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Wed February 18, 2004
Fourth Quarter Results Conference Call
Operator: Good afternoon ladies and gentlemen and welcome to the Pan American Silver Corporation Fourth 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 turn the floor over to your host Mr. Ross Beaty, Chairman and CEO. Sir, you may begin.
Ross Beaty: Thank you very much operator, and good morning and good afternoon ladies and gentlemen on the call.
As you all know, we reported our fourth quarter and annual results this morning. I will try to answer questions and provide some editorial comments now before we open the call to questions, but I won't be going through all of the information contained in the news release since you all have it.
I'm joined here in Vancouver by Jeff Burns, Pan American's President and COO, Andy Pooler, our Senior VP Operations; Steve Busby, Senior VP, Projects; Rob Doyle, our Chief Financial Officer; and Brenda Radies our VP, Corporate Relations, just in case any of these people can help me answer questions that might exist.
Just a preamble, I must say 2003 was a very good year for Pan American, and this followed several tough years, from 2000 to 2002, due to low metal prices and weak equity markets. But in many ways 2003 was a very pivotal year in our history. Pan American turns 10 this year as a silver company, and 2003 was a real year of transition, from what we had been, which was a more or less a start-up enterprise with one mine, to a multi-mine, multi-project corporation with the financial and management strength to approach the future with real confidence and strengths.
We achieved a lot in 2003, and our major achievements were as follows: As you can see, we had good production growth. We grew 11% in terms of silver production in 2003 including a 6% growth in the fourth quarter. 2003 saw the completion of construction and start up of our 3 million-ounce La Colorada Silver Mine in Zacatecas State, Mexico. After several years of steady advancement of the property through advanced exploration, feasibility work, mine financing and construction. La Colorada is by far the purest of our silver mines, with about 94% of revenues coming from silver.
We acquired Alamo Dorado last year. In February we concluded the purchase of Corner Bay Silver, a Toronto public company that discovered the 70 million ounce Alamo Dorado silver deposit in Sonora State, Mexico. Following this deal we embarked on a review of the heap leach operation envisaged by Corner Bay and we concluded that better economics might be obtained by using a mill process. This required completing additional drilling and metallurgical test work and an updated feasibility study, which remain in progress. We expect this work to be completed by June allowing a production decision and commencement of construction thereafter.
Future growth will continue to be strong. We have four projects at the feasibility stage. 2003 saw advancement of the Manantial Espejo and San Vicente project in Bolivia to the feasibility stage. Continuation of the feasibility work on the Alamo Dorado project, and commencement of feasibility work on a major expansion of our Huaron Mine in Peru. All four of these projects are considered to be economically viable at a silver price of 5 dollars an ounce. All four will contribute to our targeted growth and production to over 20 million ounces of silver by 2006. And this level of production will make Pan American the fifth largest silver producer in the world, but by far the largest primary silver mining company in the world, the other four companies having well over 70% of their revenue from other commodities.
2003 saw a big improvement in our financial condition as well. We entered the year with cash of 10 million dollars and working capital of 2.4 million. And we ended the year with cash and short term investments at 89 million and working capital of 86 million. This improvement was due to improved cash flow from our operations during the year and from proceeds of an 86 million dollar convertible debenture financing completed in August. This financing gave us the funds to build both our Alamo Dorado silver mine and our Huaron expansion project after the feasibility studies are completed in 2004. Pan American has never been in such good financial condition. Furthermore, at current silver prices all our operations are generating  positive cash flow.
Our Q-4 results were influenced by several non-cash accounting charges, but were much better than Q-4, 2002, and we expect to see even better results in Q-1 of 2004.
2003 was also a year of profound strengthening of our senior management team. In order to allow us to better manage our strong growth as we have evolved in the past few years from the one mine company to a three mine company, with four projects at the feasibility state. John Wright, the co-founder of Pan American, and my own business partner for 15 years, retired in July as President and COO, but has stayed with us as a very valued board member. Geoff Burns joined as President and COO to carry out the increased executive, administrative and financial requirements of the company. Andy Pooler joined to manage our mines. Steve Busby joined to manage our four feasibility projects. In December Rob Doyle came to us from a major bullion and mining bank to be our CFO. And earlier in the year Brenda Radies joined as V.P. Corporate Relations. We also more recently added new back-up senior staff, such as Martin Wafforn as Vice President, Engineering; Brett Boster as Project Manager for our Manantial Espejo and San Vicente feasibility projects and in Mexico Bill Faust as General Manager of our Mexican Operations.
Our team is now stronger and deeper than it was a year ago and it's fully capable of managing our growth as we evolve to achieve our single mission of becoming the worlds' leading primary silver mining company.
Looking at our operations for a moment - Quiruvilca. Our Quiruvilca Mine in Peru has been taken off the death-watch caused by three years of sustained losses. It is generating good cash flow now and we plan to continue mining there indefinitely. Our entire Peru operations group deserves much credit for this achievement.
Huaron had a reasonable year, although the fourth quarter results were affected by poor ground conditions and the cash costs were somewhat higher than they had been previously in the year. This will persist until the second quarter this year, though our 2004 forecast at 4.4 million ounces at a cash cost below three fifty per ounce is unchanged.
The big story of Huaron is its potential to expand to six million ounces a year and we began a twelve thousand meter drilling program in the fourth quarter to justify this expansion. So far, results are excellent and we are starting work to re-engineer the mines and beef up its production. Our board yesterday approved a 3 million dollar capital program to that end.
We are also very excited about a new high-grade silver zone that we have hit in several holes now at Huaron. And by high-grade I mean that. Silver grades are around just under a kilo per ton, and our lead-zinc grades are over 20%. So very, very rich ore and we hope to get into that area and start mining there later on this year.
Our silver stock-pile operation is a great cash generator as well. We acquired this in November '02 and it should repay our acquisition costs later this year, leaving us another six year or so of good solid production.
In Mexico, our La Colorada operation completed its expansion in July, but it's had a host of commissioning problems and we now expect design capacity to be reached in mid-year. In the third quarter, as you will know from having followed our results, we experienced extremely heavy rains that impacted on the start up of the expansion. And in the fourth quarter we were affected by heavy underground water flows, wet ore and poor recoveries while we sort out our off-side mill.
The good news is that we are making steady progress and expect 2004 production to about triple from 2003 levels. Next week we are having the formal mine inauguration ceremony at La Colorada and we will be expensing our operating results starting this quarter.
I've already talked a little bit about our four feasibility projects. They're extremely active and they'll support our continuing strong growth and even lower cash costs over the next few years. On January 30th this year, or pardon me, just a couple weeks ago, we announced our agreement to acquire the Morococha Mine in Peru. This deal requires some corporate reorganization of the seller in Peru, and will take another couple of months to close, but we really like the opportunity. It fits us. We already have two similar mines in Peru, including Huaron, which is only about 80 kilometers to the north. We can operate the mine with our existing administration group in Lima. Morococha has extremely good exploration potential and I believe we'll be operating there for decades. The mine is profitable today and has generated good returns even at low metal prices of the past few years. The acquisition is accretive on all counts. It will increase our 2004 production to about 13 million ounces and will decrease our forecast cash cost below 3 dollars and fifty cents per ounce for the whole company.
We've had good success in Peru. We like working there and our team there is tremendous. One hundred percent Peruvian, by the way.
So, that's a quick wrap on our operations and some discussion on our projects and overall company future. Let's talk about silver for awhile.
Why is the silver price running, and will it end, or will it continue? Clearly, the sharp recent rise in silver and all other metals is due to several things. Short covering, strong investment buying, and good industrial demand. It is easy to make a bullish case for silver. Demand is strong, supply is constrained, available inventories are depleted, the U.S. dollar is weak and so on. I think we are in a secular bull market that will last for years. Driven not by just what has happened in China, but in all Asia. Growing modernization, increasing populations, rising per capita income, greater desire for consumer and luxury goods, particularly those goods using white metals like silver and platinum.
To sum up, the wind is in our sails these days as it is with all true mining companies. It is a good time to be a sliver producer. It's a great time to have the kind of production growth pipeline we have, and it is wonderful to have such a fine team of people to work with. Our shareholders have seen excellent capital gains with Pan American Silver in the last couple of years. It's time we made some real money now, in terms of cash flow and income, and I expect we will do that in 2004.
And with that discussion, I will open the call to questions.
Operator: Thank you. The floor is now open for questions. If you do have a question you may press the number '1' followed by '4' on your touchtone telephone at this time. If at any time your question has been answered, you may remove yourself from the queue by pressing the 'pound' key. We do ask though, while you pose your question, that you please pick up your handset to provide optimum sound quality. Once again ladies and gentlemen, that is '1' followed by '4' on your touchtone telephone at this time. One moment while I poll for questions.
Your first question is coming from Terence Ortslan with TSO Associates. Please pose your question.
Terence Ortslan: Good morning Ross. Good morning everybody. Capital spending last year lost us about 18, 19 million dollars and what's the number going to be this year, and what's the DD&A?
Ross Beaty: Geoff?
Geoff Burns: Hi Terry, it's Geoff Burns responding. Our capital this year is going to be somewhat dependent on where we get to with our decision on Alamo Dorado, which we're expecting somewhere around mid-year, which could have a significant impact if we assume we have a positive construction decision at that point. Overall, we're expecting capital spending at approximately 10 million dollars this year, between Huaron, La Colorada and some additional minor capital at Quiruvilca. In terms of DD&A, I don't have that number committed to memory, Terry, but I would expect similar levels to this year with one exception, and that is we will be starting to depreciate La Colorada as it becomes a commercial, on a commercial production basis in Q-1, '04.
Terence Ortslan: If you get the positive decision on the feasibility study, those numbers going to start flowing into the third quarter?
Geoff Burns: Yes.
Terence Ortslan: And that would be approximately what? Another like 10, 15 million?
Geoff Burns: Yeah, that may be a little rich for the first six months but I would expect to see probably a minimum of 5 million dollars over the last half of '04, given that decision.
Terence Ortslan: And Ross, just to review with the operations turning around, what's your forecast for silver production this year?
Ross Beaty: Forecast for 2004 is 13 million ounces including Morococha.
Terence Ortslan: And your zinc tonnage shouldn't change that much, right?
Ross Beaty: Our zinc tonnage for the 2004, the forecast is for 36 thousand metric tons.
Terence Ortslan: Roughly between last year and the year before.
Ross Beaty: Pardon me 36 thousand excludes Morococha. Including Morococha it's going to be over 40 thousand tons.
Terence Ortslan: Thanks guys, and I'm glad that silver price is moving.
Ross Beaty: So are we. Thanks Terry.
Operator: Thank you. Our next question is coming from Haytham Hodaly with Salman Partners. Please pose your question.
Hatham Hodaly: Good morning Ross, Geoff. Couple of quick questions. Can you talk a little bit about hedging of base metals, what's been done, what's left out there?
Ross Beaty: Yes. Rob, you want to tackle that?
Rob Doyle: Certainly. We've committed roughly about 60% of our anticipated lead production for the current year of 2004. That's not including the additional lead that we're going to be getting from our contract..
Hatham Hodaly: So it's not included?
Rob Doyle: That's not included. So, that's roughly at an average price of just below about 7 hundred. In terms of the zinc, we've committed roughly about 52% of our zinc for the period, for the 2004 current year, and that is at a weighted average price of around about nine forty.
Hatham Hodaly: Are those weighted towards a certain portion of the year, or are they equally spread?
Rob Doyle: They're fairly evenly spread. We also have a little bit of zinc commitment, of about 15% of 2005's production, that's at a price of ten fifty for the first six months of 2005.
Hatham Hodaly: And next question, I guess, on the number you quoted Ross, for zinc forecast for 2004, that was 36 thousand tones of contained metal or payable metal?
Ross Beaty: That is contained metal Hatham.
Hatham Hodaly: And, couple questions...
Ross Beaty: It's virtually identical to payable metal, though.
Hatham Hodaly: Yeah, it's very close. Um, what would you put. Ross, this is specifically for you I guess. What would you put known, above-ground inventory, silver inventories at, considering that we saw a deficit of 85 thousand..
Ross Beaty: 85 million. The best guess, Hatham, and don't forget, this is still a heck of a guess. It's been a real moving target I think, with everybody who has tried to forecast it for the last twelve years as far as I'm seeing, and a lot of them have just come out with wildly inaccurate numbers. The best guess comes from Gold Fields Mineral Services' Annual Silver Survey, they do for the Silver Institute. And their guess of aboveground bullion inventory is around 500 million ounces. So that would be 500 million ounces including all the stock piles they know are held by the Indian and Chinese governments, which are about the only government stock piles that are known. It also includes the Comex inventories, Tocom, Zurich...places where they can actually go and even private inventories that they know about. Around 500 million ounces. There's coin inventories above and beyond that spread around the world that aren't in that number, but they're not considered to be liquid or for sale at a specific price. Of the 500 million ounce number, it's a very different number when you look at what is for sale at current prices.
Hatham Hodaly: Now, that's after the 2003 deficit Ross?
Ross Beaty: Yeah, it's, you know, it could be 400 million ounces, Hatham, 400, 500 million ounces, something in that order.
Hatham Hodaly: I know, obviously it's a tough number.
Ross Beaty: it is.
Hatham Hodaly: OK. Thank you.
Ross Beaty: OK.
Operator: Once again ladies and gentlemen, if you do have a question you may press the number '1' followed by '4' on your touchtone telephones at this time.
I'm showing no further questions at this time.
Ross Beaty: OK. Well that's letting us off quite easily. Obviously, for any caller who comes into this call after the conference call is over here, can certainly call myself or Geoff or Brenda Radies if they need any further back-up on any specific question they might have. Our phone number in Vancouver 604-684-1175. And if there are no other, if there are no further calls, then I'll call the call at an end. Thank you very much for joining us today.
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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