Pan American Silver Corp (PAAS) 2013 Q1 法說會逐字稿

Hello. This is the conference operator. Welcome to the Pan American Silver first quarter 2013 results conference call and Webcast. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions.

(Operator Instructions)

If you would like to follow along with a live presentation you may visit the events calendar under the investor section at panamericansilver.com. Here you'll find a link to today's Webcast. At this time, I would like to turn the conference over to Ms. Kettina Cordero, Manager Investor Relations. Please go ahead.

Thank you, Operator and good morning, ladies and gentlemen. Welcome to Pan American Silver's 2013 first quarter results conference call. I'm 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 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 they're 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 release dated May 13 and May 14, 2013, as well as the factors identified under the caption risks related to Pan American's business in the Company's most recent Form 40-F and annual information form. Investors are cautioned against attributing undue certainty or reliance on forward-looking statements and the Company does not intend or assume any obligation to update these forward-looking statements or information other than as required by law. With that, I will hand over the call to Geoff.

Thank you, Kettina and good morning, ladies and gentlemen. I will provide a quick summary of our first quarter results and then I'll hand the call over to Steve, Michael and Rob for a more thorough discussion of our operations, our development projects, our exploration program, and our finances and balance sheet during the first three months of this year.

I would like to start by saying that yesterday our Board of Directors approved the second quarterly cash dividend of the year in the amount of $0.125 per common share. The dividend will be payable on or about Friday, June 5 to holders of record as of Friday, May 24, 2013. It is certainly rewarding for us to be able to continue to provide real and direct returns to our shareholders. Using yesterday's closing price on NASDAQ, our cash dividend provides an annual yield of approximately 4%, one of the highest in all the mining sectors. Not too shabby.

Now for a quick review of our first quarter results. As you know, this will be the largest first full year production under Pan American's stewardship and thanks in large part to Dolores' contribution and solid production from La Colorada, Alamo Dorado and San Vicente, we were able to meaningfully increase our silver production to 6.3 millions ounces or 14% higher year on year in the first quarter. Our gold production also increased to 32,100-ounces, 65% of ahead of the first quarter of 2012. Today, over 51% of our silver production originates at our Mexican operations, which are amongst our lowest cost and most stable assets. Our cash costs for the first quarter were $11.33 per ounce of silver, net of by-product credits. While this was an 8% increase as compared to a year ago, our cash costs for this quarter were well below our guidance for the full year and we saw important cash reductions at Manantial Espejo and San Vicente. In particular, I would like to highlight the fact that our cash costs at Huaron declined 28% from the last quarter of 2012 reflecting the efforts we have expended to increase development rates, improve productivity and reduce costs. This is a very important trend and positive trend which we believe can be sustained over the long term.

Financially, we had a solid quarter. The increase in our gold and silver production boosted consolidated revenues to $243 million, 6% higher year on year. However, our mine operating earnings declined to $74.8 million and our adjusted net earnings decreased to $40 million, or $0.26 per share, largely due to lower price environment for precious metals and higher per ounce depreciation charges relating to the amortization of the purchase cost of Dolores. We generated operating cash flows of $45.3 million, or $0.30 per share, during the first quarter and after paying back some lease obligations for last year's infrastructure construction at Morococha, paying our final installment for our 2012 taxes of almost $45 million, buying back another $5 million of our common shares and paying our quarterly dividend, we finished March with over $490 million in cash and short-term investments, and working capital of just under $740 million. Our balance sheet remains in excellent shape.

Now I'd like to turn the call over to Michael for a more thorough review of our exploration program. Sorry, to Steve for our operations. My mistake. Steve.

Thank you, Geoff. I'm pleased to report that our first quarter operating performance has us off to a good start for the year, with production largely in line and cash costs coming in below expectation, keeping us on track to meet or exceed our full year guidance previously provided. As Geoff mentioned, our silver production rose 15% and gold production surged 65% year on year, primarily because of the new production from our Dolores mine in Mexico which we acquired at the end of March of 2012. Production from both our La Colorada and Alamo Dorado mines was similar to last year, supplemented with 800,000-ounces of silver from the Dolores mine during the quarter. La Colorada's cash costs increased less than we had expected at 14% above last year, due to a combination of a strengthening local currency, industry-wide escalations, and lower silver grades. Alamo Dorado's cash cost also increased, again, less than we expected, from last year's at 66% higher due to a combination of increased waste mining rates with the new open pit layback, reduced gold production and prices, strengthening currencies and also the industrial costs escalations.

Cash costs at the Dolores mine came in higher than we had expected at $7.75 per ounce, due to lower silver recoveries caused from constrained leach cycle times as we squeezed the last final bits of capacity from our leach pad number two, in addition to lower than expected gold grades due to a combination of mine sequencing and grade model shortfalls that were perhaps caused by higher than estimated mine dilution, as well as a slightly higher operating cost than we had expected. Fortunately, the lower silver recoveries in the quarter does not result in a loss. It simply is a fact of short leach cycle times on the heap as we need to stack fresh ores on top of areas that haven't been thoroughly leached, given the constrained stacking area we have. This is one of the beauties of a heat leach operation. We just have to be patient and that silver production will eventually be realized.

Meanwhile, we have intense efforts underway to better understand and adjust our gold grade models to reflect the mining realities we're seeing in addition to reconfiguring our life of mine plan in an effort to smooth some of the ore grade profiles over the next several years. The large Dolores deposit have a number of very high grade pods, particularly with respect to the gold grades, that are tricky to sequence into a reasonably smooth mine plan even considering our current 115,000 tons per day overall mining rates. Our mine planners are examining a variety of open pit phase options to balance and smooth both waste stripping requirements and smooth the leach feed ore grades. We are narrowing in on the preferred mine plan approach which I'll be able to describe in detail in our next quarterly conference call.

At Peru, our two Peruvian mines were on a Morococha delivered a decent quarter, achieving the same production levels as last year with both mines offsetting marginally lower grades and recoveries with increased throughputs. Cash costs at Huaron rose 57% and at Morococha, 35%, as expected, due to greater development rates, lower silver, zinc and lead grades, and a stronger local currency and industrial-wide cost escalations. Although the costs are better than we expected, as our multi-year mine mechanization initiatives are beginning to show positive results. In Bolivia, our San Vicente mine increased silver production 13% from last year, from increases in both throughput and recoveries. Cash costs at San Vicente were very similar to last year, with slight increases in cost being offset by higher silver production and by-product credits.

In Argentina, our Manantial Espejo mine had a slight decline in silver production from last year, as we are still managing low equipment availabilities that has been compounded by a few road blockages as social unrest is beginning to mount given the country's current economic climate. We've seen notable increases in unemployment beginning to show up in our neighborhood. Also, as another sign of the economic climate, our cash costs in Manantial Espejo actually fell 19% from a year ago with a combination of decreased operating costs with improved productivities, combined with a stronger devaluation of the local currency. Overall, our consolidated gold production increased from last year due to higher grades and recoveries at Manantial Espejo and the addition of production from Dolores. Our consolidated by-product zinc and lead production decreased from last year, given the sale of Quiruvilca. However, we did manage to squeeze more copper production with higher production at Huaron this year to more than offset the effect of selling Quiruvilca.

In light of the recent and rapid drop in precious metal prices below our budgeted levels, we have launched a number of operating cost savings and production enhancement initiatives to further bolster our healthy, long-lifed business in the reduced metal price environment while at the same time advancing on our high return brownfield projects that will further strengthen our business. We are looking to reduce some of our capital spending. However, the vast majority of this year's plans are true sustaining capital projects, like leach pad and tailing dam constructions which are indeed necessary to sustain our business well into the future. Irrespective, we have a well-seasoned workforce and I am confident this group will unlock some meaningful initiatives to strengthen our business. It is my intention to describe and quantify these specific cost savings and production enhancement initiatives for you as part of our second quarter earnings report in August. I can say today, however, that our first pass on this initiative gives me the confidence that we'll at least be able to maintain our original cash cost guidance by offsetting reduced by-product metal price forecasts for the remainder of the year, with real cost savings that won't jeopardize our future production profiles. On top of that, we intend to obtain full advantage of the downturn in the industry that is already showing signs of improvement with drastically reduced demand for goods and services in our sector.

On the project front, our group is focused on advancing leach pad construction efforts at Dolores which are progressing well, nearing completion of an expansion of leach pad two and the continued progression towards completing the first phase of leach pad three which will be available once we have exhausted the capacity of leach pad two. With assistance of third party engineering firms, our future production expansion studies at Dolores and La Colorada have advanced well, completing initial layouts and preliminary designs for the addition of a crushing, milling and agglomeration facility at Dolores and completing a scoping study for the addition of the primary shaft and hoist conveyance system at La Colorada. We remain on track to produce a scoping study for the pulp agglomeration circuit at Dolores in the third quarter and a preliminary economic assessment for the expansion of La Colorada by the end of this year.

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

Thank you, Steve. Good morning, everybody. My slides for this Q1 presentation will give you some details on the drill statistics and exploration costs and will illustrate the current exploration results at La Colorada. We drilled a total of over 50,200 meters during the first three months of the year. Main focus with 44,300 meters, plus our mine side exploration focused on reserve replacement at our operations.

In addition, we drilled nearly 5,900 meters on greenfield projects like Waterloo, La Virginia and some early stage targets in the surroundings of Huaron and Morococha. In total, we spent about $7 million on drilling which is pretty much in line with the original budget. Keep in mind that mine side exploration is most capitalized and greenfield exploration expels. The largest amount was drilled at La Colorada. Both Candelaria, Amolillo kept returning exceptional results and I will show you some details in a few minutes.

The recent reduction in metal prices obviously affected our exploration programs for the remainder of the year and this brings me to my second slide. You see there our original 2013 exploration budget for mine site and greenfield exploration for a total of $31 million. We decided to keep our mine site exploration mostly intact, keeping our focus on reserve replacement in our operations. Our greenfield plans have been reduced by $6 million, cutting back on early stage projects in Mexico, Peru and Argentina.

Let's move on to the results and start like every quarter with La Colorada which experienced, again, the largest program of our operations. We focused on the NC2 and HW veins in Candelaria and the Amolillo vein in the Estrella mine. Both zones are expanding at depth and especially at Amolillo to the east and west. The Amolillo vein extends now over a horizontal length of 1,200 meters, only about 400 meters shorter than the main structures at Candelaria.

On this slide you can see the HW vein to the left and NC vein to the right. You can see the access ramp in red colors and our current shaft in yellow. The numbers on the side are level numbers roughly in meters below surface. Mined out areas are shown in white, proven reserves in red and probable reserves in orange. By the way, these are the reserves as of December 31, 2012, representing nearly 65 million-ounces of silver. Green blocks are inferred resources and in blue I put some of the potential which will be partially drilled during this year. The three green blocks down to the 1,010 level are centered on the deepest drill holes.

We drilled them in 2012 and intersected in the deepest one, still 370-gram silver and nearly 14% combined lead and zinc. The three empty spaces in the model are either post mineralized spreads or low grade zones which will require further drilling during this year. Current reserves reached down to 700 level. Our deepest workings are at 498 level and as I mentioned before, the deepest holes are at 1,010 level. 700, and 1,010 levels are for illustration purposes only. They do not exist yet. Exploration drilling in these veins has been very successful during Q1. As an example, we intersected in HW 2 meters containing 1,530-gram silver and nearly 8% combined silver and zinc and lead or 5 meters at 854 grams silver and 8.6 meters through with containing 780 grams silver. A football split returned 1.9 meters with 2,390 grams silver and nearly 4% lead and zinc.

Let's turn to model about 90 degrees to the west. Now you can see the additional major structures, like the prolific Amolillo structure vein and the under explored Recompensa structure which is very short and small there all the way to the right. Discoveries in the Amolillo vein, which is located between the two main structures, were responsible for the lion's share of the 25.7 million-ounces of new silver reserves we added in 2012. Looking from this angle I'm sure you share my excitement for this structure. Our deepest holes at Amolillo reach only to 600 level, over 400 meters higher than the NC2 vein leaving us with a huge vertical area for future exploration.

During Q1 we intersected Amolillo with many drill holes which returned, for example, 878 grams silver, 1 gram gold and 7% combined lead and zinc over a true width of 2.8 meters or 2.7 meters containing 700 grams silver, 0.5 grams gold and nearly 6% lead and zinc. Besides the main structure, we also found mineable splits, not shown in this model. For example, 2.55 meters wide with 872 grams silver and 4% zinc and lead or 1 meter containing 937 grams silver. By the way, in purple you can see our planned new shaft which would service both main structures. Details on this expansion will be available in Q3.

Let's keep turning the model another 90 degrees. We are looking now to the south and you can see Amolillo from the back. Again, in red, the access ramp, in white, the mined out areas and in red and orange, the reserves. As I mentioned, we already expanded the strike length of the vein during Q1 but there is still a very large potential to expand reserves along strike and tip. I think it is very easy to see why we are able to add every quarter another year of production in our reserves and why I'm so bullish on the potential of La Colorada.

One more 90-degree turn. We are looking now towards the east showing clearly the very large exploration potential of all main veins, at least down to 1,000 level. We are currently drilling about 5,000 meters per month at La Colorada and it is always one of my highlights during the month to review the drill results.

Now to our other mines. Drilling at Dolores is advancing very well. We finalized in Q1 10,930 meters drilling on the east tax zone, on the Northeast side of the pit and to the south end of the pit. Drilling in the south returned 18 meters containing 1.71 grams gold and 10 grams silver, including 13.2-meter interval, with 2.26-gram gold and 12 grams silver. Another hole intersected 16.5 meters with 0.8-gram gold and 43-gram silver.

Drilling on the east side was finalized in Q1 and we are currently revising the model. Results show a bit lower grade than in the south but are still very respectable like 20.3 meters with 47 grams silver and 0.28 grams gold. The east side will be included in our new pit model at the end of the year. The south zone will most likely be an underground target. The many positive results from this zone will increase the resources but will only be added to the reserves once an underground mine plant is established.

One highlight of the Huaron exploration in Q1 was the discovery of a wide disseminated zone on 420 level. Drill results returned 17.6 meters containing 243 grams silver and 21.7 meters containing 168 grams silver, 2.8% lead and 4.3% zinc. Much more drilling will be required to understand the exact size and geometry of this ore body but it is for sure an encouraging development at Huaron.

I'd like to finish my presentation with some remarks on Waterloo. We finalized phase two drilling in Q1 and up-to-date we drilled 53 holes which largely confirmed the [Aserca] intersect from the 60s. There are truly impressive intersects like 62.5 meters containing 130 grams silver or 77.7 meters with 114 grams silver starting right at surface. Focus is now on the metallurgy and test results will guide our next steps forward on this project. Some of the initial mineralogical evaluation suggests some fine grained encapsulation of silver and silica. Metallurgical results will be available in Q2 and Q3.

I'll pass on now to Rob.

Good morning, ladies and gentlemen. As Geoff highlighted earlier, Q1 was another respectable quarter for Pan American from a financial perspective. The current slide shows a summarized income statement for the period, reflecting a bottom line adjusted earnings of $40 million which was $0.26 per share. As expected, our gross margin for Q1 2013 of 31% was lower than the margin we enjoyed a year ago as a result of lower realized prices with silver down 9% and gold down 5% from our Q1 2012 realized prices, and also due to the effects of the Dolores production, remembering that we acquired the mine at the end of Q1 2012 and, therefore, it was not part of our results in the comparative quarter. Other items of significance to point out on the income statement are the proposed Esperanza transaction resulted in a non-cash impairment charge as we are required to compare the book value of the assets that we are selling to Esperanza against the value of the shares we are due to receive as measured by the closing Esperanza share price on March 31. This comparison gave rise to an $18.3 million impairment charge on these held for sale assets.

Additionally, our agreement with Esperanza requires us to subscribe for shares of Esperanza at closing and although the transaction has not closed yet, we are required to mark-to-market that commitment at the end of Q1, again, based on closing share price. That non-cash mark-to-market charge was $13.5 million, which is contained in the loss on derivatives line and was largely offset by the mark-to-market gains on our outstanding warrants. We do recognize -- we did recognize a cash gain of $4 million in the quarter on the disposal of our Taviche property to Fortuna Silver during the quarter. We have adjusted out the impairment charge, the net derivative loss and the gain on disposal of Taviche for our calculation of adjusted earnings for the quarter, due to their non-recurring nature.

The next slide shows a waterfall progression of our adjusted earnings from Q1 2012 to Q1 2013. The two main factors boosting adjusted earnings were, firstly, increased quantities of silver and gold sold, thanks mostly to additional production from Dolores. We sold almost 1 million more silver ounces that was an 18% increase and more than 10,000 additional gold ounces, a 55% increase as compared to Q1 2012. And secondly, lower income tax expense, primarily due to reduced taxable income generated in the period. These factors were offset by the costs associated with the additional production from Dolores, including higher depreciation and other cost escalations and by lower realized prices. Our realized price for silver dropped about $2.90 per ounce and for gold we realized about $80 less per ounce than in Q1 2012.

Moving to the working capital portion of our balance sheet. Working capital position dipped modestly during the quarter, but remained extremely healthy at almost $740 million. The decline was mainly reflected in our cash and short-term investment balances as we made our typical Q1 tax payments which mostly represent taxes accrued on prior year's taxable income. And we also retired 70% of the leases we had utilized to fund the Morococha relocation project over the past two years. These two items totaled cash payments of $66.1 million in the period. Our current and non-current liabilities decreased as a result of these payments, although the Esperanza share purchase mark-to-market loss of 13.5 has the effect of increasing current liabilities.

Lastly, brief snapshot of our cash flows for the period. Operating cash flows were similar to the comparative quarter of 2012, as large tax payments reduced cash flows in both periods. Included in investing activities, our CapEx for the quarter was close to $40 million, which we expect will be our approximate spend rate for the full year with guidance at $157 million for 2013. Also included in investing activities was a purchase of short-term investments of $52.8 million, as we continually try to optimize our objectives of capital preservation and yield on our substantial treasury assets. Investing activities in the comparative period of 2012 were unusually high as that was a period that we closed the Minefinders transaction and recognized the acquisition of $86 million in cash, as well as a large liquidation of short-term investments in order to fund the cash components of that transaction. The two main items in the financing activity section of our Q1 2013 cash flow statement were a $24.5 million return of value to shareholders by dividends and share buybacks and the aforementioned repayment of leases in Peru of $21 million. At quarter end, we had some $490 million in cash and short-term investments, and are feeling extremely excited about the prospects of deploying this capital in a highly disciplined, accretive manner, given the current market conditions we find ourselves in.

And with that, I'll return the call to Geoff.

Thank you, Rob. We've had a good start to 2013 and I'm happy to be able to reaffirm that we are right on track to achieve our original production forecast for the year at 25 million to 26 million ounces of silver and 140,000 to 150,000-ounces of gold. We are still reviewing our forecast for cash costs over the balance of the year. We were well below our full year guidance in the first quarter. However, with lower by-product prices, particularly gold, our cash costs are likely to rise. The lower by-product effect will be offset with lower operating expenditures.

We have already identified some low hanging cost fruit that we can quickly trim. However, we are still in the process of identifying and quantifying potential savings and then balancing them with our clearly stated goal of maintaining our production. I expect this work will be completed and implemented over the next couple of months and at this point -- at that point we'll be in a position to revise our forecasted cash costs, if necessary. Like Steve, my expectation today is that we are most likely to find that we will be able to maintain our full year guidance at $11.80 to $12.80 per ounce.

As most of you on the call this morning are painfully aware, we have seen a decided shift in the equity markets, particularly as it relates to the precious metal and silver sector. For instance, in spite of our excellent financial results in 2012, and production records, our share price declined 21% and we saw investors shift out of precious metals on fears of political or fiscal changes in some jurisdictions and operational risks associated with cost increases at operating mines and development projects. In this new environment, investors pass demands of continued production growth have clearly given way to desires for real return, real returns in the form of dividends and share repurchases and demonstrated capital discipline. This trend was exacerbated last month when speculators pulled away from the gold and silver markets and the prices of both precious metals declined sharply in just a couple of days. Interestingly enough, while the speculators left or went short, the fundamental buyers in Asia and India came rushing back and physical metal sales in both locations have left dealers scrambling to find metal. It will be interesting to see over the next couple of months which of these groups will dictate the price; the speculators that merely play the precious metals like Vegas style gamblers or the real investors who understand and want to hold silver and gold for their intrinsic long-term value.

While not a happy time for precious metal and silver equities, Pan American Silver included, I am somewhat comforted to know that our conservative and disciplined financial management, our focus on maximizing the profitability of our current operations, and our delivery of real returns to our shareholders has helped us clearly outperform our peers. We would not be good investors or stewards if we didn't respond to the decline in the price of our primary product. While our basic plans for 2013 remain unchanged, achieve another year of record silver production, achieve another year of record gold production, evaluate our growth opportunities at La Colorada and Dolores, replace again our proven and probable reserve mine, proven and probable reserves mine, maintain our strong balance sheet, and directly share our financial returns with our shareholders through one of the highest dividend yields in the industry, we have to acknowledge the current environment and change some of our plans. We will be reducing our operating expenditures. As Michael has already described, we will be cutting our greenfield exploration programs and we will be reducing our overheads.

In terms of our capital programs, we will be looking at all of our discretionary projects and will be trimming where appropriate. But as Steve mentioned, the majority of our capital this year is for projects that are required to maintain our production levels at our current operations. The leach pad expansion at Dolores, tailings dam at Huaron, San Vicente and La Colorada, and underground development at our Peruvian mines. I'm not anticipating that we will be reducing our capital spending materially. We will continue to evaluate our organic, low risk, low capital growth opportunities at Dolores with the heat leach pulp agglomeration project and at La Colorada with the shaft and throughput expansion project. I am confident that both of these projects will provide excellent returns, even at current price levels. Our goal is clear. To preserve our balance sheet strength while at the same time not sacrificing our future production capabilities.

I would like to say that I remain very optimistic about the prospects for long-term silver and gold prices. Precious metals will recover. It may take some time, perhaps by the end of this year or even into the middle of next year, but in my view nothing has changed since the Fed embarked on its cash printing spree. In fact, if anything, the situation globally has been exacerbated by the Japanese Central Bank jumping on the same print money at all costs bandwagon. We are witnessing the biggest financial experiment in history and unfortunately I'm not very optimistic about the outcome when it finally unwinds and make no mistake, it will. Fundamentally, the Central Banks of the developed world are in a race to debase their currencies and my opinion, they will succeed. When that finally happens, precious metals, which have carried intrinsic value for the last 2,000 years, will do exceedingly well and investor confidence and sentiment will return to our sector and patient and supportive shareholders of Pan American should be very well rewarded.

In closing, I'd like to take a moment to thank all of our 7,000 plus employees worldwide who are the backbone of our Company and who will be leading the charge in adapting to this stressful period. And with that I would like to ask the operator to open our call for questions.

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

(Operator Instructions)

Rahul Paul, Canaccord Genuity.

Hi, everyone. Just at Dolores, the tonnage stacked in Q1 seemed to be quite a bit below what we've seen in the past. Just wondering what were the reasons for that? Is it the mine holding you back or the crushers or is it something else?

Yes, good morning, Rahul. This is Steve. The mine's producing pretty good tonnage and we also have a fair amount, probably a couple million tons of stockpile available to us. So the bottleneck is not up at the mine. We did experience some unexpected downtime's in the crushing plant during Q1 where we had some screen failures and we have a crusher mainframe that we're addressing as well. In addition, we're a little bit constrained on this leach pad two. We're having to move conveyors around, trying to make the final fill of that leach pad has constrained us to some degree so our tonnages are down from what they used to be. But they are -- I will say that the tonnages are in the range that we expected with our guidance. We did expect a slight decrease from last year on overall throughput as we get this leach pad three construction finished.

So for the rest of the year, should we expect something similar to what we saw in Q1? Or, should we expect it to pick up in the second half of the year?

Yes, when you look at our forecast, we pretty well kept that kind of throughput certainly through Q2 and into Q3 and a slight improvement in Q4 and that all depends on when we actually bring pad three online. If we bring it on in October, we should have a pretty good Q4.

Okay. And then staying with Dolores, you also mentioned that you were mining in zones where the silver grade was lower than expected. How much lower was it compared to your block model?

The silver grade looks pretty good, actually. It was the gold grade I was referring to. We were anticipating a 0.5-gram per ton gold and we achieved about a 0.45. And I would say right now probably three-quarters of that difference could be attributed to just mine sequencing and where we're mining relative to where we planned to mine. The other quarter is still in question relative to the reconciliation of the model. It is totally directed to the gold, not the silver.

Silver is fine. The MD&A had a sentence that said lower than expected silver grade. So just wanted to clarify that. And you also mentioned that at Dolores the revised mine plan was nearing completion. Is that something separate from the pulp agglomeration scoping study we're expecting in Q3?

Pardon me, Rahul, can I ask you to repeat the question. I'm not sure I understood.

I thought you mentioned during the call that revised mine plan for Dolores was nearing completion. Is that something separate from the pulp agglomeration scoping study? Is it something else?

I understand the question now. Yes, it's actually a good question. It's a combination thereof. We are looking at a mine plan with the all heat leach only case. Simultaneously, we are doing a mine plan with the pulp agglomeration. We've even done mine plans with the full scale mill and an underground as well.

So we've got probably four kind of iterations of mine plans going on simultaneously and we're kind of narrowing in, as I say, we're narrowing in on the mine plan. It is a mine plan that will likely include the pulp agglomeration circuit. The key in these mine plans is how we sequence the pits. We have the original design had eight different phases of sequencing the pit. We're looking at opportunities to maybe add one more phase and change the sequencing of each of those phases to try to access some of the higher grades and the more smooth fashion so we don't have these ups and downs of grades as we currently see in the current mine plan.

Okay. So if that's the case, should we expect the results to be available in Q3 with everything else?

Yes, exactly. Come August, we should have a real good feel for that mine plan and how it looks overall for the next short and long term periods.

Okay. That's it from me. Thanks a lot.

You're welcome.

Jorge Beristain, Deutsche Bank.

Good morning, guys. My question is -- a few. Could you just clarify what's happened with the large change in the non-controlling interest and if that's expected to be a recurrent issue or is there something going on with some of the assets that have been put up for sale there?

Sorry, Jorge, that doesn't -- I'll have to come back to you on that one. There shouldn't be any large factors driving that non-controlling interest in the period. I'll have to investigate that and come back to you.

Well, in the table you have in your presentation you're saying that in Q1 '13 you had a $72 million -- I believe that's a loss or a sharing of minority interest there and in the year-ago period it was de minimis. Seems to be a large change year on year.

That must be an error on the slide. Sorry about that. Actually, the non-controlling interest is de minimis in both periods. It was actually a $72,000 loss in the current period to --

Maybe it is a typo there. It does reflect a very large change on slide 20.

Okay. Sorry about that. That's $72,000.

Okay. My other question was maybe just for Geoff, in terms of increasing in this current environment, how can you increase your silver leverage per share for investors and if you could talk a little bit toward M&A and what you would plan to do with your very strong balance sheet in an environment where some of your competitors may be under more pressure, either operationally or due to recent large acquisitions or projects.

Certainly, Jorge. Certainly, on the M&A side, we are very actively looking at opportunities. It has not gone unnoticed by ourselves and by the market that assets have been devalued kind of universally within the silver sector and that has certainly been noticed by us and we're actively looking at things that perhaps even as little as five months ago did not look value accretive. And we're going to continue to do that and I hope over the next coming months that we might find an opportunity that will strengthen our overall portfolio by either, I'm going to say providing additional production or providing an additional development opportunity at lower cash costs and lower investment thresholds than what we're currently doing. So we're going to keep looking very carefully. The intention would be in that environment to use cash. I don't think at this time we're at all inclined to issue shares to do any further growth.

I'm not sure I fully understand your first question, Jorge, in terms of leverage to silver prices. We are currently, in terms of our income statement, we are 71% or plus 70% leveraged to the silver price. I don't see that changing in the short term with our production mix and I don't have plans to actually today change that production mix materially from what we've talked about and what we've guided.

I just meant leverage in terms of having more ounces of attributable silver production per share. In other words, that you could engineer that through a potential transaction.

Again, if that opportunity is there, absolutely, would provide some good accretive returns both on cash flow as well as earnings, rest assured we will take advantage of it.

And -- thank you. Sorry. Maybe just a quick follow-up for Michael. Is there any update on the drilling at Waterloo? I understand that you've been exploring some of the issues with the metallurgy with the ore out there. And if you could talk if there has been any advancement on the metallurgy.

As I said, we finished the drilling. We drilled two phases there right now. We drilled 53 holes. Most of them are C-holes to compare with the drilling done by Aserca in the '60s. So far, all the twin holes we drilled came back very similar or slightly higher in grade. So compared to probably around 10% to 14% higher in grade. But keep in mind that the study done by Aserca was not done after 43101 standards obviously in the '60s and not completely clear what all they included in that grade. But so far, when I do a direct comparison we're about 14% higher.

What we see is very fine grain mineralization in this deposit and we are full on working there on the metallurgy. We drilled two -- sorry, three large PQ holes, took very large samples, shipped them out and we are waiting for results right now. I don't know if Steve wants to add something here on the metallurgical side.

No, I think Michael mentioned, Jorge, in his talk about probably the most prevalent issue we're dealing with now is the silicon capsulation. We are seeing mineralogically there is silicon capsulation so we are working with the met labs at trying to look at alternative ways to try to liberate some of that silver and that seems to be a key driver to us in terms of defining what the flow sheet could be, which will in turn define what the potential economics could be. We're hoping during Q2, Q3, more and more metallurgical results will start flowing out that we'll report on.

Thank you.

Dan Rollins, RBC Capital Markets.

Thanks very much. My questions is regarding Morococha. If I were to take guidance as sort of the gospel right now, looking at the cash costs between 20.5 to 22 to 25 an ounce and then back on the CapEx you're spending there, about $15 million, looks like you're going to be all in cash costs in the $27 to $29 a range, rough estimate. Right now that mine is going to be bleeding pretty significant cash at the current spot silver prices. How much more low hanging fruit can you pick off of this mine? It's been one of the ones, I know you have focused on keeping the costs under control, trying to reign in costs. How much more work can really be done here to bring those costs down to a break-even on a free cash flow basis?

Dan, this is Steve. We are pretty encouraged by what we're seeing right now at Morococha in terms of the benefits of this mechanization program. We are seeing costs starting to trend better than we anticipated even and as we start to implement some of these cost saving initiatives, they kind of had a head start if you will in Peru because the economics of our Peruvian mines in our budget estimates were fairly tight. So we launched a number of these initiatives already that are starting to bear fruit today and we are starting to see some movements that are going in the right direction. The other key aspect of Morococha is we are still mining below reserve grades due to a combination of access and where we can get to those reserves, as well as mining methods and dilutions that we think there's some opportunities there as well. We're currently feeling pretty comfortable that we can readjust our plans without changing cut-off grades, per se, at our current price forecast for the rest of the year and keep it at a reasonably break-even price going forward.

Okay. So we should sort of expect to see some improvement over the next two to six quarters, especially as you get the underground development up and running? You also see unit costs coming down.

Exactly.

Okay. Perfect. That's all I have. Thank you very much.

Trevor Turnbull, Scotiabank.

Yes, the first one is related to Dolores. I was wondering, given that you've had a little bit of a reconciliation issue with the gold that Steve was talking about, when you put out the new mine plan later this year at Dolores, will there have been in-fill drilling or anything that might address that and help tighten up the reconciliation there?

Yes, Trevor, this is Steve. The exploration drilling is really focused outside of the pit area itself to extensions in the pit and some of the underground targets that we're looking at. So that drilling by itself won't really factor into this reconciliation review. What we'll do is we are doing our seed drilling now. We have been doing it since Minefinder's time for ore control and we have been looking at that RC drilling. We have been doing a number of blast movement studies and mine ability you studies to try to improve our ability to cut the ore away from the waste there and we're seeing some pretty good progress in that. So those are the kind of things that will feed this new mine plan. We'll see it as an outcome of the new mine plan there.

Okay. And then while I've got you, with respect to the direct cost savings, I heard you say that you're looking at things that should be able to hold the line on costs, given that you're likely to see lower by-product credits. But I wasn't sure if you said this or not. Does that also include trying to keep the production relatively stable or is that one of the things that might be on the table is slightly reducing production if that's what it takes?

Yes, no, we actually said we want to keep the production stable right now. We feel we're in a pretty good position to bring in our costs at the current production rates and we don't want to see a drop in production at all.

And certainly understandable. That implies that either there is a fair bit of low hanging fruit like you were being asked about just previously or potentially you might be looking at slightly higher cutoffs. Is that something you would also take a look at?

Yes. Right now we don't see a need to go to higher cutoffs. I would say of our seven operations, Morococha is clearly the one that's probably at the most risk. It will be the first one that we will probably start to look at changes in cutoffs if we have to. But as of today, we feel there are some low-hanging fruits, some cost savings out there that we can gather without changing the cutoff grade right now, today.

Okay. And then maybe just a couple of quick financial questions. You mentioned that Q1 is when you tend to make your final payment on 2012 taxes. Is that something that is likely to recur every first quarter, you'll be kind of making that last cash tax payment?

It's Rob here. Actually, in 2012 Q1 and 2013 Q1 were extreme cases of that. We would always expect slightly elevated payments in Q1 but not as elevated as we've seen the last two years. There's some very specific reasons why that's been the case in the last two years. But ordinarily, it should be relatively even with a slight increase in Q1 as we finalize our tax returns.

And so for the remainder of the year we would expect it to be fairly even?

We would certainly expect so as we pay installments, although obviously the lower price environment would likely lead to lower installment payments.

Okay. And then just a final question maybe on the share buy-back. It seems that the pace of the buy-back has been fairly slow. Is that something that's by design or more a nature of volumes and liquidity?

Hi, Trevor. It's Geoff. That's very much by design. We looked at early in the quarter and quite frankly we're trading at levels much higher than where we are today and we were active in the market and as we saw prices being squeezed literally about a month ago, we thought it at least prudent in a short term to let -- A, let the prices settle and see where we're at and they seem to have done that to a certain degree as of today and see the impact on our share price and as a consequence, we were less active in the market. I think going forward, we'll, again, re-evaluate looking at what we believe our MPV is internally relative to the share price. We'll look at other opportunities for using our cash. As Jorge questioned a little while ago, we're certainly very actively looking at opportunities in the M&A field and should circumstances warrant and our finance committee decide, we would happily pick up that activity again if we see stable prices and continued share price pressure.

Okay. Super. Thanks, guys.

Thanks, Trevor.

Chris Lichtenheldt, Dundee Capital Markets.

Good morning, everyone. First, just wanted to ask on Manantial Espejo. If I think back to the past few conference calls it hasn't sounded like that asset has been the best place to put your capital but with a bit of a currency devaluation and potentially some better operating prospects ahead, what is the outlook for that asset? Has there been enough capital being put in there to move forward pretty steadily or do you have to do some upkeep beforehand?

Yes, good morning, Chris, this is Steve. No, I think Manantial Espejo, the next few years look pretty good with where we've capitalized right now. If we can get these costs to continue to trend downward, it looks like upside is ahead of us for the next few years for sure.

Okay. Great. Second, I just wanted to come back to the M&A topic quickly. You talked about potentially some opportunities out there, asset prices have obviously come down but as have the silver prices which I think most investors are willing to plug into their models when considering potential returns on investments. Can you talk a little about your philosophy around when you're looking at these things, do they have to work under higher metal prices or are you at the point where they'd have to work at spot silver or lower for you to go ahead? What sorts of opportunities are these? Are these exploration stage where there's still some years of capital ahead or can you just talk a little about that?

Sure, Chris. Right now we still have our reserves pegged at $25 silver. We've yet to make a change to that and I'm not sure we will to be quite honest. It's pretty short-term to be making long-term pricing decisions based on a one month dislocate in the silver and gold prices. So I would say as it stands today we'd be looking at things at $25. I would say in terms of returns, we're now applying higher return rates and those rates would be adjusted relative to jurisdiction with countries like Argentina or Bolivia. I'm not saying we would move in those directions but if there were projects in those locations, they would have to demand much, much higher returns in the at least plus 20% neighborhood or higher. And even in jurisdictions like Mexico, which is fairly favorable and remains fairly favorable, we're now looking at returns of at least 15% before we would get very excited.

As for the style of project or style of opportunity, ie, exploration development stage and, or an operation stage, I would say first and foremost would be an operating project where we saw upside either in the associated reserve and, or in an ability to run it better is the best way to describe it, an ability to rationalize or improve productivity. That would be number one target. Number two target would be late stage development project. I'm not as excited about those projects, only in so far as they would add additional capital risk and as we've seen of late, my impression is that our shareholders are not particularly excited by taking on more capital risk today and I would say I'm least excited about late stage exploration that requires a lot of discretionary exploration funds just to get it to a point where you could even contemplate doing a PEA study or even a scoping study. So number one is, does it have some production that would meaningfully change our profile and two, does that -- do we think we can do better with that current production than perhaps the current operator is doing.

Great. Sounds like a good approach. That was great color. Thanks a lot.

Thanks, Chris.

Andrew Kaip, BMO Capital Markets.

I've just got two quick questions. I noticed on your CapEx spend for both San Vicente and Manantial Espejo that your CapEx spend during the quarter was quite light relative to what you had guided and I'm just wondering is -- are these expenditures we should see flowing through the remainder of the year or are these areas where you feel that you can reduce overall CapEx spend?

Hi, Andrew. This is Steve. They were light mostly on timing of the projects and when we brought the projects online.

Okay.

There is some savings we're looking at both of those mines going into the rest of the year. However, I don't think they're going to be large. Again, we've got some real requirements to raise the dam at San Vicente and some of the pre-stripping that we have to do at Manantial Espejo on the pit that we have to do to maintain our productions into next year and years beyond. So I don't anticipate a big change but there may be some reductions there.

Okay. So we should be expecting those to flow in through the remainder of the year.

Correct.

All right. Thanks very much.

Thanks, Andrew. Ladies and gentlemen, thank you very much for joining us today for our first quarter call. Certainly, as always look forward to updating you again in August during our second quarter call and with some ideas and some further details on where we're at with some of our cost reduction programs and what we look like going forward over the balance of the year. Thank you very much.

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