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Pan American Silver Corp. (NASDAQ:PAAS)

Q1 2010 Earnings Call Transcript

May 11, 2010 11:00 am ET

Executives

Kettina Cordero – Coordinator, IR

Geoff Burns – President and CEO

Steven Busby – COO

Michael Steinmann – EVP, Geology and Exploration

Rob Doyle – CFO

Analysts

Haytham Hodaly – Salman Partners

Chris Lichtenheldt – UBS

Steven Butler – Canaccord Adams

Shey Ylonen – TD Newcrest

Operator

Welcome to the Pan American Silver first quarter 2010 earnings conference call. (Operator instructions) I’d now like to turn the over the conference 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 President and CEO, Geoff Burns

our Chief Operating Officer, Steve Busby; our Executive Vice President of Geology and Exploration, Michael Steinmann; and Chief Financial Officer, Rob Doyle.

I would like to start this 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 not necessarily based upon a number assumption and estimates, that while considered reasonable by the company are inherently subject to significant business, economics, competitive, political and social uncertainties and contingencies.

Many known and unknown factors 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 or related to many of these factors.

We encourage investors to refer to the cautionary language included in our most recent news release dated May 10, 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 cautioned 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.

Geoff Burns

Thank you Kettina. Good morning ladies and gentlemen and welcome to Pan American’s 2010 first quarter earnings conference call. As is become our normal format, I am going to start by making some brief opening comments, and then let Steve, Michael, and Rob provide more fulsome descriptions of our operations, project development activities, exploration programs, and overall financial position as of the end of the first quarter of this year.

Overall, I'm pretty pleased with our first-quarter results. Relative to the first quarter of last year, we significantly increased our silver and gold production, reduced our cash cost, increased our bottom-line net income and generated more cash flow from operating activities and absolute free cash flow.

Our headline metrics for the first quarter of 2010 are as follows. The silver production increased by 13% to 5.5 ounces. We increased our gold production by 34% to 27,896 ounces. Our cash cost declined 27% to $4.35 per ounce of silver, net of by-product credits.

We increased our sales by 88% to 132 million. Our net income rose 189% to 19 million or $0.18 per share. We increased our cash flow before changes in our operating cash flows, before changes in non-cash working capital by 127% to 42.6 million or $0.39 per share. And lastly, our net free cash flow was almost $20 million right into the bank [ph].

While our Huaron mine had a difficult first quarter, all of our operations performed at or above expectations, and we were within 3% of our quarterly silver production forecast. This is clearly the benefit of having a diversified asset base, where in any given quarter production shortfalls at one of our operations can be offset by positive production performance at one of our other mines. This was the story in Q1.

While our silver production remains on track to achieve our full year guidance of 23.4 million ounces, our gold production truly provided a positive surprise. Driven by better than anticipated gold grades at Manantial Espejo, we produced almost 7000 ounces more gold in the first quarter than we had expected. As a consequence, we have raised our full year gold production forecast to 95,000 ounces from 85,000 ounces, and have reduced our cash cost guidance to $5.90 per ounce as our by-product credits will benefit from the increased gold production and higher gold prices.

We also paid our first dividend in the company's history during the first quarter. It is extremely rewarding to realize that your company has grown and evolved to a point where we can begin to return cash to our shareholders, while maintaining the financial strength to fund their future growth objectives. It will be our intention to continue this dividend on a semi-annual basis, and we will announce future dividends and payout dates as they are approved by the board.

Now, I would like to turn things over to Steve, who will talk about our operating mines and development projects. Steve.

Steven Busby

Thank you Geoff and good morning ladies and gentlemen. It is my pleasure to provide you a report on our first quarter 2010 mine operating performance and project development advances. We are focused this year on sustaining solid production performances at our seven operating mines, while bolstering our future growth potential with outstanding mine development projects, including our world-class

Navidad deposit in Argentina.

I'm going to start off my comments by discussing our one operation that had a challenging quarter. At Huaron in Peru our production was impacted by about 25%, after we made a decision to temporarily shut down an area of the mine that we had been trying to develop into a more productive mechanized mining area over the last couple of years.

The ground conditions in this area were worse than we had expected, and we made the decisions to temporarily shut down the area, so we could step back, redesign and enhance both the ground control systems and the mining method. Despite this setback, we remain committed to successfully deploying mechanized mining methods that stand to significantly improve productivities and reduce cost at our long life Huaron mine.

We are expecting continued reduced productivity and higher costs at Huaron for the next 4 to 6 months, as we redesign and restart the mechanized mining method. Meanwhile, our Quiruvilca and Morococha operations in Peru delivered solid production results as expected during the quarter. Overall, our Peruvian operations produced 1.7 million ounces of silver at a cash cost of $6.92 per ounce, which was below our planned production of 1.9 million ounces, but the mines did deliver better than our forecasted cash cost of $7.50 per ounce, thanks primarily to better than planned by-product base metal prices.

We are also currently addressing labor related challenges in Peru, where 2009 profit-sharing distributions fell shy of expectations due in part to the closure of the Doe Run smelting facility. We feel we have now satisfactorily addressed the expectations at all of our operations, and we are not expecting any further impacts beyond the six-day work stoppage at Huaron that we reported in April.

Overall in Peru, we are forecasting similar performance in Q2, followed by improvements coming from Huaron in late Q3 and into Q4 of this year, all the while continuing solid performances at Quiruvilca and Morococha.

Our mines in Mexico provided another outstanding quarter exceeding our expectations, producing over 2 million ounces of silver at a cash cost of $6.67 per ounce with better than planned production at lower than planned cost at both La Colorada and Alamo Dorado mines.

We were particularly pleased with La Colorada performance, where we are enjoying the fruits of the previous two-year investments in underground mine ventilation and dewatering systems that are now yielding productivity benefits far beyond those we had anticipated. This coupled with the exploration successes in extending the Candelaria structure to death that served to further stimulate an already focused and performing work force.

We see many years ahead of solid and sustained production at La Colorada. Alamo Dorado also continues to exceed expectations with our operators executing continual improvements to their productivities, enhanced by some positive surprises to our mineral resource realizations, particularly in the Phase 2 pit layback, where the initial exploration drilling was somewhat limited due to topographic constraints.

We are expecting steady state performance at La Colorada for the rest of the year, and an increase in production at Alamo Dorado as we begin pulling some production from the bottom of our higher grade Phase 1 pit beginning in the second quarter.

In Bolivia, our San Vicente mine performed above expectations, producing over 840,000 ounces of silver for the company at a cash cost of $7.18 per ounce. We are excited with the benefits we are realizing from the upgrades made to the tailings pond [ph] water recycle systems, and starting to achieve regular mill throughputs, substantially exceeding our design rates.

We are expecting continued steady state production from San Vicente for the remainder of the year, and actually feel there is an upside to the mill throughput.

In Argentina, Manantial Espejo had an excellent quarter, producing nearly 1 million ounces of silver at an incredibly low cash cost of negative $6.63 per ounce, as outstanding gold production of nearly 21, 800 ounces coupled with higher than anticipated gold prices exceeded our byproduct credit expectations.

We continue to experience a modest shortfall in our silver grades, but with much better gold grades relative to our mineral model, and have an extensive effort under way to reconcile the differences and improve our abilities to predict future performances. In the midst of this reconciliation effort, the operations are performing solidly in both productivity and cost measures, and we are very pleased with the competency of the workforce we have assembled in Argentina.

In the meantime, while we complete our mineral model enhancements, we are forecasting similar Q1 production with slightly less gold production, and therefore slightly higher costs for the remainder of the year at Manantial Espejo.

Our project development teams are enthusiastically advancing studies at both the La Preciosa joint-venture project in Mexico, and our new Navidad project in Argentina. At La Preciosa, we are advancing the deposit infill drilling, have initiated critical geotechnical studies, which will determine the appropriate mining methods according to the ground conditions present, and have substantially advanced the metallurgical studies, honing in on the preferred process flow sheet alternatives, while we continue to collect environmental (inaudible) data on the site.

All of these studies are fundamental in determining the feasibility to develop a mine on the known current resources. Meanwhile, we are advancing additional exploration efforts on this site, which could influence our schedule for the feasibility work, depending on what discovery successes may be encountered along the way.

I cannot adequately describe the excitement we have as we begin to get our hands around the world class silver deposits at Navidad since mobilizing our teams to the field early in January of this year. With the current workforce 130 employees, plus another 50 contractors mobilized on-site, we are in full swing with infill drilling, geotechnical and hydrologic studies, metallurgical sampling and testing, mine design, environmental baseline studies, and community relations programs.

We have launched a number of third-party consultants, including M3 Engineering of Tucson, Arizona, who will assist us in developing the process plant and site infrastructure designs, and assemble a mine scoping study in the third quarter of this year. In addition, we continue to work closely with the Chubut provincial government, who has been drafting a revised mining law that would enable development of the Navidad mine, taking every opportunity we can to highlight the benefits of mining, and demonstrate Pan American Silver’s proven mine development capabilities.

We are encouraged and remain confident that the mining law in Chubut will be amended, allowing for open pit mine development at Navidad. It is too early in the process to comment on our findings today, however, it is easy for me to say that without a doubt Navidad is a positively unique silver occurrence, and early indications have us extremely excited relative to the size of the silver mineralization and the potential magnitude of the economics of a mine development project on this site.

As per our previous report, we expect to achieve our full year consolidated company silver production guidance of 23.4 million ounces, as shortfalls particularly in our Huaron mine in Peru will be completely offset with increases at the Alamo Dorado, San Vicente and La Colorada mines.

In addition, we have increased our annual consolidated gold production guidance nearly 10,000 ounces to 95,000 ounces, given the continued better than expected gold production at our Manantial Espejo mine, which is also serving to drive our consolidated cash cost guidance down 8% to $5.90 per ounce net of by-product credits.

As I have mentioned before, our diverse portfolio of mines provides us meaningful abilities to make up from unexpected production disruptions that are so common in our industry. This along with our second to none mine development and operating personnel provide Pan American Silver and its shareholders distinct and unique competitive advantage.

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

Michael Steinmann

Thank you Steve. Good morning. We have ambitious exploration plans for 2010, advancing several products at the same time and increasing our ground field exploration at Manantial Espejo and San Vicente. The activities at our sites and projects have been impressive. Including the infill in metallurgical drilling at Navidad, we completed a total of nearly 60,500 meters of drilling during the first quarter of 2010.

This is a company record and more than on track to finalize our 183,000 meter program for this year. Including our 8300 meters of drilling at Manantial Espejo, and over 2600 meters of San Vicente of exploration programs initiated at both sites in October 2009 gained momentum.

Let us have a detailed look at some of the exciting results. I'm sure you will remember the exceptional exploration results enjoyed last year at La Colorada. We added more than 16 million ounces of silver to our proven and probable reserves, extending the mine life of La Colorada by at least three more years. Drilling continues at the San Vicente [ph], which is returning similar results to what we published at the end of last year.

Exploration also returned exceptional results from the (inaudible) exploration. Although no final resource estimate has been done yet, it seems that we already added more than one year of additional production to La Colorada mine life during the first quarter. Exploring this wide and high grade range is a real pleasure, and I'm confident that we will see more impressive results from La Colorada during the rest of the year.

In the past, I mentioned many times Manantial Espejo’s excellent exploration potential. At the beginning of the southern hemisphere summer, we started the first exploration program at Manantial since the construction of the mine. Most of the drilling is currently focused on vertical and horizontal lane extensions close to our recurrent production; a new Greenfield exploration team is discovering new drill targets on our large land holdings around Manantial Espejo.

We discovered over 6 million silver equivalent ounces of new resources during the last three months. The most important result is an extension of the main Maria Vein to the northwest. This was a planned exploration target and was drilled based on a ground magnetic survey. Up to now, we drilled 12 holes, and discovered track line [ph] extension of the Maria Vein of over 700 meters.

Maria is our most important vein, containing nearly half of Manantial’s reserves. Drill holes have intersected up to 12 meters wide lane, with 224 grams silver, and 1.3 gram gold. Most intersects are multimeters wide and contain substantial silver mineralization.

At this time, our drill spacing is 100 meters, and mostly located only on one level. Hence, it is difficult to get an idea of the size of this new discovery, but there is no doubt in my mind that economic vein intersects over a 700 meter straight length will eventually return high grade ore shoots, and extend our most important vein at Manantial Espejo.

The main reason for us to build a plant at San Vicente was the high grade Litoral vein and its foot and hanging wall [ph] structures. Current drilling has extended this major structure to the east for another 100 to 200 meters, and returned results of up to 4.8 meters with 950 gram silver per ton, and in some cases substantial base metal grades.

The drill program continues and I'm looking forward to share with you interesting resource additions in the coming quarters on San Vicente.

Exploration drilling is continuing of our other operations, on track with our exploration budget and so far on track with our reserve replacement plans.

Now I would like to comment on our two development projects, La Preciosa and Navidad. Infill and geotech drilling at La Preciosa was advancing very well during Q1. We finalized over 15,000 meters, and I'm confident we will be able to finish our 50,000 meter program in the third quarter of this year. As I mentioned, most of the drilling was infill, and there are no new exploration results to report at this time.

A ground magnetic survey was done in February, and drilling of new exploration targets is planned in the coming weeks, a crucial step to increase resources at La Preciosa.

Finally, I would like to share Steve's enthusiasm on Navidad. This is an exceptional silver deposit, not only in size but also in its geology. We drilled nearly 17,000 meters in the first three months of the year. Most of it was for infill, geotech and metallurgical purposes in order to support the upcoming preliminary economic and feasibility studies.

Not many geologies have the opportunity to explore such a unique deposit, and I'm very much looking forward to start drilling some of the 11 most immediate exploration targets. (inaudible) mentioned and indicated resource of 632 million ounces of silver and 2.9 billion pounds of lead, certainly enough to work on a feasibility study, but the exploration potential in Navidad is so enormous that additional drilling could reveal new zones in the potential size of most of our existing mines, targets I definitely want to explore.

We will pass on now to Rob Doyle.

Rob Doyle

Thank you. Good morning ladies and gentlemen. On a financial perspective, it has been another busy quarter at Pan American. Some of the significant events were the successful completion of the comprehensive acquisition process for Aquiline common shares, which allowed us to buy the remaining 7% of the company that we did not acquire in 2009. This resulted in issuance of 1.7 million Pan American shares, and some significant movements on our balance sheet, including increases in property, plant and equipment; future income tax liabilities; and a reduction in the noncontrolling interest account.

As Geoff mentioned, we also declared our first-ever dividend of $0.025 in late February, and expect this to become a biannual event. Silver Wheaton elected to convert the convertible debenture that we inherited through the Aquiline transaction into a silver stream contract. Since we're still in the process of negotiating the definitive agreement with Silver Wheaton, we have not changed the accounting treatment in the quarter, and still reflect the fair value of the debentures as other liabilities on the long-term portion of our balance sheet.

From an earnings and cash flow perspective, our results in Q1 2010 were dramatically better than the comparable period of 2009, when metal prices were vastly lower. Of course, we have also ramped up operations at Manantial Espejo and commissioned San Vicente since Q1 2009, which also helped us to achieve nearly a threefold increase in net income, and more than double operating cash flow from a year ago.

However, relative to our strong financial results in Q4 2009, we were a little disappointed that our Q1 2010 results were not even better. The following factors are relevant when comparing Q1 2010 results with the results of the last quarter of 2009. The biggest difference was the quantity of metals sold. Q4 was an exceptional quarter in that we sold more metal then we produced, roughly $20 million of additional sales at today's prices.

In Q1 2010, we actually ended up selling almost exactly the same metal value as we produced. Although we did build up 2009 for the gold inventory, offset by draw downs of base metal concentrate inventory. Our realized prices in Q1 2010 declined by approximately 3% on average as compared to Q4 2009.

As a result of these slight price declines, we recorded negative sales adjustments in Q1 2010 of $2.8 million. The represent sales that were provisionally booked in prior periods, and then finalized in Q1 at lower prices. As you have heard from Steve, Huaron mine had a very challenging quarter, and underperformed relative to our expectations, and compared to Q1 and Q4 of 2009.

Huaron mine operating earnings were approximately $4.7 million below our expectations, and $4.6 million below the mine operating earnings that the mine generated in Q4 of 2009.

Our effective tax rate in Q1 2010 was 38%, which was the highest it has been for the last six quarters, and was well above the 30% expectation. The main factors, which drove up our effective tax rate were our considerable assumption that our current exploration and project development expenditures will not create future tax benefits, and the reestimate of our NOL usage in prior periods in Bolivia. Current taxes for the period were $7.9 million.

Nonetheless, our Q1 2010 results were pleasing from a number of perspectives. Net income for the first quarter was $19.1 million, which equates to $0.18 per share.

Our mine operating earnings were $36.9 million, which was a gross margin of 28%. Cash flow generated from operations, before working capital movements was $42 million or $0.39 per share.

Our capital expenditures for the first quarter on property, plant and equipment were $7.3 million with an additional $4.7 million capitalized as part of Navidad project evaluation expenditures. The net result was that we increased our cash balances by $19.3 million during the quarter, net of the $3.7 million paid to our shareholders as a dividend. We expect to see our cash balances continuing to build in the coming quarters, as all our mines continue to generate positive cash flow, including Huaron.

Healthy operating cash flow propelled the company's working capital position to a record $302.8 million at March 31. That is an increase of 50.5 million for the quarter. Most of the increase in working capital is reflected in higher cash and short-term investment balances. We did also see a 25.9 million decrease in our accounts payable, and accrued liability balances from the end of 2009 with most of that decrease a direct consequence of setting accruals related to the Aquiline transaction, and the repayment of concentrated advances.

We finished the quarter with cash and short-term investments of $215.4 million and no debt. We still retain the doubtful debt provision of $4.4 million that we established in Q2 of 2009 related to our accounts receivable balance from Doe Run, Peru and have made no adjustments to that provision in the first quarter.

The company continues to sell copper concentrate to other buyers at terms that are inferior to the terms of the company's concentrate contracts with Doe Run, Peru. While there have been some encouraging developments recently, as yet, there are no tangible financing plans in place to allow the La Oroya smelter to reopen.

On a more positive note, we did make some progress on debt recoveries in Argentina during the quarter, are receiving an important approval relating to our first 12 shipments of dorey [ph] from Manantial Espejo, and believe that we are in a good position to collect the first approximately $12 million of the roughly $44 million we have paid in refundable

debt to date.

With that, I will hand it back to Geoff for some closing comments.

Geoff Burns

Thank you Rob. Yesterday we held our annual general meeting here in Vancouver, and I had the pleasure of being able to give a presentation to our shareholders who attended in person. I like to use this opportunity to share with those of you who have joined us on the call this morning the key messages in that presentation.

Our mission is straightforward. We are going to focus on optimizing our current operations, and maximize our cash flow generating capacity and profitability. We are going to continue to aggressively explore around our current assets to extend their respective mine lives. There is no question that the best exploration potential we see is within the shadow of our own head frames.

As Michael has just described, La Colorada, San Vicente, and Manantial Espejo have tremendous exploration potential that we are just starting to tap into. Lastly, we are going to put our project development teams to the test, as we ramp up development work at both La Preciosa silver project in Mexico, and the Navidad silver project in Argentina. These two projects are Pan American’s future, and have the potential to take our silver to a completely new level.

I just returned from a trip to our Navidad project, and I'm having difficulty finding the word to properly convey how excited I am about this project. I stood at the top of the (inaudible) deposit, which is the topographic high, some 150 meters above the valley floor and I looked off to the east. What I saw was a miner’s dream, and like nothing I have been involved with in the tough 25 years I've been in the precious metals business.

Calcite Hill, Navidad Hill, Connector Zone, Galena Hill, Barite Hill and Valle Esperanza, almost 6 continuous kilometers of the Navidad mineralized trend, over 500 million ounces of contained silver in resources. And where I was standing (inaudible), another 160 million ounces of silver. What a remarkable deposit.

Perhaps even more important are the things I didn't see. I didn't see a tree, I didn't see running water, and I didn't see a single hose. This is truly a location where mine can be developed in complete harmony with the environment, providing significant economic stimulus in a region that desperately needs it without encroaching or competing with the current users of the land.

As Steve mentioned, we have ramped up our activities since finalizing the acquisition of Aquiline in January. In the little over three months we are moving ahead with all aspects of project development, and I couldn't be more pleased that our team has hit the ground running.

Our goal is to complete a PEA, or pre-feasibility study, by the third quarter of this year, and be positioned to complete a full feasibility study and make a construction decision early in 2001. This is a world-class silver deposit, and we're going to provide all the attention it deserves and remain confident that by continuing to work closely with the province of Chubut, and by continuing to demonstrate that a mine can be developed in a socially and environmentally responsible fashion that they will respond positively and make the necessary changes to the law that will allow us to build Navidad.

Not to forget La Preciosa in Mexico, as we are concurrently carrying out the same project development work at this 135 million ounce resource as we are in Navidad. With these two development projects, Pan American is truly rich with future growth potential.

Before opening the call to questions, I would like to make some very brief comments on silver and gold prices. I apologize if I'm starting to sound like a broken record when it comes to my view on future silver and gold price. As a sovereign debt situation in Greece continues to unfold, we are reminded yet again of the frailty of governments and their ability to manage their own currencies.

In my opinion, the situation in Greece will be played out in numerous other countries in the coming months and years, as the ability to finance public debt is pushed to the very limits of investor interest. The world turned massive private debt into massive public debt last year and the year before. And in my opinion, the only way out of the debt (inaudible) is to deflate the value of those currencies.

I would contend then in a world where currencies are going to become less and less able to maintain their relative value that silver and gold are going to look very, very appealing.

Gold is over $1200 per ounce today, silver is pressing up to $19 per ounce, and I believe it is very easy to make a case that these prices are going to climb even higher in the coming years.

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

Question-and-Answer Session

Operator

(Operator instructions) First question comes from Haytham Hodaly with Salman Partners. Please go ahead.

Haytham Hodaly - Salman Partners

Good morning Geoff. Good morning everybody.

Geoff Burns

Good morning Haytham.

Haytham Hodaly - Salman Partners

Just a couple of simple questions. Maybe I will start with Manantial Espejo, like the grades like you said, the gold grades are looking pretty good, what is your actual gold forecast for that operation for this year?

Geoff Burns

Just one second Haytham.

Steven Busby

We will be just over -- our forecast right now Haytham, this is Steve, will be just over 70,000 ounces.

Haytham Hodaly - Salman Partners

Steve, is that contained or is that payable?

Steven Busby

It is virtually all payable. I think we get 99% payable on that.

Haytham Hodaly - Salman Partners

Okay. So pretty close. Perfect, 99% and then with regards to your forecast for cash costs companywide of 590, are you using local price in that assumption?

Geoff Burns

I think it is still…

Rob Doyle

975 Haytham.

Haytham Hodaly - Salman Partners

975, perfect. Thank you Ron. And then your G&A forecast for 2010, it looks like obviously if you were to take out the stock-based compensation, you would be somewhere south of $10 million. But from what I recall when we spoke last, I think it was supposed to be $11 million to $12 million, what is your actual forecast for the stock-based compensation this year?

Rob Doyle

Yes, I think we're going to be right around the $11 million to $12 million Haytham.

Haytham Hodaly - Salman Partners

Okay, still at 11 to 12. Perfect. That hasn’t changed yet?

Rob Doyle

That has not.

Haytham Hodaly - Salman Partners

And then maybe just a question for Rob, your effective tax rate for the year, I know you talked about 38% in the first quarter, 37.5% the tax implications are, would you expect 30% for the remainder of this year?

Rob Doyle

It really depends on how we treat the exploration expenditures in Mexico and Argentina, Haytham, I would say that if we continue along the conservative route of assuming there is no tax benefit on those expenditures, then the tax rate will be a little higher maybe in the sort of 35, the same range, but as we make progress we may be able to change our outlook on that treatment.

Haytham Hodaly - Salman Partners

Okay. Can you keep us updated on what you decide to do there?

Rob Doyle

Absolutely.

Haytham Hodaly - Salman Partners

Perfect. That is it gentlemen. Thank you very much.

Geoff Burns

Thank you.

Operator

Your next question is from Chris Lichtenheldt of UBS. Please go ahead Chris.

Chris Lichtenheldt - UBS

Hi, good morning everyone. First just Rob, can you remind or just repeat again maybe what you said about the inventory, you sold most of the metal, but then there is a small build in inventory of gold. Is that right?

Rob Doyle

That is correct. I mean, we built up 2000 ounces of gold in inventory but that was offset by an equivalent amount of value draw down in our basement of concentrate inventory. So for the quarter net-net we sold the same amount of value as we produced.

Chris Lichtenheldt - UBS

I see, okay. Great, thanks. And just a quick question on the situation in Argentina if I can, you said you anticipate that once you’re able to convey that a responsible mine can be constructed that that may sway them to change things so that open pit mining would be allowed. Do you expect that conveying to occur in the form of a feasibility study. Is that the type of conclusion they would need or maybe the PEA or would that just be ongoing discussions in their site visits, if you don’t mind commenting on that?

Geoff Burns

Yes, I think that we are probably crossing about three or four different thresholds or three different things we’re working on at the same time. One is as Steve mentioned, we are very active in our social programs working with the communities, the local communities of Gastre and Gan Good afternoon, where we’ve done most of our hiring for our current team on the site, where we’re working with those communities on water, power, and a number of other initiatives.

That’s one aspect. Certainly, as we move forward with our development ideas, we’re going to be sharing those with the government in terms of the size of the plant, the location, what it is we’re going to building, how much we’re going to be spending to do that build. We’re also working with the government very much in looking at what the potential benefits are financially in terms of taxes to their region and yes, we’ve already had a number of the senior officials visit our Manantial Espejo mine site that actually happened last year, or excuse me first quarter of this year, and which very clearly demonstrates how we’ve developed that project.

So, as we, you know, we have all these initiatives going on at the same time and we are aware that they are indeed working on the law right now, and drafting the law and we think with these initiatives and with their own political impetus that we are going to see that change in the near future.

Chris Lichtenheldt - UBS

Okay, that’s great. Thanks a lot. I think that’s it from me then. Thanks.

Geoff Burns

Okay, thanks Chris.

Chris Lichtenheldt - UBS

Take care.

Operator

The next question is from Steven Butler of Canaccord Genuity [ph]. Please go ahead.

Steven Butler - Canaccord Adams

Good morning guys. Rob, you had addressed the group here with respect to revenues in the quarter, and in fact sales volumes that was one of my questions, sales volume is you were saying or suggesting that we’re very close to production volumes. Is that correct?

Rob Doyle

That is correct, Steve. The only thing is that we did -- as I mentioned we did the incur $2.8 million negative sales adjustment in the quarter. So --

Steven Butler - Canaccord Adams

Okay, and that’s excluded from your realized pricing table. Is that correct?

Rob Doyle

That is correct.

Steven Butler - Canaccord Adams

Okay, and guys as you’re evaluating things, Rob, as you are evaluating then the Navidad’s future, Geoff, any comments is it really going to still be based on Loma de La Plata as a starting point for the preliminary economic assessment or the PEA now?

Geoff Burns

Steve, I can’t go too far, let’s say certainly Loma de La Plata is going to be a very, very important component of the PEA. What I will say is our metallurgical testing to date is starting to suggest that there is a lot more material available within Calcite Hill, within Navidad Hill itself, within Galena Hill that had previously been excluded from the PEA that was put together, I believe by Snowdens [ph] for Aquiline. So, yes, Loma de La Plata is important but we are finding that there is a much more of the deposit that may find itself in that PEA.

Steven Butler - Canaccord Adams

And simply because the met testing Geoff, not because of drilling new less refractory resources?

Geoff Burns

I think that (inaudible) doing all this work, I mean, typically you come up with a measured and indicated and then a referred resource and you do your infill drilling and then you keep your fingers crossed that most of that is upgraded and maintained when you close out or tighten your spacing. I think finding that at this stage that most of what we had classified is actually being retained, and measured and indicated and inferred category. So that’s really positive news. Having said that are we drilling less refractory material, no, what we are finding is that there is some very distinct zonation to the mineralization in the zones that were previously thought to be completely refractory, and --

Steven Butler - Canaccord Adams

Okay.

Geoff Burns

Our view is that -- again I don’t want to go too far. We are working that equation right now, but I will say I’m very optimistic about the results that I’ve seen today.

Steven Butler - Canaccord Adams

Okay, Geoff, and then with the timing of permits I guess really has come sometime after full fees or are there preliminary permits may be granted on a PEA, or is it full fees after which you would expect permits to come through thereafter?

Steven Busby

Yes, this is Steve Steven. Our view is it will be almost simultaneous, we will be working the full feasibility study simultaneously with the permit and EIA. So you know, we are preparing ourselves to submit the EIA immediately after the law is passed, and at the same time finishing off our feasibility study and hopefully the permit to construct would occur simultaneously with the issuance of the full feasibility study.

Steven Butler - Canaccord Adams

Okay, and lastly guys sorry, the laws that are envisioned to be revised drafting changes to law, is it primarily the ban on open tip mining that could be hopefully no longer a ban?

Geoff Burns

That’s correct Steve. There is a provision within the current legislation to zone different pieces of the province in different manners as it relates to open cut mining and the use of cyanide frankly. And we believe that with the drafting of the amendments that they are going to identify those zones and we fully believe that Navidad end up being in one of the zones where open cut mining is allowed. At the same time there are going to be other zones within the province, where open cut mining will continue to be banned.

Steven Butler - Canaccord Adams

Right, okay, and then how long is the current ban in place Geoff?

Geoff Burns

The law was renewed actually in June of last year for an additional three years.

Steven Butler - Canaccord Adams

June of ’09. Okay. Thanks guys.

Geoff Burns

Thanks Steve.

Operator

(Operator instructions) The next question is the follow up question from Haytham Hodaly. Please go ahead.

Haytham Hodaly - Salman Partners

Thanks operator. Sorry guys. Just got one quick housekeeping issue, just with regards to depreciation levels, a question for Rob, are the depreciation levels presented on if you look at them on a unit to production basis, is that a good indicator of the level of depreciation we should use on a go forward basis for this year?

Rob Doyle

Yes, I would say that’s a good indication.

Haytham Hodaly - Salman Partners

Okay, and then with regards to your tax, there’s just one other question. What’s a good deferred percentage proportion for this year?

Rob Doyle

Well, the current -- in the first quarter our current taxes were $7.9 million versus a total of $11.4 million. So there is about $3.5 million of deferred.

Haytham Hodaly - Salman Partners

So 30% or 35% sort of thing?

Rob Doyle

Yes, somewhere in that range.

Haytham Hodaly - Salman Partners

Okay, perfect. Thank you.

Operator

The next question is from Shey Ylonen of TD Newcrest. Please go ahead.

Shey Ylonen - TD Newcrest

Thanks very much. Just a quick question on Navidad and your spending plans, you are looking at about $40 million over the next 10 months to get you towards the full feasibility construction decision. I presume that points whether you are conceiving, or you capitalizing that and also just second part of that was the -- can you give any guidance as to how that’s going to be weighted over the next three, four quarters, thanks?

Geoff Burns

Okay. Shey, the $40 million actually takes it’s a little bit longer than 10 months. It’s going to take us to a completion of feasibility study, which we’re envisioning in I’m going to say February of next year. In terms of the flow, we’ll probably see both 65% to 70% of that value capitalize as project development expenditures, whereas about 30% to 35% of that, that’s our current estimate volume flowing through the income statement, and I think in general terms, you can balance that on fairly much an even basis over the next 10 to 12 months.

Shey Ylonen - TD Newcrest

Okay, great. That wasn’t included in your prior guidance with respect to any of this sustained capital et cetera?

Geoff Burns

No, it was not Shey. We actually just approved an expanded budget at our board meeting yesterday. I think it’s in our MD&A disclosure, where we went from about $16.5 million up to the $40 million and it’s just really reflecting the confidence we have in the deposit, and secondly quite frankly the size of the deposit is bigger than anything we’ve seen, and if you just think about the amount of drilling you need to do off-hand to tighten up the drill patterns when you’re going across 5 km of mineralized trend, you start to generate a pretty significant number, and as Michael said pretty significant meterage of drilling. So yes, that is a new disclosure Shey.

Shey Ylonen - TD Newcrest

Okay. Thanks so much, guys.

Operator

There are no more questions at this time. I will turn the call back over for closing comments.

Geoff Burns

Well, thank you ladies and gentlemen for joining us here again to listen to our quarterly conference call. I very much look forward to our second-quarter and look forward to sharing some more exciting developments at Navidad and La Preciosa, and also with Michael continuing to drill holes all our assets. I fully expect to have some positive exploration news as well. Thanks very much.

Operator

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

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