panamericansilver_425.htm
Filed
by Pan American Silver Corp.
pursuant
to Rule 425 under the Securities Act of 1933
Commission File No. 333-162778
Subject
Company: Aquiline Resources Inc.
Commission File No. N/A.
Pan
American Silver Corp.
Third
Quarter 2009 Earnings Conference Call
November
11, 2009
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN
OF THE STATEMENTS AND INFORMATION IN THIS TRANSCRIPT CONSTITUTE
“FORWARD-LOOKING STATEMENTS” WITHIN THE MEANING OF THE UNITED STATES PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 AND “FORWARD-LOOKING INFORMATION”
WITHIN THE MEANING OF APPLICABLE CANADIAN PROVINCIAL SECURITIES LAWS RELATING TO
THE COMPANY’S AND ITS OPERATIONS. ALL STATEMENTS, OTHER THAN
STATEMENTS OF HISTORICAL FACT, ARE FORWARD-LOOKING STATEMENTS. WHEN
USED IN THIS TRANSCRIPT THE WORDS “ANTICIPATE”, “BELIEVE”, “ESTIMATE”, “EXPECT”,
“INTEND”, “TARGET”, “PLAN”, “FORECAST”, “STRATEGIES”, “GOALS”, “OBJECTIVES”,
“BUDGET”, “MAY”, “SCHEDULE” AND OTHER SIMILAR WORDS AND EXPRESSIONS, IDENTIFY
FORWARD-LOOKING STATEMENTS OR INFORMATION. THESE FORWARD-LOOKING
STATEMENTS OR INFORMATION RELATE TO, AMONG OTHER THINGS: THE PRICE OF SILVER AND
OTHER METALS; THE ABILITY OF THE COMPANY TO SUCCESSFULLY COMPLETE THE PROPOSED
TRANSACTION WITH AQUILINE RESOURCES INC. OR TO TAKE-UP AND PAY FOR ANY SUCH
SECURITIES, AND THE EFFECTS OF ANY SUCH ACQUISITION ON THE COMPANY; THE EFFECTS
OF LAWS, REGULATIONS AND GOVERNMENT POLICIES AFFECTING PAN AMERICAN’S OPERATIONS
OR POTENTIAL FUTURE OPERATIONS, INLCUDING BY NOT LIMITED TO, LAWS IN THE
PROVINCE OF CHUBUT, ARGENTINA, WHICH, AMONG OTHER THINGS, CURRENTLY PROHIBIT
OPEN-PIT MINING AND THE USE OF CYANIDE IN MINING AND WHICH, AS CURENTLY ENACTED,
WOULD LIKELY RENDER ANY FUTURE CONSTRUCTION AND DEVELOPMENT OF THE NAVIDAD
PROJECT UNECONOMIC OR NOT POSSIBLE AT ALL; FUTURE SUCCESSFUL DEVELOPMENT OF THE
NAVIDAD PROJECT AND OTHER DEVELOPMENT PROJECTS OF THE COMPANY; THE SUFFICIENCY
OF THE COMPANY’S CURRENT WORKING CAPITAL, ANTICIPATED OPERATING CASH FLOW OR ITS
ABILITY TO RAISE NECESSARY FUNDS; THE ACCURACY OF MINERAL RESERVE AND RESOURCE
ESTIMATES AND ESTIMATES OF FUTURE PRODUCTION; ESTIMATED PRODUCTION RATES FOR
SILVER AND OTHER PAYABLE METALS PRODUCED BY THE COMPANY; TIMING OF PRODUCTION
AND THE CASH AND TOTAL COSTS OF PRODUCTION AT EACH OF THE COMPANY’S PROPERTIES;
THE ESTIMATED COST OF AND AVAILABILITY OF FUNDING FOR ONGOING OR FUTURE
DEVELOPMENT PLANS AND CAPITAL REPLACEMENT, IMPROVEMENT OR REMEDIATION PROGRAMS;
THE ESTIMATED COST AND TIMING OF RAMP-UP OF MANANTIAL ESPEJO AND SAN VICENTE;
THE ESTIMATES OF EXPECTED OR ANTICIPATED ECONOMIC RETURNS FROM THE COMPANY’S
MINING PROJECTS, AS REFLECTED IN FEASIBILITY STUDIES OR OTHER REPORTS PREPARED
IN RELATION TO DEVELOPMENT OF PROJECTS; ESTIMATED EXPLORATION EXPENDITURES TO BE
INCURRED ON THE COMPANY’S VARIOUS SILVER EXPLORATION PROPERTIES; FORECAST
CAPITAL AND NON-OPERATING SPENDING; FUTURE SALES OF THE METALS, CONCENTRATES OR
OTHER PRODUCTS PRODUCED BY THE COMPANY; RECOVERY IF ANY OF AMOUNTS DUE FROM DOE
RUN PERU; AND THE COMPANY’S PLANS AND EXPECTATIONS FOR ITS PROPERTIES AND
OPERATIONS.
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 FACTORS, BOTH KNOWN AND UNKNOWN, COULD CAUSE
ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM THE
RESULTS, PERFORMANCE OR ACHIEVEMENTS THAT ARE OR MAY BE EXPRESSED OR IMPLIED BY
SUCH FORWARD-LOOKING STATEMENTS CONTAINED IN THIS TRANSCRIPT AND THE COMPANY HAS
MADE ASSUMPTIONS AND ESTIMATES BASED ON OR RELATED TO MANY OF THESE
FACTORS. SUCH FACTORS INCLUDE, WITHOUT LIMITATION: FLUCTUATIONS IN
SPOT AND FORWARD MARKETS FOR SILVER, GOLD, BASE METALS AND CERTAIN OTHER
COMMODITIES (SUCH AS NATURAL GAS, FUEL OIL AND ELECTRICITY); FLUCTUATIONS IN
CURRENCY MARKETS (SUCH AS THE PERUVIAN SOLES, MEXICAN PESO, ARGENTINE PESO AND
BOLIVIAN BOLIVIANO VERSUS THE U.S. DOLLAR); RISKS RELATED TO THE TECHNOLOGICAL
AND OPERATIONAL NATURE OF THE COMPANY’S BUSINESS; CHANGES IN NATIONAL AND LOCAL
GOVERNMENT, LEGISLATION, TAXATION, CONTROLS OR REGULATIONS
AND POLITICAL OR ECONOMIC DEVELOPMENTS IN CANADA, THE UNITED STATES,
MEXICO, PERU, ARGENTINA, BOLIVIA OR OTHER COUNTRIES WHERE THE COMPANY MAY CARRY
ON BUSINESS IN THE FUTURE; RISKS AND HAZARDS ASSOCIATED WITH THE BUSINESS OF
MINERAL EXPLORATION, DEVELOPMENT AND MINING (INCLUDING ENVIRONMENTAL HAZARDS,
INDUSTRIAL ACCIDENTS, UNUSUAL OR UNEXPECTED GEOLOGICAL OR STRUCTURAL FORMATIONS,
PRESSURES, CAVE-INS AND FLOODING); RISKS RELATING TO THE CREDIT WORTHINESS OR
FINANCIAL CONDITION OF SUPPLIERS, REFINERS AND OTHER PARTIES WITH WHOM THE
COMPANY DOES BUSINESS; INADEQUATE INSURANCE, OR INABILITY TO OBTAIN INSURANCE,
TO COVER THESE RISKS AND HAZARDS; EMPLOYEE RELATIONS; RELATIONSHIPS WITH AND
CLAIMS BY LOCAL COMMUNITIES AND INDIGENOUS POPULATIONS; AVAILABILITY AND
INCREASING COSTS ASSOCIATED WITH MINING INPUTS AND LABOUR; THE SPECULATIVE
NATURE OF MINERAL EXPLORATION AND DEVELOPMENT, INCLUDING THE RISKS OF OBTAINING
NECESSARY LICENSES AND PERMITS AND THE PRESENCE OF LAWS AND REGULATIONS THAT MAY
IMPOSE RESTRICTIONS ON MINING, INCLUDING THOSE CURRENTLY IN THE PROVINCE OF
CHUBUT, ARGENTINA; DIMINISHING QUANTITIES OR GRADES OF MINERAL RESERVES AS
PROPERTIES ARE MINED; GLOBAL FINANCIAL CONDITIONS; BUSINESS OPPORTUNITIES THAT
MAY BE PRESENTED TO, OR PURSUED BY, THE COMPANY; THE COMPANY’S ABILITY TO
COMPLETE AND SUCCESSFULLY INTEGRATE ACQUISITIONS AND TO MITIGATE OTHER BUSINESS
COMBINATION RISKS; CHALLENGES TO, OR DIFFICULTY IN MAINTAINING, THE COMPANY’S
TITLE TO PROPERTIES AND CONTINUED OWNERSHIP THEREOF; THE ACTUAL RESULTS OF
CURRENT EXPLORATION ACTIVITIES, CONCLUSIONS OF ECONOMIC EVALUATIONS, AND CHANGES
IN PROJECT PARAMETERS TO DEAL WITH UNANTICIPATED ECONOMIC OR OTHER FACTORS;
INCREASED COMPETITION IN THE MINING INDUSTRY FOR PROPERTIES, EQUIPMENT,
QUALIFIED PERSONNEL, AND THEIR COSTS; AND THOSE FACTORS IDENTIFIED UNDER
THE
CAPTION
“RISKS RELATED TO PAN AMERICAN’S BUSINESS” IN THE COMPANY’S MOST RECENT FORM 40F
AND ANNUAL INFORMATION FORM FILED WITH THE UNITED STATES SECURITIES AND EXCHANGE
COMMISSION AND CANADIAN PROVINCIAL SECURITIES REGULATORY
AUTHORITIES. INVESTORS ARE CAUTIONED AGAINST ATTRIBUTING UNDUE
CERTAINTY OR RELIANCE ON FORWARD-LOOKING STATEMENTS. ALTHOUGH THE
COMPANY HAS ATTEMPTED TO IDENTIFY IMPORTANT FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY, THERE MAY BE OTHER FACTORS THAT CAUSE RESULTS NOT
TO BE AS ANTICIPATED, ESTIMATED, DESCRIBED OR INTENDED. THE COMPANY
DOES NOT INTEND, AND DOES NOT ASSUME ANY OBLIGATION, TO UPDATE THESE
FORWARD-LOOKING STATEMENTS OR INFORMATION TO REFLECT CHANGES IN ASSUMPTIONS OR
CHANGES IN CIRCUMSTANCES OR ANY OTHER EVENTS AFFECTING SUCH STATEMENTS OR
INFORMATION, OTHER THAN AS REQUIRED BY APPLICABLE LAW.
Operator:
Welcome to the Pan American Silver Third Quarter 2009 Earnings Conference
Call. During today’s presentation, all parties will be in a
listen-only mode. Following the presentation, the conference will be
open for questions. If you have a question please press the star,
followed by the one on your touchtone phone. If you would like to
withdraw your question please press the star, followed by the two. If
you are using speaker equipment please lift the handset before making your
selection. This conference is being recorded today, November 11th,
2009.
I would now like to turn the conference over to, Kettina Cordero, Coordinator of
Investor Relations. Please go ahead, ma’am.
Kettina
Cordero:
Thank you, operator and good morning ladies and
gentlemen. Joining me here today are Geoff Burns, our President and
CEO; Steve Busby, our Chief Operating Officer; Michael Steinmann, our Executive
Vice-President of Geology and Exploration; and Rob Doyle, our Chief Financial
Officer.
I
would like to start today’s conference by mentioning that this call cannot be
reproduced or retransmitted without our consent. I also point out
that certain of the statements and information in this call will constitute
forward-looking statements and forward-looking information within the meaning of
applicable securities laws. All statements, other than statements of
historical fact, are forward-looking statements. These statements
reflect the Company’s current views with respect to future events and are
necessarily based upon a number assumptions and estimates, but while considered
reasonable by the Company, are inherently subject to significant business,
economic competitive, political and social uncertainties and
contingencies.
Many
factors, both known and unknown could cause actual results, performance, or
achievements to be materially different from those expressed or implied by such
forward-looking statements and the Company has made assumptions and estimates
based on, or related to many of these factors. We encourage investors
to refer to the cautionary language included in our most recent news release
dated, November 10, 2009, as well as those factors identified under the caption
Risks Related to Pan American’s business in the Company’s most recent Form 40-F
and AIF. 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.
Now,
I will turn the call to Geoff Burns, President and CEO.
Geoffrey
Burns: Thank
you, Kettina and good morning and welcome to Pan American Silver’s Third Quarter
Earnings Release Conference Call. Wow, what a difference a year
makes! Only 12 months ago we were in the midst of a global economic
crisis that saw financial markets in complete disarray. Metals prices
were collapsing and with them, the share prices of the companies like ours that
produce metals were in free fall.
Due
to reengineering our mining plans, we were cutting capital, people and wages and
we were squeezing our costs everywhere we could. At the same time, we
were working hard to complete two key project developments, Manantial Espejo
in Argentina and
San Vicente in Bolivia. It was a difficult period of time for Pan
American and for a lot of companies, not only in the mining business but in all
economic sectors.
It
is truly rewarding today to be able to talk to you about our third quarter and
to realize that the extremely difficult decisions and the consequent actions
that we undertook a year ago have clearly paid dividends. What are
those dividends? First, we produced a new quarterly Company record of
6.4 million ounces of silver, up 31% from the same period a year ago and up 10%
as compared to our second quarter of this year.
Second,
our quarterly gold production also climbed to over 28,000 ounces, also a new
Company record and up another 12% from the second quarter of this year, which
was also a Company record at that time. Gold is now clearly our most
significant by-product, accounting for almost 20% of our total
revenues.
Third,
our consolidated cash costs declined 26% to $4.91 per ounce of silver, well
below our full year forecast of $6 per ounce. This is extremely
gratifying, as we have been able to hang on to the massive cost decline we
reported earlier this year.
Fourth,
our cash flow from operating activities before working capital adjustments was a
very healthy $43 million or $0.50 per share with the majority of that cash
making its way directly into our bank account, and finally, we posted net income
of $17.4 million or $0.20 per share, an increase of 172% as compared to the
third quarter of last year and $7.2 million higher than our second quarter of
this year.
Clearly,
the swift recovery in the price of both silver and gold and to a lesser extent,
the recovery in base metal prices have contributed to this performance but there
is no doubt in my mind that the actions and plans we implemented a year ago,
when we were in full-on crisis mode have allowed us to post one of the best
quarters in the Company’s history.
With
that, I’d like to turn the call over to Steve, Michael and Rob, who are joining
me here this morning, who I know will provide you with some
additional
color and commentary on our operations, our development projects, our
exploration programs and our financial condition. Steve.
Steven
Busby: Thank
you, Geoff and good morning, ladies and gentlemen. I’m very proud of
all of our operations and projects’ accomplishments during the third quarter and
pleased to be able to provide you a more detailed description of our
performance.
Starting
off in Argentina, we had a solid, steady state operating quarter at Manantial
Espejo, where we again produced just over 1 million ounces of silver at an
excellent cash cost of negative $3.11 per ounce, thanks to better-than-planned
gold production of over 20,000 ounces at better-than-forecasted gold
prices.
We
have successfully repaired the failed grinding mill motor that I described last
quarter, without incurring any material disruptions to our production and have
been steadily improving operating performance ever since. The plant
processed nearly 170,000 tons of ore in the third quarter, which is 92% of our
design capacity and we have reached design capacity during the months of
September and October.
The
silver mill feed grades for the quarter at Manantial Espejo was 214 grams per
ton and 88% was recovered, just shy of our expectations. However,
this was more than offset with the better than expected gold grade of 3.9 grams
per ton and better than expected gold recoveries of plus 95%. We are
expecting slightly improved silver production and similar cash cost performance
from Manantial Espejo in the fourth quarter of this year as our initial employee
training efforts are now being enhanced with real time experience and the local
operators are gaining more confidence in their own abilities, resulting in a
stable operating environment.
Our
Peruvian operations produced just over 2 million ounces of silver in the third
quarter at a cash cost of $8 per ounce of silver, which is right on our previous
production forecast from the second quarter, despite continuing to incur higher
smelting costs with the closure of the Doe Run smelter, which has added over
$1.35 per ounce to our cash cost of our operating mines in Peru, in addition to
not selling any of our silver stockpile materials which is used by the smelter
for fluxes. Higher base metal prices have helped to offset the effect of the Doe
Run smelter closure in Peru.
We
continued to advance our mine deepening project at Huaron that was started in
2006 and, although the development and mining of the higher grade ore zones from
these areas will be ramping up slower than we had planned due to the need for
more expensive ground support efforts than we had originally anticipated, we
forecast the ramp up for the higher grade production from the 180 level
deepening will slowly increase from the current 2,000 tons of ore per month to
an expected steady state of 9,000 tons of ore per month by the third quarter of
2010.
The
slower ramp up is pushing us to advance developments in open mining in other
areas, which generally produce lower grade ores at higher cash
costs. As a result, our production at Huaron for the next few
quarters is forecasted to slowly ramp up about 10% from the current 910,000
ounces of silver per quarter to close to 1 million ounces of silver, with costs
decreasing at the same rate from the current $10.35 per ounce to around $7.50
per ounce at current base metal prices, once we achieve the steady state
production from the deep developments.
We
are very pleased with the solid performance at our Morococha mine, where we are
producing right at planned rates of nearly 750,000 ounces of silver per quarter
at cash cost of $5.33 per ounce. We anticipate this production rate
and cost base will continue for quite some time, assuming that base metal prices
stay relatively consistent. Simultaneously, we are advancing our long
term, multi-year underground mine access and infrastructure projects which are
designed to allow us to sustain current performance far into the future given
the significant resource base we have at Morococha.
As
reported last quarter, we are continuing reduced, yet profitable operations at
Quiruvilca given the current metal prices and have a plan in place to place the
mine in care and maintenance should the situation
deteriorate. Quiruvilca produced more than 360,000 ounces of silver
in the third quarter at a cash cost of $7.69 per ounce, which includes all
capital expenses and we expect this will continue into early 2010.
Our
mines in Mexico continue to perform solidly, with Alamo Dorado producing 1.6
million ounces of silver at a cash cost of $4.37 per ounce and La Colorada
producing 885,000 ounces of silver, at a cash cost of $7.92 per ounce for the
third quarter. Gold production at Alamo Dorado once again exceeded
our expectations. The mine produced nearly 5,000 ounces for the
quarter against our forecast of approximately 3,000.
We
have now, essentially mined our high grade zone out of the phase one pit at
Alamo Dorado and we will begin to see production rates decline as we strip down
to the phase two pit, which happily, may actually grow into a phase three pit
with some of the recent extension drill results that Michael Steinmann will
describe later in this call. As such, we are forecasting the fourth
quarter silver production at around 1 million ounces for Alamo
Dorado. The quarterly production rate will continue into mid to late
2010 when we’ll start to see again high grade ore from our phase two
pit.
We are expecting continued solid performance from La Colorada for some time to
come and we are very pleased with the opportunity to extend the lives of both of
our Mexican mines, given some of the recent successes we have seen from our
exploration efforts.
As
promised last quarter, I’m extremely pleased to be able to provide you details
of our outstanding start up at San Vicente in Bolivia, where we produced over
870,000 ounces of silver at a cash cost of $5.81 per ounce during the third
quarter, only our second quarter of operation since commissioned in the new
plant in the expanded mine. Ramp up continues well ahead of our
projections, with the plant processing just over 600 tons per day during the
quarter, against our design of 750 tons per day. We were able to feed
higher grade ore to the plant during the quarter, which resulted in us being
able to produce silver ounces at essentially plant capacity rates. We
anticipate continued success in the wrap up towards design throughput rates in
the last quarter of this year and our feed grades will decline somewhat so we
can sustain current silver production rates and costs.
We
have completed our winterization projects at San Vicente and continued to gain
comfort and confidence in the operation as the operators become familiar with
the new plant expanded mine. It is a pleasure to observe the
outstanding accomplishments of the local work force and the obvious welcomed
economic stimulus this mine expansion and plant construction project has brought
to the local community of San Vicente. We are optimistic, that our
successes at San Vicente are being viewed positively in the country and could
incentivize additional foreign investing into a region that so desperately needs
it. As you can well imagine, our mine development and operating teams
are very excited about our future prospects at La Preciosa in Mexico and the
projects we’ll secure with the Aquiline acquisition, particularly of course, the
Navidad project in Argentina.
We
have motivated development teams with proven talents to maximize the value of
these assets and can’t wait to get things kicked off. This is a very
exciting time to be part of the Pan American Silver organization and our future
looks very bright indeed. As Geoff mentioned, overall, Pan American
Silver had another solid quarter, producing a record-breaking 6.4 million ounces
of silver at cash cost of $4.91 per ounce, better than our expectations thanks
primarily to outstanding performance from our operating teams together with
better than expected byproduct metal prices. We are confident that we
will achieve our 2009 production and cost guidance and stand ready to tackle our
next development project.
I
will now turn the call over to Michael Steinmann for the exploration
update.
Michael
Steinmann: Thank you, Steve and good
morning. Q3 was not only a quarter of record silver and gold
production but also a record quarter for our exploration drilling. We
completed over 28,500 meters of diamond and RC drilling in our brown &
greenfield programs, including the La Preciosa project in
Mexico. Year-to-date, we stand at 65,800 meters of drilling at our
operations and projects; already beyond our full year planned program of 53,000
meters.
No
doubt that La Preciosa got the lion’s share of this drilling with over 14,000
meters during Q3. During the last five months we drilled 78 holes
at
La
Preciosa for a total of 22,367 meters and collected over 3,300
samples. Our joint venture partner, Orko Silver, published drill
results in a press release on September 8, 2009. As expected, all the
inflow holes intersect the main Martha vein, as well as
hanging and footwall structures.
Martha
is an up to 40 meter wide structural corridor containing several sets of more
narrow, high grade veins with lower grade intervals. Drill hole DP
09374 returned 32.68 meters at 245 grams silver and 0.38 grams gold, including a
high grade vein of 3.50 meter width at 1.17 kilograms silver and 2.18 grams
gold. Hole 359 returned 34.77 meters at 202 gram silver and hole 372
returned 22.45 meters at 289 gram silver and 0.51 gram gold.
Additional
details on these and other holes have been published by Orko Silver in September
’08—sorry—September 8, 2009. Most of the holes served as infill
drilling for the Martha vein structure, by far the most important structure on
site. But also, some surrounding new exploration targets, like the
Vaquero and Baritina veins have been partially drilled and more exploration
targets will be tested in the coming months.
Infill
drilling will continue with a maximum spacing of 50 meters in order to upgrade
part of the resource into measured and indicated categories. Besides
the drilling, we were very active on preliminary resource modeling and possible
mining methods. The technical studies are in progress and
metallurgical work is advancing well on floatation and cyanide leach
tests. Our goal is to complete the feasibility study and be
positioned to make a production decision for La Preciosa by the end of
2010.
The
brownfield programs at our operating mines advanced very well, too during
Q3. They’re currently drilling at every of our operations and at one
additional exploration project in Peru. Like in Q2, La Colorada
returned by far the highest grade intersect, especially from the drilling on the
vertical expansion of the NC2 vein. The wide sulfide structure shows
continuous mineralization and is still open at depth and to the
east. The vein is up to 10 meters wide with an average width of about
five meters.
Besides
the main structure, there are hanging and footwall veins and we discovered
several replacement mantos in the limestones. Up to date, we drilled
out about 250 meters along strike of this 750 meter long structure in
approximately 25 meter space drill pattern. The deepest hole reached
level 610, about 200 meters below the actual mining level. Some of
the most notable intersects are 6.65 meters at 2,021 grams silver, 3.46 meters
at 4,536 grams silver, 8.44 meters at 765 gram silver, 6.43 meters at 1,000
grams silver, 13.30 meters at 617 gram silver, and 6.80 meters at 1,342 grams
silver. In addition, all of these holes returned up to three grams
gold and 15% to 25% combined lead zinc. So far we drilled 26 holes in
this zone and every one of them returned economic grades.
We’re
currently working on a new resource and reserve estimation for La Colorada and
will release the overall results as soon as we have finished. I have
no doubt that the sulfides of the NC2 vein will form an important part of the La
Colorada production during the coming years and provide the plant with new high
grade silver and base metal ore.
At
Alamo Dorado, we drilled over 3,700 meters year-to-date, targeting the south and
north ends of the pit, as well as some areas below the current pit
shell. The gain of reserves to the north and southeast of the pit has
been offset by a loss to the southwest due to a structural
complication. We are currently drilling on a possible plan phase
three pit extension, as Steve mentioned. Besides the depletion due to
production, we don’t anticipate any material reserve change at Alamo Dorado at
the end of the year.
As
I mentioned, the brownfield programs are in full swing at our operations and the
greenfield programs are advancing well at San Vicente and Manantial
Espejo. We now have substantial land holdings around those
mines. An additional surface rig is mobilizing into San Vicente as we
speak and Manantial Espejo is drilling with two rigs at surface and with one rig
underground to take advantage of the good climate during the coming spring and
summer months.
These
are two of our most prospective properties and I’m sure we will see important
new results during the first six months of 2010. I am extremely
pleased with the exploration results we achieved so far in 2009. All
of this new information will be included in the annual reserve and resource
update, which I will share with you in January 2010. But I’m
confident that once again, we will more than replace all of the resource ounces
we’ve mined in 2009.
Now
to, Rob, for the financials.
Robert
Doyle: Good
morning, ladies and gentlemen. Our financial results in Q3 2009 were
just what you would expect from Pan American, given our grand production base
and the improving price environment for metal that we produce. We
reported record sales of $118.6 million or a 49% increase from a year ago on the
back of record silver and gold production.
Our
mine operating earnings were a solid $34.7 million, more than double mine
operating earnings from a year ago and up 48% from Q2. Net income was
$17.4 million, which equates to $0.20 per share, again more than double net
income from a year ago and up 70% from Q2.
Cash
flow generated from operations before working capital movement was
$43.3 million, very nearly double the $22.1 million from one year ago and 20%
higher than Q2. With strong cash flow from operations and capital
expenditures significantly reduced to $5.8 million for the quarter, we banked
$28 million in cash during the quarter.
These
excellent results could have been even better had we been able to sell all of
the metal that we produced during the quarter. However, concentrate
shipments and doré refining schedules around quarter-end resulted in us building
up our inventory position by almost 400,000 ounces of silver, 4,000 ounces of
gold and 9,600 tons of zinc concentrate during the quarter. We’ll be
working hard to reduce these inventory levels and recognize the associated sales
and profits with this third quarter production in the fourth
quarter.
So,
what is at the heart of our improving financial results? Well, there
are two main factors. Firstly, the addition of high margin production
from the Manantial Espejo and San Vicente mines which have both ramped up
extremely smoothly, reaching commercial production in their first quarter of
operation after construction activities.
Secondly,
the continuation and the recovery of metal prices resulted in a further
expansion of our margin per ton in Q3. Average margin per ton of ore
milled has gone from about $10 in Q4 2008 to $53 in Q3 2009. Our
total number of tons milled has increased by 50% over that same
period. Simply put, our results reflect the benefits of increased
throughput of higher margin ore combined with improving price environment for
the metals we produce.
Our
statement of operations for Q3 2009 did contain several items that are worth
further discussion. Sales increased by $39.1 million from the
comparable quarter in 2008, almost entirely due to increases in the quantities
of silver and gold sold which increased by 30% and 450%
respectively. These increases in quantity sold also resulted in our
cost of sales increasing by 17% and our depreciation charge almost doubling in
Q3 of 2009. However, the increased sales significantly outweighed the
increase in cost of sales and depreciation, resulting in mine operating earnings
that more than doubled to $34.7 million.
Included
in net income in Q3 2009 was a non-cash, foreign exchange loss of $2.4 million
and the revaluation of the Company’s cash and other working capital and future
income tax balances that we denominated in local currencies. This
last resulted by a mark-to-market gain of $2.7 million on an equity warrant
position held by us at quarter end.
Moving
to the balance sheet, our working capital went from strength to strength during
the quarter, increasing by $41.6 million. Most of the increase in
working capital is reflected in higher cash and short term investment balances
which rose by $37.1 million. As I mentioned earlier, our doré and
concentrate inventory increased during the quarter which added an additional
$10.3 million to our working capital.
We
finished the quarter with a working capital position of $258 million and cash
and short term investments of almost $150 million and no debt. From a
cash flow perspective, cash flow from operations before working
capital
movement
was $43.3 million, a jump of $7.2 million from Q2 2009 and nearly double the
operating cash flow for the comparable quarter of 2008.
With
the construction of Manantial Espejo and San Vicente now behind us, our capital
expenditure for the third quarter on property, plant and equipment was only $5.8
million. The combination of sharply higher operating cash flow and
significantly lower capital expenditures resulted in Pan American increasing its
cash balance by $28 million during the quarter. We expect to see our
cash balances continuing to build in the coming quarters as all of our mines are
generating positive cash flow.
Lastly,
I’d like to give you a brief update on the Doe Run Peru situation, the owner of
the La Oroya smelter in Peru, which was closed during the third quarter and
remains closed today. Doe Run Peru was the largest buyer of the
Company’s copper concentrate production and the only buyer of the pyrite
stockpile material. We were able to sell copper concentrates to other
buyers during Q3 2009. However, the terms of such sales were
significantly inferior to the terms of the Company’s concentrate contracts with
Doe Run Peru by approximately $2.7 million but that’s before tax
effects. This added approximately $1.35 per ounce to the cash costs
at our Peruvian mines in the third quarter. Some impacts are expected
on future results of the Company for at least the period that the La Oroya
smelter remains closed.
We
do believe that the recent developments surrounding Doe Run Peru have been
positive, especially the fact that the Peruvian congress granted a 30-month
extension for the completion of their PAMA obligations. We are
optimistic that the smelter will resolve its financing requirements and resume
operations in the first half of 2010. However, we still retain the
doubtful debt provision of $4.4 million that we established in the second
quarter related to the accounts receivable balance from Doe Run Peru and have
made no adjustments to that provision in the third quarter.
With
that, I’ll hand it back to Geoff for closing comments.
Geoffrey
Burns: Thanks,
Rob. Okay, you have now heard in detail what we accomplished last
quarter. Now let’s look at where Pan American is headed and why I
remain as optimistic as ever about our prospects for the balance of this year
and beyond. We are maintaining our production forecast for 2009 and
are planning to produce 21.5 million ounces of silver, not including the
production from our Quiruvilca mine, which is still moving towards care and
maintenance, although at current price levels we may be compelled to revisit
this decision.
We
are maintaining our cash cost forecast of $6 per ounce for the year but I think
it’s safe to say that we are very likely going to do much better, given the fact
that for the first nine months of 2009 our cash costs were $5.57 per
ounce. We should more than double, actually almost triple our gold
production this year and like silver, are maintaining our 2009 guidance for gold
at 85,000 ounces. Again,
frankly,
given the fact that we have already produced over 74,000 ounces of gold so far
this year, I think we’ll do quite a bit better here.
As
Michael indicated, we are going to continue to aggressively explore at all our
operations, with particular emphasis at Manantial Espejo, San Vicente and
obviously, La Colorada. Just because I think it is worth repeating,
we have clearly discovered an exciting new extension to the NC2 zone at the La
Colorada mine. 6.65 meters at over 2 kilos of silver per ton, which
is almost 22 feet at 65 ounces of silver per ton, has to register as one of the
best drill holes that Pan American has ever had. All I can say is
stay tuned as we continue to explore this tremendous target.
We
are going to continue to push hard at La Preciosa and are targeting a full
feasibility study by the end of next year. The Martha vein is proving
up nicely. We have identified a half dozen new explorations targets
that will be methodically—that we will be methodically exploring in the coming
months and as I said before, it is our opinion that La Preciosa is a tremendous
property in a great location and at absolutely the right stage and we can create
additional value by bringing this project forward. There’s a defined
silver resource in excess of 135 million ounces of silver. It’s in
Mexico and literally within an hour of our established infrastructure in
Durango.
With
no debt, over $258 million in working capital, our heavy capital expenditures
behind, us we are well positioned to continue to generate significant positive
cash flow and earnings for the balance of this year and beyond. I
would like to finish my remarks by taking a brief moment to talk about the
friendly offer we mailed on October 30th, to
purchase Aquiline Resources, Inc. I truly see this as a tremendous
transaction and an ideal combination and a chance to create additional value for
both Pan American and Aquiline shareholders. It is a transaction that
will marry Pan American’s financial horsepower and proven mine development
capabilities with Aquiline’s world class primary silver deposit,
Navidad.
And
secondly, and perhaps more importantly, I see Pan American as uniquely
positioned to move Navidad forward. As you know, we have recently
completed the construction and commissioning of the Manantial Espejo mine in
Argentina and consequently, are intimately familiar with the Argentine landscape
and political sensitivities within our host country. The key to
unlocking the ability to develop Navidad lies, in my opinion, in our ability to
address these sensitivities and work proactively with the government of Chubut
and with the local communities that surround Navidad.
If
we are successful with this acquisition, which is open for acceptance until
December 7th,
about a month from now, the potential production growth from developing Navidad
will be transformational to Pan American. With La Preciosa and
hopefully Navidad, Pan American will have reloaded its growth pipeline at a time
when we are generating tremendous cash flows and have the people and resources
available to take our new development opportunities and move your
Company
to another level. There is clearly good reason to be optimistic about
Pan American’s future.
With
that, I would now ask the operator to open the lines for questions.
Operator: Thank
you, sir. We will now begin the question and answer
session. As a reminder, if you have a question please press the star,
followed by the one on your touchtone phone. If you would like to
withdraw your question press the star, followed by the two. If you
are using speaker equipment you may need to lift the handset before making your
selection. Just a moment, for our first question.
Our
first question comes from Steven Butler with Canaccord Adams. Please
go ahead.
Steven
Butler: Hello,
good morning gents, et al. Question for you guys and Rob, I guess for
you. You mentioned the shipments of lower than production 400,000
ounces of silver, 4,000 ounces gold, 9,600 tons, I think, of zinc
con. What would that earnings impact or revenue impact of that be,
roughly? I think you said 10.3 million build in working
capital. What would be the related earnings, as best you would
estimate, that could fall into Q4 from Q3 assuming Q3 prices?
Steven
Busby: It’s
Steve. We haven’t done that analysis. I mean just as a
rough guideline, the increase in the inventory number that you quoted there of
$10.3 million, that’s of course the cost. And then if you applied in
our mine operating earnings margin to that cost basis, you might get some idea
of what we would expect in terms of operating earnings on that
inventory. But that would be about the only guidance I could give you
right now. We haven’t done that analysis.
Geoffrey
Burns: Maybe
I can help you a little bit there, Steve. I think our average cash
cost as you saw was just under $5. As 400,000 ounces we treat the
zinc and the gold as byproducts, as you know. So, you know, you’re
looking at $17 prices. You’re looking at $12 margins on those 400,000
ounces. So that’s not a bad—would not be a bad guideline to use and
then apply a 30% tax rate to it.
Steven
Butler: I
think we could work that out, Geoff, thank you. Michael, on the La
Colorada, is it the NC2 zone is that correct and where is that spatially
again? I think you said a couple hundred meters below and what is the
rough dimensions of the zone in terms of strike, width, depth?
Michael
Steinmann: Yes, NC2 is one of
our main veins that we are mining at the moment in the upper
levels. It’s producing the sulfide for our sulfide plant mostly and
this is the continuation deeper down and further to the east. So the
dimension that I know from upper levels is about 750 meters long. I
mentioned that we drilled the deepest hole 200 meters down. We
drilled out about 250, maybe this month, close to 300 meters, so less than half
of this land.
I
have some indication on the other half that one or two older holes we drilled
that the high grade continues there. How deep it’s going to go down,
I can’t tell you at the moment. It’s in limestone. We see
start getting some very nice replacement structures on replacement mantos in
this limestone but I can’t tell you how deep it goes down. Yet one of
the limitations we have is I need a pretty big crosscut to drill the structure
in a good angle. I can’t drill it from surface because it’s too deep
down but we drill it, obviously from our levels that we currently access for
production. So, stay tuned for the drilling during the coming months
as we continue to the east but rough dimension, I think that you should look at
the mantos about 750 meters by maybe 150-200 meters down.
Steven
Butler: Okay
and thickness, roughly?
Michael
Steinmann: An average roughly
about 5 meters will be good.
Steven
Butler: Okay. Thanks
very much guys.
Geoffrey
Burns: Thanks
Steve.
Operator: Thank
you. Another reminder ladies and gentlemen, if you do have a question
please press star, one at this time. And our next question comes from
the line of Chris Lichtenheldt with UBS. Please go
ahead.
Chris
Lichtenheldt: Good
morning. Thanks for taking my questions. Just first on the
Doe Run Peru situation. The alternative that you’re seeking in terms
of your concentrates, it doesn’t look like it’s gotten a whole lot worse
relative to the second quarter. Is that true that the alternative in
terms of sort of steady state now until you get La Oroya back and
running?
Robert
Doyle: Chris,
Rob Doyle here. Yes, that is true. In fact we’ve probably
seen a fairly significant improvement in the concentrate market, copper
concentrate market for complex concentrates. So we have managed to
commit some of our 2010 production into contracts to other buyers of concentrate
at significantly better terms than we realized in Q2 or Q3. So there
is some relief in that market by the looks of it.
Chris
Lichtenheldt: Okay,
great. Can you just remind us, as you move—at Alamo Dorado, as you
move into the next phase now, what silver and gold grades might look like over
the next couple of quarters and how many quarters until you expect you may get
back up to higher grades in the second phase?
Robert
Doyle: Yes,
while we’re mining—stripping down that pit we’ll probably be seeing grades drop
to the 90, somewhere between 80 and 100 grams, I would say. And then
once we’re back into the high grade we’ll see the plus 125 to 150 type gram
fee.
Chris
Lichtenheldt: Okay great
and gold will move similarly downward, or is it hold a little bit more
steady?
Steven
Busby: Gold’s
a little bit more steady but we do expect it to drop back to the more historic
kind of 0.3 gram range. But yes, it somewhat follows that silver to
some degree.
Chris
Lichtenheldt: Okay great,
thanks. And then just last question on the Aquiline offer, if I can,
I think you—you’re seeking an opinion from the Argentine Antitrust Authority and
I’m just wondering if you can update us as to the timing on when that opinion
may come or how that’s looking if you’ve had any feedback?
Geoffrey
Burns: Yes,
Chris, we made application for, essentially it’s an advanced ruling and we did
that basically on the day we mailed and we’re expecting a reply in 30
days. I can tell you that it’s—our Argentine legal counsel tells us
that this is kind of just a matter of due course, that there is no—should be no
concern that we’ll have any problems with the antitrust ruling. It’s
just a matter of really making the application.
Chris
Lichtenheldt: Right,
okay. Okay great. That’s it for me. Thanks a
lot.
Geoffrey
Burns: Thanks
Chris.
Operator: And
our next question comes from the line of Haytham Hodaly with Salman
Partners. Please go ahead.
Haytham
Hodaly: Nice
job. Good morning everybody.
Geoffrey
Burns: Good
morning, Haytham.
Haytham
Hodaly: Just
a couple of easy questions. What do you expect your run rate for your
G&A to look like next year?
Geoffrey
Burns: This
was a bit of an unusual quarter, Haytham. We’re sitting, I think
about $4 million. We had a couple of compensation related catch up
accruals to do. I think we’ve been running prior to that at about
between $2.7 million to $3 million a month—a quarter and I don’t expect that
that should be our normalized rate.
Haytham
Hodaly:
Okay and then maybe just effective tax rate guidance for next year
maybe?
Robert
Doyle: We
should be coming in right around 30% as we were this quarter.
Haytham
Hodaly: Okay
and in terms of timing of closing of the Aquiline, what’s the timeline there
again, refresh my memory?
Geoffrey
Burns: The
expiry date for tendering Aquiline’s shares is December 7th, at
9:00 p.m. Eastern Standard Time, subject to us—there is a period,
likely extension of 10 days for that as per our agreement on the support, or
excuse me, on the support agreement but it’s December 7th is
the date.
Haytham
Hodaly: Okay
perfect. Thank you.
Operator: And
our next question comes from the line of John Bridges with JP
Morgan. Please go ahead.
John
Bridges: Good
afternoon, Geoff, everybody. The inventory, this 400,000 ounces, how
much of that is actually going to be available and how much is simply filling up
the pipeline as you expand your operations?
Geoffrey
Burns: Okay,
I’ll—hey, John. How are you doing? That’s actually out
turned material. It’s just—it’s not in the circuits
anywhere. It’s simply material that just for timing and location of
where that material was in the transportation, it didn’t get
sold. So, that’s not a matter of pipeline filling, it’s just exactly
where it was in our sales process.
John
Bridges: Okay. On—then
on your lower cash cost, how much of that was related to base metals, maybe
concentrate adjustments helping you this quarter?
Geoffrey
Burns: Yes,
the base metal and byproduct credit, it’s not just base metal, it’s gold
byproduct now coming out of Manantial Espejo in Q3 2008, our byproduct credits
were about $8.27 per ounce. This year, that same number was about
$9.69 an ounce. So you can see there’s, you know, roughly $1 plus in
there that relates strictly to metal prices and as well, increased gold
quantities, right. We’re producing more gold now.
John
Bridges:
Okay, okay.
Robert
Doyle: Sorry,
John, just one further point. You raised the provisional price
adjustments, actually we didn’t see a significant adjustment in Q3 which I was
quite surprised at. It was only about a $300,000 benefit from sales
that had provisionally been priced in Q2 that were repriced in Q3. It
was just a function of when open QPs were actually finalized given that actually
passes traded flat to slightly down in July but for the quarter it was only
about a $300,000 benefit, a relatively minor number.
John
Bridges: Yes,
I’m glad you get surprised by these things too.
Robert
Doyle: It’s
totally unpredictable.
John
Bridges: And
then finally, are there any sort of dates that we can look to for progress with
respect to the, you know, the rules on open pit mining in Argentina next
year?
Geoffrey
Burns: Yes,
as I said in our conference when we announced the deal, we’ve had some meetings
with some very senior officials in the provincial government of Chubut and many
of that—much of that discussion is going to remain
confidential. Here’s what I said on that call, I’m going repeat it
is, “If the Aquiline acquisition closes as we expect in the middle of December
and we’re going to immediately start sort of a three prong program of drilling,
metallurgical testing, environmental impact assessment and feasibility study—I
guess that’s four prongs not three—and we would expect to produce a feasibility
study in approximately 12 to 14 months time. I do not believe that
the mining laws in Chubut will have any impact on us whatsoever when we reach
the end of that timeframe and are ready to make a production
decision.”
John
Bridges: Okay,
great. Well, good luck, guys and congratulations on the
results.
Geoffrey
Burns: Thanks,
John.
Operator: And
as a reminder, ladies and gentlemen, if there are any additional questions
please press the star, followed by the one at this time.
And
our next question comes from the line of David Christie with Scotia
Capital. Please go ahead.
David
Christie: Hi
guys, just a quick review on the provisional pricing. So 300,000 of
mark-to-market for the quarter, was there any settlement gains?
Robert
Doyle: That
was a combination of...
David
Christie: That’s
the combination.
Robert
Doyle:
Right.
David
Christie: Okay,
good. And for Aquiline, for the Navidad project, what do you envisage
you’ll spend next year as far as drilling et cetera?
Geoffrey
Burns: We’re
just doing our budget reviews in a couple of week’s time, actually and
obviously, we’re assuming that we are successful. I would anticipate
us spending somewhere in the neighborhood of $10 million to $15 million in 2010
but that is subject to the meeting that I’ve just talked about.
David
Christie: Perfect. Thank
you very much.
Geoffrey
Burns: Thanks
David.
Operator: And
our next question comes from the line of Karen Lazarovic with KLP Capital
Management. Please go ahead.
Karen
Lazarovic: Yes,
hi. I’m fairly new to this story. I was wondering what
your hedging program is, if have one and what it would look like for
2010?
Robert
Doyle: Sure. The
Company’s philosophy, firstly, on silver is not to hedge the exposure that we
have to silver. So our hedging program is really confined to our
byproduct credits, particularly base metals and from time-to-time,
currencies. At the moment we only have a very small residual zinc
program in place which runs out at the end of December and the same applies to
our currencies. We have a small Mexican peso and Peruvian sol
position which also runs out in December.
So
for 2010, we actually won’t have any hedge positions open. However,
the subcommittee of the Board of Directors and the Hedge Committee does review
those businesses from time-to-time and we may be adding to them depending on the
circumstances.
Karen
Lazarovic: So
for your gold byproducts you get the spot price?
Robert
Doyle: That’s
correct.
Karen
Lazarovic: Okay
great. Thank you.
Operator: And
there are no further questions at this time. I would like to turn the
call over to Geoff Burns, President and CEO. Please go ahead,
sir.
Geoffrey
Burns: Thank
you, operator. Well, thanks everybody for joining us this morning and
we will look forward to talking to you again in the coming months, hopefully to
discuss a successful transaction with Aquiline and to update you on our advances
at La Colorada in terms of exploration and finally, to probably talk about our
year end earnings early in 2010. Thanks very much.
Operator:
Ladies and gentlemen, this concludes the Pan American Silver’s Third Quarter
2009 Earnings Conference Call. If you would like to listen to a
replay of today’s conference, please dial (303) 590-3030 or toll free
1-800-406-7325, using access code 479606. Thank you for your
participation. You may now disconnect.