Pan American Silver Corp (PAAS) 2013 Q3 法說會逐字稿

Welcome to the Pan American Silver third-quarter 2013 results conference call and webcast.

(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 third-quarter results conference call. Today I am joined 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 statement 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 are necessarily based upon a number of assumptions and estimates that, while considered reasonable by the Company, are inherently subject to significant business, economic, competitive, political and social uncertainties and contingencies. Many known and unknown factors could cause actual results, performance, or achievements to be materially different from those expressed or implied by such forward-looking statements, and the Company has made assumptions and estimates based on or related to many of these factors.

We encourage investors to refer to the cautionary language included in our news releases dated November 13 and November 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.

As has become our practice, I will briefly discuss the highlights of what was very much a turnaround third quarter, both operationally and financially; and then I will let Steve, Michael, and Rob provide you with some additional granularity on our operations and projects, our exploration programs, and our financial results.

To begin, I'm happy to be able to report that yesterday our Board of Directors approved our fourth quarterly cash dividend of the year in the amount of $0.125 per common share. The dividend will be payable on or about Monday, December 9, 2013, to holders of record of common shares as of the close of business on Monday, November 25, 2013. At yesterday's closing price on NASDAQ, our dividend provides an annual yield of approximately 4.9%. This is a very healthy return, and our ability to continue to pay a sector-leading dividend is a sign of the financial strength of your Company and the confidence that I and our Board of Directors has in our ability to continue delivering strong production and financial results through our fiscal discipline and our commitment to operational excellence.

Now, let's have a look at how we did in the third quarter. After what was admittedly a difficult second quarter, we rebounded strongly in the third quarter to produce 6.7 million ounces of silver and a new Company record of 41,600 ounces of gold. Responding to our cost-cutting initiatives across all of our operations and to our improved byproduct production, our cash costs declined 25% from the same period a year ago to $10.40 per ounce of silver, net of byproduct credits. This is well below our full-year forecast of $11.80 to $12.80 per ounce. Our production and cost results are a clear sign that the efforts we have put in to repositioning our mines and adapting to the current metal price environment have started to pay dividends. There were some notable operational improvements in particular at Dolores, and at our higher-cost Peruvian mines, but I will leave it to Steve to discuss this further.

This quarter, we have begun reporting all-in sustaining cost per ounce of silver sold. Although internally we have been tracking this metric since I arrived at Pan American over ten years ago, this is the first time that we are presenting our costs in this manner publicly. And we believe it will provide all stakeholders a better understanding of our mining Company's real cost structure and its capacity to generate cash flow. I think a number of people who have followed Pan American will be pleasantly surprised that our all-in sustaining costs were $16.26 per ounce in the third quarter, and under $19 per ounce year to date -- a decrease of 33% for the quarter and 10% on a year-to-date basis.

Our excellent operational performance translated into vastly improved financial results. First of all, after posting a loss in the second quarter of 2013, we returned to profitability by generating $14.2 million in net earnings, or $0.09 per share, while our adjusted earnings rose to $12.2 million, or $0.08 per share. Our quarterly mine operating earnings, which is revenue minus our direct operating costs and depreciation and royalties, climbed to almost $34 million from $3.8 million in the previous quarter. And operating cash flows climbed to $40.7 million, or $0.27 per share, from only $0.5 million in the second quarter.

We continue to maintain our balance sheet strength, ending the quarter with $421 million in cash and short-term investments, only a modest amount of debt of approximately $60 million, and close to $700 million in net working capital. We have one of the strongest balance sheets in the industry and are in a great position to continue to thrive in the current price environment, self-finance our internal growth projects -- which Steve will also be discussing momentarily -- and to take advantage of strategic opportunities should they present themselves. We are in an excellent position to meet or surpass our full-year production guidance for both silver and gold production forecasts, as well as we have reduced our cash cost forecast in view of the success of our cost control program.

And now, I'll let Steve run you through our operations and development programs.

Thank you, Geoff.

As Geoff has described, we have achieved solid consolidated silver, gold, and base metal productions during Q3, while realizing excellent benefits from several cost savings and productivity-enhancing initiatives. In fact, I'm very pleased to report that each of our seven mines achieved important cost savings and/or productivity enhancements in Q3 as compared to our Q2 results. I will touch on some of our most successful initiatives as I highlight each mine's quarterly performance.

Starting off in Mexico, La Colorada produced 1.1 million ounces of silver during the quarter, at a cash cost of $10.19 per ounce, which was slightly below production achieved last quarter and the third quarter or 2012; but at a 4% lower cash costs than last quarter, with savings primarily in power usage with mine ventilation and dewatering enhancements, as well as lower employment costs through enhanced productivity incentives. Alamo Dorado produced 1.3 million ounces at a cash cost of $6.76 per ounce, which was also slightly below production achieved last quarter and the third quarter of 2012; but at nearly 7% less cost than last quarter primarily due to clever optimization of consumable usages and trimming of some administration expenses.

During the quarter our Dolores mine produced a record-breaking 1 million ounces of silver, 25% greater than the third quarter of 2012 and 31% greater than last quarter, thanks to the efficient leach pad loading benefits that I mentioned would come last quarter with the completion of our leach pad 2 expansion project. Even more impressive is that Dolores produced a record-breaking 21,641 ounces of gold during the quarter, which is 60% greater than either the last quarter of Q3, or Q3 of 2012. I believe these record-breaking silver and gold production performances begin to highlight the capability of this mine once the much larger capital-intensive leach pad 3 is commissioned into production, which is happening this month.

Cash costs at Dolores were $5.70 per ounce, which is somewhat higher than we had expected, as we have been completely focused on getting the leach pad stabilized, and are just now starting to launch various cost-saving initiatives, which should begin to show benefits in the next few quarters. We are taking advantage of the momentum we have gained in our leach pad construction efforts by accelerating the construction of the next phase of the leach pad 3 expansion, which will provide about four years of overall capacity once completed in mid 2014. Overall we expect to spend about $30 million to complete the next phase of pad expansion, and we'll then be in good position to demobilize our pad construction team, which won't be needed again until probably 2016.

I am very pleased to report stronger quarterly production from our two higher-cost Peruvian mines, Huaron and Morococha, who delivered 0.9 million and 0.7 million ounces of silver during the quarter, respectively. Most rewarding is that both Huaron's and Morococha's cash costs declined significantly to $12.85 and $15.89 per ounce, respectively -- a huge improvement relative to where each of these operations were a year ago. Huaron's production was 19% greater than the same quarter last year, and 11% greater than last quarter. Even more impressive is Morococha's production was 24% greater than last year and 22% greater than last quarter.

Significant benefits are being realized from our intensive multi-year modernization programs at both of these mines, which have not only boosted production, but has also driven cash cost down to 35% and 38% at Huaron and Morococha, respectively, compared to last year's third quarter. Our operating teams in Peru are completely energized with this remarkable success in cost savings and productivity enhancements, and this is only serving to increase their appetite to find even more. I am optimistic we will see more from these operations, and with these improvements, they will remain solid assets for our Company for many years to come.

In Bolivia, our San Vicente mine had an outstanding record-breaking quarter, producing 1.1 million ounces of silver at a cost of $13.14 per ounce, which was 10% greater production than last year, and nearly 13% greater than the last quarter. Quite impressively, San Vicente's quarterly cash cost was 29% less than last year, and 18% less than last quarter, reflecting excellent productivity improvements obtained by our experienced operating team, coupled with a pleasant, positive reserve reconciliation as well as the reduced royalty and participation charges at the lower silver price.

Our Manantial Espejo mine in Argentina produced 0.8 million ounces of silver, which was 9% less than last year, but 17% greater than last quarter, as we slowly work our way out of the reduced equipment availability issues associated with the more challenging spare-part supply logistics we now face in Argentina. Our operating team has managed to capture some real cost-saving benefits, which helped to drive our cash costs down for the quarter to $12.55 from the $21.61 last year and the $18.86 last quarter. I believe we will continue to see slow improvements in parts supply, leading to productivity enhancements as well as further benefits from certain cost-savings initiative and further local currency depreciation.

Meanwhile, our future production expansion studies at Dolores and La Colorada continue to advance positively. During the quarter we have initiated both laboratory and on-site pilot metallurgical test programs designed to investigate an alternative for possibly dry grinding in our pulp agglomeration project at Dolores. We believe a dry grinding circuit could eliminate the need for expensive filtration, reducing the overall capital requirements while still obtaining the enhanced gold and silver recoveries for the high-grade ores at Dolores by 15% and 20%, respectively. Our testing program should wrap up early next year, at which time we can refine our plant design and complete our preliminary economic assessment.

We also remain on track to finish our technical study for the La Colorada mine expansion by year end, which will include plans for developing a new mine extraction shaft and hoisting system, as well as expansions of the process plant and infrastructure over a two- to three-year period, leading to a material increase in production at this solid, stable, long-life, high-grade mine. This is developing into a very exciting opportunity for us. And I think you'll be very impressed with the viability of this project once you see the economics that we will release once the study is completed.

We spent a total of $42 million on sustaining capital at our mines during Q3, including $10.6 million for the leach pad project at Dolores, $10 million for open pit stripping at our three open pit mines, and about $2 million on the La Colorada and Dolores expansion project studies I described previously, with the balance spread across all mines for various exploration, equipment replacements, rebuilds and infrastructure projects. Our overall capital expenditures for 2013 are expected to come in near the $157 million we had previously forecasted. However, as I had mentioned previously, we do plan to accelerate the next phase of the leach pad construction at Dolores, which may result in a little more capital expenditures during 2013.

Overall, our solid production performance this quarter clearly reflects the capabilities of our highly experienced and skilled operating teams. We remain on track to meet or exceed our production guidance across all metals. And largely thanks to the success of our cost-savings initiative, we are lowering our year-end consolidated cash cost guidance from $11.80 to $12.80 per ounce down to between $11.25 and $11.80 per ounce.

I think it is important to note that we are still working on further cost reduction initiatives, and are just starting to see some price relaxation from key suppliers. But, we also still faces some strong cost headwinds in the recently adopted royalty taxes in Mexico, increased diesel fuel prices at our Dolores mine, and continued inflation of plus 25% in Argentina. So, while I believe many of the cost reductions we have obtained are sustainable in the long term, I'm also realistically expecting our costs in Q4 to be somewhat above, and our production levels to moderate slightly as compared to what we have just achieved.

I'd like to personally extend my thanks and congratulations to our teams, who are doing a remarkable job capturing productivity enhancement and real cost savings across all operations while keeping their primary focus on safety. Our operations support the theory that a safe operation is truly a productive operation. We continue to make significant investments in improving working conditions and defacing certain contractors in favor of using our own miners, which helps to ensure our operations run safely.

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

Thank you, Steve. Good morning.

The cutbacks in our greenfield exploration programs implemented early in the year took full force in Q3. With these changes we expect to save about $6.5 million from our originally $14.7 million greenfield budget. At the same time, we maintained largely our near-side exploration plans in order to replace mine reserves during 2013. In Q3 we drilled a total of nearly 36,000 meters, right on track with our adjusted plans. Our limited greenfield exploration was focused on geological mapping and geochemical surveys and [now] drilling supplies in Q3. Our drilling cost for the quarter was $3.3 million, well within our adjusted exploration budget.

We saw the largest spending at La Colorada and Dolores with about $1 million for each side. Morococha and Huaron finalized most of its year's planned drilling during Q3. Our remaining focus for the remainder of the year will be La Colorada and Dolores, where we have again achieved excellent results.

About 42% of the Q3 drilling took place at La Colorada, where both main areas, Candelaria and Estrella returned, like so many quarters before, exceptional results. In Candelaria, we intercepted the NC2 vein, over 3.1 meter width containing 2,032 grams silver, 0.8 grams gold, and over 6% lead/zinc combined. Another hole intersected the same structure over a width of 2.6 meters, returning 800 grams silver per ton and 7% lead/zinc combined. A split to the main NC2 vein returned 5.4 meters containing 1,000 grams silver. And the second narrow split intersect 0.4 meters, with 3.5 kilograms over 12.5% lead and over 38% zinc.

While drill results from the NC2 vein were outstanding, I believe that the resource [conditions] in the Estrella zone will be even larger. On the slide you see a long section of the Amarillo vein with the reserves in red and blue and resources in yellow and green. The white areas are the target zones and will host most of the additions to the current resources. I showed this long section in earlier quarters as it is impressive how much the resources are expanding every quarter.

I highlighted a few drill holes on the east and west side, but every red dot represents an exploration hole. Positive drill holes have expanded the strike lines of the vein by another 400 meters to the west. We also encountered very high-grade mineralization in the deeper levels to the east, like 4.1 meters with 984 grams silver, 1.6 grams of gold, and 13% lead/zinc combined. 3.7 meters at 1,500 grams silver, and over 3% lead/zinc combined, or 3.5 meters with over 1,000 grams per ton silver.

Drilling returned similar results on the west side, like 5.8 meter width containing 588 grams silver per ton; 2.5 meters at 823 grams silver per ton; or 3.4 meters with over 710 grams silver. Amarillo is an impressive vein with several parallel splits, open to the east, west and [at depth]. It has track lines of over 1,400 meters. Since January we have added nearly 18 million ounces of new silver resources at La Colorada. And I'm sure that many of those ounces will be added to our resources when we complete our reserves at the year end.

As I mentioned earlier, our second most important exploration program is at Dolores. Infill drilling on the west side of the pit returned some wide intersects, like 22.9 meters at 1.05 gram gold equivalent; or 12 meters at 1.9 gram gold equivalent. But it revealed also some shorter intervals at very high grades, like 4.9 meters at 6.6 gram gold equivalent, or 2.5 meters at nearly 10 grams gold equivalent. During the last quarterly call I introduced you to our new discovery in the far south, which confirmed high-grade mineralization far beyond our current pit design. Additional drilling during Q3 confirmed the continuity over strike lines of more than 700 meters, and a vertical expansion of over 200 meters, still open to the south and at depth. Some of the most promising holes returned 44 meters containing 2.4 gram gold equivalent, including an intersect of 19 meters at 3.2 gram gold equivalent, or 35 meters at 2.3 gram gold equivalent.

There are also very high-grade narrow veins, like 1.05 meters containing 17.6 gram gold and 13 grams silver. The current drill spacing is approximately 50 by 100 meters. For the remainder of the year, and into 2014 program, we will focus on infill drilling and the expansion to the south of this exciting addition to Dolores.

Steve talked about the positive production changes we experienced at Huaron. And the exploration results did not disappoint neither. I mentioned in Q2 the important results from our drilling in the north part of the mine, where exploration of the Pozo D ore body returned wide and high-grade intersects -- like 25.6 meters with 514 grams silver and 12.8% zinc; or 21 meters with 124 grams silver and over 7% lead/zinc combined. Related veins are narrower but returned many impressive results, like 4.6 meters with over 1,000 grams silver; 3.9 meters with 262 grams silver; and 4.6 meters with over 340 grams silver per ton, just to mention a few. More drilling and development is required to understand the full size of this ore body, but so far we identified over 6 million ounces of new silver resources in this area.

As we move towards the end of the year, our exploration programs at the operations and projects are shaping up nicely. Drilling has added substantial new resources in most of our mines. And we will hopefully be able to replace mine reserves at the end of the year once the results are incorporated into our mine plans. I look forward to sharing with you in detail our new corporate-wide reserves and resources as of the end of 2013, as well as the exploration results in February of 2014.

Now to Rob for the financials.

Good morning, ladies and gentlemen.

It is my pleasure to review with you our financial results for Q3, which was an excellent turnaround quarter for Pan American after the challenges we faced in Q2. We generated net earnings of $14.2 million for the quarter, down from $22.6 million in net earnings from a year ago, but vastly better than the last reported in Q2 of this year. Our return to positive earnings was primarily driven by two factors. Firstly, by higher revenues than Q2 resulting from record quantities of precious metals sold despite realizing lower prices for silver and gold. These high quantities sold were also the reason for the increased depreciation charge in Q3.

The second major factor behind our improved results was the significantly lower variable and discretionary costs relative to prior periods, as our cost initiatives at the operations at the corporate level and at our exploration projects resulted in meaningful reductions in key expense lines. Additionally, cost of items directly related to metal prices, such as royalties, taxes, concentrate treatment charges, also declined during Q3. The result was a strong recovery in our mine operating earnings from Q2, up to $33.9 million, nearly a tenfold increase. Our mine operating earnings over sales margin or gross margin rebounded to 16% on higher quantities of silver and gold sold at a much lower cost, up from 2% in Q2.

Our adjusted earnings after backing out the usual nonrecurring and unrealized gains and losses were $12.2 million, or $0.08 per share. While down from the $37.3 million in Q3 of 2012, our adjusted earnings were almost $30 million higher than the adjusted loss of $17.4 million reported in Q2 2013. You will note that one of the items that we adjusted out was a $6.3 million loss related to our precious metals hedge book, which we decided to close out during the quarter, and therefore view this item as nonrecurring.

As of today, there are only 300,000 ounces of silver remaining from our hedge program, which will settle before the end of this month. Pan American will again have 100% of our future precious metal production unhedged and exposed to volatility in silver and gold prices. This is the strategy that the majority of our shareholders want us to follow. And, most importantly, the Company is in such strong financial condition that we are able to tolerate a high degree of price risk.

We show the most important sectors responsible for the improvement in our adjusted earnings on a waterfall graph on your screen now. Our return to profitability was primarily driven by higher production and, in turn, higher sales volume, which were only partially offset by additional amortization and cost of sales associated with those increased volumes. For the first time, we have adopted the reporting of all-in sustaining cost of silver ounces sold as a measure of our consolidated operating performance and the ability to generate cash flow from all operations collectively. We believe it is a more comprehensive measure of the costs of operating a consolidated business than the traditional cash and total cost per ounce, as it includes the cost of replacing ounces through exploration, the cost of ongoing sustaining capital, general and administrative expenses, as well as other items that affect the Company's consolidated earnings and cash flow.

To facilitate a better understanding of this measure, as calculated by us, we present the table that you should see on your screens now, that provides the detailed reconciliation of this measure to the applicable cost items as reported in our consolidated income statements for their respective periods. We calculate an all-in sustaining cost of $16.26 per ounce for Q3, a full one-third lower than the comparable period of last year, and meaningfully lower than our year-to-date all-in sustaining cost of $18.86 per ounce. It is gratifying to see the lower cost trends reflected in our financial results as we realign our business with the current price environment.

Moving to the working capital portion of our balance sheet, we saw only a modest decrease of $1.8 million in our overall working capital balances, with working capital sitting around $700 million at quarter end. The decline was mostly reflected in lower cash and short-term investment balances, partially offset by a decrease in accounts payables on declining royalties and lower income taxes payable. From a cash perspective, cash flows from operations jumped in Q3 relative to Q2, while actual cash taxes paid declined, giving rise to strong cash flow generated from operating activities of $40.7 million. In fact, our net operating cash flow was very nearly sufficient to fund all of our capital expenditure in the period, which amounted to $41.7 million. We did utilize our treasury to fund our dividend of $18.9 million, but still remain in an exceptionally strong financial position with cash and short-term investment balances at quarter end of $420.2 million and with debt of only $58.8 million.

Before I hand it back over to Geoff, I would like to draw your attention to a large expected impact that the recently approved tax changes in Mexico will have on our Q4 tax expense. While we are still working through all of the details of the wide-ranging suite of new taxes in Mexico, we expect that our deferred tax liability will need to be increased as a result of the changes in tax rates, which will create a material non-cash charge to our income tax expense line in Q4. It is likely that every mining company operating in Mexico will be affected in a similar way, but we did want to alert you to this pending issue relative to any earnings forecast you may be preparing for Q4. It is worth repeating that this likely adjustment to our deferred taxes and increase in Q4 tax expense is a non-cash book entry.

With that, over to Geoff for closing comments.

Thanks, Rob.

Last quarter I talked about the steps our Company was taking to respond to the decline in the price of our two primary products, silver and gold. I mentioned our operational cost-cutting initiatives, our focused efforts to reduce general and admin costs and exploration expenses, as well as increase our overall productivity. I said that it would take us a number of months for these initiatives to bear fruit, and that I fully expected to see the results of our efforts in the third quarter.

It is certainly rewarding for me to see that Pan American can still deliver. We have re-tuned and are a stronger company as a result. We returned to profitability, generated solid operating cash flow, meaningfully reduced our costs while increasing our silver and gold production, and maintained one of the most pristine and strongest balance sheets in our sector.

At the same time, we have taken major steps forward in engineering and evaluation of our two organic growth projects -- pulp agglomeration and expansion at our Dolores mine, and a major mine expansion at our La Colorada mine. As Steve mentioned, we should be able to release the results of our La Colorada expansion study before the end of this year, along with a clear decision and a timeline on implementation. It is also rewarding to know that we are positioned to internally fund both of these projects.

I wanted to end my remarks this morning by reviewing with you our history of sharing our success directly with our shareholders. As I mentioned when we started the call, our Board approved the payment of our quarterly dividend of $0.125 per share, which currently provides a sector-leading yield of close to 5%. Since we started paying dividends in 2010 we will have distributed a total of $120 million to our shareholders directly in dividends, counting this current announcement. Between share repurchases and dividends we have returned in excess of $0.25 billion to our shareholders over the last three years, and still maintain the best balance sheet in our sector, with maximum flexibility even during this period of lower prices. This is something that I am incredibly proud of, as it is the absolute testament to the strength of our Company, and hopefully some small reward to our long-term shareholders who have stayed with us through this difficult market environment over the last couple of years.

Operator, I would now like to open the call to questions.

(Operator Instructions)

Chris Lichtenheldt of Dundee Capital Markets.

Good morning, everyone, and congratulations on what was a very good quarter. I wanted to start by asking, G&A during the quarter was obviously down significantly. Is this a new run rate you expect to carry forward?

Hi, Chris. First of all, thank you for your comment.

In fact, our current quarter does incorporate some severance, et cetera, costs in there, so it's a little bit higher than what I think our longer run rate will be. We're going through our budget process but long term, I'd expect somewhere around $3.5 million to $3.7 million per quarter in G&A.

Okay, that's great. Also really appreciate the new disclosure you have by mine, breaking out some of the profitability and byproducts. Can't quite yet get to a cost per ton number. But can you help us understand, during the quarter -- obviously the cash costs are quite good. Some of that appears to be higher byproduct grade and perhaps higher silver grades within the Company. But can you talk a little bit about maybe the cost per ton in Peru, in particular, how those compare to prior quarters, how much relief you're seeing there, if any, on mining costs?

Sure, Chris, this is Steve. Relative to cost per ton, on an overall consolidated basis we're seeing about a 15% reduction relative to same quarter last year. Improved specifically, we're looking probably in the 10% to 12% range.

Okay. Can you comment a bit just versus last quarter, like Q2, some improvements in that, as well?

Relative to last quarter on a cost per ton it is a little bit higher, maybe 5% to 10% for the two mines. But we anticipated that with some of the development sequencing that we had going on. We're still bringing -- if you recall, over a year ago we were talking about taking some of our high-grade stopes offline to allow development to catch up and bring them back in a more mechanized fashion. That's really what you're seeing the benefit of grade that we see. And that's going to continue as we bring more stopes online. So, it isn't, I don't think, reflective of what our true cost reductions will be.

Okay. And should we see, with respect to the mechanization that's been going on, should we see ongoing increases to throughput at some of the mines in Peru, in particular? Or have you reached that level now?

No, I think we will be seeing some ongoing increases. There may be some additional capital needs as we do that, particularly at Huaron in the mill. We are starting to effect recoveries by throughput. So, next year we'll be talking about possibly doing some expansions in the mills up there. There will be increases going on but they will likely come with some additional capital.

Okay. And then just lastly, and maybe I'll ask Geoff or the team, I assume with the strong balance sheet you're looking at opportunities. Can you comment a little bit about the attractiveness of various opportunities you're seeing? Are there assets out there that still look good in today's metal price environment? Or can you comment a bit just about that landscape?

Sure, Chris. A little bit disappointingly, I would have to say that we have reviewed probably in excess of 50 different silver-related opportunities. And within that population we've identified a total of zero that seem to be accretive or with distinct upside. There are a couple of opportunities that look appealing to us, but in general many of the projects where money has been spent over the last number of years, and PA work done and drilling done, et cetera. In this current price environment they really don't scrub up very well. So, that is a bit disappointing.

Having said that, the two projects that we're looking at internally would clearly be at the very top end of things, opportunities we have in order to invest and garner significant IRRs, even in this price environment. So, we're still looking, but we really are going to focus on expanding La Colorada significantly. It is a 400-gram-plus mine and one of the highest grade silver mines around.

So, taking advantage of the exploration successes we've had over the last three years just seems like an obvious thing to do. And, the pulp agglomeration, increasing recovery at Dolores, in view of a 17-year-plus mine life just again makes so much sense intuitively that we're really going to spend a lot of effort focused on doing those while we keep looking over the landscape.

Okay, that's helpful. I will hop back in the queue. Thanks a lot.

Jorge Beristain, Deutsche Bank.

Hello, Geoff and team. Again, congratulations, as well, on the solid quarter. I just wanted to understand if you could quantifying in buckets, it looks like you've had about an $8 per ounce change year on year for the quarter in terms of your all-in sustaining costs. And if you could just broadly break that down into three or four main buckets for us, such as currency, the proactive effects of layoffs, mine planning in which I would include grade, and then, lastly, perhaps the cut in sustaining CapEx. I'm just trying to understand, of that, how much is really currency and sustaining CapEx belt-tightening related.

That's a pretty good question, Jorge. You've got a whole group of us sitting around here trying to just instantaneously put it into the different buckets. Obviously, number one is the byproduct production. When you look at the change there, a pretty significant increase in lead, copper, zinc production, as well as gold. That's probably the number one change if you look at all-in sustaining costs.

I would say number two would be in our actual cash expenditures quarter over quarter. Compared to last year we're $12 million of actual cash down on what it costs us to run our operations. And that's spread predominantly through labor, and secondly would be consumables and inputs that have come off, less so at the current time. That would be, I think, number two.

Obviously the third thing is going to be our divisor got bigger. We sold 6.9 million ounces of silver over the period so that has the next impact. And I think the third thing, I'm going to say to a lesser degree, is going to be -- sorry, fourth thing -- is going to be currency. Obviously the devaluation in Argentina has really helped offset that 25% inflation rate that we've been experiencing. And to a lesser degree we've seen some softening in the Peruvian soy. That's helped a little bit. And a little bit even in Mexico. But I would put that as a distant fourth from the three things I just identified.

That's great. I was just trying to get an ordinal ranking. Thanks for pointing out the byproducts.

And then my second question is just on taxes. It's been tough speaking with corporates to get a good baseline as to what really is changing with the Mexican tax code. It seems like it's all but a done deal at this point. But we're just trying to understand, at the end of the day how much does this really increase your effective fiscal take in Mexico? And that can be broadly defined as including the higher water usage charges and things like that.

I'm just trying to understand, is this roughly a 10 percentage point increase in tax load down there of all kinds? Or 20 percentage points? It's just hard to know who to believe when you read the Mexican Chamber stuff and then trying to check it with the corporates. There's a wide range.

Jorge, I'm going to try and answer this on an absolute basis versus a percentage basis because the percentage changes so quickly with the price assumptions that you throw against it. But when we looked at and evaluated what the impact was going to be on Pan American for 2014, granted we haven't completed our budget, but if we assume we had the same run rate in 2014 as we had in 2013, it's about a $14 million to $15 million hit, in that range, for us, above what we're currently paying in taxes.

And the way I look at is, I look at it on a consolidated basis on per ounce. And that's about $0.75 an ounce for us on a consolidated basis. When Steve was talking about ability to continue reducing costs, that's one of those headwinds we're going to run right into. I know that's not on a percentage but that's the absolute impact on Pan American on an annual basis.

That is great. And that is the most direct answer we've received. Thank you.

Andrew Quail of Goldman Sachs.

Again, like the other guys said, congratulations on a very solid quarter. Most of my questions are on Morococha. Obviously the grades are improving. Do we see that going to Q4 and even into 2014?

Hi, Andrew, this is Steve. We think there is still a little bit of upside on the grade. Like I mentioned earlier, we are bringing on more stopes and less development. We do get a little bit of dilution, more dilution if we're heavily weighted in the development. But we're pretty happy with the grades we're seeing there. And it's really, I think the bigger upside we see is on the throughput more than the grade going forward.

Okay. And then just wanted to get an update on Navidad.

We still own it. (laughter) Kidding aside, Andrew, we're still doing what we need to do in order to maintain all our legal rights and ownership of Navidad. And that incorporates about $1.5 million of expenditures on an annual basis on the mining tenements that we have. I think we're certainly, from my perspective, Navidad remains a tremendous asset. I am not yet ready to give up on that asset. I have to continue to exercise patience. I think the potential of improvement in Argentina on both the national and provincial level is increasing.

I think we've seen some very modest signs of improvements. And I do believe that in, I hate to say the fullness of time because that's kind of non-quantifiable, but I do believe that Argentina will take the steps necessary to become a location again where companies like ourselves are comfortable in investing. And it may be another year it might be another two years. But I am confident that time is going to come. And when it does, Navidad is going to be developed by Pan American and is going to be one of the best silver mines in the world.

Yes. That's good, thanks. And last question, can you guys give us any guidance on a per ounce basis of sustaining CapEx you see going forward in 2014?

Andrew, you're just a bit in advance of our ability to do that. We're literally, over this coming weekend, sitting down and doing our full management budget review for all our operations. So, I'm reluctant to give you that number today.

I will say that clearly our expectation is to see our capital come down significantly next year. In total between expansion of pad 2 and pad 3, we've put in almost $30 million, and closing in on $35 million by the end of this year. And our expenditure level next year on just that one project is going to be significantly reduced.

So, we are expecting that number to come down. I don't want to put a pin in it today. We're literally a couple months away from being able to give you much better granularity on that.

Got it. And thanks again, guys.

Trevor Turnbull of Scotiabank.

Thanks, Geoff. Maybe not trying so much for the granularity on CapEx spending, but can you talk about who is going to see the bulk of your CapEx attention maybe in these budget meetings? Are we still looking at Morococha, a phase 2, to be fairly capital intensive there? And just give us a sense of which projects look like we should be thinking about in terms of CapEx.

Hi, Trevor. This is Steve. I'll take that question. Really, the bulk is going to be, again, at Dolores with the leach pad construction.

And the pre-stripping.

And the pre-stripping that we do there. That will be the lion's share of our capital next year. We really see opportunities in capital both at Morococha and Huaron going into next year. They'll be reduced.

Okay. That's good. That helps a lot. The other question is again related to cash outflows, and that's with respect to the dividend. You've got an incredible yield relative to some of your peers. And it's not an insignificant amount of cash on an annual basis. Is that something that gets discussed this weekend in budget discussions?

Certainly. Here's where I'm at with that, Trevor. If you assume that we can reduce our capital by -- and I hate to do this, but I'm going to take a touch of a stab -- by maybe $10 million a quarter, and if you look at our current quarter where we average $20.52 an ounce, or $20.60 an ounce, which is below the current price, we generated $41 million in cash flow and we spent $41 million in capital. If you reduce that down to, say, $30 million, you're now generating $10 million in free cash flow. Our dividend on a quarterly basis is just over $18.5 million.

So, 8.5 goes into 400 a whole whack of times. I know that's not a financial term, but it does. And I have to preface this last comment, depending on metal prices, if we see ourselves in a similar environment as we are today, around $21 silver and close to $1,300 gold, I see no reason we would not continue our dividend.

It is a reward for our shareholders and it is indeed one of the strengths we've built. We've built a cash balance. And dipping in a little bit to it to pay our dividend, I don't see any problem with that at all, considering we have almost no debt at the same time. So, that's where I'm at with the continuation of the dividend.

That should make shareholders happy. That's all I have. Thanks, Geoff.

There are no more questions at this time. I will now hand the call back over to Geoff Burns for closing comments.

Thanks, ladies and gentlemen, for joining us here this morning. It certainly was a pleasure to be able to talk about what was one of our best quarters in quite a period of time, and certainly a turnaround quarter. And I look forward to updating you with a project announcement before the end of this year and certainly early next year as we release our annual 2013 results. Until then, thank you.

This concludes today's conference call. You may now disconnect your lines. Thank you for participating. And have a pleasant day.