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Pan American Silver Corp. (NASDAQ:PAAS)

Q2 2009 Earnings Call

August 12, 2009; 11:00 am ET

Executives

Geoff Burns - President, Chief Executive Officer

Steve Busby - Chief Operating Officer

Michael Steinmann - Executive Vice President of Exploration and Mine Geology

Rob Doyle - Chief Financial Officer

Kettina Cordero - Coordinator of Investor Relations

Analysts

John Bridges - J.P. Morgan

Haytham Hodaly - Salman Partners

Chris Lichtenheld – UBS

Shey Ylonen - TD Newcrest

Operator

Good day ladies and gentlemen, thank you for standing by. Welcome to the Pan American Silver second quarter 2009 earnings conference call. During today’s presentation, all parties will be in a listen-only mode. Following the conference will be open for questions. (Operator Instructions)

I would now like to turn the conference over to our host, Mr. Geoff Burns, President and CEO. Please go ahead.

Geoff Burns

Thank you, operator; good morning, ladies and gentlemen and welcome to Pan American Silver’s second quarter earnings release conference call. Joining me today here in Vancouver, are Steve Busby, our Chief Operating Officer; Michael Steinmann, our Executive Vice President of Exploration and Mine Geology; Rob Doyle, our Chief Financial Officer; and Kettina Cordero, our Coordinator of Investor Relations.

During our last conference call in mid May, I described the first quarter of 2009 as being a turnaround quarter for Pan American Silver. As we successfully reduced our consolidated cost by 28% and moved back into the block on all financial metrics.

On that call, I also openly expressed my optimism that our results would only get better over the balance of 2009, as our two newest mines, Manantial Espejo in Argentina and San Vicente in Bolivia ramped up to full production capacities. It’s indeed rewarding to have delivered on that optimism during the second quarter.

Here’s our headlines. In the second quarter, we produced a new quarterly company record, $5.8 million ounce of silver, up 28% from the same period a year ago and up 19% as compared to our first quarter of this year, our quarterly goal production also climbed by 20% from the first quarter of our quarterly company record of 25,000 ounces.

Gold is now clearly our most significant byproduct, accounting for 18% of our total revenues. Our consolidated cash cost remains stable at $5.99 per ounce, just slightly below our full year forecast of $6 per ounce. This is extremely gratifying as we’ve been able to hang on to the massive cost decline we reported during the previous quarter.

We generated mine operating income of $23.5 million, more than double of what we generated in Q1. Cash flow from operating activities was a very healthy $32 million or $0.37 per share, also significantly improved from Q1, and our bottom line was solid, with quarterly adjusted net income of $13.5 million or $0.16 per share. Again, almost double the income we reported in the first quarter of this year.

It wasn’t all a smooth sailing in the second quarter, but then it rarely is. After 25 plus years in this business, I’ve come to learn that this is mining and there’s always something. As Steve will talk about in a moment, we had to deal with the swine flu outbreak in Mexico and the government’s response to that too. We had a short lived labor disruption in our Morococha Mine in Peru improved, followed by a mechanical issue with their primary ball mill of the same operation.

As Rob will discuss, we had to deal with hopefully, the temporary closure of Doe Run smelter in Peru, the primary purchase of our high value silver copper concentrates, but I’ve also learned that when you have a diversified asset base and a top notch operating development team, there’s usually some good news that helps keep things on track and we had more than our share of that this past quarter.

Manantial Espejo was solidly outperforming our projections, thanks in large part to the fact that we’re churning out more gold than we expected. San Vicente’s ramp up rivals Manantial in terms of timelines and performance, allowing us to declare commercial production in the first quarter of operation, some three months ahead of schedule.

Our Mexican operations had been spot on, with Alamo Dorado continuing to outperform our estimates and La Colorada, meeting every challenge that you can imagine in an underground mine, and still hitting right on forecast. When we toiled up all the pieces, we delivered some pretty happy second quarter results.

With that, I’d like to turn the call over to Steve, Rob and Michael, who I know will provide you with some additional color and commentary on our operations, development projects, financial condition, and exploration programs. Steve.

Steve Busby

After last five years of intensive project development and mine construction work, it is a pleasure to report our record breaking second quarter results to you today, which highlight our company’s now proven talents in bringing dreams into reliable producing mines that generate a solid economic base locally, while providing returns to our trusting shareholders.

Let me start by jumping right into great news, with our outstanding performance of Manantial Espejo in Argentina. We reproduced just over 1 million ounce of the silver at a cash cost of negative $0.93 per ounce, net of an excellent byproduct credit from nearly 18,500 ounces of gold production, which more than covered all of our operating cost just by itself.

Our start up hasn’t been without its own challenges, as we had lost one of our critical grinding mill motors during the quarter, which fortunately was replaced in early July without incurring the material impact to our 2009 forecasted production or cost. Despite this disruption, I believe the production and cost results speak for themselves. In particular, the plant processed over 144,000 tons of ore in the second quarter, which is almost 80% of the plant design capacity, in spite of the failed mill motor issue.

The silver feed grade for the quarter was 232 grams per tons, with 88.5% recovery, just shy of our expectations. Whereas the Gold Mill feed grade was 3.8 grams per ton and 94.4% recovery, which is ahead of our expectations. We feel confident, we’ll be able to achieve our targets for both production and certainly for cost for 2009 at Manantial Espejo given we have completed the necessary plant winterization projects in time to prevent any weather related disruptions.

I’d like to give a special recognition to our Argentine workforce, who has recently been named the Argentine 2009 mining company of the year by the primary Argentina Mining Press and Argentina’s association for the development of the mining industry. This is an award well received by the staff whom has put in long and hard hours getting the job done right and bringing this mine into production safely and efficiently.

Our Peruvian operations produced just over 1.9 million ounces of silver in the quarter, which was slightly ahead of our projections, given continued profitable production at the Quiruvilca mine at the current and improved metal prices offset by setbacks from the labor strike and grinding mill breakdown in Morococha, as well as the breakdown of a grinding mill at Huaron, which caused a four day disruption there.

Cash cost at our Peruvian operations were much higher than expected, at $10 an ounce in the second quarter compared to our target of $8 per ounce. The high cost were largely due to higher smelting cost, caused by the Doe Run smelter shut down that Rob Doyle will discuss in more detail later.

Along with the impacts of the mill breakdowns at Morococha and Huaron and the fact that at Quiruvilca all cost including expenditures and in the past would have been capitalized or being expensed, as we prepare that mine for carrying maintenance. As reported last quarter, we expect to be able to continued reduced operations at Quiruvilca for the next several months and into early 2010, provided metal prices stay at their current levels, while we simultaneously prepare that operation for care and maintenance.

Overall we anticipate producing slightly above 2 million ounces per quarter at our Peruvian operations for the second half of 2009 at approximately$9.50 per ounce. This assumes that the Doe Run smelter remains closed and we are subject to higher offshore concentrate treatment terms. If Doe Run reopens sooner, our cost could decline as much as $1.50 per ounce.

Our multiyear mine deepening project that we are on is nearing completion, and has successfully dewatered the mine, the entire mine, 70 meters below the main drainage tunnel, which had originally been driven in the late 1940s and early 1950s. This mine deepening allows us access to all the historic high grade main structures that had been mined out above the drainage tunnel during the long successful history at the Huaron Mine, and we expect to start reaping benefits from this important investment gradually beginning in the next few months and lasting for many more years to come.

We are also advancing a significant number of mine developments at Morococha, which are intended to access some of our newly discovered reserves at the Morro Solar area, as well as reserves that will be mined for the next several years.

I’d also like to make a special recognition to our Peruvian workforce. It was recently been awarded the prestigious 2008 Peruvian Company of the Year from the Peruvian Association of Civil Companies. We operate challenging underground narrow vein mines in Peru and it is particularly gratifying to CR Group recognized for all their outstanding efforts in safety, environmental cleanliness, proactive community interactions, and productivity.

Once again, our Alamo Dorado mine in Mexico led the company producing more than 1.4 million ounces of silver at cash cost of $4.23 per ounce. Smelt by over 4,000 ounces of gold production versus our forecast of only 3,300 ounces, in addition to knowing an average of over 4,600 tons per day or 10% ahead of our target.

Even sooner than we had expected, Alamo Dorado has already successfully made out for the entire five day suspension of operation in May that was deigned to combat the influenza outbreak. We expect Alamo Dorado silver production performance will continue with a slight increase in cash cost, as gold production levels were reduced somewhat as the Phase II open pit layback advances.

Alamo Dorado has lived up to all of our promises of becoming a solid, reliable, low cost silver producer for the company with the extremely confident mining team we have developed there.

The La Colorada Mine in Mexico produced 835,000 ounces of silver in the quarter, surprisingly ahead of our expectations despite incurring the five day influenza suspension in May. La Colorada produced at a cash cost of $7.23 per ounce, 12% below our expectations due to tight controls on spending that was instituted in late 2008.

We expect the production in cash cost performances we have had there for the first half of 2009, will be sustained through the second half. We have a very strong operating team at La Colorada and we are all very excited about some of the future potential, which I’m sure Michael Steinmann will discuss further in a moment.

I would say it some of our best news for last, and very please to report outstanding success at the startup of our San Vicente project in Bolivia, where we have produced over 616,000 ounces of silver to the company’s account at a cash cost of just over $9 per ounce.

Declaring commercial production on April 1, ramp up for production is proceeding well ahead of projections and our cash cost are coming right in line with our projections of below $7 per ounce as a ramp up continues during the start of the third quarter.

Our new plant processed over 50,500 tons in the first startup quarter, and no feed grades of 445 gram per ton silver, 2.1% zinc, and 0.3% copper, which is nearly 75% of our designed throughput capacity and ahead of our silver grade expectations.

Our silver recovery for the quarter was 90%, which is already well ahead of our life of mine average projection of 85%. I look forward to reporting to you in our next quarterly update as it’s looking like our production and cost were becoming a very nice story to tell at San Vicente.

We are advanced in some winterization projects and gaining confidence in the operation each day as the operators become familiar with the new plant and the expanded mine. We are confident in our ability to meet our production and cost guidance for San Vicente, given another smooth startup for the company after constructing a quality plant and an expanded mine.

Overall, Pan American Silver had a solid quarter, producing a record breaking 5.8 million ounces of silver at a cash cost in line with our projection of just under $6 per ounce, and the beauty of all of this, is that we expect this level to continue or even expand slightly as our two new operations come into steady state production in the second half of the year allowing us to achieve our production and cost guidances.

I’ll now turn the call over to Rob Doyle for the financial update.

Rob Doyle

Good morning ladies and gentlemen. Our financial results in Q2 2009, clearly, reflected much improved operating results; mine operating earnings of $23.5 million for the quarter, an increase of 124% from Q1 mine operating earnings.

Current operating results were driven by record quarterly sales of $111.4 million as record production of silver and gold conciliated into significant increase in the quantities of precious metals sold. These quantity increases resulted in 7% higher sales than the comparable quarter of 2008. Despite 40% plus decline in realized base metal of prices and a 22% decline in realized total prices from a year ago.

The addition of high margin tonnage from Manantial Espejo and San Vicente combined with the continuation and a recovery of metal prices resulted in a fairly expansion of our margin per ton in Q2. Our average margin per ton of ore milled has gone from about $10 in Q4 2008 to $28 in Q1 2009 to $40 in Q2 2009. Our consolidated total number of tons milled has increased by 27% over that same period. Healthier margins and more tonnage, that is at the heart of our improving operating and financial results.

As Steve has discussed our San Vicente Mine in Bolivia enjoyed an exceptional startup buying as to clear commercial production as of April 1, 2009, just like the Manantial Espejo the quarter before commercial production at San Vicente was achieved in the first quarter after the completion of construction activities.

Mine produced over 600,000 ounces of silver and almost 700 tons of zinc for Pan American, contributed $1.7 million of income to our bottom line and positive operating cash flow all in this first quarter production. San Vicente and Manantial Espejo non-full production, we are seeing higher cost of sales and deprecation charges. However, we continue to see good results from our cost catching effort.

On a per ton basis, our operating cost declined by 9% on average at our Mexican and Peruvian operations compared to Q2 2008, largely due to our cost initiative and the benefits of weaker local currencies and softer markets for consumables and reagents. These cost reductions were achieved despite the various short term mechanical and labor related shutdowns we endured in Mexico and Peru during the quarter.

Our statement of operations in Q2, 2009, will contain several charges that are with further discussion. The largest buyer of our copper concentrate and pyrite stockpile materially improved Doe Run, Peru, which owns and operates the La Oroya smelter again experiencing severe financial difficulty during the first quarter of 2009 and it was not able to grow on its credit facilities using a complete pleasure of the La Oroya smelter in June 2009. About 10 days ago, Doe Run, Peru was reported to have filed an application for bankruptcy protection under Peruvian laws.

At the end of Q2, 2009 Doe Run, Peru owed us $8.8 million. Recognition of these circumstances, company has established doubtful debt provision in Q2 with $4.4 million or 50% of the amounts receivable, and in addition we classified the remaining receivable balance of $4.4 million from current assets into long term assets on our consolidated balance sheet.

This reclassification reflects our expectation that the remaining receivable balance will not be recovered within the next 12 months. We recorded an additional charge of $0.6 million in Q2, related to the negative present value impact of the expected today in the recovery of the Doe Run receivable.

Combined after tax effect on earnings in Q2 of the charges related to our Doe Run, Peru receivable is $3.3 million or $0.04 per share. We have been able to sell our copper concentrates to other buyers since Doe Run, Peru defaulted. However, the current market trends are significantly inferior to the turns in our concentrate contracts with Doe Run, Peru.

Sales of the company’s pyrite stockpile material have halted, as Doe Run, Peru, was the only buyer of that material. The lack of pyrite stockpile sales, pretreatment charges, freight cost, penalties and reduced payables related to our public concentrates and we’re diverted from Doe Run in Q2, that was approximately $2.1 million and that’s before tax effect, and where a significant factor behind the higher cash cost recorded by the Peruvian operations during the quarter.

Similar impacts, I expected on our Q2 results, for at least the period that the La Oroya smelter remains closed, all until market conditions for the sale of copper concentrates improves. Also included in net income in Q2, was a non-cash foreign exchange about $1.2 million on the revaluation of the company’s cash and other working capital and future income tax balances as we denominated in local currencies.

Moving on to the balance sheet, our working capital increased by $16.8 million during the quarter, the combined results of increasing our cash and other current asset balances by $6.8 million and reducing current liabilities by $10 million. Decrease in current liabilities was primarily a result of the decline in the unrealized loss on our FX contracts, due to financial settlements and the effects of a weakening U.S., dollar.

Accounts receivable was steady, as the write-down and reclassification of our Doe Run, Peru receivable was offset by increases in other trade receivables at both Manantial Espejo and San Vicente Ranch up operations. We finished the quarter with a solid working capital position of $216.1 million, at the current ratio of 4.421 and cash and short term investments of a $112.4 million and no debt. That leaves us financially very well positioned to respond to strategic growth opportunities.

From a cash flow perspective, cash flow from operations, before working capital movements was $32.5 million in the quarter, a jump of $13.5 million from Q1, invested $19.7 million in property, plant and equipment during the quarter, $7.8 million of that amount was spent closing our construction payables and completing expansion of San Vicente, of $7.2 million was spent at Manantial Espejo, completing refinements to plant and machinery at the mine.

In addition, we invested $4.6 million on capital projects at our other operations. With the construction of Manantial Espejo and San Vicente now complete, we are at the end of a period of heavy capital expenditures, which have seen Pan American investing approximately $518 million in its development projects and operations beginning of 2005. As we saw in Q2, 2009, I expect to see our cash balances continuing to build in the coming quarters, as our mines provide returns on those investments, by generating positive cash flow.

With those comments, I’ll hand it over to Michael for an update on our exploration activities.

Michael Steinmann

Thank you Rob, and good morning everybody. Q2 was a very active quarter for our exploration on both Greenfield and Brownfield projects. We drilled over 26,000 meters of diamond and RC drilling as part of our 53,000 meter annual drill budget. In addition, we executed over 4,200 meters of diamond drilling with our La Preciosa JV with Orko Silver in Mexico.

The JV was announced on April 14, for the large 32,000 hector land package, including an indicated resource of $72 million ounces of silver on an inferred resource and then inferred resource of $97 million ounces. Pan American will spend this year $5.7 million for exploration metallurgical studies, site improvements and development. This budget includes over 30,000 meters drilling for diamond drilling, for a cost of about $3 million.

I’d like to have first a more detailed look at the Brownfield programs for each of our operations. Although, we encountered very good results from all our Brownfield programs, La Colorada return by far the highest grade Intersects. Exploration has been very successful at La Colorada for several quarters now. You may recall the high gold, silver discovery from the last year, is nearly single handed responsible for the overall higher gold grades in the current La Colorada production.

This year we started into program to explore the depth extension of the major NC2 vein, which has returned many holes with multi kilograms silver intersections containing also a higher lead and zinc grades and in some cases substantial gold credits. Building on this zone will continue for the remainder of the year and so there is an important resource for the future of La Colorada production.

Both Morococha and Huaron exploration focused during the first six month of this year on high-grade targets and the results did not disappoint. The Morro Solar area at the Morococha keeps returning high grades for the results and development of Morro Solar ring and parallel structures is well underway. I’m convinced that both of these mines will this year again more than replaced to reserves mined during 2009.

Adjusted return from a trip to Bolivia and Argentina, as you heard from Steve, both mines Manantial Espejo and San Vicente are in full swing and exploration programs have been started at both sites. Building for the Melissa vein expansion, one of the main structures of Manantial Espejo discovered the continuation of this high grade vein to the rest on it depth. Surface exploration of San Vicente identified several neutral targets.

Both sites will intensify drilling with the start of the southern hemisphere spring in September. San Vicente is more than impressive for everybody, especially the large and high grade Litoral vein. Underground development is well advanced and I had the chance to admire a nine meter wide vein with development on already two levels.

Observing massive sulfide ore over such wide intersections containing in some cases up to 10 and 20 kilogram of silver per ton together with high grade base metal contents is a special treat for a geologist. San Vicente has many unexplored or poorly explored veins and explorations programs will continue for years to come.

Our fastest growing drill program is developing at the Pan American Silver, Orko Silver, joint venture La Preciosa project in Mexico. Drilling started on the 20 of June and is advancing very fast with two large diamond rigs and the third to arrive this month. As mentioned, we executed a total of over 4,200 meters of drilling during Q2, and a total of over 7,400 meters to-date.

Program focused on infield drilling of the existing resource as well as our new exploration targets in the immediate surroundings. The current resource is based on 100 meters based hole, which we are currently infield drilling on a 50 meter grid. Surface geology trenching and sampling discovered additional exploration targets and geotechnical as well as metallurgical test work is underway.

I’m extremely excited about what we are finding on the main market structure at La Preciosa and I can’t wait to get the third rig going on some of the new exploration targets. This is a very large system with several important structures and I anticipate publishing the first real results early this fall.

Back to you, Geoff.

Geoff Burns

Thanks Michael. Okay, you have now heard in detail where we were. Let’s take a moment and look at where Pan America is headed and why I remain optimistic as ever about our prospects for the balance of 2009 and beyond.

We are maintaining our production forecast for 2009, and are planning to produce 21.5 million ounces of silver, not including the production from our Quiruvilca mine, which is still moving towards care and maintenance. We are maintaining our cash cost forecast at $6 per ounce for the year, which you may recall was already reduced from 628 per ounce at the end of the first quarter based on better than expected results we achieved.

We should be more than double, actually almost triple our gold production this year, and like silver are maintaining our 2009 production guidance for gold at 85,000 ounces. Although frankly, given the fact that we have already produced our 46,000 ounces of gold so far this year, I think we’ll do a little better here.

We will continue with the ramp up of San Vicente and I trust you guys sensed from Michael as to how excited we are about what we are encountering now that we’ve started exposing and mining from Litoral vein. I think San Vicente is going to positively surprise even us over the balance of this year and beyond.

We are going to restart significant exploration efforts at Manantial and San Vicente now that these operations are up and running. Some of the most prospective ground in all of Pan America surrounds these two operations, and neither property has really been touched with a diamond drill for the past three to almost four years.

Now, that we are organized, have our permits and with drill rigs in place, we’re going to push hard at La Preciosa. In our opinion it’s a tremendous property in a great location and is absolutely the right stage where we can create additional value by bringing this project forward. There’s a decline in silver resource in excess of a $135 million ounce of silver, it’s in Mexico and literally within an hour of our established infrastructure in Durango and our development group is now available and is being redeployed on this new project.

There’s no debt over $200 million in working capital, our heavy capital expenditures behind us. We are positioned to generate significant positive cash flow for the balance of this year. We are exceedingly well positioned to aggressively look for additional growth opportunities.

Before taking questions I would be remised if I didn’t personally and on behalf of our Board Of Directors, publicly congratulate our operating teams in both Argentina and Peru. Our Peruvian subsidiary, Pan American Silver Peru S.A.C. was selected, as Steve mentioned, the 2008 Peruvian Company of the Year. While in Argentina, our operating Minera Triton Argentina S.A. was named 2009 Mining Company of the Year. Well done folks.

These separate acknowledgements are clearly a testament to the dedication of our South American operating teams and proof that being good miners go hand in hand with being responsible corporate citizens, working closely with the countries and the communities that host our operations. This is a core value at Pan American wherever we operate.

With that, I would now like to ask Lou to open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from John Bridges - J.P. Morgan.

John Bridges - J.P. Morgan

Just wondered, if you could give us a little bit more clarification on how you are handling Quiruvilca. You still mentioned it in your prepared remarks, but just wondered whether everything was being expensed in the income statement?

Geoffrey Burns

Indeed, every dollar that we’re spending at Quiruvilca, is going through and into our cash cost, we’re not deferring anything. So that certainly are, some mine development, we’re still doing limited mine development and other things that would normally have been capital that are now coming through as direct operating cost. So, especially a little over $10 reported in the second quarter is the fully loaded cash cost.

In terms of plans, we’re still, as Steve mentioned, we’re still preparing Quiruvilca for care and maintenance at this price level with $14 prices and $10 cash cost, it may well keep going longer than we probably initially anticipated at the start of this year, because it is still making both $4 an ounce of production. So it may go further into 2010, but the longer term plan is still care and maintenance for Quiruvilca.

John Bridges - J.P. Morgan

Then in early to this presentation, you could have got remarkable chart of trebling your productions since 2002. Just wondered whether the expressions especially you have been talking about is enough to show any growth next year, or will you just put, a recessed any study state absent deals?

Geoff Burns

I think John that we can look forward to some additional growth next year as we see full year’s production coming at San Vicente and relatively steady state from our other operations. We are looking very carefully at the discoveries we’ve made at our own projects. Do you see where there are opportunities for internally generated growth, probably the most prospective is at our Huaron operations, which is our largest proven and probable reserve.

Where we could look at internally increasing capacity although it’s a little bit premature to talk much more than in those general terms on that. Then beyond that, yes, we are going to have to push along with La Preciosa, which we are very excited about, the more we get into it, the more we’re liking it, and yes, followed by acquisition activity to keep that growth profile going in 2011 and beyond.

John Bridges - J.P. Morgan

Any part of the world, that you particularly like?

Geoff Burns

Well, simple, we are going to continue to focus in the areas where we are. There are opportunities in Mexico, I think there are some opportunities in Argentina, and certainly Peru still has some significant polymetallic systems that would fit into our portfolio.

Operator

Your next question comes from Haytham Hodaly - Salman Partners.

Haytham Hodaly - Salman Partners

Couple of questions, just for in terms of forecast production guidance of 21 plus million ounces, can you just give us just a rough breakdown? Is there anything unusual that’s changed from last quarter? Is everything still in line?

Geoffrey Burns

Actually pretty much everything is still in line. I mean we’ve had although a few pluses and minuses with respect to our Peruvian operations and doing a little better in Mexico. Steve just said Manantial, we are expecting it to be pretty much bang on target for the year. So, I don’t think the pluses or minuses are worth going into Haytham. We’re pretty much right where we thought it would be.

Haytham Hodaly - Salman Partners

What about CapEx? What’s your forecast CapEx , you have for the second half of the year?

Steve Busby

It’s about $19 million, just under $20 million.

Haytham Hodaly - Salman Partners

Can you give a breakdown of that roughly?

Steve Busby

The biggest part of that is a part of this power line development at Manantial Espejo. We have about $5.7 million set aside to joint venture with the government on a power line. That’s still in the air, we may not spend that. The other big components are at Huaron and Morococha, where we are spending about $3 million each for the rest of the year.

Haytham Hodaly - Salman Partners

That 5.7, that was in the 19 to 20, correct?

Steve Busby

That’s correct.

Haytham Hodaly - Salman Partners

Maybe one last question, just from a housekeeping perspective, the effective tax rate for this last quarter seemed a lot lower than the one before I believe, somewhere in the low 20s, what are your forecasting for effective tax rate for the full year?

Rob Doyle

Haytham, just coming right around 30%, that’s the sort of weighted average of our tax rate that we operate under, in a subject to any unusual items that should converge somewhere around 30%.

Haytham Hodaly - Salman Partners

In what proportion that roughly would be deferred? Roughly, a third I’m guessing.

Rob Doyle

That’s right.

Operator

Your next question comes from Chris Lichtenheld - UBS.

Chris Lichtenheld – UBS

Just a couple of questions, actually, just quickly first on, you just mentioned that you may spend $5.7 million at Manantial, but you may not, if you do spend that, should there be a distinct positive impact on cash out there?

Steve Busby

Absolutely, yes. That investment, which would bring in power line, it’d probably be a 12 to 18 month period to construct the power line. We expect the cost savings with that power line to be on the neighborhood of $8 million per year of cost savings against our diesel fuel power generation today. Most substantial reduction in cash costs there.

Chris Lichtenheld - UBS

Secondly on La Preciosa, I know that you said within 36 months you may be preparing a feasibility, but you mentioned, you’re really pushing on that given the attractiveness, is there a possibility, it will take all the three years or could that be done earlier based on your aggressiveness?

Geoffrey Burns

I’ll take that one Chris. Provided my partners at Orko aren’t listening too closely. Yes, there is a distinct possibility. I don’t want to be too aggressive and give you an earlier time line.

We typically are conservative in our projections and conservative in our timelines, but I think there is a reasonable probability that we could get things done faster, depending on, the work that Michael’s doing on the exploration side, the work that Steven and his team are doing on the metallurgical side of things, and frankly the work Joe Phillips is leading on permitting an organizational structure and water and land acquisition.

So, we are pushing on all those things very strongly and I would venture to say, I’d like to get them done as soon as we can.

Chris Lichtenheld – UBS

So, you may spent more than the $5 million minimum in the first year, is that safe to say?

Geoffrey Burns

Well, I think, our budget this year is, as Michael said, is actually 5.7 to the end of December. So, we really didn’t get going on the ground until May. frankly, kind of mid-May. So we’re going to push pretty hard and easily cover that number and we’re just going to keep ramping forward as the result comes through.

Chris Lichtenheld - UBS

Just a quick question on the Huaron, I noticed grades are down about 10% from the first quarter. Is that sort of the level we should expect for the next several quarters going forward or is that transient?

Geoff Burns

We’re expecting that grade to come back, what happened there is, we have a long haul stop in a fairly high grade areas, that we had poor ground conditions and we lost that stop and it has forced us to go elsewhere that we don’t have the grade. We’re now recovering that stop and we expect to get back into the grades, probably the latter part of third quarter and certainly into the fourth quarter.

Operator

Your next question comes from Shey Ylonen - TD Newcrest.

Shey Ylonen - TD Newcrest

Yes, I just wanted to confirm the La Preciosa budget for $5.7 million, is that part of your $19 million CapEx budget?

Geoff Burns

No, it isn’t. It’s not included in that Shay.

Shey Ylonen - TD Newcrest

Okay, that’s just being expensed.

Geoffrey Burns

Yes, it will be, that will be expensed.

Operator

(Operator Instructions) Your next question comes from Chris Lichtenheld - UBS.

Chris Lichtenheld - UBS

You mentioned there’s sort of obviously a $4 margin or so at Quiruvilca, if prices stayed up here, sort of indefinitely, $13 to $15 silver that are based on the prices, I mean you said early 2010 potentially, but do you have a sense of how many quarters exactly you could run it?

Geoff Burns

There is certainly material that could take it easily to the end of 2010 at these price levels. After that there really is a major decision point, even assuming our cash cost stay where they are and silver stays at 14, because there are couple of capital expenditures that then we would have to look very carefully at with respect to tailings management in particular.

So the easy answer today is, we are going to keep running it as long as it makes money, and that could be till the end of 2010, and you’ll have to ask me again as next year develops how our plans modify or change?

Operator

Your next question comes from Haytham Hodaly - Salman Partners.

Haytham Hodaly - Salman Partners

I would just add a quick question on the income statement. The net gains on commodity and foreign currency contracts. That was the closeout of the zinc and lead hedges was that what that was?

Geoff Burns

Actually, no, because that gain was crystallized in the fourth quarter and the first quarter respectively, so that gain is really because of the weakening of the US dollar against Mexican Peso and Peruvian Sol. So, again, it’s almost all attributable to our ex-contracts.

Haytham Hodaly - Salman Partners

When you actually made that announcement of $7.6 million, was for example, from the zinc hedge. You said that a portion will be settled monthly until December 2009, did that change?

Geoff Burns

All of those contracts are settling as scheduled, but the P&L effect of that sort of those contracts was crystallized in the first quarter and there’s no more income statement effect.

Operator

Thank you. There are no further questions in the queue. Management I would like to turn the conference back to you for any closing remarks.

Geoff Burns

Thanks, Lou. Ladies and gentlemen thank you for joining us again this morning for our second quarter conference call. Again, I’m very optimistic about how we’re going to continue to perform over the balance of 2009. I very much look forward to talking to you in November to discuss our third quarter results. Thank you.

Operator

Ladies and gentlemen, this concludes the Pan American Silver’s second quarter 2009 earnings conference call. This conference will be available for replay on the company’s website at www.panamericansilver.com. Thank you for your participation. You may now disconnect.

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