Pan American Silver Corp (PAAS) 2014 Q1 法說會逐字稿

Welcome to the Pan American Silver first-quarter 2014 conference call and webcast. As a reminder, all participants are in a listen-only mode and the conference is being recorded.

(Operator Instructions)

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

Thank you, operator. And good morning, ladies and gentlemen. Welcome to Pan American Silver's 2014 first-quarter results conference call. Joining me here today are 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.

I would like to start this call by reminding 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 facts 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 are 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 May 8, 2014, 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 over to Geoff.

Good morning. Thank you, Kettina. And good morning, ladies and gentlemen. As is our practice, I will briefly discuss the highlights of what was another strong production quarter, continuing the trend we established in the second half of last year. And then you will hear from Steve, Michael and Rob, who will provide you some additional detail on our operations and projects, our exploration programs, and our financial results for the current quarter.

To begin, I'm happy to report that yesterday, our Board of Directors approved our second quarterly cash dividend of the year in the amount of $0.125 per share. The dividend will be payable on or about Tuesday, June 3, 2014 to holders of record of common shares as of the close of business on Wednesday, May 21, 2014. At yesterday's closing price on NASDAQ our dividend provides an annual yield of just over 4%. Our ability to continue to pay this 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 deliver strong production and financial results even during times of challenging silver and gold prices through our commitment to operational excellence and fiscal discipline.

Turning to the first quarter of 2014, we produced 6.6 million ounces of silver, 5% more than the first quarter of last year, and 45,900 ounces of gold, which was 43% more than in the comparable period last year, and just 300 ounces shy of our all-time record for quarterly gold production, which we set in the fourth quarter of 2013. For the third consecutive quarter, we were able to sustain the meaningful cost reductions we achieved in the second half of last year.

Our cash costs for the first quarter of 2014 were 27% lower than they were a year ago at $8.35 per ounce, net of byproduct credits. And perhaps more importantly, down a further 14% from the fourth quarter of 2013.

Our all-in sustaining costs per ounce of silver sold were $15.54 per ounce in the first quarter, down 20% from the first quarter of last year, and 9% lower than in the fourth quarter of 2013. Our production and cost results for the first quarter are a further sign that the efforts we have put in to reposition our mines last year are indeed sustainable.

Our adjusted earnings for the first quarter were $8.6 million, or $0.06 per share, down substantially from the $0.26 per share in earnings from a year ago. Unfortunately, our excellent operational performance wasn't fully sufficient to overcome the 34% decline in realized silver price and the 21% decline in the price of gold. Our mine operating earnings also suffered from the decline in metal prices, and declined to $36.1 million in the current quarter.

Having said this, I think it is also important to note that our mine operating earnings were the strongest we have seen in the last four quarters, and a testament to the work we have accomplished at our operations, particularly given the current quarter's prices are the lowest average we have realized in the last 12 months.

Looking at cash, we generated operating cash flow of $36.1 million, or $0.24 per share in the first quarter. A pretty reasonable result considering this is after paying an additional $9 million in taxes relating to last year, and absorbing a $5.7 million devaluation on our Canadian dollar bank account holdings, as the US dollar strengthened on a relative basis. Excluding these two items, we actually generated close to $50 million in operating cash flow during the first quarter, a very respectable sum given current silver and gold prices.

Continuing to focus on cash, we ended the first quarter with $39.4 million in cash and short-term investments. And our balance sheet remains sector-leading, with $680 million in working capital and only $40 million in long-term debt. This strength leaves us in a great position to continue to self finance our internal growth projects, like the La Colorada expansion, continue to pay meaningful dividends, and take advantage of strategic opportunities should they present themselves.

Now I will let Steve run you through our operations and development programs.

Thank you, Geoff. I'm pleased to report that we are off to a good start this year with La Colorada expansion project aggressively initiated, production largely in line, and costs coming in below our expectations, keeping us on track to meet or exceed our full-year guidance previously provided.

Our silver production increased at all but our Alamo Dorado mines, largely as we expected. Our overall consolidated gold production surged 43% year on year thanks to the significant increases at our two largest gold producing mines, Manantial Espejo and Dolores. The production increases came with improved unit operating costs, driving our consolidated cash costs per ounce down even more than we expected, to $8.25 per ounce, extending a downward trend that started back in Q3 of 2013.

I have many highlights to share with you this morning that contributed to our overall success, starting with our solidly stable San Vicente mine in Bolivia who delivered just over 1 million ounces of silver production, a 7% increase over last year's Q1, at a cash cost of $12.73 per ounce, erasing more than 30% of the last year's Q1 cash costs, benefiting from the increased by-product production, reduced royalty payments given the lower metal prices, and substantial smelting and refining savings which is on account of both the general competitive concentrate market conditions today, but also thanks to the very desirable high-quality concentrates we produce at this mine.

Our two Peruvian mines, Huaron and Morococha delivered well, with both achieving meaningful increases to production of about 10% over last year, with much higher base metal grades, helping to drive down cash costs substantially from last year's performance. In addition, Morococha continues to succeed in its quest to unlock additional cost savings through further mechanization and operational consolidations.

In Argentina, our Manantial Espejo mine delivered an exceptional quarter, producing just over 1 million ounces of silver, 25% greater than last year's Q1, and nearly 24,500 ounces of gold, which was 88% greater than last year's Q1, all leading to the mining of a high-grade gold zone from the deepest benches of Maria Phase 1 open pit. Just the gold production in and of itself more than covers our full operating costs at this property during this quarter, particularly after achieving some significant cost savings through enhanced shift scheduling and improved mobile equipment availabilities, coupled with an eroded local currency. Net-net, these factors drove our cash costs down to negative $4.82 per ounce, well below last year's positive $7.11 per ounce.

We have mined out this high-grade ore from this zone in the bottom of the Maria Phase 1 open pit. And we do not expect to encounter similar ore grades until late this year when the prestripping of our Phase 2 Maria pit advances down and catches up to where we were mining last quarter in the bottom of the pit. We will expect to be back in those grades by probably late Q4.

Our excellent quarterly performance did not come without its challenges, typical in our mining business. For instance, at Alamo Dorado, we suffered an unscheduled 13-day extension to a scheduled 5-day plant maintenance shutdown in January after a certified vendor technician inadvertently failed to open a critical bearing lubrication port, causing the sag mill motor to fatally overheat during the startup, requiring us to shut down and send the motor out to a regional shop for the repairs. This extended shutdown cost us a couple hundred thousand ounces of silver production. However, we believe we can make up a good chunk of that shortfall during the remainder of the year by processing higher-grade ores that we had mined, which should displace some of the anticipated lower-grade ores we intend to process late in the year.

Elsewhere in Mexico, both La Colorada and Dolores, delivered solid production quarters at expected cash cost levels, with increased ore productions and better than expected recoveries at Dolores. The higher recoveries were largely the results of the benefits we obtained with the introduction of staged leaching whereby enriched solutions recovered from the residual leaching of the ore stacked on pad two are used to leach fresh ore stacked on our new leach pad 3, providing a boost to overall recoveries. We expect this boost of recovery to trend downwards over the next coming months as the incremental pad 2 stage leaching production to those contributions will begin to trickle down, and will stabilize at the mine's model recovery rates, probably towards year end this year when the leaching operation achieves steady state.

Meanwhile, we are in the final throes of generating alternative mine plans with and without pulp agglomeration milling and underground mine expansion opportunities at Dolores. Our aim is to produce a preliminary economic study that we will share with you in the next couple of months.

There are many significant value-adding levers in this study to poll in this study. And unlocking the optimum combination of mining rates with mining methods, and processing rates with processing methods, in a complex matrix of metal price and mineral model high-grade gold reconciliation sensitivities is an exercise that would be the envy of the smartest mines in our industry.

Dolores still retains some significant potential long-term value we have yet to fully define, before we even consider the immense untapped exploration potential on this property. All the while, our project team advanced on the construction of phase 2 of our leach pad 3, as planned. And this will provide us sufficient capacity for the next couple of years of stacking when the construction is finished later this year.

Additionally, we were able to get the La Colorada expansion project solidly kicked off in January. And have made meaningful advances on the underground lateral and ramp developments, underground equipment purchases, and contractor prequalification efforts, preparing for the start of shaft excavation early next year. In addition, we are advancing on certain community projects, the tailings dam expansion, started basic engineering of the plant expansion, and locked up a great opportunity by purchasing a used ball mill which will save us both on time and money.

In summary, our Company-wide focus on productivity, quality and cost reductions, that really began in April of 2013 after the abrupt drop in precious metal prices, has fueled improve operating results, while being supplemented with additional positive impacts from certain foreign currency exchange rate movements and general industry-wide cost reductions. We have some of our greatest challenges ahead in the coming quarters for this year. But I'm very pleased with the high level of energy and enthusiasm possessed by our industry-leading experienced operations and project teams who are squarely focused on their individual tasks at hand.

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

Thank you, Steve. Good morning, everyone. We drilled a total of nearly 28,600 meters during the first three months of the year. This represents a reduction of about 43% compared to the same period in 2013. Reductions took place in most of our operations and exploration programs, but we are on track to achieve our annual program of 108,000 meters of drilling.

The focus of the exploration for 2014 will remain on reserve replacement. Only a small part of the budget is dedicated to explore earlier-stage projects in Mexico. There's no drilling plan for Alamo Dorado this year. And the San Vicente program will start in Q2.

No surprise that, once again, we drilled the largest amount at La Colorada, especially with the new addition of the Recompensa vein in our exploration plans. Like every quarter, the drilling at La Colorada returned exceptional results and we will show some of them in a few minutes.

Let's start with the drill results for Huaron. I'm sure you remember that we discovered several wide mineralized ore bodies during 2014, which are now under development, like [deposaday] ore body. The exploration success continued during Q1, this time with the new discovery made through surface drilling called severe east.

You can see this amount of mineralization which is located about 300 meters to the east of the deposit ore body on your screen right now. Intersections of 4.3 meters containing 515 gram per ton silver, 6.8 meters at 324 grams per ton silver, or 11.4 meters with 275 gram per ton silver, are for sure impressive for this first round drill program.

Up to date we finalized already 31 drill holes exploring this ore body. We discovered already high-grade mineralization for 100 meters along strike and 270 meters along dip of this mantle. And will continue with expansion and infield drilling during Q2.

At La Colorada we focused during Q1 on the NC2 Amarillo and Recompensa veins located in the Candelaria, Estrella and Recompensa zones. You can see all of them on your screens in an oblique section. I showed a similar graph several times before, with the mined out sections in white, proven reserves in red, probable reserves in orange, and inferred resources in green. By the way, the new shaft location for the expansion project is shown in purple in the center of the graph.

I'll show you more details later on regarding the Recompensa vein. The known parts of the structure are still very shallow, and the vein dips into the opposite direction than Amarillo and Candelaria. But all three veins return high grades and wide intersect.

I would like to mention a few, and start with Amarillo where we drilled 3.7 meters containing 467 grams silver, 0.6 gram gold, and about 3% lead-zinc combined. A split on Amarillo, we intersected 1 meter containing 1,025 grams silver and 8% lead-zinc combined.

Drilling along the NC2 vein in Candelaria returned many high-grade intersects, as well. For example, in the NC2 vein with double three meters, containing 1,460 grams silver, 2.35 gram gold, and nearly 13% lead-zinc combined.

As reported before, the NC2 vein has several splits as well, and some are actually wider than the main structure. One of these plays returned 6.75 meters width, containing 1,409 grams silver, 8.9% lead, and 16.2% zinc.

Like in many quarterly reports before, there's a long list of high-grade results for both of these veins, and I won't have time to mention all of them. But they will all be included in the reserve statement at the end of the year.

I mentioned before the newest outstanding results came from drilling of the third main structure at La Colorada, the Recompensa vein. The structure runs sub parallel to Amarillo [and dancy 2] but further to the north. The vein contains currently a small reserve of just over 1 million ounces of silver along a very short strike line.

During the last two quarters we started to drill deeper and encountered very interesting results. It is still early days and lots of drilling will be required during 2014 to substantially increase the resources and reserves of this vein. But I like very much what I see so far.

On the graph, you can see a long section of the Recompensa vein, with the small mined out area in black and the proven and probable reserves in red and blue. Mining only plays down to about 200 meters below surface. But we started drilling now about 300 meters below the old mining level.

Results have been astonishing, with drill intersects, for example 4.8 meters, containing 1,786 gram per ton silver, over 1 gram gold, and nearly 7% lead-zinc combined. Another vein intersect returned 2.6 meters containing 1,085 gram per ton silver, over 1.7 gram gold, and more than 6% lead-zinc combined, just to highlight two.

In general, all the drill programs are advancing as planned and I will share some results with you during future calls once the drilling is more advanced. At that time I will also have an update for you regarding the advances on reserve and resource replacement. I would like to pass on to Rob for the financial review.

Good morning, ladies and gentlemen. Driven by the solid operational performance that Steve described, we got the 2014 year off to a strong start from a financial perspective. Operating cash flow before taxes and working capital movements of $56.1 million remained robust in Q1, consistent with the steady cash generation we saw in the second half of 2013.

Our operating cash flow was sufficient to fund all of our sustaining capital expenditures and tax payments related to the period, which amounted to $24.7 million and $10 million, respectively, as well as fully funding our dividend payment of $18.9 million. We did utilize our treasury to fund our investment capital expended on project development totaling $13.3 million for the quarter, and taxes accrued on 2013 income but paid in Q1 of $9 million.

Which together with some realized FX losses and minor financing activities reduced our cash and short-term investment balances by $28.3 million, to end the quarter at $394.4 million. This still leaves us in an exceptionally strong liquidity position with debts of only $64.5 million. Our Board has approved the next quarterly dividend of the same amount, which will be paid on or about June 3, 2014.

Our Q1 consolidated all-in sustaining costs per ounce sold is presented in the table that you should see on your screens now, which provides the detailed reconciliation of this measure to the applicable cost items, as reported on our consolidated income statement for the respective periods on a per ounce base. We calculate an AISCSOS of $15.54 per ounce for Q1, almost a full $4 lower than the comparable period of last year. The calculation of Q1 benefited from lower production costs and treatment charges, higher by-product credits, lower exploration in G&A, as well as more than 0.5 million more ounces of silver sold in Q1 2014 than in Q1 2013.

While we have started off the year well below guidance, repeating the same performance over the balance of the year will be challenging, especially maintaining the quantity of payable metals sold. So, while we expect to be on the lower end of our guidance, we are affirming our AISCSOS range guidance of between $17 and $18 for the full 2014 year.

We present select information from our Q1 income statement on your screens now compared to the previous quarter, that being Q4 of 2013, comparable period of Q1 2013. Starting at the top, Q1 2014 revenues trailed revenues from a year ago as negative price variances outweighed positive volume variances. More specifically, the revenue analysis shows that in spite of selling more than 0.5 million more silver ounces, almost 17,000 more gold ounces, and more base metals, due to the lower realized prices our revenues declined by $33.3 million compared to Q1 of 2013. The higher volume sold also explains why our depreciation charge for Q1 2014 was high relative to our Q1 2013 depreciation.

Our mine operating earnings were $31.6 million for the quarter. While negatively affected by a net realizable value charge to Dolores heaps of $2.3 million, that was still a very healthy margin of 15% of revenue. A very nice improvement from the 10% margin generated in Q4 of 2013.

Another item in our Q1 income statement worth noting was an FX loss of $5.5 million, primarily attributable to realized losses we incurred on our Canadian dollar treasury balance, as the Canadian dollar continued its weakening trend against the US dollar, a trend which started in the fourth quarter of last year. As of March 31, about one-third of our cash and short-term balances were held in CAD.

Our effective tax rate for the quarter was on the high side of 56%, driven primarily by FX losses previously described, as well as additional withholding taxes paid on repatriations during the period. In the long run, we expect our effective tax rate to be in the 30% to 40% range.

Our adjusted earnings calculation for the quarter was relatively straightforward, with the only significant adjustment to net earnings being the unrealized FX loss of $1.7 million. That leaves us with adjusted earnings of $8.6 million for the quarter, which equates to $0.06 per share.

This slide shows the factors that explain the change in our adjusted earnings from the comparable period of 2013. Again, we see the recurring themes of the impact of significantly lower prices being partially offset by higher volumes of metal sold. The higher depreciation charge is a direct result of more volumes sold. And the lower taxes are a direct result of lower realized prices.

Finally, let's move to the working capital portion of our balance sheet. We only saw a modest decrease of about $8.7 million in our overall balances, with working capital right around $680 million at quarter end. Our working capital movements in the quarter were routine in nature, and fluctuated with normal course timing of concentrate shipments, payment of taxes accrued on 2013 income, and a decline in our lines denominated in Argentine pesos as a combination of net repayments, and as a consequence of the sharp devaluation suffered by that currency during the first quarter.

With that, over to Geoff for some closing comments.

Thanks, Rob. As you heard from Steve, Michael and Rob, we have had a very strong start to 2014. We nicely increased our silver and gold production as compared to the first quarter of last year. We have been able to maintain and even further reduce both our cash costs and our all-in sustaining costs, largely as a result of excellent by-product production.

We have optimized the solution flows at Dolores to squeeze a bit more recovery out of our pad 2, now that we're on to pad 3. We have commenced our La Colorada expansion project which will create new long-term value for many years to come. And we continue to share our successes directly with our shareholders through our continued dividend payments.

As for the full year, we have not updated the full-year guidance we provided to you in February even though we have had a good start to the year. We are still forecasting 25.75 to 26.75 million ounces of silver, 155,000 to 165,000 ounces of gold, and cash costs of $11.70 to $12.70 per ounce, net of by-product credits. However, I would comment that, all things being equal, most importantly, the prices over the balance of the year, that I would expect us to find ourselves at the high end of our guidance for gold production, and clearly at the low end of our guidance for cash costs and all-in sustaining costs per ounce.

Before opening the call for questions, I would like to make a couple of comments on the price of silver. After seeing a bit of a rally in both gold and silver prices in the early part of this year, specifically from late January through most of February, where we saw silver prices move back up to $22 per ounce, we have watched prices drift lower, back towards the $19 per ounce level that we're seeing today.

While I'm obviously disappointed that we didn't see the rally in February keep going, I am also of the opinion that we are at or exceedingly close to a bottom in this part of the price cycle. And if there is any risk to the price it is far greater to the upside. However, more importantly, I am comfortable that we have done what is necessary at Pan American to survive and even grow our business in the current price level environment, and if indeed this is extended for a longer period of time.

When investor sentiment returns to precious metals, and prices start to rise again, which I have absolutely no doubt will happen, our patient and supportive shareholders will be well rewarded. And in the interim, we are going to continue to pay you a healthy dividend to stay engaged with us until the price movement happens. Operator, I would like to now open the call to questions.

(Operator Instructions)

Andrew Quail of Goldman Sachs.

Good morning, guys. Congratulations on a very strong quarter. I've just got a couple of questions. First in Argentina, obviously you've flagged at that, the high grade and when you expect that to come off. Can you give any guidance about [verse] reserve grade going forward, not just second half 2014 but maybe into 2015?

Sorry, Andrew -- this is Steve -- I didn't understand the question. You wanted the reserve grade?

No, sorry. Just saying can you give some guidance -- obviously you're mining well above reserve grade right now. And you've flagged why. I'm just saying, is there any guidance you can give -- obviously you said it into second half what's going to happen, but I'm talking into 2015.

We're in the 3, 3.5 gram gold in this high-grade zone at the bottom of the pit. We will get back into that zone and we expect it to be 3, 3.5 gram. With that said, we will be in a bigger part of that zone and we will be mining out on the fringes, too. So, I would suspect, as we move into 2015, we've got a pretty good ore supply blocked out ahead of us that is going to be right around reserve grade, right around the 2.5, I would guess, overall.

Great. Thanks, Steve. And maybe again for you Steve on Dolores, obviously an excellent quarter, all-wise -- cost-wise, production-wise. With the recoveries obviously doing so well there, what do you see is normalized recoveries, given what is all going on there? What can we model going forward into the second half and even into 2015 for recoveries at Dolores?

I think we typically use an anticipated 70% on the gold and like 40% to 45% on the silver. That's where we think that the monthly -- heaps are notorious for having wide swings in recoveries just because you literally have years of inventories built on these heaps. When you look at it month by month, it's very difficult to see a stable recovery. But on the long term, we're expecting 70%, roughly, in the golds and 40% to 45% on the silvers.

Great. And last one. Rob, just on tax, obviously you flagged why it was high. Are we expecting -- obviously that 30% to 40% range, is that 2015 onwards, or are we expecting a lower tax rate from second quarter forward for the rest of the year?

Andrew, it really should be -- there's no reason why the second quarter we shouldn't be seeing it back in the normal range. Having said that, obviously things like FX gains or losses are out of our control and that can really throw the rates around. But all things being equal, that's the way we would expect it -- in the 30% to 40% range.

Okay, thanks, guys. And congratulations on a strong quarter again.

Kevin Chiu, CIBC.

It's actually Cosmos here. Thanks, Jeff and team, for hosting the call. Congrats again on a very strong Q1. Maybe first off on the Dolores, is there any update in terms of timing of when you might be able to share some of the study results coming from the pulp agglomeration or the underground portion, as well? As we've talked about that on site, is this still at this point in time an exercise of terms of the increase in recovery, and how much it would cost to achieve that higher recovery?

Hi, Cosmos. This is Steve. As we have discussed before, it is a complex study. And we're heavy into it now and we're starting to get the results that we wanted to see and we expected to see. I would say we're still shooting for the end of June to release some information on that study. And then follow it up a month and a half later with a detailed report. That's the time frame.

Okay. Maybe Steve, as well. We were on-site back about a month and a half ago. Now moving to La Colorada we had talked about different approaches in terms of how Pan American Silver might be able to sink that shaft. Is there any update at this point in time that you can provide to us?

What we're doing right now, Cosmos, is we are doing some additional geotechnical work. We've got four shaft contractors that are looking at the project that are interested in helping us on this project. So, with their assistance, and we brought in a third-party geotechnical firm, we are actually drilling some geotechnical holes in the shaft location now, that really is necessary to make the final determination of the precise approach we're going to make on that shaft. So that's the status of where that sits at this moment.

Okay. And then moving on to your last Mexican asset here, Alamo Dorado, it's unfortunate that there was some downtime during the quarter. But it's good that it's been fixed. Could you remind us again in terms of when the scheduled mining is going to come to an end, and when the processing of stockpiles is going to start happening?

Right now we're probably going to mine through 2015. We are seeing a bit more ore than we expected so it may squeeze a little bit into 2016. But not too much probably. But then we will be running stockpiles through into 2017, late 2017 probably.

Okay. And then, maybe Geoff, I was late coming on to the call, but is there any update that you can provide to us in terms of Navidad and what is happening there?

Sure, Cosmos. I guess I hadn't made any comments on Argentina. I have had the benefit of being in country in Argentina for a couple of extended periods this year. And, without getting into the details, which I could probably spend the next hour on, my general comment is this.

I am more optimistic than I have been in at least the last two years on the changes I'm seeing, both at the national level as well as at the provincial level in the country. Amidst some difficult economic times that they're facing in the country right now, there really seems to be a push towards, once again, trying to attract foreign investment and creating new jobs and really bringing new money into the country.

Obviously Navidad is quite large project. And I believe we are on the radar screen in terms of, within the political arenas, that our project is known, what we can do in terms of having been in country is known. So, these are all, I think, very positive signs.

I don't want to go much beyond that because we've had some, I'm going to call, a little bit of false hopes and false starts previously, particularly back in 2012. But I think there is a real opportunity right now to move Navidad forward. And we're going to do what we can at our end to try and work with the various levels of government to convince them that we are long-term players, and that we would be certainly excited about the opportunity to actually build this world-class asset.

For sure. Thanks, guys, and congrats again. That's all I have.

(Operator Instructions)

John Tumazos of Very Independent Research.

Good morning. Thank you for taking the question and having the call. Your balance sheet is spectacular. And I was wondering how in the slower markets you might utilize it? Do you expect to use the balance sheet to undertake big projects like Navidad? Could you withhold some of your silver and gold production and not sell it, holding it like a cash equivalent as the prices are low? Or do you envision consolidating out some under-financed smaller competitors?

Hi, John. I think, first, in terms of the order of how to utilize our balance sheet, I think priority one is financing what we see as an excellent growth project in La Colorada, which has got an all-in cost of about $160 million over the next couple of years. That's number one.

Number two, as I think we have discussed a few times, we're getting very close to completing our studies on pulp agglomeration and underground potential at Dolores. We are probably within eight weeks of delivering all of that. There will be a capital associated with that project. So, that would be my number two priority in terms of utilizing our balance sheet.

I don't offhand see us holding on to our gold and silver production. We have actually discussed that, John, about three or four times at the Board level over the last five years. And we ultimately always get to the same place, which is, we are already very long gold and very long silver in terms of reserves in the ground. And our forte and our experience is really taking those ounces out of the ground and turning them into cash.

So I don't feel bad about selling what we produced on an ongoing basis because we're backed up by another ten years of reserves, plus a lot more resources beyond that. Our view is always that we're going to continue to sell into the spot market.

In terms of the very last piece -- and this would be my third priority -- yes, we are continuing to review our sector and the landscape in our sector for opportunities to add production or add reserves. I have to say that there is no doubt that we are being very picky, I guess is the best way to describe it, in terms of what kind of return we're looking for, if we're going to go out and do some sort of acquisition.

And I look at our own portfolio and I say -- and we really changed a little bit the way we looked at things. When you've got a deposit like La Colorada, which is growing and it's over 400 grams silver, and you've got a deposit like San Vicente which has also been growing and has the potential to grow even further, and it's over 400 grams silver, it makes sense to spend that first round of thought and effort and capital on what you can do in your own backyard.

So, as we stacked up those opportunities within our own portfolio against external ones, what we're finding is there's just not very many out there that are better than what we already have. So, yes, we're still looking. And, yes, we would utilize some of that capacity if that right opportunity were to come along. As of today, we have not found that right opportunity.

Geoff, with your various projects -- and I realize this is rough -- but looking out about five years, how much more do you expect the silver equivalent production of Pan Am to rise -- 10%? 20%? 30? -- net of depletions?

If we're thinking five years, John, I'm going to dream big, so I'm going to say 30%. And I say that -- well, I've scared everyone in the room around me here. (laughter)

I look at La Colorada and our expansion. And I think we have been very conservative with what we have put out there to date. I think by the time three to five years goes by, you're going to find out that we're going to do better than what we said. That tends to be the way we approach it.

I think, within that time frame, again, even though we haven't announced anything, I have no doubt that at some moment in time we're going to build the pulp agglomeration and go underground at Dolores. And, again, we're going to see incremental production from there.

I think there's a tremendous opportunity at San Vicente. Undefined today but I put it in this perspective -- we're mining 900 tons a day there. This is a very small level of production relative to the potential of the [Literale] vein and the other veins that we're mining at that property.

When I add all of that up and then I take away -- yes, we're going to lose Alamo, that is going down and the production is going to come down -- I see the potential of adding in the neighborhood of 20% to 30% more production over that time period. And I guess indirectly I'm challenging the group of guys sitting around this table this morning to help me get there.

Thanks, Geoff. I'm looking forward to it.

John Kratochwil of Canaccord Genuity.

Congratulations on a great quarter. I had a question here. Manantial Espejo -- you had mentioned in the MD&A that part of the cash cost decline year over year was due to the devaluation of the local currency. Do you have an idea of approximately how much of that decline is due to the currency devaluation? I'm just trying to see how much would be sticky going forward.

Hi, John. This is Steve. Overall, if you look at last year versus this year's Q1, our gross cash required for operating costs was down about $1.6 million. And of that, we have done some rough -- it's really difficult to get your hands precisely on what the FX effect on that is, but I would say roughly it was probably two-thirds to three-quarters of that.

Okay. And then most of your other assets, generally speaking cash costs were below actually the low end of your 2014 cash cost guidance for most of the assets. Going forward, do you see it being fairly lumpy in terms of performance quarter over quarter with by-product credits? Just to get to low end of cash cost guidance for the year, are we expecting maybe some smooth trends going forward, creeping up, or is it going to be lumpy quarter over quarter?

The lumpiness comes from Manantial Espejo. If you took Manantial out, I think you're going to see fairly smooth numbers elsewhere, with Alamo improving a little bit, and maybe Dolores coming off a little bit as the recovery curves get back to normal. But the real lump comes at Manantial and that big gold kicker and we are not going to see that over the next couple of quarters. We are going to be in a bit of a dry spell, if you will, in gold. Outside of that, no, I think we're going to see fairly stable costs.

Okay. That takes care of my questions. Thanks a lot, guys.

Dan Rollins of RBC Capital Markets.

Thanks very much I just wanted to circle back to some of the comments that were made on the TC and RCs, some of your operations. Can you just give us some indication, is it the savings on the TC side, or are you starting to see the refining charges that ran up over the last couple of years in the silver, are they starting to decline given the demand by the smelters?

Sure, Dan, it's Rob Doyle here. I can give you a couple comments, although obviously there's some proprietary information in our numbers there. But, overall, we are seeing the market particularly in RCs on silver, on the high-grade silver concentrates, has come down quite dramatically. At one point in time it was not uncommon to see a refining charge approaching $4 per ounce for silver ounce. And now that's come way down. Typically that's come down by at least 50%, if not more.

Okay, perfect. Is it more price linked or is it really just a factor that of supply and demand and the pull from the smelters?

I think there's a bit of both, for sure. Obviously producers have been able to negotiate a little harder. But there is more capacity that has come onstream to handle some of the more complex hike rates. [Silvercon's] La Oroya, for instance, the [lead sectors] of La Oroya in Peru came on stream late last year. That's helped the market a little bit, and various other facilities. So, there's definitely a supply-demand and smelter capacity aspect to this.

Okay. Perfect. Thanks very much. Congrats on the good quarter, guys.

Chris Thompson of Raymond James.

Good morning, guys. Congratulations on a good quarter. A couple of quick questions relating to some of the smaller mines. Just looking at the mill throughputs on Manantial Espejo and Huaron for the Q1, are those mill throughputs sustainable? Is that what we should be modeling on an ongoing basis?

Hi, Chris. Steve here. Manantial, yes, we are feeling pretty good with those throughputs. We do have some issues we're dealing with this quarter. We have a cone crusher that we're having to upgrade a little bit. So we may see it come off a little bit in the short term. I think overall we're pretty comfortable with that.

Yes, we're definitely feeling good that we're seeing more ore coming out of the mines. It was a heavy quarter for us. I'm not sure we're going to be able to see it quite that high. But we're feeling pretty optimistic there, as well.

Great, Steve. Thanks for that. Just moving on, looking at some of the unit costs, I typically monitor these things on a per ton mill basis at Moroccha, Manantial Espejo and the San Vicente. Again, a good quarter as far as what we were predicting as far as those costs. Do you see those costs in the Q1 sustaining themselves?

We're going through the cycles now of our collective bargaining with our unions. We typically see, going into Q2, that's where we will see a bit of a bump for some of the labor costs, so you don't know. I think you're going to see them come up to where we guided through the year as it goes through.

Okay, great. Thanks for that, Steve. And congratulations again, guys.

Chris Lichtenheldt of Dundee Capital Markets.

Good morning. Just a quick question. At Alamo Dorado, what is the expected reclamation costs when you're done producing there?

Chris, I think we're carrying just under $8 million -- $7 million, $8 million. We will look. Rob's got it.

$5 million to $8 million is the number. I'll confirm that afterwards but it's in that range.

Okay. That's it actually. Thanks a lot.

Okay. Thank you very much, ladies and gentlemen, for joining us this morning. It's very rewarding to come to you today on the back of really our third very solid production quarter in a row. I look forward to updating you probably before our next scheduled conference call, which will be in early August for our second quarter, with the results of the studies at Dolores that we have been working on, on the pulp agglomeration. Until then, may the silver gods go with us.

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