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Tue May 13, 2003
First Quarter Results Conference Call
Operator:
Good morning ladies and gentlemen. Welcome to the Pan American Silver's first quarter financial results conference call. I would now like to turn the meeting over to Mr. Ross Beaty, chairman and chief executive officer. Please go ahead Mr. Beaty.
Ross Beaty:
Thank you operator and good morning and good afternoon ladies and gentlemen. Welcome to the Pan American Q1 03 conference call. Around me here in Vancouver are the usual suspects, John Wright, president and chief operating officer and Tony Hawkshaw, chief financial officer. I'm also very pleased to welcome for the first time to our conference call Geoff Burnes who is going to take over John's position as president and COO of the company. And I'll deal with that in a few minutes.
As some of you will know we had our annual general meeting yesterday. In addition to the shareholders, brokers and media in attendance we also had all of our senior operating group both those in Vancouver and those from our four operations in Mexico and Peru. And it was a real pleasure to have them introduce themselves to the shareholders and those attending our AGM.
Pan American continues to grow strongly. We had record silver production of two point one five million in the first quarter. We are on target to reach our forecast silver production in 2003 of ten point three million ounces which will be 32 percent higher then our 2001 production. 3 of our 4 silver operations should produce profitably this year with only the Quiruvilca mine operating poorly. We hope to construct the Alamo Dorado mine in 2004. This project came to us in our Corner Bay acquisition in February this year. Successful construction of Alamo Dorado will add a fifth operation to our company and take our silver production to almost 20 million ounces per year.
With this rapid growth comes heavier management requirements. I said in our last conference call in March this year that a priority for 2003 would be to beef up our senior management team to deal with our growth. And I'm really pleased today to welcome several new members to our team. But I'm also sad to advise that we will be losing two members of our team who have served the company so well in it's short history. First of all John Wright will be retiring from the company in mid year though he will remain an active board member.
John started Pan American with me in 1994 and has been integral to our operations and growth since then. He will initially be replaced as president and COO by Geoff Burnes. But we expect to add at least one and perhaps two more senior engineers to support the COO position. I am really pleased to have Geoff join us. Geoff has had a long and distinguished career in the mining industry mostly in financial management. And he has already proven invaluable in the work he has done with us to date.
On the investor and public relations front Rosie Moore will be leaving to join a start up exploration company. And she will be replaced in that position by Brenda Raties who comes to us from one of Canada's and the world's foremost gold producing companies where Brenda was director of corporate communications. I've known Brenda for 13 years and I think she'll make a great contribution to the company in investor relations, public relations and corporate relations, all the relationships.
To keep us out of trouble and to make sure that the "i's" are dotted and the "t's" crossed we welcome back to the company Mr. Robert Pirooz as vice president legal affairs. Robert's skills served us well in the past and I'm really pleased that he has returned back to Pan American Silver. And finally I welcome Bill Faust to Pan American. Bill is a mining engineer who will look after getting Alamo Dorado into production as quickly and cost effectively as possible. He did this for Corner Bay and he's going to stay with Pan American and continue the effort to get Alamo Dorado built as a great new mine.
Our first quarter financial results speak for themselves. Three good operations and one poor one. As 2003 progresses we expect our total cash costs to decrease because productions in the La Colorada expansion will begin in July and this should be our lowest cost mine. Our Huaron mine and stock pile operations in Peru both had good results in first quarter. The La Colorada mine in Mexico remains on track both in schedule and budget for a July start up, so all is well there too.
Our problem child continues to be the Quiruvilca mine. This is like a broken record since it has been hurting us since last 2000 when zinc and silver prices dropped to record lows. Unfortunately 2002 also saw a decline in silver and zinc grades at the mine. And we do not see these recovering any time soon. I must commend our operating team at Quiruvilca for making heroic attempts to reduce costs and operate better. But Mother Nature has not been kind to us. And we simply cannot operate the mine profitably at current prices under the lower grade conditions of the operation there. We wrote the mines carrying value down to zero in the third quarter of 2002. And we took a reclamation accrual in the fourth quarter.
While I am very optimistic that silver prices will improve in 2003 as they have year to date I am not so saying about the prospects for higher based metal prices. Now base metals form the biggest part of Quiruvilca revenues. As the veins deepen they become more zinc rich particularly and less silver rich. So at some point we may have to take the hard step of closing our (Inaudible) Quiruvilca. We're examining all the costs and benefits of the different alternatives there and expect to report more definitively on our conclusions later this year.
We made good progress in the first quarter on several of our development projects where we had such promising growth prospects. On February 26th we concluded the Corner Bay acquisition and we are now redoing the feasibility study for Alamo Dorado plus some drilling and metallurgical work to refine the processing options available there. In Argentina at Manantial Espejo we concluded a very successful drilling program and made a decision to undertake a major underground tunnelling and drilling outfit there to begin this fall. 
And in Bolivia at the San Vicente mine we're discussing with the Bolivian government and our existing partner options available to allow us to restart work there, a major program there leading to eventual feasibility and do large scale mining at that project.
So to sum up we had a reasonable first quarter. Better in fact then our budget projection due especially to lower costs then expected at La Colorada and Quiruvilca and slightly higher production. And we are optimistic this will continue for the balance of 2003.
Turning to silver markets the GFMS, Gold Fill Mineral Services published last Thursday it's annual compendium of silver statistics. A good summary can be available, pardon me, a good summary can be obtained by going to www.silverinstitute.org. To sum up the silver deficit continues to be large at 67 million ounces in 2002. Even though total demand went down for the second year running. Demand was up for industrial uses, the largest component of silver demand. Down slightly in photographic demand. At GFMS ascribes that to fewer holidays being taken last year. Although certainly there's probably a minor but real impact from digital imaging in certain industrialized counties like Japan and North America and Europe. Although silver demand in photography is up in many other parts of the world that don't have access to computers and Internet.
And silver demand was down significantly in jewellery and silverware demand particularly in China, in India due to poor harvest and higher Rupe prices for silver. That when I say down it was down a great deal, 28 percent relative to 2001. On the positive side mine supply went down in 2002 for the first time since 1994. And Chinese official sales of silver declined to 51 million ounces from 68 million ounces the previous year. Chinese internal demand for silver nearly, rose dramatically and nearly equalled Chinese mine supply. So the large, the large historic surpluses of silver internal demand, pardon me internal supply and demand and surplus in China has nearly been eliminated.
I remain optimistic that silver prices will trend over 5 dollars in 2003. Mine supply is projected by GFMS to decline again this year. The US dollar weakness is positive for silver. And of course gold prices. Industrial demand should continue to show positive growth in 2003. And Indian silver purchases should recover significantly as they have already done in the first quarter.
One big question remains as to the level and price targets for disposal of remaining Chinese stock piles. We expect the Chinese sales will be more price sensitive this year as they were last year when compared to the previous year. And perhaps that sales will again be lower in 2003. So far 260, over 260 million ounces has come out of China since 1998. And remaining inventories there are just that much lower. One day soon they will be completely gone. As US Defence department stock piles were depleted completely last year after 50 years of large inventories. And the silver price should rise when this inventory is used up. I await that day with great anticipation and hope it comes soon.
So with those introductory remarks I would like to open the call to questions and hopefully we'll able to answer the questions as best we can. Thank you very much.
Operator:
Thank you gentleman. We will now take questions from the telephone line. If you have a question please press one on your telephone keypad. If you're using a speaker phone please lift your handset and then press one. If at any time you wish to cancel your question please press the pound sign. Please press one at this time if you do have a question. There will be a brief pause while your participants register for their questions. We do appreciate your patience. Our first question will come from Brian Christie of Canaccord Capital. Please go ahead.
Brian Christie:
Good morning Ross. Just a question I guess and this is probably more theoretical. What really is going to kind of make you decide on Quiruvilca. Is it a metal price decision or you know what's kind of the deciding factor there whether you sell it, close it, keep it?
Ross Beaty:
Yeah fundamentally it's metal prices Brian and it's a combination of both silver and zinc prices. As well as I suppose the mine plan and what we see as the capital outlook for deepening the mine, for building another tailing facility to continue the mines operation. A matrix of things. And but normally I would say that the base metal price scenario more then anything.
Brian Christie:
Okay great. Thanks Ross.
Operator:
Thank you. Our next question will come from Steve Butler of BMO Nesbitt Burns. Please go ahead.
Steve Butler:
Ross just a follow up on Brian's question on Quiruvilca. I think you told us before that the cost of closing Quiruvilca would be, that would be your worst case scenario. If you have a sense for some of those numbers how big they could be. And secondly do you know what the Chinese have remaining in stock piles. Thanks.
Ross Beaty:
Okay. Those are two good questions Steve. The answer to first is we accrued for about 10 million dollars in reclamation costs. That would be done over many years. And that would include closing the mine permanently. And as you say that is a worst case scenario. We actually haven't got an annual budget yet developed for closure where we to proceed that way but it is something we are working on because it is a scenario that is very much open to us. Of course we don't want that to happen, that is a scenario that nobody likes to think about. It's not just the environmental cost but also the social costs. We have quite a big workforce there. We would like to you know keep them employed.
And there are social consequence in the region of course when you lose an employer such as the mine would be if we did close it. On a positive front though right next door to Quiruvilca we have the Alamo Dorado project, I'm sorry the Alcajicamo(ph) project of Barrick. This is Barrick's newest and probably best gold mine. It's the one they discovered and announced early last year. And they're really rocketing that one towards production. They're working very hard to get, to fast track that into development as they did the Piramina(ph) mine in Peru. So if we did have to close Quiruvilca over the next year or so at least the economic stimulus to the region that is being brought by the Alcajicamo development, it's a four hundred and some million dollar development by Barrick will certainly ameliorate or significantly reduce the social impact of the Quiruvilca closure. So that's the answer I think on that one.
Oh the second question was the level of Chinese stockpiles. That's an old, it's not a defined number, the Chinese are not transparent yet in respect of what their remaining inventories are. But in the Gold Fills review last Thursday in New York when we launched the 2003 silver survey they did say that remaining inventories of silver in China are in the order of a 150 million ounces. Which would be two and a half years or so at current disposal rates. Now that's a fuzzy number. It could be higher, it could be a little bit lower. They were, they actually increased the number. They thought I think when you sort of you've got to kind of pry them out of Gold Fills report. It's not clearly stated anywhere, you've got to kind of make some inferences. But they had a lower number last year and they've increased that number somewhat as they have better data in China. They have a lot of information that they get anecdotally and through statistical sources that they find. For the level of silver sales, level of inventories in China they've definitely got the best data available. And that will be the best guess of the level.
Steve Butler:
Ross another question, how much have you guys spent to date then on La Colorada. I know you've drawn four of ten million drawn against the loan for La Colorada. How much have you spent at La Colorada?
Ross Beaty:
Steve we had a little over ten million dollars spent and another two and a half million dollars committed as of 2 weeks ago. Be getting new numbers at the end of this week.
Steve Butler:
Okay. And Tony or Ross maybe Tony if you guys had sold all of your production in the quarter what would revenues have been and/or the bottom line have been?
Tony Hawkshaw:
Revenues would have been in the order of eleven point seven million. But you can't just look at the top line, you've also got to look at the operating costs would have increased to about ten point seven. So you know we roughly have about a million dollars of gross profit that's not reflected in the first quarter numbers that we'll see flow through during the rest of the year.
Steve Butler:
Yeah and depreciation would have been as well higher?
Tony Hawkshaw:
No. Depreciation would have been the same.
Steve Butler:
Okay. All right. Thanks Tony.
Ross Beaty:
Okay. Thank you very much Steve.
Operator:
Thank you. Our next question will come from Barry Cooper of CIBC World Markets. Please go ahead.
Barry Cooper:
Ross can you give us any more information on your drilling program down in Argentina and just where you're finding things and what kind of grades they are relative to the historical reserve or resource grade that you have there.
Ross Beaty:
Okay Barry. It sounds good. I'm not going to actually, I'm going to just direct you to look at some news releases that we issued in conjunction with Silver Standards over the last few months regarding Manantial Espejo. There's a complete compendium of news, or probably (Inaudible) compendium of good results that you can dig out in our web site or the web site of Silver Standard when you go back to look at previous news releases. I think we had our results released out on, in January and another one in February and possibly one in March. So all results are there. But fundamentally the main vein, there's about, there's a multiple number of veins. One principle vein and some side veins. Grades at Manantial Espejo well the resource previously was 6 millions tons at about two hundred and sixty grams per ton silver. So pretty high grade of silver. But equally high grade gold. There's about four grams per ton gold in the veins. And about 80 percent of that resource is one vein. It's a wide vein that averages about what John about 4 metres wide.
John Wright:
Average is about 5.
Ross Beaty:
5 metres wide. It's straight as an arrow for a kilometre. It's a real nice looking opportunity to mine. The deposit which was dore(ph) rather then concentrate will be a silver gold dore. And really it's in a wonderful part of the country. It's in a windswept plain. Low rolling hills with no infrastructure issues around it. There's a main highway about a mile and a half away from it. Local source of, local population source in a town very close. It's in a lovely development area. Apart from the fact we'd have to bring power in. I mean that's a main infrastructure I think has to be brought in. But same region as the Cera Van Guardia(ph) mine of Anglo American. And so I'm quite sure it's going to be an operating mine very, in a few years. It's not going to be before then because we have to go underground, do the internal tunnelling or internal or underground drilling program which will lead up to a final feasibility. And then we'll be able to give you firm numbers on the reserves and all the project indices that obviously we have to get.
John Wright:
Barry we're still modelling the results that will be the end of the this month by the time we come out with you know our own number for the first time otherwise it's always been done by different third parties. And roughly in the resource right now probably half of it or slightly more will be open pittable at a reasonable strip ratio and the other half would be underground.
Barry Cooper:
Okay. Well that sounds encouraging there. Now a question for Tony. Tony I see on the ballot sheet the provision for future income taxes jumped from nothing up to 19 million. What is the reason for that (Inaudible).
Tony Hawkshaw:
Can you hear Ross's comment Barry?
Barry Cooper:
No I missed it.
Tony Hawkshaw:
I think he said it's a stupid accounting rule.
Barry Cooper:
Okay. Maybe you can explain it to a stupid guy like me.
Tony Hawkshaw:
When we acquired Corner Bay we bought shares of Corner Bay Canada. The real asset that we were acquiring was Alamo Dorado which was a you know a piece of property. The tax basis of the property is very low relative to the purchase price of the shares that we bought. So to make a long story short we're not going to get a full tax deduction for our full purchase price. So the difference between the ultimate tax deduction and the tax deductions that we're not going to get is reflected as a deferred tax liability on the balance sheet.
Barry Cooper:
And that tax gets paid off as the project comes into production.
Tony Hawkshaw:
Well it's not a real tax. It's an accounting number. It's an accounting guess for what an opportunity lost might be.
Barry Cooper:
Okay.
Ross Beaty:
(Inaudible) don't understand it. But it's required under the rule. I cannot fathom what it is either.
Barry Cooper:
Okay good enough. We'll leave it at that.
Ross Beaty:
Sorry Barry.
John Wright:
It's not a real payable number.
Barry Cooper:
Well I know I look at a lot of these and they usually never ever get paid by anyone else either so nonetheless they (Inaudible) on the sheets and you do get questions about them. Thank you.
Tony Hawkshaw:
It's a pretty strange concept to me.
Ross Beaty:
Sorry we can't be more definitive and at least I can't be.
Barry Cooper:
Oh that's fine. Thanks a lot.
Operator:
Thank you. Once again if you do have a question please press one. Our next question will come from George Topping of Sprott Securities. Please go ahead.
George Topping:
Hello everyone. Most of my questions have been answered. But just on Dorado the updating of the feasibility parameters are you finding it's confirming what you thought or are you finding some variances?
Ross Beaty:
Well we haven't got an answer for that George because we're just in the initial phase of the drilling right now. Did we finish the (Inaudible) John?
John Wright:
We finished the (Inaudible). George we had Amex(ph) do a you know sort of a scoping study on the mill. And...
Ross Beaty:
The mill option as opposed to the heat bleach.
John Wright:
As opposed to the heat bleach. Which is sort of I mean the way I would like to push it. They came back with you know order of magnitude the same number on capital costs as what we expected you know and a cheaper cost per ounce. What we're doing now is where we'll probably take it in the feasibility is I mean the drill holes we've done are to provide us metallurgical samples much as anything else. And we'll probably be looking in the feasibility at a mill option with our waste going, a lot of our waste going to a heap option. And that's I mean Corner Bay had bought the Briggs crushing plant so we're looking at sort of a 6 thousand ton a day mill with a 10, 11 thousand ton a day crushing plant and that excess capacity would go and serve us for the crushing for the heap and then our water certainly we'll put to the heat (Inaudible) and bring back in in the mill. So the incremental cost on the heat will just be in the pad itself.
Ross Beaty:
So the metallurgical program, drilling the (Inaudible) program results should be done in a few months in conjunction with obviously new costs for mill construction. And the whole feasibility phase rewrite. And that's why we expect that to come out in about September. We have some pretty good guesses right now as John described on the cap ex so we'll be initiating financing discussions already. We will be initiating them in the next few months. And really get rolling in the third quarter.
George Topping:
Good. Thank you.
Operator:
Thank you. Once again if you do have a question please press one. Our next question will come from Brian Christie of Canaccord Capital. Please go ahead.
Brian Christie:
Ross can you maybe update us on the water situation on the Corner Bay project.
Ross Beaty:
Sure I can Brian. We had a review of that yesterday at our board meeting prior to the annual general meeting with Bill Faust up here. What we're doing right now is we're securing, there's 13 different water uses in the district that controls water rights over the water we're proposing to use. And we're actually getting detailed agreements from every one of those 13 groups to allow us to use the water. This was something that was approved in general by the district council comprising all those 13 groups in February and that agreement was ratified by the Conaqua(ph) Mexican government authorities both at a state level and at a federal level. And so that's the process that is now underway, we're just dotting the "i's" and crossing the "t's", getting the firm formal of all those districts. We've got 10 signed up now. We're just finishing off the last 3. And that should be that. I don't know John if you'd like to add anything.
John Wright:
No that should be (Inaudible) Mexico City itself is happy already with the module representatives so they're going to grant the licence. But it will be you know you can't withdraw until you have the contracts. So we're doing both sides at the same time.
Brian Christie:
So that puts that whole issue to rest then Ross?
Ross Beaty:
Yes it does Brian.
Brian Christie:
Thanks.
Operator:
Thank you. Once again if you do have a question please press one. And at this time I show no further questions registered. I would like to turn the meeting back over to you Mr. Beaty.
Ross Beaty:
All right. Well thanks again for joining the call today. And I think we'll leave it at that. Look forward to talking to you again on the next conference call and if you've got any further questions please contact me or wait for 2 weeks and then Brenda Raties will be on the team on June 1st, she'll be your contact from now on. Thanks again and good day. |
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