Pan American Silver Corp.
Q2 2016 Earnings Call Transcript

Published: 12 Aug 2016

[Operator:]

Welcome to the Pan American Silver Second Quarter 2016 Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions [Operator Instructions]. I'd like to turn the conference over to Siren Fisekci, Vice President, Investor Relations. Please go ahead.

[Siren Fisekci:]

Thank you, operator and welcome everyone to Pan American Silver's 2016 second quarter conference call. We released our results after yesterday's market close and a copy of the press release, MD&A 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 an overview of 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 and our 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 subscribed in our most recent Form 40-F an annual information form. I will now turn the call over to Michael.

[Michael Steinmann:]

Thank you, Siren. Siren Fisekci recently joined Pan American as a VP of Investor Relations and Corporate Communications and I am very pleased to have her as part of our team. Welcome, everyone joining us in this Q2 conference call. Yesterday, we reported a very strong performance for our second quarter. We generated earnings of $34.2 million or $0.22 per share that's an increase of $41.5 million over the same period last year. Adjusted earnings reached $19.9 million or $0.13 per share with the biggest adjustment to earnings being the removal of the gain related to sale of non-core assets in Peru. We generated $66 million of operating cash flow, the highest level since the fourth quarter of 2012. That strong financial performance resulted in cash and cash equivalents and short term investments growing to $204 million at June 30, 2016. We fully funded our requirements both for sustaining capital and our expansion projects and still grew our cash on short term investments possession by $26.6 million. With the rising cash balance, our already enviable balance sheet grew even stronger. Our total debt stood at just under $59 million and our working capital position at the end of the quarter was close to $400 million. Clearly our Q2 financial results point to the value created for our shareholders, but it is important to emphasize that it wasn't just about higher prices, silver prices were largely flat in Q2 2016 compared with the same period last year. And while gold prices were up marginally, the prices for by product metals declined quarter-over-quarter. Now, we have seen silver prices rise across the Q2 period which obviously benefits future performance. But the real story this past quarter has been the strong operating performance across all of our mines. Cost have been coming down now for several quarters and Q2 highlights the significant progress we've seen there. Our outlook for 2016 confirms our view that this lower cost will persist and that the lower cost structure will magnify the impact of rising precious metal prices. Cash costs for Q2 came in at $5.57 per ounce of silver net of byproduct credits, down 41% from Q2 last year. The significant improvement in cash cost is a result of higher byproduct metal prices and our sustained efforts to reduce operating costs. We also achieved a meaningful reduction in all in sustaining cost per silver ounce sold which came in at $11.31 per ounce net of byproduct credits, down 22% from Q2, 2015. With year-to-date cash cost and all-in-sustaining cost well below the low end of our original guidance we're reducing our guidance for 2016. We now expect cash cost to be between $6.50 and $7.50 per ounce of silver and all-in-sustaining costs to be between $11.60 and $12.60 per ounce. That's a reduction in our cost outlook of 30% and 16% respectively. During the second quarter we produced 6.33 million ounces of silver, this was slightly less than a year ago, but in line with our expectations. We had anticipated production declines at Dolores due to mine sequencing at Manantial Espejo due to a slowdown of the mining activities as the open pit mining approaches the end of its life and at Alamo Dorado where the plant is now processing low grade stockpiles. During the quarter we also produced 48,400 ounces of gold, 9% more than a year ago mainly due to production increases at Dolores where mine sequencing moved to higher gold grades. Production is tracking to plan and we're maintaining our outlook for production of silver, gold and base metals. Mine-by-mine we had a great quarter with some remarkable achievements in cash cost performance. At Dolores cash costs were down almost $9 per ounce compared with last quarter's Q2 -- last year's Q2, entering negative territory, the significant decrease is due to higher gold production and to lower operating costs driven by lower Mexican peso and lower fuel costs. We also reported negative cash cost at our Manantial Espejo mine in Argentina, the main drivers there were devaluation of our Argentine peso, lower royalties and higher gold prices. At our Peruvian mines we continue reaping the benefits of the sustained improvements brought on by our multi-year mine mechanization programs and the rationalization of the work force. Cash costs of $1.35 per ounce in Morococha and $5.70 per ounce at Huaron are the impressive results of those improvements. It is worth noting that the cost reductions we expect to receive from the expansions of La Colorada and Dolores still lie ahead of us. Year-to-date we've spent $48.4 million in sustaining capital and $50.5 million on our La Colorada and Dolores projects. We're confident that it will be within our forecast total capital expenditures of $200 million to $215 million at the end of the year. Overall the La Colorada expansion project is advancing on time and on budget. On July 13 we announced the commissioning of the new sulphide processing plant. On behalf of our Board of Directors and the executive team I would like to congratulate our project team for a superb job. This was a remarkable achievement as this critical component of our expansion project was complete not only on time and on budget, but also without one single loss time accident. That's testament to the excellence and commitment of our project team and the contractors who participate in the construction. The new plant achieved throughput rates of up to 1,400 tons per day during commissioning. Throughput has now being scaled back until the underground expansion of the mine has been completed to provide additional ore to reach full design capacity. The other key component of the La Colorada expansion is also achieving as planned. The new shaft escalation and lining has been completed. The remaining work include installation of the two skips [ph] and cage, commissioning of the loading pocket and completion of the electrical work and commissioning of the hoist at full speed. We expect that the new shaft will be hoisting ore by the end of this month. Underground development of La Colorada is advancing as planned with new production films opening in the Estrella vein by the end of Q3 2016. In addition, construction of the new 115 kilowatt power line is advancing as planned. We expect to energize the new power line during the first quarter of 2017. The La Colorada expansion remains on track to reach the desired production rate of approximately 1,800 tons per day by the end of 2017. At Dolores we received environmental permits for the new pulp agglomeration plant in May. We immediately mobilized engineering, procurement and construction team and started major earth works as planned on site. We also ordered all key pieces of equipment advanced detailed engineering to 90% completion and awarded more after-major [ph] construction contracts. In the underground mine we advanced 684 meters of development. Set of a series of diamond drill stations and are now performing exploration and info drilling. Construction of the new power line was completed at the quarter end and we finalized the power supply agreement with the national power company. Energizing the line is imminent, the power line is expected to result in cost savings of about $6 million to $7 million per year. Overall, the Dolores expansion project is progressing according to the original timeline and budget. We anticipate the pulp agglomeration plant will be commissioned in mid-2017 and the underground mine will achieve approximately 1,500 tons per day capacity by the end of 2017. The Dolores team is also advancing the new phase of fleet add expansion which will provide an additional 18 million tons of forward stacking capacity. Turning now to developing our future prospects. We are increasing our exploration budget for 2016 by 38% to a total of $14.5 million this includes 44,000 meters of additional drilling in both mine, site exploration and regional projects. We have progressed our strategic initiatives to realize value for certain assets embedded in our company. We completed the sale of 13 royalties and precious metal streams to Maverix in July. We hold the 54% or 63% fully diluted majority ownership position in Maverix, retaining upside exposure to these assets and to Maverix ability to grow and diversified a portfolio. Maverix is up approximately 107% since it began trading in July 12. We also closed the sale of 75% of the shares in company Compania Minera Shalipayco to Votorantim for $15 million in cash and a 1% net smelter return royalty. Votorantim provides us with a free carry of its remaining 25% ownership interest to commercial production in this large zinc development project located in Peru. In summary, Q2 was an excellent quarter. Our operations delivered production that puts us comfortably on pace to achieve our annual targets at significantly lower cost. This translated into strong financial results and the return to free cash flow, just as we entered final stages of investment of La Colorada and to advanced expansion of Dolores. These projects are expected to improve operating margins even further when completed in 2017 Prices for precious metal has been rising support by uncertainty of Brexit, dynamic economic growth in Europe and lower or negative interest rates. While our business obviously benefits from improved precious metal prices, our focus is on creating value by reducing costs, pursuing expansion projects and exploring initiatives to surface value within our portfolio. And that concludes my formal remarks and I'd like to open for questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] the first question comes from Ralph Profiti from Credit Suisse. Please go ahead.

[Ralph Profiti:]

Michael as you look across the portfolio and the progress that you’re making on cost, so where do you think the most incremental and compelling opportunities are to revisit any of the mine plants over and above what already you have in the pipeline?

[Michael Steinmann:]

You know obviously the higher metal price will impact our mine plants across the Board. The biggest cost savings if you look at the -- work with it with mechanization and improvement is definitely our Peruvian mines. But you know with much higher prices I can see some improvements in our [indiscernible] as well. But they are much more impacted the directly by fuel prices and pay FX improvements and such by they’re less labor intensive, than our underground operations.

[Ralph Profiti:]

Okay as a follow-up Michael how much of a goal does a role does the silver price play into the current exploration strategy and the budget or are you running up against sort of a more human resources challenges when you want to potentially increase the budget for exploration?

[Michael Steinmann:]

Definitely no problem on the human resource side yet Ralph, there was such a long downturn -- there's plenty of high qualified geologists available to do this work. But the reason why the exploration there -- our exploration budget was really on an all-time low last year for obvious reasons after a long downturn and very low prices, we scaled back on the exploration, as you know we're sitting on 10 -- about an average of 10 years of reserves, I had most of our operations. So, there was no imminent need but it's always nice to explore new projects and know what we have ahead for us for future investments and to plan our nine plants [ph] and capital expenditures together. So, with these improvements it's just a matter of that we return to a more normal budget for exploration.

[Operator:]

The next question is from Cosmos Chiu from CIBC. Please go ahead.

[Cosmos Chiu:]

A few questions from me here, maybe first off on the Peruvian assets as well, as you mentioned and as we can see as well, so far the biggest cost improvements came from the Peruvian assets. Could you maybe quantify for me how much of that improvement actually came from operating cost improvements versus currency benefits?

[Michael Steinmann:]

Sure, I'll pass it on to Steve and he will give you some details Cosmos.

[Steve Busby:]

Relative to Peru as you mentioned, I mean that's where we're seeing our greatest success in cost reductions and it's really a productivity improvement, is what we're seeing there with the mechanization. Both mines are for all intents and purpose is a 100% mechanized mining now, and we see that continuing for the rest of the mine life. Our exploration is kind of retooling and re-gearing towards those kind of deposits. I would say probably 8% of the overall cost reductions, cost savings we have in Peru are from the foreign currency exchange rate movements. So, you're really looking at the vast majority of those improvements or those productivity increased. And those are sustainable increases provided the exploration can find those kind of deposits going forward.

[Cosmos Chiu:]

And Steve, I know you now had a pretty good a cost level that you're happy with or do you think it could continue to go down a little bit more?

[Steve Busby:]

Well I think we can always do better. Clearly we've taken the low hanging fruit, so it's not going to be as easy as what we've done so far, although it's taken us five years to really organize where we're at now. But we're -- we have applied some very new mining methods to that, these are cemented back-fill, cut and fill methods that we're using in some areas, they're very new to the team there. So I do think there's still going to tweak some value out of those things. But along with that, and kind of along the earlier question, is the price -- as we start to select next year's price, and budget price and look at reserve pricing, we may start to capture some lower grade orders into the future, it probably won't effect this at all, takes us a long time to change the mine plans there, but as we look into the future we'll probably try to capture some of those benefits by mining additional ore.

[Cosmos Chiu:]

And then maybe switching gears a little bit, the other big part of the cost savings in Q2 was coming from byproduct gold production at Dolores and as you mentioned it benefitted from higher grades for gold. Could you may be remind us how much longer this is likely going to be continuing as you said as far as the mine plan and mine sequencing, but how much longer is this higher grade going to continue?

[Steve Busby:]

Yeah, good question. As we look at Dolores and I have always explained the high grade gold at Dolores we get into higher grades as we get deeper into that open pit and we're mining the pit in several phases I think we now have designed over 10 phases of the pit and each phase we mine we get into more and more of the high grade gold as we touch down deep into the deposit. We're now on to the phase seven and a lot of what we're seeing today the high gold production rates are coming out of that phase seven. So each year as we look forward we're going to see more and more of that high grade with each phase that we develop. So you're going to see for the next I'd say four to five years kind of steady ramp up of gold production particularly as we bring pulp agglomeration and underground on to play in a similar kind of fashion that we kind of outlined in our PEA our [indiscernible] 101 technical report. So, this is something that will continue, but we do move in and out of the through the year depending on where we're out in the phase and we're just seeing more and more high grade each year as we go forward.

[Cosmos Chiu:]

And may be that leads into my next question here. May be a question for Michael, certainly when you put out your 2016 projections it was part of a three year production and cost guidance and certainly with the decrease and improvement in the all sustaining costs guidance in 2016 there should be some kind of read through into future years. I guess you're doing your budgeting right now, but will you be providing us with a longer term projection later on.

[Michael Steinmann:]

We will definitely provide you long term projection again in January when we have all the budgeting done and a clear view on the metal prices here in the future. As we know this is only a few month where the picture [ph] completely change, but as I said our costs and just to go a bit back to your first question there. We see probably FX savings on the costs across the board in the company to be about 18% to 20% only. So there is really are some sustained costs savings beside obviously the base metal prices that are a bit strong and now production is strong there as well. But to re-guide the three years right now doesn't make too much sound obviously that has improved a lot for this year and there will be consequences for next year plus we will have La Colorada finished by the end of the day, which will be included as well in our guidance with the new numbers that we have on cost savings using the shaft and new numbers on the plant. So, you have to wait a few months but we will definitely do [technical difficulty].

[Cosmos Chiu:]

Great. And then may be one last question I think jumping back to Steve again. Looking at your CapEx estimates for your Dolores and La Colorada expansion projects it looks like you're pretty on track for La Colorada but so far you've spent less than half at Dolores, has that always been the plan in terms of spending more money Dolores expansion in the second half?

[Steve Busby:]

Yeah, ideally we would have spent more money on the Dolores project already than we had. I think they kick of constriction would be honest we're running a little bit behind what our desired scheduled were. With that said, we've been able to really advance on the procurement and engineering such we don’t feel we've really impacted our startup date mid 2017 right now. So we're going to see heavy spending start to come on Dolores and at the same time that little La Colorada spending is going to wind down. That’s why we got to look forward.

[Cosmos Chiu:]

And then Steve, could you remind me again like beyond 2016, how much more money as projected or budgeted for the two projects.

[Steve Busby:]

La Colorada, it's not a lot, its less than 10 million going into 2017 the finish of that project because it shares underground development at that point, hardly 5 million to 10 million, whereas -- by the case of Dolores we still probably have a third to a half of the spending for the full project to do into 2017. So that would be in the $30 million to $40 million range, maybe a bit more.

[Operator:]

The next question comes from Chris Thompson with Raymond James. Please go ahead.

[Chris Thompson:]

I got a couple of little question here maybe some extensions from some of the questions. I guess asked by previous callers here but we will start off with Dolores, amortization I correct in saying when you energies it bring on the good [indiscernible] you located about $6 million to $7 million saving for year, for Dolores?

[Steve Busby’:]

Yes, that’s correct Chris. [Indiscernible] additional on the [multiple speakers], don’t forget it, currently all powers generated with these diesel fuel onsite.

[Chris Thompson:]

Looking I guess forward obviously what a happening there with pulp agglomeration going on the ground and you are currently enjoying some good cost savings,, I guess on the back of the [indiscernible] and whatever do you -- do you expect to see operating cost perspective revisions as far as the cost of the mine considering that two soul of advancements?

[Steve Busby’:]

Yes, Chris we are like --- we have mentioned we are going to be starting our budget process for next year and will be establishing kind of our projections for foreign exchange and diesels and important part of the mine. And that’s going to drive that kind of cost projection going forward right now we are in joint better than expected cost because of those provisions. And I suspect given the duration, we’ve have seen quite a lengthy duration of those kind of benefits. We are probably going to project that into next year and that could start to reflect the mine plants as well.

[Chris Thompson:]

Just on the sustaining cost, I know you spoke little bit about growth cost and that -- but on the sustaining you seem to be tracking a little ahead, I guess of your annual guidance, actually for both La Colorada and Dolores, did you see that lightening up somewhat?

[Steve Busby’:]

Yes, we do. We did have a fair amount of carry over cost from last year that we really hadn’t anticipated too much of. So we maybe a little bit heavier than we -- on the heavy side of what we projected for those two operations. So we have hadn’t anticipated too much of, so we maybe a little bit heavier than we have on the heavy side of what we projected for those two operations. But generally speaking on the sustaining part of things heavy side generally speaking they are going to drop off on the sustaining part of things as we look to the second half of this year just a bit.

[Chris Thompson:]

Alright and then La Colorada, I noticed because it's so great to see that -- are we seeing the sustainable of that levels, maybe a bit of positive grade reconciliation?

[Steve Busby’:]

I mean reconciliations are pretty tight, we’re within 3% to 5% each quarter. And it's just really sequence and as that sulfide plant comes up and we are deep on the deposit. Yes, that’s definitely sequencing into the higher several grades. We are seeing it pretty strong and pretty stable going forward.

[Michael Steinmann:]

Just to add something if Chris this La Colorada obviously very high sale of rates, if you look historically that reserve replacement that is in some of the presentation, the older one, there's a slide under, and you will notice that even with different metal prices those grades have been very well maintained around 400 grams in reserves. So, this is very strong operation obviously and even with much lower metal prices because of the high grades reserves -- remain very-very similar throughout metal price cycles.

[Chris Thompson:]

And just a couple of little questions just touching on some of the other operations. I agree Morococha the grades look great, sort of the cost look good there. At Huaron I'm getting the gross, I guess operating cost a little higher than I was expecting, a little higher than the Q1, could you break that down for me?

[Michael Steinmann:]

For the second half you mean to come up with the average?

[Chris Thompson:]

No, that, just for the second quarter, I'm just wondering if could just breakdown, what are you incurring by way of mining, processing in G&A there at the moment?

[Chris Thompson:]

Well, okay, just give me one second.

[Rob Doyle:]

No we don’t have all this details available, Chris will give you a call, Chris will give you -- Steve will give you call and pass you on the numbers.

[Chris Thompson:]

Then finally guys, obviously improving sort of I guess investment environments whatever in Argentina at the moment, any thoughts on [indiscernible] that, where do we circle right now?

[Michael Steinmann:]

Well, obviously the improvements are very important in Argentina, as the new government there deals with a lot of things there, a lot changes, lot of improvements. Lot of improvements, not all of them easy to push through by the government, but Argentina is definitely moving into a direction that will make an investment decisions for us or/and that matter of fact of any foreign investment in Argentina and a much easier decision, that's for sure. The legal process that is needed in Chubut is still pending, so there's no news there. But definitely Argentina is moving in a direction that will make our decision one step, that low will change in much easier.

[Operator:]

The next question comes from Craig Johnston with Scotiabank. Please go ahead.

[Craig Johnston:]

Just a couple of small questions, because a lot of good questions were asked earlier. Just at Alamo Dorado looks like you're already at the midpoint of guidance, are you expecting any production in the second half of the year there or is that essentially done?

[Steve Busby:]

Good catch their Craig, Alamo Dorado because of these higher metal prices, if you recall we budgeted for this year, $14.50 silver, and obviously we're sitting $20ish today, that opens up opportunities to process lower grade stockpiles. So we had anticipated not processing into the Q3 this year and right now it looks like we will process into Q4 albeit lower grades in -- but with these metal price still pretty profitable for us so.

[Michael Steinmann:]

Actually Craig, Steve is very conservative here. There is a bit more of low grade material available to us. Direct metal prices stay, in terms of ranges of where they are right now I could see that we even will go into a very early part of 2017.

[Craig Johnston:]

And anywhere I can find the grades within the stockpiles, like 46 grams per ton in Q2 assuming it goes lower than that. So, say 40-ish or are we below that [ph]?

[Steve Busby:]

Yeah, probably 35 to 40ish on a silver equivalent basis.

[Craig Johnston:]

Okay, okay.

[Steve Busby:]

And yeah, as Michael says with these kind of prices we won't move into lower grade, it which below the reserve cutoff, so it looks pretty good.

[Craig Johnston:]

Okay, okay. No, that sounds great. And just then thinking with regards to reclamation expenses when do you think those kick in or when you start spending the bigger portions of that?

[Steve Busby:]

Yeah, we're spending against it right now through this first half, we've done a lot of the regarding and the dumps. We'll probably be at the same intensity of that through the second half of this year. And then we start reclaiming on the tailings facility which is really holding some rates [ph] rock on to the tailing and dumping on the tailings towards the end of this year or early part of next year. So, we'll see a little bit of a kick there, but we don't really have some really large reclamation costs going on there beyond those items.

[Michael Steinmann:]

So just three member, this was dry stock tailing, so there is no big tailing spawn to reclaim at Alamo Dorado.

[Craig Johnston:]

Right. Good point Michael. Okay. And then moving onto Manantial Espejo, look like good gold grades in Q2. Thoughts on gold grades going into the second half, keeping that kind of high 3.5 plus range or are we coming off in the second half.

[Steve Busby:]

Craig we're seeing fairly similar grades going into the second half of the year. We're that is an area we're looking at the open pit mine plans and with this higher price we're looking at some laybacks that weren't -- didn't make into the model this year. So, we'll probably will be extending that and that may be bring in a little bit lower grade, but overall today for the rest of this year we feel that we'll be similar kind of gold going forward.

[Craig Johnston:]

Okay. That's great as well. And then finally, just the La Colorada notice that costs -- overall operating costs when up a bit quarter-over-quarter, anything specific driving that?

[Steve Busby:]

No, Craig it's just kind of timing of maintenance needs and things like, nothing special there. We did notice that as well and now it just balancing out overall, we're still pretty comfortable that things be kind of the average to what we see for the first half going forward.

[Michael Steinmann:]

And don't forget that we're pulling off this -- pulling off these job to expanding La Colorada in an underground mine at the same time that we actually slowly increasing production, not decreasing and building. So, there will be some, I could imagine that as some friction that that we see under construction, that elevated that cost a little bit.

[Craig Johnston:]

Yeah, that makes a lot of sense. Okay. Thanks, guys. Yeah, great quarter. Have a good weekend.

[Operator:]

The next question comes from Jessica Fung with BMO Capital Markets. Please go ahead.

[Jessica Fung:]

So few questions for La Colorada. Next year, is there any way you guys can accelerate underground development there?

[Michael Steinmann:]

I’ll let Steve touch [ph] it. Just remember I am like a conservative guy. No, that's a great question Jessica and we're focusing on that clearly that is the limitation to achieving that full expansion benefit of this project, so we are putting a lot of effort into that. That development includes some ventilation raise boards and critical ventilation raise board, if you recall during our tour. That we have to get in. We are looking at how we can do those things little faster than what we originally planned. I would say there is good upside for sure, as we work through next year's budget we will be pushing that development as fast as we can. Now that the shaft will be operating by our next call for sure.

[Rob Doyle:]

So obviously the commissioning of the plant has being incredibly fast and we are very proud of that, what the project did on that. And as you are listening to the call now the shaft is pretty soon ready to go and we’re using it for hoisting. So on -- probably on track or a bit faster than we anticipated we originally looked at the project. So I am sure as Steve will push hard on the underground development to please stay on track or be quicker.

[Jessica Fung:]

Okay sounds good. And then are you able to give us some guidance in terms of cost savings you might seeing Q4 this year with the shaft in operation or the hoist rather?

[Michael Steinmann:]

We haven’t given any guidance, while we give the guidance for the full year included Q4 reduction of cost with the use of the new shaft and the higher rates. So it’s kind of factored into out guidance for the year already. We are not really prepared to try to lower that guidance at this point.

[Rob Doyle:]

But if you look at the re-guided cost, that’s what is available to you right now, Jessica and I will start with hoisting under -- we will have a few months under developed that the year end and budgeting is done, see where we are going to next year.

[Jessica Fung:]

Okay and then very near term at La Colorada do you guys have any provisionally price material there?

[Rob Doyle:]

We get just [indiscernible]. We have two concentrates of reproduces at La Colorada a very high grade leads-zinc -- sorry lead-silicon concentrate and then zinc concentrate, both of those have provisioning price material, which with open compositions at any point of time.

[Jessica Fung:]

Can you give us the volume?

[Rob Doyle:]

They’re relatively volumes, the concentrate tonnages is about and the lead which is really the high value concentrated it's about 12,000 ton per year, also of production. So relatively small tons, but it is 12 kilos of silver of each ton so it contains a lot of silver. So we should -- naturally if silver prices remain here about where they were in Q2 we should see some as positive price adjustments trying to do to earnings in Q3.

[Jessica Fung:]

Okay perfect, and then moving on to Manantial Espejo there just a quick question on the numbers Rob why are the treatment refining in transportation charges a negative number?

[Rob Doyle:]

At which operation was?

[Jessica Fung:]

Manantial Espejo.

[Rob Doyle:]

Yes, that’s benefit of the Patagonia Export Credit that I'll be capturing at the moment by exporting the Dorado out of southern ports.

[Jessica Fung:]

Okay so you’re it in that line. Okay.

[Rob Doyle:]

Yes, so it’s a credit through --.

[Jessica Fung:]

Understood and then the removal of the export duties, where are you guys realizing that?

[Rob Doyle:]

Same.

[Jessica Fung:]

Same? Okay. Understood. That is it for me. Thank you very much guys.

[Operator:]

The next question comes from Lucas Pipes with FBR & Company. Please go ahead.

[Lucas Pipes:]

Michael I think in your prepared remarks it sounds like you could be both buyer as well as the seller of assets. So, I was hoping if you could add some color on what you think could maybe make sense to be pruned and on the flip side, what sort of assets you would be looking for?

[Michael Steinmann:]

On the selling side, obviously nothing of our major asset set that we’re taking about. I mean it was not like we, what we did and what I'm trying to do is, go to our portfolio and selling assets that obviously are non-core to us that are in many places even not silver offshore. So, we have a few of the smaller goal on the assets that they will be on my list, that would be too small and gold only, so not on our list bill. But there is always, we have a very large portfolio on land, on exploration land, on earlier and late stage exploration projects some and then some of the, Rob would call him late or early stage development projects that we acquired through some acquisitions of Aquiline and Minefinders. So, there definitely will be available but of course nothing on our core asset to do there, we're very happy what we have, if you look at our cost performance across the Board, a very healthy story for us. On the buying side well, we're always out there looking as you know the [indiscernible] agreement with [indiscernible] at the beginning of the year. This is definitely a style of projects that we always looked at -- some earnings on earlier or late stage explorations that's what we do, that's how we gained access to most of our current mines with all the plans and evaluations and projects that are available.

[Operator:]

The next question comes from David Phelp [ph] with Phelp Company of Texas. Please go ahead.

[Unidentified Analyst:]

First thank you for the good quarter gents it’s nice to see those costs coming down. Kind of a two part question here, the first is how are you guys holding your cash, is it short term bonds and can you give us some idea, what currency maybe about portions?

[Michael Steinmann:]

Sure, Rob will answer that question David.

[Rob Doyle:]

We hold most of our liquid treasury assets at the corporate level predominantly in U.S. dollars, we do have some of our holdings in local currencies and then Canadian dollars, but it's roughly about 90% in U.S. dollars and under our cash management policy we do have short term investments in mostly sovereign bonds, very, all very highly rated liquid bonds. So we've never had any credit concerns with that portfolio at all.

[Unidentified Analyst:]

I guess our view is that the product we produce is kind of a hedge against sovereign risk and currency devaluation. So, from our perspective wouldn’t it be safer just to withhold a fraction of our production at a vault or something than having this kind of counterparty risk. It just seems a bit counterintuitive on our end.

[Rob Doyle:]

It is something that we talk about from time to time, but our policy has being to monetize production as and when it's produced to this point.

[Operator:]

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

[John Bridges:]

Congratulations on the results. I was talking [ph] about earlier you did benefit from base metals, big zinc and lead numbers this quarter. Although you're saying that that's pretty much in line with your expectations. Although I think lead was about 1/3 of what you had projecting to produce this year. Could you give us a sort of idea as to how sustainable these extra lead and zinc numbers are going to be and what you expect in Q3 and Q4 in terms of volumes?

[Steve Busby:]

Hi John this is Steve. Yeah in response relative to La Colorada we do see again as we develop that deeper sulphide ore and more of it with the new project the lead and zinc production rates have come up and we see that fairly sustainable, we're seeing fairly positive reserve reconciliations on those zinc and lead side right now, but generally speaking we see it sustaining or improving even from where it's at. Related to we're on in Morococha those are really sensitive to the mining plan sequencing. We do have zones of very high copper on one side of the zone with very high zinc on the other side and we're moving in between the two. So, we do tend to see shifts going on relative to the zinc production to a copper production. So those are little bit more lumpy, if you will, on both of them. So it really gets down to sequencing if we happen to be in good zinc zones both of them in the same quarter at the same time are going to see a pretty good zinc production, whereas may be one quarter we're not at either [ph] one mine is lower, like I say they are fairly lumpy. Overall, when we look at the year average for those two properties, we think that's going to hold into the second part of the year, but again be a little bit lumpy between the two of them. And then [indiscernible] is a little bit lump as well on the zinc. We do have a couple of high zinc zones there that we mine in and out of.

[John Bridges:]

Okay. And just carrying on the lumpiness topic, the lower, you know where you're going to be in each phase. So, could you give us some idea as to when you're going to be in the bottom of the pit and likes getting into the good grades with gold over the next two, three years?

[Steve Busby:]

Yeah, interestingly enough we generally have always talked in the past that we'll be in the bottom of the pits each of the last half of the year. This year we actually got into it much sooner and when we did have to change our mine sequencing a bit, we were hoping to strip more of the Phase 8 and mine, -- according to our sequencing that was planned going into the year, we were going to be doing more Phase 8 stripping in the first part of the year and less Phase 7 high grade mining in the first part. We've kind of seen a little bit of the reverse of that. So we were into the higher grade gold zones earlier this year than we expected, but generally speaking ever year as we go forward the kind of first part of the year we're more up in the upper parts of the reach of the mine and later in the year towards the lower parts. And some of that's driven by weather too because we have the big sump at the bottom of the lower parts that prevents this mining that high grade particularly at the very, very bottom during July, August, September, October timeframe, so then we are kind of force to being doing some stripping during that time.

[John Bridges:]

And then there is a little bit of mention in the report of that, smaller contracts and some changes there, any trends in that anything you should taking out [indiscernible]?

[Michael Steinmann:]

Nothing too remarkable. John, its -- obviously these markets are changing like any markets, particularly we see lower improvement in zinc concentrated terms seems to be very tight market moment in shortage in zinc concentrate, so we are seeing some very attractive bids coming in on our zinc concentrated across the whole portfolio.

[Operator:]

The next question comes from Chris Thompson with Raymond James. Please go ahead.

[Chris Thompson:]

Just a follow on question very quickly, Manantial obviously limited mine life there, would that changing metal price environment is there any potential for expanding upon that a little bit?

[Steve Busby:]

Yes, Chris Steve here. Yes, I think I mentioned earlier, but we are with the higher metal price, we are as we are starting to see some of the laybacks of the [indiscernible] that we are going back and re-examine in and we do see some potential to expand those. Right now there in -- the neighborhoods of months, multiple months, three, six months per [indiscernible] but as we look at that stronger and we decide on our reserved pricing and next year's pricing, we will be examine in that pretty closely and seeing that if we can extend even beyond those kind of numbers.

[Michael Steinmann:]

Chris there is definitely potential with higher metal price, but don’t forget it’s only a few months that we see these higher metal prices we need to see them sustain build a next few month doing crude [indiscernible] in our budgeting process and we definitely look at any opportunity in Manantial to expand a line.

[Operator:]

This concluded the time allocated for question-and-answer session. I'd like to turn the conference back over Michael Steinmann for any closing remarks.

[Michael Steinmann:]

Thank you very much, operator, and thanks everybody for calling in and we are looking forward to welcome you on our Q3 conference call in November. Until then have a good summer everybody, thank you very much. Bye.

[Operator:]

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