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Pan American Silver (NASDAQ:PAAS)

Q1 2011 Earnings Call

May 19, 2011 11:00 am ET

Executives

Michael Steinmann - Executive Vice President of Geology & Exploration

Geoffrey Burns - Chief Executive Officer, President, Director and Member of Health, Safety & Environmental Committee

Kettina Cordero -

Robert Doyle - Chief Financial Officer

Steven Busby - Chief Operating Officer

Analysts

Ralph Profiti - Crédit Suisse AG

Chris Lichtenheldt - UBS Investment Bank

Buck Bandura

Jeffrey Thorp

Haytham Hodaly - RBC Capital Markets, LLC

Question-and-Answer Session

Buck Bandura

Any thoughts on like Newmont's new policy that’s raising the dividend with the price of the increase in silver, kind of something like that, a ratio like they did?

Robert Doyle

I think it would be subject to our board’s discretion, of course, at any point in time. And I think we would prefer rather than to have an automatic trigger like that, we would prefer to make a determination each period as to what the dividend should be for that quarter. So that certainly hasn't been discussed in our boardroom at this point in time.

Operator

There are no more questions at this time. I will turn the call back over to Mr. Busby.

Steven Busby

Okay. Well, thank you, ladies and gentlemen, for participating in our Q1 conference call. And with that, I'd like to close the call. Thank you for your participation.

Operator

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

Operator

Hello, this is the Chorus Call conference operator. Welcome to Pan American Silver Corporation's First Quarter 2011 Results Conference Call and Webcast. [Operator Instructions] At this time, I'd like to turn the conference over to Mr. Kettina Cordero, Coordinator, Investor Relations. Please go ahead, Ms. Cordero.

Kettina Cordero

Thank you, operator, and good morning, ladies and gentlemen. Joining me here today are our President and CEO, Geoff Burns; 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. Any 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 in our most recent news release dated May 18, 2011, as well as those 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 turn the call to Geoff Burns, President and CEO.

Geoffrey Burns

Thank you, Kettina. Good morning, ladies and gentlemen, and welcome to Pan American Silver's 2011 First Quarter Earnings Release Conference Call. As you know, yesterday we once again released record financial results for the quarter ended May -- March 31, and today, we are pleased to give you more details on our performance.

I have to start by excusing myself in advance because, due to a personal appointment which I can't delay, I will have to leave before the Q&A session. However, Steve, Michael and Rob, who are here with me, will more than make up for my absence and will provide you with commentary and will answer all your questions at the end of our call.

Once again, today, I will open the call with some brief general commentary and then let Steve, Michael and Rob to discuss our operations, our development projects, our exploration programs and our record-breaking quarterly financial results.

I am pleased to deliver the good news that you are getting accustomed to hear, and again, we will be paying another quarterly dividend. Yesterday, our board of directors approved the payment of the second one of this year in the amount of $0.025 per share. The dividend will be paid out on or about June 15 to holders of record of common shares as of the close of business on May 31.

In the current metal pricing environment, Pan American continues to generate record financial results. Our dividend reaffirms our commitment and, perhaps more importantly, our ability to share our earnings with our shareholders without compromising our next leg of growth.

Let's recap our operating and financial results. During the first quarter of 2011, our consolidated silver production was 5.3 million ounces, decent, but frankly, slightly below our own expectations, due to a combination of lower throughput rates and grades at our Peruvian, Bolivian and Argentine mines. This was more than -- sorry, excuse me. The lower throughput was mostly due to a series of production disruptions in South American operations. Many of them were actually politically motivated and slightly lower than anticipated grades in Morococha and Huaron.

Fortunately, these issues were largely offset by another consistent and outstanding performance at both of our Mexican mines, Alamo Dorado and La Colorada, which continue to produce above forecast and at lower-than-expected cash costs.

I'm happy to be able to tell you that and report to you that the social issues I just mentioned and some of the production shortfalls I just mentioned have been successfully addressed. And I'm completely confident that we will make our annual forecast for 2011 of 23 million to 24 million ounces of silver. In fact, as I'm sure Steve is going to discuss, our San Vicente mine in Bolivia already has recovered the ounces it was short in the first quarter and is now well ahead of plan for the entire year.

As you have probably seen, our financial results were stronger than ever, taking full advantage of record silver and gold prices. Our margins continue to expand, and we delivered record adjusted net earnings of $64.6 million or $0.60 a share and record operating cash flows of $82 million or $0.77 per share, both well ahead of market consensus. This allowed us to bank another $40 million during the quarter and increase our cash position to almost $400 million and our working capital to almost $500 million.

I will now turn the call over to Steve, who will talk to you in detail about our operations. Steve?

Steven Busby

Thank you, Geoff, and good morning, ladies and gentlemen. In my nearly 30 years in the precious metals mining business, I have never before witnessed or even imagined the exhilaration that we are currently experiencing at Pan American Silver, where we've managed to successfully combine solidly performing assets with an experienced and confident operating team at a time of record-high silver and gold prices.

Our future looks even brighter as we had new exciting projects, coupled with an energized project development team determined to elevate the company to becoming the world's largest primary silver producer.

We successfully overcame several unexpected, unique and largely politically fueled challenges during Q1, producing 5.3 million ounces of silver at a cash cost of $7.83 per ounce, preserving our ability to meet or exceed both our silver production and cost targets for 2011, while sufficiently advancing our development projects to secure our future production growth.

Breaking down our Q1 operating results. Starting off in Argentina, our Manantial Espejo mine produced 859,000 ounces of silver at a cash cost of $8.56 per ounce, compared with 972,000 ounces at a cost of negative $6.63 per ounce a year before.

Productivities during the first quarter, particularly in the mine, were negatively affected by an intense annual union collective bargaining negotiation. I am happy to report that, that negotiation was settled successfully, and productivities have returned to normal levels.

In addition, we had to realign our offshore purchasing of repair parts and materials to comply with the heightened Argentina importation restrictions that were put in place to curb the country's strong import growth that had occurred during 2010.

Fortunately, we have successfully overcome these challenges, enhanced our employees' commitment and motivation and are sufficiently positioned to take full advantage of our open-pit mine fleet expansion in Q3 that will make up for Q1's production shortfall. We fully expect to achieve our production and cost targets by year end at Manantial Espejo.

Moving on to Peru. We encountered some background and reserve grade shortfalls at Morococha, where we produced 515,000 ounces of silver at a cash cost of $6.86 per ounce during the quarter, compared to 668,000 ounces at a cash cost of $3.58 per ounce the previous year.

Huaron produced 654,000 ounces of silver at a cash cost of $11.60 per ounce, compared to 663,000 ounces at a cash cost of $12.30 per ounce the year before, falling just a bit short of our expected silver grades.

It is difficult to make up shortfalls in production at these 2 mature mines, but we are stepping up underground development rates to try and improve quantity of production performance for the remainder of the year.

Meanwhile, Quiruvilca continues to produce solidly and profitably, even though the silver grade continues to fall as the mine deepens on the deposit and becomes much more base metals rich. During Q1, Quiruvilca produced 279,000 ounces of silver at a cash cost of $4.65 per ounce compared with 334,000 ounces at a cost of $2.56 per ounce in Q1 of 2010. Quiruvilca is solidly on track to meet or exceed our annual production and cost targets for 2011, while we advance reclamation projects to prepare the mine for eventual closure.

Moving on to Bolivia. Our San Vicente mine produced 640,000 ounces of silver at a cash cost of $13.49 per ounce during Q1, compared to 840,000 ounces at a cost of $7.22 the year before as productivities were negatively impacted by several production disruptions, which were all relatively minor but cumulatively significant.

Fortunately, we have the excellent ability to make up for disruptions at San Vicente by stepping up production from our high-grade area, the rich Litoral vein. And this is exactly what we have done in April. As Geoff mentioned, I am very pleased to report we have actually already made up the entire Q1 production shortfall in San Vicente in just one month.

Our Q1 costs were negatively impacted by the effect of reduced production, which, as I mentioned, is now resolved in April. However, we are also facing cost pressures with our copper concentrate smelting terms where TC/RCs have escalated some $2.42 per ounce during Q1. The copper concentrate market, particularly with respect to these concentrates containing appreciable silver values, has constricted due to all the new production that has reached the market in the last year or so, the closure of the Doe Run smelter, the problems in Japan and the recent movements in China to reduce output. We suspect this situation could continue through the remainder of the year.

I would also like to mention that, as previously reported, there were some Bolivian media reports in April suggesting the Bolivian government was considering taking control of the San Vicente mine. Largely, thanks to our employees and our local community support of Pan American Silver's involvement at San Vicente, there was actually no mention of nationalizing San Vicente in President Morales' speech on May 1, and nor has the company received any official correspondences discussing any intent by the government to take control of our mine.

From my perspective, this situation has actually served to fortify our employees’ and our community’s support of our Bolivian business, which has become one of the best performing investments in the company's history. We are fully expecting to meet or exceed our annual production targets at San Vicente during 2011, albeit at perhaps a couple of dollars per ounce higher than our projections, given the current silver-bearing copper concentrate market conditions.

Once again, Mexico continues to make up shortfalls in other parts of the company during Q1 with Alamo Dorado producing nearly 1.3 million ounces of silver at a cash cost of $4.93 per ounce and La Colorada producing 1.1 million ounces at $6.73 per ounce, both ahead of expectations and ahead of last year's 1.1 million ounces at a cost of $4.91 per ounce and 0.9 million ounces at a cost of $8.80 for Alamo Dorado and La Colorada, respectively.

As mentioned last quarter, we have initiated drilling at Alamo Dorado to gain a better understanding of the metal distribution in our Phase 2 pit, which has been consistently outperforming plan. And we also intend to investigate the potential to actually expand Alamo Dorado into a Phase 3 pit, given these higher metal prices. We anticipate concluding these analyses by year end but, meanwhile, anticipate both Alamo Dorado and La Colorada will continue to outperform and, in all likelihood, continue to offset shortfall in other parts of the company for the remainder of the year.

On the project front, we continue to advance our Navidad and La Preciosa studies, as well as the Morococha infrastructure relocations. We invested nearly $6.1 million at Navidad, $0.7 million at La Preciosa and $5.5 million at Morococha during Q1.

Infill drilling continues at Navidad as we advance the resource modeling, mine plant development, metallurgical testing, tailings facility geotechnical studies, the environmental impact analysis, the feasibility study and the community relations programs. We are targeting the fourth quarter of this year to complete a feasibility study for the project at Navidad.

At La Preciosa, our alternative mine plant evaluations are nearing an exciting conclusion. We are preparing the preliminary assessment for the project and expect to release this sometime in Q3, once we receive all the reports from the busy external consultants who are working on the project.

The Morococha facility relocation project continues on schedule and on budget for a year-end 2011 completion. Several of the buildings have been erected, including some of the camp wings, the air compressor buildings and the administration office. We are excited for the completion of these facility upgrades and look forward to consolidating and streamlining the operations, management and support functions at Morococha towards year end.

So all in all, thanks to both the breadth and depth of our experienced and motivated operating and project development teams, we are successfully addressing many challenges that had not been anticipated, and I am confident that we will achieve our full year 2011 production and cost guidance, while substantially advancing our project developments on plan and within budget. With that, I'll now turn the call over to Michael Steinmann for the exploration update.

Michael Steinmann

Thank you, Steve, and good morning, everybody. One year [ph] exploration project went over 31,000 meters of diamond drilling are designed [ph] a busy and successful exploration program during the first quarter of 2011. Our brownfield exploration amounted to a total of 24,960 meters of diamond drilling, representing about 19% of our 129,000-meter annual program for reserve replacement, likely behind where I expect it to be.

We had a couple of minor mechanical issues with some drills, which have been resolved, and we should easily reach our program targets for the remainder of the year.

The largest drill program was executed at Manantial Espejo with 7,560 meters, followed by Navidad with 6,046 meters and Huaron with nearly 4,000 meters for the first 3 months of the year. Results have been impressive in many of our operations, and we'd like to share some of the most exciting details with you.

Let's start with La Colorada, where drilling on the NC2 sulphides continued. I am very pleased to report that some of our deeper holes returned high grades with up to 4,100 grams of silver per ton and 29% combined base metals.

We have also discovered an over 100-meter long vein extension to the East, returning more than 2,000 gram per silver and up to 21% combined lead and zinc over vein width of 1 to 3.5 meters. I'm very excited about this vein extension, which we will explore further in the coming month.

The NC2 vein added the lion's share of the 28.3 million ounces of new silver reserves we discovered at La Colorada during the last 2 years. And in the first quarter of 2011, we have continued drilling with great success.

Exploration at Manantial Espejo has been successful as well with high-grade gold and silver ore shoots discovered along several new veins. Although short in most cases, they carry gold grades of 3 to 40 grams per ton and, in many instances, several hundred grams of silver.

The low sulphidation vein systems in Santa Cruz need a lot of drilling due to their spotty nature. The newly added Candelaria and [indiscernible] veins are no exception to this, but the high gold grades and the shallow nature of these ore shoots are very encouraging.

Our new exploration project is also located in the Manantial neighborhood. We optioned the Espejo project from Mirasol Resources. It covers 15,400 hectares of prospective ground, located just to the southeast of Manantial. The 4-year earning contract gives us the right to gain up to 61% of the properties by investing a minimum of $4 million in exploration, making certain cash payments to Mirasol and presenting a feasibility study within an additional 4-year timeframe.

I would like to move north to Navidad. We drilled a total of 6,046 meters of diamond drilling during the first quarter, mostly targeting Barite Hill for metallurgical and delineation drilling and Valle Esperanza for exploration and infill drilling.

Exploration at Valle Esperanza returned some amazing results like Hole #1570, which intersected 1,393 grams of silver over a core length of 17 meters. Hole #1568 intersected 1,052 grams of silver over a core length of 14.85 meters. Hole #1571 got 647 grams of silver over a length of 13.60 meters, and Hole #1575 returned 315 grams over a core length of 21.75 meters, just to mention a few.

These are simply some of the best intercept sites I ever drilled in my career. Although we are used to encounter wide intersects and high grades in many of the Navidad deposits, these results reiterate the importance of Valle Esperanza and will keep us very motivated to continue with the drill program on this deposit.

A second very exciting event was published yesterday by Treasury Metals, which will acquire our Pico Machay Gold Project. Pico Machay entered our portfolio with the purchase of Aquiline Resources last year. It represents a very interesting potential heap leach project with a measured and indicated resource of 270,000 ounces of gold plus 450,000 ounces in the inferred category, an interesting size, but it would be too small to fulfill our development criteria. Treasury Metals, run by the former CEO and VP of Exploration of Aquiline, is well-positioned to bring this gold project into production in a short timeframe. We will receive a cash payment of $21 million plus 11.5 million Treasury Metals shares for the project, and we'll hold an important interest in a well-positioned [indiscernible] gold company with projects in Peru and Canada.

As you can see, we have been very busy during the last quarter, not only with our exploration programs but also on the business development side. These efforts will continue for the rest of the year with a strong focus on reserve replacement at our operations and the addition of new prospective exploration opportunities. I would like to pass on now to Rob for our financial review.

Robert Doyle

Good morning, ladies and gentlemen. I'll provide a short but sweet update on our financial results for Q1.

This is the first period that we are reporting our financial statements under IFRS. Despite some of the operational challenges that Steve detailed in his discussion, the first quarter was extremely pleasing from a financial perspective. Generated record earnings and another quarterly dividend for our shareholders. Attributable earnings for the first quarter were $92.2 million, which equates to $0.86 per share. After taking out a $27.5 million mark-to-market, non-cash gain on our warrants, adjusted earnings were $64.6 million or $0.60 per share.

Our mine operating earnings were a record $96 million, which equate to a 50% gross margin, another new high for us.

The strong earnings were fueled by record realized prices for gold and silver, which combine to make up 83% of our revenue for the quarter. Our average realized silver price for the quarter was $31.94 on sales of 4.6 million ounces. And in gold, we sold 16,410 ounces at an average price of $13.85 per ounce.

We actually sold significantly less quantities of all metals than we produced as a result of timing of shipments during the quarter, which is the main reason for the $14.5 million increase in inventories that you see in our balance sheets over the quarter.

However, thanks to exceptional metal markets, consolidated revenues were very close to the record levels achieved in Q4 of 2010 at $190.5 million. Thus, we should see the benefits of the additional sales in the second quarter, as we reduce our doré and concentrate inventories.

We have seen continued pressure on our cost of sales from increased prices for consumables, royalties, wages and also appreciating local currencies, all aggregating to approximately a 13% year-on-year increase in our cost per ton. However, the growth of our net smelter return has increased by 48% on average over the same period, resulting in a margin expansion of some 85%.

Our Q1 earnings included a gain on derivatives of $27.5 million, as mentioned, in recognition of the mark-to-market movements of the Canadian dollar denominated warrants that we issued as part of the Aquiline transaction as required by IFRS. While we exclude this gain in the calculation of our adjusted earnings, we do expect these warrants to continue to create volatility in our future earnings, which is caused principally by movements in our share price and volatility and changes in the Canadian dollar against the U.S. dollar.

Our effective tax rate for the first quarter was 21%, which is significantly lower than the 35% we would expect in the long term, primarily due to the fact that the derivative gain is not tax-effective. We also recorded an upward adjustment to our tax assets we have estimated in Mexico of approximately $2.8 million.

Operating cash flow, before working capital movements and taxes paid, more than doubled from the comparable quarter of 2010 to a record $112.1 million. After we paid income taxes of $29.6 million, cash flow per share was $0.77 per share for the quarter.

During the quarter, we invested $20.5 million into working capital accounts and an additional $20.2 million in property, plants and equipment, mostly at Navidad on the technical work to support the feasibility study at Manantial Espejo as we gear up for the accelerated mine plan Steve mentioned, and at Morococha on infrastructure relocation.

We ended up banking $38.6 million in the quarter to take out cash and short-term investment balances to almost $400 million. Our pristine balance sheet and strong cash flows put us in an excellent position as we assess the financing alternatives available to us for the construction of Navidad and/or La Preciosa.

Moving quickly to the balance sheets. Our working capital continued to strengthen during the quarter, increasing by $63.3 million, most of which is reflected in higher cash and short-term investment balances.

Accounts receivable also increased noticeably, due directly to the higher metal prices and the resultant increase in the value of our shipments.

As I mentioned earlier, we increased the inventory of doré and concentrated products due to the timing of shipments.

We finished the quarter with a working capital position of close to $500 million and no debt, other than some minor capital leases. Financially speaking, the first quarter of 2011 was exceptional by all measures. With that, I'll hand it back to Geoff for some closing comments.

Geoffrey Burns

Thanks, Rob. Before opening the lines for questions, I think I do need to make a couple of comments about politics in the countries where we operate.

Let's start with Bolivia. As Steve mentioned, with the unwavering support of our union and our workforce and the unwavering support of our local community, we continue to operate San Vicente status quo. My comment would be a lot of press but much ado about nothing. We will continue to operate San Vicente. It is one of our best assets, and nothing has changed.

Moving to Argentina and the province of Chubut. There were elections held on March 20. And while the race for governor has yet to be determined, there is one very significant change. The FPV party has taken control of the legislature with the majority. The FPV party is Cristina Kirchner's party. And Cristina and the FPV party are pro-development, and they are pro-mining. More than ever, I am confident that we will see amendments to the legislation in the province that will allow us to develop Navidad.

We continue to keep both the local governments, our communities and the national governments informed of our schedule and of our progress. And I can't wait until the time we are allowed to dig our first shovel in at Navidad.

With that, I'd like to open up the call, operator, to questions. And I will have to take a -- leave that for Steve and for Rob and for Michael. And I would like to thank everyone for joining us here this morning, and I look forward again to being able to speak to you in about 3 months' time to tell you how we're doing with our second quarter. Thank you, operator.

Operator

[Operator Instructions] The first question comes from Haytham Hodaly of RBC Capital Markets.

Haytham Hodaly - RBC Capital Markets, LLC

Just a quick question, just to follow up with the comments Geoff just made on the election, et cetera, in Argentina. What's your -- in terms of your development plan, what's your assumption for the attainment of permitting in terms of your development plan at this point?

Steven Busby

Yes, we have -- we're estimating a 6-month permitting cycle, Haytham, in our anticipation. We've already started submitting portions of our EIA document, our Environmental Impact Assessment, to the government, so they can start analyzing certain parts of the project and give us some feedback. We're also sharing that with the communities. We anticipate once the official -- once the law is changed, we will officially submit a permit application with EIA. We estimate a 6-month timeframe for that. We do -- right now, our current forecast is that we will try to obtain permits sometime in the early part of 2012, which will allow us immediately to begin groundwork and ground preparations.

Haytham Hodaly - RBC Capital Markets, LLC

And your projected start date for commercial production, let's say, based on that time line would be?

Steven Busby

It would be 2 years and maybe 2 1/2 years from that point on, so mid-2014.

Haytham Hodaly - RBC Capital Markets, LLC

Okay, mid-2014 startup, perfect. And just another question with regards to Bolivia. Obviously, we -- you touched a little bit on the political rumblings, I guess, we'll call it, that we've heard of late. Have there been any discussions actually with the government officials regarding some of the stuff they've said?

Steven Busby

There has not been, no. The officials have not had any discussions. We have had meetings with representatives from the unions and certainly representatives from all the communities. And as Geoff mentioned, we have excellent support from all those groups. We have not had any official meetings with the government at all on these discussions -- supposed discussions.

Haytham Hodaly - RBC Capital Markets, LLC

Right. Is there -- are you still trying to get those type of meetings at this point?

Steven Busby

We are going to be meeting with COMIBOL, who is a joint venture partner on the project. But right now, that meeting is not intended to address any kind of nationalization movements or anything like that. It's pretty much just a typical joint venture meeting that we have with COMIBOL.

Haytham Hodaly - RBC Capital Markets, LLC

Okay. My final question, just in terms of costs. And obviously we've seen costs increase due to various escalation pressures, et cetera. What is your biggest hurdle, I guess, or what's the biggest component of the increase in costs over the last 12 months?

Steven Busby

Labor has been our biggest cost increase across the board. With all the union negotiations that we typically do this time of year, that's where we see all the labor impacts, and they range anywhere from 5% to as high as 24% down in Argentina. That's been the biggest impact. This TC/RC issue on copper concentrates would be second to that.

Operator

The next question is from Jeffrey Thorp of Sonoma Capital.

Jeffrey Thorp

I was just -- you seem to have a lot of cash and working capital, and I was just wondering what your plans with it are. Are you planning on potentially looking at acquisitions or new assets?

Robert Doyle

Jeff, I can take that, Rob Doyle here. Certainly, with the growth we have ahead of us in the form of Navidad and potentially La Preciosa, we do have needs for capital. So at this point in time, our plan is to continue to build our treasury, aside from the modest quarterly dividend that we pay, of course. But the idea is to really build treasury in anticipation of those capital projects.

Operator

[Operator Instructions] The next question is from Chris Lichtenheldt of UBS Securities.

Chris Lichtenheldt - UBS Investment Bank

First, just probably another follow-up question on cost. The 14% increase in direct operating cost due to labor that you cite in the MD&A, would that be in line with what you expected when you produced the guidance of $7 to $7.50 cash advance [ph] originally?

Steven Busby

It is, Chris, with the exception of -- during Q1, we were a little bit short on tonnage produced. Because those are largely fixed costs, our cost per ton is higher than what we anticipated. As we get our production levels up, which we're already seeing in April, the impact won't be as severe as what it was in Q1. But the levels of wage increases were in line largely with what we had planned in our budgets.

Chris Lichtenheldt - UBS Investment Bank

So, I guess, just another way to ask it. The $7 to $7.50 that you still expect to hit, that still assumes a lower by-product metal prices than we're seeing today? Because I think the guidance was based on 13-something gold and 90-some-odd cent lead and zinc?

Robert Doyle

Actually, lead and zinc were at around, slightly above where we had budgeted, but there is a favorable variance on gold.

Chris Lichtenheldt - UBS Investment Bank

We could actually -- okay. I don't want to suggest that yet, but you could actually do better if precious -- or if by-product metal prices stay above those levels?

Robert Doyle

I think that's why we gave the range and that we -- we're still confirming that range, Chris, of $7 to $7.50.

Chris Lichtenheldt - UBS Investment Bank

Okay, that's good. That's fair enough. Just on the San Vicente, you mentioned making up for lost production via the high-grade vein. Have you -- at high metal prices or high -- particularly high silver and gold prices right now, are you giving more contemplation or any contemplation to mining that out in a more advanced manner or is that sort of there when you need it?

Steven Busby

I would say in short-term spurts, it's there when we need it. We're not really focusing on trying to go in there and muck that material out quickly because it provides a pretty balanced feed, given all of our older shrinkage-style stoping methods that we use in the older part of the mine. Our view is if there is opportunities at San Vicente with the exploration successes that we're seeing and the potential out there are, there is opportunities we believe in the future to start to consider some increased production rates . But it won't come from, I'll use the word loosely, high-grading the Litoral bank.

Operator

[Operator Instructions] The next question is from Ralph Profiti of Crédit Suisse.

Ralph Profiti - Crédit Suisse AG

With respect to Peru and some of the political activities there, have you guys sort of heard the possibility of the amount of the possible tax increases or royalty increases? Or have these been just abstract comments out there?

Steven Busby

To date, Ralph, these have all been abstract comments. We have not seen any concrete figures whatsoever.

Ralph Profiti - Crédit Suisse AG

Right. Okay. When you think about sort of stress testing Huaron and Morococha, have you guys done that in your analysis? And how flexible are those operations to the possibility of a higher tax or royalty regime?

Steven Busby

I mean, we are making -- despite some of the problems we're having operationally there, we are still making pretty good profits, pretty good margins on our tonnage. We can take some stress in the form of increased royalties or taxes. We do pay a voluntary royalty there. Our hope is that, that's what they focus on and they focus on not a significant increase but a modest increase in that level, and we can withstand that.

Ralph Profiti - Crédit Suisse AG

And how flexible will those operations be to more exploration, the possibility of looking at expansion of operations? I mean, how flexible would that be in a new tax regime? Are those at risk?

Michael Steinmann

No, I don't think so. We are very active exploring in these places. They have very large deposits. They need a lot of drilling every year to replace the reserves. They are old mines and cover a very large area, but I don't see any risk on that side, if there really would be a change in the tax regime. But as Steve mentioned, these were, so far, just some comments during campaigns. We have nothing confirmed on it.

Operator

The next question is from Buck Bandura of Wells Fargo.

Buck Bandura

Just a quick question on the dividend policy. I notice a lot of investors with the ETS SLV and GLD, they don't pay a dividend. So differentiating the miners to pay a larger dividend might bring some of those investors over here. I have 2 questions. My first question is, Newmont Mining has initiated a dividend on the gold price, so as gold price goes up, they raise their dividend. Number 2, you guys pay an awful small dividend for the earnings you guys are generating. What are your thoughts going forward on dividend policy for long-term investors?

Robert Doyle

Rob Doyle here. Yes, I can provide some comments. Certainly, our hope is that the dividend will grow over time, as we continue to generate these kind of earnings and cash flows. However, of course, our main focus is on the funding requirements for our growth ahead of us in the form of Navidad and La Preciosa. So that's really what's driving the quantum of the dividend. At this point in time, we do want to differentiate ourselves, and we think it's appropriate to return some of the cash flow back to our shareholders. However, we do also want to build our treasury so that we are in a good position for the financing requirements of the new projects.

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