Pan American Silver Corp. Q4 2009 Earnings Call Transcript

Feb.16.10 | About: Pan American (PAAS)

Pan American Silver Corp. (NASDAQ:PAAS)

Q4 2009 Earnings Call

February 16, 2010 11:00 AM ET


Kettina Cordero - Coordinator of Investor Relations

Geoffrey A. Burns - President & Chief Executive Officer

Steven Busby - Chief Operating Officer

Michael Steinmann - Executive Vice President of Geology and Exploration

Robert G. Doyle - Chief Financial Officer


Ankush Agarwal – JP Morgan

Haytham Hodaly - Salman Partners

Steven Butler - Canaccord Adams

Shey Ylonen - TD Newcrest

Mike Jalonen – Bank of America

Chris Lichtenheld – UBS

David Christie - Scotia Capital

Andrew Kaip - BMO Capital Markets



Hello, this is the Chorus call conference operator. Welcome to the Pan American Silver Corporation's Fourth Quarter 2009 Results Conference Call and webcast. (Operator Instructions).

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

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 reminding our listeners that 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, that while considered reasonable by the company are inherently subject of significant business, economics, competitive, political and social uncertainties and contingencies.

Many factors, both 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 included in our most recent news release dated February 15th, 2010 as well as those factors identified under the caption "Risks related to Pan American’s business" in the company’s most recent Form 40F and AIF.

Investors are cautions against attributing 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.

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

Geoffrey Burns

Thank you Kettina and good morning and welcome ladies and gentlemen to Pan American’s 2009 fourth quarter and year-end earnings conference call. On our last call in November of last year, I concluded by saying that I was as optimistic as I had ever been about the prospects for Pan American for the balance of 2009 and beyond.

It is extremely gratifying to be here with you this morning to talk about our fourth quarter of 2009 and full year’s performance and to know that we have delivered on that optimism.

Pan American had an outstanding fourth quarter which helped propel us to the best year in the company’s history as indicated by all our key productions and financial metrics.

Here is a quick overview about how 2009 ended. To produce the company record 23 million ounces of silver, buoyed by production from our newest mines, Manantial Espejo in Argentina and San Vicente in Bolivia, our 14th consecutive year of silver production growth.

We produced the company record 100,000 ounces of gold. Our consolidated cash cost declined to $5.53 per ounce, of silver well below our previous guidance of just over $6 per ounce. We generated record mine operating earnings of $126 million.

Our cash flow from operating activities before non-cash working capital adjustments was a company record, $151.7 million or $1.73 per share. Our metals sales increased to a company record $455 million. We recorded full year net income of $62 million or $0.71 per share, also a company record.

And lastly, on the strength of continued successful exploration drilling and with the completed acquisition of Aquiline Resources and it's Navidad silver project, our proven and probable reserves, plus measured and indicated resources climbed to close to 1 billion ounces of silver.

2009 was truly an exceptional year for Pan American Silver. Company records for silver and gold production, company records for earnings and cash flow, two new mines smoothly commissioned and in commercial production and the biggest acquisition in the company's history, which added the largest undeveloped primary silver deposit in the world to our portfolio.

As good as 2009 was, the real question is always, what's next? Before I get to that, I'd like to turn the call over to Steve, Michael and Rob who will undoubtedly provide you more detail on the year and fourth quarter we just completed from an operations, exploration and financial perspective. Steve.

Steven Busby

Thank you, Geoff and good morning, ladies and gentlemen. I'm very pleased to provide you a discussion of our excellent operations and project accomplishments for both the fourth quarter and the entire year of 2009, as it has been Pan American Silver's best year yet using virtually any measure.

I will also include details of our 2010 production and cost guidance for each property as part of my commentary.

Starting off in Argentina, we had another incredibly solid, steady state operating quarter at Manantial Espejo where we again produced just over 1 million ounces of silver for the third consecutive quarter, which is a world class achievement given that we are now just celebrating our very first anniversary of production.

Manantial also produced 19,533 ounces of gold, which is also very consistent to the average gold production over the previous two quarters before. The cash costs and that of byproduct gold for the fourth quarter was a $0.11 per ounce and is better than our guidance of $2.25 per ounce, thanks to better than planned gold production and price.

For the entire year, Manantial Espejo produced just less than 3.8 million ounces of silver and nearly 72,000 ounces of gold at a cash cost of negative $0.84 per ounce with the byproduct gold credit.

The silver production fell 12% short of our original 4.3 ounce guidance, whereas the gold production exceeded the original 63,700 ounces guidance by 13%, almost entirely due to realizing better than expected gold and less than expected silver grades than predicted by our mineral model.

Overall operating cost spending was pretty much inline with our expectation. However, the higher than expected gold production and price led to significant improvements over our original annual cash cost guidance of $2.25 per ounce.

For 2010, we are forecasting improvements in silver production up to 4.6 million ounces, offset by lower gold production to 62,600 ounces based on a full year of steady state mine production using our latest estimate from a revised mineral distribution model.

We are not expecting significant changes to our unit operating cost per ton of ore process and therefore predict a cash cost of $3.26 per ounce of silver given the reduced gold production.

Our Peruvian operations produced 1.9 million ounces of silver in the fourth quarter at a cash cost of $6.75 per ounce, which is slightly below our previous production forecast of 2 million ounces but at a lower than our forecasted cash cost of around $8 per ounce.

As I mentioned last quarter, we are continuing to ramp up production from our mine deepening projects that we’re on slower than had originally been projected given some of the challenging ground conditions we have encountered there.

For the year of 2009, Huaron produced just under 3.6 million ounces of silver at a cash cost of $9.96 per ounce, which was below our original guidance of 4.2 million ounces of silver at a cash cost of $8.14 per ounce.

We are still forecasting the ramp up of higher grade production from our 180 level deepening project to a steady state 9000 tons of ore per month or about 15% of our overall production sometime by the third quarter of 2010.

Therefore we are forecasting Huaron's production to slowly increase from the 800,000 ounces produced in the fourth quarter at a cash cost of $10.77 per ounce, to around the mid 900,000 ounces at a cash cost of the mid $8 an ounce by the third quarter of 2010, once the full production rate of the high grade ore from the 180-level is realized.

This will yield a production forecast of 3.7 million ounces of silver at a cash cost of $8.72 per ounce for the full year in 2010 at the Huaron mine.

Elsewhere in Peru, we are very pleased with the solid performance that both Quiruvilca and Morococha where we produced 361,000 ounces of silver at Quiruvilca and 741,000 ounces at Morococha during the fourth quarter at cash cost of $7.69 per ounce at Quiruvilca and $5.33 per ounce at Morococha.

For the year of 2009, Quiruvilca did not close as we had forecasted and actually produced 1.4 million ounces of silver at a cash cost of $8.64 an ounce, generating an healthy profit for the company at the realized metal prices.

Morococha produced slightly better than the forecasted 2.7 million ounces of silver at a cash cost of $5.86 per ounce, which was less than the $7.82 per ounce guidance we gave for 2009 given the better than expected by-product credit pricing.

We are forecasting continued solid performances from both these operations through out 2010 with Quiruvilca producing 1.4 million ounces of sliver at a cash cost $6.95 per ounce while continuing to absorb all previously capitalized expenses into operating costs given its short life expectancy.

We further forecast Morococha to produce 2.7 million ounces of silver at a cash cost of $4.13 per ounce during 2010, continuing its solid production blend of silver with base metals.

We are also forecasting a restart of the Doe Run La Oroya smelter in Peru sometime before the end of second quarter and therefore forecasting 200,000 ounces of silver production from our pyrite stockpiles at a cash cost of $4.05 for the year of 2010.

Our mines in Mexico ended an outstanding year with Alamo Dorado producing just under $1.1 million ounces of silver at a cash cost $5.07 per ounce for the quarter with the lower grades from the phase II pit layback being processed as we had predicted.

For 2009 Alamo Dorado exceeded our original expectations producing $5.3 million ounces of silver at a cash cost of $4.51 per ounce versus our original guidance of $4.8 million ounces at a cost of $6.32 per ounce.

La Colorada also had a very solid fourth quarter producing 946,000 ounces of silver at a cash cost of $7.66 per ounce, exceeding our original full year expectations by producing just under $3.5 million ounces of silver at a cash cost of $7.55 per ounce compared to our original guidance of $3.35 million ounces at a cost of $8.01 per ounce.

For 2010, we are forecasting Alamo Dorado to produce $4.2 million ounces of silver at a cost of $6.87 per ounce due to lower average silver fee grade of 90 gram per ton gold grad of 0.29 grams per ton, as we continue to strip our phase II layback.

At La Colorado we are forecasting $3.6 million ounces of silver production at a cash cost of $8.73 per ounce with our silver grades falling from the 414 gram average in 2009 to 370 gram predicted for 2010 in addition to expecting a power rate hike by the National Utility Company perhaps early in the new year.

It is indeed a pleasure to report a pleasant surprise from our Bolivian San Vicente mine, who has the honor of being Pan American Silver's largest producing mine for the fourth quarter of 2009, achieving just under 1.1 million ounces of silver at a cash cost of $6.56 per ounce.

San Vicente has set a new standard for Pan American Silver startups, exceeding all of our expectations and producing 2.6 million ounces of silver at a cash cost of $7.07 an ounce for the entire year compared to our original guidance of 1.9 million ounces at a cost $6.98 an ounce.

San Vicente exemplifies our proven abilities to build and operate quality mines, which were already being deployed at our new exiting projects. We expect a solid 2010 for San Vicente, forecasting 3 million ounces of silver production at a cash cost of $7.01 per ounce as we process more tons of near reserve grade ores than we enjoyed during the 2009 startup when we had access to significant quantities of higher grade ore following the delay in the middle startup.

As mentioned, our mine development teams are happily deployed at our future prospects with teams in place and working at the La Preciosa joint venture project in Mexico, the Pico Machay project in Peru and of course the very exciting Navidad project in Argentina.

We are enhancing the organization to attack these projects and advance them rapidly. We are busy organizing the significant scooping work that will be undertaken on these new projects during the year of 2010.

Overall, Pan American Silver had another solid quarter producing 6 million ounces of sliver at a cash cost of $5.38 per ounce, thanks again to the outstanding performances of our operating teams who are highly motivated and focused on quality for Pan American Silver’s operations and projects.

I am extremely pleased to report that our 2009 consolidated production was 23 million ounces at a cash cost of $5.53 per ounce, exceeding our original production guidance. For clarity, I’d like to reiterate our 2010 production by mine as follows.

For Manantial Espejo, for 2010 we expect to produce 4.6 million ounces of silver. Quiruvilca we expect 1.4 million ounces. At Huaron, we expect 3.7 million ounces, Morococha we expect 2.7 million with the pyrite stockpiles contributing 200,000.

Alamo Dorado we are anticipating 4.2 million ounces of production, where La Colorada we are expecting 3.6 and San Vicente 3.0 million ounces. That gives us a total production forecast for 2010 of 23.4 million ounces of silver and we are expecting a consolidated cash cost of $6.40 per ounce.

Overall, sustaining capital for our operations will be $44 million, which is significantly less now that we don’t have the large construction projects and developments.

With this, I’ll now turn it over to Michael Steinmann for the exploration update.

Michael Steinmann

Thank you very much and good morning. 2009 was one of our most successful exploration years ever. We have been very active in our brown field programs that have advanced several new projects.

We finalized nearly 99,000 meters of diamond drilling, successfully earning 36.8 million contained ounces of proven and probable silver reserves to our operating mines.

As I anticipated during earlier conference calls, the new reserve additions were more than sufficient to replace the 26.6 million contained silver ounces mined during the year. Including the 2009 production, our proven and probable silver reserves increased approximately 5% to 234 million ounces as of December 31st, 2009.

Looking at our resources, the additions are even more impressive due to the acquisition of Aquiline Resources last year. The Company's aggregated measured and indicated silver resources increased to 711 million ounces, up from the 82 million ounces we carried at the end of 2008, but inferred silver resources more than doubled to 229 million ounces.

I would point out that these resource numbers do not yet include our 55% interest in the La Preciosa joint venture project, which has a resource published by Orko Silver of a 135 million ounces.

During each quarterly conference call in 2009 I updated you on the result and advances of our green and brown field exploration programs. These efforts and results are reflected in the 2009 reserve and resource statements, which we finalized as of 31st of December 2009. Details for each operation have been published in our press release on February 11 and are available on our corporate website.

No doubt that the most important reserve increase came from La Colorada. You may have seen the exceptional exploration results we published in January from the vertical expansion of the NC2 vein, the primary source of sulfide ore at the mine.

Average through width intersections of 4.5 meters with the maximum of over 12 meters carrying in many holes multi kilograms of silver and high base metal grades resulted in the reserve increase of 67% to 30.4 million ounces at La Colorada. This reserve position will extend the mine life by at least three years.

The drilling will continue at La Colorada during 2010, with a program of over 12,000 meters and I'm confident that we will see similar results from the remaining un-drilled areas of the NC2 and NC3 veins.

2009 was also a successful year for our Peruvian operations where we once again, more than replaced the reserves mined. Total reserves at Morococha increased by 8% to 38 million ounces at year end.

Exploration activities at Huaron yielded an increase of 4% or 6.7 million ounces of silver, net of the 4.5 million ounces mined during the year. Huaron continues to have the largest proven and probable silver reserves in the company's portfolio with more than 64 million ounces.

I could not be more pleased about our brown field exploration results, adding corporate-wide, 36.8 million ounces of proven and probable silver is a huge accomplishment. As you know, several of our mines are open-pit operations where reserve addition opportunities are more limited.

Replacing our large annual production and increasing our proven and probable reserves by 5% is a clear statement for a solid geological work done at each site. I would like to mention that these results do not include any significant exploration at San Vicente and Manantial Espejo as programs there started later in the year with the southern hemisphere spring.

For 2010, Manantial Espejo and San Vicente, we have a combined exploration worth of $2.9 million including about 24000 meters of diamond drilling. We will follow up on some very high grade extensions of Maria, (Sol) and Litoral veins we have discovered last year.

Adding value to brown field exploration is one of our core strength and we proved it again 2009 with a solid reserve increase. Our measured and indicated resources were transformed during 2009 with the acquisition of Aquiline resources.

As mentioned, our total measured and indicated silver resources increased to $711 million ounces. Together our proven and probable reserves and measured and indicated resources have increased to almost $1 billion ounces of silver, one of the largest resource books in the silver sector.

Brown field exploration activities during 2010 will focus again on reserve replacement at our operations where we expect to invest approximately $8.2 million including 89,000 meters of diamond drilling.

However, our main focus will be on resource conversion and new discoveries of both Navidad and La Preciosa. Consequently we have stepped up our green field exploration budget to a record of $15.4 million including over 94,000 meters diamond drilling planned for 2010.

With Navidad, La Preciosa, (inaudible), Ariana and Atlanta exploration projects improve and to brown field programs around each of our operations, we have an exciting and very busy exploration year ahead of us and I’m looking forward to reporting on the advances and result during the quarterly conference calls.

I would like to pass now, on to Rob for the financial review.

Robert Doyle

Thanks Mike good morning ladies and gentlemen. What a difference a year makes. Our strong financial results in Q4 reflected the combination of a growing production base, a healthy price environment for the metals that we produce, and a clean balance sheet, which all translated into record sales and cash flow, solid earnings and now a dividend for our shareholders.

Net income for the fourth quarter was $27.8 million, which equates to $0.31 per share compared to a loss from a year ago of $0.41 and an increase in earnings of 60% from Q3. We reported record sales of a $154.4 million, which was a staggering 234% increase from a year ago on the back of higher quantities of metal sold at much higher prices. Q4 sales were 30% higher than Q3 sales.

Our mine operating earnings were a record $57.3 million compared to our mine operating loss from a year ago of $9.9 million and an increase of 65% from Q3. Cash flow generated from operations, before working capital movements was $52.5 million, an improvement from one year ago of $64 million and 21% higher than Q3.

With cash flow from operations at record levels and capital expenditure significantly reduced to $5.3 million for the quarter, we banked $41.5 million in cash and short-term investment during the quarter.

The record operating cash flow propelled to company's working capital position to record $273.2 million at December 31, 2009. With these excellent results in the fourth quarter it is not surprising that we set some new financial records for the full year as well.

Pan American's annual sales in 2009 were a record $454.8 million, an increase of 34% over 2008 sales. Operating cash flow, before changes in non-cash working capital was $151.6 million in 2009. That’s a $51.7 million improvement on a comparable cash flow from 2008. And lastly mine operating earnings in 2009 jumped to a record $126 million, an increase of 35% over the prior year.

On just about every financial metric, 2009 was our best year ever at Pan American. Certainly the improvement in metal price environments that we saw in 2009 helped to drive the company’s financial performance and far exceeded our forecast.

However, we were able to deliver on our operational targets, which put us in the best position possible to benefit from the resurgence in metal prices. The addition of high margin production from the Manantial Espejo and San Vicente mines has transformed the overall quality of Pan American’s portfolio of mines.

The best illustration of this is our margin per ton of ore milled. Our average margin has gone from about $10 in Q4 2008 to about $60 in Q4 2009. Our consolidated total number of tons milled has increased by 40% over that same period. Our results reflect the benefit of increased throughput of higher margin ore combined with an improving price environment for the metals we produce.

I’d like to make a few comments related to our statement of operations for Q4 2009. Besides from favorable metal prices, the massive increase in sales in Q4 compared to any quarter before was partially due to the fact that we did go down on our zinc concentrates and precious metal Doray inventory for sales of approximately $10.2 million from the sale of production over and above what was produced in Q4.

Understanding this inventory clear out in Q4, for the full year we still ended up building our overall inventory balances as we increased our Doray inventory position by almost 600,000 ounces of silver and 7700 ounces of gold, partially offset by a reduction of approximately 5000 tons of concentrate inventory. This is the main reason behind the $20.8 million increase in our inventory accounts on our balance sheet over the last year.

Included in net income for Q4 2009 was a non-cash fair value charge of $2.1 million in recognition of a delay we have experienced in the recovery of refundable VAT in Argentina, and our expectation is that collection may continued to be delayed for an 8 month period.

We also recorded $2.3 million donation charge for a contribution that the company made to the construction of a new earth science building on the University of British Columbia campus. Excluding these two items, our adjusted earnings for the quarter would be have been $32.2 million or $0.36 per share.

Our effective tax rate for the fourth quarter was about 36%, which is higher than what we would have expected primarily due to some non-detectable expenditure and a change in tax rates in Mexico. For the full year the effective tax rate was more inline with our expectations at a little over 30%.

Moving to the balance sheet, our working capital continued to strengthen during the quarter increasing by $15.5 million. Most of the increase in working capital is reflected in higher cash and short-term investment balances, which rose by 43.6 million in the fourth quarter.

You may notice that our accounts payable increased by about $30 million from the end of Q3, with most of that increase a direct consequence of the accruals related to the Aquiline transaction, many of which have been settled early on in 2010.

We finished the quarter with a working capital position of $273.2 million and cash and short-term investments of $193.1 million and no debt.

We still retain the doubtful debt provision of $4.4 million that we established in the second quarter related to our accounts receivable balance from Doe Run, Peru and have made no adjustments to that provision in the fourth quarter.

The company has been able to sell copper concentrate to other buyers during Q4 2009. However, the terms of such sales were significantly inferior to the terms of the company's concentrate contracts with Doe Run, Peru by approximately $2.2 million before tax effects.

This added approximately $1.30 per ounce to the cash costs at our Peruvian mine in the fourth quarter. Similar impacts are expected on future results of the company for at least the period that La Oroya smelter remains closed.

There were several large movements in the long-term portion of our balance sheet in the fourth quarter related to the accounting of the Aquiline transaction. For the 93% ownership interest that we acquired in Aquiline before December 31, 2009, we calculated the fair value for the consideration paid as $543.6 million.

That consideration was allocated to assets and liabilities acquired, the two main items being mineral property plants and equipment which was valued at $811.6 million and future income tax liability of $255.7 million.

As this is the convention with purchase accounting, the future income tax liability arose as a result of a difference between the tax basis and the book values of the acquired assets and liabilities.

I’d like to draw your attention to the fact that this liability, which is deemed to be mostly denominated in Argentine Pesos is likely to introduce significant non-cash volatility into our future earnings as we are required mark-to-market this liability with an offsetting entry in the foreign exchange gain or loss account.

From a cash flow perspective Q4 was exceptionally pleasing. Cash flow from operations before working capital movements was a record $52.5 million or $0.59 per share, a jump of $9.2 million from Q3 2009.

Our capital expenditures for the fourth quarter on property, plant and equipment were $5.3 million with an additional $3.3 million capitalized as part of the Aquiline transaction.

The net result, Pan American increased it's cash balance by $35.2 million during the quarter and invested an additional $6.3 million in our short-term investments portfolio. We expect to see cash balances continuing to build in the coming quarters as all our mines continue to generate positive cash flow.

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

Geoffrey Burns

Thanks Rob. Before I dive into our plans for 2010 and beyond, I’d like to mention another historic event for Pan American. I’m assuming that most of you have seen the other release that we sent out yesterday morning. The Board of Directors approved a semi annual dividend policy and as a consequence we declared the first dividend in the company’s history.

While modest at $2.5 per common share, I hope this will be the start of the same trend we have set with our production growth. The Board will determine a specific dates for the amount of future dividends on an ongoing basis. But the policy has been established, and our first dividend will be pay on around March 12 of this year.

Pan American has matured to a point where we feel that we can comfortably begin returning cash to our shareholders rewarding them for their continued support on an ongoing basis without compromising our future growth.

And now to the future, as you've heard from Steve, in 2010 we're planning to produce 23.4 million ounces of silver, a modest increase from the 23 million we produce last year. We will see full year of at capacity silver production from both Manantial Espejo and San Vicente, which will more than offset the expected production decline from Alamo Dorado.

Our gold production is likely to decline to approximately 85,000 ounces due to lower gold rates at Manantial Espejo. However, we are forecasting increase production of zinc, lead and copper in 2010 as San Vicente's base metals production is added to that from our Peruvian operations.

We're forecasting higher cash costs of $6.46 per ounce in 2010. Strengthening local currencies, increased wages and energy costs and slightly lower by-product credits are expected to increase our costs in the coming year. Having said this, with silver trading above $15 per ounce today, our cash margins are still going to be extremely healthy.

Turning to growth, we clearly have refilled our development pipeline in 2009. In April, we signed a joint venture agreement with Orko Silver to advance the La Preciosa project in Mexico. As the operator of this development project, we intend to spend approximately $9 million to complete a program of exploration and delineation drilling, metallurgical testing and engineering culminating in the completion of a feasibility study for La Preciosa by the end of this year.

In January of this year we completed the acquisition of 100% of Aquiline and now have 100% control of the world class Navidad silver projects in Argentina. Our 2010 plans call for the investment of approximately $16.5 million in continued exploration and project development at Navidad to advance to a full feasibility report, either late in 2010 or early in 2011.

It is also our intention to complete a feasibility or scoping study for Navidad closer to the middle of this year and I look forward to sharing the results of this work with you so that you can see for yourselves why I am so excited to be the new owner of Navidad.

As you know, the province of Chubut currently has a ban on open-pit mining. I can tell you that we have already started working with the government to address this issue and we intend to continue to work with provincial authorities and all stake holders to demonstrate that we can develop this extraordinary asset in an environmentally and socially responsible way for the benefit of everyone involved.

What I think is important to understand is that, while the law in Chubut contains language banning open-cut mining throughout the province it also contains language that already allows for the designation of zones where open-pit mining will be welcomed. It continues to be our firm expectation that the province will make use of this provision and designate the area around Navidad as one of those zones where open-cut mining will be allowed.

Obviously, we are watching these developments closely and hope to be able to share some good news with you on this front sometime in the middle of this year. With these two projects in our hands, I am confident we will deliver explosive growth going into 2012 and 2013.

We have ample financial resources, as Rob just mentioned, with $193 million in cash plus significant cash flow generating capacity. Coupled with the technical horsepower, I have no doubt that we are explicitly positioned to double our production by 2013. We have never been positioned so well to continue to grow our business.

I'm going to conclude my remarks today, the same I did in November of last year. There are many concrete reasons to be excited about Pan American's prospects and I continue to be as optimistic as I've ever been about your company and its future.

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

Question-And-Answer Session.


(Operator Instructions) Your first question comes from Ankush Agarwal – JP Morgan.

Ankush Agarwal – JP Morgan

First question is on the pyrite stockpiles, if I remember correctly the logic behind the suspension was that there was no alternative to the Doe Run smelter and now we see you are forecasting some production in 2010. So does that mean you’re expecting Doe Run to come back or have you found an alternative?

Geoffrey Burns

No, we are expecting the Doe Run smelter to reopen this year, probably sometime or hopefully sometime in the second quarter, so as a consequence of that we’re anticipating resuming shipments of the pyrites to the smelter. No, we do not have an alternate purchaser.

Ankush Agarwal – JP Morgan

So could you elaborate a little bit on the progress you're seeing there or --?

Geoffrey Burns

I think they certainly have reached some agreements with the government. That has been previously announced. They've been working not only with their union but the creditors, of which we are one in order to formulate a concrete plan that will allow them to be financed and to reopen.

That work is ongoing and we are participating to a certain degree in that and as I said, we believe those are very good possibility, a probability pardon me, that they will reopen in the second quarter of this year.

Ankush Agarwal – JP Morgan

Could you please elaborate a little bit more on the thought process behind the dividend policy?

Geoffrey Burns

I think its very straight forward Ankush. As we've outlined, we are starting to be in a position where we are comfortable to start returning dividends or cash to our shareholders.

We're generating very significant cash today and we see that continuing going forward and feel comfortable that we can do that and reward our shareholder without at all compromising our future ability to grow the company.


Your next question comes from Haytham Hodaly - Salman Partners.

Haytham Hodaly - Salman Partners

Just with regards Quiruvilca, that continues to surprise, you read in your comments or somebody's comments indicated that it was originally expected to close towards the latter part of last year, this year we're in for another 1.4 million ounces.

What's allowing you to keep, outside of the silver price obviously being where it's at, what's allowing you to keep that open, how long you can keep going for?

Steven Busby

Hi Haytham, Steve Busby here. The big driver there, the base metal prices, the zinc pricing primarily. At the end of 2008 you remember zinc prices fell to $0.53 a pound, type and numbers. And at $0.53 a per Quiruvilca is not a positive cash generator I’ll say that. But at today’s prices, which are plus $0.90, it’s generating a healthy profit for us.

Haytham Hodaly - Salman Partners

Okay, so let’s say it prices is going to stay where they are at right now how long do you think keep this thing going for?

Geoffrey Burns

Well, one of big drivers is how much development and exploration work we do ahead of us. We think it’s a typical underground mine, it’s been operating 80 years, there is definitely resources out there that, should we choose, we can test and develop and probably continue this for sometime. With what we know today in terms of reserves and resources, I think we got a solid two years ahead of us and it could go one beyond that depending on exploration success.

Haytham Hodaly - Salman Partners

So it’s a plan at this point to consider your outlook for zinc and determine whether to start spending money on it again?

Geoffrey Burns


Haytham Hodaly - Salman Partners

Maybe just to clarify on the gold grades. I know you mentioned that at 0.29 grams per ton was the gold grade at Alamo Dorado. Do you recall what your Manantial Espejo gold grade is expected to be?

Geoffrey Burns

Yes, we are forecasting 2.86 for Manantial Espejo in 2010.

Haytham Hodaly - Salman Partners

Okay, what's the silver grade associated with that?

Geoffrey Burns


Haytham Hodaly - Salman Partners

225, okay. And then with regards to exploration indicated that $15.4 million would be spend. How much of that do you think that should be expense this year? How much will it hurt the income statement in other words?

Geoffrey Burns

Haytham, we don’t have the exact breakdown on that number off hand. Rob can get back to you with that.

Haytham Hodaly - Salman Partners

If you could that will be great. Just more question with regard to CapEx. CapEx of $43.6, you broke down 16.5 for Navidad $9 million at La Preciosa. What are some of the other large components?

Geoffrey Burns

Actually the Navidad and La Preciosa, the majority of that will be expensed in 2010 because we are largely, while we're pre-feasibility on both of those assets, so we're going to expense the vast majority of that.

The capital expenditure is, I'm going to say, relatively dispersed throughout other operating assets and the biggest thing is, if you recall last year, we did cutback on our capital programs. Typically we run somewhere around a $1 to $1.50 per ounce on average overall assets on our capital replacements sustaining basis.

This year we have a little bit of catchup to do, related to tailings dam's expansion in Peru and in Mexico as well as we still have the infamous power line project at Manantial Espejo that we set money aside for, which would be a pretty significant expenditure if we can come to some agreements with the government to actually get that project moving.

Haytham Hodaly - Salman Partners

So that would be outside of the 43.6 correct?

Geoffrey Burns

That would be included.

Haytham Hodaly - Salman Partners

That would be, okay. Last question, G&A excluding stock base compensation just a forecast for 2010? It was about two half this year in total so that would put to somewhere around 10? That sound reasonable?

Geoffrey Burns

Our G&A last year was just little over $12 million. That did include kind of the one time donation to the University of British Columbia as was mentioned. So the G&A being slightly above where we were last year, somewhere around $11 million for 2010. I can't give you the breakdown exclusive of stock base comp at the moment.

Haytham Hodaly - Salman Partners

Does that $11 million incorporate stock base comp?

Geoffrey Burns

It does indeed.

Haytham Hodaly - Salman Partners

It does, okay perfect. Thank you.


Your next question comes from Steven Butler - Canaccord Adams.

Steven Butler - Canaccord Adams

Question for you, maybe to clarify maybe Rob when you sent around an e-mail perhaps to all the analysts or interested parties maybe to clarify sustaining capital exclusive, I guess of the – if I’m adding the numbers, is it $15.4 million for exploration plus $9 million for La Preciosa, plus $16.5 for Navidad? Is that the grand total of potential expense? Exploration seems like obviously a big number, but recognize the accounting treatment?

Geoffrey Burns

The exploration dollars, the 15.4 is actually included within the expenditures that were summarized for La Preciosa and Navidad. So, a portion of the $16.5 million at Navidad and a portion of the $9 million of La Preciosa is for exploration and Michael was just outlining some of the total exploration on the green fields programs.

But, I think Rob can provide a bit of clarity to the actual breakdown to yourself and any other analysts who are interested.

Steven Butler - Canaccord Adams

As it relates to La Preciosa, you talked in your press release about a feasibility study by late 2010 early 2011. Is there anything before that Geoff, in terms of potentially or a preliminary economic assessment study or scoping level at La Preciosa?

Geoffrey Burns

Yeah we are going be – I don’t want to time myself too tightly. But yes, we are looking to do a scoping study probably near the middle of this year and at that point we’d have to carefully assess whether we should do, as you call the PEA, and a fileable report that we can disclosure to the investment community and our shareholders.

Steven Butler - Canaccord Adams

Is there a resource update pending on La Preciosa? I know the late date of resources was Feb ’09, but maybe in the hands, still of Orko, is it?

Geoffrey Burns

Yes, I mean we’re now drilling programs and we’re collecting the data and we’re working the resource model. Again we wouldn't put anything out without a PEA in our hands in terms of a resource update. So, again I would look towards the middle of the year to get both of those bits of information.

Steven Butler - Canaccord Adams

And Rob, just to clarify could you give us the after tax amount of your adjusted earnings, those two items again? Thanks.

Robert Doyle

Actually those two items wouldn't be tax effective. So you could just add them to adjusted earnings of $32.2 million or $0.36 for the quarter.

Steven Butler - Canaccord Adams

$32.2 million, the one item we read on the release, what was the second item again, a donation to UBC?

Robert Doyle

Correct, for the earth science building, that was a $2.3 million donation.


Your next question comes from Shey Ylonen - TD Newcrest.

Shey Ylonen - TD Newcrest

Just if you could detail a little bit more as to why cash costs at Manantial Espejo are going up considerably in 2010, or at least you’re forecasting them to?

Geoffrey Burns

The real driver there Shey, is the lower gold production. Where this year we had gold production – gold production this year we ended up 71,900 ounces. Next year we’re only projecting 62,400 ounces.

We’re actually showing in the budget a slight reduction in our unit cash cost per ton milled, but because of that lower gold production we don't get the big divisor on the gold credit.

Shey Ylonen - TD Newcrest

Okay, I see. And I know you mentioned in the release changes in royalty rates. Can you provide any specifics as to one operation those are applicable to?

Geoffrey Burns

I think its referring to the slight change in the provincial royalty in Manantial Espejo. Originally at the start of 2009 we were subject to a 1.8% basic royalty there and now its been increased to 3% because of the economic conditions of the province in Santa Cruz and Argentina, which is the maximum that the provincial royalty can increase to.

Shey Ylonen - TD Newcrest

And are you able to just clarify how much silver was actually sold in the quarter as opposed to being produced?

Geoffrey Burns

We can get back - Rob will get back to you with that number.


Your next question comes from Mike Jalonen – Bank of America.

Mike Jalonen – Bank of America

I guess I was intruded by your comments, you have explosive growth for 2012 and 13. I'm just wondering what has to happen between now and December 31st, 2011 for this to occur and I assume you mean explosive growth in silver outputs?

Geoffrey Burns

I do indeed Michele. I think the, obviously the two things that are sitting there are the development and construction decisions ahead for both La Preciosa and Navidad.

Assuming positive feasibility reports on both by late this year or very early next year and then moving into construction mode, I could see very conceivably, La Preciosa in a position to start producing and maybe third quarter of 2012 followed by Navidad very early in 2013.

And you put those two things together with where we are today and I stand by my comment of explosive growth. Obviously there are lot of things that have to line up for all that, all those things to happen. We’re certainly going to work very hard on the items in that list that we control, which is the engineering, the metallurgical work, the resource delineation drilling etc, but we are still constrained as we go forward by what prices it will be at the permanent time we’re making our decisions and what the investment returns look like at that those points of time.


Your next question comes from Chris Lichtenheld – UBS.

Chris Lichtenheld - UBS

Just a quick question on the guidance. The cash flow guidance that you’ve given for 2010, did those also assume that by the second half of this year La Oroya will be back up?

Geoffrey Burns

No, they do not. Pardon me, yes they do.

Chris Lichtenheld – UBS

Okay, they do. So worst case scenario, if that persisted through the third quarter, will it at $.30 still to those Peruvian operations would that be fair?

Robert Doyle

That is fair, although in our budget we did assume that when La Oroya does get up and running that we won’t go back to the original Doe Run contract terms that we have. So we assume that kind of a blended term for our concentrates in the second half of 2010. Though I would say somewhere roughly in the middle of that number, so an extra $0.70 or so.

Chris Lichtenheld – UBS

And I would also be interested in all that exploration break down if you do send it out.

Robert Doyle



(Operator Instructions). Your next question comes from David Christie - Scotia Capital.

David Christie - Scotia Capital

I'd also like to hear that exploration run down, so if Rob could you e-mail that as well. Just on Manantial Espejo, I was wondering if you give me sort of the grade profile for the next couple years? What's going to happen there as far as gold and silver?

Geoffrey Burns

We're kind of expecting the grades that I reported for 2010 to be sustained over the next several years, 3, 4, 5 years even.

David Christie - Scotia Capital

So the production just say sort of flat where it was for 2010 then for next few years?

Geoffrey Burns



Your next question comes from Andrew Kaip - BMO Capital Markets.

Andrew Kaip - BMO Capital Markets

Can you provide some addition clarification on Huaron and increasing production and what the combination of factors are that are causing that?

Steven Busby

This is Steve Busby again. At Huaron we've been working on a basically a four year project to deepen the mine below the main drainage tunnel. We have a significant drainage tunnel at the 250 level, the 250 meters above 4,000 meters that's been draining the mine for quite a number of years, 50 plus years.

We have started four years ago going beneath that drainage tunnel to develop our next level down which is the 180 level and in order to do that we had to install some pretty significant pumping to pump the water that drains down into that level back up to the 250 and out through the drainage tunnel, plus we have that a lot more ventilation and ramp access and we also extended a shaft or reactivated a shaft in the area to allow production.

The complexities of that project are pretty severe given that kind of water flow, half a cubic meters per second type of water flows we are dealing with there. And the project turned out to be a four -- it’s turning out to be a 4.5 year type of project, where we expected it originally to be something closer to three years.

Because of that, our high grade deposits or high-grade reserves all occur beneath the 250 level, we are having to mine lower grades than we had desired in the time we are waiting to get that level opened up.

We now have the infrastructure in place, we are now focused on developing the ore deposits beneath that 250. It just takes time to complete all the underground advances and slope preparation works and we are expecting as I said in this third quarter that we’ll be slowly ramping up from about 2000 tons a month coming out of the180, today to the 9000 tons a month we expect in the third quarter, which will be significantly higher grade.

Andrew Kaip - BMO Capital Markets

Can you give us a sense of what the grade is going to be from the deeper part of the mine?

Steven Busby

We expect the 180 will be above the 200 grams silver, 210, even as high as 220, where when we are above the 250 we are seeing grades drop down below the 180 gram type figure in rough numbers.

Andrew Kaip - BMO Capital Markets

Then I had one other question. What were the cost implications of the power rate hike at La Colorada?

Geoffrey Burns

La Colorada right now, when you look back to 2008, we had seen power rates increase to close to $0.12 per kilowatt-hour. And then in 2009, after the economic crisis, the government did put a program in place and reduced the power cost we've been enjoying, somewhere around 5.5, something less than $0.06 a kilowatt hour.

We’re anticipating that they are going to raise the rates somewhere between that $0.06 and $0.12 and we have budgeted $0.10 a kilowatt hour and the impact to us is somewhere in the neighborhood of a couple of hundred thousand dollars per month more cost.


This concludes the time we have for questions. I will now turn the call back to Mr. Burns.

Geoffrey Burns

Thank you operator, and thank you ladies and gentlemen for joining us here this morning. I'm very much looking forward to our first quarter conference call, which will probably be sometime in the middle of May and being able to give you an update on our progress at that point in time, as well as celebrate with everyone Canada's gold medal men's hockey final victory.

And with that, I'd like to conclude the call.


Ladies and gentlemen, this concludes today conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


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