Pan American Silver Corp.
Q1 2007 Earnings Call Transcript

Published: 1 May 2007

[Operator:]

I would like to welcome everyone to the Pan American Corporation First Quarter 2007 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer period. If you would like to ask a question during this time, please press * and then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. It is now my pleasure to turn the floor over to your host Geoff Burns, President and CEO. Sir, you may begin your conference.

[Geoffrey A. Burns:]

Thank you Operator. Good morning Ladies and Gentlemen, and welcome to Pan American Silver’s First Quarter for 2007 Earnings Release Conference Call. Joining me today here in Vancouver are

[Michael Steinmann:]

Good morning. I’m sure most of you have seen our press release from February 16 with its company wide reserve and resource estimates. We published a 20% increase of our private and public reserves, adding 35.4 million ounces of silver compared to the year before. In order to achieve similar results in 2007, an aggressive exploration program at our operations in Greenfield project has been started in January. I would like to give you a short overview of the exploration plan for this year. First, our ground field exploration programs. On Morocoha we’re building on 8-10 bricks on a program of 40,000 meters for exploration and over 7000 meters for drilling. The total costs for this program will be approximately $2.8 million. At Huaron the program is 28,000 meters using three to four weeks for a total of about $1.3 million. We are drilling through the year at about 20,000 meters using three weeks for a total cost of about $1 million. At La Colorada we are drilling with three weeks on a program of 13,000 meters for a total cost of about $1.5 million. In total our ground field exploration program for 2007 is about $6.5 million which will be spent on over 100,000 meters of diamond drilling alone. Our Greenfield exploration programs are mainly focused on Mexico, Peru, Ecuador and Argentina where we have several prospects in each country. We plan to spend a total of $2.5 million on these properties for exploration work and are constantly reviewing opportunities in these countries. We’re also active in staking new ground. For example in Peru, we staked in the first quarter 13,500 hectares of exploration properties which will be part of our exploration program throughout the year. As you see we are very active exploring around our mines as well as on Greenfield properties and will be releasing the results once the first stage of the program has been finished around the middle of this year. It’s going to be challenging to duplicate the kind of reserve increases we enjoyed last year and I’m confident that in 2007 we will once again add to our reserve base and I can tell you that I’m very pleased with the progress we have made in our Greenfield programs for this date.

[Geoffrey A. Burns:]

Thank you Michael. I’d like to touch on a couple of other items before we open up the lines for questions. We held our annual general meeting yesterday and Mr. John Right who has been a director of the company since inception as Pan American Silver in 1994 did not stand for re-election. I would personally like to thank Mr. Right for his years of dedicated service both on the board and as a key member of management for many years prior to my joining the company. John was one of the co-founders of Pan American, along with Ross Beaty, our Chairman, and was truly instrumental in the evolution of the company. I will miss his guidance. I wish him the best in all of his future endeavors. As for the silver market, in spite of the last couple of days which has yet again proven that the silver price can be extremely volatile, the basic drivers of the silver price continue to be bullish. The US dollar continues to show weakness, the silver ETF has continued to grow, reaching almost 121 million ounces at the end of March, and fundamental investment demand has remained strong with growth in China and India unabated. Together these factors make a good case for continued strong silver prices. In summary, with the exception of La Colorado, we had a good, solid production quarter, however for the reasons I have described we didn’t achieve the performance we were hoping for. However I am extremely optimistic about the balance of 2007. La Colorado is now wrapping up nicely and will deliver to its performance. We will sell in the second and third quarters the concentrate we produced in the first quarter. La Colorado mine reached record production in April and there is no reason to believe that the production trends we have established in the first four months of this year will not continue. Morococha and Huaron are right on track for excellent years. Put this all together and 2007 should be the best year ever for Pan American and we are on path to produce 25 million ounces of silver in 2009. This is mining. We have the team, we have the assets and one quarter does not a year make. Thank you and I would ask the operator to open the line for questions.

[Operator:]

At this time, if you would like to ask a question please press * then the number 1 on your telephone keypad. We will pause for a moment to compile the Q&A roster. Our first question comes from John Bridges of JP Morgan.

[John Bridges:]

Hi, you reported copper production at La Colorado mine which is presumably coming from the new sulfate circuit? Could you please give us some more details on the copper grades in the sulfides, both the reserve grade and what you’re doing currently?

[Geoffrey A. Burns:]

Are copper grains coming from Colorado? We do not commercially produce copper in La Colorado.

[Andrew Pooler:]

I’m sorry to interrupt, thank you for point that out. I’m afraid that John refers to the gold production for the quota.

[Geoffrey A. Burns:]

That is 11,057 ounces. 857 ounces of gold produced for the year which is actually 46% above our budget.

[John Bridges:]

OK, I was just wondering where all that copper came from. OK, thanks for that.

[Geoffrey A. Burns:]

You’re welcome.

[Operator:]

Thank you. Our next question comes from Howard Flinker with Flinker & Co..

[Howard Flinker:]

I have a few questions about taxes. Is that VAT in Argentina new?

[Robert G. Doyle:]

No its not Howard, that’s been there for quite a while.

[Howard Flinker:]

I understand that you describe it as something that was unexpected or did I misunderstand?

[Robert G. Doyle:]

No, the VAT taxes are not unexpected. They are fully refundable and we included them in our capital estimate because he pays them up front and then gets them back at the end of production.

[Howard Flinker:]

Did you not include them before?

[Robert G. Doyle:]

They were included before as well.

[Howard Flinker:]

Oh they were. Did the Peruvian tax go up? Is there a new Peruvian tax? Did Garcia say they need a new house or something like that?

[Robert G. Doyle:]

There has been no change to Peruvian tax rates.

[Howard Flinker:]

And finally, please explain that accounting phenomenon where you shifted $4.5 million of costs in the fourth quarter to the first quarter, or it was delayed for some reason? I don’t understand that.

[Robert G. Doyle:]

OK, Howard, if you’re referring to our zinc pricing adjustment at the end of last year, we have sold our zinc on an accounting basis, but the final pricing on that material from our customers is not set for up to three months into the future.

[Howard Flinker:]

How so?

[Robert G. Doyle:]

That’s just a function of how our concentrate sales contracts work, standard in the industry.

[Howard Flinker:]

So, up to three months in the future the price can go either way?

[Robert G. Doyle:]

It can go either way, that’s correct.

[Howard Flinker:]

And who gets the benefit if it goes up, and who gets the benefit if it goes down?

[Robert G. Doyle:]

If it goes up, we get the benefit. If it goes down, potentially we get less value for that material.

[Howard Flinker:]

I see. So that’s also fixed. It’s not some choice of the smelter?

[Geoffrey A. Burns:]

No, the smelter determines that the period of pricing, but up or down goes to either party.

[Howard Flinker:]

I forget where zinc was at the end of the year, clearly if I can infer properly…

[Geoffrey A. Burns:]

It was well above $4,000 thousand per ton, Howard.

[Howard Flinker:]

Oh I see. And now it’s $3,200?

[Geoffrey A. Burns:]

Zinc pays $3,600 on three month basis.

[Howard Flinker:]

OK, thanks, those are my only questions.

[Geoffrey A. Burns:]

You’re welcome.

[Operator:]

Thank you. Once again if you would like to ask a question, please press star and the number one on your telephone keypad. Our next question comes from Haytham Hodaly with Salman Partners.

[Haytham Hodaly:]

Good morning gentlemen.

[Geoffrey A. Burns:]

Good morning Haytham

[Haytham Hodaly:]

Just a couple quick questions, can you just give me your forecast for G&A this full year and maybe for your expiration budget that would be expensed etc.?

[Geoffrey A. Burns:]

I think our G&A in the first quarter was just about $2 million and essentially for G&A, you can just take that and multiply it by four Haytham, and you’re going to get a pretty decent estimate for the year.

[Haytham Hodaly:]

What about your stock based compensation expenses and all that? Is that built in there?

[Geoffrey A. Burns:]

It’s built in there, yes. And in terms of our expiration budget that will be expensed from that…expiration is capitalized. We’re looking at close to $7-$8 million for 2007.

[Haytham Hodaly:]

Are there any plans to put any hedging in place for the (inaudible)?

[Geoffrey A. Burns:]

That was a long, heavily debated topic at our board meeting yesterday. What I can tell you is that as of today we do not have any mandate for putting any sink hedging in place, but we are going to watch the market very closely. Certainly we’re cognizant of some of the comments that were in your newsletter as well as some of the other people who follow the price who suggest that while they’re strong at the moment, there is some potential for degradation in the price. So we don’t have anything today, but I’m not going to preclude us from moving into that market over the next several months.

[Haytham Hodaly:]

One last question on the path proceeds. Initially it was $20 million. I think you said that in this quarter you have another $10 million. Is that correct for this last year?

[Geoffrey A. Burns:]

Yes, we did.

[Haytham Hodaly:]

Again, that additional $10 million which showed up in the first quarter numbers, assuming silver price stays above $10, how would expect that to play out for the next twelve months? A similar number?

[Geoffrey A. Burns:]

Actually, no. The reason for the additional payment was part of the structure of our deal with Poly-Metal was that if they ever IPO’d the company, which they did near the end of last year, that they would have to pay us in advance, half of the outstanding amount that they owed us. So, they did IPO the company and as a result of that, they were dictated to pay us $10.5 million. If the price of silver stays where it is right now, there is about another $2.5 million that we can expect to receive from Poly-Metal at the end of this year and then that would complete that deal.

[Haytham Hodaly:]

So there is $2.5 million left in Q4 of ’07 and then you’re done. There should be no more surprises after that?

[Geoffrey A. Burns:]

There should be no more surprises after that, although this was a pretty nice surprise.

[Haytham Hodaly:]

Definitely. Thank you gentlemen.

[Operator:]

Thank you. Our next question comes from Daniel Altman with Bear Stearns.

[Daniel Altman:]

Good morning. Can you just share with us the revenue break-down of our product in the first quarter?

[Geoffrey A. Burns:]

Daniel, that’s a fairly detailed question in terms of dollars and percentages. If I could ask you to give us a call back here at Pan Am and talk to Robert Doyle, and he’d be happy to share that with you. We just don’t’ have that handy right at the moment.

[Daniel Altman:]

OK.

[Operator:]

Thank you. Our next question comes from Frederick Brimberg with Avatar Associates.

[Frederick Brimberg:]

Hi, good morning. I have two macro questions. Can you update us on the strikes in Peru. I understand they’re not affecting you’re mine directly, but if you can just bring us up to date with your current situation down there.

[Andrew Pooler:]

Sure. Actually that’s an operations question and something I should have touched on in my comment. Yes, there has been a call for a general mining strike by the unionized workers in Peru and the issue really involves contracting out some of the work at various areas of the mine where companies have their own employees but then also carry on mining using contract employees. The issue really revolves around profit sharing. As a full time employee of a particular operation, you’re entitled to an 8% share, obviously pro-rated over a number of workers of the profits of any given operation. If you’re a contract worker, you do not participate in that profit sharing. So that’s the issue. And our operations were almost 100% company only employees. At the moment we have a number of contractors, but we have been systematically over the last two years adding them to our payroll to bring them on to our payroll. As it stands right now, as you’ve noted, all of our operations are still going full tilt. We have not been affected by the general strike. In fact, we’ve settled our labor contract with the union early this year and they actually wrote a letter to the country union telling them that they did not want to participate in any job action whatsoever. So at this point in time we have been very fortunate not to have a union disruption to our operations from that general strike. How it will play out, at the other mines and throughout the country is a little more difficult to call. Certainly the federal government has called the strike illegal and is busy trying to mandate the workers back to the job. Today is a holiday in Peru, so I suspect a number of those workers, you can call it a strike or holiday as I'm not really sure which one it qualifies as for today, but my long-term expectation would be to see most of those workers back on the job throughout the country. And I am hopeful that we've been blessed without any disruptions, and we'll continue on that path.

[Frederick Brimberg:]

Second question is, and I've talked to Rob about this in the past, but I'd just like a reminder. In Argentina, that government has had a history of not upholding contracts with foreigners. I understand the president is very friendly to the company. Could you update me, or all of us, on why you feel confident on your long-term investments in that country, given its history with foreigners?

[Geoffrey A. Burns:]

Sometimes you're good, and sometimes you're a bit lucky when it comes to politics. In our particular case, our operation is located in the province of Santa Cruz. Nestor Kirchner is from that particular province, he's the president of the country, as are a number of his senior cabinet members, and they have been very pro-active, along with the provincial government, in fostering development of all sorts, including mine development. There are clear indications that their long-term political future will see them back in the province when they are done at the federal level, and we are already aware of steps that are being taken internally to the province to provide states for their return. So, while in a general concept of the country some of your comments may be applicable, we are fortunate to be located in an area that is clearly favored by the political winds in Argentina.

[Frederick Brimberg:]

Is it possible, though, if there were a change in the leadership to a president who is not from that province, that it might then be a problem?

[Geoffrey A. Burns:]

We could speculate Frederick, on where the politic is going five or six years from now. It's possible they could have another president come in who is even more in favor of that particular province. That's a tough speculation to make. I can tell you that right now, at the municipal level, the town of Gubernador, at a provincial level and at a federal level, we have very strong support, and we are hopeful it will last.

[Frederick Brimberg:]

OK. Moving on to Bolivia. I noticed in the release a positive construction decision regarding expansion for San Vicente is pending. Can you just help us understand your confidence, given Mr. Morales' background? Why have confidence making a long-term commitment to that country?

[Geoffrey A. Burns:]

I think in the case of San Vicente there is about three things. The first one is magnitude of our commitment to what is going to end up. If we have a positive construction decision, being the magnitude of our investment, then I could say on a material level without getting into the specifics, which we can't do before we make a formal announcement, that any magnitude of investment is going to be very small relative to what we're investing in Argentina, or what we just invested in Mexico, for some very positive production results. So magnitude versus potential returns is the number-one issue. Number two is there has been an incredible amount of rhetoric picked up in the press from Mr. Morales. The reality is, for the vast majority of the mining industry, ourselves included, with the exception of perhaps one specific company, there has been no change whatsoever to the way we do business, the way we're being taxed, the way we're operating, the way we pay our unions, since Evo has taken office. That's zero change, nothing has changed. I'm not saying that's an absolute for sure going forward, but that's certainly the result of a lot of talk and not much action. I guess the last thing is that Bolivia is, indeed, a very poor country. They do need foreign investment in the mining industry. They just need it. It's one of their primary economic drivers in the country. They don't have the wherewithal to develop many of the natural resources themselves, particularly in mining. And again, despite the rhetoric, underneath that rhetoric in dealing with most of the cabinet ministers that report to Mr. Morales, the message has been very clear

[Frederick Brimberg:]

Thank you. The original guidance for silver production this year, I know has dropped to $17 million, but I don't remember from what.

[Geoffrey A. Burns:]

The original guidance was $17.6 million.

[Frederick Brimberg:]

OK, great. And the differential is because of the commissioning problems in Mexico, rather than the inventory problems in Peru? Is that fair?

[Geoffrey A. Burns:]

That's absolutely correct.

[Frederick Brimberg:]

Alright, so you'll make all that up. OK, great. Gentlemen, thank you very much for your time and patience this morning.

[Geoffrey A. Burns:]

You're welcome Frederick.

[Operator:]

Thank you. Once again, if you would like to ask a question, please press * and the number 1 on your telephone keypad. Our next question comes from Richard Gray with Blackmont Capital.

[Richard Gray:]

Hi Geoff., I guess just a little further onto the previous question. How have the events down in South America changed your acquisition strategy? Are you still looking at things down in Peru, Bolivia, and Argentina? Or are you kind-of looking at more opportunities in Mexico, for example?

[Geoffrey A. Burns:]

No Richard, we're still very actively looking in the South American countries. I mean, on an absolute basis, would I say we would favor Peru over Bolivia? Yes. Does that preclude us doing something in Bolivia? No.

[Richard Gray:]

OK. Fair enough, thanks.

[Geoffrey A. Burns:]

You're welcome, Richard.

[Operator:]

Thank you. At this time, there appears to be no further questions. I'll turn the floor back over to Geoff Burns for any closing remarks.

[Geoffrey A. Burns:]

Thank you, operator, and thanks everyone for joining us here this morning to talk about our first quarter. I look forward to talking to you again in a few months time about how we do in the second quarter, and as I said, I am confident that our financial performance will more closely reflect our operating performance. Good day.

[Operator:]

Thank you. This does conclude today's Pan American Silver Corporation conference call. You may now disconnect.