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Great Panther Silver Limited (NYSEMKT:GPL)

Q2 2012 Earnings Call

August 14, 2012 10:00 am ET

Executives

Rhonda Bennetto – Vice President-Corporate Communications

Robert A. Archer – Chief Executive Officer

Martin Carsky – President

Analysts

Jeff Wright – Global Hunter Securities LLC

Heiko Ihle – Euro Pacific Capital, Inc.

Joe Reagor – Global Hunter Securities LLC

Bruce Forer – EF Capital LLC

Operator

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Great Panther Silver Limited Second Quarter 2012 Financial Results Conference Call. 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)

Now, I like to turn the call over to Ms. Rhonda Bennetto, Vice President, Corporate Communications for Great Panther Silver. Thank you. You may begin.

Rhonda Bennetto

Thank you, Natania. Good morning and thank you for taking the time to join our call today. Mr. Bob Archer, Great Panther’s CEO; and Martin Carsky, our President, will be reviewing our Q2 financial results and answering any questions at the conclusion of the prepared remarks.

Before we begin, I’d like to mention that some of the commentary on today’s call will contain forward-looking statements. Although we will make every effort, you should be cautioned that there can be no assurance that those statements will prove to be accurate and that actual results and future events might differ materially from those noted today.

After some remarks from Mr. Archer, there will be a question-and-answer session, and a replay of this call will be available a little later today. The details to access the replay were noted in the press release announcing this call, and are available on our website.

I’ll turn the call over to Bob Archer, Great Panther’s CEO.

Robert A. Archer

Thank you, Rhonda. Good morning everyone, and thank you for joining us. Before I speak to our actual financial results, I would like to note a few key operational takeaways from the second quarter.

The overall metal production in Q2 was effectively flat quarter-over-quarter, but this is expected to increase in the second half of the year. The drought conditions throughout Central Mexico, which impacted our operations at Topia ended in June, but for the majority of the second quarter we were forced to cut back our plant throughput and stockpile of ore that is being processed now.

Although this resulted in a 1% decrease in overall metal production when compared to the second quarter of 2011, Topia’s silver production actually reached a record 148,439 ounces in the quarter.

Overall gold production increased by 22% from a year ago thanks to steady production from the Santa Margarita vein at Guanajuato, and the plant at Guanajuato achieved record recoveries of 91.1% for silver, and 92.3% for gold due to the addition of a regrind mill. We are confident that a number of the operational developments and efficiencies that have been put into place will prove beneficial to the growth in production in the second half of this year.

For instance, the Guanajuato mine complex is now operating on a 7 day week instead of a 6 day week, and that will allow for increased equipment utilization and production. In the Cata mine at Guanajuato, the sill pillar will be recovered at the 470 meter level, and in the plant a new double-deck crushing screen became operational in June, which should further improve our recoveries.

Now let me shift into some of the key financial results from the quarter. You have been hearing on earnings calls throughout our sector that revenues have been impacted by lower silver prices and rising costs industry wide. Although our revenue growth was essentially on target, like our peers our gross profit was impacted by lower silver prices and higher smelting and refining charges.

On top of that, we realized higher than normal amortization and depreciation charges due to the substantial investments we recently made in our mines and in plant upgrades and equipment purchases. Furthermore, the majority of our 2012 Capex budget was spent in the first half of this year. As such, from the first to the second quarter of 2012, gross profit decreased by 2.6 million or 40% mainly due to the decrease in the silver price and a 58% or 0.8 million increase in depreciation.

In the second quarter revenues increased 69% over the same period last year to 14.4 million. As noted earlier in the year, we have secured contracts for the sale of all of our planned 2012 concentrate production and to date have not experienced any concentrate backlogs as we did last year.

When compared to Q1 of this year, revenue for Q2 increased by 0.8 million or 6%. Although production for the second quarter was relatively consistent with the first quarter, the increase in revenue came from concentrate shipments that were in transit at the end of the first quarter, which we recognized in this quarter, albeit, offset by a 14% decrease in silver prices.

Another important and related item that I will address is the reduction in our cash position. During the second quarter, our cash balance went from 40.3 million at March 31 to 28.7 million at June 30, 2012. The primary factor for the decrease was the timing of payments on concentrate shipments during the second quarter. Under our existing contract with a European smelter, there is a long lead time for payment, resulting in a temporary drawdown on cash, but an increase of 8.5 million in accounts receivable.

We do have a credit facility available to receive advances on shipments of concentrates, but decided not to use it as they would have been a cost to borrowing against the line as well as locking in spot silver prices. Given that we have the cash available at no cost, we determined that it was more prudent to simply use our cash.

We maintained a very strong working capital position throughout the quarter, which at June 30 was $49.9 million. Total cost of sales in Q2 was 8.3 million, which was almost double when compared to Q2 2011. However this increase is primarily due to the higher metal sales volumes this year, as compared to the concentrate buildup that we experienced last year along with a slight increase in operating costs.

Our consolidated cash cost per silver ounce net of by-product credits for the second quarter was $11.42 for the second quarter of 2012, 11% lower than Q2 of 2011, but 26% higher compared to $9.05 in the first quarter of 2012. As I have often commented on before, these fluctuations in unit costs are largely a function of variable grades and by-product credits reflecting gold, lead and zinc prices rather than actual on-site costs.

Although our revenue was essentially in line with our expectations, lower metal prices and slightly higher operating costs resulted in lower net income of 0.4 million this quarter when compared to $2.5 million for the same period in 2011. Another non-cash factor negatively affecting net income was a foreign exchange loss of 0.8 million. This loss relates primarily to unrealized losses on loans made by the company through its wholly owned subsidiary in Mexico.

To show the effect that foreign exchange fluctuations can have in the first quarter of this year we realized a gain of 3.2 million as the peso strengthened in the quarter. This was essentially a reversal of the foreign exchange losses we experienced in the fourth quarter of 2011. During the end of the second quarter, the peso weakened, so we reported a loss. Unfortunately, we expect the volatility of the peso against the Canadian and US dollars to continue and as such we will continue to report gains or losses in future quarterly periods.

And while this is a non-cash item, it does still affect the bottom line. And finally, adjusted earnings before interest, taxes, depreciation and amortization or adjusted EBITDA was 3.7 million for the quarter compared to 2.8 million for the same period last year.

As for what the second half of the year looks like for us, we are retaining our guidance for metal production in the range of 2.5 million to 2.75 million ounces of silver equivalent, although realistically we do expect to be in the lower end of this range. Production from Cata, the highest grade area of the Guanajuato mine complex, is expected to increase. The Guanajuato processing plant, which is already achieving record metallurgical recoveries will be further improved.

Development at Valenciana is ongoing along with underground diamond drilling throughout the Guanajuato mine complex. Throughput at Topia is back to more than 200 tonnes per day and we’re catching up on the stockpiled ore from the first half of the year. If there is one message I would like you to take away today it is this that our company and our board of directors remain committed to our growth strategy, and we feel strongly that continued execution will allow us to achieve both our near and long-term goals.

We believe in our plan to become a mid-tier silver producer with the highest possible margin capture. Our corporate priorities remain on track. As part of our commitment to achieve these goals, the company announced a number of changes to its senior management structure on July 18, 2012, primarily the separation of the President and CEO roles, will allow me to focus more on corporate strategy, business development and marketing, while Martin Carsky, as our new President, will focus on operations, fiscal oversight and administration.

We believe that these and other changes will allow us to be more focused, efficient and productive and return improved value to our shareholders. That concludes my commentary on our Q2 results.

Operator, at this time I’d like to open the Q&A session, please?

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from Jeff Wright with Global Hunter Securities. Please proceed with your question.

Jeff Wright – Global Hunter Securities LLC

Hi, good morning Bob. Thanks for taking my question.

Robert A. Archer

Good morning Jeff.

Jeff Wright – Global Hunter Securities LLC

A couple of questions on Guanajuato and San Ignacio, so the second half of the year – so the mill is going to 7 days, so we should not anticipate that there is additional tonnage on a daily basis, the rate of tonnage is not increasing, correct?

Robert A. Archer

Actually it is the mine that has gone into 7 days Jeff. The plant is still working on a kind of a week on, week off type of schedule, and it runs usually between 800 tonnes and 900 tonnes per day when it is operating, but it is actually the mine that has gone to 7 day a week, which gives us better equipment utilization and better efficiencies that way.

Jeff Wright – Global Hunter Securities LLC

Okay.

Robert A. Archer

So, we’re hoping to see more tonnes coming out of the mine, basically this is bottom line.

Jeff Wright – Global Hunter Securities LLC

Okay. Now you talk about Cata and Valenciana, both improving, so would we look for higher grades through the second half of the year in comparison to I guess about 190 grams per tonne in Q2?

Robert A. Archer

Yes, grades are always the hardest thing to predict as you are aware, they do tend to fluctuate a lot. Potentially we could see grades increase and depending on what we find at Valenciana, we are still drilling that right now, and we will try to get a bit of production coming out of there later on in the year. We will be producing from that sill pillar at Cata, which should give us some higher grades from there.

So, we are hoping that yes the grades will increase a bit, but it is difficult to be too specific on those.

Jeff Wright – Global Hunter Securities LLC

Okay, and one last follow up, [starting] last year or last press release, you said you guys were in negotiation to acquire surface lands and to begin permitting – to get down into the [ore] with a ramp, any update on permitting or how long do you think that timeline would be to if it permits us to get the ramp and starting driving in there?

Robert A. Archer

Well, actually I hope to have an update on that out maybe within a week or so. And so, I probably shouldn’t comment too much on that at the moment other than that we are making good progress.

Jeff Wright – Global Hunter Securities LLC

Okay. But update in about a week or so?

Robert A. Archer

Well, that is good.

Jeff Wright – Global Hunter Securities LLC

Okay. Well, thank you very much and I will go back in the queue. Thanks.

Robert A. Archer

Thanks Jeff.

Operator

Our next question comes from Heiko Ihle with Euro Pacific Capital. Please proceed with your questions.

Heiko Ihle – Euro Pacific Capital, Inc.

Hi, thanks so much for taking my question.

Robert A. Archer

Hi Heiko.

Heiko Ihle – Euro Pacific Capital, Inc.

Can you guys talk a little more about the additional ore that is sitting around Topia, should I see most of that being utilized up in Q3 or can you maybe just give a breakdown between Q3 and Q4?

Robert A. Archer

I guess well the majority of it should come through in Q3 I suspect, but we have been making some additional improvements at the plant there as well, and so it is not quite back to full operating capacity just yet. We are shut down for about a week to 10 days or so to put in the new screen.

So, we just like to get that back up and running again at full capacity. So, it will take us into Q4, but I don’t have a particular schedule at this point Heiko.

Heiko Ihle – Euro Pacific Capital, Inc.

But if I put 70:30 into my model, it probably wouldn’t be too far away from the truth.

Robert A. Archer

Yes, somewhere around there. 70:30, 60:40, something like that for Q3 and Q4, yes.

Heiko Ihle – Euro Pacific Capital, Inc.

Okay, and then also you talked about some of the changes in cash, and you guys got $20.7 million of cash, and you talk about some CapEx plans in your release, has anything for Capex for the remainder of 2012 changed over the course of Q2, should we update our models in any way, shape or form?

Robert A. Archer

Well, we’re just reviewing our CapEx for the remainder of the year at the moment, and so I cannot give you specific numbers on that. Compared to our budget, we had spent almost 70% of our CapEx in the first half of the year, and I think from a timing standpoint that’s something that did impact our overall financials for the first half.

And so, it will decrease going into the second half of the year, and part of that was equipment purchases, part of that was drilling. We stopped drilling at San Ignacio for example, we stopped drilling at Topia. So there will be less drilling going on for the balance of the year.

And so our cash is just under $30 million at this point in time, and as payments come in from the smelter, we should see our cash position gradually increasing again through the balance of the year.

Heiko Ihle – Euro Pacific Capital, Inc.

Got you. And last one, you guys had administrative expenses of $1.9 million in the quarter, which compares quite favorably with $2.9 million in Q1, can you just sort of go over what happened there, and then sort of the trends for the remainder of the year, please?

Robert A. Archer

Well, the higher G&A in the first quarter was in part related to a one time payment to our Chairman, who retired during that time frame. So that was a bit abnormal in that respect. So I think going forward, we should be expecting something more in line with Q2. So maybe around $2 million or just under $2 million range.

Heiko Ihle – Euro Pacific Capital, Inc.

Excellent. Thank you guys so much.

Robert A. Archer

Thanks, Heiko.

Operator

(Operator instructions) Our next question comes from Joseph Reagor with Global Hunter Securities. Please proceed with your questions.

Robert A. Archer

I’m on the phone.

Joe Reagor – Global Hunter Securities LLC

Hi guys. Thanks for taking my call, just one real quick thing, can you guys provide color as to the exact breakdown of how we got from $9 per ounce in cash cost to about $11.40, what percentage was metals prices, what was operating cost increases and what was the smelting charges?

Robert A. Archer

I don’t have a breakdown of that in front of me. I’m not sure, maybe Martin or Jim could – would you be able to address that in terms of a break down on that?

Martin Carsky

Hi, this is Martin here. I think that’s actually a fairly detailed calculation, the biggest difference in cash cost from Q1 to Q2 was the effect of the by-products at Guanajuato in Q1 versus Q2. If you look through the MD&A, we have several tables that break out the detailed cash cost, which as you know the components are the operating costs net of the by-product credit, and the smelting charges, but I think I’ll leave it at that for the moment.

Joe Reagor – Global Hunter Securities LLC

Okay, and just a little follow up on that is, what can you guys do I guess in the second half of the year on the operating side, obviously the smelting charges and the price of zinc are out of your control, but on the operating side to contain cost a little bit?

Robert A. Archer

Well, I mean the biggest inflationary pressures that we’re seeing are probably on the labor side of things, and that’s again industry wide, so there is not a whole lot we can do in that regard to comment on or remain competitive. Our actual on-site costs haven’t really been going up all that much, and most of the increase is coming through metal prices and smelter charges.

So, we’re always looking at ways to cut costs and greater efficiencies and moving to a 7-day week at Guanajuato, and the mine is one example of that. So any way we can get better efficiencies from our equipment, and our people then we will be looking to do that.

Joe Reagor – Global Hunter Securities LLC

All right. Thank you.

Robert A. Archer

You’re welcome.

Operator

Our next question comes from Bruce Forer with EF Capital LLC. Please proceed with your question.

Bruce Forer – EF Capital LLC

Hi, Bob.

Robert A. Archer

Hi, Bruce.

Bruce Forer – EF Capital LLC

Hi, this is more of an industry wide question. I’m wondering what the lower prices of the underlying of silver, and the underlying metals affects M&A activity, is there much or very little or none, and what do you see going forward?

Robert A. Archer

I’m not sure it’s so much the metal prices driving that right now, Bruce. I think a lot of companies are looking at that space, certainly we are. And if anything, we’ve got more of a focus on it now with our restructuring. But it can be a challenging thing to do particularly in terms of – if I’m looking at the public companies, and the silver space is a relatively small one as you are well aware.

So that means fewer opportunities if you like, and it takes several months to do a proper due diligence on a project or a company. So it is something that takes some time, but we are working on it, and we do hope to make some acquisitions in the fairly near term going forward.

Bruce Forer – EF Capital LLC

Okay, thanks. Good luck for the coming year.

Robert A. Archer

Thank you.

Operator

There are no further questions at this time. Thank you very much for joining us today and have a pleasant day. This does conclude Panther Silver Limited conference call. You may disconnect your lines at this time, and thank you for your participation.

Robert A. Archer

Thanks very much.

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