Pan American Silver Corp.
Q2 2018 Earnings Call Transcript

Published: 10 Aug 2018

[Operator:]

Good day and welcome to the Pan American Silver Second Quarter 2018 Results Conference Call and Webcast. All participants are in a listen-only mode [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Siren Fisekci, VP of Investor Relations. Please go ahead Ms. Fisekci.

[Siren Fisekci:]

Thank you, operator, and welcome everyone to Pan American Silver's second quarter 2018 conference call. We released our results after yesterday's market close, and a copy of the news release and presentation slides for today's call, are available on our website. In a few moments, I will turn the call over to Pan American's President and CEO, Michael Steinmann who will provide a brief review of our second quarter results. We will then open up the call to questions and answers. Joining us for the Q&A portion are Pan American's Chief Operating Officer, Steve Busby; Chief Financial Officer, Rob Doyle; Senior VP, Project Development, George Greer; Senior VP, Technical Services & Process Optimization, Martin Wafforn; and VP of Business Development and Geology, Chris Emerson. Before we get started, I would like to remind everyone that our news release and certain statements and information in this call constitute forward-looking statements and information. Please review the cautionary statements included in our press release and presentation as well as the risk factors described in our most recent Form 40-F and annual information form. I will now turn the call over to Michael.

[Michael Steinmann:]

Thank you, Siren. Welcome everyone joining us today to discuss our results for the second quarter. We generated revenue of $216.5 million, up 8% from Q2 2017, mainly due to high byproduct prices and lower treatment and refining charges. Higher revenues and lower production increased mine operating margins by about 22% compared to Q2, 2017. We recorded $55 million in mine operating earnings, which included the impact of higher royalties and higher depreciation and amortization expense. Net earnings for the period were $36.7 million or $0.24 per share similar to adjusted net earnings of $35.4 million or $0.23 per share. Operating cash flow in Q2 was roughly $67 million, which factored in $7.8 million source of costs from working capital changes and $18 million in tax payments. Tax payments are heavily weighted to the first half of they and we expect payments to be lower in Q3 and Q4. Operating cash flow before working capital changes, interest and taxes were more than sufficient to fund sustaining and project capital expenditures, taxes and dividend, resulting in a $25 million increase of our treasury at the end of Q2 2018. As of June 30, 2018, our cash and short-term investment balance was $250 million. Total debt was less than 10 million related entirely to finance lease liabilities. Total available liquidity including our undrawn 300 million credit facility was $550 million. Consolidated operating results were strong in Q2 with silver production as planned and costs lower than forecasted. Silver production was of 6.3 million ounces, reflecting higher production at San Vicente and La Colorada offset by lower production at Huaron. Production at Huaron was impacted by an approximate three-week suspension of operations during the quarter. As we previously reported, members of the Huayllay community erected temporary road blockage, demanding compensation for alleged impacts to land and additional service contracts for the mine. With the help of the Social Affairs General Office of the Peruvian Ministry of Energy, we were able to negotiate a mutually agreeable solution to allow the mine operations to restart on May 11. Gold production was 53,400 ounces, up 42% from Q2 last year and reflects record quarterly production at Dolores due to higher throughput from the expansion, improved grades, and faster recoveries from the pulp agglomeration plant. For base metals, zinc production was up 8%, lead production slightly lower and copper production down 44% compared with Q2 2017. The decrease in copper production was primarily because of anticipated lower grades at Morococha and for lower production as Huaron. Consolidated cash costs for Q2 2018 were $0.92 down 84% from Q2 2017, as a result, of higher byproduct credits due to increased golden and zinc production and higher metal prices for all byproducts as well as direct selling costs decreased primarily because of improved contract terms for concentrate treatment and refining. All-in sustaining costs were $6.45. Turning now to performance of each of our mines. At La Colorada production and cost continued to benefit from the mine expansion completed in 2017. In Q2, we produced 1.9 million ounces of silver at cash cost of $1.93 and all-in sustaining costs of $3.46. For Q2, we have started commissioning the backfill plant that will provide the ability to increase production rates from our high-grade stopes. At Dolores, we produced 1.1 million ounces of silver at cash cost of negative $9.80 and all-in sustaining costs of $1.18, driving those low costs was record-breaking quarterly gold production of 39,800 ounces. Thanks to the benefits from the new pulp agglomeration plant. We are planning to install expansion kits to our pressure filters in the pulp agglomeration plant later this year, which will assist in the continuous ramp up of throughputs in the plant. As previously announced, we suspend the transport of personnel and materials to Dolores in late May due to security incidents on the access roads to the mine. Production of silver and gold continued at normal rates throughout this period due to the availability of large or stockpiles. However, we did curtail work on the heap leach expansion project as well as open pit and underground mine activities. The Chihuahua state and federal law enforcement agencies rapidly address the security situation, allowing us to resume use of the access roads in early June. Open pit mining returned to normal levels by late June. As customary, leach pad expansion work will resume after the rainy season. We also took advantage of the disruption to accelerate the demobilization of one of the primary underground mine contractors in favor of hiring and training our own workforce which had originally been planned to occur later in the production ramp up phase of the operation. Consequently, we anticipate reinitiating underground mine production early next month. The planned underground production of 1,500 tons per day should be achieved in early 2019. The timing is not critical to our long-term production forecast, as we have sufficient high-grade feed from the open pit for the agglomeration plant. Moving onto Huaron as mentioned production was impacted by an approximate 18 days suspension of operations, which has since been resolved. In Q2, we produced 742,000 ounces of silver at cash costs of $1.95 per ounce, all-in sustaining costs were $8.11. More good news from Huaron, we have initiated development of a new deeper production level that will access the continuation of the rent structures 80 meter below the deepest, current mine level. We are now installing the infrastructure necessary to support mining on that level for many years ahead. At Morococha, we produced 652,000 ounces of silver at cash cost of negative $6.41 per ounce in Q2, all-in sustaining costs were negative $0.19. We continue to see mine sequencing into less zinc rich zones with less copper production for the remainder of the year. Our San Vicente mine posted strong production growth in silver, copper, lead and zinc in Q2 as a result of higher grades from improved ore control performance and mine sequencing to access higher grade stopes, as compared with the recent past quarters. We produce 976,000 ounces of silver 27% more than Q2 2017 at cash cost of $9.36 per ounce and all-in sustaining costs of $13.15. This performance demonstrates that we are now beginning to see the benefit of the moves to more mechanized mining methods of San Vicente, similar to what we have archived in Peru. At Manantial Espejo, we produced 962,000 ounces of silver at cash costs of $6.52 per ounce and all-in sustaining costs of $7.08. The devaluation of the Argentine peso and better-than-expected gold production largely from higher than expected grades in our underground ores drove cost to this low level, we are anticipating some offsetting increases during the second half of the year. However, we do anticipate overall cost to be lower than originally planned Manantial Espejo for 2018. The COSE and Joaquin projects in Argentina are progressing on budget. Completion of working projects has potentially been delayed by a few weeks due to a short stretch of difficult ground conditions encountered during the decline development. The COSE project remains on schedule. We have revised the annual forecasts for 2018 cash costs, all-in sustaining cost and copper production based on results achieved for the first half of the year including current lower base metal prices for the second half. Annual 2018 cash cost has been lowered to the range of $2.80 to $3.80 per ounce and annual 2018 AISCSOS costs has been lowered to the range of $8.50 to $10 per ounce. Due to lower copper grades at Morococha, we reduced our copper guidance for 2018 to range of 9,000 to 10,400 tons. We are maintaining all our other estimates for production and capital expenditures. In summary, our Q2 results demonstrate strong cash flow generation, record low cash costs and silver and gold production on-track for 2018. And with that, I would like to open the call for questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Chris Terry with Deutsche Bank. Please go ahead.

[Chris Terry:]

Hi, Michael and team. Just a couple of questions for me. The first one is just on the cost guidance. How do we think about the medium term on the costs like what are the cost guidance that you have just guided down to? It seems to be a trend in the last few years where you have continually been able to because obviously a portion of its byproducts. But can you just step through the other components within the costs at the moment, maybe talk about cost inflation and cost -- any deflation you are seeing, so we can think about how -- what a 2019 cost model look like?

[Michael Steinmann:]

Good morning, Chris, its Michael. Sure, as you mentioned we've have seen cost reductions here over the last few years. You know why that happen, large part of it is productivity increase that we seen, obviously with the larger production in our Mexican expansion the Dolores and La Colorada and the mechanization in Peru that helped us there, but you also mentioned the byproducts that are important part of our cost as well. So right now, we see quite a bit weaker market for base metals and coal prices, so we can factor that in for the second half of this year, obviously looking at kind of actual lower prices. Time will tell where prices will go and that will have some impact in our cost, but I think if you look at the mechanization and the improved productivity, this cost reductions -- the lion share of that we already included in our lower cost over the last few years. I may pass it on to Steve to give you some ideas on cost inflation, a possible inflation for next year, although just keep in mind we are not giving guidance out yet for 2019 in detail on the cost. We did not change those costs and we remain with our three-year forecast that we did at the beginning of the year.

[Steve Busby:]

Yes, Chris, this is Steve. Relative to our based costs, inflations and things, I would say overall with the exception of Argentina and Manantial Espejo, our costs have -- the escalation of costs have been pretty modest, down in the 2% to 3% to 4% range. We are seeing that relatively across the Board. Q2, we did have a couple unusual events with the shutdown that were on actually without that production, so when you factor in that cost and the restart up, there is probably some cost impacts there on a unit basis that we won't see going forward. At Dolores, kind of a little bit of the opposite effect because we basically shut down the open pit mine for a while and the underground mines, so our costs actually came down as we ran some of that stockpile out. Argentina of course has a big devaluation on the peso. We do anticipate there is still high inflation, local inflation down there, so there will be some claw back as we go back towards the end of this year, but that gives you a fairly good feel of our base cost.

[Chris Terry:]

Okay, thanks Steve and Michael. The other one for me, so just thinking about 3Q versus 4Q obviously you are expecting slightly stronger production in second half. What -- can you maybe just talk through a couple of your operations and where there is moving parts on what we should expect on the production or anything significant on 3Q versus 4Q?

[Steve Busby:]

Yes, Chris, this is Steve again. The big thing that we will see different movement into the second half is really, we won't -- we don’t anticipate that slowdown, we had -- we're on during the second quarter and the second half. We also feel second quarter is more characteristic of what we will see a San Vicente moving through the rest of the year. So when you factor those annual, you will see some improvement. There will be a bit of an offset at Manantial Espejo, but it's not really material relative to everything else. Manantial will go to more normal rate that we had predicted for the year in the second half.

[Michael Steinmann:]

Just a way in here Chris that I’m sure you noticed that there was quite some improvement at San Vicent as we start working our way through with the mechanization there, and as Steve mentioned that will obviously will continue for the rest of the year and have a bigger impact. If you go back to Q1, San Vicente was a bit weaker there and really strengthened substantially in Q2.

[Chris Terry:]

Just the last one from me, the dividend, what are you thinking there in terms of just caving the cash balance versus M&A versus paying a dividend? How are you trying to get the balance right between your capital allocation?

[Michael Steinmann:]

Really, nothing changed to what I said in the quarters before. I think as the Board, we have to look every quarter at the dividend. We normally make, try to make the changes beginning of the year, if you look back historically unless something really would change dramatically in the markets up or down. Nice to have a strong cash balance at this point in the market, there is weaker silver price, weaker metal prices. I think there is more opportunity out there in the M&A space. I would like to keep some powder dry for that for sure, but as I always mentioned, we are always happy to return some money to our shareholders and happy that the Board decided again this year or this quarter to pay the dividend.

[Operator:]

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

[Cosmos Chiu:]

Thanks Michael, Steve and team. Maybe a few questions for me or may be first of on Dolores, you know as you mentioned you have worked through some of those stockpiles, those high-grade stockpiles. How much more of those high-grade stockpiles do you still have? Have you started -- I think you mentioned you have started open pit mining once again. Where are you in terms of -- I don’t -- are you a 100% yet or are you trying to get to 100% sometime in Q3?

[Steve Busby:]

Hi, Cosmos, this is Steve. I will start with the mining -- relative to mining, yes, we are at full speed in the open pit mine 100%. We got back up in running at 100% pretty quickly once we send everybody back to work, so really there was about a three week period. We had planned on mining roughly 45 million total tons of waste in ore in this year from the open pit at Dolores. We plan to accelerate a little bit through the second half and we think we will make the tonnage this year. So everything is back to normal there -- we don't anticipate --relative the high-grade stockpile, there is probably about 200,000 tons of rough numbers ahead of the pulp agglomeration plant right now. With that said, we do have quite a bit of high grade exposed in the bottom of the pit that we lose access during the wet season, during the rainy season that we are currently experiencing. But as we come out of that, we will get back into so there is ample high grade at the bottom of pit just scheduling the dam and scheduling around the weather we deal with.

[Cosmos Chiu:]

Okay. And I guess the grade was actually fairly good in Q2 at Dolores 1.03 gram per ton and your recovery has improved as well. Looking at gold you are averaging 72.3%. I guess my question is, once you get back to the underground, once you start mining underground again, can we see a further improvement in the grade? Moreover, on that in terms of recovery, was it improvement in recovery due to pulp agglomeration? On was it due to the improvement in grade?

[Steve Busby:]

Good question Cosmos. Relative to the underground production, because we are going to self-mining we accelerated that schedule as Michael mentioned to self-mining, we don't anticipate a material supplemental production from the underground during the remainder of the year, that really start coming on more importantly into 2019. Again, as Michael mentioned too, we have plenty of that high grade I mentioned in the pit that we can access, so we don't anticipate that being any kind of impact to our production. The higher recoveries we saw, there is a benefit with the pulp agglomeration plant because we get that quick return particularly with gold, because it leaches so quickly. We can get 45%, 50% of the gold in just eight hours ahead of the filters in the pulp agglomeration plant. So that has really given us that booze. We anticipate that to continue, we don't really think the grades happened much. We see more of an impact whether its sulfide ores versus oxide ores that is really what impact the gold recovery just by a few percentage points. So, we are not talking anything major, but that is really what we look at to recover.

[Cosmos Chiu:]

And then looking at your cost guidance here, certainly one of the assets that has had a very good cost profile in the first half is Dolores. Much lower than what you had anticipated when we first ticked off 2018. How much of that lower cost could -- would you say is due to higher buying product gold? How much of that lower cost would you say is due to the fact that you weren’t mining much in Q2? And how much of that would you say is actual decrease in the unit cost per ton?

[Michael Steinmann:]

Yes, I think the vast majority the biggest impact for sure is to gold price. We did get a little bit more gold out than we had forecasted so the combination of higher quantity and higher prices really what drove those costs down. Our costs per ton are tracking reasonably close to what we were forecasting. As I mentioned, we did have three weeks without open pit mining where we were mining our stockpiles. So there was basically three weeks of costs no open pit mining or underground mining cost, so that is fairly substantial impact there in Q2.

[Cosmos Chiu:]

Maybe switching gears a little bit on Manantial as they hold that was the other one where the all in sustaining cost guide into 2018 has decreased quite substantially. How much of that is due to deflation of Argentinian peso?

[Steve Busby:]

Yes, another good question. The big surprise for us at Manantial Espejo was really on the grades, the head grades feeding the plant were substantially higher than we anticipated. That was a positive reserve reconciliation in the areas we are mining particularly in the Murrieta East underground. We definitely had some surprises there for better grades and that is what really drove those costs -- drove the productions up and drove our unit cost down with that gold production. With that said that depreciation was very substantial and the majority of our costs are peso related there. So, it did have a fairly substantial effect as well. So, the two together obviously is what really drove those costs quite favorably. We don't forecast in that reconciliation moving into the second half or moving more into the conceptual ore body. We're not -- we haven't really been mining their underground yet so we don't know how that reserve model is going to behave. So we haven't factored in any kind of positive reconciliations moving forward. And we are anticipating a bit of a claw back on that depreciation in the second half.

[Operator:]

The next question comes from Mark Mihaljevic with RBC Capital Markets. Please go ahead.

[Mark Mihaljevic:]

A little bit easier with a nice clean beat from you guys, so just a couple of quick ones from me. First of obviously you did tweak the copper guidance for 2018 now I’m just wondering how much of that was a management to scale back and mine some of the lowered copper grade areas given the pullback in prices we have seen and whether that will impact the 2019, 2020 outlooks? Or how we should be thinking about that?

[Steve Busby:]

Yes, hi, Mark. Steve here. Yes, I wish I could say we could dial it in on price that well, but that is not the reality. The reality is it's really mine sequencing according to accessibility and as we develop our headings in -- these are old mines so we are deep underground, we are deep and developing infrastructure in faraway places. So, it's really just sequencing into ore that is in front of us and available to us according to our developments.

[Mark Mihaljevic:]

Okay and then I guess with the Dolores security issues, there had been some talk about putting in a more permanent security presence with the state or federal police and I was just wondering, if there is been a decision on that, and if there was a sense of the potential cost of this is being implemented?

[Michael Steinmann:]

Sure, Mark. So, as your noted and we put that in our press release as well that the state of Chihuahua and federal government reacted very quickly to that issue, and mobilized escorts for our vehicle along the access road after what I think there was about a week after the shutdown. So that is why we could reach to transportation that quickly and we are really pleased with the support of that we received really from law enforcement at the time. On the cost side for sure there is more activity, much more activity there that's, we are talking about public roads here obviously. I would like to clarify that there was a never a security issue in our employee comp or on our site. So, the government is taking care of that, I think with the authorities right now and for sure that will be some cost like food and lodging related for the additional security up there, but I would not anticipate a major big impact to our cost at this time.

[Mark Mihaljevic:]

Thanks and then just one final one. With the pullback in silver prices, lot of times, we asked companies about stress testing of their balance sheets but given your cash position and free cash flow generation. Just wondering, if you are starting to see any more opportunities on the M&A front, and whether some management teams are little more willing to discuss with you guys now?

[Michael Steinmann:]

As you known and as I've mentioned many times that we are pretty picky on the M&A side. I think we are really looking for high quality asset as you can imagine. We are looking for us asset that fit in our current cost structure and that have to be accretive and low cost. There is no point of just growing our production, if it's not accretive and making money or being even better, but we right now, but have been said that, there is defiantly I think this market distress metal price market there is more opportunity out there. We really don't you know just slow down or speed up looking around based on metal prices because as you know that takes normally quite some time to identify the high-quality project and keep the bad ones out there that is an ongoing process. And then of course when the prices are a bit lower of the management teams are a bit more willing to discussions with us but for sure we are having a great situation here with our strong balance to react, if opportunities come out.

[Operator:]

The next question comes from Chris Thompson with BI Financial. Please go ahead.

[Chris Thompson:]

Just listen to P&L there and getting some good comments on that channel. Just couple of quick questions we'll start off with La Colorada obviously the greatest tracking higher tons attracting higher, can you give a sense of a bit of visibility on what to expect in the second half of this year there?

[Michael Steinmann:]

No, I think with the increase throughput that we are seeing above our targets, we are kind of distributing our mine plan a little bit differently and starting to bring in. We don’t want to run that higher tonnage than we have planned just strictly on high grade, so we are going to dilute a grade a little bit. I generally believe Q2 is probably a good reflection of steady state run rate at La Colorado right now in terms of tons, grades, costs.

[Chris Thompson:]

Just moving onto to Dolores, I know Cosmos was talking about the recoveries in the grades there especially the nice gold grade. I am going to sort of ask a pointed question one gram on the gold side is that sustainable in the second half of this year?

[Michael Steinmann:]

This is a pretty pointed question. I would say we would be -- we are probably going to commence somewhat less than that, I don’t it's going to be -- I think plus or minus 10% to 15% of that.

[Chris Thompson:]

Just Manantial very, very quickly, nice grade bump. I know you did comment about that earlier versus the Q1 there sustainable at these levels?

[Michael Steinmann:]

No, as I mentioned Chris that came as a surprise to us with a very positive reserve reconciliation in one area of the mine. We are mining out of that area. We are moving into a new area that deep -- deeper part of the Concepcion, which we really haven’t been mining yet, so we don't know how that one is going to behave, so we haven't forecasted that going forward.

[Chris Thompson:]

And then finally San Vicente here, any chance of seeing 400 gram per ton this over grade out of this asset?

[Michael Steinmann:]

The straightforward answer is that that would be a scratch. I think the grades we're seeing during Q2 are kind of what we expect going forward, and what's driving that a lot is that the big literal we see nice grades throughout San Vicente, but we don't have that big 15 meter wide literal we vein that we mine anymore. There are more three -- there is still a very nice vein, but when you are comparing back to what we used to have, it is quite a bit different picture there. So, it'd be a scratch to see us go to 400.

[Operator:]

The next question comes from Lucas Pipes with B. Riley FBR. Please go ahead.

[Lucas Pipes:]

I wanted to follow up a little bit more on the cost side as well and if I recall correctly, three months ago or so when you reported Q1 results, there were a number of questions about the cost inflation in Argentina given the currency situation and such. I think at the time you said, it just takes a little longer for those inflationary pressures to roll through, and I wonder here at this point three months later, what are you seeing not just in Argentina but across your operations in terms of high labor rates and such?

[Michael Steinmann:]

I will just start and then pass it on to Steve. Obviously, we've seen further devaluation of the peso since we talk last time in Argentina. so that helped us on the cost side to a certain level. As you mentioned, we talked about some of that lower cost call back we still anticipate that that will happen later on in the year. At this moment, it's kind of a steady state and we see the positive impact to Manantial Espejo. I'll pass on to Steve and will you make already comment on the other operations as well.

[Steve Busby:]

Yes, Lucas, this is Steve. I don’t have much more to say, I mean apart from Argentina, I would say our escalations are pretty modest, they are in the 2% to 4% range, no real surprises there.

[Lucas Pipes:]

And then switching topics not we got, I don't think it's come up much on the call at all. What’s the most recent status any development thereon, can you update us in terms of what you're seeing on the ground? I would appreciate your thoughts.

[Michael Steinmann:]

Sure, Lucas, I can give you a quick update here. And I’m sure if you follow the press in Chubut, I'm sure you have noticed that the debate regarding the mining in the provinces sustained really much more momentum there. We are seeing a lot of recent press reports indicating that the governor of Chubut and of course the national government are supporting really the debate in the legislature regarding mining activity in the province. So I think we will see continuing that and we also understand that there is a proposed bill there that would deal with mining in the province in certain areas. I think there is some coordination with some land use sensitivity in the province and we have to understand that Navidad will be located in the mining zone with low sensitivity. So, as I said before, we are really looking forward to this open and transparent debate here on mining in Chubut and obviously we're helpful -- hopeful that responsible mining will happen in Chubut here. I think with the appropriate government controls that could be a very good thing for all the stakeholders involved.

[Operator:]

The next question comes from Ryan Thompson with BMO. Please go ahead.

[Ryan Thompson:]

Hi Michael and team, I just had a quick question on Morococha. I know back at the analyst day there was some talk about potentially having to relocate the mill at some point. Just wondering, if you could provide any sort of update on that?

[Michael Steinmann:]

Yes, we talk about that and if you look into our public filings, there is some information about that too. This is kind of a fluid situation obviously, depending on how the mining advances with our neighbor territory module. You don’t have really a fixed stage right now. We're obviously discussing with our neighbor. There is enough time for us to do the engineering and make a decision when it happens, but right now I don’t know, Steve, do you want to add something?

[Steve Busby:]

No, I think that is we are looking at some engineering, but the big thing is we are in discussions and trying to work with their schedules and determine when we may have to move. We don't know when that is right now.

[Operator:]

Next question comes from John Bridges with JP Morgan. Please go ahead.

[John Bridges:]

I had modeling/accounting question. Steve, you mentioned with respect to Dolores that you pulled from the stockpile three weeks and where mining either in the pit or underground, I’d have thought though and that brought your cost down, but I would have thought that you've already attributed cost to that stockpile, and so it shouldn’t have had a significant effect on your reported cost for the quarter. How does that work out?

[Steve Busby:]

You are correct that we do inventory cost and then as the inventory with the stockpile is processed then that those costs and flow through to our production. So that is correct. There is sometimes a timing difference of course and typically the cost basis on our inventory maybe lower than our current cost. So, there is typically a bit of a benefit to processing inventory versus incurring the current cost of operations.

[John Bridges:]

So is that a last in first out situation where the stockpile ounces you pulled out were old ounces of low cost, is that why it happened?

[Rob Doyle:]

It's actually weighted methodology that we used on the stockpile at Dolores.

[Michael Steinmann:]

That first in averaged out so the other thing that happened there, John, is because of the large heap and the large inventory on the heap there is a huge diluting effect to take place. So, it gets pretty complicated when you get into the details, but generally what Rob said is correct.

[John Bridges:]

Yes, so as long as that lose the ounces in the heap like some miners do, anyway [indiscernible].

[Michael Steinmann:]

Yes.

[Operator:]

[Operator Instructions] And our next question comes from Lawson Winder with Bank of America Merrill Lynch. Please go ahead.

[Lawson Winder:]

I didn’t hear you mentioned on the stockpiles. How large is a low grade stockpile? And then I also did not hear you mention the grades of the existing stockpile both either the low grade or the high grade?

[Steve Busby:]

Lawson, Steve here. Yes, we don’t really show the grades on the stockpiles in the many of our reporting. We have massive amounts of low-grade millions of tons scattered on that side that we stockpile during the open pit mining. The high grade we did have obviously quite a large stockpile ahead of the pulp agglomeration plant as we are commissioning on that plant. The great of that high-grade I would say is close to the grades that we have seen going through the plant during Q2. They are very good grades and they were intentionally put there to give us some buffered capacity for the pulp agglomeration plant.

[Lawson Winder:]

And then just finally I might have missed it but I don’t think I saw any mention of 2019 and 2020 production. So just with what happened at Dolores, could there be any change whether it would be higher or lower in terms of that production guidance? I know it's -- I don’t think you have obviously not changed that guidance but I mean where would it -- like if we were to serve risk weight this, would it be potentially higher or potentially lower?

[Steve Busby:]

Yes, Lawson, it's really -- we're just starting our budget process for next year. We will be starting that next month and working through the mine plan. So, we didn't provide any change to the forecast for the two-year outlooks. We will bring a new guidance out in January. Right now, I don't -- I can't say that that this would have much of a material impact to what we are going to see in 19, but we need to work through the mining plants and you know there's lots of factors that go through all there. So, we are not willing to change anything at this stage in.

[Operator:]

This concludes the question-and-answer session. I would like to turn the conference back over to Michael Steinman for any closing remarks.

[Michael Steinmann:]

Thank you, operator, and thank you everyone for joining us with the call today. Looking forward to talk everybody in November it will be already for our Q3 and until then enjoy the rest of the summer. Thank you very much. Bye.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your line.