I was pleased by Pan American Silver Corporation's (PAAS) second quarter conference call today. I thought the call went very well, so I was a bit disappointed by the Pan American's stock price action.
For those interested, you can listen to conference and will soon be able to download a transcript by going to Pan American's homepage (see link above). I have not yet read in detail Pan American's Second Quarter Report to Shareholders (PDF), but I have given it a quick perusal.
Consolidated silver production for the second quarter totaled 3.3 million ounces, a 7% increase over Q2 2005. Five of the Company’s six operations increased their silver production and recorded higher mill throughput. The most significant increases in silver production were seen at La Colorada and Morococha, where production increased 23% and 12%, respectively. Base metal production in the quarter also increased compared to the year earlier period, with higher mill tonnage offsetting the impact of slightly lower ore grades.
Consolidated cash costs for the quarter were a record low of $1.17 per ounce compared to $4.48 per ounce for the year-earlier period, primarily due to increased by-product credits from greater base metal production coupled with higher base metal prices. Most notably, the Morococha and Quiruvilca mines generated negative cash costs per ounce of $3.81 and $1.07, respectively.
Geoff Burns, President and CEO of Pan American Silver commented: “The first and second quarters of 2006 combined to deliver Pan American’s highest production, earnings and cash flow performances ever. By focusing on improving operating efficiency and increasing production, we have positioned the Company to take advantage of the current strong market conditions. Having now eliminated our zinc hedge position, we will be able to clearly demonstrate our ability to generate significant earnings going forward. We are on track to produce 14 million ounces of silver in 2006 at a cash cost significantly lower than previously forecasted, and our two mines under construction should deliver sharply increased silver production and even better financial returns in the near future.”
Bill Fleckenstein, who is a director of Pan American Silver and a hedge fund manager, wrote the following on his subscription website FleckensteinCapital.com:
Turning to more pleasant topics, Pan American had a pretty good quarter, if I do say so myself as a biased observer, shareholder, and company director, though there's radically too much emphasis on quarter-to-quarter developments, in my opinion.
Further to Bill's comments, I think there is too much worrying about non-cash hedging costs showing up on the income statement. Smarter investors will understand or will make an effort to understand.
I plan to review the company's information in more detail this weekend. My initial impressions are very positive. Please note, my impressions are not a recommendation to buy or sell Pan American Silver stock. Investors must make their own decisions.
As a matter of disclosure, I remain long shares of Pan American Silver.
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