Pan American Silver's (PAAS) CEO Geoffrey Burns on Q1 2014 Results - Earnings Call Transcript

May. 9.14 | About: Pan American (PAAS)

Pan American Silver Corp. (NASDAQ:PAAS)

Q1 2014 Earnings Conference Call

May 9, 2014 10:00 AM ET

Executives

Kettina Cordero – Manager, IR

Geoffrey Burns – President and CEO

Steve Busby – COO

Michael Steinmann – EVP, Corporate Development and Geology

Rob Doyle – CFO

Analysts

Andrew Quail – Goldman Sachs

Cosmos Chiu – CIBC

John Tumazos – John Tumazos Very Independent Research

Dan Rollins – RBC Capital Market

Chris Thompson – Raymond James

Chris Lichtenheldt – Dundee Capital Markets

Operator

Thank you for standing by. This is the conference operator. Welcome to the Pan American Silver First Quarter 2014 Conference Call and Webcast. As a reminder all participants are in a listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions. (Operator Instructions)

At this time, I’d like to turn the conference over to Miss Kettina Cordero, Manager, Investor Relations. Please go ahead Miss Cordero.

Kettina Cordero

Thank you, operator, and good morning, ladies and gentlemen. Welcome to Pan American Silver’s 2014 first quarter results conference call. Joining me here today are our President and CEO, Geoff Burns; our Chief Operating Officer, Steve Busby; our Executive Vice President of Corporate Development and Geology, Michael Steinmann; and our Chief Financial Officer, Rob Doyle.

I would like to start this call by reminding our listeners that this call cannot be reproduced or retransmitted without our consent, and that certain 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 facts are forward-looking statements that reflect the company’s current views with respect to future events and are necessarily based upon a number of assumptions and estimates that, while considered reasonable by the company, are inherently subject to significant business, economic, 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 news release dated May 8, 2014, as well as the factors identified under the caption, Risks Related to Pan American’s Business in the company’s most recent Form 40-F and Annual Information Form.

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 hand over the call to Geoff.

Geoffrey Burns

Good morning. Thank you, Kettina, and good morning, ladies and gentlemen. As is our practice, I’ll briefly discuss the highlights of what was another very strong production quarter continuing a trend we established in the second half of last year. And then you will hear from Steve, Michael and Rob who will provide you some additional details on our operations and projects, our exploration programs and our financial results for the current quarter.

To begin, I’m happy to report that yesterday, our Board of Directors approved our second quarterly cash dividend of the year in the amount of $0.125 per share. The dividend will be payable on or about Tuesday, June 3, 2014 to holders of record of common shares as of the close of business on Wednesday, May 21, 2014. At yesterday’s closing price on NASDAQ, our dividend provides an annual yield of just over 4%. our ability to continue pay this sector leading dividend is a sign of the financial strength of your company and the confidence that I and our Board of Directors has in our ability to deliver strong production and financial results even during times of challenging silver and gold prices through our commitment to operational excellence and fiscal discipline.

Turning to the first quarter of 2014. We produced 6.6 million ounces of silver, 5% more than the first quarter of last year and 45,900 ounces of gold which was 43% more than in the comparable period last year and just 300 ounces shy of our all-time record for quarterly gold production which we set in the fourth quarter of 2013.

For the third consecutive quarter we were able to sustain the meaningful cost reductions we achieved in the second half of last year. Our cash cost for the first quarter of 2014 were 27% lower than they were a year ago at $8.35 per ounce net of byproduct credits. And perhaps more importantly down a further 14% from the fourth quarter of 2013.

Our all-in sustaining cost per ounce of silver sold were $15.54 per ounce in the first quarter down 20% from the first quarter of last year and 9% lower than in the fourth quarter of 2013. Our production and costs results for the first quarter are a further sign that the efforts we have put in to reposition our minds last year are indeed sustainable.

Our adjusted earnings for the first quarter were $8.6 million or $0.06 per share, down substantially from the $0.26 per share in earnings from year ago. Unfortunately our excellent operational performance wasn’t fully sufficient to overcome the 34% decline in realized silver price and the 21% decline in the price of gold.

Our mining operating – mine operating earnings also suffered from the decline in metal prices and declined to $36.1 million in the current quarter. Having said this I think it is also important to note that our mine operating earnings were the strongest we have seen in the last four quarters and a testament to the work we have accomplished at our operations particularly given the current quarter’s prices at a lowest average we have realized in the last 12 months.

Now, looking at cash, we generated net operating cash flow of $36.1 million or $0.24 per share in the first quarter. A pretty reasonable result considering this is after paying an additional $9 million in taxes relating to last year and absorbing a $5.7 million devaluation on our Canadian dollar bank account holdings as the U.S. dollar strengthen on a relative basis.

Excluding these two items we actually generated closer to $50 million in operating cash flow during the first quarter, a very respectable sum given current silver and gold prices. Continuing to focus on cash we ended the first quarter with $394.4 million in cash and short term investments and our balance sheet remains sector leading with $680 million in working capital and only $40 million in long term debt.

This strength lead us in a great position to continue to self-finance our internal growth projects like the La Colorada expansion, continuing to pay meaningful dividends and take advantage of strategic opportunities should they present themselves. And now I’ll let Steven run you through our operations and development programs.

Steve Busby

Thank you, Jeff. I’m pleased to report that we are off to a good start this year with La Colorada expansion project aggressively initiated, production largely in line and cost coming in below our expectations, keeping us on track to meet or exceed our full year guidance previously provided. Our silver production increased at the Alamo Dorado mine largely as we expected. Our overall consolidated gold production surged 43% year-on-year thanks to the significant increases at our two largest gold producing mines Manantial Espejo and Dolores.

The production increases came with improved unit operating cost, driving our consolidated cash cost per ounce down even more than we expected to $8.25 per ounce extending the downward trend that started back in Q3 of 2013.

I have many highlights to share you this morning that contributed to our overall success. Starting with our solidly stable San Vicente mine in Bolivia who delivered just over 1 million ounces of silver production, a 7% increase over last year’s Q1 at a cash cost of $12.73 per ounce erasing more than 30% of last year’s Q1 cash cost benefiting from the increased byproduct production, reduced royalty payments given the lower metal prices and substantial smelting and refining savings which is on account of both the general competitive concentrate market conditions today but also thanks to the very desirable, high quality concentrates we produced at this mine.

Our two Peruvian mines Huaron and Morococha delivered well with both achieving meaningful increases to production of about 10% over last year with much higher base metal grade helping to driven down cash cost substantially from last year’s performance. In addition Morococha continues to succeed in its quest to unlock additional cost savings through further mechanization and operational consolidations.

In Argentina our Manantial mine – our Manantial Espejo mine delivered an exceptional quarter, producing just over a 1 million ounces of silver 25% greater than last year’s Q1 and nearly 24,500 ounces of gold which was 88% greater than last year’s Q1 owing to the mining of a high grade gold zone from the deepest benches of our Maria Phase 1 open pit. Just the gold production itself more than covers our full operating cost of this property during this quarter particularly after achieving some significant cost savings to through enhanced shift scheduling and improved mobile equipment availabilities coupled with an eroded local currency.

Net-to-net these factors drove our cash cost down to a negative $4.82 per ounce well below last year’s positive $7.11 per ounce. We have mined out this high grade ore from this zone in the bottom of Maria Phase 1 open pit and we do not expect to encounter similar ore grades until late this year when the pre-stripping of our phase 2 Maria pit advances down and catches up to where we were mining last quarter in the bottom of the pit. We will expect to be back in those grades by probably late Q4.

Our excellent quarterly performance did not come without its challenges typical in our mining business. For instance at Alamo Dorado we suffered an unscheduled 13 day extension to a scheduled 5 day plant maintenance shutdown in January after a certified vendor technician inadvertently failed to open a critical inaudible lubrication port causing the SAG mill motor to fatally overheat during the start-up requiring us to shut down and send the motor out to regional shop for the repairs. This extended shutdown cost us a couple of 100,000 ounces of silver production.

However, we believe we can make up a good chunk of that shortfall during the remainder of the year by processing higher grade ores that we have mined which should displace some of the other anticipated lower grade ores we intend to process late in the year.

Elsewhere in Mexico, both La Colorada and Dolores delivered solid production quarters at expected to cash cost levels with increased ore productions and better than expected recoveries at Dolores. The higher recoveries where largely the results of the benefits we obtained with the introduction of staged leaching whereby enriched solutions recovered from the residual leaching of the ore stacked on pad 2 are used to leach fresh ore stacked on our new leach pad 3 providing a boost to overall recoveries.

We expect this boost of recovery to trend downwards over the next coming months as the incremental pad 2 staged leaching production those contributions will begin to trickle down and will stabilize at the mines model recovery rate probably towards the year end this year when the leaching operation achieves steady state.

Meanwhile, we are in the final throws of generating alternative mine plans with and without pulp agglomeration milling and underground mine expansion opportunities at Dolores. Our aim is to produce some preliminary economic study that we will share with you in the next couple of months. There are many significant value adding levers to pull in this study and unlocking the optimum combination of mining rates with mining methods and processing rates with processing methods in a complex matrix of metal price and mineral model high grade gold reconciliation sensitivities is an exercise that would be the envy of the smartest mines in our industry.

Dolores still stay – retains some significant potential long term value we have yet to fully define before we even consider the immense untapped exploration potential on this property. Although our project team advanced on the construction of phase 2 of our Leach Pad 3 as planned and this will provide us sufficient capacity for the next of couple of years of stacking when the construction is finished later this year.

Additionally we were able to give the La Colorada expansion project solidly kicked off in January and have made meaningful advances on the underground, lateral and ramp developments, underground equipment purchases and contractor pre-qualification efforts, preparing for the start of shaft excavation early next year. In addition we are advancing on certain community projects the tailings dam expansion, started basic engineering of the plant expansion and locked up a great opportunity by purchasing a used ball mill which will save us both on time and money.

In summary, our company wide focus on productivity, quality and cost reductions that really began in April of 2013 after the abrupt drop in precious metal prices has fueled improved operating results while being supplemented with additional positive impacts from certain foreign currency exchange rate movement and general industry wide cost reductions. We have some of our greatest challenges ahead in the coming quarters for this year but I’m very pleased with the high level of energy and enthusiasm possessed by our industry leading experienced operations and project teams who are squarely focused on their individual tasks in hand.

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

Michael Steinmann

Thank you, Steve. Good morning everyone. We drilled a total of nearly 28,600 meters during the first three months of the year, this represents a reduction of about 43% compared to the same period in 2013. The reductions took place in most of our operations and exploration programs as we are on track to achieve our annual program of 108,000 meters of drilling.

The focus of the exploration for 2014 will remain on reserve replacement. Only a small part is dedicated to explore earlier stage projects in Mexico. As no drilling plan for Alamo Dorado this year and the San Vicente program will start in Q2.

No surprise that once again we drilled the largest amount at La Colorada especially with the new addition of the Recompensa vein in our exploration plans. Like every quarter the drilling at La Colorada returned exceptional results and we will show some of them in a few minutes.

Let’s start with the drill results for Huaron. I’m sure you remember that we discovered several wide mineralized ore bodies during 2014 which are now under development like the Pozo D ore body. The exploration success continued during Q1 this time with the new discovery made through a surface drilling called [inaudible] East.

You can see this amount of mineralization which is located about 300 meters of the east of Pozo D ore body on your screen right now. Intersections of 4.3 meters containing 515 gram per tonne silver, 6.8 meters or 314 grams per tonne silver or 11.4 meters with 275 gram per tonne silver are for sure impressive but it is first round drill program.

Up to-date we finalized already 31 drill holes exploring this ore body. We discovered already a high grade mineralization for 100 meters along strike and 270 meters along the vein and we’ll continue with expansion and in field drilling during Q2.

At La Colorada we focused during Q1 on the NC2, Amolillo and Recompensa veins located in the Candelaria, Estrella and Recompensa. You can see all of them on your screens in a cross-section. I show the similar graph several times before with the mined out sections in white, proven reserves in red, probable reserves in orange and inward resources in green. By the way new shaft location for the expansion project is shown in purple in the center of the graph. I will show more details later on regarding the Recompensa vein.

The known parts of the structure are still very shallow as the vein dips into the opposite direction in Amolillo and Candelaria. The all three veins return high grades wide intersects.

I would like to mention a few and start with Amolillo where we drilled 3.7 meters. It contained 467 gram silver, 0.6 gram gold and about 3% led zinc combined. At Amolillo we intersected one meter containing 1,025 gram silver and 8% led zinc combined.

Drilling along the NC2 vein in Candelaria returned many high grade intersect as well. For example in the NC2 vein we drilled over 3 meters containing 1,460 gram silver, 2.35 gram gold and nearly 14% led zinc in combined.

As reported before the NC2 vein has several splits as well and some of them are actually wide and on the main structure. One of these plays returned 6.75 meters containing 1,409 gram silver 8.9% led and 16.2% zinc.

Like in many quarterly reports before there is a long list of high grade results for both of these veins and a time to mention all of them but they will all be included in the reserve statement at the end of the year.

I mentioned before the newest outstanding results came from drilling after the third main structure at La Colorada the Recompensa vein. The structure runs up parallel to Amolillo and NC2 but further to the north. The vein contains currently a small reserve of just over 1 million ounces of silver along a very short line.

During the last two quarters we drilled, we started to drill deeper and encountered very interesting results. It is still early days and a lots of drilling will be required during 2014 to substantially increase the resources and reserves of this vein but I like very much what I see so far. On the graph you can see a long section of the Recompensa vein with the small mined out area in black and proven and probable reserves in red and blue.

Mining took on [inaudible] down to about 200 meters below surface but we started drilling now about 300 meters below the old of mining level. Results have been astonishing with drill intersects for example 4.8 meters containing 1,786 gram per tonne silver, over 1 gram gold and nearly 7% led zinc combined and other vein intersects returned 2.6 meters containing 1,085 gram per tonne silver, over 1.7 gram gold and more than 6% led zinc combined just to highlight a few.

In general all the drill programs are advancing as planned and I will share some results with you during future calls once the drilling is more advanced. At that time I will also have an update for you regarding the advances on reserve and resource replacement.

I’d like to pass on to Rob for the financial review.

Rob Doyle

Good morning ladies and gentlemen. Driven by the solid operational performance that Steve described we got the 2014 year off to a strong start from financial perspective. Operating cash flow before taxes and working capital movements of $56.1 million in Q1 were consistent with steady cash generation we saw in the second half of 2013.

Operating cash flow was sufficient to fund all of our sustaining capital expenditures and tax payments related to the period which amounted to $24.7 million and $10 million respectively as well as fully funding are dividend payments of $18.9 million.

We did utilize our treasury to fund our investment capital and expended on project development totaling $13.3 million for the quarter and taxes accrued on 2013 income but paid in Q1 of $9 million, which together with some realized FX losses and minor financing activities reduced our cash and short term investment balances by $28.3 million to end the quarter at $394.4 million.

This still leaves us with an exceptionally strong liquidity position with cash reserves of $64.5 million. Our Board had approved the next quarterly dividend of the same amount which will be paid on or about June 3rd, 2014.

Our Q1 consolidated all-in sustaining cost per ounce sold is presented in the table that you should see on your screens now which provides the detail reconciliation of this measure to the applicable cost items as reported on our consolidated income statement for the respected periods on a per ounce basis.

We calculate an [AISCSOS] of 15.54 per ounce for Q1 almost $4 lower than the comparable period of last year. The calculation of Q1 benefited from lower production costs and treatment charges, higher byproduct credits, lower exploration and G&A as well more than a 0.5 million ounces of silver sold in Q1, 2014 than in Q1, 2013. While we have started well below guidance repeating the same performance over the balance of the year will be challenging especially maintaining the quantity of payable metal sold. So while we expect to be lower end of our guidance we are reaffirming our AISCSOS range guidance of between $17 and $18 for the full 2014 year.

We present select information from our Q1 income statement on your screens now compared to the previous quarter that being Q4 of 2013 comparable period of Q1 2013. Starting at the top, Q1 2014 revenues trailed revenues from a year ago as the negative price variances and positive volume variances. More specifically the revenue analysis shows that in spite of selling more than 0.5 million more silver ounces almost 17,000 more gold ounces and more base metals due to the low realized prices our revenues declined by $33.3 million compared to Q1, 2013. The high volumes sold also explains why our depreciation charge for Q1, 2014 was high relative to our Q1, 2013 depreciation.

Our mine operating earnings was $31.6 million for the quarter while negatively affected by a net realizable value charge to Dolores of 2.3 million that was still a very healthy margin of 15% of revenue a very nice improvement from the 10% margin generated in Q4 of 2013.

Another item in our Q1 income statement worth noting was an FX loss of $5.5 million primarily attributable to realize losses we incurred on our Canadian dollar treasury balance as a Canadian dollar continued its weakening trend against the U.S. Dollar, a trend which started in the fourth quarter of last year.

As of March 31 about a third of our cash and short term balances were held in [bank]. Our effective tax rate for the quarter was on high side of 56% driven primarily by FX losses previously described as well as additional withholding taxes paid on repatriations during the period. In the long run we expect our effective tax rate to be in the 30% to 40% range.

Our adjusted earnings calculation for the quarter was relatively straight forward with the only significant adjustment to net earnings being the unrealized FX loss of $1.7 million that leaves us with adjusted earnings of 8.6 million for the quarter which equates to $0.06 per share.

This slide shows the factors that explain the change in our adjusted earnings from the comparable period of 2013. Again we see the recurring themes of the impact of significantly lower prices being partially offset by higher volumes of metal sold. The higher depreciation charge is a direct result of more volume sold and the lower taxes are a direct result of lower realized prices.

Finally let’s move to the working capital portion of our balance sheet. We only saw a modest decrease of about $8.7 million in our overall balances with working capital right around $680 million at quarter end. Our working capital movements in the quarter were routine in nature and fluctuated with normal course timing of concentrate shipment, payment of taxes accrued on 2013 income and a decline in our loans denominated in Argentine pesos as a combination of net repayments and as a consequence of the sharp devaluation suffered by that currency during the first quarter.

With that over to Geoff for some closing comments.

Geoffrey Burns

Thanks, Rob. As you’ve heard from Steve, Michael and Rob we’ve had a very strong start to 2014. We nicely increased our silver and gold production as compared to the first quarter of last year, we’ve been able to maintain and even further reduce both our cash cost and our all-in sustaining cost largely as a result of excellent byproduct production. We’ve optimized the solution flows at Dolores to squeeze a bit more recovery out of our Pad 2 now that we are on to Pad 3. We have commenced the La Colorada expansion project which will create new long term value for many years to come and we continue to share our successes directly with their shareholders through our continued dividend payments.

As for the full year we have not updated the full year guidance we provided to you in February, even though we’ve had a good start to the year. We are still forecasting 25.75 million to 26.75 million ounce of sliver, a 155,000 to 165,000 ounces of gold and cash cost of 1170 to 1270 per ounce net of byproduct credits. However I would comment that all things being equal most importantly the prices over the balance of the year that I would expect us to find ourselves at the high end of our guidance for gold production and clearly at the low end of our guidance for cash cost and all-in sustaining cost per ounce.

Before opening the call for questions I would like to make a couple of comments on the price of silver. After seeing a bit of a rally in both gold and silver prices in the early part of this year specifically from late January to most of February where we saw silver prices move back up to $22 per ounce we have watched prices drift lower back towards the $19 per ounce level that we are seeing today.

Well I am obviously disappointed that we didn’t see the rally in February keep going, I am also of the opinion that we are at or exceedingly close to a bottom in this part of the price cycle. And if there is any risk to the price it is far greater to the upside. However more importantly I am comfortable that we have done what is necessary at Pan American to survive and even grow our business in the current price level environment and if indeed this is extended for a longer period of time.

When investor sentiment returns to precious metals and prices start to rise again which I have absolutely no doubt will happen, our patient and supportive shareholders will be well rewarded, and in the interim we are going to continue to pay you a healthy dividend to stay engaged with us until the prices – price movement happens.

Operator I would like to now open the call to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question today comes from Andrew Quail of Goldman Sachs. Please go ahead.

Andrew Quail – Goldman Sachs

Hi good morning guys. Congratulations on a very strong quarter, I have just got a couple of questions. First in Argentina and obviously you’ve flagged about sort of the high grade and when you expect that to sort of come off. Can you give any sort of guidance about the reserve grade going forward not just second half forward seeing but maybe into ‘15?

Steve Busby

Yeah. Sorry Andrew this is Steve.

Andrew Quail – Goldman Sachs

Hi, Steve.

Steve Busby

Yeah I didn’t understand the question you wanted the reserve grade?

Andrew Quail – Goldman Sachs

No, no. So, no just saying can you give us some guidance obviously your mining well above reserve grade right now and you’ve flagged why obviously to say is there any sort of guidance you can give I mean obviously you said it into second half what’s going to happen so I am talking sort of into 2015?

Steve Busby

Oh, well. I mean we are in the kind of 3 gram, 3.5 gram gold in this high grade zone at the bottom of the pit. We’ll get back into that zone and we expect it to be 3 gram, 3.5 gram. With that said we’ll be in a bigger part of that zone and we’ll be mining out on the vein. So I would suspect as we move into 2015 we’ve got a pretty good ore supply blocked out ahead of us, so it’s going to be right around reserve grade, right around that 2.5 I would guess overall.

Andrew Quail – Goldman Sachs

Yep. Great thanks, Steve. And maybe again for you Steve on Dolores obviously an excellent quarter volume wise, cost wise, and revenue wise. What’s the – with the recoveries obviously doing so well. Then what do you sort of see is normalized sort of recoveries given – what’s all going on there? What can we sort of model sort of going forward into the second half and even into 2015 for recoveries at Dolores?

Steve Busby

Yeah I think we typically use an anticipated 70% on the gold and like 45% – 40% to 45% on the silver. That’s where we think the monthly the heaps are notorious for having wide swings in recoveries just because you literally have years of inventories build on these heaps. So when you look at it month by month it’s very difficult to see a stable recovery but on the long term we are expecting 70% roughly in the gold and 40% to 45% on the silver.

Andrew Quail – Goldman Sachs

Great. And then last one Rob just on tax obviously you flagged rate was high. Where you expecting that obviously that 30% to 40% is that sort from ‘15 onwards are you expecting sort of a lower tax rates sort of form second quarter ‘14 to the rest of the year?

Rob Doyle

Yeah. Andrew it really should be – there is no reason why in the second quarter we shouldn’t be seeing it back in the normal range. Having said that obviously things like FX gains and losses are out of your control and that can really throw the rates around. And so but all things being equal that’s where we would expect it in the 30 to 40 range.

Andrew Quail – Goldman Sachs

Okay. Thanks guys and congratulations on a strong quarter again.

Operator

The next question comes from Kevin Chiew of CIBC. Please go ahead.

Cosmos Chiu – CIBC

Good morning it’s actually Cosmos here. Thanks Jeff and team for hosting the call and congrats again on the very strong Q1. Maybe first of on the Delores, is there any kind of update in terms of timing of when you might be able to share some of the study results coming from the pulp agglomeration or the underground portion as well. Is that as we’ve talked about that on say is it still at this point in time an exercise in term of the increase in recovery and then how much it would cost to achieve that higher recovery?

Steve Busby

Yeah. Hi, Cosmos this is Steve.

Cosmos Chiu – CIBC

Hi, Steve.

Steve Busby

Yeah as we’ve discussed before I mean it is a complex study and we are heavy into it now and we are starting to get the results that we have wanted to see and we expected to see. I would say we are still shooting towards kind of the end of June to release some information on that study and then follow it up a month and a half later with the detailed report that’s kind of the timeframe.

Cosmos Chiu – CIBC

Okay. And maybe Steve as well we’re on say about a month and a half ago. Now moving to La Colorada we had talked about different approaches in terms of how Pan American Silver might be able to sink that shaft? Is there any kind of update at this point in time that you can provide to us?

Steve Busby

What we’re doing right now Cosmos is we’re doing some additional geotechnical work, we’ve got four shaft contractors that are looking at the project that are interested in helping us on this project. So with their assistance and we have brought in a third party geotechnical firm, we’re actually drilling some geotechnical holes in the shaft location now that really is necessary to make the final determination of the precise approach we’re going to make on that shaft. So that’s kind of the status of where that sits at this moment.

Cosmos Chiu – CIBC

Okay. And then I guess moving on to your last Mexican asset Alamo Dorado, it’s unfortunate that there was some downtime during the quarter but it’s good that’s been fixed. Could you remind us again in terms of when the schedule mining is going to come to an end and when the processing of stockpiles is going to start happening?

Steve Busby

Yeah I mean right now we’re probably going to mine through 2015. We’re seeing a bit more ore than we expected so may squeeze a little bit into 2016 but not too much probably. But then we’ll be running stockpiles through into 2017 late 2017 from it.

Cosmos Chiu – CIBC

Okay. And then maybe Geoff I was late coming on to the call but is there any update that you can provide to us in terms of Navidad and what’s sort of happening there?

Geoffrey Burns

Sure Cosmos, I guess I hadn’t made any comments on Argentina. I have had that benefit of being in country in Argentina for a couple of extended period this year. And without getting into the details which I could probably spend the next hour on and my general comment is this that I am more optimistic than I have been in at least the last two years on the changes I’m seeing both at the national level as well as the provincial level in the country.

And amidst some difficult economic times that they are facing in the country right now, there really seems to be a push towards once again trying to attract foreign investment and creating new jobs and really bringing in new money into the country. And obviously Navidad is a quite a large project and I believe we are on the radar screen in terms of within the political arenas that our project is known, what we can do in terms of having been in countries is known, so these are all I think very positive signs.

I don’t want to go much beyond that because we’ve had some I’m going to call a little bit of false hopes and false starts previously particularly back in 2012 but I think there is a real opportunity right now to move now with that forward and we’re going to do what we can at our end to try and work with the various levels of government to convince them that we are a long term players and that we would be certainly excited about the opportunity to actually build this world class asset.

Cosmos Chiu – CIBC

Sure. Thanks guys and congrats again and that’s all I have. Thanks

Geoffrey Burns

Thanks, Cosmos.

Operator

(Operator Instructions) Our next question comes from John Tumazos of John Tumazos Very Independent Research. Please go ahead.

John Tumazos – John Tumazos Very Independent Research

Jonathan Tumazos, good morning thank you for taking the question and having the call. Your balance sheet is spectacular and just wondering how in the slower markets you might utilize it. Do you expect to use the balance sheet to undertake big projects like Navidad, could you withhold some of your silver and gold production and sell it holding like a cash equivalent as the prices or do you envision consolidating out some under-finance to smaller competitors?

Steve Busby

Hi John, I think first in terms of the order of how to utilize our balance sheet I think priority one is financing what we see is an excellent growth project in La Colorada which has got an all-in-cost of about a $160 million over the next couple of years, that’s number one.

Number two, as I think we’ve discussed a few times we’re getting very close to completing our studies on pulp agglomeration and underground potential at Dolores we’re probably within eight weeks of delivering all that and there will be a capital associated with that project, so that would be my number two priority in terms of utilizing our balance sheet. I don’t off hand see us holding onto our gold and silver production, we’ve actually discussed that John about three or four times at the Board level over the last five years.

We ultimately always kind of get to the same place which is we are already very long gold and very long silver in terms of reserves in the ground and it’s our forte and our experience is really taking those ounces out of the ground and turning them into cash. So I don’t feel bad about selling what we’ve produced on an ongoing basis because we’re backed up by another ten years of reserves and plus a lot more of resources beyond that. So our view is always that we’re going to continue to sell into the spot market.

In terms of the very last piece and I guess this would be my third priority yes, we are continuing to review our sector and the landscape in our sector for opportunities to add production or add reserves. I have to say that there is no doubt that we are being very picky I guess is the best way to describe it, in terms of what kind of return we’re looking for to do some sort of acquisition.

And I look at our own portfolio and I’d say and we really changed a little bit of the way we looked at things and when you have got a deposit like La Colorada which is drawing and its over 400 grams silver and you have got a deposit like San Vicente which is also been growing and has a potential to grow even further and it’s over 400 gram silver it kind of makes sense to spend that first round of through and effort and capital on what you can do in your own backyard.

So as we have stacked up those opportunities within our own portfolio against external ones, what we’re finding is there is just not very many out there that are better than what we already have. And so yes we’re still looking and yes we would utilize some of that capacity if that right opportunity were to come along. As of today we have not found that right opportunity.

John Tumazos – John Tumazos Very Independent Research

Geoff with your various projects and I realize this is rough but looking at about five years, how much more do you expect the silver equivalent production of Panam to rise 10%, 20%, 30% net of that?

Geoffrey Burns

If you’re thinking five years John I’m going to dream big so I’m going to say 30%. And I say that I don’t want to scare everyone in the room around me here. I look at La Colorada and our expansion I think we’ve been very conservative about what we put out there to-date I think that by the time three to five years goes by you’re going to find out that we’re going to do better than what we’ve said that tends to be the way we approach it.

I think within that timeframe again even though we haven’t announced anything I have no doubt that at some moment in time we’re going to build pulp agglomeration and go underground in Dolores and again we’re going to see incremental production from there. I think there’s a tremendous opportunity at San Vicente, undefined today but I’ll put in this perspective we’re mining 900 tons a day there I mean this is a very small level of production relative to the potential of the vein and the other veins that we’re mining at that property.

When I had all that up and then I take away the fact that we’re going to lose Alamo that is going down and production is going to come down. I see the potential adding in the neighborhood of 20% to 30% more production over that time period. And I guess indirectly I’m challenging the group of guys sitting around this table this morning to help me get there.

John Tumazos – John Tumazos Very Independent Research

Thanks.

Geoffrey Burns

Thanks very much, John.

Operator

The next question comes from John [inaudible] of Canaccord Genuity. Please go ahead.

Unidentified Analyst

Hey guys, congratulations on a great quarter. I had a question here Manantial Espejo you had mentioned in the MD&A that part of the cash cost decline year-over-year was due to the devaluation of the local currency. Could you – do you have any idea of approximately how much of that decline is due to the currency devaluation, just trying to see how much would be sticky going forward?

Steve Busby

Yeah. Hi John, this is Steve. Overall if you look at last year versus this year’s Q1 our gross cash required for operating cost was down about $1.6 million and of that we have done some rough – it’s really difficult to get your hands precisely on what the FX effect on that is but I would say roughly it was probably three quarters in that, two thirds to three quarters in that.

Unidentified Analyst

Oh really, okay. And then most of your other assets I mean generally speaking cash cost were below actually your – the low end of your 2014 cash cost guidance for most of the assets. Going forward do you see it being fairly lumpy in terms of performance quarter-over-quarter with byproduct credits or I mean just to get to low end of cash cost guidance for the year, are we expecting maybe some smooth trends going forward kind of creeping up or is it going to be lumpy quarter-over-quarter?

Steve Busby

The lumpiness comes from Manantial Espejo, and taking Manantial out I think you are going to see fairly smooth numbers elsewhere with Alamo improving a little bit and maybe Dolores coming off a little bit as the recovery curves kind of get back to normal. But the real lump comes at Manantial and that big gold kicker and we are not going to see that over the next couple of quarters – I mean we are going to be in a bit of a dry spell if you will in gold. So, I would say to that no I think we are going to see fairly stable cost.

Unidentified Analyst

Okay, okay. That takes care of my questions. Thanks a lot guys.

Geoffrey Burns

Thanks, John.

Operator

The next question comes from Dan Rollins of RBC Capital Market. Please go ahead.

Dan Rollins – RBC Capital Market

Yeah, thanks very much. Just wanted to circle back to some of the comments that were made on the [TC in RCs] from your operations. Can you just give us some indication is it savings on the TC side, are you starting to see the refining charges that were I guess [inaudible] up over the last couple of years and the silver base trying to decline given the demand by the smelters?

Rob Doyle

Sure, Dan it’s Robe Doyle here I can give you a couple of comments. Obviously there is some proprietary information in our numbers there but overall we’re seeing some – the market particularly in RCs on silver on high grade silver concentrate has come down quite dramatically. At one point in time it wasn’t uncommon to see refining charge of pricing $4 per ounce for silver – for payable silver ounce and now that’s come way down and that’s typically that’s come down by at least 50% if not more.

Dan Rollins – RBC Capital Market

Okay. Perfect. Is it more price linked or is it really just a factor of supply and demand and – smelters?

Rob Doyle

That I think is a bit of both for sure. And obviously producers have been out to negotiate a little harder but there has been – there is more capacity that’s come on stream to have some of the more complex high grade silver comps and for instance and the [inaudible] Peru came onstream like last year that’s helped the market a little bit and various other facilities. So, there is a definitely supply demand and it’s not the capacity aspect to this.

Dan Rollins – RBC Capital Market

Okay. Perfect. Thanks very much and congrats on the great quarter guys.

Operator

The next question comes from Chris Thompson of Raymond James. Please go ahead.

Chris Thompson – Raymond James

Hi, good morning guys and congratulations on a good quarter. A couple of quick questions relating to some of the smaller mines just looking at the mill throughputs on Manantial Espejo and Huaron for the Q1. Are those mill throughputs sustainable is that what we should be modeling on an ongoing basis?

Steve Busby

Yeah. Hi Chris, Steve here. Manantial, yeah we are feeling pretty good with those throughputs, we do have some issues we are dealing with this quarter, we have got a crusher that’s – that we are having to upgrade a little bit. So we may see it come off a little bit in the short-term but I think overall we are pretty comfortable with that. Huaron, yeah we are definitely feeling good that we are seeing more ore coming out of the mine. So, it was a heavy quarter for us I’m not sure we are going to see it quite that high but we are feeling pretty optimistic there as well.

Chris Thompson – Raymond James

Great, Steve thanks for that. Just moving on I guess looking at some of the unit cost and I typically monitoring things on a per tonne mill basis at Morococha, Manantial Espejo and the San Vicente. Again a good quarter as far as what we were predicting I guess as far as those costs, do you see those costs in the Q1 sustain themselves?

Steve Busby

We typically – we are going through the cycles now of our collective bargaining with our unions that we typically see going into Q2 that’s where we see a bit of a bump for some of the labor cost. So you don’t know – I think you are going to see them come up to where we kind of guided through the year as it goes through.

Chris Thompson – Raymond James

Okay, Great. Thanks for that Steve and congratulations again guys.

Operator

The next question comes from Chris Lichtenheldt of Dundee Capital Markets. Please go ahead.

Chris Lichtenheldt – Dundee Capital Markets

Good morning. Just a quick question. At Alamo Dorado what is the expected reclamation cost when you are done producing there?

Geoffrey Burns

Yeah, Chris, I think we are carrying just under like $8 million, or $7 million to $8 million, I guess for Rob’s got it.

Rob Doyle

Yeah. Just give me a moment Chris. I think five days is

Steve Busby

Yeah, five days.

Rob Doyle

I think [inaudible] but it’s in that range.

Chris Lichtenheldt – Dundee Capital Markets

Okay, that’s it actually, thanks a lot.

Kettina Cordero

Okay. And thank you very much ladies and gentlemen for joining us this morning. It’s a very rewarding to come to you today with on the back of really our third very, very solid production quarter in a row. I look forward to updating you probably before our next scheduled conference call which will be in early August for our second quarter with the results of our – of the studies that Dolores we have been working on the pulp agglomeration and until then may the silver gods go with us.

Operator

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

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Pan American Silver (PAAS): Q1 EPS of $0.06 beats by $0.03. Revenue of $209.7M (-13.7% Y/Y) beats by $14.08M.