Kettina Cordero – Coordinator, IR
Geoff Burns – President and CEO
Steve Busby – COO
Michael Steinmann – EVP, Geology and Exploration
Rob Doyle – CFO
Steven Butler – Canaccord Genuity
Pan American Silver Corp (PAAS) Q3 2010 Earnings Call November 9, 2010 10:00 AM ET
Hello. This is the Chorus Call conference operator. Welcome to Pan American Silver Corporation’s third quarter 2010 conference call and webcast. As a reminder, all participants are in 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 would like to turn the call over to Mrs. Kettina Cordero, Coordinator Investor Relations, please go ahead Mrs. Cordero.
Thank you, operator, and good morning ladies and gentlemen. Today are our President and CEO, Geoff Burns, is joining us from Toronto, and I am joined here in Vancouver by our Chief Operating Officer, Steve Busby, our Executive Vice President of Geology and Exploration, Michael Steinmann, and our Chief Financial Officer, Rob Doyle.
I would like to start this conference by reminding you that this call cannot be reproduced or retransmitted without our consent, and by pointing out that certain of the 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 they 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, encouraging investors to refer to the cautionary language included in our most recent news release dated November 8, 2010 as well as those factors that emphasize under the caption risk related to Pan American's business in company's most Form 40-F and IR 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 turn the call to Geoff Burns, President and CEO.
Thank you, Kettina. Good morning, ladies and gentleman, and welcome to Pan American Silver’s 2010 third quarter earnings release and conference call. As has become our normal call format, I will start our call with some very brief general comments about our third quarter results, and Steve, then Mike will provide a more detailed discussion of our activities in our mines, our development projects and their exploration programs. Rob will then discuss our financial results and how we have continued to enhance our cash balances as we prepare for the development of Navidad.
Before jumping directly into our results, it is a great pleasure that I would like to mention that our Board of Directors approved a doubling of our annual dividend. Starting with the recently completed third quarter, we will move to a quarterly cash dividend distribution of 2.5 cents per share from what was previously semi-annual distributions.
Our third dividend of 2010 and first quarterly dividend will be paid on or about December 1 of this year, to holders of record of common shares as of the close of business on November 19. It is indeed gratifying to be in a position to comfortably distribute an increasing portion of our growing prosperity back to you, directly in cash.
Now to our results. Pan American delivered a solid third quarter, we produced 6.2 million ounces of silver in the third quarter and a cash cost of $6.08 per ounce. Our third quarter gold production was a very respectable 21,300 ounces in line with our expectations.
Our Zinc, Lead, and Copper production was slightly below planned, largely due to lower-than-forecasted throughput at our Huaron mine.
This indirectly hurt our cash cost, which were a little higher than we thought they would be due to the lower-than-expected byproduct credits.
Year to date, to the end of September, we produced 18.6 million ounces of silver at a cash cost of $5.41 per ounce, which puts us right on track to comfortably meet, and in all likelihood surpass our annual silver forecast of 23.4 million ounces at a cash cost of $5.90 per ounce.
Our consistent operating results translated nicely into outstanding financial performance during the third quarter. Trying not to steal to much of Rob’s thunder, as I know he’s all set to review with you in detail our third quarter financial results in a few minutes, I would like to mention a couple of key financial metrics.
First, silver prices averaged over $18.60 per ounce during the third quarter, which allowed our cash margins to expand to almost $12.70; the highest levels we’ve experienced since the first quarter of 2008. With silver prices now bouncing up $28 per ounce, our margins have literally exploded in the last several weeks.
Second, our cash flow from operations before chances in non-cash working capital items was $50.7 million or $0.47 per share. And lastly, we had net free cash flow and banked $51 million to bring our working capital position at the end of September to over 360 million.
I think it’s safe to say, we delivered some very fine financial results in the third quarter. I’ll now turn this call over to Steve, who will present a detailed account of our operations and our project development activities, Steve.
Thank you, Geoff, and good morning everyone. It’s my pleasure to provide you a report on our Q3 2010 mine operating results and project advances.
We remain on target to meet or exceed our 2010 consolidated operating performance forecast and project development advances. I’d like to thank all of our dedicated and hardworking employees and contractors for overcoming their day-to-day challenges, and executing their duties so well. These people are the backbone of our organization and continue to demonstrate their superior skills at sustaining and growing our business successfully.
As I had predicted last quarter, our Huaron mine in Peru has showed significant improvements in production and cost, following the restart of our mechanized mining operations in increasing production from the recently opened, and higher grade 180-level in the mine.
During Q3, Huaron produced 823,000 ounces of silver, 12% greater than Q2 at a cash cost of $11.71 per ounce, 14% less than Q2. I expect to see continued improvements at Huaron in Q4 as we get this operation back on track to its normal long-term, lower-cost, and stable production profile.
Our Quiruvilca mine produced 288,000 ounces at a cash cost of $9.40 during the third quarter. Favorable metal prices have allowed us to continue profitable operations at Quiruvilca while we accelerate certain reclamation projects in the areas apart from the current mining activities.
Our Morococha mine contributed 693,000 ounces at a cash cost $4.20 during Q3, right in line with our forecast. We spent $3.1 million on Silver works preparing for the relocation of our primarily surface offices, shops, labs, and camps in 2011 according to the agreement we signed with our neighbor Chinalco. Furthermore, we have recently completed the legal work required to obtain the rights to mine the extension of the Silver rich Bonaentura vein that was included in our agreement with Chinalco.
We are currently completing mine plans to develop and mine the plus 600,000 tons of 351 gram per ton silver-grade ore that we know already exist at this extension of the Bonaventura vein. In addition, we are preparing an exploration program in this new area.
Our Manantial Espejo mine in Argentina produced 1 million ounces of Silver at a cash cost of $3.65 during Q3, in line with our production forecast, all be it at a 16% higher cost as we continued to feel the effects of the county’s sustaining double-digit U.S. dollar inflation rates, and our lower gold grades compared to Q3 2009, both of which had raised our cash cost.
We are evaluating a number of interesting cost saving initiatives that will be rolled into our 2011 mine plan and we’ll report that in early part of the new year.
Further north in the providence Chubut, also in Argentina, we are busy advancing our Navidad project development activities. We invested nearly $12 million in Navidad during Q3, where nearly 180 people are working onsite. We have been extremely busy completing the infill drill program, metallurgical testing, failing facility GEO technological studies, environment impact analysis, and preparing the preliminary economic assessment, which we will issue before the year-end.
I would be remiss in my comments about our operations in Argentina if I did not mention that we are sadden by the sudden, and unexpected loss of the former President of the country, Mr. Nester Kirchner, an avid supporter of mining. And we wish to offer our deepest condolences to Madam President, Cristina Kirchner, and their family.
Our San Vicente mine in Bolivia produced 676,000 of silver at a cash cost of $8.99 per ounce during Q3 of 2010, which was approximately 10% below our production and 26% above our cash cost forecast due to mine development and stoke sequencing as well as the anticipated tendency for the mine grades to trend towards the average reserve grade of the deposit as the high bridge stockpiles we had built for mill startup are now largely depleted.
Overall, our operating cost have been exceedingly stable in the low inflationary environment that exist in Bolivia today, and the operation is settling into a steady-state mode, reasonably well. We are very excited about our continued exploration successes and feel San Vicente has become yet another consistent, profitable, and long-term asset for the company.
Our Alamo Dorado mine in Mexico had yet another outstanding quarter in Q3, producing 1.8 ounces of silver at a cash cost of $2.98 per ounce, well above our forecasted performance thanks to continued benefits achieved from altering the mine sequence during an extended dry weather condition experienced earlier in the year.
We actually had stockpiled some of the high-grade ores from the extended dry season, and we still have a little bit of this material left to process during the fourth quarter.
At the La Colorada mine, we produced right on plan at 912,000 ounces of silver at a cash cost of $8.67 per ounce. We have additional underground mining equipment arriving during Q4, which will allow us to kick up mining rates going into early 2011. This higher mining rate will be included in our 2011 production forecast, which we will release early in the new year.
It was particularly gratifying for me to have reported in early October, that we have been named recipients of the prestigious Costco De Plata Safety Awards for both our Alamo Dorado and La Colorada mine in Mexico. This is a reflection of our employee’s continued commitment to the highest standards, and their primarily dedication to safety.
I would again like to take this opportunity to congratulate each of our Mexican employees and contractors on this tremendous achievement.
We have also advanced our preliminary economic assessment at the La Preciosa project during Q3, spending $2.7 million on infill and exploration drilling, metallurgical testing, GEO technical studies, environmental baseline studies, and advancing a preliminary economic assessment which we aim to complete by year end.
Our thinking is that the mine plan for this project will consider both open pit and underground mining methods. As one of the last steps in completing the PA is the definition and identification of the critical ground support systems we will need to execute in the underground mine.
To summarize, our silver production was in line with our consolidated forecast, achieving 6.2 million ounces at an average cost of $6.08 per ounce and our projects advanced according to plan as we spent a total of $17.5 million during Q3.
We are solidly on track to meet or exceed our annual consolidated performance targets of producing the 23.4 million ounces at a cost of $5.90 per ounce while continuing to advance our exciting development projects and completing preliminary economic assessments for both the Navidad project in Argentina, and the La Preciosa project in Mexico.
With that, I’ll now turn the call over to Michael Steinmann for the exploration update.
Thank you, Steve. Good morning, everybody. Our exploration activities are very impressive during Q3 and for the first nine months of the year. Q3 alone we completed over 83,600 meters of diamond drilling, which included 33,400 meters at Navidad, and nearly 20,500 meters at La Preciosa.
Looking at the period from January to September of this year, we drove the company total of nearly 228,600 meters, which includes over 84,000 meters of infill, metallurgical and condemnation drilling at Navidad, and nearly 55,200 meters of infill and exploration drilling at La Preciosa. This is a company record, and due to the substantial increase programs at La Preciosa and Navidad, far ahead of the 183,000 meters initially planned for the entire year.
From January to September, our current operations completed a total of 83,900 meters of ground fill exploration, and resurface and resource replacement program. The program was 74% complete at the end of the quarter and right on track to complete our 2010 plan, or 113,000 meters of drilling.
I hope that you can appreciate that large drill programs like these return far too many individual interesting results to be discussed in detail during this call. But I would like to mention some of the most exciting discoveries we’ve made during the last quarter.
As in the past several quarters, our La Colorada mine enjoyed the most exploration success. It is covered lateral and vertical expansions to all the major structures, either a sulfide or in a few places as oxide ore. Both sides of the NC2 and NC3 vein extensions returned the highest grades with an average well above 1,000 grams per ton silver with very high lead in zinc grades.
Many drill holes returned samples of 2,500 up to 4,000 grams per tons. Expansion of the Alamo Dorado and [inaudible] oxides are not far behind with average grades in the 700 to 800 gram per ton silver range. Below a somewhat lower grade in Australia and [inaudible] oxide. Overall, I expect again to see a substantial resource increase at La Colorada, and we outline our research at the end of this year.
Alamo Dorado also returned very exciting exploration results. First, states of our adjoining efforts was focused on immediate reserve additions, both our operations and the results will be reflected in the year-end reserve provision. I expect more than a 100% resource replacement in Manantial Espejo adding at least one year of life to one of our most profitable mines.
Drilling continues to the northwest extension of the main Marta vein where we have identified some potential open pit material along the 470 meter long vein extension. Along deeper drill hole, they intersected about 200 meters below surfaces spilt of the Marta vein, 1,300 grams per ton silver at 2.7 gram per ton coal, over a lift of nearly 4 meters. A fact that it is covered potential open pit and underground mine of [inaudible], underlines the important potential of this recent discovery.
Besides the immediate Bronze field exploration for resources and resurface addition, we started a more regional exploration program on our large over 25,500 [inaudible] package around Manantial Espejo
There are literally hundreds of range showings on the property, and our current program is focused on target identification for next year’s drill program.
Brown field exploration are advancing as planned, and I’m confident that new discoveries will again, more than replace what we’ve mined during 2010. As is our standard practice, the new resurface estimations will be done as of 31 of December 2010, and published in February of next year.
Both our development projects are advancing very well. La Preciosa finished the third quarter with nearly 20,500 meters of diamond drilling for a total of 55,200 meters since January. We drilled about 10% more than planned, finishing most infill and exploration drilling for this year. Results, with all the integrated in the PA, which should be completed and released towards the end of this year.
Navidad had an incredible busy third quarter with a total of over 55,200 meters of infill metallurgical combination growing. This is a great achievement and an important step towards completing our PA before the end of 2010. Infill drilling was completed over large parts of the deposit, and geological as well as structural interpretations are being finalized.
I’m very much looking forward to exploring areas surrounding the primary deposit next year, based on our new and more detailed understanding of the Navidad’s style mineralization. I’d like to pass it on to Rob now for the financial review.
Good morning, ladies and gentleman, I’ll keep my comments relatively brief this quarter and rather let the numbers speak for themselves. With the improving price environment for the metal we produce, combined with the solid operating performance we have come to expect from Pan American, our Q3 financial results, were in a word, stellar.
We reported record sales of 161.3 million which was a 36% increase over the record sales from a year ago. Our mine operating earnings were record 60.6 million, 75% higher than mine operating earnings from a year ago, and 18% higher than they were last quarter.
Net income was 28.8 million which equates to $0.27 per share, a 66% increase as compared to third quarter of 2009. Cash flow generated from operations before working capital movements was 50.7 million or 47% per share which was a 17% jump from one year ago and Q2 2010.
The strong cash flow from operations allowed us to bank 50.7 million in cash and short-term investments during the quarter, in addition to the 2.7 million we paid to shareholders as a dividend.
As strong as our sales were in the quarter, we were not able to sell about 4,000 ounces of gold produced in the quarter and that’s into the fourth quarter with the relatively large metal inventories of about 2 million ounces of silver and 15,000 ounces of gold; a happy situation given our prices of previous metal have increased since the end of the third quarter.
Relative to Q3 2009, sales increased by 42.7 million, 89% of that increase was due to higher realized prices with the balance due to increases in quantities of silver and zinc sold. Other than price adjustments from sales booked in prior periods, earnings amounted to about 0.6 million in Q3 2010.
The increase in sales was partially offset by higher crest of sales which increased by about 25% with depreciation staying relatively similar. The net result was that mine operating earnings jumped by 75% to 60.6 million for a gross margin of 38%.
Our effective tax rate in Q3 2010 was 37%, which was somewhat higher than our long-term expected effective rate. The main reason for that result conserved the assumption that the exploration and project development expenses at Navidad and La Preciosa of 9.8 million will not be tax effective.
Moving to the balance sheet, our working capital increase by 38 million during the quarter as a combined results of increasing our cash and short-term investments by 50.7 million and our inventory balances is by 5.9 million offset by an increase in current liabilities of 15.2 million.
We finished the quarter with working capital of 360 million and cash and short-term investments of over 288 million and no debt. Besides our excellent financial performance that was driven by consistent operating results and higher metal prices, I’m very pleased to report that after a longer-than-anticipated delay, we have finally started to receive vat recoveries in Argentina.
During the third quarter we received 3.3 million from vat recoveries and sequent to the end of the quarter have been able to collect an additional 5.9 million.
With that, I’ll hand it back to you, Geoff, for some closing comments.
Thanks, Rob. I would again like to emphasize our current strategy. We are going to focus on optimizing our current operations to maximize our cash flow generating capacity and profitability.
We are going to continue to aggressively explore around our current assets to extend their mine lives. As Michael and his exploration team have continuing demonstrated, there’s no question that the best exploration potential and the best value addition is there to be found where we are already mining.
And we’re going to continue to keep our project development teams busy as we push forward on the development work at both the La Preciosa and Navidad. These two projects, particularly Navidad, are without question, key to Pan America’s future growth.
The one thing we haven’t discussed, and I’m sure you most keen to hear about, is the status of the mining launch in Chubut, where our Navidad is located.
We have focused a great deal of effort over the last several months on sharing our activities and plans with the local communities around Navidad. Our transparent style appears to be working, and we are clearly gaining local support given the recent favorable declaration issued by the mayor of this central plateau region, reaffirming that group’s intention to positively support the development of Navidad and in general, decide on the development of their natural resources in order to improve the life in their communities.
We are confident that we can garner significant support for the Navidad project, and for the necessary mining law reform, by openly disclosing and discussing with the local communities and the government the results of our preliminary economic assessment and the environmental-responsible development plan we are preparing.
In Navidad project can clearly become a welcome catalyst for reversing the steady population decline experienced over the past few decades in Chubut’s Central Plateau, bringing significant prosperity to the people of that region.
I remain absolutely confident that the needed amendment to the current mining law that will allow us to proceed with Navidad will be forth coming. However, given the unfortunate and unexpected passing of the former President and the head of the Peronist party, Mr. Nester Kirchner, and the unavoidable introduction of a degree of political volatility, and the significant countrywide debate that surrounded the recent passing of the Glacier law at the national level, I now believe that the most likely timing of the introduction of the law will be after the provincial elections which take place at the end of March of next year.
This is still consistent with the plan completion of our feasibility study, and should put us in a good position to make a construction decision in the spring of 2011.
Before opening the call to questions, I would like to make a very brief comment on silver and gold prices. Last quarter I said that in my opinion nothing has fundamentally changed over the past year and a half that would change the long-term investment appeal of silver and gold. I indicated that I believe there would be more governmental intervention in the financial markets that would lead directly to currency deflation.
I must confess that even I did not anticipate the QE2 program and the profound effect it has had on the prices of hard commodities and precious metals. I continue to contend that in a world where currencies are going to become less and less able to maintain their relative value prone to the vagrancies of political pressure that silver and gold, even at today what seems like lofty prices, are going to look extremely appealing as long-term investments.
In an environment like this, precious metal companies like our, here at Pan American provide a compelling value proposition.
With that, I will now ask the operator to open the lines for question.
Thank you, Mr. Burns. We will now begin the question-and-answer session. (Operator Instructions). First question from Steven Butler of Canaccord Genuity. Please go head, sir.
Steven Butler – Canaccord Genuity
Good morning, Jeff, et. al. Guys, congratulations on the results. Navidad, 55,000 meters in the quarter alluded to infill’s met and condemnation drilling. How much of that infill drilling, Michael, was related to inferred conversion, or is it simply the M&I infilling for reserve purposes? Thanks?
Yeah, Steven. Most of it is M&I as drilling and infilling, there’s some in the surroundings, very close to deposits and some inferred to the M&I. I think it’s a bit too early for me to talk about details and numbers. But most of it is M&I infill.
Steven Butler – Canaccord Genuity
Sure. And as you give thoughts to the silver price, I can’t remember I’d have to look up the scoping study done by the previous owner, Aquiline, but what is the current thoughts, guys, on silver price for amount of resource for reserve purposes as you go towards year end and implications it may have for the scoped – previously scoped minable resource at Navidad?
Why don’t I make a comment on the price, and then perhaps I’ll let Michael comment on the effective price on the size of the resource and the amount of material that ultimately might end up in our mind plant for the PA.
Last year, Steve, I believe we calculated reserves – our reserves internally at Pan American at a $13.00 silver price. That clearly appears to be a far too conservative assumption given what we’re seeing going on in the silver market today.
I think it’s, you know, we probably look more to analyst consensus, long-term pricing when we’re looking at very long-termed development projects. I think the last time we looked at that pricing deck, the average price came out to about $16.00, which again seems quite low relative to what we’re seeing today.
I suspect that when we get right into the detail that we’ll probably be at least for the PA, which is only a number of weeks out, maintain that consensus pricing number at about $16.00. Obviously, we’ll try and sensitize at least the financial metrics to something that more closely approaches what we’re looking at today. I’d like to see – while I'm still incredibly bullish on the price, I’d certainly like to see the sliver price settle, not settle so much, but at least maintain its current position for a number of months before we go through a process of rerunning the entire resource estimate at an even higher price.
And now, Michael, maybe you can add something to that.
Yeah Geoff, no problem. Of course, with the high prices now, and if we would use higher prices in the future, that would have a positive impact to our future reserves. If you look at data on the inferred portion of the total resources, it’s not that large at the moment. We have a large part that’s been indicated already at $16.00. But there’s a lot of very positive through results and surroundings that we are picking up and hopefully will help the next year’s return, lower grade but obviously at the much-higher silver price it will be very interesting as price and targets for the future.
Steven Butler – Canaccord Genuity
Okay. Thanks, guys. For the record, my long-term silver price is $17.25 respecting higher peaks over the near term. Thanks.
(Operator Instructions) There are no more questions at this time. I’ll turn the conference back over to Mr. Burns.
Thank you, Operator. Ladies and gentlemen, thank you very much for joining us here this morning for our third quarter earnings release conference call. I look very much forward to continuing to see buoyant silver prices, although I confess a little bit, that even I have been surprised by the rapidity with which silver has moved closer – over $28. And I hope you can join us in February next year when we bring you our fourth quarter results and our forecast for 2011. Thank you.
Ladies and gentlemen, this concludes today’s conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.