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Wed November 12, 2004
Third Quarter Results Conference Call
Operator: Good afternoon ladies and gentlemen. Welcome to the Pan American Silver Corporation Third Quarter Results conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions following the presentation. It is now my pleasure to turn the floor over to your host, Chairman and CEO, Mr. Ross Beatty. Sir, you may begin.
Ross Beaty: Good, thank you operator, and good morning everybody who's on the call. I want to introduce the group around the table with me here in Vancouver, who will be answering questions after I finish with some introductory comments. Geoff Burns, Pan American's President and COO, Tony Hawkshaw, our CFO, Brenda Radies, VP of Corporate Relations, and our new Senior VP of Operations, Andy Pooler. I look forward to him participating in any questions you might have regarding operations.
Well, our third quarter results were good. We increased our silver production by 25 percent from 2002 levels, and more importantly, we decreased our costs of producing our silver, both in relation to 2002 by 13 percent, and in relation to the second quarter this year by 11 percent. Our mining operations continued at 1.7 million to cash flow compared to a negative contribution last year, and a contribution of 1.2 million in the second quarter this year. These numbers are reflected in the declining total cash cost per ounce of silver produced in the quarter from $4.53 in the third quarter of 2002, and $4.42 in the second quarter of 2003 to $3.93 this quarter.
I would like to emphasize that these improved results are due to mostly operations improvements, not just higher prices. Our Quiruvilca mine particularly generated positive cash flow in August and September for the first time in three years. This was a direct result of our closure of the north zone, which had high costs and low grades. Quiruvilca is producing less silver now, but a much better grade and at a lower cost. Unfortunately, the south part of the mine cannot carry the high fixed cost of the mine for long nor the high level of sustaining capital. In our previously discussed scenario of closing the mine in mid 2004 remains most likely unless we see much higher silver and zinc prices in the next six months.
I would also like to remind our shareholders of our two other gold assets in the Quiruvilka area. First we have some ground leased to Barrick Gold, adjacent to it's new Alto Chicama gold discovery. And we do expect to realize value from this land in the future. And second, in October we agreed to convert our minority interest in the Tres Cruces gold deposit to a direct interest in the majority owner, New Oroperu, a TSX public company trading under the symbol OROU on the TSX exchange. We will own 3.5 million shares of Oroperu, about 20 percent of the company on a fully diluted basis, plus retain a 1.5 percent net filter (inaudible) royalty in the property, and that, this deal gives us much better liquidity for our interest and a long-term retained interest in the product, which contains about 1.8 million ounces of currently defined gold resources. It will also give us a good vehicle to offer gold projects that we see that don't fit our silver strategy, but which we feel has good potential.
Our flagship mine, Huaron in Peru, also had a good quarter, producing one million ounces of silver at a cash cost of $3.94 per ounce. This was lower than the second quarter, and we expect it to decline further in the fourth quarter. We kicked off this quarter, we kicked off the feasibility study in to expanded production from Huaron, and we're currently focussed on three areas right now, to decrease it's costs further and to increase it's production. First, we're planning to replace one of the two mine contracts with our own miners. This will give us much better control over mining, and should allow us to retain the contract overhead and profit margin we now pay. Secondly, we're looking at ways to remove the ore haulage bottleneck that is restricting current production to about 50,000 tonnes per month. Re-opening an existing shaft and portal will enable this. And third, and for me as a exploration geologist the most exciting, we have just started a one million dollar join program at Huaron, designed to increase the reserve base and provide a solid foundation for major mining expansion decision in mid 2004. This program will include about 25,000 metres of drilling in surface and underground holes in the tremendously prospective Huaron mineralized system. Huaron is located in a world-class mining district in central Peru, and this is how we can best realize value from our large land position there.
Shareholders may have seen our announcement a few weeks ago that we bought back the three percent NSR royalty held by others over Huaron. This purchase leaves the mine totally unencumbered for our shareholders to receive all the value for future production, particularly if we expand it as planned.
Our other operation in Peru, the small silver stockpile operation near Huaron, also performed very well during the quarter, producing 233,000 ounces of silver at a cash cost of $2.17 per ounce. This is about 30 percent better than our projections earlier this year.
Moving to Mexico now. We completed a major mining expansion at our La Colorada mine in July, slightly ahead of schedule and below budget. However, our commissioning of the new 600 tonne per day oxide plant was seriously affected by record rainfall in August and September, including one day when the site received nearly eight inches of rain in 24 hours, of which over four inches fell in two hours. This washed out all access roads and bridges to the mine, and generally caused havoc all over the region. I am, however, pleased to report that the mill is now operating at designed tonnage levels. We're now focussing on increasing silver and gold recoveries to plan levels, as well as boosting ore production from underground. Costs are being treated as pre-production expenses, and will probably not be capitalized until full production is obtained at year-end.
Our large Alamo Dorado silver development project also saw good progress in the third quarter. We completed additional drilling to confirm the reserve model, and provided samples for metallurgical testing in to a combined mill and heap leach operation. This test work is now in progress, and will provide the basics for an updated feasibility study early next year and the subsequent production decision.
Good progress was also achieved in our Manantial Espejo project in Argentina during the quarter. We began a final 4,500 metre drilling program to enable us to complete a feasibility study in 2004 on a new mine. Initial results have been just excellent, and work will now focus on engineering design, environmental studies, and permitting work. The property is located in a great location in the middle of the Patagonian Plains, and we are very enthusiastic about constructing a new silver-gold mine here as soon as possible. Manantial Espejo is simply a great project.
Lastly, our shareholders will have noticed our announcement on Monday this week regarding our San Vincente silver mine in Bolivia. After two years of leasing this mine to a local Bolivian company, while metal prices were very depressed, we returned the project to active status at the end of October. We stopped mining activity there, and we began a 7,000 metre drilling program and underground tunnelling program, designed to enable a feasibility study to be carried out in 2004 on development of this mine as a major new operation. Because we are already pretty stretched as a management team, with three other projects at the feasibility stage, and because of a lot of social and political turmoil in recent months in Bolivia, we decided to partner this project with the Bolivian company we have worked with for the last two years. And so we auctioned the 49 percent interest to them in return for them funding the next two million dollars of project costs. This work is now underway, and I expect continuing good things from the project in the next year or so.
So to sum up, things continue to be very busy at Pan American Silver. We have four producing silver operations today, and we have four projects at the feasibility stage, all of which should be economic at today's silver price, and all of which should result in new silver production in the near future. Our management team has been strengthened to meet the operational challenges that all these projects represent.
And on the financial front, we completed during the third quarter an 86 million dollar convertible debenture financing to give us funds to execute our growth plans in the new year. We remain absolutely focussed on delivering the best possible silver leverage of any company in the world to our shareholders, and we have the projects, the people, and the money to achieve this. We now have to put our heads down and execute our growth plans. I hope our shareholders are as excited as we are in management as we do this. 
And speaking about silver, I believe silver today has better fundamentals than we have seen for a long time. Last week in New York, Gold Fields Mineral Services, a consulting company that works for the Silver Institute in compiling the silver statistics on an annual basis, GFMX gave us an update of the silver markets so far in 2003. And it was a very bullish picture. Demand is forecast to increase in 2003, lead by a five percent growth in industrial demand, even while jewellery and photographic demand show as a modest decline. Digital imagine is causing the decline in film sales, but it's increase in the demands for silver photographic paper on which images are printed. So the net effect is for flat demand growth looking out five years, not declining demand.
I want to remind people that while Kodak made a very high profile announcement a few weeks ago to the effect that film sales in the US are down sharply this year, I think their number was something like 14 or 15 percent, what they didn't say is that film sales are up by 15 percent in China, 15 percent in India, and 12 percent in Brazil.
On the supply side, silver mine supply looks to decline again in 2003 by two to three percent. And sales of silver from Chinese stockpiles appear to be down by about 20 percent this year. The silver deficit looks to be greater this year at about 85 million ounces. So some of this is being filled by producer hedging of by-product silver production. I confess to being puzzled as to why silver has actually under performed most other metal commodities this year. Base metals are up 35 percent this year on average, and gold has slightly outperformed silver, being up about ten percent. But I do think silver will catch up as investors cycle out of the strongest base metals and in to silver, taking in to about of this very bullish demand and supply fundamentals. Silver is indispensable. It is used in more diverse applications than any other metal, it's use in thousands of industrial applications is rising sharply, and it's use as a monetary metal has persisted for centuries. When you see a metal that people need and want, but who's supply is very limited, you will see a metal who's price rises over time. That is why I feel silver is a good investment, why silver mining is a good business, and why the future promises good returns for anyone buying shares in what will soon be the world's largest primary silver producer.
And on that note, I will open the call to questions.
Operator: Thank you sir. The floor is now open for questions. Our first question is coming from Adrian Day of Global Strategic.
Adrian Day: Good afternoon. Ross, you mentioned you referred to the fact that management was stretched as being one of the reasons that you're partnering in Bolivia. And I'm just wondering if you could expand on that a little bit. I mean, how deep do you think your management is and are you going to be able to, do you have to hire more people or how's it going?
Ross Beaty: Thanks Adrian. No, the question really is that, you know, we don't want to extend ourselves too much. We think we are absolutely acceptably managed right now with the projects we have. We had a need for more people at the beginning of this year, and we spent a lot of time in the second quarter, particularly, looking for some additional people. We've actually added three new people at the top, Geoff Burns, bringing a tremendous amount of financial skills to the company, or additional financial skills to the company, Andy Pooler who's taken over as Operations Manager and who has multi mine experience, and that's really the type of company we are today, and then a wunderkind engineer, Steve Busby who's our new Senior VP Projects. So Andy's running the operations, Steve's running the new development projects, and between Geoff and Tony, we're keeping on top of the financial management needed to make sure we can continue our reputation of being a thrifty and very cost effective company.
Now on the site level, of course, we've got new teams, not new teams, we've got bolstered teams in Mexico with our new Alamo Dorado project, and we've got a couple of new people in Peru. But really, we have about 3,000 people in Peru already, Adrian, and we're very well managed down there. What we have to do now is build up a team at the Argentina project, which is in the feasibility stage. So we've spent a lot of time on bolstering our management to meet our growth projects. Needs, we've done that now, and we do not need additional people beyond where we are today.
Adrian Day: Great. Thank you.
Operator: Once again, to ask a question, please press the numbers one then four on your touchtone phone at this time. Our next question is coming from Steve Butler of BMO Nesbitt.
Steve Butler: Ross, yeah, you might find there's some slim pickings on the call because everybody's in Australia, except for me and Adrian. But anyway, I just wanted to ask a question about, I joined the call a little late. Quiruvilca, is there a scenario here where this mine continues beyond mid '04 given what's happening to zinc? Or what would zinc have to do to turn your crank on Quiruvilca?
Ross Beaty: Well obviously, Steve, we're watching the metal markets pretty closely, and we're very happy with where they're going. Quiruvilca does produce a lot of zinc, in fact, it's more of a zinc mine today than a silver mine. That's why it's sort of down on the list for us in importance compared to what it used to be like a few years ago. Given the need for sustaining capital cost to expand the tailings dam to do some equipment replacements to deepen the mine further, you know, really you're looking at a need for zinc prices to go above 1,000 dollars per tonne. And again, for what kind of a period can we predict this is going to happen. Those are the calls that have to be made, and they're very, very tough calls. We really like where lead is right now, we produce quite a bit of lead at Quiruvilca as well. We really like copper, but, you know, the driver is zinc and silver, and it's the matrix of prices that are key. You know, let's just say we're watching it very closely. We've already extended it somewhat next year compared to what we had earlier thought about. You know, there's no question in mind the veins keep going to depth, it's really an economic call for us is how long these metal prices will stay where they are, where they're likely to go, and it's, you know, we lost a lot of money by making a call that they were going to improve before they did. And that didn't serve us too well in 2001 and 2002. Don't know if that answers the question, but we're certainly watching. Geoff, do you have anything to say?
Geoff Burns: No, I think, Steve, just to reiterate, there's some pretty significant capital to, that we would need to invest, and it is a balance between looking at that investment and what returns we could expect on that investment, given the metal price scenarios. Right now, mid next year seems to be where we're at, but as Ross said, we're watching it very closely to see if there's a point which makes sense for us to add additional investments. Today, we're not there. I can tell you right now the answer would be no, but we're going to watch it carefully over the next few months.
Steve Butler: Okay. And just a question relating to where on, you speak in the press release about a million dollar exploration program commenced immediately or has been initiated as part of feasibility study through early '04. So are we expecting, that seems like a fairly quick initiation of a program to actually convert resources to reserves. But do you think you can get that done here and still have a feasibility study due early '04?
Geoff Burns: Steve, let me take that one. I guess to a certain degree, the two items are independent. In the first sense, as Ross went through, there was really three things we're doing at the same time. Two of those things, which are one, replacing the contractor, and two, expanding our accesses to the mine and to the zones we currently have defined, they are independent of the exercise on the drilling, and our engineering on those two aspects are going ahead full tilt right now.
Ross Beaty: And further, those can be implemented almost immediately, Steve.
Geoff Burns: Exactly. They, as soon as the engineering is completed, we can move forward with those decisions to invest the capital in those two areas.
On the exploration side, yes, it's a quick initiation, but want to emphasize the size of the structure that we're dealing with. This is a highly mineralized system where we already had defined six million tonnes plus of resource. So I think our efforts in that are very targeted to bring a good pieces of that resource to reserve status, and I think that can be accomplished in the four months that we have targeted.
Steve Butler: Okay. And last question, on the silver stockpiles, you actually delivered a great number of ounces, 250,000 plus ounces. I mean, annualized, that's over a million. What's the run rate looking for the silver stockpile sales?
Ross Beaty: By run rate do you mean the life?
Steve Butler: Well, annual, let's say what would be your annual sales expectation next year, Ross.
Ross Beaty: Well, the annual expectation for the silver stockpiles is about 750,000 ounces a year, 700 to 750,000 ounces at a cash cost of just over two dollars an ounce. And it looks like, it's very much dependent on what the smelter asks to take because they are our customers. We deliver the stockpiles to them and then smelt them immediately and pass according to the contained silver content. And the deliveries this year have been far in excess of what we had budgeted at the beginning of the year. The stockpiles are very, very large, and to the extent that we can supply them more if they need more, we have a limitless supply, almost limitless supply to do that. So we're hoping that they will take next year exactly what they took this year and allow this production to increase beyond what we had projected when we acquired this project last November.
Steve Butler: Okay. And one last question Ross, before I stop hogging the phone, is basically relating to what preservatives in the silver usage in that sub sector of biocides, that seems like a pretty exciting proposition. And the Silver Institute has estimated maybe 130 million ounces of silver could be consumed in wood preservatives. But do you think, in your view, is it a cost effective solution? I know it's a three year study that's being proposed.
Ross Beaty: Right. That's an interesting question, and just to introduce the subject more particularly to the rest of the people on the call. There has been a big research program started to look at the use of silver to replace arsenic in wood preservatives. Arsenic containing wood is now banned in many states of the US, and they have to find a replacement for it soon. Silver has the advantage of killing bacteria, but it doesn't kill people, it's non-toxic to mammals, and it's a wonderful, wonderful product when used in things like handy caulking paint, wood preservatives, many, many applications in large volume. So it's a very exciting new use of silver.
I should mention that the silver usage in biocide, it kills bacteria, is exploding. Silver is used in water purification, for example, it is increasing rapidly in hospitals, in swimming pools to replace chlorine, silver is used in clothing now to kill smells, to kill bad smells, in particular silver, well for example, the astronauts that go to outer space now are all wearing silver socks because it kills the bacteria that causes a stink. And in effect, a lot of clothing manufacturers now are making clothing that has silver contained in the fabric to do the same thing. Silver is used in burn medicine is on the increase, and in gauze to kill bacteria in wounds is increasing. So it's a really big sector of new use, and it's both real and it's in R&D in areas like wood preservatives. Silver has also got some huge new applications, again in the R&D sector, in catalysts, in fuel cells, and in super conductors. So there's quite a few things that are on the development block, as it were, using silver that again takes advantage of it's unique physical and chemical characteristics that have the potential to really, really bolster demand in the future, and certainly sucking up any silver that's lost through a diminishment of demand through digital imaging, for example.
Steve Butler: I guess, and just the final on that one, is there an estimate of it's cost? I mean, do you think it can be a cost effective solution for wood preservatives? Is that the preliminary indication or are there any yet?
Ross Beaty: Steve, I'm afraid I cannot give you any details yet. It's still very much in the R&D phase. In fact, it's just starting R&D. So there's nothing that's commercial, nothing that has really been tested on a wide scale basis where we can really find out whether this is, in fact, cost effective or not.
Steve Butler: Okay. Thanks Ross.
Ross Beaty: Okay.
Operator: As a reminder, to ask a question, please press the numbers one then four on your touchtone phone at this time. Our next question is coming from George Popping of Sprott Securities.
George Topping: Hello there. Yeah, not everybody made it to Australia. On Manantial in Argentina. On the scoping study, can you give us an idea of the initial scoping work, I know it's early days yet, but an idea of what capital and cash costs would be associated with that?
Ross Beaty: George, it's just too early to give details. We do have numbers, but they're very, very preliminary, and I'm afraid to say, I just don't think it's fair to talk about them at this stage. We will have numbers in, what Andy, another six months, eight months?
Andy Pooler: Yeah, yeah, most likely in six to eight months. Something in that range.
Ross Beaty: Yeah. I'd much, much rather, George, talk about real numbers instead of hypothetical. We have done it, we have definitely done a run, it's based on our best numbers, but I'd rather not talk about them publicly at this stage. Certainly they were absolutely strong enough to encourage us to get in to a full feasibility study. It looks like an economic project as a lay down.
George Popping: Okay.
Ross Beaty: And just while I'm on that, the real thing that shifted us earlier this year was the new model we did on the silver resources there, we had traditionally been looking at this as an underground mine, and felt that the next stage would be to put a ramp down and go underground, and then drill it off, and then do all the work you need to do to get to a feasibility study then, which was sort of a two and a half year exercise. But when we did the new model, we threw an open pit over this, and it looked to us like we could mine almost all the reserves on a very economic level as an open pit. So we decided to skip the underground ramp and underground tunnelling program that we had planned, and go straight to a feasibility study as an open pit operation. It's, I mean, it clearly will speed up the timeframe by at least a year and save us the cost of going underground. As I say, at the moment it looks like a great robust project, but we'd much, much rather have detailed numbers so we can talk about them with more safety, I guess, and security.
George Topping: All right. Okay, fair enough. Thank you.
Ross Beaty: Okay.
Operator: Mr. Beaty, there appears to be no further questions. Do you have any closing comments?
Ross Beaty: No, I don't. I would just encourage anybody that has questions they'd like to have answered to call Brenda Radies here at Pan American at 604-684-1175, and we'll be happy to answer questions on a one-on-one. Thank you very much for joining us today. Bye-bye.
Operator: Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a great day. |
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