5 million. In total, we have bought back and cancelled 5.4 million shares at a cost of $124.9 million. We intend to apply for approval to buy-back an additional 7.6 million shares as it remains our belief that equity valuations do not currently reflect the economic reality of our business and therefore reducing our issued and outstanding share balance at these levels represents a compelling way to return value to our shareholders.

With that, I'll hand it back to Geoff for some closing comments.

Thanks, Rob.

Given our announcement of July 2nd regarding the political developments in the province of Chubut in Argentina, and the impact on our Navidad project, I would be remiss if I didn't spend a few moments discussing this. After two and a half years of dedicated effort, both technical and social to move the world class Navidad silver project forward and prepare for its ultimate construction, the Governor of the Province of Chubut, Martin Buzzi introduced the expected and long awaited legislation that zonified the province allowing for the development of Navidad as an open pit operation. However that same draft legislation also introduced an additional 5% NSR in favor of the province, a requirement for Petro Minera, the provinces petroleum and mining Company, to receive no less than 4% of total sales as well as get a direct 7% carried net pre-tax interest.

The new proposed royalties and carried interest were in addition to the existing 10% export duty payable on the sales of concentrate and the existing 35% net income tax rate payable to the Federal Government. This level of government participation and tax burden is unprecedented relative to any of the other jurisdictions where Pan American operates, including the Province of Santa Cruz in Argentina where the Company's Manatial Espejo Mine is located.

Our review of the effects of the proposed legislation indicates that the increased level of provincial participation when coupled with the Argentine inflation which has been running at close to 25% over the last three years, will render the Navidad project uneconomic at any reasonable estimate of long term silver prices. The proposed law has been sent to subcommittees of the legislature where it could be revised prior to being introduced to the full legislation for debate and vote. To date, the draft legislation remain stalled in the subcommittees.

The response within the province from the provincial deputies, from the national government, and from the other Governors that are part of Ofemy, the coalition of mining provinces formed earlier this year, has been very negative. The widespread opinion being that the legislation is trying to push the provincial participation beyond what had been regulated nationally and beyond what any of the other province in Argentina are doing and most importantly, beyond what is reasonable and accepted within the mining industry. While it is obviously welcome news to a long lasting legislation that would allow us to develop Navidad as an open pit, it was equally disappointing that the government of Chabut would introduce the proposed participations without any meaningful consultation with the mining industry. The provincial government is now currently studying the situation carefully and frankly, I do not think the legislation as currently drafted will be passed.

I am convinced that it was not the provincial governments intent nor the Governors intent to render Navidad uneconomic and dissuade any further potential investment in mining in the province. They got it wrong and I believe they will try to modify the law before introducing it to the legislature. Having said that, if the draft law is passed as it currently reads there could be no choice for us but to stop investing in Navidad. While clearly side tracks and perhaps sidelined at the moment, Navidad is still one of the best undeveloped silver deposits in the world today and its story is far from over.

Moving to more positive news for Pan American, as Michael and this mornings Press Release described, we had some very exciting news from our exploration programs. Drilling at La Colorada continues to return wonderful results and we are clearly reaching a point where the size of the resource dictates that we start to reevaluate the optimal mining scenario for La Colorada and logically consider expanding the mine to increase its production rates.

In addition, the drilling results from Waterloo, a project that had been dormant in our portfolio since Pan Amer -- sorry --a project that had been in our portfolio basically since Pan American was founded in 1995 are extremely exciting. We own 100% of this project, the majority of which sits on patented mining claims. And while it is early days since reenergizing this project we're going to aggressively explore this plus 100 million-ounce resource and begin to evaluate its true potential.

It has been a bit of a welcome surprise to look into our own cupboard and rediscover a project of this magnitude where no meaningful work has been done since Asarco had the property in the Mid 1960s. Let's see where this one goes over the coming months.

From a strategic point of view, it has not gone unnoticed that there has been a huge revaluation of the assets and companies within our sector over the last nine months, Particularly in the junior exploration and junior development stage category. Opportunities that in our opinion were incredibly over-valued have now become interesting and we will be looking closely at these over the coming months.

While we have no intention whatsoever of using our stock, we do have a considerable cash reserve that could be deployed for the right opportunity in the right jurisdiction. A couple of month ago our development pipeline looked very full with Navidad and the potential for the expansion of production at Dolores with the construction of a mill. Now, with Navidad potentially sidelined or at least delayed, it now makes sense to look elsewhere for growth and from a market and cost perspective, the time is right.

It has been a very active year for Pan American so far with many positive developments and one negative. We completed the acquisition of Mine Finders Corp. and now have fully integrated the low cost long life Dolores mine into our portfolio.

We have sold our high cost pure [Bilka] mine. These two steps have clearly strengthened our mining portfolio, while at the same time we are making strides at improving our Peruvian Mines and getting them back to their optimal production profile. As Steve mentioned, operationally, we can confirm the guidance we provided earlier this year that we expect to produce 24 million to 25.5 million ounces of silver at a consolidated cash cost between $11.50 and $12.50 per ounce.

We have generated exceptional exploration results that added significant new resources and value at La Colorada and reenergized a sleeping project that has enormous potential. We've increased our dividend for the third time since was first introduced in 2010 and we have actively repurchased our stock. And as Rob mentioned our planning continued to do so based on the fact that, in my opinion and in our Board's opinion, our shares remain extremely under valued having great investment opportunity for some of our excess cash. And while negative, there's no doubt in my mind that the Navidad story is by no meaning finished.

From a financial perspective, the current quarter was not where I've liked to have seen it and not totally reflective of our solid operating performance we had. But as Rob described, due to some repricing of concentrate sales and a build up of precious metal inventory we have every reason to expect much better for the third and fourth quarters.

For me, the tail of the tape financially is clear on our balance sheet. The company's working capital has increased to $769 million at June 30, 2012, an increase of over $200 million in the last six months since December 31 of last year. Of this amount $520 million was held in cash and short-term investments.

So far this year, Pan American has paid $109 million in income taxes, predominantly related to previous years income. We've invested $53 million in capital at our operations and development projects, invested a further $30 million in precious metals and mine leach pad inventories. Spent $23.5 million repurchasing shares, paid $9.7 million in dividends and still increased our cash and short-term investments by close to $30 million.

But perhaps more importantly, and in spite of a 23% decline in the price of our primary commodity silver, Pan American continues to generate solid earnings and cash flows. And while I remain optimistic that we will see silver price move solidly upward later this year, I am comforted to know that the Company remains in excellent condition even as prices have drifted lower.

With that I'd now like to open the call to questions. Operator?

(Operator Instructions)

We will pause for a moment to compile the Q&A roster. Your first question comes from the line of John Bridges from JP Morgan. Your line is open.

Good morning, Geoff, everybody. Just wanted to give a bit of a head start on the concentrate adjustment for next period. Can you give us the number of ounces and the price of the contract left at the end of the last period?

John, I don't have those numbers in front of me. I'll have to come back to you an that one.

If you could fire them over that would help me with the model and then on Navidad, just wondered what does IFRS say about the situation? Well, there aren't many situations like this one but where have something where you've got a significant investment and you're not sure at year end if this law has gone through. What does IFRS say you must do with the carrying value?

John there's quite a lot of disclosure in our MD&A on this topic surrounding impairments and very briefly IFRS requires you to look at impairment. If there's any indication of a change in value, we certainly assess that there was reason to go through that process in Q2 and we undertook a process to assess the carrying value of Navidad against what we consider to be the fair value. Of course, there's a lot of uncertainty and we ended up doing some probability model taking into account various possible scenarios. In the end, the determination was that at this point in time we can comfortably justify the carrying value which is about $560 million on our balance sheet at the end of Q2.

Okay, thanks, guys, good luck.

Thanks, John.

Your next question comes from the line of Chris Lichtenheldt from UBS. Your line is open.

Thanks, good morning everyone. Just on the inventory, do you expect most of that to be moved through during the third quarter or could some of that still be there for the fourth?

Chris, it should be, I would expect within a three-month turnover so it should, we really should be cleaning out most of it during the third quarter.

Okay, great and can you just let us know how much you plan on spending at Waterloo for the remainder of the year?

Chris, this is Michael. Good morning. So far it was pretty modest spending, we spent about $600,000 and just working currently on the program, second phase now and I would estimate that we are probably going to spend about $1.5 to $2 million for the remainder of the year and then you will see the new number for next years as drilling in the budget.

Okay, so it will still be drilling for another year or so before you'd even start looking at the studies?

I'm pretty sure, Chris. As I said it is a historic resource and there will be a lot of drilling required for us to actually do new 43-101 resource on these properties. It's a very large property, very large resource and it will require quite some time.

Okay, that's it for me, thanks.

Your next question comes from the line of John Kratochwil from Canaccord Genuity. Your line is open.

Hello. I've got a couple questions. First off, Dolores, the depreciation expense of about $7 million over the quarter, is that something that we should be expecting going forward or is this number going to come down?

No, that will be a consistent depreciation rate that's -- the requirement is to amortize the purchase price over the units of production. So, bearing in mind also that we had an inventory build up during the quarter at Dolores, in a normal quarter in fact the depreciation charge will be higher than it was in Q2.

Oh, okay and as well at Dolores, you've got about $51 million remaining in CapEx for the year. Is that going to be weighted to a certain quarter or is that going to be pretty evenly distributed for the remainder of the year?

Yes, this is Steve. It should be pretty evenly distributed. With that said we think we're doing everything we can to get those projects done and our ability to complete that by the end of the year, it's likely going to spill over some of that into next year but the spending rate will increase for the last two quarters and they will be pretty well even for those two quarters.

Okay, and could you give us an idea of approximately what the inventory is like at Dolores right now?

We have a number of different inventories, if you're talking about sole balance inventory, Rob is looking up that number right now.

Okay, just as a follow-up on Rob's comment about depreciation. The depreciation at Dolores is best to look at it on a per ounce basis versus a gross basis in dollars because the gross basis is going to change depending on how many ounces we sell in a given quarter. It's about $14 an ounce give or take which as Rob said not only accounts essentially the capital base but the price that we paid above the capital base to buy the assets and that should be relatively consistent for the balance of this year.

It is very likely to change going into next year depending on our exploration programs and success because the basis is on how many ounces over the life of the mine ultimately are we going to recover or produce. We're very hopeful that some of Michael's programs right now -- drilling, I guess it's on the east side of the dike, will be successful in adding significant new resources which would bring that depreciation rate down.

Down okay. No I appreciate that. That's a good number to work with the $14 an ounce.

Okay, John, we'll have to follow-up with you on the inventory level at Dolores. We don't have it handy.

Sure, no problem. That would end my questions. Thanks a lot guys.

Your next question comes from the line of Trevor Turnbull from Scotiabank.

Yes, I had a question about some of the success you're having at La Colorada as you drill deeper. I was just wondering if the development of some of that material provided it does come into the reserves, is that something that can be developed just in the normal course of sustaining capital or should we look a few years out to see a ramp up in the amount of capital you're putting into development at La Colorada?

Hello, Trevor. We're really getting to a point where the size of the potential both between the NC2 structure as well as Amolillo is dictating us to take it a full step back and say, you know, is running a plant and a processing rate mining rate at about 1,100 tons a day combined between sulfide and oxide is that the optimum rate to mine at La Colorada. Certainly we could continue to do what we're doing today and just, for the next 10, 12, 13 or 14 years depending on ultimately how all the resourced converts to reserve keep doing the same thing. But like I said there's a magnitude where it says let's step back and see if there's a different mining rate that makes sense and look at the capital, to be blunt to put in a shaft, and retune the mill to do more sulfide which is the direction we're heading in anyways.

It's probably -- we're probably, I'm a little bit ballpark in this Trevor but we're probably 12 months away from being able to put any real brackets around that potential but it is certainly exciting when I think you picked up. I mean some of these intercepts are 400-meters below the lowest level of reserve we have right now between 600 down to 1,000. We more than -- it appears more than doubling the length of the strike length of the Amolillo zone which we thought was a tiny little oxide resource that we're mining at about 125 tons a day and now it's starting to look like a completely parallel structure to the main NC2, which is where the bulk of our activity had been. So very excited about where this could go, Probably just a little bit early to be able to give you real firm guidance on what it might look like.

Okay well it's a good problem to have, being able to have to rethink the scale you're operating at.

Every now and again it's nice to have a good problem, yes. (laughter)

And then just a couple of really quick operational questions. The hardness at Alamo Dorado, is that something you expect that you're going to fight your way through that will change with time or are you putting in something to get that throughput back up?

We are putting in some more elaborate control systems on our mills to try to squeeze a little bit more throughput out of it but we do expect for the next probably nine months to be in this harder ores. So, we will fight through it for about nine months before we're back into some softer material.

Okay, and then switching gears over to Morococha, seems like you've had some higher grades here in the first half of the year. Does that look sustainable going through the end of the year?

We are expecting to see close to these grades. We did get a little bit of a boost with some resources we bumped into, that was a pleasant surprise -- that may not hold together for the rest of the year but in general, we are expecting a bit higher grade.

Okay, and then the last one at Manantial, do you have a forecast on the amount of gold that you expect, production not sales obviously?

Yes, just give me one second. Right now, we're forecasting for year end probably, hold on a second. We're probably going to be in, just over 50,000 ounce range.

Okay, full year.

Yes.

Great. That's all I had. Thanks, Steve.

Thanks, Trevor.

Your next question comes from the line of Barry Cooper from CIBC. Your line is open

Hello, everyone. A couple things. At the Analyst Day there back a couple months back, you said that you're going to attempt to basically pay a dividend out of the Argentine operations there. Did, in fact, you try that and -- it worked, didn't work, or did you just abandon it, given all of the other hoopla that was going on there?

Barry, we were very successful in repatriating funds to repay inter-company loans plus interest. We indeed did try, as you mentioned, to repatriate dividend in July and as it stands today, we have been unsuccessful. It was a modest one but we were rejected by the Central Bank.

And did they give any reasons for that or is it just rejected meaning you have to try again later?

Yes, the reason they gave was, no.

Okay, so I guess then persistence may pay off.

We hope, Barry.

Geoff, on your discussion of M & A, obviously there are two broad things out there that people look at. Either undeveloped projects that you can build on your own or developed projects that are up and running, both carry varying risks. Obviously the latter much less risk particularly on the financial side of things as well as permitting and everything else like that. Which way are you leaning and wanting to take the Company?

I think my priority would be to look at a development stage asset more so than a production, in production asset, and my thinking is as follows. The strategy we are very clearly following was with the purchase of Dolores. Strengthening and essentially lowering the cost of our operating assets on a portfolio basis and, in the nicest sense, we dealt out Quiruvilca. I'm very comfortable with where we got to there and then focus on the development of Navidad. That's now sidelined, and to me the one thing we're lacking now is that next development project that I can focus our technical expertise and our project development team on.

I mean, we have them tuned right now at Dolores and looking at the mill option, but we need something else in that vein so that and two other pieces to that part, Barry, and one is jurisdictionally we'll be very careful as to where we go. For some obvious reasons we don't need to repeat. And we're looking for something that again when in production could potentially move us lower on the cost curve again or lower on the cost curve fighting against some of the cost escalations we've seen in Argentina and Peru in particular.

Thanks. That's all my questions.

Thanks, Barry.

(Operator Instructions)

Your next question comes from Ralph Profiti from Credit Suisse. Your line is open.

Good morning. Thanks for taking my question. This follows up on the last question, M&A and perhaps how that impacts the dividend. Geoff, you'd previously talked about perhaps moving to a cash flow linked dividend. Was wondering if that's still on the table or is more M&A now a focus? Do you think there's still room to go to something more cash flow linked?

Hello, Ralph. We did a very thorough evaluation in conjunction with the Board at looking at our dividend policy and we looked very carefully at linking dividends to adjusted earnings or earnings linking dividends to operating cash flow. We looked at what a number of our peers, in not only the silver sector but in the gold sector, were doing. And the basic conclusion is, its all over the map in terms of how everyone is addressing that issue.

Where we got to, and I think for us it ultimately is a good answer is, that by putting in a fixed cash dividend which is predictable, understandable, it isn't ever going to be adjusted by some, I hate to say this but, some weird accounting number that comes rocketing out of left field, it just felt right to our Board and frankly to myself after considering the other alternatives. And I think at this level, we're still well within our capability to pay that dividend and to fund a cash acquisition and subsequent growth that, that might provide.

So I think we did as today as best as we can to evaluate current circumstances, current cash balances and future strategy. I would like to say that again, if two quarters from now, we don't have that development stage project or Navidad is still on the side line, and we're sitting with this amount of cash, we'll look at that dividend one more time and if the Board determines that it makes sense to return even more, we will return even more.

Okay, thanks. Maybe just a second question perhaps for Rob. One of your competitors had talked about, within Argentina, a pretty drastic change with regards to time permitted to repatriate ex-proceeds from silver sales, it had gone from 180 days down to 15 days. Now as we understand it, it's back up to 140 days. Just wondering I'm trying to benchmark whether or not all miners are being treated equally and just the logistics of how that mine works. Is the new framework for those proceeds to the government. Is that a manageable situation?

Yes, Ralph, the specific item you touch on is the reason for the inventory build up at Manantial because of that uncertainty about the timing on getting money back to Argentina. This is frankly impossible, impractical, as you know, to turnaround a [doray] shipment and get money back in 15 days, so we chose just to hold on. In our case we received some relief, we now have 120 days so it appears that it's slightly different in each case for each miner, but in our case 120 days is a workable arrangement and we are back to exporting doray.

Got it. Okay thanks very much.

Thanks, Ralph.

Your next question comes from the line of Joel Locker from FBN Securities. Your line is open.

Hello guys. Thanks for taking the question. Just wanted to see if you had a timeline on the legislation. You mentioned it was stalled in Argentina on the open pit but just basically when did you expect it to be amended or passed as is or more news coming from that.

Really tough question, Joel. I don't expect it to be passed as is, that's number one. And given the views of the Deputados that have been expressed in the legislation, it's extreme unlikely it will get passed as is currently drafted.

There is a process where I think the governor and the ministries are now very carefully studying, I'm going to call it the feedback, that they are getting from the national government, from the Deputados, and trying to understand where perhaps they're overreached. And it's hard to put a time limit on how long that is going to take because there are frankly, quite a number of people they need to talk to both within their province and now externally at the national government level. So I would not be surprised if this legislation stayed in committee until much later this year.

But do you expect something by at least year-end or it could be a month, could be four months or could it be even longer than that?

Again, this is if it had been introduced in such a frame work where it was readily accepted by the other mining companies and ourselves, my full expectation it would have passed already. It would have gone through committee and been done but it's very difficult now to put a time limit on the political process around modifying a law that's come in, in draft form and not been readily accepted -- but I would be surprised if it went in a month. I would think we'll know with some definity by the end of the year what direction it's going in.

Okay, thanks a lot.

Thanks, Joel.

There are no further questions at this time. I'll now turn the call over to Mr. Burns.

Thanks, Operator and thank you everyone for joining us today for some discussion on our second quarter results and some of our exploration activities and I look forward to talking to you each and every one of you again in, I guess it will be November, when we're ready to release our third quarter results. Thank you.

This concludes today's conference call. You may now disconnect.