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Pan American Silver (NASDAQ:PAAS)

Q2 2012 Earnings Call

August 15, 2012 11:00 am ET

Executives

Kettina Cordero

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

Steven L. Busby - Chief Operating Officer

Michael Steinmann - Executive Vice President of Geology and Exploration

A. Robert Doyle - Chief Financial Officer

Analysts

John D. Bridges - JP Morgan Chase & Co, Research Division

Chris Lichtenheldt - UBS Investment Bank, Research Division

John Kratochwil - Canaccord Genuity, Research Division

Trevor Turnbull - Scotiabank Global Banking and Market, Research Division

Barry Cooper - CIBC World Markets Inc., Research Division

Ralph M. Profiti - Crédit Suisse AG, Research Division

Joel Locker - FBN Securities, Inc., Research Division

Operator

Good morning, my name is Howell, and I will be your conference operator today. At this time, I'd like to welcome everyone to the second quarter results conference call. [Operator Instructions] Thank you. Ms. Cordero, you may begin your conference.

Kettina Cordero

Thank you, operator. Good morning, ladies and gentlemen, and welcome to Pan American Silver's Second Quarter 2012 Earnings Conference Call. Here with me today are Geoff Burns, President and CEO; Steve Busby, Chief Operating Officer; Michael Steinmann, Executive Vice President of Geology and Exploration; and Rob Doyle, Chief Financial Officer.

Before Geoff takes over, I would like to remind our listeners that this call cannot be reproduced or retransmitted without our consent and to indicate 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 facts are forward-looking statements. These statements 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 have 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 releases from August 14, 2012, as well as those factors identified under the caption Risks Related to Pan American's Business in the company's 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.

I will now turn the call over to Geoff.

Geoffrey A. Burns

Thank you, Kettina. And thanks, everyone, for taking the time to join us on the call this morning. I'm going to start with an overview of our second quarter results and then pass the call over to Steve, Michael and Rob for a more thorough description of the highlights of our operations, development projects, exploration programs and financial performance.

I'm happy to report that we had a very good second quarter from a production perspective, and we just released some excellent news from our exploration programs. However, as a consequence of a number of items, including a build-up of unsold silver and gold inventory and a sizable repricing adjustment, our short-term quarterly financial results lagged our operating performance. Rob will describe these items in more detail in a few minutes, but suffice to say that all things being equal, we should see our financial results catch up to our solid operating performance over the balance of the year.

We produced 6.4 million ounces of silver in the second quarter. This was the second highest silver production total in our company's history. We also produced 32,000 ounces of gold, a new company record. As we have discussed during our last call in May of this year, our cash cost increased to $11.85 per ounce, net of byproduct rate -- net of byproduct credits, basically right in line with our full year guidance.

We realized average sales prices of $29.53 per ounce for silver, which was 23% lower than the $38.21 we realized a year ago. And $1,622 per ounce of gold, about 8% higher than a year ago. Base ore prices for zinc, lead and copper were also lower as compared to the second quarter of 2011.

In spite of the downtrend in prices, we still managed to generate very respectable mine operating earnings of $56 million and net earnings of $44 million or $0.29 a share. Our operating cash flow for the quarter, before changes in working capital, was $35 million or $0.23 a share. We closed the quarter with over $770 million -- or near $770 million in working capital, of which $520 million was cash in the bank, not quite the financial results we're expecting given the production quarter we've delivered, but decent. And I fully expect to see a significant improvement in Q3, driven largely by a sell-down in the silver and gold inventories that we built during Q2.

In keeping with our stated intention of returning value directly to our shareholders, I am pleased to announce that yesterday our Board of Directors approved a 33% increase to our quarterly dividend and approved the payment of our third quarterly dividend of the year now in the amount of $0.05 per common share. This was the third increase to our dividend since it was introduced in 2010, and it now stands at $0.20 per share per year. The dividend will be paid on or about Monday, September 10, to holders of record as of the close of business on Monday, August 27.

As we previously announced and consistent with the theme of returning value, we restarted our share repurchase program in late May, having stopped the program late last year during the period of time that was required to complete the acquisition of Minefinders. We continue to firmly believe that the current market price of the company's common shares does not reflect the underlying value of our operations, our properties and our future growth prospects. We have now completed this program, perhaps one of the few, or perhaps even the only mining company to have announced a share repurchase program and actually then executed it. In total, we repurchased 5.4 million Pan American common shares, returning almost 125 million to our shareholders. We fully intend to apply the TSX in early September to renew and restart this program as soon as the 12-month limitation on our first program expires.

I'd now like to turn the call over to Steve to review our operations and development projects, and I'll be back later to make some comments in Argentina, our strategic direction and some summary observations about the silver market and what I see for Pan American over the balance of the year. Steve?

Steven L. Busby

Thank you, Geoff, and good morning. It is my pleasure to report further details on our second quarter 2012 operating results and project development advances. Once again, Pan American's unique geographically diverse portfolio of operating mines has proven effective in offsetting challenges with opportunities to deliver growth in production, yielding our second highest quarter of silver production and a record-setting quarter of gold production at cash costs in line with our targets.

As Geoff mentioned, our consolidated silver production for the quarter was 6.4 million ounces at a cost of $11.85 an ounce, net of byproduct credits, including the production of 32,244 ounces of gold. The strategic acquisition of Minefinders has substantially bolstered our production from the geopolitically and economically secure country of Mexico where we produce collectively 3.3 million ounces of silver, greater than 50% of our total, at a cash cost of $5.46 per ounce. The transitioning of our newly acquired Dolores mine in Mexico is proceeding exceedingly smooth, and we have our project development teams deployed at the mine constructing heap leach pad number 3, that will provide security of production while we begin to evaluate a number of opportunities to increase profitability from this wonderful long-life asset. The Dolores mine successfully delivered 924,000 ounces of silver at a cost of $2.06 per ounce, net of 15,270 ounces of gold byproduct credit.

Meanwhile, La Colorada continued its solid, reliable performance, producing 1.1 million ounces of silver at a cash cost of $8.38 per ounce, compared with the same 1.1 million ounces at a cost of $7.16 a year before. We are extremely excited about the opportunity to begin to investigate substantial expansion opportunities at La Colorada given the incredible exploration success, which Michael will expand on a bit later in the call.

We have expanded our waste stripping it Alamo Dorado to access some Western pit ore extensions that were discovered late last year. And although we encountered some unexpectedly hard sulfidic ores during the quarter, we managed to produce 1.3 million ounces of silver at a cash cost of $5.50 per ounce.

Without doubt, we have been challenged by the many obstacles and distractions that currently exist in Argentina, a country that is facing severe inflation and all the economic uncertainties that come along with it. In the face of this uncertainty, coupled with the recent headline project capital blowouts, we are proceeding extremely cautiously with our businesses in Argentina on all fronts.

On the production front, our Manantial Espejo mine produced 880,000 ounces of silver at a cash cost of $15.46 per ounce, compared with 960,000 ounces at a cost of $6.80 per ounce a year before. Stringent importation, revenue repatriations and currency restrictions, along with the severe inflation, have all impacted our business in Argentina, and our teams are spending an inordinate amount of their valuable time trying to manage these realities in a safe and prudent fashion.

On the projects front, we spent $6.6 million advancing the Navidad project, substantially completing the feasibility study and the environmental impact assessment, which we are now placing on hold for the time being, pending a positive advance in the provincial mining law reform, which Geoff will touch on later in this call. We intend to hold the project in a build-ready state for as long as it takes and anticipate reducing expenditures over the next 6 months to around $1 million per quarter moving into 2013 unless conditions change beforehand.

Despite the incredible robustness of Navidad, I am at the same time disappointed by the draft law, but conversely, very thankful we're not in the midst of full-scale construction facing these types of capital blowouts being reported in the region. I am impressed at the resiliency of the Argentine people who know from experience that this turbulent time is only temporary in nature and an overall correction is likely forthcoming.

In the meantime, we are hunkering down to weather the times in the best possible fashion we can while maintaining our incredibly strong profitability outlook for the brighter days that lie ahead.

Despite a 7- and 4-day Union-led work stoppage to dispute our 2011 employee profit sharing results at our Peruvian Huaron and Morococha mines respectfully -- respectively, we produced 652,000 ounces of silver at a cost of $18.95 per ounce during the quarter that we're on, compared to 678,000 at a cost of $14.47 a year before.

At Morococha, we produced 525,000 ounces of silver at a cost of $24.32 per ounce compared with 412,000 at a cost of $16.98 a year before, as we incur additional underground development expenses to offset previous year's shortfalls at substantially reduced byproduct credit prices. We spent just under $2 million during the quarter completing the infrastructure and ancillary facility relocations at Morococha and look forward to commissioning these new state-of-the-art facilities.

In a bitter-sweet transaction for Pan American, we successfully sold our Quiruvilca mine during the quarter to a company who's attracted to the base metal production opportunities. Quiruvilca was Pan American's first operation and had provided sustained production results for the company for nearly 17 uninterrupted years. Prior to the conclusion of this transaction, Quiruvilca contributed just over 100,000 ounces of silver production at a cost of $41.91 per ounce for the quarter.

Our employee disputes were successfully resolved during the quarter and we are solidly on track to deliver our forecasted production for the rest of the year at both Huaron and Morococha in Peru. In another seemingly turbulent environment, I am extremely pleased with the solid, reliable performance at our San Vicente mine in Bolivia, which produced nearly 928,000 ounces of silver at a cash cost of $18.21 per ounce, inclusive of our substantial increased payment to our joint venture partner, the Bolivian government, following our capital recovery period. This compares to 897,000 ounces produced at a cost of $12.85 an ounce a year before. We have a solid operating team at San Vicente who, along with our communities nearby, is strongly and voicefully supporting our businesses in Bolivia.

In conclusion, we remain focused on delivering against our full year 2012 guidance of collectively producing between 24.25 million to 25.5 million ounces of silver at a cash cost between $11.50 and $12.50 per ounce net of byproduct credits, all the while reshifting our project development focuses in light of the unusual and unsettling uncertainties that currently and temporarily exist in some of the jurisdictions we operate in.

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

Michael Steinmann

Thank you, Steve. Good morning, everybody. I'm sure most of you have seen our press release this morning with the exploration updates for La Colorada and Waterloo, and you can you can imagine that I'm very excited to talk about the excellent results in more detail. All our geology and exploration teams worked hard during the last quarter, completing 53,475 meters of drilling in our brown and greenfield projects. For the first 6 months of the year, we stand at 45% completion rate for our company-wide annual drill program of nearly 200,000 meters. After we drilled a total of over 89,500 meters from January to June, I'm convinced that we'll be able to complete the entire program by December.

Let's have a look at some of these results and start with La Colorada. I discussed quarter-after-quarter during the conference calls some of the impressive results from La Colorada. Most of them came from HW and NC2 veins, which are currently responsible for 88% of our daily ore production. Exploration of these structures added substantial new reserves and resources in the last 3 years. We are currently mining at 468 level on the NC2 vein and at 498 level on the HW vein. But the deepest drill hole intersected the NC2 vein at level 1,008, more than 1,000 meters below surface, returning 707 -- sorry, 378 grams of silver and over 14% combined lead and zinc over a width of 0.6 meters. By the way, our current Proven and Probable reserves are only reaching down to 600 level.

The 2012 campaign is focused on the Amolillo vein located about 500 meters northwest of the HW/NC2 structures. Amolillo is currently producing 125 tonnes of oxides per day from the 245 and 275 levels, along a 400-meter strike length. Drilling is targeting a potential lateral and vertical Mineral Resource and Mineral Reserve expansion.

To date, a total of 23 holes have been drilled, 16 from surface and 7 from underground, for a combined total of 9,643 meters of diamond drilling. The first phase drilling intersected the vein down to the 520 level, 245 meters below the deepest mining level, and expanded the lateral extension of the East -- to the East and West by over 500 meters.

Drill results are exceptional from both oxide and sulfide mineralization. Impressive sulfide intersections were encountered in hole S-04-12, which returned a true width of 2.41 meters containing 1,750 grams silver, 0.63 grams per tonne gold, 3.01% lead and 6.7% zinc. Hole U-20-12 returned 2.62 meters containing 1,096 gram per tonne silver, 1.38 gram per tonne gold, 2.76% lead and over 4% zinc and sulfide mineralization.

Oxide intercepts are also very impressive. As an example, hole U-48-12 returned 2.41 meters of true width containing 840 gram per tonne silver and 1.15 gram per tonne gold. And hole S-55-12 returned 465 gram per tonne silver and 0.38 grams per tonne gold over a true width of 3.43 meters. Please have a look at the complete table of drill results in the appendix of the press release or in our website where you will also find a map and a long section.

I'm you sure you will understand why I'm excited to incorporate these results into the December 2012 mineral reserve and resource update. We will step up our drill efforts at Amolillo for the rest of the year, hopefully reaching our goal for a substantial reserve and resource addition at La Colorada, which could lead to future mine and mill expansion.

Waterloo is the next project I would like to discuss. The project is located 16 kilometers northeast of the town of Barstow, in the Calico Mining District of San Bernardino County in California. The silver-barite mineral property covering 769 hectares consists of 18 patented and 20 unpatented mining claims, 100% owned by Pan American. The former owner of the project, Asarco, outlined in the '60s a historic resource on the property of over 100 million ounces of silver based on 181 RC drill holes. This historical estimate was prepared prior to implementation of NI 43-101 and cannot be relied upon.

We decided to evaluate the potential of the property and started the first phase drill campaign this year. So far, we completed 11 vertical RC and 4 short diamond drill holes for a total of 1,233 meters. Mineralization is outcropping or close to surface in most locations. Much more work is needed on the geological interpretation, but the deposit could represent a sedimentary exhaltive style, or SEDEX, with mineralization dipping 20 to 25 degrees to the Southwest.

The main section contains -- the main section contained 4 holes about 50 meters apart, hole 12007 intersected 108 meters at 181 gram per tonne silver, including 36 meters at 285 gram per tonne silver right at surface. Hole 12008 also intersected 108 meters containing 143 gram per tonne silver including a shorter interval of 62 meters at 194 grams per tonne silver. 12006 returned 94 meters at 109 gram per tonne silver and including 26 meters at 170 grams silver, and hole 12009 intersected 106 meters at 120 gram per tonne silver including 40 meters containing 166 grams per tonne silver.

Further to the Northwest, the intersections are somewhat narrower, but still reaching down-hole length of 34 to 80 meters. They compare very well to the historic drill results from Asarco, and in some instances are even higher grade. Drilling will continue with the second phase in order to confirm the historic Mineral Resource. Waterloo is well on its way to being Pan American's new development project, and we will increase exploration efforts, including metallurgical test work, continued RC and diamond drilling, geological mapping and geophysical surveys.

I promise to you a busy exploration year for 2012, and I believe that we delivered so far impressive results, and many of them will be included in the resource and reserve updates over the coming 6 to 8 months.

Now to Rob for a financial review.

A. Robert Doyle

Good morning, ladies and gentlemen. As Geoff mentioned, while Q2 was a respectable quarter from a production standpoint, the financial results were not what we have come to expect. Our adjusted earnings after adjusting for gains on derivatives, the sale of Quiruvilca, transaction cost and FX losses, were $17.1 million or $0.11 per share, significantly lower than the adjusted earnings of $75.4 million for Q2 2011 and a $60.6 million from the previous quarter in 2012. Mine operating earnings were $56.3 million, a 53% decline from a year ago. And cash flow from operations before working capital changes were $35 million, a 71% decrease from $120.5 million in the comparable quarter last year.

So what were the factors that led to the deterioration of our Q2 results relative to a year ago? First of all, our earnings, like the entire mining industry have been reporting recently, were negatively impacted by the drop in most metal prices from a year ago. Our realized total price of silver dropped by 23%. Our base metal prices has seen declines between 10% and 20% over the same period. A notable exception to this trend was gold, with our realized prices up 8% over the comparable quarter of 2011.

Secondly, the drop in silver and base metal prices also caused a $9.6 million downward adjustment to sales in Q2 2012 relating to shipments that had been provisionally priced in Q1 2012 under our numerous concentrate contracts. These price adjustments were particularly severe for our lead and copper concentrates, which contained high grades of silver. The combination of these 2 factors resulted in a decline in our revenues by 13% from Q2 2011, notwithstanding that volumes of silver and gold sold during Q2 2012 increased by almost 400,000 ounces and 6,300 ounces, respectively.

The third important explanation for the disconnect between our operating and financial results in Q2 2012 was the fact that we both had a huge precious metal inventory. In total, our silver doré inventories increased by 0.7 million ounces, and golden doré increased by 6,000 ounces. This buildup of precious metal inventory was concentrated at Manantial Espejo and at Dolores. In the case of Manantial Espejo, uncertainty regarding regulations over the repatriation of funds back into Argentina resulted in the company not exporting doré for a period of approximately 6 weeks prior to quarter end. We now have clarity on the timing of repatriations required under Argentine law and have recommenced doré shipments. We fully expect to normalize the inventory levels at Manantial Espejo over the coming months.

At Dolores, the buildup of precious metal inventories resulted from a change in the commercial process upon the integration of the mine under Pan American's management. We do not anticipate any further delays in sales at Dolores and would expect that sales volumes would approximate production volumes each period. All in all, we calculate that approximately $8 million of pre-tax earnings is captured in this inventory that was produced during the quarter but will only be released once sold.

The fourth factor is again an industry-wide phenomenon, that of cost escalation. Ignoring the impact of Dolores and Alamo Dorado for a moment, we have seen a 7% increase in our average cost per tonne at our other mines in Q2 2012 over the cost from a year ago. Our budget expectations were for a 9% increase in average cost per tonne. Now that -- now there were some specific factors during Q2 2012 which skewed our average cost higher, most notably at Alamo Dorado, where throughput rates were challenged by harder-than-expected ore, as Steve has mentioned. Incorporating the high tonnage production from Alamo Dorado results in a 16% increase in our average consolidated cost per tonne for Q2 2012 from a year ago. Over the course of the remainder of the year, we do expect to be able to hold our cost at our original forecast. The high production cost that you see on our income statement compared to Q2 2011 where the combined effect of more sales volume, by about 9% on an equivalent ounce basis, and the cost escalation just described.

Lastly, and as expected, higher levels of depreciation attributable to the Dolores mine were evident in Q2 2012, thereby reducing our overall mine operating earnings. Dolores contributed a gross margin of 16% for the quarter, which when combined with the other factors I mentioned, resulted in a reduction of our consolidated gross margin to 28%.

Moving on to other noteworthy items that impacted earnings in the quarter. We did recognize a gain on the sale of Quiruvilca of $11.2 million during the quarter, as we concluded our strategic review process by determining that the best course of action was to sell the mine to a local Peruvian company, Southern Peaks Mining. The gain is made up of an upfront proceed payment of $2 million subject to various adjustments plus the release of net liabilities associated with the mine. Not included in the calculation of the gain is any future benefit we may receive from an interest that we retain in the mine through, at our election, either a 2% net smelter return royalty on all saleable metal subject to certain price thresholds; or secondly, the price difference between $23 per ounce of silver and the market price on 50% of Quiruvilca's future payable silver production for an applicable period, provided, however, that such payments will be capped at $3 million in any 12-month period until such time as Quiruvilca generates $25 million in EBITDA.

G&A costs for the quarter came in at $6.1 million, which was about $1.5 million up from a year ago and above our normal run rate. The overage is attributable to the timing of several expense items, as well as an overall increase in the level of corporate activities since the Minefinders' transaction. We do expect that our G&A expense will reduce over the balance of the year and anticipate average in the range of $4.5 million to $5 million per quarter. Our effective tax rate for the second quarter was 36%, which was slightly higher than the 30% to 35% we expect in the long term.

Moving to the balance sheet. We saw a $32.9 million increase in inventories on account of the buildup of precious metals I mentioned earlier, and current liabilities decreased by $22.6 million as we paid down our tax and other accruals. These were the 2 main items making up the noncash working capital movements for the quarter. Cash and short-term investment balances ended the quarter at $520 million with working capital at a solid $768.8 million.

And finally, as Geoff touched on, we resumed our share buyback program during the quarter, spending $23.5 million to buy back and cancel 1.3 million shares. Subsequent to the quarter end, we have completed the approved program by purchasing an additional 0.5 million shares, spending $7.5 million. In total, we have bought back and canceled 5.4 million shares at a cost of $124.9 million. We intend to apply for approval to buy back an additional 7.6 million shares, as it remains our belief that equity valuations do not currently reflect the economic reality of our business, and therefore reducing our issued and outstanding share balance at these levels represents a compelling way to return value to our shareholders.

With that, I'll hand it back to Geoff for some closing comments.

Geoffrey A. Burns

Thanks, Rob. Given our announcement at July 2 regarding the political developments in the province of Chubut in Argentina and the impact on our Navidad project, I would be remiss if I didn't spend a few moments discussing this.

After 2.5 years of dedicated effort, both technical and social, to move the world-class Navidad silver project forward and prepare for its ultimate construction, the governor of the province of Chubut, Martin Buzzi, introduced the expected and long-awaited legislation that zone-fied the province, allowing for the development of Navidad as an open-pit operation.

However, that same draft legislation also introduced an additional 5% NSR in favor of the province, a requirement for Petrominera, the province's petroleum and mining company, to receive no less than 4% of total sales, as well as get a direct 7% carried net pre-tax interest. The new proposed royalties and carried interests were in addition to the existing 10% export duty payable on the sales of concentrate and the existing 35% net income tax rate payable to the federal government.

This level of government participation and tax burden is unprecedented relative to any of the other jurisdictions where Pan American operates, including the province of Santa Cruz in Argentina where the company's Manantial Espejo mine is located. Our review of the effects of the proposed legislation indicates that the increased level of provincial participation, when coupled with the Argentine inflation, which has been running at close to 25% over the last 3 years, will render the Navidad project uneconomic at any reasonable estimate of long-term silver prices.

The proposed law has been sent to subcommittees of the legislature where it could be revised prior to being introduced to the full legislature for debate and vote. To date, the draft legislation remains stalled in the subcommittees. The response within the province from the provincial deputies, from the national government and from the other governors that are part of OFEMI, the coalition of mining provinces formed earlier this year had been very negative. The widespread opinion being that the legislation is trying to push the provincial participation beyond what has been regulated nationally and beyond what any of the other province in Argentina are doing, and most importantly, beyond what is reasonable and accepted within the mining industry. While it is obviously welcome news to a long-lasting legislation that would allow us to develop Navidad as an open pit, it was equally disappointing that the government of Chubut would introduce the proposed participations without any meaningful consultation with the mining industry.

The provincial government is now currently studying the situation carefully. And frankly, I do not think the legislation that's currently drafted will be passed. I am convinced that it was not the provincial government's intent, nor the governor's intent to render Navidad uneconomic and dissuade any further potential investment in mining in the province. They got it wrong. And I believe they will try to modify the law before introducing it to the legislature. Having said that, if the draft law is passed as it currently reads, there could be no choice for us but to stop investing in Navidad. While clearly sidetracked and perhaps sidelined at the moment, Navidad is still one of the best undeveloped silver deposits in the world today, and its story is far from over.

Moving to more positive news for Pan American, as Michael and this morning's press release described, we had some very exciting news from our exploration programs. Drilling at La Colorada continues to return wonderful results, and we are clearly reaching a point where the size of the resource dictates that we start to reevaluate the optimal mining scenario for La Colorada and logically consider expanding the mine to increase its production rate. In addition, the drilling results from Waterloo, a project that had been dormant in our portfolio since Pan -- or sorry, a project that had been in our portfolio basically since Pan American was founded in 1995, are extremely exciting. We own 100% of this project, the majority of which sits on patented mining claims. And while it's early days since reenergizing this project, we are going to aggressively explore this plus-100 million ounce resource and begin to evaluate its true potential. It has been a bit of a welcome surprise to look into our own cupboard and rediscover a project of this magnitude, where no meaningful work has been done since Asarco had the property in the mid-1960s. Let's see where this one goes over the coming months.

From a strategic point of view, it has not gone unnoticed that there has been a huge revaluation of the assets and companies within our sector over the last 9 months, particularly in the junior exploration and junior development stage category. Opportunities that, in our opinion, were incredibly overvalued have now become interesting. And we will be looking closely at these over the coming months. While we have no intention whatsoever of using our stock, we do have a considerable cash reserve that could be deployed for the right opportunity in the right jurisdiction.

A couple of months ago, our development pipeline look very full with Navidad and the potential for the expansion of production at Dolores with the construction of a mill. Now with Navidad potentially sidelined, or at least delayed, it now make sense for look elsewhere for growth, and from a market and cost perspective, the time is right.

It has been a very active year for Pan American so far, with many positive developments and one negative. We completed the acquisition of Minefinders Corp., and now have fully integrated the low-cost, long-life Dolores mine into our portfolio. We have sold our high-cost Quiruvilca mine. These 2 steps have clearly strengthened our mining portfolio, while at the same time, we are making strides at improving our Peruvian mines and getting them back to their optimal production profile.

As Steve mentioned, operationally, we can confirm the guidance we provided earlier this year that we expect to produce 24 million to 25.5 million ounce of silver at a consolidated cash cost between $11.50 and $12.50 per ounce. We have generated exceptional exploration results that have added significant new resources and value at La Colorada and reenergized a sleeping project that has enormous potential. We've increased our dividend for the third time since it was first introduced in 2010, and we have actively repurchased our stock. And as Rob mentioned, are planning to continue to do so based on the fact that, in my opinion, and our board's opinion, our shares remain extremely undervalued, having great investment opportunity for some of our excess cash.

And while negative, there is no doubt in my mind that the Navidad story is by no means finished. From a financial perspective, the current quarter was not where I'd like to have seen it, and not totally reflective of our solid operating performance we had. But as Rob described, due to some repricing and concentrate sales and a buildup of precious metal inventory, we have every reason to expect much better for the third and fourth quarters.

For me, the tail of the tape financially is clear on our balance sheet. The company's working capital has increased to $769 million at June 30, 2012, an increase of over $200 million in the last 6 months since December 31 of last year. Of this amount, $520 million was held in cash and short-term investments. So far this year, Pan American has paid $109 million in income taxes, predominantly related to previous year's income. We've invested $53 million in capital at our operations and development projects, invested a further $30 million in precious metals and mine leach pad inventories, spent $23.5 million repurchasing shares, paid $9.7 million in dividends, and still increased our cash and short-term investments by close to $30 million.

But perhaps more importantly, and in spite of a 23% decline in the price of our primary commodity, silver, Pan American continues to generate solid earnings and cash flows. And while I remain optimistic that we will see silver price move solidly upward later this year, I am comforted to know that the company remains in excellent condition even as prices have drifted lower.

With that, I'd now like to open the call to questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes the line of John Bridges from JP Morgan.

John D. Bridges - JP Morgan Chase & Co, Research Division

I just wondered, to give us a bit of a head start on the concentrate adjustment for next period, what -- can you give us the number of ounces and the price the contract left at the end of the last period?

A. Robert Doyle

John, I don't have those numbers in front of me. I'll have to come back to you on that one.

John D. Bridges - JP Morgan Chase & Co, Research Division

Yes, if you could find them over -- that would help me with the model. And then on Navidad, I just wondered, what does IFRS say about the situation? Well, I suppose there aren't many situations like this one. But in a way, you have something where you've got a significant investment and you're not sure at year-end if this law has gone through, what does IFRS say you must do with the carrying value?

A. Robert Doyle

John, there's quite a lot of disclosure on our MD&A on the topic surrounding impairments. And very briefly, IFRS requires you to look at impairment if there's any kind of indication of a change in value. We certainly assess that there was reason to go through that process in Q2, and we undertook a process to assess the carrying value of Navidad against what we consider to be the fair value. Of course, there's a lot of uncertainty, and we ended up doing some kind of probability model, taking into account various possible scenarios. In the end, the determination was that, at this point in time, we can comfortably justify the carrying value, which is about $560 million, on our balance sheet at the end of Q2.

Operator

Your next question comes so the line of Chris Lichtenheldt from UBS.

Chris Lichtenheldt - UBS Investment Bank, Research Division

Just on the inventory, do you expect most of that to be moved through during in the third quarter, or could some of that still be there for the fourth?

A. Robert Doyle

Chris, it should be -- I would expect it within a 3-month turnover. So it should -- we really should be cleaning out most of it during the third quarter.

Chris Lichtenheldt - UBS Investment Bank, Research Division

Okay, great. And can just let me - let us know, how much do you plan on spending at Waterloo for the remainder of the year?

Michael Steinmann

Chris, this is Michael. So far, it was pretty modest spend, we spent about $600,000. I'm just working currently on the program's second phase now, and I would estimate that we are probably going to spend about $1.5 million to $2 million for the remainder of the year, and then you will see the new number for next year's drilling in the budget.

Chris Lichtenheldt - UBS Investment Bank, Research Division

Okay. So it will still be drilling for another year or so before you'd even start looking at studies, or do you have...

Michael Steinmann

I'm pretty sure, Chris, it is -- as I said, it is a historic resource, so there will be a lot of drilling required for us to actually do a new 43-101 resource on this property. It's a very large property, a very large resource. And it will require quite some time.

Operator

Your next question comes the line of John Kratochwil from Canaccord Genuity.

John Kratochwil - Canaccord Genuity, Research Division

I've got a couple of questions. First off, Dolores, the depreciation expense of about $7 million over the quarter, is that something that we should be expecting going forward, or is this number going to come down?

A. Robert Doyle

No, that -- it will be a consistent depreciation rate. The requirement is to amortization the purchase price over the units of production. So bearing in mind also that we had an inventory buildup during the quarter at Dolores. In a normal quarter, in fact, the depreciation charge will be higher than it was in Q2.

John Kratochwil - Canaccord Genuity, Research Division

Okay. And as well at Dolores, you've got about $51 million remaining in CapEx for the year. Is that going to be weighted to a certain quarter, or is that going to be pretty evenly distributed for the remainder of the year?

Steven L. Busby

Yes, this is Steve. It should be pretty evenly distributed. With that said, we think it's -- we're doing everything we can to get that -- those projects done. And our ability to complete that by then of the year, it's likely going to spill over, some of that, into next year. But the spending rate will increase for the last 2 quarters, and they will be pretty well even for those 2 quarters.

John Kratochwil - Canaccord Genuity, Research Division

Okay. And could you give us an idea of approximately what the inventory is like at Dolores right now?

Steven L. Busby

We have a number of different inventories. If you're talking about sole balance inventory, Rob is looking up that number now.

Geoffrey A. Burns

Just as a follow-up on Rob's comment about depreciation. I mean, the depreciation at Dolores, it's best to look at on a per-ounce basis versus a gross basis in dollars because the gross base is going to change depending on how many ounces we sell in any given quarter. It's about $14 an ounce, give or take, which is, as Rob said, it not only accounts essentially the capital base, but the price that we pay at above the capital base to buy the asset. And that should be relatively consistent for the balance of this year. It is very likely to change going into next year depending on our exploration programs and success because the basis is on how many ounces over the life of the mine ultimately are we going to recover or produce. And we're very hopeful that some of Michael's programs right now, drilling, I guess it's on the east side of the dike, will be successful in adding significant new resources which would bring that depreciation rate down.

John Kratochwil - Canaccord Genuity, Research Division

Okay, no, I appreciate that. That's a good number to work with, the $14 an ounce.

Geoffrey A. Burns

Yes.

Steven L. Busby

Okay, John, we'll have to follow-up with you on the inventory level at Dolores. We don't have it handy.

Operator

Your next question comes from the line of Trevor Turnbull from Scotiabank.

Trevor Turnbull - Scotiabank Global Banking and Market, Research Division

Yes, I had a question about some of the success you're having at La Colorada as you drill deeper. I was just wondering if the development of some of that material, provided it does come into the reserves, is that something that can be developed just in the normal course of sustaining capital, or should we look a few years out to see a ramp-up in the amount of capital you're putting into development at La Colorada?

Geoffrey A. Burns

We're really getting to a point where the size of the potential, both between the NC2 structure as well as Amolillo, is dictating us to kind of take a full step back and say, is running a plant and a processing rate, mining rate at about 1,100 tonnes a day, combined between sulfide and oxide, is that the optimum rate to mine at La Colorada? Certainly, we could continue to do what we're doing today and just for the next 10, 12, 13, 14 years, depending on ultimately how all this -- all the resource converts to reserve, keep doing the same thing. But like I said, there's a magnitude where it says let's step back and see if there's a different mining rate that makes sense and look at the capital, to be blunt, to put in a shaft and re-tune the mill to be more sulfide, which is the direction we're heading in anyways. It's probably just -- we're probably -- I'm a little bit ballpark in this, Trevor, but we're probably 12 months away from being able to put any real brackets around that potential. But it is certainly exciting when -- I think you picked up -- I mean, some of these intercepts are 400 meters below the lowest level of reserve we have right now from between 600 down to 1,000. And we more than -- it appears we are more than doubling the length, the strike length of the Amolillo zone, which we thought was kind of a tiny little oxide resource that we were mining at about 125 tonnes a day. And now it's starting to look like a completely parallel structure to the main NC2, which is where the bulk of our activity had been. So very excited about where this could go, probably just a little bit early to be able to give you some real firm guidance on what it might look like.

Trevor Turnbull - Scotiabank Global Banking and Market, Research Division

Okay. Well, it's a good problem to have, being able to have to rethink the scale you're operating at.

Geoffrey A. Burns

Every now and again, it's nice to have a good problem, yes.

Trevor Turnbull - Scotiabank Global Banking and Market, Research Division

And then I just had a couple of really quick kind of operational questions. The hardness at Alamo Dorado, is that something you expect that you're going to kind of fight your way through, it will kind of change with time, or are you putting in something to get that throughput back up?

Steven L. Busby

We are putting in some more elaborate control systems on our mills to try to squeeze a little bit more throughput out of it. But we do expect for the next probably 9 months to be in this harder ores. So we will fight through it for about 9 months before we're back into some softer material.

Trevor Turnbull - Scotiabank Global Banking and Market, Research Division

Okay. And then switching gears over to Morococha. It seems like you've had some higher grades here in the first half of the year. Does that look sustainable going through the end of the year?

Steven L. Busby

We are expecting to see close to these grades. We did get a little bit of a boost with some resources we bumped into, that was a pleasant surprise. That may not hold together for the rest of the year, but in general, we are expecting a bit of higher grade.

Trevor Turnbull - Scotiabank Global Banking and Market, Research Division

Okay. And then the last one, at Manantial, do you have a forecast on the amount of gold that you expect production, not sales, obviously?

Steven L. Busby

Yes, just give me one second. Right now, we're forecasting for year-end probably -- hold on a second. We're probably going to be in just over 50,000-ounce range.

Trevor Turnbull - Scotiabank Global Banking and Market, Research Division

Okay, full year?

Steven L. Busby

Yes.

Operator

Your next question comes from the line of Barry Cooper from CIBC.

Barry Cooper - CIBC World Markets Inc., Research Division

A couple of things. In the -- at the Analyst Day there, back a couple of months back, you said that you're going to attempt to basically pay a dividend out of the Argentina operations there. Did, in fact, you try that and it worked, didn't work, or did you just abandon it given all of the other hoopla that was going on there?

Geoffrey A. Burns

Barry, we were very successful in repatriating funds to repay intercompany loans plus interest. We indeed did try, as you mentioned, to repatriate a dividend in July. And as it stands today, we have been unsuccessful. It was a modest one, but we were rejected by the Central Bank.

Barry Cooper - CIBC World Markets Inc., Research Division

And did they give any reasons for that, or is it just rejected, meaning you have to try again later or...

Geoffrey A. Burns

Yes, the reason they gave was, "No."

Barry Cooper - CIBC World Markets Inc., Research Division

And so I guess, then, persistence may pay off?

Geoffrey A. Burns

Well, we hope, Barry.

Barry Cooper - CIBC World Markets Inc., Research Division

Geoff, then on your discussion of M&A, obviously, there are 2 broad things out there that people look at, either undeveloped projects that you can build on your own or developed projects that are up and running, both carry varying risks. Obviously the latter much less risk, particularly on the financial side of things, as well as permitting and everything else like that. Which way are you kind of leaning and wanting to take the company?

Geoffrey A. Burns

I think my priority would be to look at a development stage asset more so than a production -- in production asset. And my thinking is kind of as follows. I mean, the strategy we were very clearly following was with the purchase of Dolores strengthening our -- and essentially lowering the cost of our operating assets on a portfolio basis. In the nicest sense, we dealt out Quiruvilca and was then very comfortable with it, where we got to there, and then focus on the development of Navidad. That's now sidelined. And to me, the one thing we're lacking now is that next development project that I can focus our technical expertise and our project development team on. I mean, we have them tuned right now at Dolores and looking at the mill option, but we need something else in that vein. So that, and there's 2 other pieces to that part, Barry, and one is jurisdictionally, we're going to be very careful as to where we go, for some obvious reasons we don't need to repeat. And we're looking for something that again, when in production, could potentially move us lower on the cost curve again, or lower on the cost curve fighting against some of the cost escalations we've seen in Argentina and Peru in particular.

Operator

[Operator Instructions] Your next question comes from Ralph Profiti from Credit Suisse.

Ralph M. Profiti - Crédit Suisse AG, Research Division

This follows up on the last question, M&A, and perhaps how that impacts the dividend. Geoff, you've previously talked about perhaps moving to a cash flow-linked dividend. I'm wondering if that's still on the table or is more M&A now a focus? And do you think there's still room to go to something that is more cash flow-linked?

Geoffrey A. Burns

Ralph, we did a very thorough evaluation in conjunction with the board at looking at our dividend policy. And we looked very carefully at linking dividends to adjusted earnings, or earnings linking dividends to operating cash flow. We looked at what a number of our peers in not only in the silver sector but in the gold sector were doing, and the basic conclusion is it's kind of all over the map in terms of how everyone is addressing that issue. And where we got to, and I think for us it ultimately is a good answer, is that by putting in a fixed cash dividend, which is predictable, understandable, it isn't ever going to be adjusted by some -- I hate to say this, by some weird accounting number that comes rocketing out of the left field, it just felt right to our board, and frankly to myself after considering the other alternatives. And I think at this level, we're still well within our capability to pay that dividend and to fund a cash acquisition and subsequent growth that, that might provide. So I think we did as -- today, as best as we can to evaluate current circumstances, current cash balances and future strategy. I would like to say that, again, if 2 quarters from now, we don't have that development stage project, or Navidad is still on the sideline and we're still sitting with this amount of cash, we'll look at that dividend one more time. And if the board determines that it makes sense to return even more, we will return even more.

Ralph M. Profiti - Crédit Suisse AG, Research Division

Okay. Maybe just a second question, perhaps for Rob. One of your competitors had talked about within Argentina, a pretty drastic change with regards to time permitted to repatriate export net proceeds from silver sales, right, it had gone from 180 days down to 15 days, and now as I understand it, it's back up to 140 days. Just wondering, I'm trying to benchmark whether or not all miners are being treated equally, and just the logistics of how that mine works is the new framework for those proceeds to the government. Is that a manageable situation?

A. Robert Doyle

Yes, Ralph, the specific attributes you touched on is the reason for the inventory buildup at Manantial. Because of that uncertainty about the timing on getting money back to Argentina, it's frankly impossible, impractical to, as you know, to turn around a doré shipment and get money back in 15 days. So we chose just to hold on. We -- in our case, we've received some relief. We now have 120 days. So it appears that it's slightly different in each case for each miner. But in our case, 120 days is a workable arrangement and we're back to exporting doré.

Operator

Your next question comes from the line of Joel Locker from FBN Securities.

Joel Locker - FBN Securities, Inc., Research Division

I just wanted to see if you had a time line on the legislation. You mentioned it was stalled in Argentina on the open pit, but just basically, when did you expect it to be amended or passed as is, or more news coming from that?

Geoffrey A. Burns

A really tough question, Joel. I don't expect it to be passed as is, that's number one. And given the views of the deputados that have been expressed in the legislation, it's extremely unlikely it will get passed as it's currently drafted. There is a process where I think the governor and the ministries are now very carefully studying -- I'm going to call it the feedback that they are getting from the national government, from the deputados, and trying to understand where perhaps they've overreached. And it's hard to put a time limit on how long that is going to take because there are, frankly, quite a number of people they need to talk to, both within their province and now externally at the national government level. So I would not be surprised if this legislation stayed in committee until much later this year.

Joel Locker - FBN Securities, Inc., Research Division

But do you expect something by this year end, or is it -- could be a month, could be 4 months, or could be even longer than that?

Geoffrey A. Burns

Again, very -- this is -- if it had been introduced in such a framework where it was readily accepted by the other mining companies and ourselves, my full expectation, it would've passed already. It would've gone through committee and been done. But it's very difficult now to put a time limit on the political process around modifying a law that's come in, in draft form, and not been readily accepted. But I would be surprised if it went in a month. I would think we'll know with some definity by the end of the year what direction it's going in.

Operator

There are no further questions at this time, I'll now turn the call over to Mr. Burns.

Geoffrey A. Burns

Thanks, operator. And thank you, everyone, for joining us today for some discussion on our second quarter results and some of our exploration activities. And I look forward to talking with you, each and every one of you, again in -- I guess it will be November when we're ready to release our third quarter results. Thank you.

Operator

This concludes today's conference call. You may now disconnect.

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Source: Pan American Silver Management Discusses Q2 2012 Results - Earnings Call Transcript

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