₪ David Pescod's Late Edition September 15, 2006
An Interview with Ross Beaty
Chairman and Director of Pan American Silver
(From September 7, 2006)
We are here with Ross Beaty the senior mining executive who probably doesn’t get the attention he deserves, for the simple reason that he doesn’t need brokers to give him any money!
Anyway Ross, you’ve had an awful lot of experience with Pan American Silver, Global Copper and some of your other companies in Latin America. Do you have any guidelines for working down there and any countries that might be your favorites?
Ross: Latin America has been very good to me, particularly Peru, Mexico and Chile. Peru has recently had a lot of bad press and most of it is misinformed, I think. We did have a scare with a nationalist candidate for Presidency in the spring, but that concern has now gone away. Peru has elected a good President, and I think that he will do a fine job alleviating some of the issues Peru has faced recently.
Pan American Silver (PAA-T) operates three large underground silver mines in Peru, and we have a copper company called Northern Peru Copper (NOC-T) there as well, which has an extraordinary good copper deposit in Northern Peru. We have now been operating that for 2 ½ years without a single incident or problem.
I also love Mexico. It’s been great for Pan American Silver. As for Chile, it is the most secure and advanced country in all of Latin America and is one of the greatest mining countries of the world.
We had a great experience with Chile in May this year when we sold Regalito Copper for enormous capital gains, so obviously we think Chile is a very good country too, and we are continuing to work there with Global Copper.
David: Any countries you would stay away from?
Ross: I certainly would stay away from Venezuela. It’s got a very difficult President who will create problems for many years going forward.
Columbia is probably a little better than what it was, Ecuador is probably 50-50 – it is a small country, has great potential but it is likely to have various problems because it is a small country. Bolivia has been a very difficult country – I have worked in Bolivia now for 14 years - very intensely and find it an extremely difficult country to work in, but it does have plenty of potential. So if you are looking for silver, it is one of the places that you would want to be in.
I adore Argentina, but it can also be a very difficult place to work in depending on the province a project is located in. It has many good assets that off-set the ones that are bad, though. It is well endowed with minerals, it has excellent potential and you can do business there. Global Copper has two properties in Argentina, which we like a lot, and Pan American Silver is currently constructing a large silver mine in southern Argentina in one of the most positive Provinces in Argentina Santa Cruz. Brazil, I think, is another great country – a real mining country with a tremendous middle class and large infrastructure. It is a good place to go. So that pretty much wraps up South America.
Central America, for me, is a bit tough - small countries with lots of problems, but again in the right environment we would go there. In general with mining you’ve got to go where the mineral potential is best.
Mines last a long time, and they go through many political cycles. Most governments want mining to occur in their countries because they create jobs, they create wealth, they create tax revenues, they build infrastructure and so generally you see good support from governments. And since most mines can be built only with significant foreign investment, most countries in Latin America support foreign investment.
David: Now of course, you can’t be aggressive in mining without some belief in commodity prices. I would like to use the analogy here with what is going on in oil & gas. With the big increase in oil & gas prices, all of a sudden we’ve got too much natural gas, which is killing prices; do you worry about any of the same happening with some commodities down the road?
Ross: Sure! Commodities all have very classic demand and supply fundamentals, but they are all to some degree different and have to be looked at separately. Just as you wouldn’t look at oil in the same way as you would look at gas. They have different supply realities and different demand realities.
Generally speaking though, there are very strong winds in the minerals commodity business forcing all prices up. There are macro things like secular weakness in the U.S. dollar and secular strength in demand growth from Asia. Those are very powerful bullish factors in all metal commodities.
Then you have a whole bunch of other factors. Mining is becoming more difficult in many places in the world. Discovery rates are going down, so it is harder to replace reserves. Mines are getting deeper; they have higher costs and in places like Chile, for example, which is an enormous producer of copper, it is very hard to find water to mine and if you don’t have water you can’t produce copper. So these are very powerful factors which mean the supply side of most minerals will continue to be constrained for a long time – hence that will keep prices higher.
When you have a secular event, such as a once-ina-lifetime movement of people from the country to the city in Asia - not just in China, but also in Malaysia, Indonesia, India and in the Middle East — you create an enormous new appetite for metals. Couple that with constrained supply in most metals, whether it be zinc, copper, gold, or silver, you have the forces that create higher prices.
Higher prices are great for my business across the board. It’s good for Pan American Silver on the silver side, but Pan American also produces a very large amount of zinc, lead, gold and copper. And of course, it supports the business plan of the copper companies that I am involved with, Northern Peru Copper, Global Copper and Lumina Resources. So, the winds are blowing very strongly now and very much in our favor.
David: Inventory numbers are interesting. There just seems to be no nickel or zinc around, but what kind of prices would you expect for the different commodities down the road – say a one and three year time horizon or even longer?
Ross: I am bullish across the board for metal commodities to remain strong. Again each one is going to be different. Copper and nickel prices, I think, are going to be strong for the next year or two, but ultimately they are going to decrease in price. I would say looking three or four years down the road you are looking at lower prices in those metals.
But, it still doesn’t mean that any of the mining equities are
going to be cheaper, because the mining equities seem to discount unrealistically low prices. Copper stocks, for example, seem to be valued on the basis of long-term prices of $1.20 today. So even if copper was to drop in half to $1.75—copper stock trading prices could still go up significantly.
I am also very bullish on gold and silver. I don’t see any reason why gold couldn’t hit $1000.00 in the next year or two at all, there are very good reasons for it going higher.
David: Interestedly a lot of people refer to you as “Mr. Silver”, so what are your thoughts on silver in particular?
Ross: Well, silver is a more complicated metal, because it is both a precious metal and a base metal. So you have to look at the outlook for both industrial production globally because that is the number one user of silver right now – 45% to 50% of silver is now used in industrial products and you probably know of course, the more the world goes digital the more silver is being used.
So I am bullish on the prospects for silver, muted by the fact that if base metal demand does decrease, if there are industrial shocks in the world, that would reduce industrial demand for silver. As a precious metal, silver’s strength right now is also being driven by powerful investment buying and the use of silver in many places as a hedge against global trauma.
So silver has good strength along with gold and its price will be muted or enhanced relative to gold by what happens with industrial production side globally. Right now silver has the best of both worlds and has an excellent outlook.
David: It has been interesting in the last quarter or two to see that actual demand for precious metals from jewelers has dropped, but an increasing role has been made by the investment banks, hedge funds and the like, does that make you
nervous at all?
Ross: Well if you look at all categories of silver demand, the only real price-elastic component of demand is actually jewelry. Jewelry comprises about 15% of total silver demand.
As the price goes up demand tends to go down, but I would advocate that’s a short term reaction by jewelers – they tend not to buy the metal for a while.
Remember that silver jewelry, like gold, is bought because it is a beautiful metal as an adornment. Even at a higher silver price, you are going to see that fundamental demand come back. It might go away for a few months or half a year or so, but ultimately it’s a profound demand that will always be there.
David: When you mention silver, Pan American Silver is probably one of the world’s biggest players. It has a market cap now of almost $2 billion. Your thoughts on your major company?
Ross: Pan American Silver is the pre-eminent silver mining company in the world and should be in every silver investor’s portfolio. Like all silver and gold stocks, it has always traded at a premium over its net asset value. But today under today’s silver price environment, Pan American is actually cheaper than it has ever been in its 12 year history.
Last quarter, Pan American generated earnings of $0.17 a share, and cash flow of about $29 million. Our silver production is set to double in the next year and a half — from 12 million ounces last year to 25 or 26 million ounces by 2008.
When you see the cash generation that is going to come out of Pan American by 2008 without any need for higher silver price, you will realize that Pan American is trading today at a lower multiple than it has ever traded at before and is very cheap relative to the other large silver plays such as Silver Wheaton, Coeur d’Alene and so forth.
David: One question miners such as Eric Coffin of the Hard Rock Analyst and others would like to ask about many of the silver producers, is there any way to reduce costs?
Ross: Well that question by Eric may be a little stale. He might have asked that question in January when most of the silver producers did report mixed results for 2005, but if he looks at the quarterly results for 2006, everybody is making money right now.
Pan American costs for example were $4.57 an ounce in the second quarter of 2005, but only $1.17 per ounce in the second quarter of 2006! Eric can not complain about a company that is making silver at $1.17 an ounce.
David: I don’t think so, no!
Ross: That huge difference is because of not only higher silver prices but also of cost efficiencies at our mines and higher base metal prices and gold prices, which we show as a credit against our costs.
David: Okay one of your other companies Northern Peru has just seen a recent analyst report calling for the stock to double. Any comments on that one?
Ross: I would encourage any of your readers to look at the excellent research report by Tom Meyers of Raymond James where his target price is actually $10.00 a share. I just love Northern Peru Copper, I think the main asset, the Galeno copper deposit in northern Peru is probably the best undeveloped copper deposit in all the Americas.
This project has no significant fatal flaws, it will go to a prefeasibility study in November. The company’s business plan is to divest it to a major company. And we certainly won’t be looking at selling the company for anywhere near the current share price..
David: Global Copper has recently had a quite a nice move on the markets as well.
Ross: Global Copper is still a very cheap copper stock. It only has 26 million shares outstanding today. We are drilling a large known deposit in Chile called Relincho. We have three other big copper projects. We will have a steady flow of news out this fall and winter based on our drilling activities, and potential sales of two of the other three properties. It is a very active company and I think its still got legs on it for further capital gains in 2006.
David: We now get to the point in the interview, which we think is very interesting, where we ask you for your one favorite commodity and your one favorite stock. Once again the rules are - we are looking for you to pick a stock that is not one of your own, that is a commodity-based play and of course, we would be upset if it wasn’t a double.
Ross: Well, you know I love two metals, copper and silver. Both of them have tremendously strong demand and supply
fundamentals. On the stock side, you just sprung this on me and I am really not an investor. I tend to buy in my own deals because I’ve always had the best capital gains there and I think all of my own companies will deliver doubles this year, particularly the three copper companies – Northern Peru Copper, Global Copper and Lumina Resources. But I will give you a stock that you probably don’t know of Dave, and maybe your followers don’t know about called Solitario Resources (SLR-T).
Solitario is a company that has a basket of excellent exploration assets in Latin America, its got a ton of cash right now, so it doesn’t need any cash to finance its activities, its got exploration projects all over the map in Latin America, Bolivia, Brazil, Peru, Mexico, it has gold, silver, zinc (well diversified), is extremely well run, so a very solid stock. I think it is trading around $3.50 a share at the TSX and it also trades on the AMEX as well.
So that is my stock pick for you right now and whether it will go to $7.00, I don’t know but is a very sound stock and very low risk I would say on the downside.
David: Thank you very much for your time Ross.
Disclosure: Pan American Silver and Silver Wheaton Corp: Canaccord Capital covers these stocks and has a Buy rating on them. (Buy: The stock is expected to generate risk-adjusted returns of over 10% during the next 12 months.)
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