Pan American Silver Corp. (PAAS) Q4 2010 Earnings Report, Transcript and Summary

Welcome to Pan American Silver Corporation's Fourth Quarter and Year-End 2010 Results Conference Call and Webcast. [Operator Instructions] At this time, I'd like to turn the conference over to Mrs. Kettina Cordero, Coordinator, Investor Relations. Please go ahead, Mrs. Cordero.

Thank you, operator, and good morning, ladies and gentlemen. Joining me here today are President and CEO, Geoff Burns; our Chief Operating Officer, Steve Busby; our Executive Vice President of Geology and Exploration, Michael Steinmann; and our Chief Financial Officer, Rob Doyle. I would like to start this conference by reminding you that this call cannot be reproduced or retransmitted without our consent and by pointing 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 they 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 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 February 15, 2011, 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 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. With that, I will turn the call to Geoff Burns, President and CEO.

Thank you, Kettina. Good morning, ladies and gentlemen, and welcome to Pan American Silver's 2010 Fourth Quarter and Year-End Earnings Release Conference Call. We released quite a bit of pretty favorable news yesterday and are happy to be here this morning to try and provide some additional color and commentary. As has become our normal call format, I will start with some very brief general comments about our fourth quarter and full year results, then Steve and Michael will provide a more detailed discussion of our activities at our mines, our development projects and with our exploration programs. Rob will then discuss our record-breaking financial results and how we have continued to add to our cash position as we get ready to develop our world-class Navidad silver project. Before getting to our results, it is a pleasure to again be able to inform you that yesterday, our board of directors approved the payment of our quarterly dividend. Our fourth dividend, and first to be declared in 2011, of $0.025 per share will be paid on or about March 14 of this year to holders of record of common shares as of the close of business on Monday, February 28. It is truly gratifying to comfortably share a portion of the company's current prosperity directly with our shareholders, even with the tremendous growth and the substantial investment that it will require just ahead of us. In my opinion, this is clearly a sign of the stable and mature company that Pan American has become since its inception just 15 years ago. Now to our results. Pan American delivered a record-breaking fourth quarter in 2010, which was a culmination of a year which was by all measures the best in the company's history. We produced 5.7 million ounces of silver in the fourth quarter at a cash cost of $6.61 per ounce. Our fourth quarter gold production was a very respectable 19,250 ounces, right in line with our own expectations. Our zinc, lead and copper production were slightly below plan, largely due to lower-than-forecast throughput at our Huaron and Morococha mines. This indirectly hurt our cash cost, which were a little higher than we thought they would be due to the lower-than-expected by-product credits. For the full year, we produced a new company record of 24.3 million ounces of silver at a cash cost of $5.69 per ounce, which was 800,000 ounces better than our full year forecast of 23.5 million and $0.21 per ounce better than our full year forecasted cash cost of $5.90 per ounce. Our cash cost forecast, which I'll remind everyone, which we reduced in May of last year. It is nice and yet another sign of the kind of company that Pan American is to again deliver on our forecast. Our consistent operating results, coupled with higher silver prices, translated into truly outstanding financial performance. I'll try not to steal too much of Rob's thunder, as I know he's all set to review with you in detail our fourth quarter and year-end financial results in a few minutes, I would like to mention a couple of key metrics: For the fourth quarter, we established new records for income at $0.43 a share, operating cash flow at $0.77 per share, net sales at $191 million and mine operating earnings of $91.2 million. For the full year, we delivered even more records: Record net income, $1.05 per share; record operating cash flow, over $2 per share; record margins, record sales and probably most significantly, record net cash flow, net cash flow, which pushed our bank balances to over $360 million and our working capital to over $434 million. I think it's safe to say we delivered stellar financial results in 2010. It was truly a great year to be in the silver mining business. I will now turn the call over to Steve, who will present a detailed account of our operations and our project development activities. Steve?

Thank you, Geoff, and good morning. It is my pleasure to provide you a report on our Q4 2010 mine operating results and project advances, having successfully achieved our 2010 goals for silver production, cash cost and project advancements. We encountered several unexpected challenges and pleasant surprises in Q4, and for all of 2010 for that matter, which collectively and reasonably balanced out to yield the results we had forecasted at the start of last year. Our biggest challenges in Q4 came in Peru with a ground failure on one of our primary underground ore passes at Morococha, and not encountering the ore grades we had expected in key production zones at both Huaron and Morococha. The loss of the ore pass and a higher-grade production zone in the upper reaches of the Morro Solar vein at Morococha resulted in approximately 5% less ore tons and 12% lower grades than we had forecasted. Morococha mined 153,000 tons in Q4 2010, producing 621,000 ounces of silver at a cash cost of $5.18 per ounce compared to Q4 of 2009, when we mined 176,000 tons, producing 733,000 ounces at a cash cost of $2.36 per ounce. We are excavating a new ore pass at Morococha over the next few months to recover from the reduced mine extraction rates incurred during Q4. As a result of lower-than-expected grades coming from the mine deepening 180 level, offset with production from other low-grade areas of the mine, Huaron produced 764,000 ounces of silver at a cash cost of $11.86 per ounce in Q4 2010, compared to Q4 of 2009 when we produced 810,000 ounces at a cash cost of $10.73 per ounce. We are ramping up development rates on the 180 and the 250 levels at Huaron to open more production phases, which should help to increase grades in the next couple of quarters. Quiruvilca produced 302,000 ounces at an excellent cash cost of $3.89 per ounce during Q4 compared to 364,000 ounces at a cash cost of $6.26 per ounce in Q4 of 2009. We will continue to mine profitably while accelerating our reclamation efforts, and expect this will continue throughout 2011 at Quiruvilca. Our Manantial Espejo mine in Argentina again produced 1 million ounces of silver at a cash cost of $6.08 per ounce during Q4 as compared to 1 million ounces of silver produced at a cash cost of $0.11 per ounce in Q4 of 2009. The higher cash costs were primarily due to the reduced gold by-product production. In the current quarter, we produced 12,411 ounces of gold as compared to 19,533 ounces in Q4 of 2009. Our Q4 operating results were also nearly 20% higher than our expectation, as we absorbed the effects of the country's double-digit U.S. dollar inflation rates that have been sustained over the past few years. Our San Vicente mine in Bolivia produced 675,000 ounces of silver at a cash cost of $9.08 per ounce during Q4 of 2010, which was about 38% below the production record we achieved in Q4 of 2009. We are now mining closer to the average life of mine ore reserve grade of the deposit. Overall, our cash operating costs continue to be exceedingly stable in the low inflationary environment that exists in Bolivia today. Our Alamo Dorado mine in Mexico had yet another outstanding quarter in Q4, producing 1.4 million ounces of silver at a cash cost of $3.40 per ounce, well above our forecasted production performance as we benefited from realizing more ore tons at a better-than-predicted grade in our Phase 2 pit layback. We have a team evaluating this pleasant surprise and will be revising our resource model during the first part of 2011. In all likelihood, we will need to do some additional drilling to fully understand the mineral distribution that lies ahead of us. At La Colorada mine, we produced right on plan at 946,000 ounces of silver at a cash cost of $7.88 per ounce. Most of the additional mining gear we have ordered has now arrived on site and we are already starting to see increased production rates early in 2011. On the project front, we continue to advance our Navidad and La Preciosa studies, as well as the Morococha infrastructure relocations. We invested nearly $8 million at Navidad, $2 million at La Preciosa and $6 million at Morococha during Q4. After a short holiday break, we have restarted the infill drill program at Navidad and continued to advance the metallurgical testing, tailings facility geotechnical studies, environmental impact analysis and community relation programs. We have now initiated basic engineering studies for the project and are on track to complete a feasibility study in the fourth quarter of 2011. At La Preciosa, we are studying alternative mine plans that take advantage of the improved long-term metal price projections, including a significantly expanded open-pit alternative. The Morococha facility relocation project continues to advance satisfactorily towards a year-end 2011 completion despite significant precipitation that has hampered our civil construction activity somewhat. Overall, Pan American Silver had a respectable quarter. We produced 5.7 million ounces of silver at a cash cost of $6.61 per ounce, pretty much right on our budgeted plans. A big thanks to Alamo Dorado's stellar performance and buoyant metal prices offsetting the challenges we faced at Morococha and Huaron, as well as the cost escalations in the high-inflationary environment of Argentina. All in all, 2010 ended with a healthy mix of unpleasant and pleasant operational surprises that balanced out and allowed us to solidly exceed both our forecasted silver production and cash cost results. As Geoff mentioned, in 2010, we produced 24.3 million ounces of silver at a cash cost of $5.69 per ounce, exceeding our forecast of 23.4 million ounces and beating our project cash cost of $5.90 per ounce. In addition, we increased our understanding and significantly advanced our exciting development projects. As we look forward to 2011 with the very strong metal prices and reduced gold production expectations as our mines mature towards average reserve grades, we perceive continued upward inflationary pressures on costs from all our local stakeholders, including employees, contractors, suppliers, communities and governments. With this concept in mind, I'd like to provide the following production and cost guidance for 2011. At our Huaron mine, we expect to produce between 3.1 million to 3.2 million ounces of silver at a cash cost between $11.10 and $13 an ounce. At Morococha, we expect to produce between 2.6 million to 2.7 million ounces of silver at a cash cost of $4.80 to $6.60 per ounce. At Quiruvilca, we're expecting between 1 million to 1.1 million ounces with a cash cost between $8.80 and $9.90 per ounce. At San Vicente, we're expecting between 3.2 million to 3.3 million ounces of silver with a cash cost between $7.60 and $8.60 per ounce. At La Colorada, we expect to produce between 4.1 million and 4.2 million ounces with a cash cost between $7.60 to $8.50 an ounce. And Alamo Dorado, we expect to produce 4.8 million to 5.1 million ounces of silver with cash cost between $5.30 to $5.70 per ounce. And finally, at Manantial Espejo, we expect to produce between 4.2 million to 4.5 million ounces with a cash cost between $4.80 and $5.60 per ounce. These cash costs forecasts assume by-product credit prices of $2,050 per ton for lead and zinc, which is $0.93 a pound; $7,000 per ton for copper, or $3.17 per pound; and $1,320 per ounce for gold. In total, we are expecting to produce between 23 million to 24 million ounces of silver at a cash cost between $7 to $7.50 per ounce. We further forecast project expenditures of $45 million at Navidad to advance engineering and permitting activities, assuming positive reforms of the provincial law prohibiting open-pit mining around midyear, post the provincial elections. We expect another $37 million for the Morococha infrastructure relocation net of payments received from Chinalco and $1 million at La Preciosa to complete the higher metal price alternative mine plan analysis and preliminary assessment during the first half of the year. In addition, we forecast sustaining capital expenditures at our other operations of $56 million, primarily for exploration drilling, underground trackless equipment replacements, underground mine developments, tailings dam raises and site infrastructure upgrades. Finally, I'd like once again to extend my personal thanks to all our dedicated and hard-working employees and contractors in Peru, Mexico, Bolivia, Argentina and here in our head office. As I have mentioned before, these people are the backbone of our organization and continue to demonstrate their superior skills in sustaining, improving and growing our business so successfully. With that, I'll now turn the call over to Michael Steinmann for the exploration update.

Thank you, Steve, and good morning, everybody. 2010 was yet another successful brownfield exploration year for Pan American Silver. We drilled over 110,000 meters at our seven operations and discovered 27 million ounces of new proven and probable silver reserves. It was almost sufficient to fully replace the 28.3 million contained ounces we mined during the record production year of 2010. As of January 1, 2011, the company had proven and probable reserves of 230.8 million ounces of silver and 698,000 ounces of gold. The smaller reserve decrease of 1.4% compared to last year was mainly caused by reclassification from reserves to resources of about 1.9 million ounces of silver from the Pyrite Stockpiles in Peru due to the shutdown of the La Oroya smelter. La Colorada was again at the forefront of reserve replacement, adding 12.1 million ounces of new silver reserves to our books. This more than replaced what we mined and added an additional two years of mine life. La Colorada has provided impressive reserve growth over the last two years, contributing 28.3 million ounces of silver reserves to the company. Compared to last year, La Colorada's proven and probable reserves grew 26% to 38.3 million ounces, mostly from the NC2 vein. This major structure remains open at depth and to the east and will be target for further exploration in 2011. Drilling will continue at La Colorada with a program of over 14,000 meters, and I'm confident we will again see exciting and high-grade results from deeper drilling at our main structures. Although the mine gets deeper and ventilation, as well as water pumping, are getting more expensive, exploration was able to add substantial growth at La Colorada due to higher silver and base metal grades we are encountering at that. Additional highlights of the 2010 exploration program include the addition of 4.6 million ounces at Manantial Espejo and 4.2 million ounces at Alamo Dorado. Manantial Espejo more than replaced the reserves mined, and will have our largest brownfield exploration program in 2011. The large, over 26,000 hectares mining property around the operation contains hundreds of vein showings, which we will explore with a $4.8 million exploration program. Alamo Dorado had an exceptional year in 2010, producing 6.7 million ounces of silver. We mined more tons with higher grades in the open pit, and are currently working on a new resource model to capture these positive additions and to make a decision on a possible Phase 3 pit expansion. Proven and probable reserves are the base for our production. Maintaining them over long periods has secured long mine lives, jobs for our workforce and superior return to our shareholders. Over the last seven years, we have been very successful with our brownfield exploration programs. We have added a total of 169 million ounces of new silver reserves since 2004, 21% more than we mined in the same period. We spent a total of $46.3 million during the same period for brownfield exploration, which means that we added new reserves at a cost of about $0.27 per ounce while delivering year after year, new production records. While our reserves are sufficient to sustain our current production levels for the next 10 years, our goal is obviously to keep replacing every year, what we mine. In order to achieve this in 2011, we will spend approximately $11 million for brownfield exploration, including a 108,000-meter drill program at our seven operations. I continue to be very excited about the exploration potential of our mines, particularly at La Colorada, Manantial Espejo and San Vicente. Greenfield exploration is another way to add value to our shareholders. In 2010, we spent about $5 million on greenfield projects and will more than double that to about $12 million in 2011. The new properties we plan to explore are located in Mexico, Peru and Argentina. 2010 was a record year not only for silver production, cash flow and earnings but also for our drill programs. Including brownfield, greenfield and project development drilling at La Preciosa and Navidad, we finalized an impressive 271,500 meters of diamond drilling during 2010. The lion's shares were done at Navidad with over 92,000 meters and at La Preciosa with nearly 63,000 meters of drilling. The results from Navidad drilling will be incorporated into the new resource model for the feasibility study. This asset has a phenomenal exploration potential which we will further explore in 2011. Our core assets have proven their exploration potential year after year, and I'm confident they will continue to do so. Our proven and probable reserves, our measured and indicated resources have increased to almost 1 billion ounces of silver. And inferred category, that's another 245 million ounces. We have one of the larger reserve and resource books in the silver sector. Our mines, together with our exciting development projects, will keep growing the resource and reserve base, and I look forward to reporting on the advances and results during our quarterly conference calls. Now to Rob for a financial review.

Good morning, ladies and gentlemen. Our record financial results in Q4 and for the full 2010 year reflected the combination of silver production growth, an extremely healthy price environment and a keen balance sheet which all translated into record sales, net cash flow, earnings and another quarterly dividend for our shareholders. New financial records for Pan American included net income for the fourth quarter of $46.4 million, which equates to $0.43 per share, driving net income for the full year to a record $112.6 million or $1.05 per share. We reported record sales of $191.1 million for Q4, and full year sales of $632 million on the back of higher quantities of silver sold and much higher metal prices. Our mine operating earnings were a record $91.2 million for the quarter and $239.8 million for the full year, a staggering 90% increase from 2009 mine operating earnings, which was our previous record. Cash flow generated from operations before working capital movements was $82.6 million in Q4, propelling our operating cash flow for the full year to $218.3 million, both numbers shattering previous cash flow records by more than 50%. With cash flow from operations at record levels and capital expenditures at $28.5 million, we banked $67.1 million in cash and short-term investments during Q4. For the full year, our treasury balances increased by $159.6 million net of paying our shareholders $8 million in dividends. Lastly, these record financial results have put the company in an exceptionally strong working capital position, a record $433.8 million at December 31, 2010. On every financial metric that I can think of, 2010 was our best year ever at Pan American. Certainly, the exciting precious metal price environment that we saw in 2010 helped to drive the company's financial performance. However, we were able to deliver on our operational targets, which put us in the best possible position to benefit from surging metal prices. As Geoff mentioned earlier, for 2010 we were able to exceed silver production guidance by some 800,000 ounces at cash costs that were 11% lower than forecast, which is a testament to the tremendous operating team we have at Pan American, and they picked a pretty good time to over deliver. Our margin per ton of ore milled makes for an interesting analysis. Our average margin has gone from about $10 in Q4 2008 to about $60 in Q4 2009 to about $90 in Q4 2010. These margin increases reflect not only a stiff tailwind of higher prices, but also the benefits of higher-grade ore from San Vicente and Manantial Espejo, and an absolutely spectacular year at Alamo Dorado. We have seen cost pressures across the board, from increased prices for consumables, royalties, wages to appreciating local currencies, all aggregating to approximately an 11% year-on-year increase in our cost per ton. However, the growth of our net smelter returns have increased 31% on average over the same period, resulting in margin expansion of some 50-plus percent. I'd like to make a few comments related to our statement of operations for Q4 2010. Aside from the favorable metal prices, the massive increase in sales in Q4 compared to any quarter before was partially due to the fact that we did draw down on our zinc concentrate and precious metal dore inventory for sales of approximately $8.2 million from the sale of production over and above what was produced in Q4. Notwithstanding this inventory clearout in Q4, for the full year we still ended up building our overall inventory balances as we increased our dore inventory position by almost 300,000 ounces of silver, partially offset by a reduction of approximately 5,700 tons of concentrate inventory. This is the main reason behind the $13.4 million increase in our inventory account on our balance sheets over the last year. Included in net income in Q4 2010 was the write-off of $1.5 million in recognition of the doubt over the recoverability of the carrying value of our Pyrite Stockpile in Peru. Aside from the La Oroya smelter, which remains closed, there do not appear to be any other economic alternatives for this material. Our G&A expense for the quarter was higher than normal, due mainly to certain severances and to a change in timing of our long-term incentive program. Offsetting that was our exploration expense, which was lower than normal due to year-end reallocations of some costs to operations and the capitalization of some expenditures at Navidad. Lastly, investments and other income was a healthy $3.1 million for the quarter, mostly made up of net proceeds of an insurance claim we received following a theft of dore from our La Colorada mine early in the fourth quarter. Ordinarily, that margin would have been included in mine operating earnings instead of below the line in other income. Our effective tax rate for the fourth quarter was up to 48%, which is higher than what we would have expected, primarily due to exploration and feasibility-related expenditures at Navidad and La Preciosa. For the time being, we have assumed that these expenditures will not be tax-effective. We also recorded a significant downward adjustment to tax assets we had estimated in Bolivia following clarification of the regulations related to exploration expenditures in that country. For the full year, the effective tax rate was 44%, whereas our long-term expectations would be in the 35% range. Moving to the balance sheet. Our working capital continued to strengthen during the quarter, increasing by $73.3 million, most of which is reflected in higher cash and short-term investment balances. Accounts receivables and taxes payable also increased noticeably, both due directly to the higher metal prices and resultant increase in the value of shipments and the taxable income we generated. We finished the quarter with a working capital position of $433.8 million, including cash and short-term investments of $360.5 million and no debt other than some minor capital leases. As already mentioned, from a cash flow perspective, Q4 was exceptionally pleasing. Cash flow from operations before working capital movements was a record $82.6 million or $0.70 per share, a jump of $0.30 per share from Q3 2010. We expect to see our cash balances continuing to build rapidly in the coming quarters as all our mines continue to generate positive cash flow. Our pristine balance sheet and strong cash flows put us in an excellent position as we assess the financing alternatives available to us for the construction of Navidad. With that, I'll hand it back to Geoff for some closing comments.

Thanks, Rob. You have now heard where we have been. The obvious question is what lies ahead for Pan American. What is our strategy going forward? It's actually pretty straightforward. We're going to utilize our core strength and expertise as an operating company to continue to focus on optimizing our mining operations, to maximize our cash flow-generating capacity and profitability. We're going to continue to aggressively explore around our current assets to extend their mine lives. In short, we're going to run a tidy, profitable and sustainable business which will strengthen our capacity to take on Navidad, the largest growth project that Pan American has ever had. As Steve mentioned, we're forecasting 23 million to 24 million ounces of silver production in 2011 and 76,000 to 78,000 ounces of gold. We're expecting our 2011 cash cost to be between $7 to $7.50 per ounce. We're going to invest $54 million in capital at our existing operations to keep them running smoothly, and we're going to continue to explore for more proven and probable reserves. We're going to spend approximately $12 million on greenfield exploration in the hopes of finding another major silver deposit. And we're going to invest almost $45 million at Navidad to finish the feasibility study and an environmental impact assessment and fully prepare the project for our construction decision in the fourth quarter of this year. One thing we haven't discussed, and I'm sure you're interested to hear about, is the status of the mining law in Chubut, where our Navidad project is located, the mining law that prohibits open-pit mining in the province, the mining law that will need to be amended before we can proceed with Navidad's development. I'm going to share with you some quotes from some of the most senior political figures in Chubut that were published by the local newspapers in the province late in 2007 and early in 2011. And I'm going to let you decide for yourselves if you believe, as I do, that the people of Chubut and the government will launch a well-informed discussion that will lead to the very practical decision to allow for the responsible, environmentally-sensitive development of Navidad in the Central Meseta in Chubut. December 28, 2010. Mario Das Neves, Governor of Chubut: "I am ready to discuss mining in the province's central plateau." January 4, 2011. Señor Cisterna, Minister of Finance of Chubut: "The province has called on a group of specialists to prepare a new mining bill to be discussed in 2011." Señor Jara, January 4, 2011, Mayor of Gastre: "The positive economic and social change from the Navidad project is already noticeable in the communities. We have to live from our resources, and there are no other resources than mining." January 5, 2011. Señor Garitano, Minister of Environment, Chubut: "The government is ready to support the development of mining in the Central Meseta." We have focused a great deal of effort over the last year and are openly sharing our activities and plans with the local communities around Navidad and with the provincial government. In my opinion, our transparent style appears to be working, and we are clearly garnering support for the development of the project. The Navidad project can clearly become a welcome catalyst for reversing the steady population decline experienced over the past few decades in Chubut's central plateau, bringing significant prosperity to the people of that region. As I mentioned in our last call, there are provincial elections in March of this year. I don't believe we will see any new announcements or hear any further discussions on the topic of the mining law until these elections have been completed. I fully expect that the mining discussion and debate will be initiated shortly after the elections, and I continue to be confident that the people of Chubut will support the zonification of the province wherein the Central Meseta will be designated as an area where open-cut mining will be allowed, and Navidad will be developed. This time frame is still 100% consistent with the planned completion of our feasibility study and should put us in a good position to make a construction decision in the fourth quarter of 2011. The development of Navidad is also a catalyst for the continued value appreciation in Pan American share price. Navidad, as we disclosed when we issued our preliminary assessment in late November last year, has the ability to produce close to 20 million ounces of silver a year, almost doubling our current production profile, at a cash cost of approximately $7 per ounce. Using a $25 silver price and a 5% discount rate, the all-in, after-tax value of Navidad is more than $1.2 billion. In my opinion, this value isn't even close to being incorporated in our current share price. Before opening the call to questions, I'd like to make a very brief comment on silver and gold prices. Last quarter, I said that in my opinion, nothing had fundamentally changed over the past few years that would change the long-term investment appeal of silver and gold. Yet another quarter, and my views remain intact. In a world where currencies are going to become less and less able to maintain their value, prone to the vagrancies of political will, struggling under the weight of ridiculous debt levels, silver and gold, even at today's lofty prices, are going to look extremely appealing as long-term investments. In this environment, we will be able to continue to deliver superior financial results and growth, which I believe should make Pan American a compelling value proposition. With that, I'll now ask the operator to open the lines for questions.

[Operator Instructions] First question is from Chris Lichtenheldt of UBS Securities.

First, on the cash cost guidance. It looks like the actual number per ounce of silver is going up, I guess, 25%-ish versus what you realized in 2010. But of course, that's a pretty busy number. I'm wondering if you can give any guidance either in dollar terms or maybe then, percentage if not in dollar. How the costs per ton on the ground are actually moving up. What sort of inflation are you seeing on your inputs, overall?

This is Steve. We're forecasting, overall, about a three to four-- probably close to 5% inflation for our cost next year.

You're talking cost per ton overall, sort of 3% to 5%?

Correct.

So that might be lower than what you experienced in 2010. Would that be true?

It is, yes.

For Michael on the reserves. I noticed that it looks like, I think, if I'm not mistaken, the silver price you're using, you're assuming that the reserve has gone up from about $13 to $18. And I'm wondering if you can -- and it looks like grade has also gone down just a little bit, but I'm wondering if you can help us gauge how much of the ounces you added this year were a result of potentially higher silver price, and how much was sort of new discovery type? Type 5?

Yes, you're right. Silver price increased from $13 of last year's reserve calculation to $18 for silver price this year. Obviously, that's the cause of the slightly lower silver grades with a higher price. To give you a guidance on the addition, I would say about 80%, around 22 million ounces, has been added through exploration, and about 5 million to 6 million ounces has been added to prices, which obviously, is a move from our measured and indicated into our proven and probable category. I would like to state here that in spite of that, we still increased our measured and indicated resources by 4.2 million ounces, and increased our inferred resources by 15.8 million ounces of silver.

This is Geoff. Really, the single biggest factor changing our cash cost going forward into 2011 is the lower gold production coming out of Manantial Espejo. I don't have the exact figure, but we're down about 15,000 ounces, give or take, year-over-year. And obviously, at an assumed gold price of around $1,200, that has a very large impact, or not having that credit has a pretty large impact on our net cash cost.

I noticed that, and that's probably the case moving forward. You don't expect any real return to the previous levels at Manantial. Is that fair?

I think that consistently we're -- 2011 is probably as close to the reserve grade as we're going to see going forward. I mean we're just slightly above the long-term reserve grade. Versus our very first year of production, we were quite a bit above the long-term reserve grade and then that helped us. I think we produced over 100,000 ounces a couple of years ago of gold and close to 75,000 or 80,000 ounces coming out of Manantial.

Next question is from Haytham Hodaly of RBC Capital Markets.

Just some housekeeping items. Maybe, Rob, can you give us -- sorry if I don't see it in the news release, can you give us sort of what the actual realized prices were for gold, silver, copper, zinc, et cetera for the year?

Realized for the year, for the full year 2010 or for the quarter?

2010’s good.

For silver, we realized $19.87. Gold, $1,216. Zinc was $21.58. Lead, $21.39. And copper, $74.57.

Expensed exploration, I know there was a total of $20-something million in greenfields and brownfields exploration. How much of that do you think will actually be expensed this year?

It's really dependent on the results of the program. Obviously, if we expend -- we would expense expenditure that doesn't add to our reserve resource book. In terms of the split, Michael's just actually got the details here.

We plan at the moment, I think it's about the $10 million that will be capitalized, and probably the rest should be expensed depending on results as Rob mentioned.

With regards to the $54 million sustaining CapEx breakdown. What are the largest components of that?

Exploration drilling is the largest, which is $12 million. Followed by mine developments, mine equipment replacements and then tailings dams. Those are the...

So which mines specifically take the big brunt of things?

The biggest capital is being spent at Morococha and La Colorada. Morococha, mostly on development work. We're going to advance development rates. La Colorada, we have a large tailings dam construction project this year.

So what do you estimate for each of those?

$12.2 million in Morococha and $10.8 million at La Colorada.

Another question I guess for, probably for Steve, I guess. Just with regards to La Colorada, your throughput for this year, what are you looking at in terms of tonnage? I guess a better question, Steve, just before you go there. I guess can you break down just roughly how much of that, what you're going to give me, the numbers, is going to be oxide versus sulfide as well?

That, I don't have the breakdown. We're going to be somewhere close to 390,000 tons processed for 2011 and we were at 346,000 in 2010.

It’s about 55% sulfide, 45% oxide. Pretty close.

At Huaron, your silver grades are changing throughout this year and into, I guess, 2012, '13. How do you see the grades starting out this year, at least in the first half?

We're projecting around the 170 range. We've been close to that on the grade. 170 to 175.

Last question for Rob. I know, Rob, we've talked about deferred taxes ad nauseum. I'm curious, you quoted an effective tax rate long-term of 35%, this last quarter was 48%. How do you see 2011 panning out?

Haytham, I think it really depends if we continue to treat our expenditures at Navidad, assuming that those will not be tax-effective, that's going to have the impact of driving up that effective tax rate. Hopefully, we'll have an event during the year that allows us to change our position during that, such as the feasibility study that will allow us to change our approach to those expenditures and start building an assumption of a tax basis there. So our budget is right around the 40% mark as an effective tax rate in 2011.

G&A forecast for this year, excluding stock-based compensation?

SG&A, excluding rebudgeting, right around $12.5 million.

Next question comes from Ralph Profiti of Credit Suisse. Ralph Profiti - Crédit Suisse AG: Geoff, there's roughly a 40-60 split in 2011 between sort of infill and conversion and greenfield exploration. And you're also using $18 an ounce. Is there room to get more aggressive around your seven operations with respect to exploration over and above sort of the $10 million, $11 million that you'll be spending? Or are you seeing more exploration upside success possibilities at La Preciosa and Navidad?

Actually, part of our greenfield, and we call it greenfields just because it's further away from our operations, obviously. But large part of it is actually spanned around, for example, Manantial Espejo. But it's also spanned obviously around Navidad, La Preciosa. So in several of our projects and mines, we have very large land holdings. And when we go quite a bit further away from the core zone where we are mining, we start calling it greenfield although it's more kind of a brownfield exploration. So our programs are pretty aggressive, and a lot of the money that we spend on exploration goes actually into our properties. Ralph Profiti - Crédit Suisse AG: I just, secondly, want to dive into these inflationary pressures that you're seeing. With respect to labor and currency, can you talk about the specific geographies where we're seeing the most susceptibility to these pressures?

Yes, Ralph, I think the number one location is Argentina. Internal inflation rates estimated by nongovernment sources are in the neighborhood of 30%. And I would say that -- I'm going to say the nongovernment sources tend to be more accurate in our opinion. Because of that, we're seeing direct wage pressures. It's very difficult not to provide wage increases commensurate with local inflation when you're certainly running a profitable operation. But that does translate into other services that are being provided to Manantial Espejo: trucking, catering, et cetera. So that's the number one place where we're seeing the most inflation. Frankly, in Bolivia, it's pretty stable. We're talking very low-single digit numbers. Similarly in Peru, although we're starting to see some recent pressure. And Mexico is actually also fairly stable at this point in time. So the cost pressure's number one place is Argentina for sure.

Next question comes from Steven Butler of Canaccord Genuity.

Michael, question for you on exploration upside or potential. This year, your focus, you mentioned specifically your excitement about upside at La Colorada, I believe it was, and Manantial Espejo. Can you maybe elaborate a bit on some of the opportunities you see there at those two assets for resource additions this year?

First, La Colorada. Obviously, if you go back in the last two years, I mean you saw there was this incredible reserve addition that we had. And resource obviously, what we talked about was just the reserves at La Colorada. Adding probably as much as about six or seven years of mine life already to La Colorada. And the structures just continue. We obviously develop the structures deeper down and need new access for drilling. But so far, there's no end in sight for the structures that we are drilling. So obviously, my excitement that that continues, we are hitting very high grade. I, through the last year several times, talked about this high-grade intersect. They're multi-meter and multi-kilogram silver intersects with very high-grade base metals in the deeper zones of La Colorada. So that's probably the primary source at La Colorada for my excitement. Going to Manantial Espejo, various -- and I'm sure you probably have seen a map sometimes of the showings and veins that we know around our main zones, mining zones in Manantial Espejo. But our large land holdings of over 26,000 hectares contain really hundreds of veins. Some of them have been drilled in the past by us and by other companies. There's some very interesting intersects that we’re going to follow up, especially this year, with quite a large exploration program of about $4.8 million.

And the La Colorada, is it strike and depth open ended to some of these new structures as well? Strike and depth?

Mostly depth. There is quite a bit of -- on NC2, a bit on strike, too, but mostly on depth.

Can you guys just confirm your expected expense exploration in 2011?

Just while Rob's checking on that number, Steven. The other exploration target, which Michael may have, I'd say, glossed over just a bit is Alamo Dorado. Last year, we did mine well above reserve grade and actually discovered tons in areas in the pit that we weren't expecting. We have been working very diligently over the last -- particularly over the last month on remodeling the entire deposit. And from the work we have completed to date, it appears that there are opportunities that we need to investigate where ore has actually continued into the pit walls and ore has been located in other areas within the pit that we need to follow up and understand. And that, coupled with the change in price, is likely going to allow us to add significant additional reserves to the mining plans at Alamo Dorado. It's probably going to take us, reality, at least six to eight months to put together the model and the additional drilling before we'll be able to talk about it with any degree of clear definition. But there is an opportunity there that's not going to be missed by us.

What's your sense of timing on updating the resource and/or reserve I guess, ultimately reserve at La Preciosa?

At La Preciosa or at Alamo Dorado?

Switching gears to La Preciosa, is there a resource update that's still pending, I think, on that project? Is that correct?

We're working on that resource assessment now. That is somewhat dependent on how we look at the potential economics, given the higher metal prices and stuff, and that's why we're holding off on it. We're probably three months to four months before releasing some figures.

And lastly unless Rob has the -- and maybe comes back with the expense exploration, you mentioned, Geoff, that talking about the zonification potentially that it may be a carve-out, is that what's maybe more likely? Is that the mining code doesn't get rewritten entirely for the province, but only maybe rewritten as a subset or zoned for Manantial Espejo's purposes? Is that what you're thinking?

Yes. Well, for Navidad. I think zonification is a very, very likely result. I mean I think they're -- last year, the governor was supportive of the glacier law. He was supportive of that and commented that he was certainly in favor of protecting what he called the headwaters of some of the major rivers in Chubut, and he's done that. I can't see him in -- frankly, I can't see him turning around and then allowing open-pit mining in the western part of the province, which is where those headwaters are. Similarly, I don't see -- I mean they have some fairly sensitive coastline areas. Again, I don't see them reversing their current position, allowing open-cut mining in those areas. Central Meseta is truly a different part of the province in many respects. It doesn't have the vegetation cover. It doesn't have the population. It is somewhat -- more than somewhat, it is economically depressed. And I can see them following that tact of, as I said, drawing some lines around areas in the province where open-cut mining would be allowed. As far as the rest of the mining law goes, I mean that's a bit of a can of worms in terms of what they decide to do there. What I am, I've said, continue to be confident based on the comments before is that it is on this year's agenda. It is going to be introduced post-elections. And I still believe we're going to see Navidad be in a position to be developed.

I assume, Geoff, that Meseta is the same thing as plateau?

It is, yes.

Steve, I have that number for you. At this point, we anticipate expensing $28.2 million in exploration and business development in 2011. That's obviously making some assumptions about how we treat that program in terms of expensing and capitalizing. But based on our knowledge today, it's around about that number.

The next question comes from Peter Antico [ph], a private investor.

With the current sovereign debt crisis in the United States of America where most of the states are bankrupt, with this money printing or quantitative easing if you wanted to call it for the layman's term, and the currency exchange rate in Canada, which, I believe, was up about I don't know, between 5% and 7% last year. And I expect the currency exchange to continue in favor of the loonie, which will be advantageous to anybody that obviously has their money in Canadian money. First, I want to know what do you expect? How much of a boon or a currency exchange do you expect in 2011 as it compared to 2010? And with the entire United States of America, the states going bankrupt, which means we'll have to unleash another QE3 because the federal reserve will not allow them to go BK [bankrupt], and being the rising price of silver after $35, the sky's the limit on the upside, there'd be no resistance. How does that affect -- how will that affect your bottom line? That's the first half of my complicated question.

I'll make a couple of comments on currency as it relates to our business. First comment I would make is relative to our cash balances. We've certainly, over the course of last year, have diversified some of our currency holdings into Canadian dollars, frankly away from U.S. dollars to provide some more stability in the event that we do see continued weakness in the U.S. dollar. And that is a program and a policy we're going to continue. We're trying protect our cash balances and make sure we're in a position to have cash when we need to expend it on our development projects. In terms of the price, while I'm reluctant to go so far as start to predicting silver prices in absolute terms, I certainly do believe that -- and it's not my own view, it's not just the U.S. dollar, it’s certainly the euro, it's certainly the Japanese yen, that currencies are going to have extreme difficulty in hanging on to their long-term values as a commodity of trade. And because of the debt levels that you've referenced, and the debt levels that we're all aware of. And in that scenario, there is just no doubt in my mind that silver and gold as stores of real value are going to continue to be very attractive, not only for investors. And so I still see some certainly positive upside signs for both of those metals. And obviously, how does that affect our bottom line? Well, I think we spent a bunch of time this morning describing how the silver prices, which popped in the fourth quarter of 2010, how explosive our earnings are and how levered we are to increases in the silver price. I mean record earnings...

At the end of the year, you're talking about almost a $15 trillion debt. And with competitive currency devaluation, and really, I don't want to say, I believe that CI [Cayman Islands] currency as we know it in the next 36 months could potentially be a dead man walking. With that and the ratio to silver and gold getting better and better in favor of silver going forward, I personally as an economist and as an investor, I'm extremely bullish on silver. If you want to look at the metal price today, Jesus -- now silver is trading at $30.90. It was up $0.06. It was down $0.42. Now it's up $0.12. I mean it's extremely volatile. Now gold's up $7.10. I mean the volatility today has been absolutely tremendous. And just to show you how investors, I mean how most of the sentiment of uneducated investors, your silver price is down $1.18 with a huge increase in the bottom line of cash, so your guidance went down a little bit. But the cash price, if you expect to produce a little bit less based upon the gold, your gold outlook, when I read your report, I read it as extremely, extremely bullish. You have a huge cash reserve. You're unhedged with relatively no debt going forward. I expect your company -- you may think I'm crazy, but I think your company's share price from this day forward 12 months out will be double.

Well, Peter, I certainly hope you're correct. I share many of your sentiments with respect to silver prices and valuation. I think we did deliver a very, very positive quarter in many respects. And we've seen strong silver prices in the start of 2011. And I certainly expect to be back here in a couple of months’ time again being able to describe some very, very positive developments. So I hope you are correct in terms of your view on our value and on the silver price.

This concludes the time we have for question and answer. I'll turn the call back over to Mr. Burns for closing.

Thank you, everyone, for joining us here this morning to talk about last year and what we're planning to do in 2011. And as I just mentioned, I very much look forward to getting together again in about three months’ time to talk about how we did in the first quarter and provide you further updates on our projects and hopefully with some new developments in Argentina to discuss as well. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.