Pan American Silver Corp.
Q2 2021 Earnings Call Transcript

Published: 11 Aug 2021

[Operator:]

Thank you for standing by. This is the conference Operator. Welcome to the Pan American Silver Second Quarter 2021 Results Conference Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions . I would now like to turn the conference over to Siren Fisekci, Vice President of Investor Relations. Please go ahead.

[Siren Fisekci:]

Welcome to Pan American Silver's Second Quarter 2021 conference call. Media and other participants on the call are invited to participate in a listen-only mode. We released our results after yesterday's market close and a copy of the news release, MD&A, and presentation slides for today's call are available on our website. That material in today's call contains certain statements and information that constitute forward-looking statements and information. Please review the cautionary statements included in our news release and presentation, as well as the risk factors described in our most recent Form 40-F and Annual Information Form. Joining the call today from Pan American are President and CEO, Michael Steinmann, Steve Busby, Chief Operating Officer, Rob Doyle, Chief Financial Officer, Martin Wafforn, Senior VP Technical Services and Process Optimization, And Chris Emerson, VP Business Development and Geology. I will now turn the call over to Michael for a brief overview of the results before opening the call for questions.

[Michael Steinmann:]

Thank you for joining us today to discuss our second-quarter results. We produced 4,5 million ounces of silver and 142,300 ounces of gold in Q2, silver production was reduced by the ventilation constraints at La Colorada, mine sequencing at Dolores into higher gold with lower silver grades, as well as the timing of heap leach sequencing at Dolores and Shahuindo, and COVID-19 related protocols which limit workforce deployment levels. The ventilation constraints at La Colorada or have been impacting silver production for the past 18 months following some ventilation infrastructure failures. As previously reported, we have completed the construction of a new primary ventilation raise from the surface to the 345-meter level on the higher-grade Candelaria East deposit. But the raise became blocked in the bottom 42 meters during commissioning in Q1 2021. We are very pleased that we successfully cleared the blockage in July, shotcrete, and fully commissioned this important ventilation raise at La Colorada that re-establishes quality ventilation into the most valuable portion of the deposit. Mine development is now underway to enable the throughput rate to increase. The completion of this project along with several other improvements to the ventilation circuit means that overall ventilation flow rates will be similar to the levels we had in 2019. During Q3 2021, we plan to rehabilitate 2 other key ventilation raises, which will further increase overall ventilation flow rates to 50% higher than 2019 levels. In early 2022, we also expect to advance the early construction of a refrigeration plant for the eventual skarn deposit development to further enhance current working conditions in the deep high-grade areas of the mine, by increasing overall ventilation flow rates to 180% compared to 2019 levels. As we look forward to the expansion of the La Colorada mine and the development of the skarn deposit, Our board yesterday approved the new concrete-lined ventilation exhaust shafts for the eastern portion of the La Colorada mining area, and above the northern edge of the new skarn deposit. We believe this will be a robust, durable solution for ventilation through the challenging ground conditions that exist in the area of that mine, providing added insurance against future premature ventilation infrastructure failures. Each shaft can be extended in the future to provide ventilation infrastructure for the development of the deeper skarn project. We estimate the cost to construct the 5.5-meter diameter and 560-meter deep shaft to be approximately $47 million, which should be completed in early 2023. Coal production in Q2 was 142,300 ounces, benefiting from mine sequencing into higher grades at Dolores and La Arena. We also had a buildup of 23,800 ounces of in-heap gold inventory at Dolores and Shahuindo. We expect most of this will be recorded in production over the second half of the year. At Bell Creek, we continue to mine at lower rates and grades, while we adjust the mining metrics and ground support system to adapt to the wider ore extensions in this section of the mine plan, expecting increased production rates during the second half of the year. That's our window as we discussed last quarter, we are in the section of the pit that has more fine-grain host rock with higher clay contents. We stockpiled approximately 857,000 tons of this fine-grained material during Q2, equivalent to 23% of the ore we mined during the quarter, which will be blended with coarser ores to be mined later this year and into 2022 for placement on the heaps, supporting higher production during the second half of 2021 in line with our annual estimates. We're also evaluating the potential of operating the agglomeration plant to process these fine-grain materials beginning in late 2022 and 2023, which could increase gold production rates from Shahuindo, but incur additional costs for operating the plant compared to our blending and run of mine, heap leaching. Overall, we do expect a stronger second half of 2021, and we have reaffirmed our production guidance as revised in May 2021. Silver segment cash costs in Q2 were $12.71, and all-in sustaining costs were $16.36 per silver ounce sold. The cash cost reflects lower silver production, lower gold by-product credits from the move of Dolores into the gold segment in 2021, an increase in treatment and refining charge due to increased contribution from concentrate mines, and an increase in royalty, primarily at the San Vicente mine. Silver segment all-in sustaining costs included $4.19 per ounce of sustaining capital, which includes increased funding on the critical ventilation work at La Colorada. Gold segment cash costs in Q2 were $857 and all-in sustaining costs for $1163 per gold ounce sold. The cash costs reflect the benefit of the move of Dolores into the gold segment. And the current mine sequencing at La Arena resulting in higher throughput and grades that were partially offset, lower grades at Bell Creek, and increased waste mining rates and door stockpiling a Shahuindo. The COVID pandemic continues to impact our operations to protocols we are maintaining to protect health and safety, continued to hinder our workforce deployment levels, reducing normal throughput rates by about 5% to 10% disproportionately affecting our underground mines. These protocols also incur additional costs and delay the execution of certain projects from 2020 into 2021. During the first half of 2021, we have seen higher-than-expected cost escalations in energy, wages, and consumables, along with a stronger Canadian Dollar. However, these appear to have leveled off in July 2021 leading us to maintain our cost guidance for the year. Furthermore, we expect the impact of COVID will diminish over the next two quarters, and we are encouraged by the higher levels of vaccination that are occurring in many of our operating jurisdictions. Vaccination programs are of course critical to combat this virus. In Q2, we committed our support to UNICEF Canada's Give A Vax campaign. The campaign is aimed at providing global, equitable access to COVID-19 vaccines through the distribution of 2 billion doses of COVID-19 vaccines to low and middle-income countries by the end of 2021. Turning to our financial results. Revenue in Q2 totaled $382.1 million. Revenue has been impacted by a $45.1 million build-up in and concentrates inventories and a $47 million buildup of heap leach inventories in the first half of the year, both of which are anticipated to normalize and improve revenue for the second half of 2021 Inventory buildup made up the majority of the $37 million use of cash from working capital, resulting in operating cash flow of $87.1 million in Q2. After funding all of the sustaining requirements of our business, project capital and dividends, cash and short-term investment rose to $240 million on June 30th. This includes the sale of non-core assets totaling $14 million. We sold a portfolio for royalties to Maverix and received nonrefundable deposits for the sale of the Waterloo exploration stage asset... The Waterloo transaction closed in early July when we received an additional $22.7 million, which will be recorded in Q3. We also retained a 2% Netsmart royalty on any future production from this asset. Net income was $71.2 million or $0.34 per share in Q2, driven largely by strong mine operating earnings of $103 million. Adjusted income in Q2 was $46.6 million or $0.22 per share. Based on the strong operating cash flow in Q2, our solid financial position, and improving outlook for our operations, we announced the 43% increase to the quarterly dividend to $0.10 per common share. This marks the third dividend hike in the past 18 months. I will now provide a brief update on the catalyst in our portfolio. At La Colorada, we are continuing with the work to provide a preliminary economic assessment for the skarn deposit late in 2021, which will include an updated resource model. At Escobal, 2 pre-consultation meetings have now been held as part of the ILO 169 consultation process for the mine. A third meeting originally scheduled for July 17th, 2021, has been postponed to August 2021 due to the COVID situation in Guatemala. The main agreement reached during the first 2 meetings is the requirement to prepare a cultural and spiritual impact study of the Escobal Mining Project. We are encouraged that the court-mandated dialogue 169, the consultation process has started with broad participation. But we are unable to provide any timing on the consultation process or potential restart of the Escobal mine, as the details of the process have not yet been determined. At our Navidad project the legislator in Chubut, Argentina has not yet voted on the modification to the mining law to allow open-pit mining in certain zones of the province. And we do not know when that bill may be debated. However, the legislator has rejected the bill that would have prohibited mining activity in the entire province. After yesterday's market close, we also reported our estimated mineral reserves and resources as of June 30th, 2021. Silver mineral reserves are estimated at 529 million ounces. And gold mineral reserve at 4.2 million ounces. The exploration program over the past year was reduced by 50% due to the COVID-19 restrictions. Although we completed the planned exploration program for Timmins and at La Colorada skarn. At La Arena, we replaced 141% of the ounces mined, extending mine life by another year. Mine life was also extended by another year at Timmins through the discovery of 209,000 ounces of gold, of new mineral reserves, replacing 147% of ounces mined. At La Colorada, the ventilation restrictions impacted exploration activities. However, the recent improvements to the ventilation circuit would allow us to ramp up exploration drilling at this long-life mine, where we have over 100 million ounces of silver mineral reserve and 192 million ounces of inferred resources, including the large skarn deposit. For the 12-month period ending June 30th, 2021, Pan American's producing mines replaced 8 million ounces of the silver mineral reserve and 98,000 ounces of gold mineral reserve s. Total reserves were impacted at Shahuindo from containing gold production of 193,000 ounces and the reclassification of 146,000 ounces of gold mineral reserves to resources which contributed to total depletion of 339,000 ounces of gold, based on geological interpretation, cost estimates, and cut off grades. The reclassification of the La Bolsa (ph) project from mineral reserves to resources reduced gold mineral reserves by 315,000 ounces and silver mineral reserves by 4.5 million ounces... La Bolsa is a non-core project that the Company intends to divest. Pan American holds one of the largest silver mineral resources and reserves in the world. And with that, I would like to open the call for questions.

[Operator:]

Thank you. We will now begin the question and answers session. To join the question queue, you may press We will pause for a moment as callers join the queue. The first question comes from Tyler Langton with JPMorgan, please go ahead.

[Tyler Langton:]

Good morning. Thanks for taking my questions. I guess to start, could you talk a little bit about the impacts from COVID that you're sort of currently seeing especially at La Colorada and Manantial now maybe versus a quarter ago. And then, just to hit your guidance, did you need restrictions from COVID to continue to ease? I'm just trying to understand how sensitive the guidance is to COVID restrictions.

[Michael Steinmann:]

Yeah. Hi, good morning, Michael. I will start and pass it on to Steve to give you more details on the operations. As you recall at the beginning of the year, we assumed the easing of restriction in a straight line every quarter with the first un-impacted quarter in Q1 2022. Of course, life is not going in straight lines, we know that. And so I think we saw a bigger impact for sure than we assumed still in Q1 and maybe some at the beginning of Q2. We definitely see strong improvements now with quite impressive vaccination rates in most places where we work. So I think it will just follow the similar trend and then everywhere else, in Latin America and it will get hopefully be easier for us, but the staffing is still impacted there and maybe Steve can give us some more details.

[Steven Busby:]

Yeah, Tyler, if I can just add to Michael. It's clearly related to vaccination rates. We see just like in North America if we can get vaccination rates up into the 50%, 60%, we can finally start to relax those COVID protocols and restrictions I think at that point. Right now, we're probably roughly around 20% to our workforce in Mexico, perhaps as high as 40% down in Argentina. During the first half of the year, we did indeed -- it was a very sensitive time for us and we did see lots of cases coming to our gates that we had to turn around and we had high levels of people that had to stay off of the workforce. So it was -- it definitely had some challenges during the first half and we're hoping the vaccination rates, as Micheal said, are picking up a lot. And we're optimistic that as we move into the second half, we will see the easing that we had projected in our current forecast.

[Michael Steinmann:]

Just to round it up, we see probably around $7 million costs per quarter as we assumed at the beginning of the year. And that really covers all our work testing, quarantines, additional transportation, and so all the added COVID cost of this. So I think we're pretty much on track on that side, what we assumed at the beginning of the year.

[Tyler Langton:]

Okay, great. That's helpful. And then I guess with La Colorada and the ventilation blockage, now, that's passed you. Can you talk a little bit about sort of how quickly throughput grades and sort of production should improve? I guess, Q3, Q4, and then costs improving as well, just any color there would be helpful.

[Steven Busby:]

Yes. Sure, Tyler. And a little bit of background, we have realized that a lot of the infrastructure failures that we've seen over the last couple of years, it's really a heat and humidity issue. As we mine deeper and further to the east on this deposit, particularly in the high-grade, we're seeing greater heat increases, greater humidity increases. And what we find is this acidic ground that we have, really starts to degrade with that higher heat and humidity. And that's what failed in those raises. We're also seeing challenges in the developments from a similar extent. So what we realize is we do have some catch-up to do on shotcreting our developments just like we have shotcrete these raises to recover those. So right now in our forecast, what we're projecting out is, a progressive 10% to 15% call it, increase in throughput each quarter going forward from where we were in Q2 and maybe 10% to 20% improvement in silver grades each quarter as well, as we move and open up and get ahead on the development into that higher grade area. So that's what we've baked into the forecast and we feel pretty confident we can achieve that.

[Tyler Langton:]

RIght. Perfect. Thanks so much.

[Operator:]

The next question comes from Cosmos Chiu with CIBC. Please go ahead.

[Cosmos Chiu:]

Thanks, Michael, Steve, and team. Thanks for taking my questions today. Maybe my first question is on Dolores. As we talked about it in the last quarter, we talked about leach kinetics. I think at that point in time, you had talked about stockpiling higher-grade oil for the rainy season, and also stabilizing the area of the leach pad between pad 1 and pad 3. Could you maybe give us an update on that? I guess we're now into the rainy season in Mexico. So have you started stocking some of that higher-grade material, and how has that impacted recovery?

[Steven Busby:]

Good morning, Cosmos. Thanks for the question.

[Cosmos Chiu:]

Thank you.

[Steven Busby:]

Yeah. Indeed we were successful in stockpiling the high-grade during the dry season, so we're continuing to run the agglomeration plan. And we are deep into the wet season now, so that high-grade is processing through the plan quite well. Relative to the leaching kinetics, we are addressing or we have been addressing a design and construction challenge, trying to try the valley fill leach pad 3 to the previous sidehill, leach pad 1, that we're reconstructing from the original mine finders build. We've had to limit leaching in some of those areas until we could build some buttressing and place some liners in a way that assures stability in that area because it's a very challenging geometry with some of the steep terrain in that area. So it restricted our ability to leach in that area and that, in turn, grows the heap inventory. That's what's happening there. Currently, we've advanced heap loading into the non-affected areas, so we expect to move away from building those high inventories that we've seen over the last 2 -- 9 months or so. And we're working really closely with our heap designer and expect to reactivate that leaching in that area in the next few months or so. And that will start to draw those inventories back out. So it's really just a matter of that, it's a bit of a tricky geometry there and that requires some buttressing and unique kind of liner placements and handling of the preg solutions coming through that connection between the valley fill and the old side hill heap that Minefinders have built.

[Cosmos Chiu:]

In terms of impact Steve. Yes, Michael. I'm sorry, just to add 1 more thing to the great detail that Steve gave us. But, obviously, Dolores, going on and on, and we're stacking, already, for many years. And the heap leach, the stack is getting thicker and thicker, so it's going to take longer and longer obviously to get the gold and silver out here.

[Steven Busby:]

Yeah.

[Michael Steinmann:]

Just the time that it takes, because of the thicker and more material there. But I'm sure Steve -- obviously Steve included that all in his planning and forecast.

[Cosmos Chiu:]

Of course, fully understand. And that leads well into my follow-up question here. If I work it out in terms of ounces stack versus ounces produced, I get " a recovery of 65% for silver, 59% for gold for Q2." Silver actually improved from the first half average of 59.6%, but gold has stayed about the same. Should we expect that to improve in the second half?

[Steven Busby:]

Yeah. And certainly, the gold will be quicker to improve. It's our faster leach time. So those inventory builds affect gold more than they affect silver because of the long leach kinetics of the silver. So yeah, it's definitely a timing thing. So it's quicker to build the inventory and it's quicker to reduce the inventory than the silver. So that's what you're seeing here.

[Cosmos Chiu:]

Perfect. And then also at Dolores as well, going through your reserve resource update yesterday, I saw that the Dolores reserves decreased year-over-year. Maybe if you can comment on that. If my numbers are correct, it looks like in terms of tonnage, a decreased level of 9 million tons. I think in the 12 month period, you stacked about 7.6 million tons, so it seems like some tonnage might be missing. Was there any kind of modeling changes? And on a more positive end is this just -- is that just a function of not enough drilling due to COVID-19 impacts and can you find more ounces here?

[Christopher Emerson:]

Yeah. Hi. It's Chris here.

[Cosmos Chiu:]

Hi, Chris.

[Christopher Emerson:]

Yeah, I know. When we look at the reserve depletion, yes you've got the depletion from production, but you're absolutely right. I mean, we had some increased costs across the underground so we lost some reserves there. And also stockpiles, we had some low-grade stockpiles which due to rehandling costs and positioning wet paths at the moment, they're actually flipped out of the reserve. So your question is saying that there net-net, there was a decrease more than just production. And that really we're seeing those slight changes attributed some to cost, et cetera.

[Steven Busby:]

Yeah, if I could add onto that, Cosmo, we did sterilize a low-grade stockpile that was up in the north part of the property that goes back to the date of Minefinders again. There was this -- it was a marginal stockpile all along, but we deemed it sub-marginal now, because of our latest estimates, as Chris said, for the leach pad handling costs, but also the leach pad construction costs that those tons have to absorb. So it's a stockpile in the far north and depending on prices, it could come back in and it just got a long haul to get around the pit and then the costs for constructing the pad that has got to absorb.

[Cosmos Chiu:]

Of course, maybe moving on to La Colorada. And thanks Steve for giving us the guidance in terms of what to look forward to in terms of Q3 and Q4. But I just want to be a bit more specific here. You did about 14, 15 tons per day in Q2, I believe. And it sounds like as Michael mentioned, flow rates in terms of the ventilation could get back to the levels in 2019, 2018. Kind of dating myself but now I remember, 2019, even though your nameplate capacity is 1800 tons per day at the mill. I think you did about 2100 tons per day in 2019, almost 2000 tons per day in 2018. Could you actually get back to that kind of throughput? Is that where you're targeting? And also in terms of grade, if I were to do the math behind it, I think you would need over 300 gram per tonne grade in Q3 and Q4 to get to your guidance. Is that what you're targeting for grade as well?

[Steven Busby:]

Yeah, Cosmo. Relative to throughput, our current forecast does not anticipate us averaging at that 2,100 tons a day through any of the quarters going forward. Like I say, it's a 10 to 15% increase over -- Q3 will be over Q2, and then another 10 to 15 for Q4 over Q3. And that's just catching up on that development I was mentioning, that we face. Relative to grades, yes, we will move up into the 300s again. 10% to 20% kind of incremental great increases quarter-over-quarter, and move towards that reserve grade going into 2022. Those are factored into our forecast.

[Cosmos Chiu:]

That's great to hear. And then at La Colorada, I'm reading that there was a delay in concentrate transport at La Colorada. That was from Q1. And I thought that would've been cleared out by Q2, but I don't think that's the case. Could you give us a bit more detail on that? Are we talking about a significant number here? And in terms of helping out on getting to guidance, was that included as part of Q1 production, or is it going to come in in Q3, Q4 production, or when the sale -- or when the shipment of the concentrate actually happens. And then, in that case, it would actually help you in terms of higher production in the second half.

[Robert Doyle:]

Good morning Cosmo, it's Rob Doyle here. Yeah. I'll take that one. Yeah. I mean, firstly, it's what's been delayed as revenue. We report production as we produce. So the delay that we've really had is around the commercialization of that production. And in -- at La Colorada as well as elsewhere we had run into some pandemic-related logistical challenges. You've seen from our balance sheet that inventories of finished production increased by about $45 million over the first half of the year. And the concentrate shipments really out of La Colorada have been constrained by delays in ship and container availability is the key factor that we've struggled with there.

[Robert Doyle:]

We are seeing that normalization and have a very robust pipeline of shipments in Q3 and into Q4. So we do believe that those inventory levels will normalize over the balance of the year. On top of that, we've also had some delays in day (ph) shipments. Specifically, there were particularly large shipments out of Shahuindo in Peru that were withheld because of some complications around the elections in Peru in June. So that was delayed and will come into revenue in Q3. So these are all simply timing issues and will come out through revenue in the course of time. And, of course, cash flow too.

[Cosmos Chiu:]

Great. Thanks, Rob. And then, maybe one last question just on Shahuindo here since we -- you brought this up. You talked about leach kinetics here and Michael mentioned part of it was to stockpiling of the fines, blending it with some of the coarser ore later on. Part of that sounds like it was also due to the stacking of higher grades towards the end of the quarter. We're about a month into Q3 now. Are you happy with what you're seeing in terms of leach kinetics, in terms of recovery, I guess in that context, I actually worked out the recovery or the ratio of ounces stacked versus produced here. It was 59% in Q2 versus about 65% in the first half. Could we see that improve back to the mid-60 level or even to, I guess some of the technical report numbers of 70%, or do we need the question on agglomeration to get to the 70%?

[Steven Busby:]

Great question, Cosmos. This is what we're studying quite hard right now. First off, we are -- because of the fine grain clay ore that we're mining at high rates right now, we are trying to push those blends as hard as we can out to the heap. And the net result is we do have to slow our application rates down in some sections of that heat, which do reduce the kinetics and come up with the kind of numbers you are talking about. We won't see that. We won't get back to our normal rate. It's probably throughout the rest of this year. We're still trying to model and understand the distribution of this fine and clay ore. It's a bit challenging when all you have for the exploration information is RC drilling. We're just not -- we're not confidently able to build this kind of lithologic models that are so important to us right now. And that's why we're kind of hesitant to say we're ready to activate the agglomeration plant and that will solve all these problems. We're not totally convinced that's the right answer yet, we're looking at that possibility. But in the meantime, we do try to process as much of that fine ore by blending it as high a rate as we can with the coarse ore. And offsetting that with slower kinetics through reduced application rates. So that's what we're doing and that's what we're forecasting going forward. We do believe this ore ultimately has very high recoveries in excess of the 70% that we have in the studies before. We've seen much higher extraction rates and expect to get there. And that's what we're trying to evaluate, and understand, and model. It's really a kinetic timing point and whether or not we need to agglomerate. And whether or not, even with an agglomeration, we feel we still will have to leach at lower application rates and have slower kinetics than what we had with the great course ore that we've seen in previous years.

[Cosmos Chiu:]

Great. Thanks, Michael, Steve, Rob, and Chris. Thanks for answering my questions. That's all I have.

[Operator:]

The next question comes from Don DeMarco with National Bank Financial, please go ahead.

[Don Demarco:]

Thank you for taking my call Operator. Good morning, gentlemen. There's a number of ventilation rates at La Colorada from surface to 345. Of course. I think there are other rates to provide ventilation to Candelaria, maybe potentially a fully line concrete shaft further east. Could you just list the ventilation - raises that you have planned at the mine over the medium-term?

[Michael Steinmann:]

Sure. It's done. Its margin was from here. So in terms of the surface to 345. That's the 1 that was plugged at the bottom. We call that the Hemilo's raise. So that's the one that was cleared just recently. That's one raise. We have another one called Lale Batad, which goes from the surface to just below 400 meters then. That one we had a failure in -- we're just close to getting that completely rehabilitated now in Q3. We're fully shotcreting in August, actually the surface to 220 level portion of that raise. And then we're doing 2 other raises to bypass that down deeper. Another key ventilation raise for us is called La Estrella, which is in the Estrella portion of the mine so remember, La Colorada has two principal parts of the mine. One's called Candeleria and the other is called La Estrella. So La Estrella actually, in the early part of Q3 towards the end of Q2, sorry, towards the end of Q1 and early part of Q2, we were able to take that one out of service and fully shotcrete it all the way from surface down, again, it's just over 400 meters deep. I'm sorry if I misspoke a little bit there. We were able to do that in June

[Christopher Emerson:]

July, So those are the three principal ones. We also have intake ramps and an intake shaft. The intakes are the El Aguila shaft, which we have about 200,000 CFM of intake air coming in that one. We have the Campania ramp, which we used as an exhaust route while we had the failures in the mine, and it's now reverting to being an intake airway. So there's going to be a refrigeration plant on top of that. That's going to be providing cool air by the end of the year. And then we also have the San Fermin ramp. So that's the -- and it is a very complicated circuit. This is a very large mine that's spread out laterally over a big long distance. And as Michael and Steve both mentioned, we have heat and humidity that we have to deal with when we're designing the ventilation flows for all those areas.

[Steven Busby:]

And Don, if I could just -- Michael had mentioned in his conference, but we have approved this new shaft we're going to call the San Geronimo shaft. Further out to the east, right in the heart of this high-grade zone that we cherish so much. And we saw the opportunity. I mean, the skarn deposit, a deep-seated deposit. Clearly, we're going to have several ventilation shafts going into that deposit regardless of the mining method that we need. We see the opportunity to start to advance that shaft to ultimately access and provide access and ventilation into that skarn deposit. But in the meantime, provides us, I'll call it an insurance policy, against any further infrastructure failures as we've seen over the last two years. So we're really pleased that that project is going forward and it should be completed towards the end of 2022, end of 2023, we have a great contractor that was well set up who was able to mobilize very quickly on that. So we're pretty excited about that opportunity. And that will be an insurance policy should we need another exhaust system of this moist hot air with a fully lined concrete shaft that's 5.5 meters diameter.

[Don Demarco:]

Okay, Steve. Yeah, I guess that's what I am getting at. I'm just trying to understand the risk. It's encouraging to hear that San Geran (ph) will be an insurance policy of sorts. But trying to understand the risks of a potential repeat of what we've seen over the last couple of years with reduced grade and throughput and so on. Can you comment on that? Do you think that it's very unlikely that you would see this happen again in the future?

[Steven Busby:]

We're very pleased with the shotcreting advances that Martin described on these raises. We're able to robotically get shotcrete into these raises now. Shotcrete seems to be the key thing in raises and developments, in sealing off the acidic (ph) ground away from the heat and humidity where it starts to degrade. There are risks with that. We're not -- this is -- we haven'treally done this for a long period of time yet to see how that shotcrete is going to perform. So that is the reason we're really pushing the shaft as an insurance policy. We do think it's an important insurance policy. But right now today, I think in the Hemelio shaft, we got up to 6 inches of shotcrete fully on that wall and we haven't seen any degradation of that to date. We feel pretty good about it, but we're feeling really good to have an insurance policy going forward too.

[Don Demarco:]

Okay. Thanks for that. And so with the ventilation restored, what is the reason again, that you can't get back up to say 2,000, 2,100 tons per day, I think? Just to expand on what a previous caller had asked.

[Steven Busby:]

Yeah, no, it deals with the development. Because of the ventilation restrictions, we not only restricted mining production but also development and ground support. And the same degradation we saw in the raises, we've been seeing in some of the developments, particularly up to the east. So we do have a bit of catch-up on there and that's why it's going to ramp up over the next 6 months or so. Up back to 2000.

[Don Demarco:]

Okay. Backups to 2000. Okay. That's great in time. And then just a final question. The La Colorada skarn resource deferred to year-end. Was there a reason not to include it in the resource update last night? I mean, the current resource is more than a year old, there has been a lot of drilling on this target. We're curious to see how it's advancing.

[Steven Busby:]

Yeah, the only reason we didn't include it, there has been some great infill drilling in there and we're really feeling good about that skarn deposit. But we also are coming out with the PEA towards the end of this year, so we thought it's best just to wait for that PEA so we have a full understanding of that new resource before it's released.

[Michael Steinmann:]

As you can imagine there is a lot of technical work going on right now on mining methods, on ventilation, on the access of the area, on processing, et cetera, et cetera for the PEA. All that will ultimately impact, obviously -- well, we're not at the reserve stage yet, but it will still impact our resource and how we see that skarn being developed. And so it's a prudent way to wait a few more months for that, for that resource update and include that right in the PEA.

[Don Demarco:]

Fair enough. Okay. Well, thank you for that, Micheal and Steve. And good luck in the second half. That's all for me.

[Michael Steinmann:]

Thank you. Thanks.

[Operator:]

The next question comes from John Tumazos with Very Independent Research. Please go ahead.

[John Tumazos:]

I don't want to repeat. Thank you for the earlier questions. But -- the resource and reserve report reads like you didn't drill a hole in the last year, which I know you did. Is it fair to just summarize that the challenges of producing in Latin America with the COVID epidemic were significant? And it was a big effort just to produce as much as you produced. And some of the reserve calculations and updates were less pressing than production. Maybe next year we'll get a little more data. And then secondly, it looks like the processes are moving in Guatemala and which is better than things were for the last several years. And I guess, it's impossible to predict how long the processes will take, whether it's 1 year more, 2 years more. But at least there's communications and engagement, which is better than nothing. Just -- if you go -- if that's a fair summary of where we are Michael? I'm trying not to put too many words in your mouth.

[Michael Steinmann:]

Yeah. Good morning. We know that there was a big impact from COVID on our operations in Latin America. I mean, last year we have been shut down by governments all across the continent when the epidemic started. And of course, that had also an impact on our exploration efforts. Probably more so than to our production because the logical step is when you think you are a Company with one of the largest reserve bases in the world. The logical step is to give priority to our products when we have interruptions like we saw from COVID and not to the exploration. Doesn't really make a big difference if you deplete a little bit off the reserves for a year like this, but have fewer people on-site and give -- as I said, give priority to production. And that's what happened in the past. That's why we mentioned in the report that we were probably down 50% on the drilling and of course, with less data, you get fewer intercepts and you got fewer reserve increases or replacements. You very well -- I'm sure you saw that we still put the full drill programs up at Timmins and at La Arena where it was easier to do and we replaced more than a year to have production in both sites. So very, very good news and obviously shows you that when spanning the efforts and start the drilling, you got the results out of there, but we really felt last year that in many, many of our assets where we have very long-life reserves ahead of us, that we can, as I said, we can take a slight reduction on our reserves and prioritize our production. So that's probably enough for the reserves. I think obviously we'll be open to give much more detail. There's much more detail in the press release that Chris put out this morning. On Guatemala and Chovota (ph) I think your analysis is fair and right. The other process in Guatemala is moving with pre-consultation meetings. I think the meeting that was supposed to happen in July has been moved to August due to COVID restrictions which are still very, very strong and in Guatemala. Obviously, we all have to make sure that these meetings are held in a safe environment and safe manner. But they're moving ahead and progress will be reported as they move ahead.

[John Tumazos:]

Michael, if I could follow up on the first point of keeping up with production. We all understand that most of the mining companies had to divert workers from exploration, from CapEx, from waste stripping and underground tunnel development, just to produce the current quarters during the crisis. Even as they've cut their production forecasts a couple of 100 thousand tons because they were behind on waste stripping. I know you haven't introduced guidance yet for 2022, let alone 2023. If we can understand 2020 and 2021 mishaps and lower output, and to -- a plethora of onetime factors, do you think you can get back to 2019 output or original 2020 guidance in 2022? Or there are so many things to get right, that it won't be until 2023 or 2024, that we get back to where the trend was 2 years ago?

[Michael Steinmann:]

Remember, when we gave the guidance for 2021, we mentioned there at our first quarter, that we assume no COVID impact was the first quarter of 2022. We didn't change that outlook, but time will tell how this pandemic evolves. As said in prior conference calls, I don't have a crystal ball on how that evolves and we have to react to reality here. But so far, I would say, so good. But we see how it's going on. But there are new variants. There is the behavior of that virus that we don't know yet and don't understand and we'll see. But with the information we have right now and the vaccination rates we see right now. I think there is a very good chance that we can go back to more normal rates and fewer restrictions, and fewer controls and protocols, et cetera, due to COVID, than we had this year. But it's now that's still a bit far away, really to make further statements on next year's behavior of the pandemic.

[John Tumazos:]

So the underground development, the waste stripping, the CapEx evolution as such, it is possible that next year your 7 million, 7.5 million ounces of silver per quarter and And a little more than 150,000 ounces of gold per quarter again?

[Michael Steinmann:]

Well, look, as I said, it's very early to make these calls. We didn't go to the budgeting yet. I don't have the numbers, I haven't obviously seen the numbers for the forecast. All I'm saying is that if everything continues as we see right now on the pandemic side, we should be able to go back to our normal throughputs and normal numbers and obviously very high on the list that Steve mentioned at La Colorada when we get back to normal throughput and normal grades there as well.

[John Tumazos:]

Michael, that's very good. Now, there are other companies that already say they're so far behind that they lowered multi-year forecast. That's actually better than a lot of people can fight the battle. Thank you.

[Operator:]

The next question comes from Lawson Winder with Bank of America Securities. Please go ahead.

[Lawson Winder:]

Hi, guys. Good morning. Can I ask about the cash costs, the per-unit costs per ounce rather, at Timmins? A slight increase in throughput, relatively flat, quarter-over-quarter grades, but the cash cost picked up about 5%. What was driving that?

[Steven Busby:]

Yeah, Lawson. Steve here. One of the drivers was just the exchange rate. We had seen an increase in the Canadian Dollar strength during the quarter. It has backed off since then, so we're feeling better moving into Q3. But also, addressing some of these geotechnical stabilities that we've been dealing with down in Bell Creek. I mean, it's required a lot of redrilling of holes that have moved after they drill and a lot more support -- more elaborate support going in there. So there are additional costs there too as we move down the levels and get into these transverse stopes, it's going to relax that as well going into the second half.

[Lawson Winder:]

Do you see any input on -- any impact on grade at Timmins because of what's going on at Bell Creek. And I don't mean for this year, I mean, just going forward.

[Steven Busby:]

Yes. Bell Creek clearly is our -- is where we get the best grades. So we are anxious to get throughput rates up to at Bell Creek, which will help produce higher grades as well.

[Lawson Winder:]

Okay. Got you. Now, turning to Argentina, I was surprised to see that gold reserves, well gold and silver reserves at Joaquin actually ticked up. So 13% and 15% respectively. What was driving that? And then similarly with the pretty substantial decline in COSE, -- was that all driven by completion, or were there other factors driving those flourish declines at COSE?

[Christopher Emerson:]

Yes. Hi. Lawson. Joaquin we were actually able to get 4 or 5 drill holes into the deposit and I don't see we've got a lot more information geologically from the development, et cetera, in Joaquin and we're actually able to upgrade some areas and thicker areas. So that was a net-net win based on some very limited exploration that we were able to do at Joaquin. while we did deplete through production. Also, again, we got a lot more geological information from development, from actually being from, so that was a slight change to the geological model as well. And we're obviously keen to get back in there and assess and review as we gain more geological information from development.

[Lawson Winder:]

Okay. Now that's great. And on that point, how do -- how are you guys now thinking about the mine life at -- in Argentina? The entire Manantial operation, including Joaquin, COSE, and what's left of the original Manantial deposit. I? mean. Let me frame it? is on my numbers. I mean, it's still looking like it's pretty much end-of-life. in less than 3 years. Are you still thinking it -- thinking of it in those terms, and -- or could it be expanded, or could it be less?

[Michael Steinmann:]

Yeah, Lawson. As you know, both Joaquin and Cosmo have been from the beginning on to kind of satellite deposits, very high-grade but very small and limited in size. And really, I think nothing has changed, obviously as Steve -- as Chris mentioned, we have constantly gained a bit more information with the development of production there and so that we'll move reserves a little bit up and down. But I would not expect to see there a major difference to our reserves here going forward. So I think you're probably about right with your estimate on timing battle alone that we would make in our big discovery, but that's how it looks like right now.

[Lawson Winder:]

Great. And then just on Dolores, of course, we've already discussed the decline in the reserves there quite a bit. But just thinking about that asset as well. Is that a three-year mine life asset or do you guys see potential to extend that mine life there longer-term?

[Steven Busby:]

Lawson, Steve here. We'll be mining there through at least 2024 into 2025 perhaps. But no, it's driven on the open pit and the open pit's an economically constrained pit. There's some pretty steep rugged terrain to the west there that we just can't afford to strip anymore. So we're not really seeing a lot of upside on exploration there. There is a bit underground, but the undergrounds are pretty small relative to that open pit. So I think mine-wise, keep on moving into 2024, maybe a little more. But then the processing will continue on the leach -- trickle-down leaching will go on quite a while given the slow kinetics on the silver on that thing.

[Lawson Winder:]

Okay, great Steve. And then just maybe one final question in terms of how you think about the gold production strategically going forward. So obviously it's been a huge contributor to the Company for or since the whole acquisition. And it continues to be it will be for a couple more years, but sort of looking out to that longer-term. Is it a strategic imperative to keep the gold production sort of at these levels or are you guys comfortable seeing sort of more silver production replace gold production on the kind of like a 5 to10-year view?

[Steven Busby:]

Well, look at the end it's obviously dictated by geology and I think Dolores is a very good example. But over time the deposit moved from a silver deposit with gold to a gold deposit with silver. And that's obviously reflected in our accounting for it. And remember at the beginning of the year we moved it over into the gold sector. In that sense, away from the silver much just because there's much more gold for the rest of the likes there comment. And so it's really dictated by geology. I'm looking at free cash flow and the profitability of assets. This fiscal asset did very well for us and I mean the fact that we have been able to replace, even in a difficult year, replace reserves by more than a year at Timmins and at La Arena. They're very important assets to us for sure. And they had developed a very very nice. When we did the purchase model actually we assumed that La Arena will be done by 2021, I believe. And now we even added another year. So gold production will continue and I'm very happy with that.

[Lawson Winder:]

Yes. La Arena has been an amazing asset for you guys. Okay. Look, we're almost at the top of the hour. Thanks so much. Those are good answers. Thanks for your time and all the best and enjoy the rest of your summer.

[Steven Busby:]

Thanks, Lawson.

[Operator:]

Once again if you have a question please . The next question comes from Ryan Kozma (ph). Please go ahead.

[Ryan Thompson:]

Hey guys. I think most of my questions have been asked, so I'll just ask 1 quick one. It's good to see that guidance was reaffirmed. It looks like obviously, some mines are attracting higher than others, and you talked in pretty good detail about La Colorada in the second half of the year. I guess my question is, would you say that the reaffirmation of guidance, should we be thinking about that more on a consolidated basis? Or are you reaffirming guidance for each mine and I guess I'm specifically referring to San Vicente, Manantial, and Timmins? Are you confident that you can sort of getting the production up pretty significantly in the second half, or should we be thinking about some of the other mines I guess sort of pulling the weights for those assets to get to consolidated guidance?

[Steven Busby:]

Ryan, Steve here. Good question. Generally, yes I would say for sure it's -- consolidated gives us a little more breathing room. Absolutely and there will be pluses and minuses. I have no doubt about that. With that said, I do think today we anticipate we will see Timmins, we will see San Vicente, Manantial move up a little bit in the second half. We do anticipate that. So we think generally they'll meet the guidance, what we set out for each individual mine. But certainly, we're really targeting the consolidated basis to give us -- there are -- one of the advantages of having many different mines is when one's having trouble, generally, we have another one doing well. We do expect that but it's just reasonable.

[Ryan Thompson:]

Got it. Okay. Thanks for clarifying that, Steve. That's all I have.

[Operator:]

This concludes the question and answers session. I would like to turn the conference back over to the presenters for any closing remarks.

[Michael Steinmann:]

Thank you, Operator, and thanks for everyone calling in today. I just would like to remind everyone on the call that on September 9th at 11 AM Eastern Time, we will be hosting now our second annual call to discuss Pan American's environmental, social, and governance approach. So please, if you have time, save the date. And call in, watch for further information. We'll put out a press release with the call-in details, et cetera, and you will also be able to find it on our website. So looking forward to talking to everyone, hopefully at that our ESG call and if you can't make it that it will be prerecorded I'm sure, and available later on. And we'll talk obviously at the end of Q3. Enjoy the rest of the summer, everyone. Stay safe. Thank you very much.

[Operator:]

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.