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Mon Nov 18, 2002
Third Quarter Results Conference Call
Operator:
Good morning, ladies and gentlemen. Welcome to the Pan American Silver third-quarter financial results conference call. I would now like to turn the meeting over to Mr. Ross Beatty, Chairman and Chief Executive officer. Please go ahead, Mr. Beatty.
Ross Beatty:
Thank you, Operator, and hello, everyone. Welcome to our third-quarter Pan American Silver conference call. Well, as you can see from our quarterly report issued this morning, we are certainly keeping busy and I have a lot of news to discuss today. Our third-quarter financial report is self-explanatory to a large degree and so I will address the new developments and try to anticipate questions that may exist.
Firstly, in terms of an operations review, and let me say that I'm here in Vancouver with John Wright, President and Chief Operating Officer of the company, Tony Hawkshaw, the Chief Financial Officer of the company and Rosie Moore, our Vice President of Corporate Relations.
Starting with an operations review, Pan American of course owns and operates three silver mines. Two of these are doing well and one is doing poorly due to low metal prices. Starting with the one we are struggling with, the Quiruvilca Mine, all I can really say here is that we are doing our best to limit operating losses as much as possible. At current prices --- and I would remind our shareholders that the third quarter saw the lowest silver prices for the year-to-date and the lowest zinc prices in history in real dollar terms, even lower this last quarter than they were last year. At these prices, Quiruvilca simply cannot make money.
So our choices are to close the mine, to sell it or to keep operating it until metal prices rise. Mine closure is one option but it is very hard under Peruvian laws. A temporary closure would be the most sensible but Peruvian laws make it rather difficult. A sale of the mine would also be hard given that the mine is now more of a zinc mine and this is because as the vein is deepened at Quiruvilca they become more zinc rich and we lose the high-grade silver mines that have been traditionally mined closer to the surface. All zinc miners today in the world I think are in trouble, so there's very little buying interest in new zinc mines for any existing producer.
So we are continuing to operate at Quiruvilca for now. We felt it prudent in the third quarter to write down our investment in the mine. At higher prices, of course the mine has long-term reserves and should be profitable as it was most recently in the year 2000.
We are also benefitting now from the discovery by Barrick of the Alta Chicama gold deposit next door. We are selling some assets to Barrick and Barrick has taken on the adjacent Tres Cruces gold project from us and Oroperu resources. The project has been reactivated and we hope to realize some value from that looking out in the next year or two.
Happily, our Huaron Mine is proving to be a great mine. It is generating positive cashflow even at today's depressed prices and it has tremendous potential into the future. We have had excellent exploration success all year this year and based on this have decided to expand the mine's capacity by 10% starting in 2003. We are expensing this cost so it is impacting our third-quarter cash costs but we will be well rewarded for this in 2003 and beyond. The mine is expected to generate more positive cashflow next year than Quiruvilca is losing even at today's prices and so we are still looking to be net cash positive in Peru for 2003. Obviously, any increase in silver and zinc prices will be very beneficial to our Peru operations.
At our La Colorada Mine in Mexico we are about a third of the way through construction and all is going well there. We closed the small mine we've been operating for the last year and a half in the third quarter for six weeks to allow construction to commence and some work done that was going to make the operation a little complicated, but it is now back operating again. We expect the $20-million expansion program to be completed by July of 2003 when the mine will produce about 3.8 million ounces on an annual basis and boost our annual silver production to nearly 12 million ounces. I would also remind our shareholders that La Colorada should be our lowest cost operation when it commences even at current silver prices.
While on operations I will discuss our new Peruvian acquisition of 10 days ago. Ten days ago we signed two deals with Volcan. Volcan is a large Peru zinc miner. One deal gives us an immediate boost to our silver production. We bought a contract to supply silver-rich dump material at Volcan's Cerro de Pasco operation to the nearby Dorun (ph) smelter. We expect to sell about 45,000 tons of ore annually or about half a million ounces of silver at essentially zero operating cost, and the reason it's zero is because all we have to do here is load the dump material into a truck and ship it about...what is it, John? About 20 kilometers, 30 kilometers to the smelter. It's a very, very cheap operation for us. It's like having a small mine for about a 10-year life.
The second deal gives us a four-year right to acquire 100% of the entire sulfide stockpile at the Cerro operation of Volcan. There's about 26 million tons right now containing about 227 grams per ton, silver ore about seven ounces per ton, and that's a total silver resource of about 180 million ounces. So it's a very, very large resource and therefore if we can find a metallurgically and economic method of recovering that silver, this should give us a long life very large silver, pure silver operation.
So what we're going to do here is take the next three years to do two programs. The first program will be a reserve definition drilling program and that's now underway, and that's going to quantify and specify exactly what the silver grade is, where it is and pull a sample for metallurgical test work. The second program will be a thorough metallurgical program to seek the most economic processing method.
These two deals are accretive to our cashflow and earnings and will materially increase, potentially materially increase our silver reserves and resources to a total of nearly one billion ounces. And of course both deals give our shareholders, give the company even greater leverage to higher silver prices.
And this brings me to our Corner Bay merger and our announcement on Friday that we have agreed to extend the merger for... for a merger closing date for up to one month. This is understandably frustrating to all our shareholders and those of Corner Bay. We have certainly expected to have had a resolution to the main condition still holding up the deal, that of securing a water source to enable heat bleaching of the deposit. Well, progress is being made. It is essential that we have a water supply for the new mine we propose to build at Alamo Dorado and we simply have to go through the lengthy approval process under Mexican laws and regulations to ensure this. The timeline is beyond our control or that of Corner Bay. We have had good support from Mexican authorities and I hope the process will be completed soon. It's taken much longer than any of us expected but there's very little we can or could have done about this. We are working hard, Corner Bay is working hard to get this done and, as I say, I hope it will be completed soon.
Moving to South American again, as described in the third-quarter report we are also doing very well in Bolivia at our San Vicente project. The mine is operating profitably under a total new agreement with the Bolivian mining company that owns the nearby mill and we are now in discussions with them to review ways to expand this operation and I hope to report positive progress in our next quarterly report.
Further south, in Argentina, we have resumed drilling at the Manantial Espejo project which we own a 50% interest in. A 6,000-meter drilling program is underway. It's about half done and results to date are encouraging. I expect that some drill results will be published in the next week or two. I do expect this will be an important silver/gold mine in a few years and it is very much part of our growth strategy along with the Alamo Dorado and San Vicente properties, as well as our new acquisition in Peru with the Volcan stock piles.
In terms of exploration, our most exciting silver exploration project is the Ocotlan project in Mexico where we began drilling this last weekend. I look forward again to reporting on this project's results soon. We certainly remain committed to finding new silver mines, not just acquiring them, and we will continue these efforts in 2003.
So to sum up, we remain very active in exploration, development and mining dedicated of course to silver. We are growing our reserves, our resources and our production. Our financial results are today being impacted by lower-than-average metal prices. I would remind our shareholders again that our lowest cost and purest silver mine is our La Colorada project which will begin contributing to our cashflow in July 2003 as a full-scale mine. So we expect in 2003 to improve our financial results from this year from a more profitable and larger operating base and that's even if silver prices do not improve. But if they do improve, we will do even better.
Speaking of silver markets for a moment, silver had a weak period in the third quarter slipping to a low of $4.30 an ounce from prices over $5 in the second quarter. Prices began improving again in late September and show signs of strengthening for the balance of the fourth quarter. Last week we heard an update from Gold Fields Mineral Services, the independent research firm that publishes the annual silver survey for the Silver Institute. Gold Fields updated us on global silver demand and supply fundamentals and so far in 2002 it looks like silver demand is up in the industrial, photographic and coinage sectors and down in the jewellery and silverware sector due almost entirely to lower demand in India. Silver mine supply looks to be lower in 2002 than in 2001 as widely predicted earlier this year. The silver deficit is forecasted to be about 99 ounces as per 2001.
In quite positive news, it looks like Chinese silver sales seem to be curtailed for the time being. I would like to think that the Silver Institute initiative in China earlier in 2002 has resulted in this. It's of course impossible to tell for sure, but it's very good news that China is not selling such large quantities of silver on the market now as it has in the last three or four years.
Silver prices this year have also been influenced by speculative buying and selling. Investors were significant silver buyers earlier in 2002, but a major liquidation in July drove prices down sharply and renewed investor buying has lifted prices recently and I think this trend will continue this Winter in line with higher gold prices, a lower U.S. dollar and a continuing shift in assets held by investors from paper assets to hard assets such as silver.
So with that summary of our developments, a couple of words on the silver market, I think I'll open the conference call to questions, and thank you again for your interest in our company. 
Operator:
Thank you, Mr. Beatty. We will now take questions from the telephone lines. If you have a question, please press 1 on your telephone keypad. If you're using a speakerphone, please lift the handset and then press 1. If at any time you wish to cancel your question, please press the pound sign. Please press 1 at this time if you have a question. There will be a brief pause while participants register for their questions. Thank you for your patience. Our first question is from Brian Christie of Canaccord Capital. Please go ahead.
Brian Christie:
Good morning, guys. I guess afternoon in Toronto. A couple of questions, Ross. Can you give us a sense of how much the Huaron expansion is going to cost? And I guess my question would be does it ultimately make sense to go beyond 10% there? And then just maybe if you could give us a timeline on the latest Volcan acquisitions especially in the concentrate sales to the smelter. Is that going to start immediately or what kind of timeline are we looking at?
Ross Beatty:
Yeah, sounds good, Brian. John, do you want to answer the... or maybe Tony, answer the Huaron, the ultimate cost, and whether we can go beyond 10% expansion. Maybe that's better for John.
Tony Hawkshaw:
Yeah, that's better for John. Hi, Brian.
Brian Christie:
Hi.
Tony Hawkshaw:
The budget for Huaron is a little under a million, $990,000. During the third quarter of this year we spent $170,000 of that. So that impacted our cash cost per ounce by about 15 cents or impact on the cost per ton milled of about $1.13. The original plan was to go for about 152,000 tons of ore, grading over 360 grams of silver and over 3% zinc. Our geologists came back from Huaron just this past week and I think maybe John can talk about the potential for expanding beyond 10%.
John Wright:
You know, we started off knowing we were going into a block for about 150,000 tons of proven and probable reserves. We have since... as we do our development, which is mostly rehabilitating our ramp access and then actually doing the stope prep for the stopes, have picked up two other veins already in that area. We're stepping up to 10% now which will push the mill to, you know, 55, 56,000 tons. The mill can handle 60,000 per month, you know, so we'll get this one under our belt and the plan will be to continue to take it up again to push towards 60,000 and then force the mill to show us what it can do.
Brian Christie:
Okay.
Ross Beatty:
Okay? So that's the Huaron situation. It's a happy story and of course, as you know, to the extent we can increase our production there with the same costs, our cost per ton should go down in cost per ounce as well. The second question was regarding the Volcan, the shipment of the stockpiles to the smelter. Brian, those began the day we signed the deal. In fact, we will have about 4,500 tons shipped or 4,800 tons...
John Wright:
Forty-five.
Ross Beatty:
Forty-five hundred tons delivered this month to the smelter so it's immediately impacting our cashflow.
Brian Christie:
What kind of cashflow are you expecting out of those sales, Ross?
Ross Beatty:
Order of magnitude about $1.4 million a year, and earnings of maybe $1 million, $900,000, something like that for the first few years anyway.
Brian Christie:
Okay, perfect. Thanks.
Ross Beatty:
Okay.
Operator:
Thank you, Mr. Christie. Our next question is from Jim Archer of Bluechip Investors Group. Please go ahead.
Jim Archer:
Ross.
Ross Beatty:
Yes?
Jim Archer:
Yeah, good morning. Jim Archer in Minneapolis. Got a couple of questions here. My first question is in a private radio conference yesterday down in the States I heard Jim Cooke mention that he thought there was about a 350-million ounce short position of silver in the world. Might that correspond with your thoughts or not?
Ross Beatty:
No, I'm sorry that doesn't correspond with my thoughts. There in fact may be a short position but for every short position there's a countervailing long position. One thing that not too many people know about is the extent to which silver mines... pardon me, mining companies have sold silver short or have sold future contracts to deliver silver. It's like a short sale, it's...
Jim Archer:
It's a carry trait he called it.
Ross Beatty:
Yeah. I mean what... there's about 300 million ounces as I remember in that order, 300/350 million ounces that has been hedged by the zinc and lead and gold producers, and that's their future production. So you can call it a short position but it's not really because it's covered by future production.
Jim Archer:
It is covered.
Ross Beatty:
Yes.
Jim Archer:
Are you in the correct position for that if silver were to move up in the future? I mean...
Ross Beatty:
Pan American itself does not hedge any silver whatsoever. The hedging that I'm talking about is largely being done by by-product producers who just don't seem to care and don't have a heck of a lot of leverage to their silver production. So they're simply taking a call to balance their revenues I suppose and deal with the silver that they see... that doesn't impact them too much. They sell it forward. Silver producers themselves, I don't think there's very many that hedge their silver and we certainly do not.
Jim Archer:
Okay. The second thing he mentioned, he said he thought the U.S. Treasury was completely out of silver and that the silver eagles they're selling down here in the States are double or triple the amount, and he thinks at some point that's going to be very bullish for the price of silver.
Ross Beatty:
One of the great successes of the Silver Institute this year has been the lobbying effort to encourage the U.S. government to buy silver on the open market. Now that their silver inventory that has been used historically for silver eagle purchases and silver eagle coin manufacturing has been exhausted. It's true that it's been exhausted and now the U.S. Mint is buying on the open market starting either this quarter or beginning of 2003. So that is all very positive news. I'm not so sure... it's about 10 million ounces a year though, Jim, so I'm not so sure it's going to profoundly affect the silver market. It will certainly be positive. And especially having that huge inventory gone, that is very positive. The U.S. government once held two billion ounces at the end of the Second World War.
Jim Archer:
M-hm.
Ross Beatty:
And now that's basically gone.
Jim Archer:
It's all gone. Did you note that Malaysia is going to a gold currency and for their oil, inner trade oil with the countries in the Middle East, and might this also not be very bullish for silver as all ships rise with the same tide and if gold were to rise, wouldn't this be very bullish for silver?
Ross Beatty:
I think anything that causes gold prices to rise will be bullish for silver because silver tends to follow gold. Next question.
Operator:
Thank you. Our next question is from David Roberts of Business News America. Please go ahead.
David Roberts:
Thank you very much. Just a couple of quick questions. The new deadline for the merger with Corner Bay December 17th, is that fixed? I mean if it hasn't been sorted out by then, will you then drop the merger or could that be extended again...?
Ross Beatty:
We had all the alternatives, we will have all the alternatives available to us in December that we had in November. We can either extend, walk away or waive the condition.
David Roberts:
Okay. Thank you, that's great. Second question: I don't know if this is actually in the report. If it is, I apologize. Do you have operating loss or profit figures for the three operations?
Tony Hawkshaw:
Yes, we do. They're extensively reported in our financials, in our quarterly, and that's public now.
David Roberts:
Fair enough, okay. Thanks.
Ross Beatty:
Okay.
Operator:
Thank you. Once again, if you do have a question please press 1 at this time. Our next question is from Barry Cooper of CIBC World Markets. Please go ahead.
Barry Cooper:
Yes, good day. Just on the exploration results, and I don't know whether you want to address this, Ross, or whether John. You talk about Huaron having increased reserves based on some wide zones that were discovered. Can you maybe quantify that and elaborate a bit?
Ross Beatty:
John, do you want to take that one?
John Wright:
Yeah. We will do it formally at year-end but as of the September 30th, you know, sort of rough reserve calc to go ahead for mine planning for 2003, then I think we had lost 27,000 tons in reserves and had mined 380/390,000 tons. I mean it becomes a changing thing all along but I think we'll finish the year with having at least replaced. You've got to remember that our drill arrived in late July, otherwise we were using what's called a meter-eater (ph) drill which is a glorified winkie. So you know, we are just starting to get it going from about 3,000 meters a year in drilling up to over 1,000 meters a month. So a lot of this has been just... one area that we found and then the rest of it has just been discovered and we've developed into an area to form a block and we've cross-cut another vein.
Barry Cooper:
Okay. And then on the width here you're talking, what sort of... what I recall of Huaron it was kind of like two meters sort of thing, or one and a half meters. Are these widths quite a bit wider than that or is...
John Wright:
In one area in particular, Barry. I mean it's an amoeba type shape but it got up as much as 15 and 18 meters across.
Barry Cooper:
Okay, so that's what necessitates presumably a bulk mining methodology that would...
John Wright:
It will... Well, we did, you know, because it was something that we just walked into, then we were able to get lower unit rates by bringing Jumbo in and that. We actually have a test going on at the beginning of December with long-haul drilling in part of that block and that was what we would hope to move forward, and one of the areas in the satellite area that's what we're doing the development on is another one that looks like it has a potential to be long-haul block as well.
Barry Cooper:
Right, okay. And then, Ross, just wondering - CRU puts out some comments there on Chinese activity and one of the things that they're indicating, that the quotas for export are going up again next year and it seems that every time there's a quota in China it's always exceeded. So how does that fit in with Gold Fields' discussion with it sounds like they're cutting back on sales?
Ross Beatty:
Yeah. No, Barry, the Gold Fields numbers are the right ones. Quotas are things that the Chinese government publishes. Having been there earlier this year, I'm sort of... I'm reasonably up to speed on this. They've been... quotas don't really have too too much to do with the volumes of Chinese silver sales. It simply allows certain exporters to export legally. The Peoples Bank of China doesn't need quotas, they're the ones that set the quotas for others. And so those are really for the mine production, and the mine production continues in China. They're selling about 30 million ounces or so surplus to their domestic needs and that does continue. The big negative I think in the last few years in the silver market has been the Peoples Bank of China silver inventory sales and those are done without the need for quotas at all.
So while the quotas definitely increased this year and will probably be filled or close to being filled, it's not true to say that they keep increasing, that they're going to keep increasing for next year and the year after. It's a matter of as the Chinese get more familiar with world silver markets and really control their own silver exports from their own mines, they're coming up to officially what they're selling unofficially. But it's not the significant part of the Chinese silver equation anyway. The Peoples Bank exports are the key and those are the ones that are being curtailed. They may not be curtailed as silver goes over $5 but as soon as silver went below $5 it looks like they stopped completely and there's evidence of that both in China and in India where now India silver needs are being sourced from Europe again and from Dubai rather than from China where they've been sourced almost entirely from in the last few years.
Barry Cooper:
Any sense of how much of the, I believe the 2,900 tons of silver that people speculated about would be available from China? Now admittedly, that was I want to say the beginning of 2000, so call it almost three years ago. Do you have any sense for how much of that is gone?
Ross Beatty:
Barry, you mean 2,900 tons which is almost 100 million ounces of government silver?
Barry Cooper:
Correct.
Ross Beatty:
Our guess is that it was much bigger than that, possibly as much as three times that, and that at least two-thirds of that has been sold.
Barry Cooper:
Okay. Thanks a lot.
Ross Beatty:
Okay, Barry.
Operator:
Thank you, Mr. Cooper. Our next question is from John Doddy of Gold Stock Analyst. Please go ahead.
John Doddy:
Hi, Ross and guys.
Ross Beatty:
Good morning, John.
John Doddy:
A couple of simple questions. This Mexican project that you mentioned at the very end, there was some kind of a comment I didn't quite catch that you thought at Ocotlan that this might have serious mine potential?
Ross Beatty:
Well, John, no, I think it's... I'd love to think that too. I'm the exploration guy here, but every exploration... I love exploration, and this one has in my books very good potential, but there's not a single kind of reserve there, John, it's just a classic large size potential exploration project and, you know, I hope in the next quarter and the next year and the next really two or three years we report good results from this, but it is just an exploration project in an attractive area in Mexico. We own 100%, we have six or seven great targets and we're drilling them and, you know, we'll just see what we get. I just happen to be personally very enthusiastic about the project and very committed to discovery which is the best way to create shareholder value as opposed to, you know, acquisitions.
John Doddy:
Okay. The second question had to do with Volcan. It seems like the deals that you're doing with them, they could have done themselves and I wonder, you know, really why they didn't.
Ross Beatty:
Right. Well, this is where... it's an example of... you can see from our quarterly report that we have maintained an activity level of both acquisitions and, you know, development this year to reflect the fact that we are in relatively good condition and there are many companies who are in relatively poor condition. That means it's a buyer's market and we like to be buyers in that situation. Volcan itself is in a tremendously distressed financial condition because of the zinc prices. They are mainly a zinc miner and they are cash poor. So what they've done is they've essentially, they have monetized a contract that they hold to give a present value to them which they can then use for other purposes they have and it fits us very well indeed because then we take the cashflow over a 10-year stream and that was on a discounted basis, the cashflow is immediate for us, but Volcan gets the discounted value of that today and then they can use that to help out their own situation. Plus it's an asset that for them is non-core and for us it's a core asset.
John Doddy:
Okay, fine. I understand now. Thanks.
Operator:
Thank you. Our next question is from Haytham Hodaly of Salman Partners. Please go ahead.
Haytham Hodaly:
Good morning, gentlemen, Rosie. A couple of questions. I hate to touch on the one mine that's unfortunately not doing too well but just some curious questions. Your total investment was written down to zero. Is that correct?
Tony Hawkshaw:
Haytham, we wrote off all the property plans and equipment. That was the $15-million writedown. We still have on the consolidated books the concentrate inventories, the accounts receivable, the supplies inventories and all the liabilities associated with Quiruvilca so that the net, if you added all those numbers up, there would be net liabilities of about three-quarters of a million dollars that's still on our books.
Haytham Hodaly:
So nothing overly significant?
Tony Hawkshaw:
No.
Haytham Hodaly:
The next question I guess, Ross, you touched on, you said a mine closure was difficult under Peruvian laws. Could you expand on that a little bit?
Ross Beatty:
Sure, Haytham. Yeah, in a normal situation, here in Canada say, we would put this mine on care and maintenance and we'd hold it there as long as zinc and silver prices were below the cost of production. Yeah, below the cost of production. That entails a care/maintenance cost and the balance or the trade-off is how large are those care and maintenance costs relative to your operating losses. It's very hard to shut a mine down anywhere, but in Peru particularly it's difficult because they have laws that dissuade companies from temporary closures. You have to keep all the miners still on the payroll and that makes the care and maintenance costs very, very expensive.
And then of course you have to... is it a temporary closure, is it a permanent closure? If it's a permanent closure, you've got to then start closing the mine down and doing things that are irreversible and that's not, you know, not terribly sensible because the mine has long-term reserves. The veins are wide open at depths. I was down there 10 days ago or so and I was crawling, climbing up and down ladders at 14,000 feet and it's not an easy thing to do but it was at our deepest level, and the veins are still there as strong as they were, you know, meters above. But they're not economic, that's the problem, under today's metal prices.
So it is a very, it's a tough call for us. If we thought that zinc and silver were going to stay where they are now for the next three or four years, I think it would be a fairly easy decision. But we don't know that and so we have to quantify the difference between the rules in Peru that require us maintain work for us and the cost of doing that versus the cost of a closure, permanently or otherwise, versus the cost of keeping it alive. It's an exercise that we've done. We actually have done this each quarter this year and we keep thinking well, you know, let's just look at this number or look at that number a little bit more and let's see how Barrick's doing next door and we're getting some value for the development that's going on there already. Let's see if we can maybe find a gold mine that'll help to make our decision and maybe use the mill for that purpose some day.
So there's a lot of issues in this and that's why we can't come to a quick decision, and of course all the time we do hope that metal prices will come back up. They are at a historic low. The mining business is cyclical, as you know. Things aren't going to be like this forever. All zinc mining companies are getting killed right now. We hope that that will cause some business to come among the big producers in such a way to cause zinc prices to go up and on the silver side we're quite bullish on silver. So you know, I hope that this is a metal environment that's not going to last for too much longer, metal price environment.
Haytham Hodaly:
Ross, I guess you've looked at the different costs for the temporary shutdown versus the permanent shutdown, etc. Do you have numbers you can quote yet or is it still too early?
Ross Beatty:
No, it's still too early I'm afraid, Haytham.
Haytham Hodaly:
Okay, and is it still... in terms of around a 450 silver price, you're still losing about $100,000 U.S. a month. Is that correct? At Quiruvilca?
Ross Beatty:
No, it's closer to 200, Haytham.
Haytham Hodaly:
Okay.
Ross Beatty:
I mean it depends on whether you include your Lima overhead, in or out your normal water treatment changes, in or out - those are permanent costs or semi-permanent costs. And then of course we've also hedged some zinc. We've sold forward about 30% of our zinc at higher prices. So we're getting about... how much, Tony? About $100,000 a month?
Tony Hawkshaw:
Have been averaging $100,000.
Ross Beatty:
About $100,000 a month extra revenue for zinc sales at Quiruvilca than we would otherwise get off spot prices. So you know, it's in that order, $100/$200,000, depending on what numbers you use.
Haytham Hodaly:
Thank you very much.
Operator:
Thank you. Our next question is from David Morgan of Stone Investment Group. Please go ahead.
David Morgan:
Good morning, everyone.
Ross Beatty:
Hi, David.
Rosie Moore:
Good morning.
David Morgan:
Ross, I wanted to verify the number you said about when you were reviewing the silver fundamentals a little bit. You said the latest GFMS update said that there were 99 million ounces predicted for the deficit for this year currently.
Ross Beatty:
What GFMS said is that the deficit this year would be about the same as last year, and last year's was around 90 million ounces as I recall.
David Morgan:
Yeah.
Ross Beatty:
Nine zero.
David Morgan:
Okay, and the other main study just came out with a report last month and they had predicted 120 million ounces and then they just updated last month that it would only be 50 million for the year which I found a little bit on the low side. Well, thanks for that update. Secondly, on the zinc situation, what you just said in the last call was that you didn't expect zinc to stay down forever and neither do I. But going forward, where do you see the zinc situation continuing say for the next one or two years?
Ross Beatty:
Well, it's going to bump along I'm afraid, David. In our best judgment it's not going to do anything dramatic. It's shocked everybody that it's stayed so low for so long now, but it's strictly a function of industrial production on a global basis and silver... I mean zinc really tracks world steel production. Zinc's main and almost only use right now of consequence is galvanizing steel. So if the world economy picks up so it uses more galvanized steel, zinc prices are going to go up. The big mining companies don't seem to be changing their supply too much, so that side isn't changing. And as long as demand is flat and supply is flat, prices are going to be flat.
David Morgan:
A last question: Based on that projection, where do you see the fall-off in worldwide production of silver as a by-product? In other words, earlier in the presentation you stated that mine production was down, which everyone expected. Do you expect that going forward for a couple more years and if so do you have any kind of quantifier as far as amount that would be, you know, less mining production versus say in a good environment?
Ross Beatty:
Yeah. I've actually got some reasonable numbers for that, David, but the conclusion is that there's going to be a bunch of mine closures, there's going to be a bunch of new mines coming on, mostly our own mines - La Colorada, San Vicente and probably, you know, a few years down the road the Manantial Espejo, and maybe even the Duca at Minor Russia (ph). It's apparently close to starting up at some sort of a scale and I'm not sure just how bit it's going to be but I may find out fairly soon. And with those new operations off-fitted (ph) by closed mines, the best guess, David, is that production will be more or less flat looking out the next say two or three or four years. Say out to 2005, 2006 there will be for every new mine opening up there will be probably be a closure and that does not assume anything dramatic on the lead-zinc side. It assumes more or less no new closures of existing base metal mines, just ordinary mine depletion offset by some new mines that are coming in. So flat to slightly negative would be the answer, and our estimates the last quarter of about a $10-million drop this year, 10 million ounce in silver supply drop this year are probably going to be about right.
David Morgan:
Thank you. You answered it fully. I appreciate it.
Ross Beatty:
Okay. Thanks, David.
Operator:
Thank you, Mr. Morgan. Our next question is from George Topping of Sprott Securities. Please go ahead.
George Topping:
Yes, good morning/afternoon, everybody.
Ross Beatty:
Good morning.
Rosie Moore:
Good morning.
George Topping:
And just on the Corner Bay water rights, Ross, I wonder if you could elaborate if you have 100% of the water rights necessary from the local agricultural cooperative for the mine.
Ross Beatty:
Sure, sure. The current status of water rights at the Alamo Dorado project in Mexico of Corner Bay's is that there has been a conditional water rights agreement with the local agricultural cooperative for all the water forecast to be needed for a heat-bleach operation at that site. That particular agreement is making its way through the approval process, both locally, regionally and federally, and that's the problem in that the approval process has taken longer than we expected. We do however continue to see progress and we hope that it will be resolved and completed very soon.
Now, the question, the next part of your question was whether that's going to be enough for a heat-bleach mine and that's something that is... the water rights agreement we have will be sufficient for a heat-bleach mine, however there's been a... In Mexico water is very important. That's one of the reasons this has taken so long, and there are issues about the use of water for all the users of that particular reservoir in the condition of say a drought or say a diminishment of quotas from the federal government. I think we're trying to get approvals for a sufficient quantity of water under any circumstance and that's what of course we will be working on to try to make sure that it gets through to the final agreement.
George Topping:
Right. And have the user associations or government authorities raised any particular issues or are they just doing their own review in their own time?
Ross Beatty:
I don't really know, George. I just know what... I mean the people who are really driving the bus on this are Corner Bay personnel, have been involved in the area and know the people for the last couple of years. I don't really know the details of issues that are being brought up but I don't think that they're particularly material, John, do you?
John Wright:
No, but you know, the users district vote is the next one which is approving the understanding of the agreement which is roughly twice what they need for the heat bleach, and then it will go from there to the federal agency. We haven't had anything in our discussions, our own discussions with the federal agency that says that they're anything but onside with this. Quite the users committee and what the internal politics are are a little bit difficult to tell but we're hoping that will be history within the next 10 days.
George Topping:
Good. Okay, thanks.
Operator:
Thank you, Mr. Topping. Our next question is from Steve Butler of BMO Nesbitt Burns. Please go ahead.
Steve Butler:
Thanks, Operator. Good afternoon. Ross, do you know what the percentage of fixed costs are at Quiruvilca?
Ross Beatty:
No, but I have people here who do. Do you want to think about it, Tony, while we wait to answer the others, and answer off the top of your head?
Steve Butler:
Okay, I'll ask another couple of questions.
Ross Beatty:
Okay.
Steve Butler:
Sorry. Another couple of questions. At La Colorada how much of the $20 million cap-ex has been spent to date? Third question: On the Volcan agreement, is it actually final and complete? Mining and transportation costs on the Volcan sulfide material on the 46,000 tons per year? And lastly, what is the metallurgical challenge to the sulfides at Volcan? Thanks.
Ross Beatty:
Okay. Tony, do you want to answer the first one?
Tony Hawkshaw:
Yeah. The fixed cost, Steve, it varies with the level of production changes, but at this level of production roughly 42% of our costs are fixed.
John Wright:
Olay, I'll move over to La Colorada. As we stand at the end of October we were $5.7 spent and committed out of the $19.2 on budget.
Steve Butler:
Okay.
John Wright:
In terms of Volcan, the way that contract works is actually is Dorun (ph) sends over the truck and we use a loader to load it and that's the extent of the operating costs that we face. We do have a geologist... we're doing a little bit of drilling just so that we can make sure that we ship the highest grade right at the beginning and we'll probably have a geologist for quality control, but those are the total of our operating costs associated with it. In terms of the metallurgical challenge on barite (ph), it is not refractory. The challenge is, you know, you're facing something that at current metal prices have a $30/$35 rock value. So you know, you can't use a pressure leach (ph) which works like a charm because the capital kills in terms of capital payback. So you're looking at short-term leach time. They looked into 96 hours and the re-agents kill them, or other means like that, a chloride leach, etc.
Steve Butler:
Okay. So John, you said in the press release last week that the total production costs of less than $2 per ounce on the 46,000 tons of material to be sent to the smelter on a custom basis. So there is some costs. I'm just thinking is the $4 million... I can use the $4 million purchase price and come up with about 80 cents I think on depreciation per ounce, but I guess what's the other... is there another estimate of the other costs? I guess it's about a buck an ounce.
Tony Hawkshaw:
That includes what we think the taxes will be.
Steve Butler:
Okay.
John Wright:
But you're right. I mean, you know, essentially the charge is the amortization.
Steve Butler:
Okay. Thanks, guys.
Ross Beatty:
Yeah, in terms of direct operating costs it's pretty close to zero.
Steve Butler:
Okay.
Ross Beatty:
Thanks, Steve.
Operator:
Once again, if you do have a question please press 1 at this time. And at this time I'm showing no questions registered. I'd like to turn the meeting back over to you, Mr. Beatty.
Ross Beatty:
Okay. Well, once again thank you all for joining us this morning or this afternoon and of course if you have any further questions don't hesitate to call myself or Rosie Moore here in Vancouver, and on that I think I'll end the call and thank you again. |
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