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Wed May 12, 2004
First Quarter Results Conference Call
Operator: Good morning, ladies and gentlemen. And welcome to the Pan American Silver first quarter results conference call. At this time all participants have been placed on a listen-only mode and the floor will be open for your questions following today's presentation.
It is now my pleasure to introduce your host, Mr. Ross Beaty, Chairman of Pan American. Sir, you may begin.
Ross Beaty: All right, thank you operator. And good morning, ladies and gentlemen, to the Pan American Q1 conference call. With me in Vancouver are Geoff Burns, President and new CEO of Pan American; Steve Busby, Senior VP Projects; Andy Pooler, Senior VP Operations; Rob Doyle, our CFO; and Brenda Radies VP Corporate Relations. And they are here to answer questions if there are any specific questions at the end of my opening remarks.
We have lots to cover today. We're very, very busy and there are four areas that I would like to go over this morning in my initial remarks: firstly, management; secondly, financial results; thirdly, operations and projects updates; and, fourthly, silver markets including some comments from me on the alleged silver market manipulation. I will cover all briefly and then I will open the call to questions and would ask if you have questions you try to limit your questions to one or at the most, two.
First I want to comment on our news release yesterday regarding the splitting of the roles of Chairman and CEO. This is simply good corporate governance. It is the trend in all significant companies across North America for good reasons and it is good management. Pan American is a much larger company now. We operate four and soon five silver mines. We manage over four thousand people in our operations and projects. We have four projects at the feasibility stage. Hence, our growth will continue to be strong for years to come. So there is a much larger management burden than there was just a few years ago. Geoff Burns joined us a year ago to help with this. He has worked out extremely well and best of all his skills in the financial, operations and administrative areas dovetail very well with my skills in business development, overall strategic management, investor and partner relations and exploration.
I want to state clearly that I intend to remain fully engaged with Pan American and do just what I have been doing since we began this enterprise ten years ago. I am not retiring and I am not changing my focus on building Pan American into the greatest silver mining company. So I see this as the final move in my efforts to really beef up our management team, which began about a year ago. Geoff is very smart, very hard working, totally focused on results and very capable in all the functions as President and CEO of Pan American. I think we will continue to make a great team as we progress the company in the future. To sum up, this is a very healthy evolution in the management structure of the company.
Moving to financial results. This morning we released our Q1 results, obviously the best results we've had in years. Our only regret is that we were unable to ship the mountain of concentrate inventory that built up during the quarter in Peru since if we had shipped we would have reported the strongest quarterly earnings in our history. This will likely happen in Q2, though. As many of you know, shipping costs have gone through the roof in recent months, so concentrate dealers are seeking fewer but larger shipments to reduce this effect, hence the buildup of inventory. We shipped all of the inventory built up at the end of March, during April and early May. And so we hope this issue won't present itself again to the same extent. Otherwise we were very pleased with the operations results.
Our production increased by 10% over last year, our revenues almost doubled and cash production costs per ounce went down. Those are very happy trends. We ended the quarter in the strongest financial condition we have ever enjoyed with cash of $142 million and we generated cash flow from operations in about $3 million dollars for the first quarter. Metal prices were strong. As you know, they have declined profoundly since the end of the quarter, particularly silver. Nevertheless, all our operations showed strongly improved results in first quarter and I think these results are sustainable. It is a good time to be in the mining business these days and good to be able to take advantage of the strong metal prices.
We also have made a number of moves recently to further improve our financial condition. We have repaid all our Peruvian debt. We are in the process of repaying our Mexican debt. We have offered to convert all our convertible debt and I am pleased to report that as of today holders of about $71 million out of the $86 million total of our convertible debentures have converted into our offer. Full conversion plus repayment of our outstanding loans will leave the company debt free and eliminate about $500,000 in annual interest expense. We have no huge objection against having some level of debt and may incur some again in the future. But when we see such low interest income from our cash balance it makes sense to use some of our cash to pay down debt.
I am particularly pleased about the great turn around at our Quiruvilca operation where cash costs declined in Q1 to $3.02 an ounce from $5.46 an ounce a year ago. How about that? The best thing I think is this is sustainable because it is mostly the result of a management led change in the mining plan at Quiruvilca last summer that resulted in our closure of the high-cost North Zone. This dropped tonnage production from about 50,000 tonnes a month to about 30,000 tonnes a month but it increased the grade, reduced the work force and allowed many other operating efficiencies. The result, a more profitable mine and higher silver production relative to tonnes mined. Of course the secondary change that has helped Quiruvilca has been higher based metal prices, especially zinc. I expect both positive changes to continue for the foreseeable future. Another great result that the environment that Quiruvilca has been a much improved safety record. March, for example, was the safest month in the history of the mine under our management. We have owned it now for nine years. And to add icing to the cake, we have just discovered a new vein in Quiruvilca which goes all the way from the eastern slope of the mine to the surface, about 500 meters vertically. And this will enable the good results to continue for at least the next few years.
At Huaron we had poor months in January and February due to bad ground conditions where we were mining. But March was a very good month and April even better. Our forecast is the production will remain strong during the rest of 2004 allowing us to more than make up for the lost production from January and February. We have now completed our big exploration program there. I think we drilled about 12,000 meters to test a lot of targets we had inferred resources on and we are going over the results now.
Bottom line, we expect very good things when we redo the reserve number as part of the feasibility we are now carrying out into expanding Huaron production by 30 percent. In fact, we are already embarked on the underground tunneling used for the expansion and we expect to complete this work throughout 2004, made into higher production later this year and next. We also found some bulk mineable areas that should allow lower cost mining when we were able to access them in due course. Huaron has been our flagship mine for the last couple of years and I expect it will continue to maintain that position for a long time.
We continue to see very good results from our improved Silver Stockpile Operation. You may notice in the Q1 results that our cash cost have increased there from $2.80 an ounce last year to $2.87 an ounce this year. This is quite misleading and suggests something negative is going on. The reverse is the case. You will see that our actual per ton cost is only 51 cents as compared to a revenue per ton of $47.82. And this is because all we do is shovel the stockpile into a truck and transport it about 40 miles to a smelter. But the smelter agreement gives us value for only 65% of the contained silver and we treat the other 35% of the costs when we do our cost per ounce calculation. So as the silver price goes up our cost goes up. In fact, we are happy about this because we still get 65% of the higher price and that is the explanation of that strange result in the Q1 summary.
In the first quarter we announced the acquisition of the Morococha Mines from a Peruvian group. This deal is still very much on track but it involves the reorganization of a Peruvian public company, relisting of some subsidiaries and formal proceedings to enable us to acquire the shares. The deal is expected to close now in June and will result in us holding our third large silver mine. Morococha is an excellent fit with our Peruvian assets and we can hardly wait for the deal to close. The property has a great pedigree as a profitable silver mine even during tough metal markets, great potential to expand, excellent exploration upside and a tremendous existing workforce. We expect to see about 3.5 million ounces of silver produced annually there at a cash cost of less than $3 an ounce. Our total silver production from Peru will then rise, starting in July, to about ten million ounces annually.
Moving to Mexico. The ramp-up of our La Colorada mine is continuing. We had our best quarter ever in the first quarter and we look forward to this being the trend for the balance of the year. We have just hired a new mine manager there, Mr. Dave Drips who comes to us from another Mexican underground mine and who has excellent credentials as a mine operator. So we expect great things from Dave as La Colorada continues as our purest silver mine. And, of course, we are continuing the feasibility work of Alamo Dorado, also in Mexico. We have resolved that the most efficient way to produce silver over there is through a mill process rather than heap leach as it increases recoveries and lowers risks from leaching that is offset by higher capital costs. So now we have to do some more metallurgical tests to optimize the flow sheet and finalize the capital and operating costs. This work is in progress -- but we don't expect it to be completed now until the second half of this year.
Our two other feasibility studies were very active in Q1. In Argentina our Manantial Espejo joint venture generated some spectacular metal results including hole 336 that ran 50 meters grading 805 g/tonne silver and 7 g/tonne gold. That equates to 165 feet grading 24 ounces per ton silver and 0.21 ounces per ton gold, pretty nice -- pretty nice hole. And drilling continues as part of the feasibility evaluation. We re also doing environmental and permitting work, metallurgical work and detailed cost studies. We have engaged all the necessary contractors to complete the feasibility study and I hope it will be ready by early 2005 to enable a production decision at that time. Manantial Espejo is an outstanding project and we are really excited about its potential. It's about 50-50 gold-silver so along with the gold we will get from Alamo Dorado, this will increase our gold and, of course, our silver for production when it enters production in 2006 or so.
And, finally, in Bolivia we have just expanded the drilling program that has been active there to about 8500 meters in our San Vincente project along with the tunneling program that's been active for the last few months. Production began again in San Vincente in March on a limited scale and we are examining various alternatives to speed up the full scale production plan there to take advantage of today's good metal prices. Bolivia is not an easy place to work but we have been working together successfully there for many years and are operating San Vincente with our Bolivian partner EMUSA.
So, to sum up, we are very pleased to be seeing much better bottom line financial results from our strong growth in recent years. It is also nice to have a strong balance sheet and no debt. Our leverage to silver prices is profound and will increase even more to the extent that we continue our mission in delivering greater and even purer silver production for our shareholders. We now have over 800 million ounces of silver reserves and resources. And this also provides great leverage to silver. It's a good time to be in the mining business. We have a great team of employees in all our operations and we look forward to continuing this strength for the long term.
So enough about the company. Let's talk a little bit about silver. After a strong performance in Q1 and in early April where silver went for a 16 year high, silver has dropped sharply in price over the last month. Why has it dropped and where will it go from here?
Well, I think the why question can be answered quite easily. Simply put, a lot of the rise in the price over the last few months was from hedge and speculative investors who bought silver and many other commodities as a hedge against the falling dollar. They didn't restrict their buying to silver, they actually bought all commodities; not only metal commodities but many other commodities, but particularly metal commodities, and they all rose. Silver was certainly a stellar performer but all metals rose in the first quarter. When the dollar bottomed in early April, particularly the perception that it bottomed and especially after that when China announced it was taking steps to cool its economic growth, all metal commodities pulled back sharply from their highs. Silver had significantly outperformed most of these on the way up and we have seen it significantly outperform most of these on the way down. And this is partly because silver is a very thin market. It's about 10% the size of the gold market and a small fraction of the base metal market. So a little money in makes a big difference to the price and a little money coming out does the same on the downside.
Now I got into some trouble last week with a group of investors who happened to believe that silver and gold prices are being manipulated. Some of these people also think it would be great if the silver mining companies withheld some of their production from sale or even used their cash to buy physical silver and held it instead. Well, for the record, we don't share those views. Our money is meant to be used to find more silver through exploration, to buy more silver through acquisition of good silver properties and to produce more silver to increase our leverage to silver prices. Our leverage comes in two forms: both capital leverage, in terms of the value of our silver reserves and resources to the extent that silver goes up and income leverage to the extent we make more money on a daily basis if silver goes up from our production. If we have surplus cash we will give it back to our owners to use as they wish. If they want to buy silver for themselves, that's -- that's wonderful. Our job, though, is to create wealth by deploying our cash as effectively as we can in pursuance of our mission to build for our owners an equity investment with the best possible leverage to silver and we have delivered on that.
We started Pan American from scratch ten years ago as a silver company with a mission to become a pre-eminent silver mining company in the world. Our market capitalization today is about seven hundred million dollars. That's good wealth creation by any measure. Yet the silver price today is only slightly better than it was in 1994. It seems a little naïve to me for some investors to suggest that we should leave our silver in the ground and hold off producing until silver prices rise profoundly. We are a mining company. We are not a seller of dreams. If we do our jobs well we can create wealth whether silver prices go up or stay static. And we can be self-sustaining in contrast to the exploration companies who must continually live off their shareholders. In fact, after ten years of growth in mining construction we are now generating good cash flow and I hope we will be able to return to our shareholders some of the money they have entrusted to us over the years. 
Finally, few of these armchair experts have, I suspect, any idea of the length of time necessary to build mines or the risks entailed in that process. By being up and running as a mining company during the first quarter this year Pan American actually received full benefit of the spike in prices that occurred then for the benefit of our shareholders. No exploration company did that.
I simply don't believe in conspiracy theories for silver. I am sorry if I offended the sensitivities of some people when I say that. I believe that simple marketing knowledge can explain movements in silver prices without resorting to unproven, illegal and utterly unfounded accusations and conspiracies. Note that I do not extend this to gold since central bankers particularly have more ability to manipulate gold prices for monetary management due to the large holdings of gold by government. So I would say the jury is still out on that in my opinion. Fortunately governments today hold very little silver and cannot use silver to manipulate monetary policies.
Silver has great fundamentals and these continue right now despite the sharp fall back in prices. Silver demand is broadly based and thousands of industrial applications use silver's unique features as a conductor of heat and electricity as a biocide and so forth. These uses are increasing sharply, particularly in the electrical -- electronics sector. Silver has broad use as a beauty metal, for solar power and for jewelry. Its use in this sector is especially rising in China where it has traditionally been small. And, of course, its use in photography is a continuing large usage despite the increase in use of digital imaging. We are finding, though, that the more digital images are taken the more silver backed photographic paper is consumed. Don't forget that photo paper actually uses more silver than photographic film. In 2002, for example, silver halide film paper used about 35 million ounces of silver as against conventional film which used about 31 million ounces of silver. So we predict minimum net loss of silver in the photographic industry looking out to at least 2008.
A much more important index is silver consumption in photography is actually how many holidays are taken in the world. In 2001 and 2002 there were fewer people taking holidays because of world events. We think this is picking up now and with it more silver will be consumed in photography. And don't forget, too, that only 11 percent of the world is wired with access to digital technology. The real growth in conventional photography today is in developing countries as large populations who simply can't afford all the digital technology.
Now tomorrow in New York the annual world silver survey will be released by Gold Fields Mineral Services, a London based consultant that does the survey each year for the Silver Institute. I don't know exactly what their findings will be but I will bet that they will be pretty bullish statistics. My guess is that silver demand will be shown to have increased strongly in 2003 and the silver supply from mines and scrap sources will show very flat growth. Those are both bullish fundamentals. This means the silver deficit though increased from 2002 levels further depleting world bullion inventories.
Now Gold Fields estimates that above ground bullion inventories comprise over six hundred million ounces of silver. This includes Comex and other exchange inventories, European dealer inventories, and government holdings in India and China. Much of this silver is not for sale, however, at least below ten dollars an ounce. It's in fact very possible that there are no more silver inventories for sale below silver prices, meaning, say, below $5 an ounce.
We think China has drastically reduced its enormous silver sales in recent years and its inventories and that's another bullish factor in the silver equation. And we know investors dramatic increases of silver for investment over the last couple of years, yet another bullish factor. But it is not a one way street. When silver prices went over $6 an ounce many of the industrial and silver buyers simply stopped buying. And this is one reason we have had a pull back in prices; particularly, evidence indicates the big silver markets in places like India, Turkey and Thailand just simply stopped buying with the silver price over six. And I think they are back in the market today.
Bottom line, we have seen in recent months an extremely sharp increase in the silver price with a big influence from speculative buying. When market conditions changed in April a lot of the short term players exited all positions in metals and currencies causing a very sharp fall in these prices and in these markets. The market today has gone from being overbought to being oversold. In the short term the market is made at the margin so you have much influence from the speculative investors on both sides. In the long term the market is made by its underlying fundamentals of supply and demand. With growing demand, static supply and sharply reduced inventories it is easy to make a bullish case for silver. Of course there will be volatility - and silver is among the most volatile of metals. But I feel strongly that what we experienced in 2001 and 2002 are behind us for a long, long time, hopefully forever and that we will continue to see higher prices over the next few years.
In this context, Pan American will continue to build its production base, continue to increase its silver reserves and resources through exploration and acquisition and will continue its mission of delivering to shareholders the best possible leverage to silver as an equity alternative to silver bullion.
Last year we printed 23,000 Annual Reports. This year we are printing 36,000 Annual Reports because our shareholder base has increased almost 50 percent. I shall also boast that our cost per ounce -- pardon me, our cost per report this year was only $2.10 compared to $4.05 last year. We did a budget version this year because I believe that fancily printed Annual Reports are really a thing of the past due to the internet's capacity for giving investors much improved and completely up to date information about companies. So our focus going forward will be to keep our web site up to date and useful.
Our share trading liquidity in our two major markets, the TSX and the NASDAQ, has also increased profoundly. Today we trade about two million shares a day between the two markets on average. Our beta to the silver price in 2003 was 6.6 meaning that for every dollar that silver rose during 2003 our share price rose more than $6.60. This year our beta is much lower and that maybe is not a bad thing as prices declined. That beta, of course, is a good thing in a rising market and not so happy in a declining market. But our perspective is long term. We are building Pan American as the best long-term way for investors to gain exposure to silver. And don't forget that all our active projects are viable at five dollar silver so we don't absolutely need higher prices to make money to create wealth for our shareholders. Having said that, we obviously certainly love it when the price rises because then we can deliver fabulous financial results to our owners.
We had a great first quarter this year and I look forward to continuing strong results all year long. I was a little windier than normal today and I think it's time we put an end to that. I would like to open the call for questions and you are certainly welcome to address your questions to anybody in the room. Thank you very much again and we will open the call to questions.
Operator: Thank you. The floor is now open for questions. If you do have a question please press star 1 on your telephone keypad at this time. If at any point your question is answered you may remove yourself from the queue by pressing the pound key. We do ask that while you pose your question that you utilize your handset to provide optimum sound quality. Once again, that is star 1 on your telephone keypad at this time. One moment while I pose for questions.
Our first question is coming from Bob Mandell, a private investor. Please go ahead.
Bob Mandell: Yeah. I would like to know what -- what price the silver has to be at for the company to break even?
Ross Beaty: Geoff, you want to answer that?
Geoff Burns: Sure. During the first quarter -- I am going to give you a bit of a long answer, but during the first quarter as we pointed out, we had a build up of concentrate inventory that we didn't get shipped which would have certainly pushed us into a positive net income position had that -- had we managed to have that sold by the end of the quarter. We will see that income coming in the second quarter. And I am assuming you are asking that question based on that result. Long story, we are at about a $5.50 break even all including exploration, G&A and interest costs.
Bob Mandell: All right. Thank you.
Operator: Once again, if you do have a question, please press star 1 on your telephone keypad at this time. Once again, that is star 1 for any questions at this time.
Our next question is coming from Peter Struby of Struby Associates. Please go ahead.
Peter Struby: Hi, Ross. Good results. Two questions. Number one, you implied by your remarks about no green stuff, is that you are not going to make any kind of a -- you are not going to use hedging at all as an aid to financing future products and that you are going to stay away from the hedging process. And, number two, with regard to the shake up in China in terms of their credit control and that sort of thing, is the -- does that mean that the development of silver mines in China that's been going on where they do a lot of shipping direct to India, do you think that that's going to be slowing that process down in the future?
Ross Beaty: Okay. Thanks very much, Peter. The two questions, I will answer the first one very simply. We do not hedge. We have not hedged and hopefully we will not hedge in the future.
Second question is that -- to respect of China, I can go on about China for a long time, Peter.
Peter Struby: Go ahead.
Ross Beaty: I am not sure where to start. We think China has been the most negative single factor in the silver equation for the last five years. China has dumped close to three hundred million ounces of silver from inventories that were built up in the 1990s through the People's Bank of China onto world silver markets, mostly into India, that was their biggest market. That is, of course, the world's biggest silver market and that's where most of their silver went from government stockpiles, okay. This was surplus during the '90s. China produced about 55 million ounces annually and only consumed 20 or 25 million. So they built up a big mountain of inventory over that period of time and decided to just dump it and they did that. So it was a very, very -- very negative -- in fact, in the world's silver equation over those years. We believe and we have fairly good evidence to believe this, that they have stopped selling silver. We think they may have actually stopped because they have no more silver out of this inventory. Now there still is surplus mine production in China, though. Mine production has probably gone up from the 55 million ounce number of a few years ago. We don't -- we have -- we have had some very incomplete numbers -- they may be complete numbers but they are not broken down. The actual volume of silver coming out of China now is probably over even a hundred million ounces. But that's not all Chinese silver and so -- because China is expanding its lead and zinc and copper smelting capacity enormously in recent years, just phenomenally. They are now the smelting country of choice for lead, zinc, copper, aluminum, magnesium, all sorts of different smelts. So -- so, for example, our Peruvian concentrate, some of that may be going to China but its not Chinese silver. So when you see numbers that show the quota of silver exports in China have been now increased from say 50 or 60 million ounces a couple of years ago is a hundred million ounces now, probably those are correct. But, again, that doesn't include how much silver has been imported into India by concentrate. Now we are trying to get better numbers so the Silver Institute commissioned a study by Gold Fields on this and hopefully we can get -- we can pin this number down. It's an important number because we would like to really understand the part China is playing today in the silver equation. What is their true production? What is their -- what are their real government holdings? And, on the other side of the equation, what is the Chinese domestic demand? How is that increasing?
We have a lot of evidence, more or less anecdotal, to say that their production had increased slightly, only slightly but that their demand had increased profoundly, now particularly demand in photographic film. Kodak has a huge factory in China, brand new, they spent a billion dollars on it and it is the biggest seller of film in the world as far as I -- as far as I know. They are also expanding their production of silver, chemicals for the electrical -- electronics industries significantly.
And, thirdly, and one of the ones that I am hoping that they'll -- they'll really take by -- the bull by the horn here is to expand the use of silver in jewelry and silver inside China from a base of close to zero. This is something -- all of these things take a little bit of time but as we have seen in the last five or ten years in China, the time frame in China is faster than it is almost anywhere else in the world. So -- so they can make enormous strides very quickly if they put their minds to it and we think that's going on in silver right now. Thus, at the end of the day, eliminating the surplus of silver in China to get fed to the world's markets and potentially trade that surplus into a deficit. So very, very important part of the silver equation today and -- and we're really trying to come to terms with better numbers. Long answer to a simple question but there you have it.
Peter Struby: Thank you.
Operator: Thank you. There appears to be no further questions at this time. I will turn the floor back over -- I am sorry, we do have a question coming from Jon Rosenbaum, a private investor. Please go ahead.
Jon Rosenbaum: What -- what is the influence -- what would be the influence on the company if Peru or Mexico, the government changes or they decide to change the policies in terms of miners? What impact would that have on the cost basis?
Ross Beaty: Okay, Jon, I think I know what you are saying. You know, it's hard to be -- really hard to -- hard to guess at what might happen in the future. It -- clearly Peru in particular has had some volatility. We have been there now for nine years. There have been, I think, four or five different presidents in the period of time that we've been there, some real political volatility and yet our net cost of doing business hasn't really changed over nine years. Happily and I think luckily for everyone, there is a very, very big Peruvian mining industry, a lot of Peruvian companies, a lot of foreign companies. It's a very big part -- it's the biggest part of the Peruvian national economy, certainly the biggest export business. So it generates a lot of wealth for Peru and they're somewhat sensitive to tweaking what has worked very well for them. There is a bill in Congress right now in Peru to levy a royalty on mining companies. It's very much up to debate. There is all sorts of different forms of that royalty bill from the very simple royalty to the very -- to actually no royalties to actually seem to be offset the income taxes. And where that goes is still up in the air. It will probably be decided later on this year. There may be no change. There may be a significant change. If it's a significant change it will be negative. If there is no change it will be no change. And so it's hard to say where that is going to go. They may offset it against improvements elsewhere in the system to make the net affect neutral to mining companies. So that's kind of -- that's a very important market for us because we have four silver operations there and a good number that work for us, some of them work in Peru. So that's something we are watching very closely.
Mexico we don't see any real changes on the horizon that would negatively affect the mining industry, the mining industry or our industry there at all. You know, never say never. Sometimes changes happen. Sometimes they are good; sometimes they're bad. We have been trying to build a diversified company in location particularly -- not in commodity but location in order to mediate some of the, you know, possible negative changes that sometimes happen in -- in certain countries. We are active in Argentina, in Bolivia and Peru and in Mexico and -- and that's one of the ways we tried to reduce the risk and any significant negative changes in a particular country.
Jon Rosenbaum: Yeah. I have one other question, if I could.
Ross Beaty: Sure.
Jon Rosenbaum: What -- what costs will be incurred with the purchase of future mine or the right mine in the -
Ross Beaty: I am sorry, I missed that, Jon. I missed the last part of that.
Jon Rosenbaum: Okay. What will be the future costs for acquiring future mines, future acquisitions? Will that be accreted or diluted?
Ross Beaty: Well we cannot say hypothetically. And -- and other than to say that, you know, we try not to make diluted acquisitions of anything. We very, very closely monitor that -- whenever we do an acquisition, whether it's accreted or diluted and, of course, we try to get only those which are accreted. So I guess the answer is we will only do it if it's accreted.
Jon Rosenbaum: What is the availability of those? Do you have a lot to choose from or are you fairly limited?
Ross Beaty: That is a far more interesting question, I think, to me. And the answer is that we are really limited. It -- silver is a very -- and this is something that very few people I think understand. Silver, because it's a bi-product metal, most silver in the world is mined from copper mines, gold mines, zinc mines and lead mines. So it's really hard to build our business since silver naturally is rarely the primary product where over half of the value of the deposit is silver. It's really rare. And they occur in underground veins usually and that means they're very expensive to mine, expensive to develop and most -- in fact, you know, there's very, very few that can be economic within the price constraints that we place on products which is we would like to see them economic at five dollars an ounce. And that means -- that means that it's a very great challenge to grow this company, to grow in this -- it is a focus we have. It also means, though, if you are successful in doing it there is very little competition. There is not more than a handful, maybe even one hand of projects today that are probably economic in the world at below five dollars silver. We monitor them all. We know the companies that have them. We are looking at the results all the time and we're trying to be the pre-eminent, you know the acquirer as opposed to the seller of projects, the acquirer of good projects ultimately. We acquired Alamo Dorado a year ago. We acquired Morococha this year. We're always looking at things -- there is not a lot of things but when we see something that fits we try to jump on it because, of course, our mission is to be the pre-eminent play and you have to look at all the projects in the industry when you -- when you have that mission. Happily there's not very many of them in some senses. In other words it means it's a very limited market.
Jon Rosenbaum: Thank you very much. Fine job.
Ross Beaty: Thank you very much, Jon. I appreciate your questions.
Operator: Thank you. There appear to be no further questions. I will turn the floor back over to you for any further remarks.
I am sorry; we just had two more questions come into the queue. Would you like to take them?
Ross Beaty: Absolutely. We are here for our shareholders.
Operator: Okay. I will go ahead and take the first question coming from John Pistilli of UBS. Please go ahead.
John Pistilli: Hi, Ross.
Ross Beaty: Hello.
John Pistilli: Quick question. Earlier you mentioned that your hauling costs were five 50 per ounce.
Ross Beaty: Yes.
John Pistilli: How do higher energy prices impact that?
Ross Beaty: That's a good question.
John Pistilli: Let's say we go from 40 dollars a barrel to 50 dollars a barrel.
Ross Beaty: Let's just say we've gone from 30 to 40.
John Pistilli: Okay.
Ross Beaty: Okay. Maybe Robert or Geoff, do you want to tackle it?
Speaker: Yeah, John, I am going to jump in here. Primarily we are underground miners in Peru and certainly that is a benefit when it becomes an energy crisis as we don't have as much diesel equipment running as one might see if we were primarily open pit miners. So that's kind of a happy story in terms of mitigating future energy price rises. Having said that, I think what Ross referred to earlier, the cost of dipping our concentrate, there's a couple of things going on there. One is clearly energy prices are influencing how much essentially per ton it's costing us to put material on a boat and move it around the world. There is also, you know, some scarcity in terms of the shipping fleets at this time. And there are other smaller impacts throughout -- throughout our business depending on how electrical power is generated via oil or via hydro.
Long story. We are not overly exposed to energy crises. There would be some small impact if we continue to see -- see higher oil prices but it's not going to be overwhelming in terms of our cost side.
Ross Beaty: Great. Thanks, Jon. Anything else? Yeah. I mean, just in the industry, John, the real heavy affect of higher oil prices is really the big old mines is this huge fleets of -- of big diesel trucks and, for example, smelters that rely on electricity that is generated from oil. Those are the ones that are getting really clubbed right now.
Jon Rosenbaum: Right. Thank you, guys.
Ross Beaty: You are welcome.
Operator: Thank you. As another reminder, if you do have any further questions please hit star 1 on your telephone keypad at this time. Once again, that is star 1 on your telephone keypad.
Our next question is coming from Ragu Guram, a private investor. Please go ahead.
Ragu Guram: Hi. Thanks for taking my call. I have a quick question regarding similar obligations in the silver community.
Ross Beaty: Okay.
Ragu Guram: Would you please, you know, elaborate a little to give us some comfort to the shareholders regarding the future demand?
Ross Beaty: Sure. I don't know if I am going to be able to give you comfort or not but here's what I know about this and don't forget our expertise is more on the supply side in mines and exploration projects and so forth and not on the demand side, specifically certain technologies.
But what we know is this: American Circuit Conductors has developed a circuit conducting wire, which is currently powering Detroit inner city and certain -- I think they have shipped quite a bit of this to China. This table uses silver as a sheathing around it to -- as part of the transmission of power at super low temperatures, close to zero Calvin. And they use a lot of silver, something like 50 thousand ounces a mile, I think. That may be incorrect but it is a very, very large amount of silver. And that technology is -- is very much in -- it's actually in commercial use now beyond just R&D but it is still in that R&D sphere. There is a lot of research going on in superconductivity because it is a really promising form of use in existing conduits in cities to transmit a hundred times more power to them if you need super conductors rather than conventional cable. That's almost where my knowledge ends.
I did see the announcement about (inaudible) conducting cable as being a big -- a big announcement they made. And but what I don't know, I think for silver -- what I don't know is how much silver their particular cable uses. There is varying silver use in cables, I think, and I don't know if theirs is a high silver or not so I really can't comment on that.
The potential of the world market for superconductors and the study was done by silver a year or so ago had the total market of around -- I think 50 million ounces -- 50 million worldwide. So 50 million ounces of silver could be world wide if this technology really got going and became a conventional technology for the convection of power in -- in these applications.
Ragu Guram: Thank you.
Ross Beaty: Okay.
Operator: Thank you. Our next question is a follow up from Peter Struby of Struby Associates. Please go ahead.
Peter Struby: Yes. With regard to the Morococha Mines, as I recall, if that is the same mine as was originally owned by Seralls (sp?) de Pasco (sp?), it was a fairly substantial producer also of base mill, copper included, and, while maybe the property that you have or the company that was -- was operating developed silver sources particularly, do you expect that mine to be as substantial producer of other metals besides silver?
Ross Beaty: Peter, your memory is very good. But the name -- maybe the name recognition is there but the actual specifics are a little different today in detail.
The Morococha name refers to a big district that was owned by Seralls de Corporation and mined for zinc, silver, lead and copper. Today, because Seralls de Pasco was taken over by the Peruvian national government about 30 or so years ago and naturalized, they split the Morocochan district into two different operations. One was a silver, lead, zinc operation which is called Morococha and the other which is a copper operation called Toromocha. Tolmeroch is in the center of the district and that it is surrounded on all sides by veins of silver, lead and zinc. About half of the veins of silver and zinc are owned or were owned by the government and the other half were owned or are owned by private companies, or maybe it's a third, two-thirds, maybe that's a better breakdown. The third that is -- was owned by the government has been mined in a specific operation there. We will be acquiring that. And the private owned silver district of Morococha was controlled mostly by a Peruvian family named the Gubbins and they operated that through a company which ultimately became a public company called Minera Corona. Okay. So Corona ended up with a lot of its own mining going on in its own veins and then they actually did a deal with the government mining company to acquire the government silver district as part of that whole Morococha district. So our acquisition will be on both of those assets when we complete it but it will not be of the central contrast which is held in a separate vehicle by the proving company and it's actually been auctioned to another company which is doing exploration over there right now. We don't get the copper. We do get the silver and with the silver comes quite high levels of lead and zinc as a bi-product. What is the zinc bi-product production at Morococha, Steve?
Steve Busby: I don't have that number off hand but the grade was around three percent.
Ross Beaty: Yeah. It's going to be ten thousand, 12 thousand metric tons for the year of zinc.
Peter Struby: Okay. Thanks.
Operator: Sir, there are no further questions at this time. I will turn it back over to you.
Ross Beaty: Okay. Thank you very much, operator. I appreciate the opportunity to give our shareholders and interested parties an update of our Q1 results and look forward to answering any questions people have after the call if they would like to call us here in Vancouver. Thank you and good day.
Operator: Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. |
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