Pan American Silver Executive Insights: Mine Planning and Dolores

On Wednesday, Pan American Silver Corporation (NASDAQ:PAAS) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Mine Planning

Ralph Profiti – Credit Suisse: Geoff or Steve, can you confirm that there’s been no changes to the Manantial Espejo mine plan and that management’s sort of plan of attack here to deal with these issues is to continue to weather them and discuss changes with the government. And I’m just looking at how flexible is this operation to go after sort of more high-grade material in the short term or sort of advanced development of either open pit or underground to get you sort of mitigating the risks of import restrictions?

Steve Busby – COO: It’s a good question Ralph, this is Steve. At the budget for last year, when we put together the mine plan for 2012, we did look seriously at our operating costs and how they were expanding and how we expected them to move through this year, and as such the mine plan did – was revised at that time to focus more on open pit mining and less on the underground mining where we saw the highest cost inflations with the labor component there. So our mine plan did expand the open pit for this year and we are proceeding on that basis. That open pit interestingly enough generally gives us lower grades than focused on the underground mine development but because of the cost structure it does give us better economics today. That’s the mine plan we are carrying out and what we find is every mine these veins that are very common in this geologic environment. The grades are highly variable and we are in and out of grade as we mine through this open pit and that’s what we are experiencing right now as kind of in this low grade part that will start to see higher grades as the year moves forward.

Ralph Profiti – Credit Suisse: Then keeping with Pan American’s convention on costs, are you guys working with an internal estimate of all in – on the all in mining costs that would sort of encapsulate inflation plus import restrictions. If we start let’s say $135 a ton which was last year and implying 20% or 25% inflation would get us to sort of $165, $170 a ton. Is that sort of a logical assumption for 2012?

Steve Busby – COO: For Manantial we think we will be somewhere just north of $150 a ton all in for this year, that’s kind of our number.

Ralph Profiti – Credit Suisse: Just lastly you talked about a 50% reduction in import exposure, what’s the exposure now and is their level of exposure to imports that management has a goal in terms of being comfortable with?

Steve Busby – COO: That 50% reduction went from $25 million down to $12 million for those materials and parts. Our goal is to make sure that we keep quality parts and materials that allow us to operate our mine effectively and efficiently and that’s been our challenge now as trying to push through that barrier where we are at, to get the quality parts that we need to operate and what we are finding is those that have attempted to replace some of our parts. They haven’t always performed the way we’d like. So there is two things going on. The Argentine suppliers are trying to improve quality of their supplies and as they realized what, they can and can’t supply they are starting to release an allowance to import those things they can, and they recognize they can. So what our goal is long term is to continue to work with the mining association in Argentina with the Secretary of Mining, Production Ministries and try to optimize and expand their capabilities to fund their mining operations in their country. We think that’s a good goal and it will lead to long term cost reductions for us. But we have to make sure that quality is there to allow our operations to proceed appropriately.

Dolores

Trevor Turnbull – Scotia Capital: I was just wondering if you could give us some of the production figures for Dolores even though it wasn’t yours until April. Can you give us a sense of how it performed in the first quarter, with respect to production cost?

Geoff Burns – President and CEO: I’ll certainly give you the production performance. We are still working on the cost side. We are still working through the accounting treatment of what we are using cost, particularly as it relates to pre-stripping of waste in the pit, and as it relates to inventory movements through the process. So I don’t really have any cost to report but production wise we did mine 2.1 million tons of ore during the period which was really close to what they had planned and looks pretty positive. Overall they mine just under 10 million tons of waste as well. Again, according to plan, we stacked 1.4 million tons. The grade of the ore that was stacked was 46 grams of silver and 0.48 gram gold per ton. We recovered just over 50% of the silver and 72% of the gold when you look at it incrementally for the quarter. So, it produced 989,761 ounces of silver and 16,395 ounces of gold, and as I say, the cost we don’t right now.

Trevor Turnbull – Scotia Capital: But going forward on your cost guidance, I think the range if I remember was in the range of $5 to $6 an ounce of silver equivalent. Is that – that does include pre-stripping. Is that how that figures arrived at?

Rob Doyle – CFO: Yeah, it’s $5 to $6 per ounce of silver net of byproduct (credit) gold, and it does – it includes waste movement and we are planning to capitalize some pre-stripping. And again, that numbers kind of move in around a little bit, and hence a range, but within that, we do capture our concept that we think it’s appropriate for the pre-stripping.

Geoff Burns – President and CEO: Trevor, just to be clear, we are going to be more conservative with how we treat the long term cost of Dolores, being very mindful of how much we end up pushing off in the capital, being mindful of how much we leave in inventory on the actual leach pads. Those are two – as you know, those are two numbers that ultimately can come back to bite you. So we are probably going to end up expensing more of that than Minefinders would have when they were calculating similar costs.

Trevor Turnbull – Scotia Capital: Just as a follow up then on Dolores, I know you are looking at a scoping study for the mill. Can you tell us, kind of what’s the – what factors in that study are kind of most important to you guys? Are you looking to see a greater resource potential there or are you concerned with throughput or CapEx kind of what’s the key for you to feel more comfortable about a mill scenario?

Geoff Burns – President and CEO: Right now today one of the key aspects we are looking at is kind of the distribution of the ore types. The Dolores ores are divided up into sulfidic ores and oxide ores and some ores with some manganese content. And we feel that that geologic model doesn’t give us the clarity of those ore distinctions that we need to properly optimize that milling circuit. So that’s been our focus. We are trying to come up with analytical tools that we can generate and model that will better lead us to the most optimum outcome for the mill. So it’s really hard and until we get all that work done associated with the new mineral model to really predict today what size that mill is going to come out to be. Our goal is to make it the most optimum size that makes sense for the long term value of the project. So that’s really where we are focused today and as that information develops we will get a better feel for how it goes. I want to also say we see some opportunities maybe deep down in the sulfidic ores of some potential base metal value there that maybe hasn’t been looked up previously.

Steve Busby – COO: I guess the other additional comment is as the concept I don’t see the real long term benefit in taking our production rates above sort of 16,000 to 17,000 tons a day and really chew into the reserve quicker. I think the way I would look at it is more of a reallocation of ore to the extent that it makes sense to do so between what goes on the pads, and what ultimately would go through a mill process. So I would not make the assumption that we are going to go to 22,000 or 23,000 tons a day coming out of the pit. I would assume more of that we would stay at a lower production rate and allocate the ore where it makes the best value.

Trevor Turnbull – Scotia Capital: The metallurgical testing that you are doing to get a better handle on some of this, that all assumable is done as part of the scoping study and what was the timing for when you think that might be done?

Geoff Burns – President and CEO: We are saying by the end of this year.

Trevor Turnbull – Scotia Capital: If I could just ask one last question Calcatreu, what’s the update there in terms of what you are looking at and when you would come to a decision point on that one?

Geoff Burns – President and CEO: We just got our feet on the ground on that one and we’ve assigned a project manager to it, we are just getting our arms around all the data. We’re reassessing the resource model, trying to understand exactly what level that resource model is and determine if we have to do some additional drilling. Right now we suspect we are probably going to have to do some additional drilling to advance the study. And again given that timeline we are expecting towards the end of this year to really start scoping what that project is going to be all about for us.