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I am providing my commentary on Pan American Silver Corp.'s (PAAS) fourth quarter conference call held on 22 February 2007.

I begin with some comments on the individual properties followed general comments and earnings information:

Alamo Dorado: Sonora, Mexico

Construction was completed this past November. Commissioning process was underway until January.

The company began pouring silver in January. The mine should produce 4.3 million ounces this year with an average cost of $3.27 per ounce.

La Colorada: West Central Mexico

Although silver production increased 13% during 2006 at La Colorada to 3.4 million ounces, the mine fell short by 400,000 ounces of its target. The company had difficulty with the sulphide plant, which was started a couple months late in June of 2006 and just recently reached design capacity 250 tonne per day capacity. Production costs should approach 3.8 million ounces for 2007.

The company discovered a new Amolillo vein and added 7.6 million ounces of silver. Depending on drilling results from the 2007 program, the mine might add further reserves.

Quiruvilca: Northern Andes in Peru

Quiruvilca produced 424,000 ounces in the fourth quarter and 2.1 million ounces for the year. Cash costs for the year were negative $0.04. Silver production rates are expected to drop slightly; however, zinc production should increase. This change is a result of the geology at Quiruvilca.

The company discovered important extensions to two vein systems containing gold, zinc, and silver. The 2007 drilling program should lead to more successes.

Huaron: 300 km (190 mi) Northeast of Lima

Huaron produced 891,000 ounces of silver in the fourth quarter at a cost of $2.15 per ounce. For the year, 3.7 million ounces, $2.41 per ounce. The company is working on projects to both lower costs and increase production, including a mine deepening program that will take at least 12 months to complete. Once this project is complete, the company will be able to access higher grade and wider ore zones.

The company increased reserves (proven plus probable) to 51 million ounces of silver.

Morococha: Peru

The mine produced 712,000 ounces of silver in the fourth quarter. Cash costs were a negative $4.09 per ounce as the results of high base metal prices, notably zinc. For the full year, 2.9 million ounces and cash costs were a negative $3.71. The company expects production to increase production from Morococha in 2007.

Reserves increased by 30% and silver reserves now exceed 120 million ounces. The company expects further increases in reserves after the 2007 drilling program.

San Vicente: Bolivia

Production was a modest 256,000 ounces at a cost of $3.49 per ounce. While this mine has the company's highest grade ore, it is located in Bolivia, which has a difficult political climate for miners. The company is taking a cautious approach until the political landscape becomes more favorable.

Manantial Espejo: Argentina

Construction continues to go well, with the completion expected in April 2008. Future annual production is expected to be 4.3 million ounces of silver and 62,000 ounces of gold.


General Comments

A quote from Geoff Burns:

Here is how I see our production unfolding in 2007. We plan to produce 17.6 million ounces of silver, up 35% from 2006. Estimated cash costs are just over $3 per ounce, using some pretty conservative base metal byproduct credit prices.

If we expect silver prices of about $14 per ounce, then the company should make roughly $200 million. Notice, I did not mention earnings, but rather making or cash flow. Market capitalization is $2.4 billion. If silver prices rise—I certainly hope that they do—the company will make that much more.

Earlier in the conference call, Ross Beaty stated:

Our share price is just off an all-time high and yet we are cheaper today than we have ever been, when our share price is compared to our net asset value by current metal prices.

Switching to reserves, the company recently announced a 20% increase in reserves (pdf). The company is confident that it will further add to its reserves in 2007. The silver discovery costs at the company's mines and projects are about $0.18 per ounce. Because the infrastructure already exists, the company can mine the new reserves with sunk capital, providing excellent value to shareholders. Furthermore, byproducts reduce the cash costs to mine the silver. As the company stated, silver is the primary focus.

While the company is always on the prowl for acquisitions, equity investors are fully valuing exploration stocks, making those stocks hard candidates for an acquisition, especially in light of the company's internal successes of adding new reserves at low costs at its mines and projects. In addition to buying reserves, the company is looking to discover new silver deposits in Central and South America. As stated by Ross Beauty, the company is exercising a disciplined approach to acquisitions.

Most definitely. I'll give you the best example. In 2006, the new ounces we added and these were not resource ounces, these were reserve ounces, these were at our mines and our advanced projects we're building mines on. $0.18 an ounce is what those ounces cost us to bring into reserves, $0.18 an ounce.

Compare that to, in some cases, acquisition of some silver companies, which we would have to pay $10 an ounce to acquire their ounces because that's where they are being valued at by the market. So, there's a heck of a gap there between buying ounces for $10 per ounce and discovering them for $0.18 an ounce.

Updated metrics are as follows:

  • Earnings (q4: Dec-06): 0.39
  • Earnings (fy: Dec-06): 0.79
  • Average Revenue (q4: Dec-06): 82.6M
  • Silver Production 2007 Forecast: 17.6 million ounces; and
  • Expected 2007 Cash Costs: $3.04 per ounce of silver.

On balance, I am favorably impressed with Pan American Silver. My impression is that it is a well managed company that is able to contain its costs and exercise discipline in its business affairs. While the company is seeking to add new reserves through acquisition, it will only do so in a prudent manner. The company is having good success at adding reserves at its mines and projects. The company carefully monitors its political risks and consequently capital expenditures. For example, although the company has a promising mine in Bolivia, it is waiting for more clarity before making more substantial investments. At present, Bolivia represents a very small portion of the overall asset portfolio.

Because I believe that the company is well managed, I then focus on my outlook for silver. Obtaining reliable and informative information on silver is difficult. But from what I have seen, I continue to be bullish on silver. Thus, I remain bullish on Pan American Silver.

Disclosure: I am long Pan American Silver shares.

Source: Pan American Silver's Conference Call Shows A Well-Managed Company In Bullish Phase