Nov 1, 2004

Third Quarter Results Conference Call

Operator:                              Good afternoon, Ladies and Gentlemen, and welcome to the Pan American Silver Corp. 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 your questions following today’s presentation.  It is now my pleasure to introduce Mr. Ross Beaty, Chairman of Pan American Silver Corp.  Sir, you may begin.

Ross Beaty:                         Thank you, Operator.  Well, I first of all want to apologize.  The Operator has delayed this through a technical problem.  But anyway, we’re going to get going here.  Good day, Ladies and Gentlemen, and I’ll start the Pan American Silver Q3 Conference Call now. 

                                                Well, as you can all see, it’s a great time to be in the silver business and our Q3 results are, as you can see, reflective of this.  Today I’m actually speaking to you from a very small village at the very bottom of South America in Southern Patagonia in Argentina near our Manantial Espejo  Development Project that we expect will be built into one of our new mines in a couple of years.  I am here to meet with Argentine officials and community leaders to explain who we are and what our plans are and to understand how we can work with Argentina to make development of Manantial Espejo successful for all stakeholders.

                                                Also on this call is Geoff Burns, our President and CEO.  Geoff is in Lima today – Lima, Peru – and he’s going to Bolivia this afternoon, where he will meet with our project team there, our partner EMUSA and government officials to discuss the expansion of our San Vicente mine.  With Geoff in Lima are our two Senior Vice Presidents, Steve Busby and Andy Pooler, who manage our projects and operations respectively.  We had our Q3 Board Meeting last Friday in Lima and a successful tour by the Board of Directors to our newest mine, the Morococha operation.  And in Vancouver we have on this call Brenda Radies, our Vice President of Corporate Relations, and Rob Doyle, our CFO.  We will all be here to answer any questions you may have on our Q3 results, although Geoff, Andy and Steve may have to depart early to catch a plane.

                                                Pan American Silver is and has always been a busy company.  We set out on this journey to build the world’s preeminent silver mining company 10 years ago.  It was an easy thing to state that objective in 1994; it is quite a different thing to implement it not only because mining is inherently a tough business where unfulfilled objectives are common, but also because silver is so hard to find as a primary metal.  So, silver mines are extremely rare and silver mining companies are, therefore, so hard to build.  But we have kept our heads down, our minds and energies focused and we have achieved our objectives.  We now operate six silver mines – four in Peru, one in Mexico and one in Bolivia.  Our production this year will be over 11 million ounces of silver and we are targeting over 15 million ounces next year.  And this should make us the largest primary silver mining company in the world.  We have three growth projects as well, which we expect will boost our silver production to nearly 25 million ounces by 2008.  We are well financed with over $80 million in cash and virtually no debt.  We hold over 800 million ounces of silver reserves and resources and, as you can see from our Q3 results, we are profitable with growing cash flow and we expect our cash costs to decrease as we build our new mines and this will further increase our cash flow.

                                                So, I am very, very pleased with our story to date with our 10-year history and I am very excited about our future.  Needless to say, our greatest asset is our people.  We had a big transition in our management team last year and our new senior team has really left us shift into a higher gear this year and the results speak for themselves as to the success of our new team’s efforts.  Of course, the real horsepower of the Company is at all levels: our miners, contractors, suppliers, accountants, lawyers, technical experts and financial managers.  Today we employ nearly 4,500 people and our strength is rooted in the talents of every one of these people. 

                                                I’m not going to repeat here right now what we announced this morning regarding our Q3 results – they’re self explanatory.  But I’ll try to fill in some holes to pre-answer some questions you might have.  Obviously, things are going very well for us.  Our one problem child over the last year has been our La Colorada Mine in Mexico, where we have experienced lower than expected results for a host of reasons.  Some due to bad luck, such as the record rainfall last fall, and some due to just plain mistakes.  I am pleased to report though that we think we have addressed most of the problems and that our results in the future should be much better.  In May we brought on a new Mine Manager, Mr. David Drips, who really has spearheaded these changes.  Our monthly employee turnover has gone from up to 20% to virtually zero today.  Our safety record has improved dramatically as well.  For example, our last three months have been accident-free.  We changed our mine plan in July and while this resulted in expected higher cash costs in the third quarter, we are now seeing higher grades in the mills and better recoveries and these results will translate into lower cash costs in Q4 and next year.  As I said, our cash costs were expected to be high in the third quarter.  In fact, we produced at lower cash costs than we had originally budgeted. 

                                                So, La Colorada was a drag in Q3 on otherwise excellent performance at our other mines, but we are seeing a steady increase in silver production there and continue to forecast production in 2005 of over 3 million ounces at a cash cost below $4.00 an ounce.  In fact, we hope La Colorada a year from now will demonstrate the kind of successful turnaround that we have seen at our Quiruvilca mine in Peru.  A year ago Quiruvilca’s cash costs were nearly $5.00 an ounce; in fact, for the first half of last year they were well over $5.00 an ounce.  Today they are $3.34 an ounce and, in fact, Quiruvilca is our most profitable mine.  This is a spectacular turnaround that we see continuing for a long time.  Our flagship Huaron Mine in Peru produced steadily in Q3 while we continued work on our planned expansion there in 2005.  We had record tonnage production at Huaron in Q3 and expect this to continue to grow in coming months as we develop a new access to the underground and increase our mining areas. 

                                                In the third quarter we acquired our third large mine in Peru, the Morococha Mine, where we generated excellent operating results, as you can see, and began a major drilling and underground tunneling program to better evaluate the property’s truly outstanding exploration potential.  We have already discovered a new very high grade silver vein at Morococha and we are really excited about making this new mine our most profitable asset. 

                                                In Argentina and Mexico, our Manantial Espejo and Álamo Dorado projects are advancing well and we hope to complete full feasibility studies in each project early in 2005 leading to production decisions.  Of course, we will not embark on building new mines at both of these properties simultaneously, but we should be able to advance one into construction early in 2005 and the other later in 2005 to the extent that we have all of our ducks in a row to make confident and professional construction management decisions.

                                                On the financial side, we are in excellent condition.  We are generating strong cash flow that will support our growth and we have an outstanding balance sheet with $80 million in cash and no debt to support our ability to finance our new mine.  We are also seeing some interesting new opportunities as more junior companies explore for silver and we hope to be the senior partner of choice for the most successful of these companies.

                                                I said earlier this year that Pan American Silver is firing on all cylinders.  I can say it today with even more force and assurance and I expect this will continue for a long time.  One of the main reasons for this lies in my conviction that we are in a new price environment for silver with a sustained price over $6.00 an ounce.  This is due to endemic U.S. dollar weakness, to synchronized growth all over the world, despite slowdowns here and there, to a secular shift of investment funds held by global investors away from stocks and bonds and into all metal commodities, including silver, and to more or less static silver mine supply growth looking out to at least 2008.  These are profoundly bullish fundamentals and it is easy to make a strong case for sustained high silver prices in this environment.  I am really pleased that our tenth year can be marked by such good results and I am fully confident that our next 10 years will be even stronger.  We have 35,000 tremendous shareholders today who have supported our journey in our first decade.  I hope they will enjoy the next journey as we travel into our second decade beginning next year. 

And with these comments, I will now open the call to questions.

Operator:                              Thank you.  The floor is now open for questions.  If you do have a question, please press * 1 on your telephone keypad at this time.  If at any point your question has been answered, you may remove yourself from the queue by pressing the # key.  We do ask that while you pose your question, to please utilize your handset to provide optimum sound quality.  Once again, that is * 1 for any questions at this time.  One moment while I poll for questions.  Our first question is coming from Haytham Hodaly of Salman Partners.  Please go ahead.

Haytham Hodaly:               Good morning Ross and Geoff and everybody else.  How are you?

Ross Beaty:                         Fine and thanks for asking, Haytham.

Haytham Hodaly:               First, I just want to congratulate you.  It’s very nice to see a profitable quarter finally and you’ve done a great job.  You’re persistent.  But more importantly, can you break down, Ross, for next year, 2005, what you’re – obviously you’re getting a number roughly 15 million ounces of contained metal – can you break that down for me and maybe just throw in what type of cash costs you’re projecting in your budgets?

Ross Beaty:                         Sure.  Brenda, can you tackle that just while I’m away from the phone for a sec?

Brenda Radies:                  Yes.  Haytham, these are contained metal amounts as well.  We’re looking at – let’s start in Peru – we’re looking at Morococha at 3.5, Quiruvilca at 2.2, we’re looking at Huaron of 4.5 and the pyrites right now we’re putting in about 700,000 because it’s dictated by Doe Run.  So, there’s always some flux in those numbers, but it’s between 700,000 and 800,000 for the pyrites.  And at La Colorada we’re looking for full year production of 3.5 million.  We’re also looking from San Vicente to have something in the order of – and we’re still working through our budget process, so I’m going to give a bit of a broad range – it’s between a half a million and a million ounces.  But hopefully to the high side of a million ounces.

Haytham Hodaly:               Thanks, Brenda.  Could you fill in some cash costs on some of those, Brenda?  Just what your forecasts are?

Ross Beaty:                         Actually, Haytham, with all respect, it’s a little premature because we’re in our budget process right now.  What we’ve been seeing and assuming is a $0.40 – $0.41 per pound zinc price because, of course, the byproduct revenue is important.  Our estimate as of mid-year this year was $3.53 per ounce total cash…

Ross Beaty:                         Right.

Brenda Radies:                  Pardon me – total cash costs for all 15.2 million ounces of forecast production. 

Brenda Radies:                  Right.

Ross Beaty:                         We’re going through the budget process right now; we have our Budget Meeting in early December where we’ll fine tune those costs.  Some operations will be a little bit lower than that and some of them will be a little higher and, of course, this is an imminent little change until then but we should have pretty good budget numbers by December.  They’ll be in that order though.

Haytham Hodaly:               Perfect.  No, that’s great.  I appreciate that.  With Huaron at 4.5 million ounces, is that sustainable going forward?

Ross Beaty:                         Oh, yes.  Oh, yes.  Huaron has a – right now it has a 20-year mine life, including the resources, and what we’re doing is we’re doing a big drilling program, as you know, to move resources into reserves so we can justify expansion of tonnage at a much; in fact, at a greater rate than 4.5 million ounces, Haytham.

Haytham Hodaly:               OK.  Ross, one silly question.  Obviously with silver over $7.00 we start to look at, you know, potentially what happens when the gold price plunges above $450, $430, $440, people start to look at hedging again.  I would assume there’s no plans in your outlook to do any kind of silver hedgings there, correct?

Ross Beaty:                         Let me be clear – very, very crystal clear.  We have never hedged, we are currently unhedged and we have absolutely no plans to hedge in the future, zero. 

Haytham Hodaly:               Perfect, that’s what I thought.  Thank you.

Operator:                              Thank you.  Our next question is coming from Terence Ortslan of TSO & Associates.  Please go ahead.

Terence Ortslan:                Thanks, Operator.  Good morning or good afternoon everybody.  Brenda or Ross, could you go over, the base metal counting is off for next year on the basis of the third quarter action you have, just to complete Haytham’s question?

Ross Beaty:                         Rob, can you tackle that question?

Rob Doyle:                           Sure.  Base metal production, looking at that for zinc payable metal you’re talking about somewhere around 45,000 tonnes of payable zinc.  Lead is going to be right around 22,000 payable tonnes and with copper roughly around about 5,000 payable tonnes of copper. 

Terence Ortslan:                OK, thanks Rob.  Thank you, guys.  And Ross, obviously your competitors are all talking about inflationary pressures.  Are you seeing any response because obviously you’re getting great results here?  Where are the pressures and are you augmenting them?

Ross Beaty:                         OK, there’s two parts to the answer to that question.  The first is inflationary pressures are pervasive in our industry for capital costs particularly and, in fact, operating costs.  We are quite protected in Peru, our main operations, from creep in capex because these operations are running really well and they’re not; there’s not great capital needs, any real material capital needs where we would see an impact on inflationary increases in capital costs.  And in terms of operating costs, we’re quite closely tied to the U.S. dollar in both Mexico and Peru, so we don’t see great exchange related cost creep.  And in terms of energy, there’s modestly higher prices.  Mexico’s quite protected because they’re such a big producer of energy and in our Peru mines much of our power comes from hydro power, so we’re insulated from the oil and diesel cost increases.  So, we’re rather well protected on our existing operations from inflationary pressures right now and similarly for exchange related, foreign exchange related cost pressure. 

                                                On the new projects though, it is true; there is definite cost creep happening.  For example, Manantial Espejo and Alamo Dorado, we are doing the final feasibility studies now.  In the case of Alamo Dorado particularly, we did, we inherited a feasibility study in 2001 that was done in 2001 or 2002 looking at a heap-leach operation and the cost – if we did that feasibility study again, for sure capital costs would be up, you know, 15 or 20%, which is sort of typical for the creep in that kind of operation.  However, we’re going to be doing a mill, so our capital can’t be compared to the capital costs from 2001.  It’ll be a new number and we’re trying to offset some of the creep by – in the truck fleet, for example – by looking at a fleet of used trucks, which we might, we might actually buy quite quickly here to cover off that particular component of capital costs.  So, there’s definitely a cost creep.  It’s offset in some cases by depreciation.  And in Mexico the peso has been more or less static with the U.S. dollar.  But, you know, there will be some creep in the capital costs and some creep in the operating costs for sure in those operations.  We’ll have final numbers we hope at the end of Q1 next year for both the projects and we’ll just see how serious it is.

                                                Luckily, of course, most of our operations are up and running. In focusing on production in the late 90s, in moving away from just being a kind of an exploration company who are resource holders to become a much larger producing company, we took the bet that silver prices would increase in the near future and we perhaps were a little bit – they didn’t increase as quickly as we had expected.  We thought that they’d be over $6.00 by the end of the decade last decade and they weren’t and, of course, in 2000, 2001, and early 2002 silver was really, really on the floor, along with all other metals.  But happily, we’ve stayed very true to our focus.  We continue to work on expanding our production and now we’re seeing the fruits of that focus without having any effect on our budgets due to the current inflationary world that we see ourselves in in terms of capital costs.  Our mines are built, they’re running well, we don’t have those capital costs in front us, we have them behind us.

Terence Ortslan:                Great answer, Ross.  Thanks.  And again, on broad terms do you have a forecast about silver markets in general and all the gossip as well.  How do you read the market in the short-term?

Ross Beaty:                         Well, it’s always a hard market to call in the short-term, really Terry.  Silver is quite volatile; it really is.  It has all the characteristics of the intermediate metal of the schizophrenic metal, as I often like to call it, between gold and base metals.  Base metals can be much better predicted.  I think even on the short-term they can.  Gold is a very difficult metal to predict and silver’s sort of in the middle.  So, I would say it will – and, of course, because it’s such a thinly traded metal, it’s a very small market, it’s about a tenth the size of the gold market and the base metals markets, so it’s a very, very volatile metal in the sense that a little bit of money coming into it and a little bit of money leaving the market has a big impact on the price.  And that’s why I tend to make my predictions, you know, medium-term, a couple of years out and even long-term, which is why I think the fundamentals are so good, that the long-term is very solid for silver.  I cannot tell you what silver’s going to be trading at next week, or tomorrow, or in the next hour.

Terence Ortslan:                All right.  This morning on their next conference call they indicated to everybody’s surprise that the Palladium consumption in China just about will double within a year or so; in fact, it already has.  And what’s the latest – I mean obviously it’s a favorite topic being China and silver – but we don’t know, in the past they were supplying the market from their stockpiles.  Where do they stand now?

Ross Beaty:                         Right.  Well, China we think has pretty well depleted its mountain of stockpile of silver built up in the 1990s.  We think that China has sold all or the lion’s share of the silver.  It’s not an overhang anymore; it’s not a threat.  And if they had anything left I think by now they would have sold it completely.  So, I think that big mountain of overhang is over, finished and the good news is that demand in China has exploded in silver and now there is more internal demand in China for silver than there is internal production.  Even though production has gone up quite a bit, the demand has gone up much more quickly.  And what was a surplus in the 1990s of silver for mines that had to be exported is now a deficit.  So, China has added to the global silver deficit and that’s one of the reasons we’re seeing such strong prices now.  I should mention that the largest component we think of Chinese silver demand today is actually industrial.  It’s in the electronics and electricity sector where silver, being the best conductor of electricity, is used in almost all components, electrical components, computers, batteries, cell phones, and for example, flat screen TVs use a tremendous amount of silver.  These are very topical and very, you know, very current industrial goods, manufactured goods use a lot of silver and that’s what’s driving the sharp growth in demand for silver in China. 

                                                Looking out into the next five or 10 years, I see gigantic growth in jewelry and silverware in China because there is virtually zero silverware demand and jewelry demand, silver jewelry demand in China right now, since silver has not been fashionable and originally it was gold in China, but in the last five or eight years platinum has taken over as the hot metal, for young Chinese women particularly, who tend to drive the fashion industry for jewelry.  And they’ve tended to follow platinum and that’s why platinum, which was consumed, which was hardly consumed at all in China 10 years ago, China is now the largest platinum market in the world and it’s all for jewelry.  And the numbers you just mentioned are absolutely representative of that.  We would like to, you know, we’re hoping that there’s going to be a move out of platinum into white metal, into the other white metal that’s so much cheaper and equally beautiful.  It takes a better shine, it’s more lustrous, it’s more easy to work than platinum and if we can convince the Chinese, you know, the young Chinese women particularly, that it’s fashionable and beautiful, hold on to your hats because we see a gigantic demand in China for that particular sector.

Terence Ortslan:                Ross, I haven’t heard you so excited for a long time.

Ross Beaty:                         Since the last quarterly call?

Terence Ortslan:                Yeah.  Last question.  Capital cost numbers range for next year please?

Ross Beaty:                         No, we can’t give you a number because the big drivers for that are going to be whether we build Alamo Dorado or Manantial Espejo or both.  We are virtually certain to continue on our expansion at Huaron.  We are virtually certain to be expanding San Vicente in Bolivia.  Those are relatively low capex projects, but the big ones are, you know, they’re, the range of monies is between, you know, $70 million to $100-$110 million for those two projects and there’s a lot of variables in that, of course, times two.  So, you know, that’s a very big number, we are well, we are fully financed to build one of those right now.  In fact, we could build both of them with a little bit of debt or gearing or even another financing if we wanted to go that way.  But we have not made the decisions to build either of them yet and when we do you can add that number to our capex budget. 

Terence Ortslan:                OK.

Ross Beaty:                         Without those, it’s completely covered with our cash flow.

Terence Ortslan:                OK, that’s great.  That’s done and the decisions for that will be made – you will be making when?  In the first quarter sometime?

Ross Beaty:                         Decisions will be made, yeah, the first, second quarter next year.

Terence Ortslan:                OK.

Ross Beaty:                         The first half.

Terence Ortslan:                Thanks, Ross.

Ross Beaty:                         OK, Terry.

Terence Ortslan:                Thanks for your time.  Thank you.

Geoff Burns:                        Ross, just to let you know, your crew in Lima is departing.

Ross Beaty:                         OK.  Very good, Geoff.

Geoff Burns:                        OK, thanks Ross.  Bye now.

Operator:                              Thank you.  Once again as another reminder, for any further questions, please press * 1 on your telephone keypad at this time.  There appear to be no further questions.  I’ll turn the floor back over to you for any further remarks.

Ross Beaty:                         OK, and while I’m making the final comments, we’re certainly here to answer questions.  So, if anybody does have any further questions, by all means call.  You won’t be able to get us if you call Vancouver though, except Brenda or Rob Doyle or – because we’re going to be – the rest of the management team will be traveling for the next week to our various operations.  But we will back after that and we are accessible, so I certainly encourage you to, anybody to call if they have detailed questions at our office number in Vancouver.  So, I think that’s all I have to say personally.  Brenda, do you have anything you’d like to sign off with or Rob?

Rob Doyle:                           I think we’re good.

Brenda Radies:                  No, I think we’re good here.

Ross Beaty:                         OK.  In that case, are there any other questions, Operator?

Operator:                              No, sir.  No further questions.