Pan American Silver Corp. (PAAS) Q2 2011 Earnings Report, Transcript and Summary

Hello. This is the conference operator. Welcome to the Pan American Silver Corporation's Second Quarter 2011 Conference Call and Webcast. [Operator Instructions] At this time, I'd like to turn the conference over to Ms. Kettina Cordero, Coordinator, Investor Relations. Please go ahead.

Thank you, operator, and good morning, ladies and gentlemen. Joining me here today are our President and CEO, Geoff Burns; our Chief Operating Officer, Steve Busby; our Executive Vice President of Geology and Exploration, Michael Steinmann; our Chief Financial Officer, Rob Doyle; and our Vice President of Project Development, George Greer. I would like to start today's call by a reminder of this note that this call cannot be reproduced or retransmitted without our consent and by indicating 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 August 11, 2011, and 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. I'll now turn the call to Geoff Burns, President and CEO.

Thank you, Kettina. Good morning, ladies and gentlemen, and welcome to Pan American Silver's 2011 Second Quarter Earnings Conference Call. In addition to discussing the results of our most recently completed quarter, we are also going to use this opportunity to talk about the positive results of the Preliminary Economic Assessment for the La Preciosa project that we jointly released earlier this morning with Orko Silver. Overall, we have some pretty interesting news to talk about today, so let's get started. As has become our standard format, I will first provide some general remarks about our second quarter results before passing the call to Steve and Michael, who will provide more insight into our quarterly and year-to-date operating performance, our development projects and our greenfield and brownfield exploration programs. We'll continue with Rob who will provide some additional color to our record-breaking financial results and, finally, George Greer, our Vice President of Project Development, has joined us for the call today to provide some additional detail on the PEA for the La Preciosa silver development project. Before diving into you to the quarter, I am pleased to be able to confirm that yesterday, our Board of Directors approved the distribution of our third cash dividend of this year in the amount of USD $0.025 per share. The payment will be made effective on or about Tuesday, September 6, 2011, to holders of record of common shares as of the close of business on Monday, August 22. Pan American continues to generate record cash flows on the back of robust silver and gold prices, and it's a real pleasure to be able to return some of this cash directly to our shareholders by way of a dividend. As important is the fact that at current price levels, the company is comfortably able to do so without jeopardizing our ability to fund the capital requirements we see coming at us for the development of our major growth projects at Navidad in Argentina and La Preciosa in Mexico. There's no doubt that over the next several years that these projects provide Pan American with a growth profile second to none. Now let's quickly look at some of our second quarter accomplishments. During the second quarter, we produced 5.6 million ounces of silver at a cash cost of $9.19 per ounce, net of by-product credits. Although our silver production was right in line with our expectations, our cash costs were higher than we predicted. As you will hear shortly and in more detail from Steve, the increase in cash cost was largely due to the increase of the silver price. A number of our costs: royalties, production bonuses, COMIBOL participations and San Vicente's cash flows are directly scaled to the silver price. Simply put, when the silver price increases, these costs increase as well. Having said this, the margin expansion on the increased silver price is much, much, much greater than the impact on our cost. So yes, our costs were up, but our margin per ounce of silver were up far more. Higher silver and gold prices had a hugely positive effect on our quarterly financial results. We delivered new records for revenue, operating earnings, operating cash flow and net earnings, a clean sweep. Revenues surged to $232 million, mine operating earnings jumped to $119 million. After adjusting for the mark-to-market valuation of our outstanding warrants, our net adjusted earnings attributed to shareholders were a company record $76.1 million or $0.71 per share. And had we been able to sell all the gold and silver we produced, we would have generated another $7 million in earnings and another $0.07 per share. Perhaps most importantly, our cash flow from operations reached a record $119.4 million or $1.11 per share for the quarter, and allowed us to bank $64 million in the last 3 months alone. Simply put, the stable and diversified base of production we have worked so hard to build over the last 5 years is delivering outstanding financial results on the back of higher precious metals prices, a pretty happy situation. And now, we are working diligently and aggressively to be able to deliver on the next leg of our growth, securing the knowledge that we have the financial horsepower to deliver. Now over to Steve who will run us through our operations. Steve?

Thank you, Geoff, and good morning, ladies and gentlemen. Pan American Silver Corp. is certainly benefiting from these record high precious metal prices, given our solidly performing operations and incredibly exciting development projects. During Q2, our projects advanced very well, and our operating teams once again managed some pluses and minuses to essentially achieve our consolidated production target of 5.6 million ounces of silver. Our operating costs in Bolivia and Argentina include significant government royalty and tariff payments that are directly proportional to the silver price. To a lesser extent, we have faced cost increases for third-party copper concentrate treatments, employment costs as the mining-related job market becomes increasingly competitive and certain raw materials, particularly diesel fuel in Argentina. These factors all contributed to escalating our quarterly cash cost to $9.19 per ounce or about 23% above our target. Our Manantial Espejo mine in Argentina produced 960,000 ounces of silver at a cash cost of $6.80 per ounce compared to 976,000 ounces of silver at a cash cost of $3.07 an ounce the year before. The silver grade in the second quarter was about 15% below, and the gold grade was about 15% above, our resource model projections, which are the types of variances that we have become accustomed to at Manantial since the start-up in 2009. Based on our experiences so far, we are confident these types of quarterly variations eventually even out, as our overall resource model continues to be a good global indicator of the ore tons and grades at Manantial Espejo. Our record high silver price realization in Q2 of $38.10 per ounce adversely impacted our cash cost since the export tariff and royalties we pay move proportionately with the silver price. However, as Geoff indicated, we clearly benefit much more from the greater margins at these higher prices, despite having to share some of that increase with the government. In addition, our cash costs were impacted by higher diesel fuel prices, which have increased from $0.75 per liter a year ago to over $1 per liter currently. Employment costs have risen sharply, and we've incurred additional logistical costs during Q2 to circumvent the travel disruptions caused by the Chilean Puyehue volcano eruption. We expect to see a 20% to 25% increase in silver production, with similar gold production and similar cash cost during the second half of 2011 at Manantial Espejo, compared to what we achieved in the first half, assuming reasonably steady-state silver and gold prices. Our largest challenges during Q2 were, once again, at our Peruvian operations. We made the decision in Q2 to temporarily stop mining our high-grade areas at Morococha in the Yacumina and Morro Solar zones that have been experiencing erratic grades, in order to conduct additional reserve definition work and enable optimization of the mine design. We are confident that these decisions will result in overall enhanced performance once the mineralization in these areas are better understood, and we can bring these zones back into production late this year and into 2012. As a result, Morococha's silver production fell to 412,000 ounces and cash cost rose to nearly $17 per ounce for the quarter compared to 706,000 ounces that had cost of $4.45 per ounce the year before in Q2. Two additional drill rigs have been mobilized to the site to expedite this ore definition drilling program. Meanwhile, we are also in the process of stepping up underground development rights to open up other areas that can partially fill the short-term gap as we provide a longer-term contingency area of mining to overcome these situations. Huaron produced 678,000 ounces of silver at a cash cost of $14.47 per ounce in Q2 compared with 737,000 ounces at a cost of $13.61 the year before. We have been developing all the services and ancillaries needed to increase our underground mine development rates, and continue to expect that we'll open up new mining areas later this year to replace the low-grade stopes that we've shut down during Q1. In addition, we are realigning our contracting strategies at both Morococha and Huaron to address the fierce competition for qualified miners that exist today in Central Peru. And as such, we have been transferring a significant number of the current contracting workforce to our payrolls and purchasing additional equipment to ensure we can increase the mine development rates to the desired levels by year end. Elsewhere, Quiruvilca produced 228,000 ounces of silver at a cost of $19.77 per ounce in Q2 compared to 322,000 ounces at a cost of $8.01 in 2010. This mine continues to advance also on its interim reclamation projects. We expect to continue to mine profitably at Quiruvilca given these high metal prices. But our reserves are clearly being depleted and the quality of ore being mined is beginning to reduce. On the political front, we are anticipating Peru's implementation of some sort of windfall profit tax in the mining sector now that President Humala has taken over. However, there still has not been any concrete details on how our new tax will be implemented other than some limited discussions, suggesting they may follow a system similar to what Chile had implemented. Moving on to Bolivia. Our San Vicente mine produced 897,000 ounces of silver at a cash cost of $12.85 per ounce during Q2, compared to 886,000 ounces at a cost of $7.49 the year before. As I've mentioned last quarter, we have excellent ability to make up for short-term disruptions at San Vicente and we have more than caught up our Q1 production shortfall to put us back on track to achieve or exceed our annual production target. Our costs are being negatively impacted by the incredibly high silver prices as the government royalty increases with increasing silver price. In addition, as I mentioned in Q1, we have seen a dramatic rise in the cost for third-party smelting and refining of our copper, silver flotation concentrates and we expect this will continue with these high silver prices. We have met with the high-ranking government officials of Bolivia to try and understand their long-term objectives relative to our business in San Vicente, following the aftermath of the nationalization rumors that was dispelled in May. While the government indicated their support for Pan American's business in Bolivia and they have a strong desire to foster and actually enhance their poor image towards attracting foreign mining investments, they have also reaffirmed that they are preparing the new mining law, which is now scheduled to be released sometime this month. We will determine what it will take to adapt our business once this new law is established and understood. However, we are currently unaware of what the new law will actually contain. Meanwhile, we are convinced as ever that our San Vicente mining contract in Bolivia stands as the model agreement the Bolivian government desires throughout the country, and we remain optimistic that this will eventually solidify our business in Bolivia, aligned to the desires of the state. Mexico continued to deliver exceptional results and helped to make up the shortfalls in Peru. Alamo Dorado produced nearly 1.4 million ounces of silver at a cost of $4.17 per ounce and La Colorada produced 1.1 million ounces at $7.16 per ounce during the second quarter, both well ahead of the expectations. Last year in Q2, Alamo had a record-breaking production of 2.4 million ounces at a cost of $2.36 per ounce, as we're mining the high-grade inch in our Phase I pit. Whereas, La Colorada produced 932,000 ounces at a cost of $9.04 an ounce. We have approved a project to expand the leach tank capacity at Alamo Dorado and improve the silver recovery by 2%, while treating the higher throughput rates that we have been accomplishing. Our drilling at Alamo Dorado to potentially expand into Phase III continues, and we hope to have a resource model developed by year end. We're confident the Phase III pit will be economic at these prices, adding at least one more year of life, and have already begun planning efforts to expand the mine fleet and enable mining in Phase III, perhaps late this year or early into 2012. We're confident Alamo Dorado and La Colorada will continue to perform solidly and offset shortfalls in other parts of the company for the remainder of this year. On the project front, we jumped at the opportunity to secure the long-lead primary mill equipment for Navidad by purchasing some never-used gear that had been bought for another mine development which has been curtailed. Almost immediately after we completed our engineering work to determine the proper equipment sizing, this unique opportunity presented itself and we purchased the gyratory crusher, the SAG mill, the ball mill and the proper cone crusher for the Navidad plant for $17.4 million, representing an $11.2 million savings in capital compared to the estimates we be used in the PEA, not to mention reduced delivery times for these types of equipment has been extended out to nearly 2 years today. There is significant competition to purchase this type of equipment today, and we were very fortunate to have been at the right place at the right time to secure this gear. In addition, we significantly advanced the engineering, the Feasibility Study and the Environmental Impact Assessment at Navidad. All the while, we mobilized significant aid by rushing in bottled water, personal respirators, loads of air filters to the residents of the area following the significant ash fallout from the Chilean Puyehue volcano eruption. We're still targeting the fourth quarter this year to complete the full Feasibility Study for Navidad. The Morococha facility relocation project continues on schedule and on budget for year end 2011 completion. Building erections continue and we are beginning to work on the interior spaces. Our operating group is already getting very excited to occupy these new facilities, and we believe this will lead to several improved efficiencies as the mine -- as many of these facilities are currently spread over a very large area of the mine. Later in the call, you will be hearing from George Greer, who will provide an update to La Preciosa project. So with that, I'd like to mention that once again, thanks to both the breadth and depth of our experienced and motivated operating and project development teams, we are successfully addressing many challenges and remain in good position to achieve our full year 2011 production guidance of 23 million to 24 million ounces of silver. We are, however, raising our full year consolidated cash cost guidance to between $8.25 to $8.75 per ounce due to the higher royalty costs we are experiencing in Argentina and Bolivia as a result of the higher silver prices, the higher treatment and smelting cost for our Bolivian copper concentrates and the continuing effects of cost escalations, particularly with respect to diesel fuel prices in Argentina and employment cost in Argentina, Bolivia and Peru. We're also revising our forecast for consolidated capital expenditures from $121.2 million to $145 million. This increase reflects $17.4 million additional for the Navidad process equipment purchase I described earlier, $5.4 million for the preparation of the Feasibility Study at La Preciosa and $5.4 million for the evaluation and development of the Phase III pit, as well as the additional leach tank capacities to improve recoveries at Alamo Dorado. These are partially offset by lower capital expenditures expected at the Morococha relocation project, primarily due to timing of commitments. With that, I will now turn the call over to Michael Steinmann for the exploration update. Michael?

Thank you, Steve. Good morning, everyone. Following my standard practice, I'd like to start with the drill statistics for the last 3 months. This gives you good idea about the advances and resources we are dedicating to our exploration programs. Compared to Q1, we increased in Q2 the company mine drilling by over 20% to a total of 37,330 meters. Advances in exploration diamond drilling amounted to a total of 27,730 meters, representing about 41% of our 129,000-meter annual program for reserve replacement. This makes the program nearly back on track after the drilling shortfall during the first 3 months of the year. Morococha nearly doubled the meters from 2,910 in Q1 to 5,790 meters in Q2. La Colorada increased drilling by over 63% to a total of 4,430 meters for the quarter and Huaron increased the program by 18% compared to Q1. The largest growth program was executed at Navidad with 9,600 meters, followed by Manantial Espejo with 7,190 meters. Both mines returned some spectacular results from the new drill holes. Navidad focused its infill extension and delineation drill program on La Esperanza, Calcite Northwest, Loma de la Plata and Galena Hill deposits, fine-mining 72 holes. We also received sample results from Barite Hill, which had been drilled at the end of Q1. The longest intersection was in hole 15-80 [ph], which returned 144.5 meters containing 290 gram per ton silver. Other news [ph] for us is Barite Hill intersects were 32.6 meters at 349 gram per ton silver hole in 15-82[ph] and 16.85 meters at 381 grams per ton silver in hole 15-83[ph]. Exploration for Esperanza already provided some spectacular results last quarter. As well in Q2, it did not disappoint. For example, hole 50-93 [ph] intersected 25 meters at 944 gram per ton silver, and in hole 15-03 [ph] we hit 10 meters at 1,004 gram per ton silver, just to mention 2. Infill drilling at Calcite Northwest, the northern most deposit of the Argenta Minor Trend returned 17 meters at 171 gram per ton silver, and 19 meters at 199 gram per ton silver, reassuring the importance and potential of this peripheral mineralization. Drilling continues at Navidad in Q3, and I'm sure there will be more exciting results reported the end of next quarter. Let's now go to our Manantial Espejo mine in the far south of Argentina. Detailed mapping and surface sampling identified a large number of potential drill targets in our extensive land holdings. We concentrated on the deborrowing [ph] a few kilometers to the north of our operations. So far, we have identified the structure with over 400 meters of strapline. The range shows a typical spudded distribution of high-grade mineralization, with gold grades of up to 8 gram per ton and silver grades in the 100 to 150 gram per ton range. The range is 2.5 meters to 4.5 meters wide and will definitely be a target for further exploration efforts. Moving up the north, growth extension of the Maria Vein returned very positive results, which could lead to a small pit expansion in the near future. The best hole cut 8.8 meters, containing 32 grams of gold and 150 gram per ton silver. Other intersects are 4.7 meters at 20.6 grams of gold, and 4.3 meters of 1.5 grams of gold and 848 grams per ton silver. La Colorada drill results in Mexico have never disappointed in the last 2 years and last quarter was no exception. You may recall that we discovered to the east a 100-meter horizontal expansion of the NC2 vein during Q1. Drilling during the last quarter revealed additional infill results and extended the structure even further. The incumbent vein drifts are about to 5 meters, containing silver grades of 1,300 grams to over 2,000 grams per ton. On top of that, the structure contains over 25% combined base metals, and as an added bonus, up to [indiscernible] gram of gold. I believe there's a good chance to add another year of production just in this area of the mine alone. And drilling will be intensified with an additional drill rig. The west end of our main vein, the Candelaria vein, returned impressive results as well. And there are good indications of a potential vein expansion to the west. Both of base metals are most prominent, the dark sides are prevailing. There are multimeter intersections containing silver in the range of 400 to 750 gram per ton. I have no doubt that this zone will be another important exploration target for the remainder of the year. Our Mexican greenfield efforts are mostly focused on our land holdings around La Colorada, as well as on our Lucita project in Zacatecas, which contains a large number of [indiscernible] tunnels silver-gold veins. Surface hunting and methane kept us extremely encouraged, and we will drill this project during the next 6 months. As I mentioned at the beginning, the drill rates at Huaron and Morococha increased substantially in Q2 and results have been very positive at both mines. Drilling will be further intensified during the next 6 months to assure our annual reserve replacement and exploration for new resources. I'm extremely encouraged by the results of our exploration efforts so far this year. We have spectacular results in Manantial Espejo and La Colorada. In some of the drill intersects, I'm confident [ph] Navidad are simply the best I've ever seen in my career. I have no doubt that they will add significant new value to the project and underline the incredible exploration potential of these deposits. Now to Rob for the financial review.

Good morning, ladies and gentlemen. Much like Q1 of this year, we had another record-breaking quarter from a financial perspective. As Geoff mentioned, we generated company records for earnings and cash flow in addition to declaring another quarterly dividend. Attributable earnings for the second quarter were $112.6 million, which equates to $1.04 per share, and adjusted earnings, after taking out a $56.5 million mark-to-market non-cash gain on our warrants, were $76.1 million or $0.71 per share. On mine operating earnings, we're a record $118.6 million, which implies a 51% gross margin. Operating cash flow before working capital movements more than doubled from the comparable quarter of 2010 to a record $119.4 million. These mine financial results were fueled by record realized prices for gold and silver, which combined to comprise 87% of our revenues for the quarter. Our average realized silver price for the quarter was $38.21 on sales of 5 million ounces. And in gold, we sold almost 19,700 ounces at an average price of $1,500 per ounce. We actually sold significantly less quantities of all metals than we produced other than lead as a result of timing of shipments, which is the main reason for the $11.9 million increase in inventories during the quarter that you may see on our balance sheet. During the quarter, the company increased its metal inventory balances by approximately 2,000 ounces of gold and about 300,000 ounces of silver. Had these ounces, which were produced in Q2 2011, been sold at the average realized prices during the quarter, additional architect [ph] earnings of approximately $7 million or $0.07 per share would've been recorded. We're shifting the benefits from the sale of these additional ounces in the third quarter as we reduce our dore inventories. Our Q2 earnings included a gain on derivatives of $36.5 million in recognition of a mark-to-market movement of the Canadian dollar-denominated warrants we issued as part of the Aquiline transaction as required by IFRS. While we exclude this gain in the calculation of our adjusted earnings, we do expect these warrants to continue to create volatility in our future earnings, which is caused principally by movements in our share price and volatility and changes in the Canada-U.S. dollar exchange rate. Our effective tax rate for the second quarter was 22%, which is significantly lower than the 35% we would expect in the long-term, primarily due to the effect that the derivative gain is not cash effective. A detailed reconciliation of our effective tax rate can be found in Section 5 of our Q2 MD&A. During the quarter, we invested $15.3 million into non-cash working capital accounts, and an additional $45.1 million in property, plants and equipment, including $17.4 million to acquire never used processing equipment that is suitable at the Navidad project, as Steve described, but which we feel could be resold in the current market at favorable terms should we not proceed with Navidad. We ended up banking $63.8 million in the quarter to take our cash and short-term investment balance to over $460 million. Our clean, debt-free 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 and/or La Preciosa. Our working capital position also continued to strengthen during the quarter, increasing by $85.4 million, most of which is reflected in higher cash and short-term investment balances. Accounts receivable also increased mercifully due directly to the high metal prices and the resulting increase in the value of our shipments. As I mentioned earlier, we increased the inventory of dore and concentrated products due to the timing of shipments. We finished the quarter with a working capital position of close to $580 million. All in all, from a financial perspective, Q2 was another spectacular quarter for Pan American. With that, I'll hand it over to George for some comments on the La Preciosa PEA.

Thank you, Rob, and good morning, ladies and gentlemen. Today, I'm pleased to be here to discuss the results of the La Preciosa project Preliminary Economic Assessment, which we have been working on for the past 8 months. This assessment had been both challenging and rewarding, and I am very excited to be finally able to talk to you in detail about how we envision this project being developed. As you are aware, the La Preciosa project is a joint venture between Orko Silver and Pan American Silver. We have been working together to develop the project to the point of completing a PEA. The assessment is based as a standalone project, developed and operated on a joint venture basis as per the current agreement between Orko Silver and Pan American. Over the past 2 years, we have spent approximately $15 million on further diamond drilling, metallurgical testing and project engineering activities. And we have contracted some of the best consultants in the industry to assist us with the assessment, including, amongst others, Snowden Mining Industry Consultants, M3 Engineering and Technology and Quantitative Geosciences. In the past 2 years, we have drilled an additional 90,000 meters of exploration and infill holes to help us better understand the nature of the mineral deposit. As such, let us start first with an update of the resources. Please note that all of these resources are expressed in terms of diluted resources. We have applied 2 cut-off grades, one for the open-pit at 35 grams per ton silver, and the other for the underground mining at 85 grams per ton silver. Total indicated resource currently stands at 24.8 million tons, grading 142 grams per ton silver and 0.28 grams per ton gold. Inferred resources include an additional 15.2 million tons at 96 grams per ton silver and 0.17 grams per ton gold. The indicated resource now contains 113 million ounces of silver and over 223,000 ounces of gold. Whereas, the inferred resources contain nearly 47 million ounces of silver and 83,000 ounces of gold. Our base case production plan for the PEA is a 5,000-metric tons per day processing facility, fed by concurrently operated underground and open-pit mines. The underground mining will provide approximately 3,000 tons per day of the plant feed, with the remaining 2,000 ton per day coming from the open-pit workings. We did evaluate the possibility of an open-pit-only mining scenario. However, due to the narrow veins in the upper portions of the mineral zone and the depth involved to get to the wider, more extensive ore zones, the open-pit design was reaching close to the upper practicality limit of open-pit mining, nearing a 30:1 strip ratio. Naturally, that mining plan did not return the most optimal economics, and it was subsequently decided to proceed with the combined underground open-pit approach as it provided a far better economic return. The front end of the processing plant will be a conventional crusher, stockpile arrangement, followed by a SAG mill-ball mill combination similar to the last 3 installations that we've performed at Pan American Silver quite successfully. This will be followed by an in-circuit and mineral gold refinery, producing us gold, silver, dore products similar to our La Colorada off-site processing plant in Mexico. Tailings will be neutralized and deposited in a conventional wet tailings facility less than 2 kilometers distance from the plant. In summary, based on our work to date, the project will produce the following economic results: Production of an average of 6.8 million ounces of silver and 11.8000 [ph] ounces of gold annually in product at an average cash cost of $11.84 per ounce silver, a mine life of just over 12 years, and a preproduction capital cost of $270 million. Based on assumed prices of USD $25 per ounce silver and $1,250 per ounce gold, the PEA indicates that the project will deliver the following economic results: An internal rate of return of 24.3%, with a net present value discounted at 5%, up $315 million. And a project payback period of 3.3 years. Using near-term [ph] silver and gold prices of $38 per ounce silver and $1,600 per ounce gold, respectively, the project economics would improve to an internal rate of return of 52.7% with an NPV at 5% of $922 million. This would also have a project payback of 1.9 years. The project is expected to result in 800 jobs during the construction phase and 500 permanent jobs once operations commence, which will contribute significantly to the local communities, particularly those of the Hiduk [ph] communities in close proximity to the future operation. On that note, we had currently established very good relations within our local community and had spent considerable effort in assisting them with community important projects, as well as providing employment to some of the local people during the past 2 years. At the present time, we are aggressively continuing with the project Feasibility Study, as well as beginning the permitting process and the negotiations with local landowners to purchase the necessary property in and around the project site. We are scheduling to have all of these activities complete by the end of Q2 2012, at which time, we would be in a position to make a decision on whether or not to proceed with the construction of the project. Once the construction decision has been made, it is expected to take approximately 24 to 30 months to construct and commission the plant. Assuming the results of the PEA are confirmed by the Feasibility Study, Pan American Silver will be well positioned to successfully develop and operate the La Preciosa silver project, given our financial capacity and perhaps more importantly, having just built and commissioned 3 new operations in the past 5 years. I would now like to pass the meeting back onto Mr. Geoff Burns.

Thank you, George. You have now heard where we have been. The obvious question is what lies ahead for Pan American. Our strategy going forward has not changed. We are 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 are going to continue to aggressively explore all our current assets to extend their mine lives. Lastly, we're going to use our financial strength and experience as mine builders and developers to bring Navidad and La Preciosa towards production decisions, and deliver the kind of growth that you have been accustomed to seeing in Pan American. Before opening up the line for questions, I'd like to cover 3 more topics. The first is La Preciosa. After a number of delays, it is certainly rewarding to finally have been able to release the PEA for La Preciosa. As I said in our news release earlier this morning, it's a very interesting project for Pan American at almost 7 million ounces per year on average, it has a solid production, silver production profile, it has a relatively long mine life and is located in a good mining jurisdiction, less than an hour's drive from our existing Mexican administration offices in Durango. At the PEA's long-term silver price assumption of $25 per ounce, the economics are very compelling. At current silver prices, the project economics become extremely robust. We will be moving forward aggressively to complete the Feasibility Study and position ourselves for a construction decision in the first half of 2012. The second thing I'm sure you're interested to hear about is the status of the mining law in Chubut, where our Navidad project is located. That's the mining law that prohibits open-pit mining in the province. The mining law needs to be amended before we can proceed with Navidad's development. Instead of describing the current political situation in the province, I'm going to refer you to a number of recent articles that have been in the press in Chubut, articles that have been published within the last couple of weeks that highlight comments made by the current Governor, Mario Das Neves, the Governor-Elect, Martin Buzzi, and the Minister of the Environment, Juan Garitano. These articles were published in Provincias [ph], a newspaper at Chubut, and begin on July 25. The debate about modifying Mining Law 5001 has clearly begun. And I'm extremely optimistic about the current discussion. I would ask you to review these articles and form your own conclusions about the development of a new mining law in Chubut. In the meantime, we will continue to work with the people of the Central Meseta and of the governments of both the local communities and the province and the federal government in a completely open and transparent manner that will allow all the people in Chubut and the government to come to a well-informed discussion that we hope will lead to a very practical decision to allow for the responsible and environmentally-sensitive development of Navidad in the Central Meseta in Chubut. Lastly, I would like to make a very brief comment on silver and gold prices. For the last several quarters, I have said that in my opinion, nothing has fundamentally changed over the past 2.5 years that would change the long-term investment appeal of silver and gold. Yet another quarter, and my view remains intact. In a world awashed with government debt, where the printing presses are now running 24/7 around the world, currencies are going to become less and less able to maintain their relative value and continue to be prone to the vagrancies of political pressures. Silver and gold, even at today's apparent lofty prices, are going to look extremely appealing as long-term investments. In this environment, we will be able to deliver superior financial results and growth, which should really make Pan American a very compelling value proposition. With that, I now would ask the operator to open the line for questions.

[Operator Instructions] Our first question today comes from Chris Lichtenheldt of UBS Securities.

Just a first quick question on the cash cost guidance that was increased slightly. You cited a number of reasons why there are higher costs. I'm wondering if you might be able to break down that increase in cash cost guidance between the higher silver prices that are causing higher royalties and the higher treatment charges. And then secondly, any improvement in by-product prices or production assumption? And thirdly, then, just most importantly, the true cost inflation on the ground in terms of per ton. I'm just trying to understand exactly what drives that. If you can help at all on that, that would be great.

Chris, this is Steve. We may have to get back to you on those details. I don't have them quite right at my fingertips. But I can say, in order of importance by far and away, are higher silver price. And we're using in our forecasting for the rest of the year, the average price of our Q2 results, which was $38.10 an ounce. That is the biggest driver to the cash cost increase. Second to that would be the higher smelting and treatment and refining charges in Bolivia. And then, following that would be the increased cost for employment between Bolivia, Peru and Argentina, and then lastly, the diesel fuel price increase in Argentina. Those are the 4 main factors in order of importance.

Okay. That's really helpful. Then just a follow-up on that quickly, you're using $38 and small change now. What were you using in the previous guidance, just out of curiosity?

The budget price of $20.65.

Yes, a budget price of $20.65 an ounce.

The next question comes from Norm Robbins [ph], a private investor.

Geoff, this is Norm Robins. I'm a private investor and a shareholder in Orko. Do you have any interest in or plans to buy my shares from me?

Norm, you know that, that is absolutely not a question I can answer. We just released the results today, and happy to talk about what La Preciosa looks like. We have -- our arrangement is, as you're aware, we can earn a 55% interest in the project by bringing it to production and Orko will retain the other 45%. Beyond that, I'm just not going to be able to comment.

The next question comes from Haytham Hodaly of RBC Capital Markets.

A question on -- just a couple of simple questions. The inventory buildup that we saw, the 2,000 ounces of gold, 300,000 ounces of silver, is that specifically related to certain operations or is that just generally across-the-board?

Haytham, Rob here. Yes, actually, gold was almost entirely in Manantial Espejo. As you would imagine, that's where most of our gold production comes from. And the silver is almost entirely at Alamo Dorado. And that's really just the timing of shipment issue. So hopefully, we will have the quarter, the third quarter or the fourth quarter, where we'll actually sell more than we produce. And we've had inventory production the last couple of quarters.

Okay. So is that a reasonable level that you've been holding for quite some time?

It's the highest level we've had in, actually, at any point in time. So yes, we do the clean-up recoveries this year and hope that the third quarter is going to be better from a timing point of view.

Okay, perfect. And then since as I've got you, Rob, just a question. You talked a little bit about the effective tax rate as a good explanation in the financials in the MD&A. What would your forecast effective tax rate be for the second half of this year?

In an ideal world, without the noise of the warrants and FX movements and withholding tax that we pay from time to time, we would expect to have them in the mid-30s as an effective tax rate.

Okay. And in a nonideal world that we live in?

Well, if there's a gain on a warrant, then it's going to be lower. If there's a loss in the warrant, it's going to be higher. That's as precise as I can be, I'm sorry.

Yes. So maybe using something like a 30% and just making adjustments thereafter. What about with regards to the deferred component? I saw the deferred component of taxes has decreased quite a bit of a last [indiscernible].

Yes, in this particular quarter, the deferred component was about $1.6 million, I believe, on top of current of $31 million. I can get back to you after the call with some detail on that if you like it.

Yes, that will be helpful. Maybe just a question on La Preciosa for George. Please remind me, just in terms of the contract, you an earn 55% by bringing the project into production. But are you responsible for 100% of the CapEx or do they pay their provided share?

Yes, we are responsible for the CapEx on a 100% basis until we start first production. From that point forward, operating cost and future capital cost sustaining our share between the 2 groups on the 55%, 45% arrangement.

Will you be able to recover your 45% of additional capital that you're paying on their half? Is that -- just the cost of actually acquiring the assets?

Well, that would be coming out of the operating earnings in those years.

So in theory, you would get the majority of the operating earnings for the first few years until the capital is repaid on a 100% basis?

No. Not of -- we would do -- we'd get our investment back through, of course, the years of operation through our share of the operating revenues.

George, I guess what I'm asking is, is the 45% of the capital cost, is that recoverable as well? Or is that, Orko paying that?

We pay 100% of the capital cost. The 45% carry is essentially us buying our way into the deposit.

Okay. That's what I was trying to get. Perfect. Maybe just one other question on Navidad. Obviously, there was a preliminary assessment released by M3 late last year. We've obviously seen cost escalation. Have you looked to see what type of impact that some of the cost escalations could have on the capital cost at Navidad?

We're going through that right now, Haytham, as we do the Feasibility Study. We don't have an update to that cost estimate. I can tell you that, that decision to buy that equipment has helped that tremendously. So we're hopeful that we can offset some of the cost escalation in those areas.

In addition, Haytham, if I could add in. There's a number of obviously moving parts relative to, going from the PEA at Navidad into a full feasibility. Certainly, we'll be reevaluating our capital cost estimate. We'll be looking again at details at our operating cost estimates. At the same time, I hope you heard loud and clear some of Michael's numbers with respect to the drilling we've done, particularly on Valle Esperanza. I mean, we're talking multi, multi, multimeters at over 1 kilogram of silver. And that is going to have an incredible impact on the project economics, well beyond the change in potentially some of the inflation that we're seeing with the some of the [ph]operating costs.

Good answer. One last question. Sorry, I'll hop around back to La Preciosa. Was the $11.84 per ounce cash cost, does that include any kind of a royalty? Is there any royalties on this cost [ph]?

Yes, it does.

It includes just, that's all. Haytham, that is the all-in standard calculation of cash cost, net of gold, by-product credits, includes refining royalties, all operating costs including site G&A, the full monty.

Perfect. And who is the royalty on that project payable to?

Actually, I'm not sure offhand. I don't want to give out a wrong answer. And we have it included in the -- at the moment, it just escapes me who's entitled.

[Operator Instructions] Our next question today comes from Ralph Profiti of Crédit Suisse. Ralph Profiti - Crédit Suisse AG: With respect to Huaron, I'm just wondering what grades you were encountering that, in this silver price environment would lead you to shut down that zone of production? And also, how much was Alianza as part of the general mine plan at Huaron? And sort of lastly, sort of on a go forward basis, do we look at Huaron being more of a lower-tons, higher-grade deposit? Or do you imagine coming it back ever, in which case, it would be vice versa?

That's a good question. The Alianza zone at Huaron is primarily a zinc zone. It was always considered to be a low-grade silver. We were kind of hoping to see around 3%, 3.5% type zinc. And we were coming in something shy of 3%. But that, it really wasn't a contributor of silver. It did give us about, I would say, 10,000 to 15,000 tons a month of material off of that zone because it was a long-hold, open-style minding. But it just wasn't giving us what we wanted. It wasn't really paying where we want it to go. And primarily, we wanted to focus the efforts that we were using in that area into developing some more higher-grade, silver-rich zones, if you will, or even potentially some copper zones that looked pretty nice for us. So it's really redirecting some of those efforts to things we feel are more profitable. Generally speaking, as we go forward, I think we are going to see a little bit -- well, certainly for the rest of this year, lesser tons at the kind of grades we're seeing now, the higher 185-type silver grades. Going into the next year, we're hoping to open up more areas and start to claw back on that 10,000 to 15,000 tons a month that we lost on Alianza. Ralph Profiti - Crédit Suisse AG: I see. Great, perfect. And, Geoff, I have to ask, we're sitting on a volatile silver market, and at these prices, they are still very robust. Has hedging the silver price come anywhere close to being higher on your priority list of a strategy?

No problem, Ralph. I guess, currently, we still have no intentions to hedge either our exposure to silver or our exposure to gold. It continues to -- as of today, it still looks like a pretty wise decision as we see gold climbing over $1,700 an ounce. And certainly, we've seen silver over 40, but sitting 37, 38, 39. Having said that, as we move forward and look at making significant capital investments in La Preciosa and also in Navidad, we would certainly once again, have a very, very thorough discussion with our board, if it makes any sense at that moment in time to protect some of that capital investment. But as of today, no. We are still 100% and will continue to be 100% exposed to gold and silver prices.

There are no further questions at this time. I'll hand the conference back to Mr. Burns for any closing comments.

Thank you, operator, and thank you, everyone, for joining us again this morning for our conference call and discussion of La Preciosa. And all I can say is I look forward to seeing you about another 3 months time with more news and more financial results, and hopefully, some updates on how things are moving forward particularly in Argentina. Thank you.

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