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Pan American Silver Corp. (NASDAQ:PAAS)

Q3 2009 Earnings Call

November 11, 2009 11:00 am ET

Executives

Geoff Burns - President & Chief Executive Officer

Steve Busby - Chief Operating Officer

Michael Steinmann - Executive Vice President of Geology and Exploration

Rob Doyle - Chief Financial Officer

Kettina Cordero - Coordinator of Investor Relations

Analysts

Steven Butler - Canaccord Adams

Chris Lichtenheld - UBS

Haytham Hodaly - Salman Partners

John bridges - JP Morgan

David Christie - Scotia Capital

Karen Lazarovic - KLP Capital Management

Operator

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

I’d now like to turn the conference over to, Kettina Cordero, Coordinator of Investor Relations. Please go ahead, ma’am.

Kettina Cordero

Thank you, operator and good morning ladies and gentlemen. Joining me here today are Geoff burns, our President and CEO; Steve Busby, our Chief Operating Officer; Michael Steinmann, our Executive Vice President of Geology and Exploration; and Rob Doyle our Chief Financial Officer.

I would like to start today’s conference by mentioning at this call cannot be reproduced or retransmitted without our consent. I also point out that certain of these statements and information in this call will constitute forward-looking statements and forward-looking information within the meaning of applicable securities laws. All statements other than statements of historical fact are forward-looking statements.

These statements reflect the company’s current views with respect to future events, and are necessarily based upon a number assumption and estimates. While considered reasonable by the company are inherent to be subject of significant business, economics competitive, political and social uncertainties and contingencies.

Many of factors with known and unknown could cause actual results, performance, or achievements to be materially different from those expressed or implied by such forward-looking statements, and the company has made assumptions and estimates based on our related to many of these factors.

We encourage investors to refer to the cautionary language and considering our most recent news release dated November 10, 2009, as well as those factors identified under the caption these related to Pan American business in the most recent Form 40F and AIF. Investors are cautions against contributing undue certainty or reliance on forward-looking statements, and the company does not intend or assume any obligation to update these forward-looking statements or information, other than as required by law.

I will now turn the call to Geoff Burns, President and CEO.

Geoff Burns

Thank you, Catena and good morning and welcome to Pan American’s third quarter earnings release conference call. What a difference a year makes, only 12 months ago we were in the midst of the global economic crisis it our financial markets and complete this array. Metals prices were collapsing and with them the share prices in the company’s like ours that produce metals were in free fall.

We were reengineering our mining plans. We’re cutting capital, people and wages and were squeezing our costs everywhere we could. At the same time, we were working hard to complete two key project developments, Manantial Espejo in Argentina and San Vicente in Bolivia. It was a difficult period of time for Pan American, and for a lot of companies, not only in the mining business, but in all economic sectors.

It is truly rewarding today to be able to talk to you about our third quarter and to realize that the extremely difficult decisions and consequent actions that we undertook a year ago have clearly paid dividends. “What are those dividends?” First, we produced a new quarterly company record of 6.4 million ounces of silver up 31% from the same period a year ago and up 10% as compared to our second quarter of this year.

Second, our quarterly gold production also climbed to over 28,000 ounces, also a new company record and up another 12% from the second quarter of this year, which was also a company record at that time. Gold is now clearly our most significant byproduct, accounting for almost 20% of our total l revenues.

Third, our consolidated cash costs declined 26% to $4.91 per ounce, well 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 earlier this year.

Fourth, our cash flow from operating activities before working capital adjustments was a very healthy $43 million or $0.50 per share with the majority of that cash making its way directly into our bank account and finally, we posted net income of $17.4 million or $0.20 per share, an increase of 172% as compared to the third quarter of last year and $7.2 million higher than our second quarter of this year.

Clearly, the swift recovery in the price of both silver and gold, and to a lesser extends the recovery in base metal prices have contributed to this performance, but there’s no doubt in my mind that the actions and plans we implemented a year ago, when we are in full on crisis mode have allowed us to post one of the best quarters in the company’s history.

With that, I’d like to turn it over to Steve, Michael and Rob, who are joining me here this morning. Who I know will provide you with additional color and commentary on our operation, our development projects, our exploration programs, and our financial condition. Steve.

Steve Busby

Thank you, Geoff and good morning, ladies and gentlemen. I’m very proud of all of our operations and project accomplishments during the third quarter and pleased to be able to provide you a more detailed description of our performance.

Starting off in Argentina, we had a solid state operating at Manantial Espejo, where we produced just over one million ounces of silver at an excellent cash cost of negative $3.11 per ounce, thanks to better than planned gold production of over 20,000 ounces that better than forecasted gold prices.

We have successfully repaired the failed grinding mill motor, that I described last quarter, without incurring any material disruptions to our production and have been steadily improving operating performance ever since. The plant processed nearly 170,000 tons of ore in the quarter, which is 92% of over designed capacity and we have reached design capacity during the months of September and October.

The silver mill feed grades for the quarter at Manantial Espejo was 214 grams per ton and 88% was recovered, just shy of our expectations. However, this was more than offset with the better than expected gold grade of 3.9 grams per ton and better than expected gold recoveries of plus 95%.

We are expecting slightly improved silver production at similar cash cost production from Manantial Espejo in the fourth quarter of this year as our initial employee training efforts are now being enhanced with real time experience and the local operator gaining more confidence in their own abilities resulting in a stable operating environment.

Our Peruvian operations produced just over 2 million ounces of silver in the quarter, at a cash cost of $8 per ounce of silver, which is right on our previous production forecast from the second quarter despite continuing to incur higher smelting costs with the closure of the Doe Run smelter, which has added over $1.35 per ounce to the cash cost of operating mines in Peru, in addition to not selling any of our silver stock pile material which is used by the smelter for flexes.

Higher base metal prices have helped to offset the effect of the Doe Run smelter closure in Peru. We continued to advance our mine deepening project that we are on, that was started in 2006 and although the development and mining of the higher grade ore zones from these areas, will be ramping up slower than we had planned due to the need for more expensive ground support efforts than we had originally anticipated.

We forecast the ramp up for the higher grade production from the 180 level deepening will slowly increase from the current 2,000 tons of ore per month to an expected steady state, 9,000 tons of ore per month by the third quarter of 2010. The slower ramp up that’s pushing us to advanced developments and opens mining and other areas, which generally produce lower great ores at higher cash cost.

As a result, our production that we’re on for the next few quarters is forecasted to slowly ramp up about 10% from the current 910,000 ounces of silver per quarter to close to one million ounces of silver, with costs decreasing at the same rate from the current $10.35 per ounce to around $7.50 per ounce at current base metal prices, once we achieve the steady state production from the deep developments.

We are very pleased with the solid performance out our Morococha mine, where we are producing right at planned rates of nearly 750,000 ounces of silver per quarter at cash cost of $5.33 per ounce. We anticipate this production rate and cost base will continue for quite sometime, assuming the base metal prices stay relatively consistent. Simultaneously, we are advancing our long term multiyear underground mine accessed and the infrastructure projects, which were designed to allows to sustain current performance far into the future given the significant resource base we have at Morococha.

As reported last quarter, we are continuing reduced yet profitable operations at Quiruvilca given current metal prices and have the plan in place to place the mine in current maintenance should this situation deteriorate. Quiruvilca produced more than 360,000 ounces of silver in the third quarter, at a cash cost of $7.69 per ounce, which includes capital expenses and we expect this will continue into early 2010.

Our mines in Mexico continue to perform solidly, with Alamo Dorado producing 1.6 million ounces of silver at a cash cost of 4.37 per ounce, and La Colorada producing 885,000 ounces of silver at a cash cost of $7.92 per ounce for the third quarter. Gold production at Alamo Dorado once again exceeded our expectations. The mine produced nearly 5,000 ounces for the quarter against our forecast of approximately 3,000.

It is now essentially mine dollar high grade zone as the Phase I pit at Alamo, and we will begin to see production rates decline as we strip down to the Phase II pit, which happily may actually grow into our Phase III pit with some of the recent extension drill result the that Michael Steinmann will describe later in this call. As such, we are forecasting the fourth quarter silver production at around 1 million ounces for Alamo Dorado. The quarterly production rate will into mid to late 2010, when we’ll start to see again high grade ore from our Phase II pit.

We are expecting continued solid performance from La Colorada for sometime to come and we are very pleased with the opportunity extend the lives of both of our Mexican mines given some of the recent successes we have seen from our exploration efforts. As promised last quarter, I’m extremely pleased to be able to provide you details of our outstanding start up at San Vicente, Bolivia, where we produced over 870,000 ounces of efforts at a cash cost of $5.81 per ounce during the third quarter, only our second of operation, since commissioned in the new plant and expanded mine.

Ramp up continues well ahead of our projections, with the plant processing just over 600 tons per day during the quarter, against our design of 750 tons per day. We were able to feed higher grade ore to the plant during the quarter, which resulted in us able to produce silver ounces that essentially gold plant capacity rates. We anticipate continued success in the wrap ups towards design throughput raised in the last quarter of the year, and our fee grades will decline somewhat so we can sustain current silver production rates and cost.

We have completed our winterization projects at San Vicente and continued to gain comfort and confidence in the operation as the operators become familiar with the new plant expanded mine. It is a pleasure to observe the outstanding accomplishments of the local work force, and the obvious welcomed economic stimulus this mine expansion and plant construction project has brought to the local community of San Vicente.

We are optimistic, that our success at San Vicente is being viewed positively in the country and could incentives additional incentives additional foreign investigation into a region that so desperately needs it. As you well can imagine, our mine development and operating teams are excited about future prospects that have law pursues in Mexico and the sweeter projects goes secured with the Aquiline acquisition particularly of course the Navidad project in Argentina.

We have motivated development team with proven talents to maximize the value of these assets, and can’t wait to get things kicked off. This is a very exciting team to be part of the Pan American Silver organization, and our future looks very bright indeed. As Geoff mentioned overall, Pan American Silver had another solid quarter, producing a record breaking 6.4 million-ounces of silver at cash cost of $4.91 per ounce, better than our expectations, thanks primarily to outstanding performance from the operating teams to gather with better than expected by product metal prices. We are confident we will achieve our 2009 production and cost guidance and stand ready to tackle our next development project.

I will now turn the call over to Michael Steinmann for if exploration update.

Michael Steinmann

Thank you, Steve. Good morning. Q3 better only a quarter of record silver and gold production, but also a record quarter for our exploration drilling, we completed over 28 ounces and 500 meters of diamond and RC drilling in our Brown & Greenfield programs, including La Preciosa silver project in Mexico. Year-to-date, this standard 65,800 meters of drilling at our operations and projects, already beyond our full year planned program of 53,000 meters.

No doubt about the share got the lion’s share of this drilling it over 14,000 meters during Q3. During the last five months we drilled 78 holes operation for a total of 22,367 meters and collected over 3,300 samples. Our joint venture partner or for silver published still results in a press release on September 8, 2009. As expected, all of the info holds intersected the main Martha Vein as well as hanging and foot wall structures.

Martha is an up to 40 meter wide structural corridor containing several sets of more narrow high grade veins, did lower grade into wells. DP 09374 returned 32 meter 68 at 245 grams silver, and 0.38 grams gold, including the high grade rain of 3 meter at 1.17 grams silver and 2.18 grams gold. All 359 return 34.77 meters have 202 grams silver and gold 3072 return 22.45 meters at 289-gram silver and 0.51 grams gold.

Additional detail from these and other holds have been published by Orko Silver in September ‘08, 2009. Most of the holes serve to infield drilling for the mark of structure as far at the most important structure on site, but also some around in new exploration targets like the La Oroya and product team events have been partially drilled and more exploration targets will be tested in the coming months.

Infield drilling will continue with the maximum spacing of 50 meters in order to upgrade part of the resource into Marta indicated categories. Besides the drilling we work very active on preliminary resource modeling and possible mining methods. The technical studies are in progress and metallurgical work is advancing well rotation and time at reached us. Our goal is to complete the feasibility study and be position to make a production decision by the end of 2010.

The Brownfield programs of their operating lands advanced very well, too during Q3. They’re currently drilling at every of our operations and there’s one additional exploration project in Peru. Like in Q2, La Oroya returned by far the highest grade intersect especially from the drilling on the vertical expansion of the NC2 vein. The wide sulfide structure it shows continues mineralization and is still open is up into the east. Vein is up to ten meters wide where an average of about five meters.

Besides the main structure, there are hanging and we discovered several replacements in manotos in the limestone. Up to date, we drilled out about 250 meters along strike of this 750 meter long structure, and approximately 25 meters space. The deepest hole reached level 610 about 200 meters below the actual mining level.

Some of the most notable intersects are 6 meters, 65 at 2,021 grams silver, 3 meters, 46 at 4,536 grams silver, 8 meters, 44 at 765 gram silver, 6 meters 43 at 1,000 grams silver. 13 meter 30 at 617 gram silver and 6 meters 80 at 1,342 grams silver. In addition, all of these holes returned up to three gram gold and 15% to 25% combined. So far we drilled 26 holes in this zone and every one of them returned an economic grades.

We’re currently working on a new resource and reserve estimation of La Colorada and will release the overall results as soon as we have finished. I have no doubt that the sulfide veins two lines will form an important part of the La Colorada production during the coming years and provide the plant with new high grade base metal ores.

At Alamo Dorado, we drilled other 3,700 meters year-to-date, targeting the south and northern of the pit as well as some areas below the current pit shell. The gain of reserves to the north and southeast of the pit has been offset by a loss to the southwest due to a structure complication. We are currently drilling on a possible plan Phase III pit extension as Steve mentioned, because the depreciation due to production we don’t anticipate any material reserve change Alamo Dorado at the of the year.

As I mentioned, the brown field programs are in full swing at our operations and the green field programs are advancing well at San Vicente and Manantial Espejo with substantial land holdings around those mines. Additional surface leakage mobilizing to San Vicente as we speak and Manantial Espejo drilling with two rigs at surface and one rig underground to take advantage of the good climate during the coming spring and summer months.

These are two of our most prospective properties and I’m sure we will see important new results during the first six months of 2010. I’m extremely pleased with the expiration of the results we achieved so far in 2009. All of this new information will included in general reserve and resource update, which I will share with you in January 2010. I’m confident that once again, we will more than replace all of the resources ounces we’ve mined in 2009.

Now to Rob, for the financials.

Rob Doyle

Good morning, ladies and gentlemen. Our financial results in Q3, 2009 were just what you would expect from Pan American. Given our grand production base and the improving price environment for metal we produce. We reported record sales of $118.6 million to the 49% increase from a year ago on the back of record silver and gold production.

Our mine operating earnings were a solid $34.7 million more than double mine operating earnings from a year ago and up 48% from Q2. Net income was $17.4 million, which equals $0.20 per share, again more than double net income from a year ago and up 70% from Q2.

Cash flow generated from operations before working capital movement was $43.3 million, bearing any double to $22.1 million from one year ago and 20% higher than Q2. The strong cash flow from operations and capital expenditure significantly reduced to $5.8 million for the quarter, we banked $28 million in cash during the quarter.

These excellent results could have been even better had we been able to sale more of the metal we produced during the quarter. However, concentrate shipments and Doe Run refining schedules around quarter end resulted and as building upon inventory position by almost 400,000 ounces of silver, 4000 ounces of gold and 9600 tons of zinc concentrate during the quarter. We’ll be rising hard to reduce these inventory levels and recognize the associated sales and profits with this third quarter production in the fourth quarter.

“What is the heart of our improving financial results?” There are two main factors. Firstly, the addition of high margin production from the Manantial Espejo and San Vicente mines, which have ramped up extremely smoothie reaching commercial production in the first quarter of operation off the construction activities.

Secondly, the continuation in and recovery of metal prices resulted in a further expansion of our margin per ton in Q3. Average margin per ton of ore milled has gone from about $10 in Q4 2008 to $53 in Q3 2009. Our total number of tons moved has increased by 50% over that same period. Simply puts our results reflect the benefits of increased throughput of higher margin ore combined with improving price environment for the metals you produce.

Our statement of operations for Q3, 2009, did contain several items that are worth further discussion. Sales increased by $39.1 million from the comparable quarter in 2008. Almost entirely due to increases in the quantities of silver and gold sold, which increased by 30% and 450% respectively, these increases in quantity sold also resulted in our cost of sales increasing by 17% and our depreciation charge almost doubling in Q3 of 2009.

However the increased sales significantly outweighed the increase in cost of sales and depreciation, resulting in mine operating earnings that more than doubled to $34.7 million. Included in the net income in Q3 2009, was a non-cash foreign exchange loss of $2.4 million, and the revaluation of the company’s cash, and other working capital, and future income tax balances that we dominated in local currencies. This last result outraged by a mark-to-market gain of $2.7 million, on an equity warrant position held by us at quarter end.

Moving to the balance sheet, our working capital went from to strength to strength during the quarter, increasing by $41.6 million. Most of the increase in working capital is reflected in higher cash and short term investment balances, which rose by $37.1 million. As I mentioned earlier, our Doe Run concentrated inventory increased during the quarter, which added additional $10.3 million to our working capital.

Finished the quart with a working capital position of $258 million, and cash and short term investments of almost $150 million no debt; from a cash flow perspective, cash flow from operations before working capital movement was $43.3 million a jump of $7.2 million from Q2 2009, and only doubled the operating cash flow for the comparable quarter of 2008.

With the construction of Manantial Espejo and San Vicente now behind us, our capital expenditure for the third quarter on property, plant and equipment was only $5.8 million. The combination of sharply higher operating cash flow, and significantly lower capital expenditures, resulted in Pan American increasing its cash balance by $28 million during the quarter. We expect to see our cash balances continue to build in the coming quarters as all of our mines are generating positive cash flow.

Lastly, I’d like to give you a brief updates on the Doe Run Peru situation. Doe Run of the La Oroya smelter improved, which was closed during the third quarter and remains closed today. Doe Run Peru was the largest buyer with the company’s copper concentrate production and the only buyer of the stock pile material. We were able to sale a couple of concentrates to other buyers during Q3 2009.

However, the terms of such sales were significantly inferior to the term of the company’s concentrated contracts with Doe Run Peru are approximately $2.7 million that’s before tax effects. This added approximately $1.35 per ounce to the cash costs at our Huaron mines in the third quarter. Some impacts are expected on future results of the company for at least the period that the Doe Run smelter remains closed.

We do believe that the recent developments surrounding Doe Run Peru have been positive, especially the fact that the Peruvian congress gone to the 30 month extension for the completion of their Pan obligations. We are optimistic that the smelter will resolve its financing requirements and resume operations in the first half of 2010. By that, we still retain the debt provision of $4.4 million that we established in the second quarter related to the accounts receivable balance from Doe Run Peru and have made no adjustments to that provision in the quarter.

With that I’ll hand it back to Geoff for closing comments.

Geoff Burns

Thanks, Rob. Okay, you have now heard in detail what we accomplished last quarter. Now let’s look at where Pan American is headed in and why I remain as optimistic as ever about the prospects to the balance of the year and beyond. We are maintain our production forecast for 2009, and are planning to produce 25.1 million ounces of silver, not including the production from our Quiruvilca mine, which is still moving toward care and maintenance.

Although at current price levels we maybe compelling to revisit this decision. We are maintaining our cash cost forecast of $6 per ounce for the year, but I think it is safe to say that we are very likely do much better, given the fact to the first nine months of 2009 our cash cost were $5.57 per ounce.

We should more than double actually almost triple our gold production this year, and like silver are maintaining our 2009 guidance for gold at 85,000 ounces. Again, frankly, given the fact that we have already produced over 74,000 ounces of gold so far this year I think we will do quite a bit better here. As Michael indicated we are going to continue to aggressively explore at all of our operations with particular emphasis at Manantial Espejo, San Vicente and obviously La Colorada.

Just because I think it is worth repeating, we have clearly discovered an exciting new extension at the MCTU zone at the La Colorada mine. 6.65 meters at over 2 kilos of silver per ton, which is almost 22 feet at 65 ounces of silver per ton has to register as one of the best drill holes that Pan American has ever had. All I can say is stay tuned as we continue to explore this tremendous target.

We are going to continue to push hard at Manantial Espejo and are targeting a full feasibility study by the end of next year. The Martha vein is proving up nicely. We’ve identified 0.5 dozen new explorations targets that will be methodically exploring in the coming months, and as I said before, it is our opinion that La Preciosa is a tremendous property in a great location and an absolutely the right stage and we can create additional value by bringing this project forward.

There’s a defined silver resource in excess of 135 million ounces of silver, it is in Mexico, and literally within an hour of our established infrastructure in Durango. With no debt over 258 million in working capital our heavy capital expenditures behind us we are well positioned to continue to generate significant positive cash flow and earnings for balance of this year and beyond.

I would like to finish my remarks by taking a brief moment to talk about the friendly offer we mailed on October 30, to purchase Aquiline Resources Inc. I truly see this as a tremendous transaction and an ideal combination and a chance to create additional value for both Pan American and Aquiline shareholders. It is transactions that will Pan American’s financial horsepower and proven mine development capability with Aquiline’s world class primary silver deposit Navidad.

Secondly, and perhaps more importantly, I see Pan American as uniquely positioned to move Navidad forward. As you know, we have recent completed the construction commissioning of the Manantial Espejo in Argentina and consequently our intimately familiar with the Argentina landscape and political sensitivities with in our most country. The key to unlocking the ability to develop Navidad lives in my opinion and our ability to address be sensitivities and were proactively with the government distribute and with the local communities that surround Navidad.

If we are successful with this acquisition, which is open for acceptance until December 7, about a month from now, the potential production growth from developing Navidad will be transformational to Pan American. With La Preciosa and hopefully Navidad, Pan American will have reloaded the growth pipeline at that time when we are generating tremendous cash flow and have the people and resources available to take our new development opportunities and move your company to another level. It is clearly good reason to be optimistic about Pan American’s future.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Steven Butler - Canaccord Adams

Steven Butler - Canaccord Adams

Question for you guys and I guess and Rob I guess for you. You mentioned the shipments of lower than production 400,000 ounces of silver, 4,000of gold, 9600 tons, I think it was zinc. What was that earnings impact or revenue impact of that would be roughly, I think you said $10.3 billion build in working capital? What would be the related earnings as best you would estimate that could fall into Q4 from Q3 assuming Q3 prices?

Steve Busby

We haven’t done that analysis. I mean just as a rough guideline, the increase in inventory number you quoted there of $10.3 million, that’s of course the cost if you apply in our mine operating earnings margin to that cost basis, you might get some idea of, what we would expect in terms of operating earnings on that inventory, but that would be about the earnings guidance I could give you right now. We haven’t done that analysis.

Geoff Burns

I can help you a little bit there, Steve. I think our average cash cost you saw was just under $5. As 400,000 ounces we treat this zinc and gold as byproducts as you know. So you are looking at $17 prices, you’re look at $12 margins on those prices. So that would not be a bad guideline to use and then apply a 30% tax rate to it.

Steven Butler - Canaccord Adams

I think we can work that out, Geoff. Michael, on the La Colorada is it’s the NC2 zone, is I correct? Where it spatially again? I think you said a couple hundred meters below and what’s the rough dimensions of the zone if terms of strike with depth?

Michael Steinmann

I think one of our main veins that we are mining at the moment in the upper levels, through producing the sulfide for our sulfide plant mostly and this is the continuation deeper down and further to the east. So the dimension that I know from upper levels is about 750 meters long. I mentioned that, we drilled the deepest hole 200 meters down, we drilled out about 250 meter this month close to 300 meters, so less than half of this land.

I have some indication on the other half, that one or two holes we drilled that high grade continues to, how deep it’s going to go down, I can’t tell you at the moment. It’s in limestone, we see start getting some realized replacement structures on replacement in mantos in this limestone, but compared to how deep it goes down at one of the limitations we have is a pretty big crosscut to drill this in a good angle.

It come probably from surface, because it’s too deep down, but the drill is opposite from our levels that we currently access for production. So stay tune for the drilling during the coming months as we continue to east, but rough dimension I think that you should look at the mantos about 750 meters by maybe 200 meters down.

Steven Butler - Canaccord Adams

Thickness roughly?

Michael Steinmann

Average rig about 5 meters will be good.

Operator

Your next question comes from Chris Lichtenheld - UBS.

Chris Lichtenheld - UBS

Just first on the Doe Run situation. The alternative that you’re taking in term of concentrates, it doesn’t look like it has gotten a whole lot worse relative to the second quarter. Is that true that in terms of steady state until you get La Oroya back in the earning?

Rob Doyle

That is true. In fact we’ve probably seen a fairly significant improvement in the concentrate market. So we have many managed to commit some of your 2010 production into contracts to other buyers of concentrate at significantly better terms than we realized in Q2 or Q3. So there’s some relief in that market by the looks of it.

Chris Lichtenheld - UBS

Can you just remind us as you move at Alamo Dorado, as you move into the next phase now? What silver and gold grades might look like over the next couple of quarter and how many quarters until you expect, you may get backup to higher grades in second phase?

Rob Doyle

While we’re mining stripping down that pit will probably be seeing grades drop to the 90, somewhere between 80 and 100 grams I would say, and once we’re back into the high grade, we’ll see the plus 125 to 150 type gram.

Chris Lichtenheld - UBS

Gold will move similarly, or is it the whole little more for steady?

Steve Busby

Gold is a little bit more steady, but we do expect it to drop back to the more historic kind of 0.3 gram range, but yes, it somewhat follows that silver to some degree.

Chris Lichtenheld - UBS

Just last question on the out line offer if I can, I think are you seeking an opinion from the urgency Argentina Antitrust Security and I’m just wondering if you can update us as to the timing on when that opinion may come or how does if you have any feedback?

Geoff Burns

Yes, Chris, we made application especially as in advanced drilling and we did that basically on the day, we mailed and we’re expecting a reply in 30 days. I can tell you that it’s our, Argentine Legal Counsel tells us this is kind of just a matter of due course, that there is no concern that will have any problems with the antitrust ruling. It’s just a matter of making the application.

Operator

Your next question comes from Haytham Hodaly - Salman Partners.

Haytham Hodaly - Salman Partners

Just a couple of easy questions, what do you expect your run rate G&A for your run rate next year to look like next year?

Geoff Burns

This is a bit of an unusual quarter worse, I think above $4 million, we had a couple of compensation related catch up accruals to do. I think, we’ve been running prior to that in both between $2.7 million to $3 million a month or a quarter, and I don’t expect that should be our normalized rate.

Haytham Hodaly - Salman Partners

Then maybe just effective tax rate guidance for next year maybe...?

Rob Doyle

It should be coming in around 30% as we were this quarter.

Haytham Hodaly - Salman Partners

In terms of timing of closing of the Aquiline, what’s time and again refreshing my memory?

Geoff Burns

The expiring date for tendering Aquiline shares’ is December 7, at 9:00 p.m. Eastern Standard Time, subject to us there is a period likely extension of 10 days that as per our agreement on the support, or excuse me on the support agreement, but it’s December 7 is the date.

Operator

Your next question comes from John bridges - JP Morgan.

John bridges - JP Morgan

The inventory this 400,000 ounces, how much of that is actually going to be available? How much is simply filling up the pipeline as you expand your operations?

Geoff Burns

That’s actually out turned material. It’s not in the circuits anywhere. It’s simply material that just for timing and location of where that material was in the transportation it didn’t get sold. So, that’s not a matter of pipeline, so I guess, it’s just exactly where it was in our sales process.

John bridges - JP Morgan

On your lower cash cost, how much of that was related to base metals maybe concentrate adjustments helping you this quarter?

Geoff Burns

The base metal and by-product, it’s not just base metal, it’s gold by-product now coming out of Manantial Espejo in Q3 2008, our by-products credits were about $8.27 per ounce, this year, that same number was about $9.69 an ounce. So you can see there’s roughly $1 plus in there that related strictly to metal prices, and as well, increased gold quantities and we’re producing more gold now.

Just one further point you raise the additional price adjustments. Actually, we did significant adjustments in Q3, which I was quite surprised at. It was only about a $300,000 benefit from sales provisions are being priced in Q2 that were repriced in Q3. It was just a function of when open QPs were actually finalized given that actually passes traded flat to slightly down in July, but for the quarter it was only about a $300,000 benefit.

John bridges - JP Morgan

I’m glad that you guys are surprised by these things too.

Rob Doyle

That’s totally unpredictable.

John bridges - JP Morgan

Then finally, are there any dates that we can look to for progress with respect to the rules in pit mining in Argentina next year?

Geoff Burns

As I said in our conference, when we announced the deal, we had some meetings with some very senior official from industrial government and much of that discussion is going to remain confidential. Here what I said on that call, I’m going repeat it is “If the acquisition closes as we expect in the middle of December and we’re going to immediately start a three prong program of drilling, metallurgical testing, environmental impact assessment, and feasibility study.”

I guess that’s four prongs not three. We would expect to produce a feasibility study in approximately 12 to 14 months time. I do not believe that the mining was in schedule will have any impact on us, whatsoever when we reach the end of that timeframe and are ready to make a production decision.

Operator

Your next question comes from David Christie - Scotia Capital.

David Christie - Scotia Capital

Just a quick review on the provisional pricing, so 300,000, mark-to-market for the quarter was there any settlement gains?

Rob Doyle

That was a combination of...

David Christie - Scotia Capital

That’s the combination. For Aquiline and for the Navidad project, what are your spend next year as far as drilling etc.?

Geoff Burns

We’re just doing our budget reviews in a couple of week’s time actually and obviously, we’re assuming that we are successful. I would anticipate us spending somewhere in the neighborhood of $10 million to $15 million in 2010, but that is subject to the meeting that I’ve just talked about.

Operator

Your final question comes from Karen Lazarovic - KLP Capital Management.

Karen Lazarovic - KLP Capital Management

I was wondering, what your hedging program is if have on and what I would look like for 2010?

Geoff Burns

The company’s philosophy firstly on silver is not to hedge the exposure that we have to silver. So our hedging program is really confined to byproducts particularly base metals and from time-to-time currencies. The moment we have a very small residual zinc program in place, which runs out at the ends of December and the same that goes to our currencies.

We have a small Mexican peso and Peruvian sol position, which also in December. So for 2010, we actually won’t have any hedge positions open. However, the subcommittee of the Board of Directors and the Hedge Committee does review those businesses from time-to-time and we maybe adding to them depending on the circumstances.

Karen Lazarovic - KLP Capital Management

So for your gold byproducts you get the spot price?

Geoff Burns

That’s correct.

Operator

There are no further questions at this time. I would like to turn the call over to Geoff Burns, President and CEO. Please go ahead, sir.

Geoff Burns

Thank you, operator. Thanks everybody for joining us this morning and we will look forward to talking to you again in the coming months, hopefully to discuss a successful transaction with Aquiline and to update you on our advances at La Colorada in term of exploration and finally to probably talk about our year end earnings early in 2010. Thanks very much.

Operator

Ladies and gentlemen, this concludes the Pan American Silver’s third quarter 2009 earnings conference call. If you would like to listen to a replay of today’s conference, please dial 303-590-3030 or toll free 1-800-406-7325, using access code 479606. Thank you for your participation. You may now disconnect.

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Source: Pan American Silver Corp. Q3 2009 Earnings Call Transcript
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