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Tue Aug 12, 2003
Second Quarter Results Conference Call
Operator: Good morning ladies and gentlemen. Welcome to the Pan American Silver second quarter 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: Okay, good morning everyone who's on the call here today. I have to say that it feels quite strange to be having this conference call today for me. I'm sitting here on a redwood stump beside a payphone in a campground in Northern California while I'm on a camping holiday with my family. But of course our need to communicate with our shareholders and interested partners on our second quarter results takes priority so I must take away from holidays to work for this important job. I can, however, report that Pan American is in good hands with the number of people on the job. On this call from our Vancouver head office are Geoff Burns, our President and COO; also Tony Hawkshaw, our CFO and Brenda Radies, our Vice President of Corporate Relations and they will be available during the call to answer questions and of course after the call if necessary.
I would summarize our second quarter financial results as okay but not great. We certainly did better than we did in 2002 despite much lower silver prices this year than last year but we continue to be really affected by poor results from our Quiruvilca Mine in Peru and that was the main reason we could not report better numbers. So I'm going to start with Quiruvilca and tell you what we're planning there to improve it. As that mine deepens it is becoming more zinc rich and less silver rich but as well the grades are declining while cost increases since the distance to haul the ore into the mill increases. We have dramatically reduced costs at the mine due to tremendous efforts by our workers there but we continue to sustain significant operating losses.
At the end of June and to take effect during the third quarter, we closed the north end of the mine, which was the farthest away from the mill, and the highest cost area of the mine. This will decrease our production from about forty thousand tonnes per month to about twenty six thousand tonnes per month but it should allow a break even operation at current prices. It is probable though that we will be forced to close the mine in mid 2004 if metal prices do not rise significantly. So we are working on a closure plan that will allow us to rehabilitate the mine over a five to ten year period at a cost of about twelve million dollars, which we fully accrued for at the end of 2002.
If we close Quiruvilca, we will lose about two and a half million ounces of silver production but it is very high cost production and we simply cannot keep producing there without a reasonable prospect of profitability. I can report that we had a very good month at Quiruvilca in July relative to the last three months and this should allow us to report better results in the third quarter. Our other three operations including two in Peru were much more satisfactory.
Huaron produced one point two million ounces in the quarter. Costs there were higher than budgeted due to problems with underground equipment availability but we expect this to be only temporary and for third quarter results to be on track. We are very pleased to have initiated a comprehensive review of the potential to expand Huaron and take advantage of the large reserve and resource base there. Huaron has reserves for about ten years of mining and resources for about the same. So we have begun a drilling program to convert resources to reserves and an engineering program to examine the capital costs of expanding the mine by twenty-five percent or so.
This would increase silver production at Huaron to over six million ounces per year and partly make up for the potential lost production from Quiruvilca. Much more importantly though, the expansion should reduce operating costs per ounce at Huaron and really improve it's profitability. We hope to have this work completed by the end of this year so we can begin to implement it in 2004. Our third operation in Peru, our small Silver Stockpile operation, generated excellent cashflow during the quarter and much better than we had budgeted.
Moving to Mexico, we were very pleased to report at the end of June that our La Colorada Mine completed it's three hundred percent expansion ahead of schedule and below the twenty million dollar budget. It is now in the commissioning phase and production is ramping up to the eight hundred tonne per day level, which will enable full year production of about three point eight million ounces at a cash cost of less then three dollars an ounce. The most important part of our plan to double production to twenty million ounces per year by 2005 is to advance the Alamo Dorado property to construction phase next year and full production in 2005.
In the second quarter, we started work on an updated feasibility study to review using the mill instead of a heap leach to process the ore and we hope to complete this work by about October. We are doing a little more drilling, some more metallurgical work and of course, new engineering to determine capital costs. Our guess right now is that this project will increase the capital costs there to about sixty to sixty-five million but drop operating costs per ounce considerably, thus making it a more profitable operation using a mill and we'll have a lot more to say about this plan later this year when we have the full numbers available to us.
Our two other silver development projects were also active in the quarter and will remain so in the balance of the year. Manantial Espejo in Argentina where we initiated feasibility stage work and permitting for a new mine and at San Vicente in Bolivia. So you can see we remain very busy, very focused on growing our company, increasing our silver production but in doing so, decreasing our operating costs and improving our profitability even at the current silver price. To do this requires an excellent pipeline of silver projects and we have this with four projects now at the feasibility stage.
It also requires capital and I remain somewhat astonished at the speed, success and market acceptance of the eighty-six point three million dollar convertible debenture financing we completed in July. In fact our share price has risen nearly twenty-five percent since the deal was announced and this is most unusual. We now have the capital to implement our aggressive growth strategy and generate what should be very good operating results in the future. Of course, this growth also dramatically increases our leverage to higher silver prices, which is an essential mission. 
Our growth strategy also requires experienced and focused management and I am really pleased to announce the addition to our senior management team of two senior engineers who will lead our company's operations and projects into the future. Steve Busby has joined as Senior Vice President, Development and Technical Services. Steve has an outstanding pedigree as a mine builder and will lead our team on the Alamo Dorado project, particularly along with Bill Faust, who is President of the subsidiary we have in Mexico.
And Andrew Pooler will be joining Pan American Silver in September as Senior Vice President, Mine Operations. Andrew ran mines while VP operations at Amax Gold, and more recently three mines of Greenstone Resources in Central America. The addition of these two fine engineers completes the process begun in early 2003 of beefing up our senior team. Now it's time to get to work and let results speak for themselves.
And finally, what about silver? Well of course if you look at the actual numbers, the second quarter silver prices were lower than the second quarter prices in 2002. Silver averaged four fifty-nine this year compared to four seventy-one in 2002. But as you all know, the prices took off in late July and reached about five dollars and nineteen cents before sliding back down to today's level. Clearly the price is responding to the strong fundamentals, mostly increased industrial demand prospects and partly to fund buying and fund selling. It is impossible to predict where the price will go on a daily basis but we like the trend this year so far and we expect it will continue in the future.
I completed my two year term as President of the Silver Institute in July but I want to mention one current initiative that is being worked on that might help stimulate silver investment considerably. Many of you will know that a gold exchange traded security is about to be launched by the World Gold Council and we in the silver institute believe there exists good potential in the silver market for an exchange traded silver security which could really enhance the ownership of physical silver by investors. We will clearly watch the gold example and I will keep you posted on our efforts in this area. And with those comments I would like to open the call to questions. We have our group in Vancouver available as well and if we can organize it, we'll try to answer questions that may exist from any participants today. Thank you very much again for joining us.
Operator: Thank you Mr. Beaty. We will now take questions from the telephone lines. If you have a question, please press star one on your telephone keypad. If you are using a speaker phone, please lift the handset and then press star one. If at any time you wish to cancel your question, please press the pound sign. Please press star one at this time if you do have a question. There will be a brief pause while participants register for questions. Thank you for your patience. Our first question will come from Terrace Orslan (ph) from TSO. Please go ahead.
Terrence Orslan: Good morning everybody thanks for the presentation Ross. Could you summarize the proceeds that you're going to use the debenture issue for in terms of major components the next year or two and how much is going to be left behind?
Ross Beaty: Absolutely, Geoff, do you want to tackle that one?
Geoff Burns: Sure Ross, I can do that. The primary one Terry is obviously going to be the Alamo Dorado project. As Ross just mentioned, our current estimate is subject to finalizing the feasibility on the mill option. It's somewhere in the neighbourhood of US sixty to sixty-five million including working capital. So that's by far the largest single use. After that is our Huaron expansion plan which as Ross mentioned we are looking to implement in early 2004.
Our scoping studies indicate a capital cost there of between eleven to twelve million US for that project. I guess the final piece is we do have a couple of small pieces of debt at the moment. We're looking very carefully at the economic benefits of potentially bringing those down. We're not likely to move in that direction Terry until we have our final numbers on both the Huaron expansion and the Alamo Dorado construction.
Ross Beaty: Thanks Geoff.
Terrence Orslan: This year's component for those though, it's going to be very Small, right?
Ross Beaty: Yes, very small Terry.
Terrence Orslan: Okay, so obviously you've got some time before you massage the numbers and we'll get the exact how much is going to go through and are you impressed, the fact that the overage was taken Ross and Geoff?
Ross Beaty: We were pleased it was taken. We were not terribly impressed because of course the stock did well and the convertible debenture traded above the issue price and it would have been quite surprising to not have it taken down. But again, we were pleased, very, very pleased at the market's acceptance of the deal. We like the deal ourselves a lot, of course that's why we did it. We were looking at having a combination debt and equity conventional debt and equity to fund our growth platform and with the convertible debenture, that's obviously taken away the need for both. We also think the terms are excellent and of course it leave us open to just about any other kind of financing if we release yet another project that we need to do anything else next year, we're quite free to do other things, not that we have anything planned right now. So we were very pleased and continue to be today.
Terrence Orslan: Ross, you're close to, or Geoff as well, close to regulations in Peru with respect to the taxation issues. Is there anything going on, there were a lot of rumours about in June revitalizing the royalty issue and the whole government was kind of uptight about the taxation and the way it worked in Peru. Looking at it, is it more political stuff than practical?
Ross Beaty: Peru is still undergoing you know, I would say some difficult times right now. They're faced with a revenue crunch as some of the basic industries are still separated and mining is very much a part of that as there a lot of mines in the country that are still under crisis and conditions because it's a low based metal price that have been prevailing for the last couple of years. And fisheries isn't terribly strong, tourism isn't as strong as it used to be. So it's got a lot of need for revenue and they look to some of the industries to help fund those needs. Happily there's an awful lot of big Peruvian companies that's joining the lobby against what we think are regressive forms fo taxation such as royalties and they've been able to convince the government that those aren't terribly clever ideas. We expect that's going to continue and is the usual trade off between, you know, governments that have social revenue and needs for revenue.
Terrence Orslan: Last question, the silver exchange traded options or the exchange traded securities, could you go over that, how it's going to work for silver and what impact it may have on Pan American and three, what liquidity do you need for us to be successful in the marketplace?
Ross Beaty: Right, Terry at this moment, it's just at the idea stage. We're looking at the plus and minuses and we're looking really at the gold examples very carefully because we think the same exact thinking can apply in the silver market. The basic idea is that there would be a, you know, there'd be a security that people can buy very easily that would represent physical silver and to the extent that it could be traded very simply on an open market, it will be something that will stimulate investment demand and this could, because of the very small amount of physical silver available in inventory relative to, for example, gold inventory, this could sop up any surplus of inventory and have a very dramatic near term effect on the silver price. So we're looking at what's going on with the World Gold Council initiative closely that will be coming into the market very soon and to the extent that it can be copied in the silver example, we're going to have a look at doing that.
Terrence Orslan: Legally and practically, how long do you see before this thing can be implemented?
Ross Beaty: Oh Terry, at least six months.
Terrence Orslan: At least six months, yeah, yeah. Thanks guys, thanks again.
Operator: Thank you. At this time if you do have a question, please press star one on your telephone keypad. And our next question will come from Brian Christie from Canaccord Capital. Please go ahead.
Brian Christie: Good morning guys. Ross, I'm just wondering, can you maybe give us an update on Manantial Espejo when you expect the underground work will get underway and kind of maybe a time line there?
Ross Beaty: Well Brian, you might have missed this but we had quite a significant development with Manantial about three months ago. Silver Standard and ourselves had a management meeting where we looked at the latest ore model and looked at the potential to open pit mine most of the resource and whether it would be then more economically or less economically than underground mining. We were quite pleased to see that most of the resource there, about eighty percent, can be taken out with an open pit at much lower cost than underground and it was so impressive to us, we decided to go ahead and basically abandon the original plan to go underground which would cost about three million dollars before we get to the sort of feasibility stage work that we still need to do there.
Instead of that we are proceeding directly into the feasibility stage work that's needed to scope out the economics of actually building the mine, saving a couple of years from what we originally thought of earlier this year. So we're moving into engineering work, combination drilling, a little bit more surface drilling this winter and we'll move into cost estimates next year about this time and try to get this wrapped up in the next eighteen months or so, so we can go ahead and get the feasibility study by then. This will cost much, much less than we originally budgeted and save us about a year or so in our time line. So that's, so we're not going to be doing our underground program, we're going to go straight into the feasibility work directly.
Brian Christie: Have you got an expenditure level there Ross?
Ross Beaty: Yes, the expenditure for the next eighteen months or so is budgeted at about two point eight million which will be shared fifty-fifty between Pan American and Silver Standard.
Brian Christie: And you're going to capitalize that I assume?
Ross Beaty: I think we're going to capitalize it, yes. I think we're expensing that work right now and it will be capitalized to the extent it's at the feasibility stage I think. Geoff, is that correct, or Tony?
Unidentified Male: Yes, that's correct. Once we get to the feasibility stage we'll start to capitalize the costs.
Brian Christie: Okay thanks guys.
Ross Beaty: Thanks Brian.
Operator: Thank you. At this time there are no further questions registered. I would now like to turn the meeting back over to Mr. Beaty.
Ross Beaty: Very good. Well I think if there's no further questions we'll call the meeting to an end and thank everyone for joining us today and of course there'll be others who attend.
Operator: I'm sorry for the interruption Mr. Beaty, we do have two questions that just queued up.
Ross Beaty: Well let's answer them. We've got time so go ahead.
Operator: Peter Struby from Struby Associates. Please go ahead.
Peter Strabe: Ross, you more than anybody else that I know of follow the Chinese, both the Chinese marketing efforts in India and their production. Have you seen any recent indications in what they're doing over there whether they're building inventory or whether they're increasing sales or have any changes in their strategies?
Ross Beaty: Peter, do you mean in China or in India when you say they?
Peter Strabe: Well I mean basically in China because of their major exports into India.
Ross Beaty: Okay, for the last four years, China has exported very, very large quantities of silver from government reserves held by the People's Bank. The total we think has been about two hundred and fifty million ounces from virtually zero prior to 1999. Happily last year they exported much less than they had in the previous three years and we expect this year they'll export less again. So we are seeing changes in the flow of silver from China to the extent that it's much less than it has been recently. The flow of silver from China went almost entirely into India which has this big silver demand for investment purposes and jewellery and silver by the Indian people.
So rather than that silver going into India from Europe and in the Middle East as traditionally has been the flow, silver was entering India from China. And we have seen some change in that. There is a return to the silver flow from the Middle East and India, pardon me, and Europe to some degree but there is still a Chinese silver going into India on quite a large scale. I think that the Chinese silver inventories are dramatically depleted and I think further Peter, that they will dry up very much over the next year or so.
I think there's another year of so of exports available in China but much, much, as I said, very depleted stock piles are there and further Chinese domestic demands have increased considerably in the last couple of years as they use more silver for industrial demand internally. And now the Chinese internal demand is more or less equal to Chinese mine production and so that's not going to create any more surpluses as they have existed for the last ten or fifteen years. I hope that answers some of that question.
Peter Strabe: That's very good, very helpful Ross. Thanks a lot.
Operator: Thank you. Our next question will come from Trevor Turnbull from BMO Nesbitt Burns. Please go ahead.
Trevor Turnbull: Yeah hi Ross. We were just looking at the, at Huaron and you'd mentioned that the scoping study, you've got kind of a ball park of eleven to twelve million in capex coming. Do you have any feel for how the operating costs, to what degree those might be improved upon?
Ross Beaty: We certainly have some back of the envelope numbers. Geoff, do you want to take a stab at that?
Geoff Burns: Sure. Right now on a cost per tonne basis and I'll take it down to a cost per ounce, cost per tonne basis we're seeing somewhere, just right around forty dollars, thirty-nine dollars per tonne. That's all in including transportation, etc. for concentrates. We're looking at a decrease in the cost of about eight dollars US per tonne. That translates in turning that into a per ounce basis and very quickly, as Ross said, we're doing about fifty thousand tonnes to fifty-five thousand tonnes a month, we're looking at going up to seventy-five to eighty thousand tonnes a month.
So you can fairly quickly do the math if you're saving eight dollars a tonne on seventy-five thousand tonnes a month times twelve months. You can start to run some numbers and get a feel for why we're so excited about this particular project. On a per ounce basis, we're on a normal case, we should be three sixty-five, three seventy per ounce net of by product credits at Huaron. This project will clearly take us below three dollars if we can make it happen as our initial study has, our initial look has said.
Ross Beaty: Great, thanks Geoff.
Trevor Turnbull: Great, thank you very much.
Operator: Thank you. At this time if you do have a question, please press star one on your telephone keypad. AT this time there are no further questions registered from the phone lines. I would now like to turn the meeting back over to Mr. Beaty for any closing remarks.
Ross Beaty: Okay, very good. Well I think we'll wind it up there. People who want to use this phone are going to be happy that I'm getting off and I'd like to thank everyone on the call. Thank you very much Geoff and Tony and Brenda for being there this morning as well and if you have any further questions don't hesitate to call any of those three people in Vancouver at 684-1175, area code, 604. So thank you again for participating and good day. |
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