Ross Beaty - Chairman Andy Pooler - Senior VP, Operations

John Doody - Gold Stock Analyst Randal Stevens Brian Benahiem - Benaheim Trust Management Unidentified Analyst

Good morning ladies and gentlemen. My name is Pam and I'll be your conference operator today. At this time, I would like to welcome everyone to the Pan American Silver Corporation Third Quarter 2006 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions). Thank you. It is now my pleasure to turn the floor over to your host, Mr. Ross Beaty, Chairman. Sir, you may begin your conference.

Thank you very much operator, and good morning ladies and gentlemen. Welcome to Pan American Silver's third quarter conference call. I'd first want to apologize for following up the time a little bit. We changed it last night to this morning. We originally planned to do it on Monday morning, but we thought it was better to give some color to the news release more quickly than three days later. The reason we originally thought we would delay it is because I am actually speaking today from the beautiful historic silver mining town of Alamos in Mexico, where yesterday our full Board of Directors met here in person to review our quarterly results, projects, operations, and plans. And right after this call ends, our Board and all our senior managers will head out to the Alamo Dorado mine, our newest silver mine to participate in its official inauguration. Along with the Board and our senior management team, we will congratulate the whole 600 person strong Alamo Dorado construction team for their amazing success at bringing the Alamo Dorado mine into production on time and on budget. I will talk more about this later. So because we have the inauguration happening today, we had a Board meeting last night, we decided we put this call together today instead of delaying it until Monday. Around the table with me today are, Geoff Burns, Pan American Silver's CEO; Andy Pooler, our Senior VP, Operations; Michael Steinmann, Senior VP, Exploration; Rob Doyle, our Chief Financial Officer; Alexis Stewart; Director of Investor Relations; and Joe Phillips, the President of our Mexican Operations to whom we owe so much regarding Alamo Dorado's great record. As well, there are seven mining analysts here, who have worked with -- who we invited for the Alamo Dorado opening and then tomorrow we are all going to go for a tour of our other Mexican mine, La Colorada mine. I am very honored and pleased that all of these analysts have come here and we hope to have a pretty nice couple of days with them. I am not going to regurgitate here everything we've said in the Q3 announcement today. The results speak for themselves. We will be available to answer your questions after this call, but right now I am going to make some comments to fill in some cracks and hopefully pre-answer some questions you might have. Starting with the financial and operating results; records across the board once again. I stated in our Q2 conference call that I expected better results in Q3 and we delivered on these. Quite frankly, I expected even better results and we would have achieved them, but for a few things. Firstly, we couldn’t ship all of our planned lead concentrate in Peru at quarter end because of a sudden -- sudden port stoppage there that delayed things a few days right to the end of the quarter and delayed the shipment into early October. So we couldn’t book the shipment in October, it was a significant value shipment. Similarly in Mexico, a high-value silver shipment was delayed into October. Together these would have added around a couple of million dollars to Q3 earnings and will be now reflected in Q4. We also had a couple of one-off exploration charges totaling about $2 million, which will not recur in Q4. For example, we wrote-off a Peruvian exploration property for $0.5 million and we had one-time charges in Bolivia of about $1.5 million. So, let me say now, we expect even better results in Q4, all things being equal. Having said that, Pan American Silver is now covered by nine analysts; new research reports came in during the quarter from Bear Stearns, UBS, Merrill Lynch, and Blackmont Capital. We are very proud of these fine firms covering us, especially when they all recommend stock as buys, and many of their mining analysts are with us today. I think the range of earnings estimates for Q3 for us were low of $0.19 per share to a high of $0.26 a share on the upper end, and we reported $0.22 per share right in the middle. In addition to having among the largest silver production in the silver sector today, especially by a true silver mining company, at 3.2 million ounces per silver in Q3, we also produced at the lowest cash cost. Each ounce is produced for $1.57 significantly below every other company in the sector. Having said that, our actual operating results did increase in Q3, and this reflects the real world today of escalating costs for our main purchases; rails, consumables, wood, labor, and power as well the currencies in the prime countries we work in appreciated against the US dollar during the quarter, Mexico and Peru. Now some of these costs will stay high, but some will decline in the future; we know that already. For example, shipping cost for our concentrates are significantly lower today than they were a year ago, and we don't expect that's going to return to the high rates we had a year ago. Another big cost for us particularly in Peru is electricity, and this year we are just stuck in to some very, very high spot rates, but starting in January '07, we expect a material reduction in power costs as we get into our long-term contract. Rates will decline, for example, from $0.18 per kilowatt hour we are paying today to only $0.06 per kilowatt hour and this will save us $3 million to $4 million next year alone just in power. You may also note that even though we enjoyed record mill throughput at our Peruvian operations, our grades declined a bit especially at Morococha and Huaron. And at Huaron, we simply mine from [road made] areas as planned and our grades should return to normal grades in Q4 yet with more tonnes. So, we should expect significantly more silver production in Q4. And at Morococha, our mill throughput has expanded by 60% in the last year and a half or last two years, and it simply outpaced our underground development to feed the mill the, kind of, average grade ore that we've been supplying at lower tonnage rates. And this has resulted in our need to access our low-grade silver stockpile. And this clearly brings the average grade down, but we are catching up with underground development and this should bring our grades right back to normal very soon and certainly we will be producing much higher silver grades in 2007 from Morococha when we catch up and we access some higher grade zones underground. And this will keep prevalence costs at Morococha at or below today's level which are already extraordinarily low at minus $5 per ounce. Of course, we are heavily benefiting from the high zinc prices of -- record high zinc prices and our high zinc production in Morococha, which of course is reflected as an offset to our costs as by-product revenues. Well, at $12 silver, Pan American Silver is a great earnings and cash flow generator. We expect to produce just shy of 14 million ounces this year. Alamo Dorado will add 5 million ounces of silver per year starting eminently. We should produce our first story within the next couple of weeks. We are setting new tonnage production records in Peru, especially in our Morococha and Huaron operations, as I mentioned; and we are budgeting higher silver production in 2007 at those mines. When our Manantial Espejo mine comes on stream in Argentina, its high volume construction right now, in early 2008 we will be producing annually about 25 million ounces of silver. And if our cash costs remain where they are today, we should very significantly increase both, earnings and cash flow. That is our growth right in front of us. These are from mines that are financed, permitted and either in production or in construction. I want to say a few words about our exploration programs and results. With 25 drill rigs active, and with promising results on many fronts, I can assure our shareholders that we will have a material increase in our reserves and resources this year. A few details. At Huaron, there will be a major increase in reserves, since we are generating outstanding exploration results by drilling at depth below the lowest existing mining level. At Huaron, there are dozens of veins that are wide open, below that level and with our drilling now we are intersecting excellent new silver, lead, zinc grades with all of those veins that we are drilling now at depth, and this will materially increase our reserves there. At Quiruvilca, while our silver drilling hasn't been particularly spectacular this year, we have discovered a significant new gold zone. That will be the focus of much work in 2007. At Morococha, we have 10 drills streaming right now and already know, again, that we will have a major increase and improvement in probable reserves at that operations. And at La Colorada mine in Mexico, we have found this year a rich, new high-grade silver vein, called Amolillo, and a 200 meter extension to our high grade NCP vein. And in addition, we plan an aggressive exploration program in 2007 of the deep zone we found in 1998 at La Colorada that we have really had on since then. And in those days we had very deep holes and expensive drilling to access this new zone, whereas now we actually have mined quite a bit deeper and we are able to access the deep zone from underground, thus saving us a lot of drilling cost for mining -- for drilling from surface. All of these discoveries come at our major operating mines where all the infrastructure is in place to extract maximum value from them in years to come. Huaron, for example, now has a shared mineralization from more than 15 years of mining at today's rates. As for silver prices, I again say, it is easy to make a bullish case for silver going higher. Endemic weakness in the US dollar, amazing demand growth in Asia and elsewhere, massive investment interest in the new silver ETF, all of this represents new silver demand. And of course, we can't forget zinc. Pan American will produce over 40,000 tonnes of zinc this year or 88 million pounds, as our second most important metal. Zinc is hitting new highs everyday, and it is very, very nice for us as our main byproduct. In 2007, we expect to produce over 45,000 tonnes of zinc metal. I am going to close on for us a real high note. I can't say enough about our team here in Mexico responsible for bringing on the Alamo Dorado mine on budget and on schedule. We announced the project capital cost in February 2005, and we are essentially right on that number today. This is an incredible achievement and I think it speaks for the -- to the quality of our people and the strength of our forecast. We do, what we say we'll do. And with that, I think I'll open the call to questions and thank you again for joining us.

Thank you. (Operator Instructions). Sir, there appears to be no questions at this time.

I am sorry. One moment please, operator. Operator, we have one call here from the room. One question I should take from the room from John Doody. John.

Yes, Ross, you have been doing some work in your small mine in Bolivia. Can you give us any current update or what the political situation is there vis-à-vis mining?

Sure. The question was, what is the political climate in Bolivia, and probably by extension Peru, where we have operations active and where there has some been some political uncertainty in the last little while. Regarding Bolivia, the first thing I want to say is that, our San Vicente mine represents 2% of our assets. It's an important asset to us, but it is not terribly material in the big picture. We like San Vicente because it's a high grade, standard milling, easy milling, very nice deposit. We have done a lot of work there over the years to explore the project and expand the reserves. In Q3, we began producing from San Vicente at a relatively small scale, just a couple of hundreds tonnes a day, and we're milling the ore at a custom mill about 45 kilometers from San Vicente. The mining and the milling operation has gone on without any delays, without any issues, and it's very profitable today. So, we are very pleased to have it up and running again. At the same time, we are working on the feasibility study and detailed engineering to build a new mill right onsite at San Vicente in the next couple of years. And so, we've been working hard there and we have been working more or less as we intend to do despite a lot of noise. There has been a lot of political noise and a lot of our shareholders seem to get fussed and worried and investors get fussed and worried by all the noise. It is not terribly friendly noise. The President has been talking about nationalizing the mining industry and taking away rights and doing all sorts of investor-unfriendly things -- foreign investor unfriendly things. We've just kept our heads down and we've a very low capital exposure in Bolivia, but we do like the operation and over the long term, we think that Bolivia is going to be as good a mining country as has been for the last 150 years. The last announcement by the President Morales was that he was going to defer any tax from the mining industry into 2007. It is not terribly reassuring to us, but again I think there is a lot of pressure against him doing any dramatic changes to the Bolivian industry. There are a couple of other foreign companies working in the mining sector in Bolivia with vastly larger investments and projects at risks than ours, and I think they'll be taking the lead on, I think, pressuring the Bolivian government to try not to do any draconian action that would be pretty negative to the whole global mining industry vis-à-vis investments in Bolivia. It is a difficult country to work in, I said that before, and I will certainly say it again, but with our project it's a relatively straight-forward project, relatively low-capital cost, low capital exposure for us and yet it should be a solid producer for many, many years to come. I would also remind our shareholders that we only own 55% of San Vicente. In fact our net interest there is even less, because we do have a joint venture with the Bolivian Government mining company where they actually take 37.5% of the cash flow off the top, before we split it with our existing joint venture partner. So, it is not by any means a significant operation for us. Yeah, as I said, we like the place. In Peru, it's quite different. In Peru, there was a lot of noise earlier this year and it turned out to be just that; surrounding the election. President Garcia has entered power in July. He has turned out to be a fine President with excellent policies so far in his tenure. He is encouraging foreign investments; he has brought a very strong cabinet into power in Peru. And it's a very mining friendly, very foreign-investment friendly cabinet. We expect great things from Peru, we are contributing to the Peruvian economy ourselves. Our tax burden in Peru is quite high, and we are paying a lot of taxes. You probably saw we accrued $8 million in the third quarter for income taxes and most of that was in Peru. We also have workers participation, requirements where we have to give it to other workers, is 8%; 8% of the pre-tax profits and so, our workers are receiving those payments right now, because we are so profitable and, it's kind of nice in a way, it's not so nice to have to pay it, but it's kind of nice pay it to the workers because after all they are part of the reason we are generating such good results. And in these good times it's -- there is lots to go around. So, we are making those payments happily. But in terms of Peru, things have stabilized. There is no noise at all that is unfriendly to mining and I think we are going to -- we've been in Peru for many, many years; we are going to be there for many years to come; very happy participants in improving mining sector.

Sir, we do have a question from the line.

Okay.

Your first question comes from [Randal Stevens], please go ahead.

Yes, do you hedge forward any of your production?

No, we don’t, we have no hedge positions outstanding right now at all; we did hedge some zinc last year, we closed that out in June this year completely, and we are unexposed in every way; we have a small program where we sell our silver as soon as we produce it rather than wait for 3 to 5 months that it gets priced under smelting contract, so that's not properly speaking hedging.

Thank you.

Okay.

(Operator Instructions).

We've got one more call here from the room, operator, go ahead.

Okay.

Hi, you mentioned that mill work pressure has been resolved facing the mine.

Right.

You mentioned that mining is trying to catch up and obviously opening more mining areas, can you talk a little bit about the timing for that on, or will you need to access some of those (inaudible).

Sure. Andy?

Yes, this is Andy Pooler, Senior Vice President of Operations. We can see great response from development into the higher grade areas, which we call the (inaudible) in first quarter of 2007, at this time we are going to rely a lot less (inaudible) which we are currently processing about 3,000 tonnes a month.

Thanks Andy.

Question coming from [Brian Benahiem] of [Benaheim Trust Management]; please go ahead. Brian Benahiem - Benaheim Trust Management: Could just elaborate a little bit on the income tax charge this quarter you just referred to, was that a catch-up charge or a previous in year, or was that all from the third quarter and you expect that to recur in coming quarters at the same rate.

Brian, most of that charge was the current charge based on our cash flow income generated from our Peruvian operations during the quarter. So, I would expect that it's going to be of that kind of level going forward. Brian Benahiem - Benaheim Trust Management: Thank you, congratulations.

Thank you.

(Operator Instructions)

We have gone off lately today operator, I guess we will close the call with that and I thank everybody for joining us today. This call will be taped and if you have got any further questions, call us up in Vancouver on Monday, morning.

Thank you. And this concludes today's Pan American Silver Corporation third quarter 2006 Earnings Call. You may now disconnect and have pleasant day.