Pan American Silver Corp (PAAS) 2012 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Pan American Silver Corp fourth-quarter and annual results conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for a question.

(Operator Instructions)

I would now like remind everyone that this conference is being recorded on Thursday, February 21, 2013. I would now like to turn it conference call over to Kettina Cordero, Manager of Investor Relations, please go ahead.

Thank you, operator, and good morning, ladies and gentlemen. Welcome to Pan American Silver's 2012 fourth-quarter and year-end results conference call. I am joined today by our President and CEO, Geoff Burns, our Chief Operating Officer, Steve Busby, our Executive Vice President of Corporate Development and Geology, Michael Steinmann and our Chief Financial Officer, Rob Doyle.

Before I hand over the call to Geoff, I would like to remind our listeners that this call cannot be reproduced or retransmitted without our consent and that certain statements and information in this call will constitute forward-looking statements and forward-looking information within the meaning of the applicable securities laws.

All statements other than statements of historical fact are forward-looking statements that reflect the Company's current views with respect to future events and are not 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 (inaudible).

Many known and unknown factors could cause actual results, performance or achievements 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 February 20, 2013, as well the factors identified under the captions related to Pan American's business in the Company's most recent Form 40F and annual information forms. Investors are cautioned against attributing undue certainty or reliance on forward-looking statements, and the Company does not intend or assume any obligation to update these forward-looking statements or information other than as required by law. Now I will hand over the call to Geoff.

Thank you, Kettina, and good morning, everyone. I am going to start with a quick overview of our fourth-quarter and full-year results and will 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.

We had an extremely good fourth quarter from both a production and financial perspective which allowed us to set your records for both silver and gold production in 2012. With the exception of our Huaron mine, all our operations showed increased silver production in the fourth quarter 2012 as compared to the same period in 2011. It was also pleasing to see our newly acquired Dolores mine rebound nicely in the fourth quarter from a less than stellar performance in Q3.

For the full-year in 2012, La Colorada, Alamo Dorado, Huaron, Morococha and San Vicente all registered silver production increases as compared to last year with La Colorada and San Vicente making new full-year records for silver production. I think it is a pretty fair indicator of the strength of our operating group when six of our seven mines we operate increased production year-over-year and two of them post new annual silver production records, particularly given the maturity of our mines.

As for our cash costs, we were at $11.75 per ounce of silver, net of by-product credits for the quarter and at $12.03 per ounce silver for the year, right in line with our guidance. Overall, a very, very respectable quarter and full-year in 2012.

Financially, we recorded a net loss for the quarter of $29.4 million as our income was blemished by the partial $100 million non-cash write-down of our Navidad project. As much as it pains me to accept any change in the value to this magnificent silver deposit, we have little choice given the significantly increased discount rate we appropriately applied to our net asset value model for Navidad.

The discount rate continued to climb throughout 2012, reflecting the general deterioration and increased risks of doing business in Argentina. While not preferred, I am satisfied that this was the correct and reasonable thing to do, and we still have maintained a healthy book value for Navidad at close to $0.5 billion.

Adjusting for the impairment and a non-cash gain of $14 million on reevaluation of some of our outstanding warrants, had a very healthy adjusted earnings of $55.8 million, or $0.37 per share, as expected. For the full-year, our adjusted earnings were $177.9 million, or $1.26 per share.

From an operating cash flow perspective, the fourth quarter and the full year of 2012 were very gratifying. We generated $86.1 million in cash flow, or $0.56 per share in the fourth quarter from operations and for the full-year, $215.5 million, or $1.53 per share.

By far the most pleasing consequence of this consistent cash generating capacity of our business is that our Board approved, and we announced last night 150% increase in our quarterly dividend from $0.05 per share $0.125 per share quarter, or $0.50 per share on an annual basis. This is the fourth and by far the largest dividend increase we have announced since we started paying dividends in February of 2010. At today's share price, this represents a prospective yield in excess of 3%. Not too shabby.

Over the last two years, between share repurchases and dividends, Pan American has returned $171.4 million to our shareholders. This is worth repeating. $171 million directly back to our shareholders. I would now like to turn the call over to Steve to review our operations and development projects, and I will be back a little later to make some closing remarks.

Thank you Geoff, and good morning, ladies and gentlemen. I would like to start my comments by recognizing our nearly 8,000 employees and contractors who achieved world-class performances in the prevention of lost time accidents and reductions in the accident severity throughout the Company during the year. We also completed the Minefinders acquisition and transitioned the Dolores operating team into our fine Mexico organization, providing a significant boost of low-cost silver and gold production to the Company during the year.

In addition, after completing the relocation of our ancillary facilities at the Morococha mine in Peru and significantly advancing the engineering of our Navidad project in Argentina, our industry-leading project team jumped right over to stabilize the existing leach pads and advanced the construction of the next-phase leach pads at the Dolores mine.

Meanwhile, our technical group advanced exciting evaluations to determine the potential value of adding a milling circuit and optimizing the Life of Mine plan for the Dolores mine, as well as began initial studies on expanding production at our La Colorada mine during the year. Overall, our seven operating mines ended the year in very good position after achieving consolidated production levels firmly within our consolidated production and cost guidance, and as Geoff mentioned, with both La Colorada and San Vicente establishing new annual silver production records during 2012.

Our consolidated silver production for the fourth quarter, as Geoff mentioned, was a record 6.9 million ounces at a cost of $11.75 per ounce, bringing the full-year to 25.1 million ounces at a cost of $12.03 an ounce, net of by-product credits. Our by-product metal production for the year was over 112,000 ounces of gold, another record for the Company, over 36,800 tons of zinc, nearly 12,300 tons of lead and just below 4,200 tons of copper.

We continue to realize performance improvements in Peru where Huaron produced 753,000 and Morococha produced 552,000 ounces of silver during the quarter, which was collectively 11% greater than the fourth quarter of 2011. Huaron's cash costs increased, as expected, to $21.81 per ounce compared to $14.84 in Q4 of 2011 as we accelerated underground development rates to over 5.1 kilometers during the quarter, 70% greater than Q4 of 2011, and absorbed the effects of industry-wide cost escalation and currency strengthening.

Morococha's cash costs also increased as expected to $25.96 per ounce as development rates were also substantially stepped up to over 5 kilometers during the quarter, 16% greater than Q4 of 2011, in addition to also observing the effects of cost escalations and currency strengthenings. We expect to continue to see steadily increasing improved performances from Huaron and Morococha over the next few years as increased development rates in our mechanization of mining initiatives begin to take hold.

In Argentina, we are beginning to see some relief in both the government's policy on import restrictions that has negatively impacted our business and improved results in adapting our business to the challenging climate several government-imposed restrictions have caused.

During the quarter, Manantial Espejo produced just over 1 million ounces of silver at a cash cost of $13.08 per ounce, which was 25% above the 829,000 ounces produced in Q4 of 2011, although well above the $7.85 cost from the previous years. Cost from the significant added cost to mitigate the effects of the restrictions and the persistent high inflationary environment that exists in the country.

We are closely monitoring the apparent increase in political conflicts developing between the provinces and the national government, in addition to a growing rate of unemployment in Argentina, as these factors could add more pressures to release a greater share of the benefits that our business creates in the region.

Irrespectively, we remain focused on running a safe and efficient mine at Manantial Espejo, which is beginning to improve as we manage the impacts of the various government restrictions being placed on our business as they strive to reduce the harsh inflationary effects. We have also seen some acceleration of the currency devaluation and are optimistic this will help to steadily improve costs at Manantial Espejo during the year.

Our San Vicente mine in Bolivia continues to perform exceedingly well, again producing nearly 1 million ounces of silver for the Company at a cash cost of $19.84 per ounce, inclusive of the increased [common full] share of the operating cash flows now that our capital investment has been recovered, compared to nearly 850,000 ounces at a cost of $13.35 for Q4 2011, a quarter of which we did not absorb the increased costs from our joint venture partner.

Our employees, unions and communities remain solidly in support of our business, and our operation remains calm and productive. San Vicente continues to be a solid asset for the Company and is managed with a strong, committed and highly affected -- effective operating team.

During Q4, with the addition of the large Dolores mine to our La Colorada and Alamo Dorado mines, our Mexico operations produced over half of the Company's total silver production, delivering from a foundation of strong, reliable and profitable production and the stable mining jurisdiction. La Colorada produced 1.1 million ounces of silver at a cost of $8.50 per ounce, 3% more and at a cost of 8% less than the previous year.

Alamo Dorado produced 1.6 million ounces of silver at a cost of $4.60 per -- $4.67 per ounce, which was 26% more and 14% less cost than the year before. These solid performances were topped off with 930,000 ounces of silver produced from our newly acquired Dolores mine at a wonderful cash cost of $3.78 per ounce. We are extremely proud of these solid performances from our cohesive and well-managed operating teams in Mexico and are confident that we will see continued solid performances from all three operations during 2013.

In addition, we are advancing the new shaft and haulage system improvement studies and are beginning to investigate the expandability of production to La Colorada, which we aim to complete in a preliminary economic assessment by the end of this year. The added reserve additions that Michael will be describing in more detail are fueling an excellent and meaningful growth project to an operation which has become a cornerstone asset of the Company.

Meanwhile, the Dolores mine continues its programs to improve operating efficiencies, including the rebuilding of the aging mobile equipment fleet, stabilizing and expanding the leach pads, continuing exploration efforts around the perimeter of the pit and fully investigating the benefits of potentially adding a milling circuit as well as an underground mines to access excellent high-grade ore shoots which has been defined outside the perimeter of our ultimate open pit design.

We have added a new concept in the mill study to investigate the benefits of a pulp agglomeration circuit whereby high-grade ore would be coarsely ground to around 35 mesh, perhaps in an open circuit rod mill, and then agglomerated with cement to the lower grade ore before placing on the leach pad for extended heap leaching and enhanced metal recovery.

This could offer significant time, capital investment and operating cost savings compared to a full milling -- full-scale milling circuit while capturing substantial increases the gold, particularly silver recoveries on a higher-grade portion of the heat-bleached feed material by as much as 10% of for gold and perhaps closer to 20% for silver when compared to direct heap leaching.

Although the full-scale milling circuit would maximize the gold and silver recoveries even further by as much as another 10% for gold and perhaps 15% for silver, it comes at a higher price of time, capital investment and operating cost. We are currently conducting in-house trade-off studies to analyze and optimize these two approaches towards enhancing gold and silver production at the Dolores mine against our reserve and resource models and will advance engineering design and cost estimations on the preferred choice, which we expect to select in the next few months.

In either case, it looks like the pulp agglomeration concept could provide an outstanding opportunity to stage into a full milling circuit should that prove optimum, while capturing the benefits of the pulp agglomeration metal recovery enhancements sooner. We are excited about this opportunity and have our technical teams focused on maximizing the profitability of the large mineral resources available to us at the Dolores mine.

2012 was a pivotal year for us as we acquired the wonderful Dolores mine and refocused our future efforts on meaningful expansion potential at La Colorada and Dolores. We achieved our 2012 guidance targets, producing 25.1 million ounces of silver at a cost of $12.03 an ounce, pretty much right on the midpoint of our guidance. Furthermore, we spent $129 million on sustaining capital at our seven operating mines and another $50 million on advancing our projects during 2012, also in line with our provided guidance.

Looking forward to 2013, and as previously reported, the Company expects to produce between 25 million to 26 million ounces of silver at a cost between $11.80 to $12.80 per ounce during the year from our seven operating mines. We are expecting a substantial increase in by-product gold production to between 140,000 ounces to 150,000 ounces of silver -- of gold, whereas we expect our zinc, lead and copper by-product production to remain reasonably consistent compared to 2012 at between 36,000 tons to 39,000 tons of zinc, between 11,500 tons to 12,500 tons of lead and between 3,500 tons to 4,000 tons of copper.

We are planning $157 million of capital investments during 2013, including significant waste stripping with an open pit phasing at the Dolores, Alamo, Dorado and Manantial Espejo mines, significant leach pad expansions at Dolores and tailing dam expansions at Huaron, La Colorada and San Vicente, underground mine developments that we're on in Morococha and our typical mobile mine equipment fleet replacements and major rebuilds across all operations.

I believe 2013 could be another record year for Pan American with an increase in silver production by as much is another 1 million ounces and a jump in gold production by as much as 34% from the record-breaking 2012 performances. We also forecast that our cash costs will be reasonably stable compared to 2012, between $11.80 and $12.80 per ounce, as several of our operating cost saving initiatives begin to bear fruit.

Before turning the call over to Michael, I would like to again extend my personal thanks to all of our dedicated and hard-working employees and contractors throughout the Company who have once again proven their superior ability to successfully overcome the vast challenges we face in running our business and achieving consolidated production levels firmly within our production and cost guidance. Thanks to these efforts, our business has proven to be exceptionally strong and incredibly sustainable. With that, I will now turn the call over to Michael Steinmann for the exploration update.

Good morning, everybody. Our exploration strategy paid off handsomely in 2012 with a little over 155,970 meters at our seven operations and discovered 31.2 million ounces of new proven and probable silver mineral reserves, more than replacing the 26 million ounces contained in the mine during 2012.

If you add to that the newly acquired properties, Delores and La Bolsa, the Company has now proven and probable reserves of 316.9 million ounces of silver and 2.4 million ounces of gold, representing an increase of 37% to our silver reserves and an increase of over 290% of gold reserve ounces year over year, net of 2012 production. These are outstanding additions and make our proven and probable reserves one of the largest reserve books in the silver industry.

Taking the exceptional drill results at La Colorada into account which are shared with you every quarter, I'm sure most of you assumed a strong reserve increase, and La Colorada, as it has for several years now, did not disappoint. We discovered 25.7 million ounces of new silver reserves in 2012, which obviously more than replace the 5 million ounces we mined. Plus, we added an additional four years of mine life.

During the last four years, exploration successes at La Colorada added nearly 65 million ounces of new reserves for the Company. This is an impressive addition which was entirely based on mine site exploration. La Colorada now has the second-largest silver reserves in Pan America, second only to Dolores. Plus the ounces produced at La Colorada are some of the most profitable ones we have. At current production rates, we can now sustain a 13-year mine life based on our current proven and probable reserves alone.

The large reserve increase of 47% at La Colorada came mostly from sulphite mineralization. Most of the major structures remain open at depth and to the east and west, and will be our target for further exploration in 2013. Please remember that we intersected last year high-grade mineralization in the main NC2 vein down to 1,000 level, 1,000 meters below surface and over 500 meters below our current active mining level. The current proven and probable reserves only reached down to 678 level; hence, there remains tremendous exploration potential.

The largest addition occurred in the newly discovered extension of the Amarillo vein. Amarillo is shaping up to be a mirror image to NC2, although lots of exploration is still required to define the entire structure. Currently, we have reserves down to 560 level at Amarillo, and we have only drilled 900 meters along strike line. This structure is wide open, and drill holes did not encounter the end of mineralization yet. We plan to drill 32,000 meters in 2013, and I am sure we will once again have a substantial addition of high-grade silver mineralization by the end of this year.

Another highlight of 2012 exploration program was the discovery of 5.6 million ounces of silver at San Vicente, adding more than one year of production to this high-margin deposit. San Vicente has still the highest grade of all of our operations with an average silver grade of proven and probable reserves of 418 grams per ton, followed by La Colorada, which came in with an average grade -- reserve grade of 393 grams per ton. These are very respectable silver grades, securing high margins for both mines.

I'll refer to reserve and resource statement for the Dolores mine, yielded a proven and probable reserve of 87.8 million tons containing over 76 million ounces of silver and 1.6 million ounces of gold as of December 31. 2012. This is a reduction from last Minefinders resource statement, but this one was done in 2010. Not only was there over two years of mining depletion, but we also applied higher mining and processing cost parameters to reflect the current mining and cost environment.

The net effect of these changes was to increase the cutoff grade for the reserve in order to maintain the profitability. In addition, there is a very large measured and indicated resource at Dolores of 26.4 million ounces of silver and 621,000 ounces of gold as well as an inferred resource containing a further 3.4 million ounces of silver and 117,000 ounces of gold.

It is important to note that this resource estimation does not include 14,330 meters of drilling with it during the last four months of 2012 which yielded some positive results from east strike zone as well as from the deeper south extension of the current pit. Based on the 2012 exploration work, we defined a large number of drill targets to expand the mineralized structures to the north, south and [the tap].

We plan to drill in 2013 over 20,000 meters at Dolores to replace mined reserves and at new resources. Dolores has a very exciting short and long-term exploration program. Due to its large size, it will take us several years to follow-up on all of them, but I am very excited to be working at this very large, long-lived mineralized system.

Now, let's move on to Peru. Huaron more than replaced the reserves mined in 2012, increasing its silver reserves from 60.9 million to 61.6 million ounces after mining 3.6 million ounces during last year. Morococha had a strong exploration year as well, adding over 4.3 million ounces of silver but I am sure you noticed the lower margins we experienced in Morococha in 2012 due to increased costs.

As a consequence, we decided to substantially increase the cutoff grades for the 2013 reserves, which led to a reclassification of nearly 2 million tons containing 4.8 million ounces of silver from reserves into resources. With this change, the average reserve grade increased to 194 grams per ton, positioning Morococha to be able to maintain its profit margins in the face of higher costs -- cost structures we are experiencing currently in Peru. The total proven and probable reserves at Morococha now stand at a very healthy level of over 37 million ounces of silver.

Manantial Espejo reserves were negatively impacted by inflation and resulting higher costs in Argentina and by operational pressures because of import restrictions. Nevertheless we still profitably produced over 4 million ounces contained and over 45,730 ounces contained gold at Manantial Espejo in 2012. Taking the high cost into account, we decided to reclassify nearly 4 million ounces of silver into the resources. These ounces are still in the ground and hopefully available should the cost structures improve and all metal prices increase.

Proven and probable reserves had a base for our mine plans, daily production and ultimately, cash flows. Replacing and increasing reserves extends the life of our operations and secures superior returns for our shareholders. Over the last nine years, we have been very successful with our mine site exploration programs, and we have added over 229.4 million ounces of new proven and probable silver reserves since 2004, 17% more than we mined in the same period.

We spent a total of $86.1 million during the same period for the mine site exploration, which means we added new reserves at an average cost of approximately $0.38 per ounce. Our reserves are sufficient to sustain our current production levels for the next 10 years. In order to maintain these levels, we will spend approximately $16.3 million on mine site exploration including a 120,000 meter drill program at our seven operations during 2013. This is very similar to 2012 and should be sufficient to once again replace in 2013 what we plan to mine.

I would like to make a few remarks on our greenfield exploration. In 2012, we spent about a $8.6 million on greenfield projects, including Waterloo and La Virginia and some other select properties in Peru and Mexico. The 2013 budget calls for $14.7 million to be spent on greenfield exploration; nearly $6.8 million are earmarked for La Virginia and Waterloo. This will be sufficient to make strategic decisions for both projects on the way forward as both of them keep returning very interesting results from the drilling.

Once again, our strong core assets have proven their exploration potential by providing us with another year of reserve replacement, and I am confident they will continue to do so. We have one of the largest reserves and resources in the silver sector, with over 1.3 billion ounces. I have no doubts that we will see once again very exciting results from our operations and projects, but I am especially bullish on our Mexican assets for 2013. Year after year, they have proven their incredible exploration potential and grade which can withstand many different metal price scenarios. I would like to move on to Rob now for the financial review.

Thanks, Mike, and good morning, all. Our financial results in Q4 and for the full 2012 year remain strong, including a new revenue record for Pan American. Annual sales were record $929.6 million, an increase of 9% over 2011 sales, driven primarily by higher quantities of silver, gold and zinc sold, partially offset by lower realized prices other than for gold.

Silver and gold made up 89% of our 2012 revenue base. Mine operating earnings in 2012, while down from the record levels achieved in 2011 on lower realized prices, were a healthy $311.4 million, a gross margin of 34%. Similarly, adjusted earnings, although down from last year, were a robust $177.4 million, or $1.26 per share.

Cash flows from operations where $193.3 million after paying $152.3 million in taxes, which mostly related to taxes generated in the 2011 year, and that was easily sufficient to cover our capital programs and distribute $66.7 million to shareholders by dividends and our share buyback program. It was these solid financial results that are providing the impetus for the increase in dividends that Geoff described.

When analyzing our adjusted earnings for 2012 of $177.4 million and comparing it to the record-setting levels of $251 million in 2011, five clear factors emerge. Firstly, we increased our quantities of silver and gold sold in 2012 by 18% and 42% respectively, which alone added $187 million to earnings. But that was somewhat offset by the second factor, which was higher operating costs of $172 million, which is associated with the additional sales quantities and general cost escalation.

Thirdly, we incurred $26 million less in taxes in 2012; but again, that was largely offset by the fourth factor, $22 million more depreciation, mostly related to the Dolores mine. Finally, the decrease in metal prices that we saw in 2012 versus 2011 resulted in a $95 million reduction in adjusted earnings as we realized approximately $3.80 less per ounce of silver in 2012 than we had in 2011.

Turning to our Q4 financial performance, I would like to draw your attention to the following highlights. Adjusted net earnings were $55.7 million, which equates to $0.37 per share. Mine operating earnings were $85 million, a gross margin of 34%. Cash flow generated from operations before working capital changes was $86.1 million, or $0.54 per share.

As Geoff has described, we recorded an impairment charge of $100 million relating to are carrying value of the Navidad project in Chubut, Argentina. As required by IFRS accounting standards, we developed an economic model to test our ability to recover the carrying value of Navidad, which was on our books for approximately $570 million.

Our model uses current Argentine sovereign risk indicators which have deteriorated to around 12.5% to discount the expected cash flows, which in turn reflect a range of possible tax regimes, which may ultimately may be enacted in Chubut as well as delay in the construction of the project. Based on these broad assumptions, our model indicates a fair value of approximately 470 million, which gives rise to the impairment charge recorded.

Q4 saw us inadvertently building silver inventory with 5.7 million ounces sold against payable production of 6.6 million ounces, an increase of almost 0.9 million ounces as a result of timing of shipments and the outturn of metal at refineries. Almost half of this increase in silver inventory is in the form of dore produced at Alamo Dorado and lead concentrates from La Colorada, both of which carry some of our best margins which will flow through earnings in future periods when that material is sold.

Adjusted income in Q4 benefited from a $2.5 million gain on the sale of investment shares we held in Orko Silver. Another 2.5 million gain realized from option payments received on the Company's proven exploration properties, and about $0.8 million in silver option payments from the sale of the Quiruvilca property. Our effective tax rates in the fourth quarter, excluding the impairment charge, was around 20%, which brought the full-year effective tax rate to 33%, right in line with or long-term expectations.

Looking back, 2012 was another satisfying year from a financial perspective for Pan American. We generated $374.3 million in operating cash flows and acquired an additional $71million from Minefinders net of the cash paid and transaction costs. We returned $66.7 million of that to our shareholders by the share buyback program and quarterly dividends, invested $159.9 million in our assets, paid income taxes of $152.3 million and still put CA66.1 million into cash or other working capital.

That left us with working capital approaching $800 million at year-end with very little debt to speak of, which leaves us well positioned to find organic growth opportunities, continue our share buyback program and industry-leading dividend yield and to take advantage of appropriate M&A opportunities that may present themselves in these turbulent markets. With that, I'll hand it back to Geoff.

Thank you, Rob. You've now heard about our operations, our exploration programs and our financial condition. On all key business metrics, 2012 truly was an outstanding year for Pan American. Record silver production, record gold production, record revenues, healthy and growing cash flows, a new long-life, low-cost mine added in Mexico in Delores, with superior exploration upside. Another year of full proven and probably reserve replacement. The strengthening of our operating portfolio with the divestiture of the high-cost Quiruvilca mine.

As Rob mentioned, the direct return of $67 million in cash to our shareholders through dividends and share repurchases, and a wonderful increase to our dividend going forward. And, the best safety record in the Company's history, operating above world-class standards for lost time, injury severity and frequency. I could not be more proud of our performance and the team here at Pan American that continues to deliver year in and year out.

Going forward, 2012 looks to be even better to me. We're expecting modest production growth to 25 million to 26 million ounces of silver at almost unchanged cash cost levels of $11.80 to $12.80 per ounce. We have three organic growth projects that we're evaluating, two of which are low risk insofar as they relate to increasing productions at mines that are already in production.

Stay tuned during the year as we complete our engineering and evaluations and share the results with you. As you have heard from Michael, we again expect to replace what we are mining in 2013 with particular together focus on our most profitable operations, La Colorada and now Dolores.

We have a wonderful balance sheet, as Rob just described, with cash and equivalents of $542 million and working capital approaching $800 million, more than sufficient liquidity to execute the growth projects I just mentioned. And we should continue to provide superior financial results directly returning the highest level of yield in the silver sector on the back of sustainable, predictable and consistent production.

Like many of you on the call, I own a significant number of Pan American shares, and like many of you, have been disappointed with the share price performance over the past couple of years. But I am not disappointed with how we are running our business, and I remain confident that if we continue to do the right things, creating value to our operations, our exploration programs and with the disciplined approach to growth in capital allocation, we will eventually be rewarded through share price appreciation and dividend distributions. With that, I would now like to open the call to questions.

Thank you. Ladies and gentlemen we will now begin the question-and-answer session.

(Operator Instructions)

Your first question comes from George Bernstein, Deutsche Bank. George, go ahead.

Good morning, it's Jorge Bernstein with Deutsch Bank. I guess my first question is for Geoff. If you could just provide some color as to what is driving the sharp change in dividend policy at this point, is this something from the Board, is this something in response to what you're seeing in terms of the market essentially not paying up for growth. So if you could just comment about the return to cash -- of cash to shareholder policy.

Thanks, Jorge. I think it comes down to, actually a couple of very simple facts. We are as a business generating very, very strong cash flows quarter and in an quarter out. We have accumulated a significant cash balance on our balance sheet, more than sufficient to fund share repurchases, the growth projects we have in front of us. And at the moment, our largest growth project is Navidad, is on care and maintenance. In that backdrop, it only makes sense to increase the distribution directly to our shareholders. And I think that the Board and I concur with bringing that level to something very, very meaningful, not just within the silver sector, but as a comparable to many other businesses across all different sectors. And that is really what is driving it, and I can see going forward we are going to continue to focus on directly distributing excess cash to our shareholders.

Right, and also on the discount rate, the change you mentioned that you are now using a 12.5% discount rate in Argentina. What did that change from?

Jorge, Rob here. Previous -- our previous turns going back a year were in the 8% to 9%. And then as Geoff described, really, we have seen a pretty steady deterioration in those sovereign risk indicators, be it the CDS rates or yields on sovereign bonds. So, over the year, it's really progressed. In June, we use 10.5%, for instance.

Got it. And is there any update on the timing of the Navidad legislation? Last we'd heard it was back in the government's court, provincial government. Has there been any advancement in changing the legislation, or when is the next legislative window that you can see this -- these proposals being overturned?

Well, in December, Jorge, the -- I'm going to call it Draconian draft legislation that was proposed was stripped away from the legislation that ultimately got passed at the end of the year. So, at this stage, I do not see that legislation coming back in anything close to the same form that it was proposed last year. I do not have today a definitive timeline on when I see them addressing the issues of mining and the regulatory environment for mining in Chubut, recognizing that effectively, they just really returned from what is their summer vacation a couple of weeks ago.

Right. Thank you.

Thank you, your next question comes from Ralph Profiti, Credit Suisse. Ralph go ahead.

Good morning thank you for taking my question. I just want clarification on Dolores if I may. You are doing a mill scopic analysis, and now you have introduced this grinding and treatment circuit study. I was just wondering if both of those are going to be released in Q3, or are these going to be independent analysis?

Yes, Ralph, this is Steve. They are being conducted through a trade off study right now, so we hope to select the preferred approach during the next quarter. And from that preferred approach, then we'll enter into engineering to do the designs and the capital and operating cost estimates to really hone in what it is going to be. Depending on that decision, if it is about pulp conglomeration circuit, that is going to be a fairly quick evaluation and certainly one that we would see the outcome by Q3. If it happens to be the full-scale mill, then it is a much more extensive effort and it may take us into the early part of 2014.

Understood. Got it. Different subject, because Steve, you talked about currency devaluation risk in Argentina. Just wondering if that could go along with that. When does the labor contract, come up for renegotiation?

Our contract is being negotiated as we speak, and we are scheduled to close on that the end of March.

March, I see. And do you have in previous years what proportion of labor is in that cost structure?

I do not have it right in front of me, but round numbers, it is about 45% of our total cost in Argentina.

Understood, that's great, thank you for the clarity.

Yes.

Thank you, your next question comes from Trevor Turnbull, Scotia Bank. Trevor, go ahead.

Yes, I was just curious with the higher cutoffs related to some of the higher operating costs. I realize that Dolores had not had an update in some time with their reserves. But can you give us a sense of what the biggest drivers were? Were those labor or foreign exchange, or little bit of everything?

That is pretty simple, it's actually cyanide and lime, both cost and consumption. Cost of cyanide is the biggest driver by far. We saw overall about a $2.50 per tonne increase in process and SG&A cost. Cyanide was probably 70% of that, the cyanide cost. There was also cost increase in lime, and then the rest of it was general overall cost escalations over the period.

And I'm sorry, that's specific to Dolores?

Specific to Dolores, exactly.

So, Morococha was more labor issues and a bit of FX?

No, Morococha primarily is increased development rates, we're expending a lot of development to try to open up other areas. So, we have advanced development rates. We were a little bit behind early part of 2012, we increased it even further at the end. Those were the biggest drivers to cost at both Morococha and Huaron. And then in addition to that, we have seen is strengthening in currency in Peru at both operations. And then the general industrial cost escalations.

Okay, and so were those the only two operations where the cutoff actually went up?

Manantial, we have the cutoff go up, particularly in the underground mine, primarily due to the labor cost increases.

But you ceased-- no, you ceased the service operations that Manantial?

We have both surface and underground.

But I thought I was reading that you have stopped with surface for now.

No, no we have not stopped -- oh, we stopped with surface exploration.

Okay, that is what I read. Okay, and then speaking of exploration, at Dolores, as you get further along with that and look at some of the areas that are a bit deeper, some of the more sulfide material, could that change the scope of what you're trying to do and might lead you again to think about the mill?

Well, the mill is being looked irrespective. With the information we have now, we think we have a good possibility of making a strong case to go forward with some sort of milling, whether it be the pulp conglomeration or milling. Any additional exploration for the deeper, higher grade materials will only enhance that value.

Right, so if you do pulp conglomeration as a first step, it should not be too hard to keep that modular such that you could make that into a mill without having to duplicate too much effort.

Exactly, precisely right. That's our concept is we can stage into the full-scale mill if that turns out to be where we want to go.

Trevor just to add, the of pulp conglomeration that Steve is describing is a very attractive, very attractive interim step, subject to, obviously some more engineering but the capital cost is maybe 1/5 to 1/6 of what it would be to build a full mill. There is no tailings dam requirement because we are still going to be loading on the heat, as you would know. And in terms of permitting, I am not sure what if -- other than minor permit amendments we might need in order to get regulatory or local approval for construction. And just the risk profile is so much lower when we are talking capital costs of well under $50 million and a timeframe of maybe 18 months to get it going. This is some new thinking, but the attraction is huge. And it does not preclude, because it is such a long life asset, it does not preclude that second step of going to a mill. So, it is something that we are going to really focus on and Steve and his group are going to focus on very heavily over the next few months.

Okay, and with respect to further resource updates, are you planning going forward you will probably have new reserves and resources each year for Dolores?

That is correct, Trevor. Like normal we will include it in our schedule and show new reserves and resources at the end of December 2013.

Okay, thank you.

Thank you. Your next question comes from Mark Mihaljevic, RBC Capital Markets. Mark, go ahead.

Thank you, can you provide any color in the potential sizes of the mill or pulp conglomeration circuits you're currently looking at?

Right now, I can tell you it is probably going to range somewhere between 4,000 tonnes and 5,000 tonnes per day.

Okay.

The big question we have right now is, how soon do we bring on additional crushing capacity and enhance current production rates with the addition of the mill versus the -- we are looking at just taking a stream off the existing heap fee, the high grade stream to the mill. In either case, the mill could actually grow some from those numbers, but that is probably where we're starting off. It's a safe --

Okay, and with significant explorations success you've had at La Colorada, can you give any details on the operating perimeters you're looking at for the PA?

Right now, we're in the midst of a shaft study. We are looking at constructing a shaft that would drop down to about 600 meters from the surface and open up production levels on both the [Amoleo] vein and the Candelaria zone that we are mining right now and enhance that haulage. That is really a key aspect of that production increase is just trying to optimize that haulage system.

Any further color on potential throughput there?

It is too early to really -- I wouldn't want to give out any numbers yet on that.

If -- I'm going to be a little bit more bold than Steve. We are doing about 4.2 million, 4.3 million ounces of silver at La Colorada currently, I think that is our forecast for 2013. When all of the work is said and done, I would not be surprised if we were able to increase that by somewhere in the neighborhood of 40% to 50%.

Perfect, thanks a lot.

(Operator Instructions)

Your next question comes from Bill DeGrove, Private Investor. Bill, please go ahead.

Thank you. I wonder if we could get some information on the drilling results at Waterloo and La Virginia, please.

We are still currently drilling, Bill, on both projects. Waterloo right now, we finished phase 2, waiting for some results there, and then we will incorporate them maybe in the press release somewhere towards the middle of the year. But I can tell you right now, it looks very similar, maybe slightly higher than the old drilling that has been done in the 60s by ASARCO. So, at the moment, we still need a little bit more time on that. Meanwhile, as I said, we will continue with the drilling and metallurgical work on that. And La Virginia, nothing really new on there. There is very similar results that we have seen in the past with some very high grade intersects and relatively spotty, some very high grade but small ore shoots in there. They are very long structures that need a lot of drill work there, very steep topography So again, we need a little bit more time. I would also think probably mid of year we will have an update with the press release and all the details on the exploration efforts at La Virginia.

Thanks a lot.

You're welcome.

Geoff Burns, there are no further questions at this time. Please proceed.

Thank you, operator, and just in the closing remarks, thanks very much for joining us this morning. 2012 really was a wonderful year for Pan American, but as I said, I am looking forward to even better things going forward into 2013. And I hope you can join us in May when we will be back together again talking about our first quarter results. Thank you.

Ladies and gentlemen, this concludes your conference call today. We thank you for your participation and ask that you please disconnect your lines.