Pan American Silver Corp (PAAS) 2013 Q2 法說會逐字稿

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

(Operator Instructions)

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

Thank you, Operator, and good morning, ladies and gentlemen. Welcome to Pan American Silver's 2013 second-quarter results conference call. Today I'm joined by our President and CEO, Geoff Burns; our Chief Operating Officer, Steve Busby; our Executive Vice President of Corporate Development and Geology, Mr. Michael Steinmann; and our Chief Financial Officer, Rob Doyle.

I would like to begin by reminding our listeners that this call cannot be reproduced or retransmitted without our consent, and that certain of our statements and information 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 are necessarily based upon a number of assumptions and estimates that were considered reasonable by the Company, are inherently subject to significant business, economic, competitive, political and social uncertainties and contingencies. There may be known or unknown factors may 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 August 15, 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.

Now, I will hand it over to Geoff.

Thank you, Kettina, and good morning, ladies and gentlemen.

I will provide a quick summary of our second-quarter results, and then I will hand the call over to the rest of our senior team for a more thorough discussion of our operations, our development projects, our exploration programs, and our finances and balance sheet for the second quarter and for the first half of the year.

I would like to start by letting you know that yesterday our Board of Directors approved the third quarterly cash dividend of the year in the amount of $0.125 per common share. The dividend will be payable on or about Monday, September 9 to owners of record as of Monday, August 26, 2013. It is certainly rewarding for us to have the financial strength to be able to continue to provide real and direct returns to our shareholders, in spite of the declines in the prices of silver and gold. We are certainly one of the very few precious metals companies that hasn't been forced to cut their dividend. Using yesterday's closing share price on NASDAQ, our cash dividend provides an annual yield of approximately 3.6%, one of the highest if not now the highest returns in the mining sector.

Now, for a quick review of our second-quarter results. Starting with production, our second-quarter silver and gold production were somewhat lighter than we had planned. Even though we increased our silver production at five of our seven operations, as compared to the second quarter of 2012, this was insufficient to offset some shortfalls we experienced at our Dolores and Manantial Espejo mines. Steve will provide more color on the challenges we faced at each of these mines during the past quarter, how we've addressed the issues, and where he sees us going over the balance of the year.

For the current quarter, our silver production was 6.2 million ounces; our gold production was 29,900 ounces; and our cash costs for the second quarter were $12.09 per ounce, net of by-product credits. This was a modest 2% increase as compared to a year ago. Not too bad considering the prices of all of our by-products, except for lead, were considerably lower in the current quarter. Perhaps more importantly, and not abundantly clear in our financials, is the cost of producing a ton of ore at Pan American has actually declined 2% as compared to a year ago, in spite of the inflationary pressures we have faced. And we expect further reductions to our cost per ton mined over the balance of the year as our cost reduction efforts start to bear more fruit.

Financially, we had a tough quarter. In spite of increasing the volumes of silver and gold we sold, the decline in prices pushed revenue down to $175.6 million, and significantly cut into our margins. Our mine operating earnings, which is revenue less direct operating costs, less depreciation, and less royalties, fell to $3.8 million in the current quarter. While lower prices hurt our margins, we also had to absorb a $10.3 million hit on repricing some of our last quarter's concentrate sales and a writedown of our Doray inventory held at the end of the last quarter of $13.2 million. Excluding these two items, our mine operating earnings would have been over $27 million.

We generated operating cash flows before interest and taxes of $23.7 million, or $0.16 per share during the second quarter. But clearly the biggest item affecting the current quarter's financials was $185.2 million writedown of the goodwill associated with the purchase of the Dolores mine -- a difficult pill to swallow, given the long life of the Dolores mine and the short duration of the decrease in precious metals prices; but a necessary step. As a consequence, we moved to a net loss for the quarter of $187.1 million or $1.23 per share.

There is a lot going on in our financials this quarter. Rob will spend more time going through the details, but we absorbed the Dolores impairment; an FX loss on our Canadian dollar bank balances as the US dollar strengthened on a relative basis; a negative pricing adjustment, an inventory writedown to the lower costs of market on our Doray, offset somewhat by gains on the sale of one of our exploration properties; and a derivative gain, largely due to the unwinding of the accounting we recognized in the first quarter for the then-proposed transaction with Esperanza.

A bit of a messy quarter financially, but we managed to end the second quarter with over $440 million in cash and short-term investments, working capital of over $700 million, and a small amount of debt, maintaining one of the strongest balance sheets in our sector.

Now I'd like to turn the call over to Steve for a more thorough review of our operations and development programs. Steve?

Thank you, Geoff.

As Geoff described, our consolidated silver production of 6.2 million ounces was 3% below the production from the second quarter of 2012, and below our expectations, due to some unique and resolvable challenges based at our Dolores and Manantial Espejo mines that I will describe for you in more detail shortly. Since Dolores and Manantial Espejo are also our largest gold producers, those same challenges led to a 7% drop in gold production from last year to the 29,900 ounces.

Solid performances across all of our other five mines fueled a 26% increase in our zinc and lead production, and a 21% increase in our copper production from the same period last year. Successful cost control efforts across all seven of our operations resulted in flat overall direct operating expenses compared to last year, which when coupled with the reduced metal price effects that lower royalty payments, led to a consolidated cash cost of $12.09 per ounce, which was in line with our expectations and only 2% increase above last year's cost, despite incurring the production challenges we faced at Dolores and Manantial Espejo.

Starting with Dolores Mine in Mexico, we encountered greater overall earth work volumes, and a higher component of hard rock requiring drilling and blasting than expected, in constructing our extension to the active Leach Pad #2 facility. This resulted in a one month delay in completing the construction, which was originally planned for the end of April. In addition, we incurred a 12-day leach pad loading shut down during the quarter to allow commissioning of a temporary conveyor bypass and removal of an overland conveyor section, which had been originally built by the previous owner along the base of the vitally important Leach Pad #3 area.

As Leach Pad #2 was already very near its ultimate capacity in early May, the one-month delay in completing the extension severely restricted areas that could be efficiently loaded and leached. Essentially, the only areas available to load were small isolated wedges along the perimeter of the heap, which basically diluted the pregnant solution normally collected from larger volumes of fresh ore with low grade solutions from the adjacent previously-leached spent ore.

Since we have a fixed volume of solution being sprayed and recovered from the heap, the resulting product solution/dilution extends the recovery time beyond that normally experienced. This is merely a time issue, and does not jeopardize the ultimate recovery of the silver and gold ounces stacked; whereas the 12-day shut down of loading of ore during May, to tie in and commission the temporary conveyor bypass disrupted production beyond the few days we had anticipated.

These two factors collectively resulted in a 10% shortfall of ore tons stacked and an 8% to 10% hold-up in the recovery of the gold and silver from the ore that was stacked during the quarter at Dolores. This resulted in silver production of only 0.8 million ounces, and gold production of 13,500 ounces for the quarter.

Underlying cash costs at Dolores before an inventory adjustment, related to the first quarter of this year, were $9.23 per ounce. This high cash cost was primarily due to lower silver and gold production for the reasons I described, in addition to higher employment costs, higher crusher maintenance costs while we took advantage of the extended down time for the leach pad project; appreciation of the local currency, and a decrease in the gold price.

In light of putting behind us the inefficient ore loading and leaching issues experienced during Q2, the adequate construction advance we have on the Leach Pad #3, which will be available for operation as needed late this year, the current site cost structure, and the good reserve to mine ore control reconciliations we have been experiencing, we are expecting an improved second half performance. With the improvements -- which, by the way, are quite evident in our July results -- we are slightly adjusting our full year forecast to between 3.1 million and 3.3 million ounces of silver production, at a cost of about $7.30 to $9 per ounce, inclusive of producing 55,000 to nearly 59,000 ounces of gold, using the reduced $1,200 per ounce gold price compared to our original $1,600 per ounce assumption.

Moving to Manantial Espejo mine in Argentina, we suffered hindered production rates from a lack of adequate spare parts inventories, as we continue to catch up with efforts to replace foreign supplied parts with local manufacturers, and adjust to the increased importation logistical requirements. Fortunately, we have been largely narrowing down the amount of equipment that is suffering from a lack of spare parts supply. However, we were particularly impacted during the quarter by poor availabilities of our open pit grade control drill rig, hindering open pit ore mining; our long hole drills, reducing the amount of higher grade underground ore being mined; and our sag mill pebble cone crusher, reducing our mill throughputs for most of the quarter. These low availabilities on this equipment resulted in quarterly silver production of 0.7 million ounces, at a cash cost of $18.86 per ounce, compared to 0.9 million ounces at a cash cost of $15.46 per ounce last year.

Meanwhile, we have made excellent progress at catching up on open pit waste mining as our blast hole drilling, our loaders, our trucks, and our other ancillary mobile mine equipment availabilities have improved to acceptable levels. We are expecting to slowly overcome the spare parts supply issues during the course of Q3 as critical part deliveries are received, and finish the year with a strong Q4. Overall, I expect our full-year silver production logistical Manantial Espejo to be between 3 million to 3.2 million ounces, at a cost of around $13.50 to $16 an ounce, including 49,500 to 53,500 ounces of gold by-product credit, using the $1,200 gold ounce price.

Elsewhere, as I mentioned, our other five mines operated solidly within expectations during the quarter. Production from our La Colorada and Alamo Dorado mines was slightly ahead of a year ago, at 1.2 and 1.3 million ounces, with cash costs increasing around 30% to $10.65 and $7.25 per ounce respectively.

At Alamo Dorado, increased throughputs and better silver recoveries were offset by lower grades, lower gold prices, higher employment costs, and a stronger local currency. We are expecting slight increases in throughputs and costs at similar grades for both mines for the remainder of the year, maintaining our original full-year silver production forecast for La Colorada of between 4.6 million to 4.7 million ounces, and slightly increasing the production forecast for Alamo Dorado to 5.1 million to 5.3 million ounces. With the reduced gold price outlook, we are forecasting slight cash cost increases at both La Colorada and Alamo Dorado for the remainder of the year, ending with a full year around $9.85 to $10.25 for La Colorada and $7.30 to $8 for Alamo Dorado.

Our two Peruvian mines, Huaron and Morococha, also delivered solid quarterly performance, achieving 0.8 million and 0.6 million ounces of silver at a cash cost of $17.29 and $20.88 per ounce respectively, as multi-year efforts in cost controls and production-enhancing mechanization initiatives are beginning to show benefits in line with our expectations. I can say that our early look at the July figures show even greater improvements, actually ahead of our expectations, and believe these will continue through the remainder of the year. As such, we are reducing our full-year forecast cash costs for Huaron and Morococha to between about $16.70 to $17.40 for Huaron, and between $18.70 and $20.05 for Morococha, which are both substantial reductions to our original guidance, thanks to these successful efforts. Production-wise, we are revising Huaron's full-year forecast upwards to 3.2 million to 3.3 million ounces, whereas we are trimming the Morococha forecast slightly to 2.3 million to 2.4 million ounces.

In Bolivia, our San Vicente mine produced according to expectations, achieving 0.9 million ounces of silver at a lower than expected cash cost of $16.04 per ounce, benefiting from the reduced royalty cost at these lower metal prices, and some higher by-product zinc production. We are anticipating similar production performance for the second half of the year at substantially reduced cash costs, given the expectations of lower silver prices persisting, resulting in reduced royalty payments, yielding between 3.7 million to 3.8 million ounces of silver at a cost between $15.70 to $15.85 per ounce, for our new full-year forecast.

Meanwhile, our future production expansion studies at Dolores and La Colorada advanced well during the quarter. We have completed laboratory testing and analysis necessary to satisfy ourselves of the potential magnitude of silver and gold recovery increases available, utilizing a pulp agglomeration circuit at Dolores for the high-grade ores. We have also completed resource modeling and mine planning work that defines the optimum production schedule of mineable tonnages and grades of open pit ores, available for treatment in a pulp agglomeration circuit.

Sufficient engineering as well as construction and operating cost estimates have been completed to support a preliminary economic assessment for this project. The project is technically viable, and our preliminary economic analysis looks very encouraging at our long-term reserve prices for silver and gold. As such, we are going to continue to investigate some additional upside opportunities that may further enhance the economics in light of the lower silver and gold prices today. At the same time, we will be proceeding with some basic engineering work, spending perhaps $2 million to $3 million this year, which will put us in good position to advance in the development of the project, should the opportunity investigations prove positive and/or the metal prices improve.

We are on track to finish our technical study for the La Colorada Mine expansion by year-end. The resource and reserve development work under way continues to confirm significant extensions of high grade continuity in the Australia structure, just as we had anticipated. The study is beginning to highlight the tremendous potential of this project to expand our La Colorada mine into our largest silver mine development in the Company's history so far, in terms of annual production, life, and profitability.

To summarize, we encountered some unique and unexpected challenges during the quarter, with drastic reductions in the silver and gold prices eroding our revenues, some unpleasant surprises in the earthworks of our leach pad expansion project, and the lagging effects of the sluggish spare parts supply chain in Argentina. However, we have managed to step up and tackle these challenges with some excellent progress at cost reductions and productivity enhancements in Peru, advancing our growth projects, and redistributing our production mix from our seven diverse assets for the remainder of the year, resulting in us maintaining our overall consolidated production and cash cost guidance of between 25 million to 26 million ounces of silver, at a cost between $11.80 and $12.80 per ounce, despite reducing the remainder of the year by-product gold price from $1,600 to $1,200 per ounce.

We are also maintaining our full-year capital spending forecast of $157 million by eliminating or deferring certain projects, which fully offset the increased leach pad construction costs incurred at Dolores, addressing the issues I previously mentioned.

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

Thank you, Steve. Good morning, everyone.

The low metal price environment forced us to make major changes to our exploration programs. I already discussed some of the cuts during our May call, when we decided to focus on our new mine exploration and put early stage projects on hold. This will result in the savings of about $6.3 million for this year.

During Q2, we drilled a total of over 47,200 meters. Only 1,640 meters of drilling was done on the greenfield project, which is located in the surroundings of the Morococha operation. We spent a total of $5.7 million in the quarter, well within our annual adjusted exploration budget. The second half of 2013 will see even more reductions to our drilling activities, as we are finalizing some of the programs at Morococha, Manantial, and Huaron in September and October. La Colorada will see an increase of exploration spending for the year, with the addition of $1.3 million for drilling of the Amolillo vein.

No drilling took place at the two projects, La Virginia and Waterloo. Although we continue with some limited desktop work, both projects have been put on hold at this time. Nearly 40% of the Q2 drilling took place at La Colorada, where both main areas, Candelaria and Estrella, returned exceptional results. In Candelaria, we intersected the NC2 vein with 2.5 meter width containing 614 grams silver, 0.7 gram gold, and over 19% lead/zinc combined. Another hole intersected a more narrow width of 0.4 meters, but returning over 7.3 kilogram per ton silver and 13% lead/zinc combined.

A split to the main Amolillo vein returned to 10.8 meters, containing 365 gram of silver; and the second hole on the same structure intersected 1.9 meters with 1.49 kilogram of silver per ton and 5.8% lead and 2.6% zinc. Drilling on the Amolillo vein itself intersected many high grade intervals, like 4.2 meters containing 833 grams of silver, 3.8 gram gold and over 6% combined lead/zinc; 2.7 meters with 1.8 kilogram silver, one gram gold and over 11% combined zinc; or 3.3-meters containing 873 grams per ton silver and over 5% combined lead/zinc, just to mention a few. On this slide you'll see a long section of the Amolillo vein, with the reserves in red and blue, and resources in yellow and green. The red dots are indicating the current drill holes. The resource along the Amolillo vein is covering narrow strike lines of over 1.3 kilometer, but is still wide open to the east, west, and [up top].

With the current exploration program, we keep adding silver resources at the rate of approximately one year of additional La Colorada production every quarter. Since January of this year, we have added already over 12 million ounces of new silver resources. How many of those ounces will make it into the reserves at the year-end will depend on metal prices we used for our reserve estimation in December, but I have no doubt that we will add again several years of mine lives to La Colorada with our exploration program.

Exploration at our Dolores Mine advanced very well during Q2, returning outstanding results from the west side of the pit. 20.7 meters, containing 5.4 gram gold equivalent, 44.7 meters with 0.9 gram gold equivalent, and 24.2 meters with 1.9 gram gold equivalent are just a few of the impressive results. After focusing exploration for the first six months, mostly on the north and west extension of the pit, we moved the rigs now to the south. First phase drilling there confirmed a potential for a new mineralized ore body, starting about 400 meters south of the current final pit outline. The most promising holes returned a 36-meter down the hole interval, with 1.7 gram gold equivalent and the 35-meter interval, containing 2.3 gram gold equivalent. Drilling in this zone will continue during Q3, which will give us a better idea of the size and shape of this possible satellite deposit.

Let's move to the Huaron mine in Peru. During the Q1 conference call in May, I mentioned some of the wide drill intersects we discovered at Huaron in the north part of the mine. Follow-up drilling of the zone called [coastal de ore body] returned even better results in Q2. On this slide, you can see a long section with the resource blocks in red and blue and a map view of the ore body with underground development on two levels at the bottom, and a table with the drill results on the right. Please note each square on the map is 50 meters long.

Some [massive] sulfites have been intersected in 10 additional holes. Some examples are 45.3meters, containing 353 grams silver, 9.2% lead, and 16% zinc; 34.2 meters with 256 grams silver, 5.6% lead and 12.5% zinc; or 18.5 meters containing 221 grams silver, 3.1% lead and 2.3% zinc. The first cross cut development, perpendicular across the ore body, has confirmed drilling, exposing the mineralization of over 27-meter length with 214 grams silver, 3.4% lead and 4.8% zinc on average. This is a very positive development for Huaron. Exploration and development work is ongoing in order to outline and prepare this disseminated and wide mineralization for production.

I believe that even with the cutbacks in our exploration program we delivered impressive results for the first six months, and many of them will be included in the resource and reserves updates at the end of December. Using the same reserve metal prices as last year, we are on track for full replacement of mined silver ounces. Applying lower long-term metal prices at the end of the year to our reserve estimation would obviously have an impact to the replacement of silver ounces, moving some of the reserves back into resources.

Now to Rob for a financial review.

Good morning, ladies and gentlemen.

There is no denying that Q2 2013 was a very challenging quarter for the Company, and our financial results are reflective of that. We showed a net loss of $187.1 million for the quarter, a far cry from the $37 million net earnings from a year ago.

Our results in Q2 2013 were hurt by five main factors. Firstly, an impairment charge of $185.2 million, relating mostly to write-off of the goodwill associated with the acquisition of the Dolores Mine in early 2012. The impairment charge was a consequence of lower metal price consensus, and a proposed mining royalty in Mexico. Secondly, sharply lower metal prices, which caused a negative price variance to revenue of $58 million compared to a year ago, including negative price adjustments of $17 million, $10.3 million of which related to provisionally reported sales in Q1 2013. Thirdly, net realizable value writedowns of $13.2 million on Doray and stockpile inventory at Manantial Espejo and Dolores. Fourthly, an FX loss during the quarter of $9.9 million, mostly in our Canadian dollar cash balances and our Argentine-backed receivable assets. And lastly, below expected operational results at Dolores and Manantial during the quarter, as Steve has reported, as throughput rates and ore grades were challenged at both mines.

Partially offsetting these negative items, Q2 2013 results were positively influenced by a derivative gain of $16.8 million, most of which relates to the termination of the Esperanza transaction and the associated cancellation of our commitment to subscribe to Esperanza shares; and secondly, a gain of $3.9 million on the sale of the Taviche exploration property in Mexico to Fortuna Silver.

So as you can tell, we had a turbulent quarter, with a significant number of abnormal items impacting our results. To provide a better insight into our underlying adjusted earnings, we have provided the following reconciliation, in which we adjust out several of the factors that I just mentioned -- the impairment to goodwill and inventory, the unrealized piece of our FX loss, the gains on our derivative and asset sales, and of course, the tax effect of those items -- to arrive at an adjusted loss of $9.9 million for Q2 2013, which compared to an adjusted earnings of $8.2 million a year ago.

The waterfall charts on your screen now shows the main factors driving this change in our adjusted earnings from a year ago. Obviously, the lower prices are the dominant factor, offset by the fact that we sold significantly higher quantities of all metals we produced, especially silver and gold. In fact, we sold almost 600,000 more ounces of silver and 6,000 more ounces of gold in Q2 2013 than we did in the comparable quarter of 2012. Naturally, with higher quantities sold comes the associated cost of those sales, including depreciation. Items worth noting were higher realized FX losses, offset by lower exploration expenses, reflecting a rationalization of those activities.

Moving to the working capital portion of our balance sheet, we saw a decrease of $37.3 million in our overall working capital balances, with working capital sitting just over $700 million at quarter end. The decline was mostly reflected in lower cash and short-term investments and accounts receivable balances, partially offset by a net decrease in current liabilities. From a cash perspective, operating cash flows before working capital movements were diminished, due to the lower realized prices, while actual cash taxes remained high, at $23.2 million for the quarter based on installments calculated at last year's higher income tax levels. This meant that we needed to use our Treasury to partially fund capital expenditures of $44.3 million for the quarter and pay our dividend of $18.9 million.

The other significant item on our cash flow statement was the drawdown of an $18.6 million loan from a local Argentine bank, in pesos, which was aimed at better balancing our peso assets and liabilities to combat the corrosive effect of devaluation of the Argentine peso on our balance sheet. We also repaid a further $4.8 million of the leases we had utilized to finance the Morococha relocation project. Cash and short-term investment balances ended the quarter at a healthy $420.2 million, with long term debt of only $43 million.

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

Thanks, Rob.

There's no doubt, as everyone has mentioned, the second quarter was a challenging quarter for Pan American and for the rest of the silver and precious metals sectors. The slide you're looking at shows the precipitous fall in April of prices that continued well into July. But of late, we have seen rebound in the price, and I'm hopeful that we have seen the bottom and remain optimistic that prices will recover, although perhaps not in the short-term.

Regardless of my optimism on the long-term profits for silver and gold, we have and we'll continue to respond and react to the lower price environment we find ourselves in. We have reduced our capital spending and our discretionary projects, but have not and will not cut spending on the projects necessary to maintain our production. We have reduced our exploration spending, and have sliced into our general and administrative cost. Some of our efforts are already apparent, while others, particularly at the mine level, where we were looking not only at cost savings but production enhancement, take more time before the full effects can be realized through our financial results -- something I am expecting to realize more fully in the third quarter.

In the interim, we have also taken the decision to hedge a limited percentage of our silver and gold production. Responding to the sharp decline in precious metals prices, we have evaluated alternatives to mitigate the financial risk of further price erosion, and decided it was appropriate to protect a portion of our future metal production associated with the higher-cost Peruvian and Argentine operations. As a consequence, and subsequent to the end of the current quarter, we adopted a short-term strategy to enter into forward contracts of up to 12 months for a maximum of 25% of our forecast silver and gold production from Morococha, Huaron, and Manantial Espejo only.

To date, we have sold about 3.1 million ounces of silver and 16,000 ounces of gold forward under contracts with average prices of -- slightly more than what I'm describing -- 5.3 million ounces of silver and 24,000 ounces of gold, under contract at $20.43 per ounce for silver and $1,323 per ounce for gold, which will be settled monthly, beginning this month and ending in June of next year.

The basic premise is straightforward and financially conservative. We wanted to protect our cash flow and liquidity from our higher-cost operations in the short-term, allowing them the time necessary to fully implement new mine plans and reduce costs. I expect this to be a short-term hedge only, and is not a shift in Pan American's strategy of leaving our precious metal production available and levered, and exposed to spot market prices.

While it's certainly not a happy circumstance to see the prices of your primary products decline by almost 30% in a few days, we have taken steps, and will continue to take more steps to adapt our business plans to this new price environment. In so doing, we will create a stronger Pan American. As Steve has described, we are maintaining our full year's production guidance at 25 million to 26 million ounces of silver, 140,000 to 150,000 ounces of gold, and cash costs of $11.50 to $12.80 per ounce. This means we are expecting much-improved production in the second half of 2013, led by rebounds at both Dolores and Manantial Espejo, and further real cost savings to offset the lower by-product prices we'll be receiving for gold production. This production trend should be sustainable well into 2014, as well.

We've cut G&A, we've trimmed exploration, and still been able to produce some tremendous results. We will continue to evaluate our low cost, low risk organic growth opportunities, led by the potential to expand our La Colorada operation and add pulp agglomeration to our Dolores mine. We have retained our liquidity, and are doing everything we can to protect it, and I do expect us to return to profitability by the end of this year, if prices don't slide below their current levels. I've seen our July results, which only boosts this confidence I have in making these statements. We are indeed retuning to become a stronger company, and we will succeed in that goal.

In closing, I would like to take a moment to again thank all of our 7,000-plus employees worldwide, who are the backbone of our Company, and who will continue to lead the charge in adapting during this stressful period. Thank you.

Operator? Open for questions.

(Operator Instructions)

The first question today comes from Jorge Beristain of Deutsche Bank. Please go ahead.

I guess two-fold. Congratulations on sustaining, as you said, an industry-leading dividend policy now so my first question was how sustainable is it? Is it something that if we were to see a protracted period of sideways silver prices, that the dividend could be at risk? That's my first question.

I mean, I think we would like to see where we get through in the third and fourth quarter, with all the steps we've taken in each of our operations. We have some pretty high expectations for how those steps will improve the cash flows, particularly from our higher cost operations. And if we see prices at this level, I'm pretty confident that with those steps, that we'll be able to maintain our dividend.

Great, thank you and my second question, and this has become quite de rigueur in the gold industry, but there's a lot of talk about all-in sustaining CapEx per ounce and all-in sustaining costs. Could you kind of give us a concept for 2014 as to what you're looking at as being your sustaining cost for silver, and then basically talk about what you see as being your maintenance CapEx in gross dollar amounts, and your growth CapEx that you would envision for 2014?

Well, we haven't released our 2014 plans yet, because as you know, we're probably now just breaking into our budget period, which we don't conclude until typically about the early part of November. I would expect, as a general concept, I would expect to see our capital requirements come down in 2014. We have, this year, been doing tailings dam work at La Colorada, as well as San Vicente, as well as Huaron. We have two leach pad expansions we're working on in one year at Dolores, with leach pad two expansion as well as leach pad three preparation. So I do expect those are somewhat one-off events, although there will be still more leach pad work at Dolores next year. But I do expect our capital to come down, sustaining capital.

I also do expect to see our direct operating costs coming down, or at least at the very minimal be flat as we increase tons processed, as I think I mentioned in my remarks a little bit earlier. And expectations for production again, we're a bit early, but I don't see any reason why we wouldn't be at similar levels next year as to where we are right now.

In terms of the all-in costs, certainly we're aware that the new pronouncements from the World Gold Council and the standard they have brought out, I think it would be our intention to look at adapting that standard going into 2014. I think it's a bit premature within the silver sector, as I look through our peer reporting companies, and don't see anyone that I would consider a peer in our sector having yet adopted that standard. But having said that, that is the direction we're going to be going in 2014.

Okay, great. Thanks very much.

The next question comes from Rahul Paul of Canaccord Genuity. Please go ahead.

With regards to Dolores, you indicated that you have completed an updated mine plan and a preliminary economic study for the year with the long based circuit. Are you planning to release the results to the market?

Well, I don't think we're going to at this point for the simple fact we ran all that work at our reserve price, which is $25 for silver and $1,350 for gold. And I can say at those levels, it's not a very exciting project. There are about three additional opportunities that we had not yet fully evaluated, relative to that program, that have to do with the kinetics of the actual release of, or the leaching of the gold and silver through the agglomeration process. Has to do with the amount of material that we -- and water we're able to move, et cetera.

I want to, I think it behooves us to fully investigate those potential upsides, and that is why we're going to go into basic engineering and continuing our evaluation. And at the same time, to see if those things are enough to push the project into a decidedly positive rate of return at current prices and/or give ourselves some time, as I expect to see prices rebound going somewhere into next year. So, that's a long answer to your question, but no we don't plan on releasing that study at present. We plan on doing more work on it before we publish the detailed results.

And just further on that question, for a project like that at an operating mine, what sort of a return would you require before you said that it was a good project?

I think we're looking at least a 15% return as our in-house hurdle rate on operating projects.

Okay, thanks, Geoff. That's it for me.

The next question comes from John Bridges of JPMorgan. Please go ahead.

Good morning, Geoff, everybody. Just following on from Jorge on CapEx, presumably you're pushing to get full value out of Dolores. You said there was another pad you wanted to work on in 2014. Could you tell us what sort of key projects there are and roughly what they would cost that you are planning to get done, to get full value out of Dolores?

The pad three expansion, which is where we're headed, is a project that over the life of the mine is going to hold somewhere in the neighborhood of 65 million tons, which is give or take 13 or 14 years worth of production. We're not building the entire pad in one stage. We've done a lot of the earthwork necessary for the entire pad, but right now, we're lining only that portion that we're going to need essentially over the next 12 months.

So as we move forward, if you can picture a valley fill, so you have a lot more front end cost in doing the earthworks and lining the bottom of the valley, and as you go up, and stage two, stage three, beyond where we're going to get to this year, you start to create bigger and bigger volumes by putting in less liner essentially. So next year, really, it's not a new pad next year. All we're doing next year is some level of continued earthworks as well as lining the next leg up or the next bench up, as you will, of that leach pad.

Cost-wise, again, I don't want to go too far because our final budgets aren't put together, but we're probably looking at between $25 million and $30 million of pad work again next year. In terms of other major projects at Dolores, by far the biggest one is pulp agglomeration, and I think I've described where we are with that, and I think the key is that we're maintaining our ability to put that program in play, should we see some positive news on the upsides that we're investigating, and/or a small increment in the -- small sustainable increment in the silver price.

Okay, thanks. And then you were speaking quite optimistically about reducing your cost per ton. I just wondered if you had any sort of key pointers as to what areas you were focused on?

Yes, John, this is Steve. The big drivers in our cost per ton decreases are mainly coming out of Peru and what we're seeing there is substantial reductions in overall workforce as we're implementing the mechanized mining. We're mining about two-third of our ore at Huaron using long hole techniques, which is fully mechanized, and about a third at Morococha, and they are continuing to add as we go.

So that's really been our big drivers on cost increases. We are working with suppliers pretty closely, and working hard to try to arm wrestle those prices and unit cost downwards. We're having some successes there, but we see generally in the industry, that sort of mentality is going forward, and I think it will continue for some time.

Could we expect rates to come down a little bit with that?

Interestingly enough, at Morococha we've been able to develop -- because we kind of backed away from our cut and fill operations in some of the better stoping areas over the last 12 months, to better prepare ourselves for long holing. So as these long hole areas come up, sure you can argue that relative to cut and fill it's more dilutive, but because there tend to be our better mining zones, we're actually seeing enhanced grades now, as these areas come up, particularly at Morococha.

Okay, I'll keep my fingers crossed. And then the copper price you're using for the second or for your estimates for the year looks a little bit high, given where copper is at the moment. Do you know something about copper forecasting that we don't?

No, not really, John. It's just copper is not really a big by-product for us, and we just didn't want to go through the effort of changing the mine plans and production forecast. We just didn't think it was worth making that change.

Okay thanks for the clarity. I appreciate it. Good luck.

The next question comes from Dan Rollins of RBC Capital Markets. Please go ahead.

My questions have to do more about the operations in Peru and then Argentina. I know you've stated that the use of long hole at both Huaron and Morococha are starting to have benefits, but just based on the second-half guidance you provided, it looks like these operations are going to be challenged within the current price environment to generate any free cash flow. And I'm just wondering if we were to stay within the price environment for a foreseeable future, do you think these are still viable operations, or do you think you can actually get the savings from the initiatives you're putting forth?

Yes, Dan, this is Steve. We feel pretty good about the initiatives going forward, and the cost savings we saw in the second quarter this year are really not reflective of the overall magnitude that we anticipate we're going to see there. And as I mentioned in my discussion in July, we're already seeing some tremendous results, improvements over what we saw through the second quarter even. So we're pretty optimistic that these kind of programs are going to deliver a sustainable plan at these kind of price levels going forward.

Okay so based on your H2 guidance, can you ballpark what you're targeting for future savings, assuming everything stays constant, is it 10% to 15% more cost savings, is it 20%?

I mean, I would hope in round numbers that we'll see costs at Morococha that will drop below $17 an ounce and we will see costs at Huaron approaching $15 an ounce.

Okay, and I know you've been heavily investing as you move to put those initiatives in place. The CapEx numbers for H2, Morococha has dropped from $12 million to $4 million. Is that $4 million representative of longer run rate or is that just sort of deferring some project until next year?

No, I think overall, I think we're seeing some we're moving out of the big developments that we were capitalizing, and we're now into stoping in those areas where we were putting ramps previously. We will have future ramp. So it's probably I would say slightly on the light side, but probably will not see the heavy kind of spending we've seen in the past couple years, for sure, because there was huge investments going into those operations.

So, maybe sustaining about $10 million to $15 million a year life of mine?

I would hope it would be less than that, less than $10 million.

Okay, great, thank you.

The next question comes from Chris Lichtenheldt of Dundee Capital Markets. Please go ahead.

I think Dan asked what I was trying to get to at the Peruvian operations, but maybe I'll ask one more question on that. Even based on the targets you had just mentioned of, I think, $15 at Huaron and $18-ish at Morococha, even if we layered on $3 or $4 of sustaining CapEx, which seems to be the range you've been tracking, it's still not an overly attractive situation unless we're counting on the significant increase in silver prices back to mid $20s or beyond. Is that the philosophy when you look at those mines or are there -- is there something that is on the table in terms of high grading them and really getting the cash flows up for a shorter per idea of time, and then actually considering care and maintenance?

Hi, Chris, this is Geoff. We're going to grind and grind and grind with these operations as best we can, as much as we can, both on increasing grades as well as decreasing costs. I think if you listen to Michael only 15 minutes ago, we just literally discovered an ore body that's running well over 200 grams, with significant tonnages at Huaron, we're going to get into that. It's going to take us a number of months to get into it, but one or two of those ore bodies totally changes your cost structure. So we're going to, I don't see at this price level, I think today's price is $22-something. I think it would be ridiculous to consider putting them on care and maintenance.

It's not as you know, doing that with a mine it's not like turning a switch on an electric socket. There are significant social issues and costs to address and consider on putting something on care and maintenance. Not to mention the cost of then reopening in higher-price environments. So as it stands today, I'm confident that the plans we have in place are going to get us in a position at either breakeven or maybe small positive cash flows at $20 silver, and we're going to keep these things going, because my long-term view on silver prices is significantly above the current levels. And any variation from that to me would just be A, taking an essentially option opportunity off the table, as well as being significantly at cost, far beyond what's happening today to Pan American.

Okay that's a fair answer. And actually as this call is ongoing we're almost at $23 silver. So my next question, just on the financial, a quick housekeeping question, where are strip ratios roughly in the quarter, and where do you expect them over the next couple quarters?

Yes, I'll have to get back to you on that Chris. I don't have those at my fingertips.

No problem. Thanks a lot.

That is all the time we have for questions on today's call. I will now turn the call back over to Mr. Burns for concluding comments.

Thank you, operator. Thank you, ladies and gentlemen, for joining us this morning. It was a challenging second quarter, and it remains a challenging environment, but I'm hopeful that everyone has the sense of the actions we're taking and the stress we're putting in those actions, and we are absolutely expecting a much better production second half to the year. We are expecting lower costs in spite of lower by-product credits, and I'll repeat, our goal is to put Pan American back to profitability in the current price environment, and I am confident that we will be able to do that, and we'll succeed. And I look forward to speaking with you again in about three months time. Thanks very much.

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