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Great Panther Silver Limited (NYSEMKT:GPL)

Q4 2012 Earnings Call

March 14, 2013 10:00 am ET

Executives

Martin Carsky – President

Jim Zadra – Chief Financial Officer

Rhonda Bennetto – Vice President, Corporate Communications

Analysts

Heiko Ihle – Euro Pacific Capital

Laurenn Russell – Dundee Securities

Christos Doulis – Stonecap Securities

Operator

Greetings and welcome to the Great Panther Silver 2012 Year-End Financial Results conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference call, please press star then zero on your telephone keypad. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Rhonda Bennetto, VP, Corporate Communications. Please go ahead.

Rhonda Bennetto

Thank you, Brock. Good morning and thank you for taking the time to join our call today. Mr. Archer will not be joining us this morning as he is recovering from a recently rescheduled hip replacement surgery, and although everything went very well, he is not able to participate on the call. Joining us instead is our President, Martin Carsky, along with Jim Zadra, our Chief Financial Officer. They will be reviewing our year-end and operational financial results and answering any questions at the conclusion of the prepared remarks.

Before we begin, I’d like to mention that some of the commentary on today’s call will contain forward-looking statements. Although we will make every effort, you should be cautioned that there can be no assurance that those statements will prove to be accurate and that actual results and future events might differ materially from those noted today in the forward-looking statements. After some remarks from Mr. Carsky, there will be a question and answer session and a replay of this call will be available a little later today. The details to access the replay were noted in the press release announcing this call and are available on our website.

I’ll turn the call over to Martin Carsky and Jim Zadra. Thanks very much.

Martin Carsky

Thank you, Rhonda. Good morning everyone and thanks for joining us. 2012 was a challenging year for Great Panther in a number of ways, but we feel that our team is addressing those challenges and we are confident that we’ll meet our operational and growth objectives for this year.

Our Topia mine was affected by the drought in central Mexico last spring, and that curtailed throughput at the plant for the first half of the year. We were able to process the stockpiled ore by year-end and in fact ended up with a record throughput for the year, but our silver grades were lower than anticipated and as such our overall silver production at Topia was down a little bit year on year.

At our Guanajuato operation, we saw increased tonnage, consistent silver grades overall, and a significant increase in our gold ounces and grades as we mined in the gold-rich Santa Margarita zone. This resulted in a 15% increase in our silver equivalent ounce production over 2011.

We believe we finished the year strong with several quarterly and annual production records. Metal production for the fourth quarter increased 23% and 8% for the year. Silver production for the fourth quarter increased by 28% and 4% for the year. Ore processed in the fourth quarter increased 30% and 6% for the year; and lastly, gold production for the fourth quarter increased 24% and 36% for the year. While we are encouraged that we achieved these record results at both mines in the fourth quarter, we know that we still have work to do and we’re focused on continuing to make improvements in both of our operations this year.

We continue to be an active explorer in and around our existing assets, as noted in our most recent release where we discovered new silver/gold zones and intersected high grade mineralization at the Guanajuato mine complex. A key goal for us is to leverage the additional capacity that we’ve built at both of our plants.

In addition, we continued to look at M&A opportunities. Our objective is to find the right fit, not just to do a deal for the sake of doing a deal. Geographically we continue to focus on Mexico and Peru, the two largest silver producing countries in the world. Our team evaluated several projects and opportunities during the course of last year and we will continue to do so until we find the right fit.

Now let me turn the presentation over to Jim Zadra, our Chief Financial Officer to cover off some of the key financial results.

Jim Zadra

Thank you, Martin, and good morning everyone. We grew annual revenue by 6% to 61 million in 2012 as higher production and sales volumes offset a decline in metal prices. Our gross profit or income from operations decreased from 27 million to 19 million due to higher unit production costs and lower metal prices. In addition, a big factor was higher non-cash depreciation charges which resulted from increased investment in our mines, plant and capital equipment over the last two years.

Net income for the year was down to 5.5 million from 11.5 million in 2011, mostly due to the decrease in gross profit, an increase in G&A, and an increase in exploration and evaluation expense. Our operating cash flow before changes in non-cash working capital was a healthy 17 million but still down compared to the 23.8 million we earned in 2011, mainly as a result of the lower operating margins.

Cash cost per silver ounce was up $1.40 from last year to $12.24 due to a combination of higher site costs at both operations, higher smelting and refining charges, and lower grades at Topia. Our cash cost at Guanajuato were actually lower as a result of higher gold production and therefore higher byproduct credits, which offset the increase in unit production costs.

Our financial position remains strong with 26 million in cash and approximately 45 million in working capital.

I will now turn the call back to Martin to speak more about our operations and outlook.

Martin Carsky

Thanks, Jim. As we’ve stated publicly, our primary goals for 2013 are to improve the profitability of our operations, to advance the development of the San Ignacio project in preparation for production next year, and to continue to seek out another mine or advanced staged project that’s a good fit for us and meets the objectives of our growth strategy. As a result, for 2013 we’ve scaled back our growth forecast so we can focus on improving our planning and operational efficiency, which will set the foundation for improved profitability and growth going forward.

We have factored in lower grades for Topia this year as we expect to see the continued impact of industry-wide inflation on consumables and labor costs as well. With the expansion of mining at Guanajuatito and higher gold grades from the Santa Margarita vein, we anticipate modestly higher production at Guanajuato with lower unit costs because of the gold byproduct credits. The net result is that we expect to produce a total of between 2.4 and 2.5 million silver equivalent ounces at an average cash cost of between 10 and $11 per ounce.

This year we have a more disciplined focus on capital expenditures and mine development, and as a result we expect to spend less than $20 million in CAPEX. That compares to nearly 27 million for 2012. This includes across-the-board reductions to improve our cash flow while still funding the development of San Ignacio.

With respect to San Ignacio, we’ve received our explosive permit. We expect to receive our environment permit here shortly in the second quarter and as soon as we have that, we’ll be collaring the portal and driving the ramp towards the mineralized zones. We expect to provide a more fulsome update on the San Ignacio project later in the year once we’ve been underground and we finalize the mine plan. We are similarly waiting for a permit to commence drilling at El Horcon and anticipate the commencement of that program in the second quarter.

In closing, we feel we’ve taken the right steps towards improving our operational efficiency and we have a clear path towards achieving our operational and growth objectives.

That concludes our commentary. Thank you for your attention. Operator, I’d like to open it up for Q&A please.

Question and Answer Session

Operator

Thank you. [Operator instructions]

Our first question today is from Heiko Ihle of Euro Pacific Capital. Please go ahead.

Heiko Ihle – Euro Pacific Capital

Hey guys. Thanks for taking my question. On your 2013 outlook, can you just provide a little bit of color on the breakdown for expected production and cash costs between the two mines?

Martin Carsky

Sure, Heiko. I guess in general terms, our production over the past few years, and it will be very similar for 2013, is sort of two-thirds Guanajuato and one-third Topia. The thing that will be a little bit different in terms of silver equivalent ounces for 2013 is because of the high gold content of Santa Margarita, we’ll have a little more silver equivalent ounces coming out of Guanajuato this year, so that ratio might shift a little bit.

With respect to cash costs, as Jim noted in his remarks and you’ve seen from our results last year, the cash costs that we report on a consolidated basis – just over $12 – is a blend of the two operations, and Guanajuato, again because of the high gold content, has a very low cash cost in that sort of $7, $8 range and Topia has quite a significantly higher cash cost. We don’t expect that to change materially for 2013, again because of the high gold content for Guanajuato. We expect it to stay at that low level.

Does that answer your question?

Heiko Ihle – Euro Pacific Capital

Yeah, yeah. Speaking of San Ignacio, you brought it up earlier briefly, but can you maybe be a little bit more specific than 2014?

Martin Carsky

In terms of when we would start production?

Heiko Ihle – Euro Pacific Capital

Correct.

Martin Carsky

Unfortunately, I don’t think it would be responsible for us to be much more specific now, Heiko, because as I mentioned earlier we’re going through the permit process, we’re developing the mine plan. We have stated before and we believe that we’ll be in production starting in Q1, if that’s what you mean about being specific; but until we finalize the mine plan, I don’t really want to be any more specific than that because one of the things that we’re trying to do a really good job of this year is making sure that we deliver on everything that we say we’re going to do, and I’d rather come out a little later with a more definitive statement about exactly what we’re going to accomplish at San Ignacio and when.

Heiko Ihle – Euro Pacific Capital

That sounds good. And building on your last sentence here with we hope we’re going to come out swinging, I like the $10 to $11 cash estimate you guys put out. Can you walk me a little bit through your assumptions – you know, the gold credits, all that – because if you think about it, it’s a 14.3% decline at 10.50 at the midpoint, which is very good. Granted, you’re coming off of a tough year, but nonetheless can you just sort of walk me through your assumptions on that, please?

Martin Carsky

Sure. At a high level, Heiko, I think maybe the easiest way to explain that is to look at our cash costs for Guanajuato last year, 2012 versus 2011, and what you’ll see there when you look at that detail is the byproduct credit that we’re receiving from the gold has gone up in the order of $5 an ounce. So as you know how this math works, as you produce more gold and if you produce more gold at a higher grade, it really cuts back your reported cash costs. So I think as I mentioned a few months ago, our expectation is that we will continue to produce a lot of gold out of Guanajuato this year, and that will drive that cash cost down to 2012 levels or lower.

On top of that, one of the challenges that we experienced last year was an increase in site costs mostly at Guanajuato but also at Topia, and so what we factored into our budgets and our plans for this year is to do some cost-cutting, which we’ve started already, and to make sure that our site costs go down. In fact, one of the most important metrics for me is to make sure that our site costs are lower than they were last year. So the combination of all of those things obviously mathematically will result in lower cash costs for us going forward.

Topia’s cash costs are not affected by gold as we don’t produce gold there and the byproduct credits we get are not as substantial, so there won’t be as much of a shift there; but we are making changes to our site costs at Topia as well.

Heiko Ihle – Euro Pacific Capital

That was very helpful. I don’t mean to hog the Q&A line, so thank you very much.

Martin Carsky

No problem at all. Thank you.

Operator

Our next question comes from Laurenn Russell of Dundee Securities. Please go ahead.

Laurenn Russell – Dundee Securities

Hi, good morning. Thanks for taking my question. Just wondering if you could provide a bit more color on the cancelled title claims at El Horcon.

Martin Carsky

Sure. Okay, I’m trying to think of the best way to explain this. So it’s fairly typical in Mexico to purchase a property from a private landowner and for that landowner to be cash strapped, and in the situation with El Horcon that was exactly what happened. So that landowner was not current in paying the annual fees for the concessions, so at closing, if you will, part of the proceeds go to the vendor and part of the proceeds go immediately to pay the back taxes, and we have a legal opinion at closing that we delivered to us that the concessions were in good standing.

So those back taxes were paid and the concessions were delivered to us in good standing, and we found out post-close that there had been a separate administrative process to cancel those claims for the late payment of those taxes. A counsel in Mexico tells us that this will be sorted and we believe it will be; but this process will take a little bit of time and our experience is that these things don’t get solved quickly because there is a little bit of bureaucracy that we need to go through and that’s really where it ended up.

Fortunately, we don’t plan to drill. We never planned to drill on those areas that are under question, and the main reason to purchase El Horcon, or perhaps the sole reason to purchase El Horcon was based on the areas that we are planning to drill that we do have clear title to.

Does that answer your question?

Laurenn Russell – Dundee Securities

Yeah, that does. Thanks very much.

Martin Carsky

Okay, you’re welcome.

Operator

As a reminder, if you’d like to ask a question, please press star then one on your touchtone telephone. Our next question come from Christos Doulis of Stonecap Securities. Please go ahead.

Christos Doulis – Stonecap Securities

Hey guys. Just wondering if you could provide a little guidance on where you think CAPEX numbers are going to be like going forward on a sustaining basis at both Topia and Guanajuato.

Martin Carsky

Hi Christos. Well, I guess as I mentioned in my prepared remarks that we expect CAPEX in total for this year to be less than 20 million. In terms of where that number might be going out a few years, it’s actually not just the two operations, it’s also San Ignacio. So to answer your question on Topia and Guanajuato, in the order of 10 to 15 million for Guanajuato and in the order of 5 million plus or minus for Topia would be some good round numbers. Included in 2013, of course, we have 2 or $3 million allocated for San Ignacio and at this point what we’ll spend on San Ignacio going into 2014 and ’15 hasn’t yet been determined because we haven’t yet finalized the mine plan. I would expect that as we roll into the end of this year, we’ll be providing guidance on that as well.

Christos Doulis – Stonecap Securities

Thanks.

Martin Carsky

You’re welcome.

Operator

There are no further questions at this time. I would like to turn the floor back over to Martin Carsky for any closing comments.

Martin Carsky

Thank you. Thanks to everyone for joining us this morning. Hope we answered the questions satisfactorily. Have a great day.

Operator

This concludes today’s conference call. You may now disconnect your lines. Thank you for participating and have a pleasant day.

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