Pan American Silver Corp.
Q2 2017 Earnings Call Transcript

Published: 10 Aug 2017

[Operator:]

Thank you for standing by. Welcome to the Pan American Silver Second Quarter 2017 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. [Operator Instructions]. I'd now like to turn the conference over to Siren Fisekci, Investor Relations. Please go ahead, Ms. Fisekci.

[Siren Fisekci:]

Thank you, operator and welcome everyone to Pan American Silver's second quarter 2017 conference call. We released our results after yesterday's market close, and a copy of the press 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 some quick highlights for the quarter. 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; our Chief Financial Officer, Rob Doyle; Senior Vice President, Technical Services and Process Optimization, Martin Wafforn; and Vice President of Business Development and Geology, Chris Emerson. Before we get started, I'd like to remind everyone that our press 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 and welcome everyone to our call today. We are very pleased with our performance in the first half of this year. Costs are down leading us to lower our guidance for 2017, cash costs and all in sustaining costs. Production is on pace and we have made good progress on our mine expansions and newly acquired projects in Argentina. Financial performance in the quarter was very healthy. I will quickly review the highlights before providing more detail on operating performance. Revenue of $201 million was up $9 million from Q2 last year. Higher realized prices for silver and zinc had the biggest impact on revenue. Lead and copper prices were also up quarter-over-quarter while gold prices were flat. In addition to higher metal prices, 2017 Q2 revenue benefitted from lower concentrate treatment and refining charges. Offsetting this positive impact was a negative settlement adjustment on concentrate shipments at lower gold and copper sale volumes. Net earnings in Q2 were $36 million or $0.23 per share similar to Q2 2016 earnings of $34 million. Our revenue was up quarter-over-quarter, cost of sales were up a similar amount. The increase in cost of sales reflects higher quarter-over-quarter production costs, royalty charges, depreciation, and amortization. Earnings quarter-over-quarter also reflect $2 million less in income tax expenses recorded for Q2 2017 which was more than offset by the roughly $18 million gain recorded in Q2 2016 on the sale of the Shalipayco property. Adjusted earnings in Q2 2017 were 22 million or $0.15 per share. Cash flow in Q2 2017 totaled $42.9 million, $23.1 million less than we generated in the same quarter 2016. The decrease was largely due to changes in working capital, the gain on the Shalipayco sale in Q2 2016 and higher taxes paid in Q2 2017. Capital expenditures in Q2 totaled about $42 million but $16.7 million was directed to project capital largely for the expansion at Dolores and close to $27 million for sustaining capital. We exited Q2 in a strong financial position. Cash and short-term investments stood at $198 million, the decrease of about $7 million from Q1 balance relates primarily to the acquisition of COSE project in Argentina. Total debt was about $47 million. Turning now to the operating performance, production is on track to achieve our guidance for 2017. Silver production in Q2 was 6.3 million ounces level with last year's Q2. For the first half of 2017 silver production totaled 12.5 million ounces in line with our guidance for the full year production of 24.5 million to 26 million ounces for the year. Gold production was 37,700 ounces in Q2 and 75,400 ounces for the six month period. This is down from last year as we expected because of lower ore grades Manantial Espejo and to wind up of operations at Alamo Dorado. We expect gold production to increase going forward as shown in our three year outlook largely from the ramp up in the Dolores production. We are maintaining our guidance for gold production in 2017. We are also maintaining our guidance for 2017 for zinc, lead, and copper production given the rates achieved during the first six months of the year. Consolidated cash costs have been better than expected. For Q2 2017 they were $5.71 per ounce. This includes $0.54 per ounce of severance cost incurred at Manantial Espejo and Alamo Dorado. Cash cost during the first half of the year were $5.94 per ounce, about $0.50 below the bottom of the original guidance range. As such we've lowered the guidance for 2017 cash cost to between $5.50 to $6.50 per ounce net of by product credits. All in sustaining costs were $10.73 in Q2, $0.58 lower than Q2 last year. The first half 2017 all in sustaining costs of $11.66 being at the low end of our guidance range, we've also reduced the guidance for 2017 for all in sustaining costs to $10.50 to $11.50. Taking a closer look at operating performance at each of our mines, we continued to see the positive impact of the expansions of La Colorada. Silver production was up 26% quarter-over-quarter with throughput rates up nearly 30%. The new sulfide processing plant is running well. Production of zinc and lead are both up 55% in the quarter compared to last year. That contributed to a significant decline in cash costs and all in sustaining costs which were down 56% and 34% respectively from Q2 last year. Development of the underground mine at La Colorada advanced ahead of plan achieving the targeted 1,800 tons per day mining and processing rates during the last month of the quarter, six months ahead of schedule. We also completed construction of and energized the new 115 kilowatt power line. At Dolores we produced 1 million ounces of silver at a cash cost of $0.12 per ounce. Yes, those are very low cash cost but they were actually up $0.76 per ounce compared to Q2 2016, largely because of a decrease in gold by product credits. As I indicated we expect gold production at Dolores to dip in 2017 due to lower grades from mine sequencing before we begin moving into higher gold grades beginning of 2018. All in sustaining cost at Dolores were down almost 50% to $7.28 in Q2 2017 compared to the same period last year. We achieved good progress on the Dolores expansion over the quarter. Construction of the pulp agglomeration plant was completed and commissioning is underway. We are currently concentrating and bringing the three large plate and frame filter presses online. The crushing and grinding circuits performed well during initial testing and we continued to expect that production from the plants will ramp up to the designed rate of 5,600 tons per day by the end of this year. Development of the underground mine at Dolores is also going well. We completed about 1200 meters of drift advance as well as the finish in diamond drilling of the central and south zones. We are pleased with the drilling results from the south which are showing excellent grades. We expect to begin production from the central zone in early Q4 2017 ramping up to the full design mining rate through the course of 2018. Simultaneously we will complete definition and mine planning for the south zone. Turning now to Peru, our Huaron and Morococha mines continued to generate very attractive margins due to higher by product credits from the improvement in zinc, lead, and copper prices in 2017. Cash costs were down about 60% at Huaron from Q2 last year to $2.24 per ounce. And we were at a negative $2.35 per ounce at Morococha. All in sustaining costs at both Morococha and Huaron were down 50% coming in at $3.30 at Morococha and $5 at Huaron for Q2 2017. In addition to higher by product credits from higher base metal prices, improved concentrate refining terms led to the decline in costs. Silver production was up 10% at Morococha from an improvement in silver upgrades but lower grades at Huaron led to the 6% decline in several production quarter-over-quarter. The lower upgrades we have encountered at Huaron for silver and base metals is due to mine sequencing and masks the more sustainable benefits we are seeing from improvements in mill recoveries. We have made several upgrades to the flotation circuit at Huaron which are now resulting in incremental improvements in metal recoveries while maintaining concentrate qualities. Comparing Q2 2017 with the same quarter in 2016, silver recoveries were up 2.8%, zinc up 3.5%, and copper recoveries are up 2.9% despite slightly lower upgrades for each metal. At our San Vicente mine in Bolivia, silver production was down a third compared with last year's Q2 primarily due to a reduction in health [ph] grades and eight days of unscheduled downtime. The downtime was required to address a combination of plant maintenance, employee work stoppages, and safety matters. The reduction in ore grades at San Vicente was due to delays in developing and preparing higher grade stops for mining. As well we experienced some additional mining dilution which we believe stemmed from transitioning some of the conventional mining areas to more mechanized mining methods. Lower ore grades led to cash costs of $14 per ounce at San Vicente in Q2 up 14% from Q2 last year. All in sustaining costs declined 19% to $13.81 largely on account of lower royalties. The decrease in royalties is a timing difference related to royalty payments at the time of export compared to payments received from the concentrate sales. At Manantial Espejo mine in Argentina Q2 2017 silver production was up 24% from Q2 2016. Both production in Q2 2017 however decreased by 37% due to lower grades from mine sequencing. Cash cost at Manantial Espejo were $15.11 per ounce up $17.51 from Q2 2016. The main factors behind this significant increase were the decrease in byproduct credits from lower gold production and severance payments associated with the end of open pit mining activities in the past quarter. While the maturity of open pit mining activity has now come to an end as we expected, we will continue to mine underground into 2019. Higher inflation in Q2 2017 compared with last year and the loss of the Patagonian port the export credit also contributed to the increase in quarter-over-quarter costs. The same factors plus increased negative and re-inventory adjustments led to Q2 2017 all in sustaining costs of $18.13 at Manantial Espejo. During Q2 we also advanced plans to develop our Joaquin and COSE projects. As you know we acquired these projects earlier in 2017 to leverage the invested capital we have at our Manantial Espejo mine. Both are high grade silver deposits offering synergies with Manantial Espejo. At COSE we plan to construct an underground mine over the next 18 to 24 months. We expect to encounter the first stopping area towards the end of 2018 after about one kilometer of development. The material mines will be trucked to our Manantial Espejo plant for processing at the rate of approximately 200 tons per day for 18 months. On average the project is expected to produce approximately 112,000 ounces of silver and 2300 ounces of gold per month. The estimated total capital investment of $21 million excluding the final $7.5 million project acquisition payment. At the Joaquin project we started a drill program and began an engineering analysis to determine the quantity of potential economic material that could be trucked to the Manantial Espejo processing plants for treatment. We expect to complete the preliminary economic assessment on the project by year-end. In 2017 we expect to spend approximately $11 million to $12.5 million on Joaquin and COSE. It is important to note that the three-year outlook we provided in January of this year does not reflect any contribution from Joaquin and COSE. In addition to the drill program at Joaquin near mine and regional exploration drilling is progressing on plan. In Mexico we are exploring -- the exploration of the La Negro deposit where we have an option agreement with Kootenay Silver to earn the 75% interest. We expect to provide the resource estimation for La Negra later this year. As I noted at the beginning of the call we've made some positive revisions to our 2017 guidance. We've lowered the guidance for 2017 cash costs to between $5.50 to $6.50 per ounce from a prior range of $6.45 to $7.45 per ounce. We produced estimated all in sustaining costs to a range from $10.50 to $11.50 per ounce from the prior range of $11.50 to $12.90. The revised estimates per mine for both cash costs and all in sustaining costs are provided in our MD&A. The guidance for estimated sustaining capital in 2017 remains at $82 million to $88 million although we've made some adjustments to the allocation amongst our mines. The details again are available in our MD&A. We have increased the estimate for 2017 project capital to a range of $73.5 million to $78.5 million compared with the prior range of $58 million to $62 million mostly for the development of the newly acquired Joaquin and COSE projects in Argentina. Consolidated production remains on pace with our original guidance and we've made no changes to our production guidance. That concludes my formal remarks and I would like to ask the operator to open the call for questions. Thank you.

[Operator:]

[Operator Instructions]. The first question comes from Lucas Pipes from FBR and Company. Please go ahead.

[Lucas Pipes:]

Yes, good morning everybody and great job on the cost side. In fact that's my first question. I wondered kind of looking forward how sustainable do you think that the cost structure is, would appreciate your thoughts on that? Thank you.

[Steve Busby:]

Hey Lucas, this is Steve. Yeah, right now actually we feel in most of the jurisdictions we're operating in, the cost are reasonably stable. We have seen a movement of the Mexican Peso obviously because of the strengthening relative the U.S. dollar over the last few months, that is going to have an effect on our cost at Dolores and La Colorada. We have seen a depreciation here recently of the Argentine Peso so that will help our costs in Argentina. Peru we are generally pretty stable and of course Bolivia is very stable at this time. We do face the annual escalation costs, particularly wages in Bolivia that we talk about each quarter. And that happens usually around March of each year. We do anticipate that to continue there. So I think in general there's going to be these constant cost escalations that we generally manage through efficiencies and improvements in our operations. So, although I would say we would expect some modest increases in to the future periods they are not going to be severe as we can see it today.

[Lucas Pipes:]

Great, great, and then maybe a follow-up question on Argentina. You have been very active in that jurisdiction. You are moving forward with the COSE project allocating dollars, how would you describe the regulatory environment, is it getting better at a satisfactory pace, what are still some of the obstacles so as you think about COSE for example, what are the main challenges at this point if any, would appreciate your perspective? Thank you.

[Michael Steinmann:]

Yeah, hi, Lucas. I mean Argentina as I mentioned already before in many occasions has improved greatly since the new administration took place what is now a year and a half ago. So very positive changes there. There are challenges that the administration is working through for sure. And we are feeling some of them especially on the inflationary side, but definitely very positive improvement there. I think the strategy is and was always very clear with this addition of COSE and Joaquin which has high grade truckable ore to -- from Manantial to use -- [indiscernible] even better use out of the capital that we invested in that plant. It's not a long trucking distance for Argentina for Patagonia it is a easy trucking there. And although as you see there COSE is relatively small and it's a very high grade deposit. And we will have more results -- results on Joaquin which will be larger obviously in size. So I think the strategy there are very clear. We invested that money in Argentina to build that plant years ago and any opportunities that we see to even get a better return on that we are obviously taking. And as I said Argentina greatly improved so we are right now happy to make that investment.

[Lucas Pipes:]

That is very helpful, thank you and then maybe one last one since you mentioned Joaquin. Should we be thinking of a rate of return similar to cause COSE or could you maybe elaborate on where it would kind of stack up versus the other projects you have pursued in that region, thank you?

[Michael Steinmann:]

I mean we don't have the numbers ready yet to share that with everybody. As I said it will come in later this year. Obviously if you look what we do in the past and what the company is doing with projects, we are kind of targeting healthy return for our projects. So I'm sure we’re looking for something similar at Joaquin but as I said I don't have any numbers yet to share.

[Lucas Pipes:]

Okay, alright. Well that's helpful. Thank you and great job.

[Michael Steinmann:]

Thank you Lucas.

[Operator:]

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

[Lawson Winder:]

Hi guys, thanks for taking the question. Just on the Mexican Peso cost, I know you do hedge and it looks like those hedges have been working out extremely well and look like they’ll probably continue to work out very well in the second half of 2017. I was just curious in terms of the percentage of your Mexican Peso cost for H2 2017 how much is actually hedged at this point?

[Michael Steinmann:]

Yeah hi, I'll pass it down to Rob here for the details but just in general, obviously we saw an opportunity here on this Mexican Peso at the beginning of the year. And obviously the Mexican Peso was under great pressure and we had a big need of Mexican Peso in country for our operations and for the expansions. And we took advantage of that opportunity and I pass it down to Rob to give you some more details on what percentage is still outstanding.

[Robert Doyle:]

Yes Lawson, so we have about $36 million with the positions left for the second half of the year. Obviously all of them deep in the money that covers about 70% of our operating and project needs in Mexico over that period. So next year we do expect our exposure to go down with a Alamo Dorado obviously taking off and the project expenditures at Dolores finishing up.

[Lawson Winder:]

Is that 70% of cost consistent between OPEX and the CAPEX or is it heavier on one versus the other?

[Robert Doyle:]

It’s the behavior on OPEX to be honest because most of our CAPEX is if not dependent it’s usually paid in U.S. dollars or Dollar Index. Most of the exposure on the operating side.

[Lawson Winder:]

Okay, that’s great. And then Rob maybe a second question for you, perhaps the second question for you. The Peru TCRC, you mentioned that the terms had improved. Do you see those as sustainable? And then secondly correct me if I missed it Michael in your discussion but I don't think you mentioned anything about the TCRCs at La Colorado but they look like they improved dramatically quarter-over-quarter, I'm just curious if those are sustainable going forward?

[Michael Steinmann:]

Again I will pass it on to Rob for the details but for sure across the board we see shortage of zinc concentrate in a row and tweaking [ph] charges and sales conditions for zinc concentrate for sure improve but not only for zinc and Rob will give you some more detail.

[Robert Doyle:]

Yes Lawson, I mean difficult to predict these obviously markets that can be volatile. But as Mike says this is for sure a very, very dire shortage of zinc concentrates today. We are seeing very aggressive tenders for zinc. And you're right, it's not only in Peru but also certainly at La Colorado. And then we are also benefiting from a huge demand for high silver concentrates. So our lead and copper concentrates which is where most of the silver that we produce and concentrate reports to are also being very, very highly bid at the moment. There just seems to be tremendous amount of silver refining capacity available and not enough feed for those facilities. So, nothing that we can see is going to change that dynamic quickly. For sure there may be some more zinc concentrate being talked about kind of waiting in the wings but nothing that we can see being turned on very quickly. So we imagine that there will be strong fundamentals in the zinc market for the foreseeable future. And likewise on the silver concentrate side that seems to be a fairly long-term factor in the market. So we are feeling good about these terms being at least persistent for the time being.

[Lawson Winder:]

Okay, that’s great and then also Michael did you say in your prepared remarks, please correct me if I am wrong, did you say that Dolores grades are to be lower in the second half of 2017?

[Michael Steinmann:]

Well with Dolores gold grades due to mine sequencing are lower in 2017, that's the reason why our goal production for the entire year is a bit lower. But we're going to come back stronger in 2018. I don’t know Steve if you want to…

[Steve Busby:]

It is a combination of that loss and as well as starting up on this pulp agglomeration plant. That additional tonnage that we will be putting up, we built an inventory in the heap. So there's a timing of when we get all that out. But yes, I think overall we were projecting right at pretty much the same gold production from last year this year but we are moving more tons with pulp agglomeration plants. So we were projecting a lower grade this year and then that grade starts to come on again next year.

[Lawson Winder:]

Right and then just in the commentary on your guidance, I mean you sounded very confident that overall gold production would be higher Dolores in the second half of 2017. So I'm gathering that you're expecting to see some quarter-over-quarter improvements in recoveries as older players do?

[Steve Busby:]

Yeah, it all stems from the start up of this pulp agglomeration plant. I mean that's where we're getting additional tonnage, we're getting additional recovery with that plant. So, that increase in gold in the second half related to the commission and the ramp up of production of the pulp agglomeration plant.

[Michael Steinmann:]

I think it is fair to say that most of that will come in and start coming in Q4 and not in Q3 because of the timing of the heap.

[Lawson Winder:]

Okay, that's very helpful. And then maybe just one more from me if you could, I understand you mentioned some worker issues, maybe a tiny bit of detail on what those are and have those now been resolved at least for the rest of 2017?

[Steve Busby:]

Well, I mean that is fairly complicated question. I guess the best way to summarize it is we are trying to adopt some more mechanization at that mine at this time. And there are some narrow vein sections of that mine that we do mine conventionally we have since we took control of the operation. So that transition period is -- we're finding a bit more challenging. I mean it was challenging in Peru when we went through this. And it took us many years to get through it to the point where it's performing marvelously today. We're finding it even more challenging than Bolivia. Just it's a new concept, it's a new method that we don't have the experience and the technical expertise readily available also in Bolivia like we had in Peru. So yeah, that's kind of what we're facing.

[Lawson Winder:]

Okay, great, that's it for me. Thanks very much for taking those questions guys.

[Michael Steinmann:]

Thank you.

[Operator:]

The next question comes from Robert Reynolds of Credit Suisse. Please go ahead.

[Robert Reynolds:]

Good morning guys and congrats on a good quarter and improving the cost guidance. Just on that cost guidance improvement, I was hoping you could provide a rough split out as to how much of it would be attributable to better byproduct pricing and better TCRC's versus operational improvements if you have that?

[Steve Busby:]

Yeah, Robert that we don't have it broken out in those percentages to give you an idea. Because there is another factor too to consider is the higher cost operation like Alamo Dorado is phased out now. So we get the benefit of the dilution of high cost if you will helping the lower cost. We haven't really went through an itemized to that detail those cost impacts. But I think in general terms the list you gave are probably in the right order for sure.

[Robert Reynolds:]

Okay, and then just in terms of the costs in 2018 and 2019 is -- I mean there are a few questions about whether the reductions are sustainable. When do you typically review your outlooks for those years, will it be at the end of the year or would you be looking at that sooner?

[Michael Steinmann:]

Yes, that's right we will come out like every year. The last two years we did three year guidance in January somewhere mid to end January and we revised the cost for the future years. It's just that there are so many factors that play in that and soon we'll start with the batches and looking into these details. But it doesn't make sense to do that more frequently for the long-term outlook but of course we're just at the cost now for this year.

[Robert Reynolds:]

Okay and then at the COSE project, is there any potential to extend the mine life beyond the 18 months?

[Steve Busby:]

I pass it on to Martin.

[Martin Wafforn:]

Well it seems to be a fairly defined, fairly small high grade deposit that we have there at COSE. So, you know, when we get in there and we start developing around that then we will have some success and find some more. But not a lot of hope there.

[Michael Steinmann:]

It's quite a limited land position there. So at this time we're not counting on a big addition there but a smart insight, when we start producing and exploring a bit more of it then we will have an answer for that question.

[Robert Reynolds:]

Okay, and then just my last question is on the TCRCs. Have you looked at or do you lock into any longer term concentrate sales contracts or what's your typical structure for selling your concentrates at your mines?

[Robert Doyle:]

Yes, Robert Doyle here. We certainly do enter into some longer term contracts, 12 months or more. The market isn't particularly liquid beyond that. The terms are certainly not nearly as aggressive in the longer term as they are in the shorter date. So we employ a variety of tactics and strategies around our constrained marketing but long-term contracts are certainly an important part of that. Just to give us the stability of and help us with our planning decisions and investment decisions.

[Michael Steinmann:]

And just to make that very clear Robert, that is only for the base metals in our concentrates, our silver and gold production remains and is always absolutely un-hedged.

[Robert Reynolds:]

Okay. That's all my questions, thanks.

[Operator:]

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

[Mark Mihaljevic:]

Hey, thanks for taking my question and good morning everyone. So first off obviously La Colorada delivering very well. I just wanted to get a sense of how that underground development is tracking and whether you're comfortable with that 1,800 ton a day rate will be sustained through the second half or should we expect a bit of a dip back and then ramp up or sustainably beyond 2017?

[Steve Busby:]

Yes Mark, this is Steve. No, we had good success on that development. We did accelerate that development rate and we got into the areas we wanted to ahead of plan. So we do anticipate pretty stable performance going forward at 1,800 tons a day.

[Mark Mihaljevic:]

Perfect, that's what we wanted to hear. Secondly, I guess is there an update on that Calcatreu option you'd given?

[Michael Steinmann:]

I don't have an update yet. I think Chris, do you want to weigh in here.

[Christopher Emerson:]

Absolutely, Patagonia Gold have an option on this. They are currently doing some twin drilling on the property and within a couple of months we hope to have an answer on that.

[Mark Mihaljevic:]

Okay and I guess kind of circling back on San Vicente, just trying to get a sense of how you see the operation evolving over the next six months and then into 2018 in terms of sequencing of the grades and when you think you'll be back into the higher grades?

[Steve Busby:]

Good question Mark. Yeah, that's under pretty intensive analysis right now and we do see some challenges through the rest of this year. We do know there are still some really good high grade zones at San Vicente. What some of our challenges are in those high grade zones are extending to depth that we don't know really the full extent of some of these zones. We've got some exploration work to do around those zones, that all lead to not wanting to mine it too soon because then we end up leaving pillars and leaving some very high grade ore that we don't like to do for the long-term value of the project. So those kind of analysis are going on pretty intensely at the moment and I wouldn't want to project out into 2018 if there's any changes to our long term guidance until we go through our budget cycle this year and come out with the new figures in January. But now we are confident in the deposit. We are confident the reserves are there and the value is there. We're kind of going through a bit of hump in the road if you will as we try to sort out some of these more newer zones, newer the high grade zones that we’re opening up and we don't fully understand those zones at this stage.

[Mark Mihaljevic:]

Thanks, and just to wrap up I guess I will ask the obligatory question that obviously you guys have a very solid balance sheet at this point and we do expect a pretty meaningful kick up in free cash flow. Actually really starting in the second half of this year and definitely ramping up into 2018. So do you want to just discuss that capital allocation strategy and whether anything is involved in the last three months since we last chatted on this?

[Michael Steinmann:]

Look I mean we have now COSE and Joaquin now that they are small projects and obviously easy covered from our cash flow from production. Wrapping up here, disbanding in Mexico greatly in the second half of this year. There will be obviously some work still to do at the lower end and some of the invoices will come in a bit later. So we’ll have the final number I guess when we go into Q4 on that result. So looking forward next two years where it stands right now with the two projects, there should be a lot of substantial free cash flow if everything stays the same. If metal prices stay the same available to us. We are always looking for new projects, you have seen that we have been active. We are quite picking and choosing those, we like good returns on those projects, it has to be accretive. You see the suite of our assets we have, the low cost mines, great producing mines with long mine life. So, we're looking for kind of similar style additions, we’re active there but nothing ready to share yet. And obviously we’re still paying a dividend and once all the capital spend will be over this year, as I mentioned before the Board is looking at the dividend payments quarter-by-quarter.

[Mark Mihaljevic:]

Thanks, that's it for me and congrats on a great quarter.

[Michael Steinmann:]

Thank you.

[Operator:]

[Operator Instructions]. The next question comes from Chris Thompson from Raymond James. Please go ahead.

[Chris Thompson:]

Hey, good morning guys, congratulations on a really good quarter. A couple of quick questions here. We'll start off with Dolores, I guess the sense that we have right now is that the modeling, the gold production, similar sort of gold production to last year to the remainder of this year. Obviously on an annualized basis but just homing in on the expectations for next year, I mean you were mentioning that it's going to be -- growth in gold production is going to be grade driven, can you give us a sense of what sort of gold grade we can expect?

[Steve Busby:]

Yeah Chris, this is Steve. I guess the best way to answer that Chris is really look at that two year forecast that we provided beyond our times for 2017 this year. That’s largely driven by the Dolores gold production when you look at that gold production growth there. As you know -- as we've discussed Manantial and we hadn't factored in COSE or Joaquin into that two year forecast. Manantial we're pretty flat now in gold production with just underground mining and low grade stock pile processing. So that's the best guidance I can give. We're not seeing much change to that, that's kind of what we're forecasting.

[Chris Thompson:]

Okay, great and can you give us a sense on the remaining CAPEX spend I guess at Dolores as far as the pulp agglomeration underground for the remainder of this year?

[Michael Steinmann:]

We're estimating somewhere around $14 million to $16 million in that project. The two projects combined.

[Chris Thompson:]

Yeah, okay, alright. Perfect, thanks and then just quickly moving on to La Colorada. You know slightly better sort of silver grades I guess in the Q2 versus Q1. Again are we expecting an uptick again in silver grades in the back half of the year or pretty much like what we saw here in the Q2?

[Steve Busby:]

Yeah Chris, I would say we’re seeing pretty stable grades through the rest of this year at La Colorado. We are heavily developing in a zone of kind of oxidize and mixed ores that tend to have lower grades than the sulfide ores. And it's just a matter of sequencing where we're at. So it's pretty reflective I think of where we're going to see it for a while.

[Chris Thompson:]

Alright Steve, and then just on the CAPEX remaining I guess as far as the expansion CAPEX is it all done at La Colorada?

[Michael Steinmann:]

We just have a little bit left maybe somewhere around $3 million to $5 million I would think. That's just -- and it's just finishing up some of the development. We've got ventilation raise forward trying to get finished up there.

[Chris Thompson:]

Okay and then just moving on I guess to the basement of production I guess just sort of a broad general sort of comment if you would, are we looking at stability as far as base metal production in the second half versus the first half or…?

[Steve Busby:]

Yes, great question Chris. One of the things we see I would say relative to La Colorada yes, it looks pretty stable going forward. Relative to where we are on Morococha it's a very interesting question. It's a fairly dynamic situation between the exploration we're doing, between the optionality we have on the various silver deposits that we mine, whether were into a heavy copper zone or a heavy zinc zone we kind of can -- we kind of got some optionality there that we are playing with and it can go either way. So there's a chance you'll see more zinc production with less copper and there's a chance you'll see more copper with less zinc and it kind of depends on the way the team directs their mine sequencing down there.

[Chris Thompson:]

Alright, perfect, and then final question guys if you would, just this cost development. Obviously you mention the CAPEX here, you mentioned the throughput, I mean what should we be looking at from a cost perspective, just plain operating cost for this asset?

[Michael Steinmann:]

I’ll let Martin give you some, we got some rough general cost per ton figures from.

[Martin Wafforn:]

Yeah. And I don’t have it actually -- I think the overall cost per ton for the project that we’re looking at right now is when we put into effect that mine is going to be expensive and then we got to transport it from the project to Manantial Espejo which is in the order of $60 a ton to do that. The actual processing is going to be a little bit more expensive but Manantial, I think that's another $57 a ton that we are accounting on for that. Get more consumption at Manantial. And then with mining as well and because it’s going to fairly low production rates and quite challenging ground conditions, we’re accounting on about another $160 to $170 a ton for that. So, this is very high grade but small and going to be quite expensive. So we are in the $250 to $300 a ton range for mining for overall operating costs for the project.

[Chris Thompson:]

Okay, great.

[Martin Wafforn:]

We will come out with some more details on this for sure.

[Chris Thompson:]

Sure, a restructuring in a great grade there, I mean can you quantify that just this ballpark?

[Martin Wafforn:]

Sure we can give you an idea of that Chris. Overall we are looking at grades in and around if we include the extra resource which we've done for the press release. But we're looking at about 15 grams of gold. So we have half an ounce of gold and we have 775 grams per ton of silver. Actually the indicated resource by itself is quite a bit higher grade than that. I mean it is just the way it works out.

[Michael Steinmann:]

For sure qualifies as high grade.

[Chris Thompson:]

I would agree with that. Thanks guys, congratulations on a good quarter again.

[Michael Steinmann:]

Thank You.

[Operator:]

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

[John Bridges:]

Hey, good morning everybody and congrats on the results. And I was just wondering the tax rates or the tax paid this quarter was on the low-end. I just wondered what sort of tax rate we could look forward in the second half?

[Michael Steinmann:]

John, I am the unfortunate one that has to answer that. Yeah, I mean the tax rate is obviously quite variable when you look back over time. We are still targeting somewhere in the mid 30's as a long run effective tax rate based on the taxes we pay in each jurisdiction. So I'm going to stick with that even though we very seldom seem to come anywhere close to that. It's either way more or way less. The fact that pushed us down to 4% effective tax rate this period you'll notice we did adjust out in our adjusted earnings because there's where predominately FX related and a onetime kind of tax windfall that we had. So we did adjust those odds of the adjusted earnings to reflect that those are not kind of part of our core business.

[John Bridges:]

Okay and then the increased project capital that's all related to the acquisition in Argentina or is there any change of scope at Dolores and/or La Colorado?

[Steve Busby:]

Yeah John, this is Steve. We do have a little change of scope at Dolores, the underground primarily. We are coming in under budget on the pulp agglomeration. We are coming in over budget on an underground. Net, net we’re probably looking at about a $10 million to $15 million overrun on the combined project which I believe was around $112.5 million. So that’s part of it. Then the rest of it is all at COSE and Joaquin spending.

[John Bridges:]

Okay. And I know you know don’t sort of know what the shape of Manantial is going to be when you've got these two, these satellite up and running but, what are you targeting there, what's your vision for that deposit or for that mill?

[Michael Steinmann:]

The vision I think from Manantial still stays the same. As I already mentioned, we concluded most of the open pit mining. Underground mining at Manantial will continue into 2019 which is supplemented by low grade open pit or that has been stopped out and then will go to the plant now. And basically what we’re kind of treating or treating that high grade order in masking mansion starting at COSE later on coming in from Joaquin as well. So until we have the final numbers on Joaquin I think we can't answer that question yet. So meanwhile they gave you the number on COSE, Manantial is the same. When we give out the three year guidance and have the PA ready end of the year on Joaquin where we have the final answer to your question.

[John Bridges:]

Okay and then just like silver strong in situation where a metal sort of just goes on and on for long periods trucking in or from long distances. What is your sort of target market for acquisitions in the part of the world within trucking distance?

[Michael Steinmann:]

Well there has been a lot of exploration in Santa Cruz in the past as you know by a lot of junior companies Argentine and a lot of Canadians as well. Several discoveries have been made and most of them have been too small to justify building own plant. [Indiscernible] is there, at the moment this too came up on our list thus being the highest grade. As Martin said this is especially for the smaller ones very, very high cost mining. So you have to look at a very high grade to make that work. We will for sure keep our eyes open to see what else is around there.

[John Bridges:]

Okay, excellent. Well done again on the results. Thanks a lot

[Michael Steinmann:]

Thank you John.

[Operator:]

The next question is a follow-up question from Lucas Pipes with FBR & Company. Please go ahead.

[Lucas Pipes:]

Yes, thank you for taking my follow-up question. I wanted to circle back on the royalty payments that were kind of different from the quarter of the sale and maybe I missed it but did you tell us what that impact was in the second quarter and then how should we think about maybe normalizing that impact going forward? Thank you.

[Michael Steinmann:]

I actually did not give you the number. I know those. But there are some ups and downs, there are nearly every quarter. As I said there is a timing difference. We pay the royalty and the concentrate leaves country and we obviously don’t get paid immediately for it, is it correct Rob?

[Robert Doyle:]

Yeah, that's right. It does relate specifically to Bolivia where we pay a government royalty upon the concentrate exiting the country. But the actual revenue recognition only occurs when the concentrate is shipped from a port in Chile. So you can imagine that any concentrate that's left Bolivia but hasn't yet been shipped is stuck in this situation where we pay the royalty to the Bolivian government but haven't yet recognized the revenue. So in isolation the revenue in that period would be zero but you would have a royalty charge. So, that is the timing difference. Of course it all washes out over time. There is some periods where we benefit, some periods where we prepay it effectively. But it all washes out. From memory I think it was about $1.5 million difference this period. But I can signal back to you if that is important.

[Lucas Pipes:]

No, just wanted to get a sense of magnitude, that's very helpful. Great, thank you.

[Operator:]

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

[Michael Steinmann:]

Thank you operator. Obviously a solid quarter, we have been very happy with the performance we are seeing here. As you saw the expansion of our mines in Mexico is nearing completion and capital spending there will come to an end. There will be greater reduced here in the coming months. I am really looking forward to get the benefits of that capital that we spent over the last two years there and looking forward to the rest of the year. And have a great rest of the summer everybody. We will talk again in November. 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.