Pan American Silver Corp.
Q1 2013 Earnings Call Transcript

Published: 14 May 2013

[Operator:]

Hello. This is the conference operator. Welcome to the Pan American Silver First Quarter 2013 Results Conference Call and webcast. [Operator Instructions] The conference is being recorded. [Operator Instructions] If you would like to follow along with the live presentation, you may visit the Events Calendar under the Investor section at panamericansilver.com. Here you will find a link to today's webcast. At this time, I'd like to turn the conference over to Ms. Kettina Cordero, Manager, Investor Relations. Please go ahead.

[Kettina Cordero:]

Thank you, operator, and good morning, ladies and gentlemen. Welcome to Pan American Silver's 2013 first quarter results conference call. I'm joined today by our President and CEO, Geoff Burns; our Chief Operating Officer, Steve Busby; our Executive Vice President of Corporate Development and Geology, Michael Steinmann; and our Chief Financial Officer, Rob Doyle. Before I hand over the call to Geoff, I would like to remind our listeners that this call cannot be reproduced or retransmitted without our consent and that certain statements and information in this call will constitute forward-looking statements and forward-looking information within the meaning of applicable securities laws. All statements other than statements of historical fact are forward-looking statements that reflect the company's current views with respect to future events and are necessarily based upon a number of assumptions and estimates that, while considered reasonable by the company, are inherently subject to significant business, economic, competitive, political and social uncertainties and contingencies. Many known and unknown factors could cause actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements, and the company has made assumptions and estimates based on or related to many of these factors. We encourage investors to refer to the cautionary language included in our news release dated May 13 and May 14, 2013, as well as the factors identified under the caption Risks Related to Pan American's Business in the company's most recent Form 40-F and Annual Information Form. Investors are cautioned against attributing undue certainty or reliance on forward-looking statements, and the company does not intend or assume any obligation to update these forward-looking statements or information, other than as required by law. With that, I will hand over the call to Geoff.

[Geoffrey A. Burns:]

Thank you, Kettina, and good morning, ladies and gentlemen. I will provide a quick summary of our first quarter results and then I will hand the call over to Steve, Michael and Rob for a more thorough discussion of our operations, our development projects, our exploration program and our finances and balance sheet during the first 3 months of this year. I would like to start by saying that yesterday, our Board of Directors approved the second quarterly cash dividend of the year in the amount of $0.125 per common share. The dividend will be payable on or about Friday, June 5, to shareholders of record as of Friday, May 24, 2013. It is certainly rewarding for us to be able to continue to provide real and direct returns to our shareholders. Using yesterday's closing price on NASDAQ, our cash dividend provides an annual yield of approximately 4%, one of the highest in all of the mining sector. Not too shabby. Now for a quick review of our first quarter results. As you know, this will be Dolores' first full year of production under Pan American's stewardship, and thanks in large part to Dolores' contribution and solid production from La Colorada, Alamo Dorado and San Vicente, we were able to meaningfully increase our silver production to 6.3 million ounces or 14% higher year-on-year in the first quarter. Our gold production also increased to 32,100 ounces, 65% of the first -- ahead of the first quarter of 2012. Today, over 51% of our silver production originates at our Mexican operations, which are amongst our lowest cost and most stable assets. Our cash costs for the first quarter were $11.33 per ounce of silver net of byproduct credits. While this was an 8% increase as compared to a year ago, our cash costs for this quarter were well below our guidance for the full year and we saw important cash reductions at Manantial Espejo and San Vicente. In particular, I would like to highlight the fact that our cash costs at Huaron declined 28% from the last quarter of 2012, reflecting the efforts we have expended to increase development rates, improve productivity and reduce costs. This is a very important trend and positive trend, which we believe can be sustained over the long term. Financially, we had a solid quarter. The increase in our gold and silver production boosted consolidated revenues to $243 million, 6% higher year-on-year. However, our mine operating earnings declined to $74.8 million and our adjusted net earnings decreased to $40 million or $0.26 per share, largely due to lower price environment for precious metals and higher per-ounce depreciation charges relating to the amortization of the purchase cost of Dolores. We generated operating cash flows of $45.3 million or $0.30 per share during the first quarter and, after paying back some lease obligations for last year's infrastructure construction at Morococha, paying our final installment for our 2012 taxes of almost $45 million, buying back another $5 million of our common shares and paying our quarterly dividend, we finished March with over $490 million in cash and short-term investments and working capital of just under $740 million. Our balance sheet remains in excellent shape. Now I'd like to turn the call over to Michael for a more thorough review of our exploration programs -- to Steve for our operations. My mistake. Steve?

[Steven L. Busby:]

Thank you, Geoff. I'm pleased to report that our first quarter operating performance has us off to a good start for the year, with production largely in line and cash costs coming in below expectations, keeping us on track to meet or exceed our full year guidance previously provided. As Geoff mentioned, our silver production rose 15% and gold production surged 65% year-on-year, primarily because of the new production from our Dolores mine in Mexico, which we acquired at the end of March of 2012. Production from both our La Colorada and Alamo Dorado mines was similar to last year, supplemented with 800,000 ounces of silver from the Dolores mine during the quarter. La Colorada's cash cost increased less than we had expected at 14% above last year, due to a combination of a strengthening local currency, industry-wide escalations and lower silver grades. Alamo Dorado's cash cost also increased, again, less than we expected, from last year's -- at 66% higher due to a combination of increased waste mining rates with the new open pit layback, reduced gold production and prices, strengthening currencies and also the industrial cost escalations. Cash costs at the Dolores mine came in higher than we had expected at $7.75 per ounce due to lower silver recoveries caused from constrained lead cycle times as we squeezed the last final bits of capacity from our leach pad #2, in addition to lower-than-expected gold grades due to a combination of mine sequencing and grade model shortfalls that were perhaps caused by higher-than-estimated mine dilution, as well as a slightly higher operating cost that we had expected. Fortunately, the lower silver recoveries in the quarter does not result in a loss. It simply is a fact of short lead cycle times on the heap as we need to stack fresh ores on top of areas that haven't been thoroughly leached given the constrained stacking area we have. This is one of the beauties of a heap leach operation. We just have to be patient and that silver production will eventually be realized. Meanwhile, we have intense efforts underway to better understand and adjust our gold grade models to reflect the mining realities we're seeing, in addition to reconfiguring our life-of-mine plan in an effort to smooth some of the ore grade profiles over the next several years. The large Dolores deposit have a number of very high grade pods, particularly with respect to the gold grades that are tricky to sequence into a reasonably smooth mine plan, even considering our current 115,000 tonnes per day overall mining rates. Our mine planners are examining a variety of open pit phase options to balance and smooth both waste-stripping requirements and smooth the leach feed ore grades. We are narrowing in on the preferred mine plan approach, which I'll be able to describe in detail in our next quarterly conference call. At Peru, our 2 Peruvian mines, Huaron and Morococha, delivered a decent quarter, achieving the same production levels as last year with both mines offsetting marginally lower grades and recoveries with increased throughputs. Cash costs at Huaron rose 57% and Morococha 35%, as expected, due to greater development rates; lower silver, zinc and lead grades; and a stronger local currency and industrial wide cost escalations, although the costs were better than we expected as our multi-year mine mechanization initiatives are beginning to show positive results. In Bolivia, our San Vicente mine increased silver production 13% from last year from increases in both throughput and recoveries. Cash costs at San Vicente were very similar to last year, with slight increases in costs being offset by higher silver production and byproduct credits. In Argentina, our Manantial Espejo mine had a slight decline in silver production from last year as we are still managing low equipment availabilities that has been compounded by a few roadblockages as social unrest is beginning to mount given the country's current economic climate. We've seen notable increases in unemployment beginning to show up in our neighborhood. Also as another sign of the economic climate, our cash costs from Manantial Espejo actually fell 19% from a year ago with a combination of decreased operating costs with improved productivities combined with a stronger devaluation of the local currency. Overall, our consolidated gold production increased from last year due to higher grades and recoveries at Manantial Espejo and the addition of production from Dolores. Our consolidated byproduct, zinc and lead production decreased from last year, given the sale of Quiruvilca. However, production at Huaron -- however, we did manage to squeeze more copper production with higher production at Huaron this year to more than offset the effect of selling Quiruvilca. In light of the recent and rapid drop in precious metal prices below our budgeted levels, we have launched a number of operating cost savings and production enhancement initiatives to further bolster our healthy, long-life business in the reduced metal price environment, while at the same time advancing on our high-return brownfield projects that will further strengthen our business. We are looking to reduce some of our capital spending. However, the vast majority of this year's plans are true sustaining capital projects, like leach pad and tailing dam constructions, which are indeed necessary to sustain our business well into the future. Irrespective, we have a well-seasoned workforce and I am confident this group will unlock some meaningful initiatives to strengthen our business. It is my intention to describe and quantify these specific cost savings and production enhancement initiatives for you as part of our second quarter earnings report in August. I can say today, however, that our first pass on this initiative gives me the confidence that we'll at least be able to maintain our original cash cost guidance by offsetting reduced byproduct metal price forecasts for the remainder of the year with real cost savings that won't jeopardize our future production profiles. On top of that, we intend to obtain full advantage of the downturn in the industry that is already showing signs of improvement with drastically reduced demand for goods and services in our sector. On the project front, our group has focused on advancing leach pad construction efforts at Dolores, which are progressing well, nearing completion of an expansion of leach pad 2 and the continued progression towards completing the first phase of leach pad 3, which will be available once we have exhausted the capacity of leach pad 2. With assistance of third-party engineering firms, our future production expansion studies at Dolores and La Colorada have advanced well, completing initial layouts and preliminary designs for the addition of a crushing, milling and agglomeration facility at Dolores and completing a scoping study for the addition of the primary shaft and hoist conveyance system at La Colorada. We remain on track to produce a scoping study for the pulp agglomeration circuit at Dolores in the third quarter and a preliminary economic assessment for the expansion of La Colorada by the end of this year. With that, I'll now turn the call over to Michael Steinmann for the exploration update.

[Michael Steinmann:]

Thank you, Steve. Good morning, everybody. My slides for this Q1 presentation will give you some details on the drill statistics and exploration cost and will illustrate the current exploration results at La Colorada. We drilled a total of over 50,200 meters during the first 3 months of the year, main focus with 44,300 meters was our mine site exploration focused on the reserve replacement at our operations. In addition, we drilled nearly 5,900 meters on greenfield projects like Waterloo, La Virginia and some early-stage targets in the surroundings of Huaron and Morococha. In total, we spent about $7 million on drilling, which is pretty much in line with the original budget. Keep in mind that mine site exploration is mostly capitalized in greenfield exploration expense. The largest amount was drilled at La Colorada, both Candelaria and Amolillo kept returning exceptional results and I will show you some details in a few minutes. The recent reduction in metal prices obviously affected our exploration programs for the remainder of the year, and this brings me to my second slide. You see that our original 2013 exploration budget for mine site and greenfield exploration for a total of $31 million. We decided to keep our mine site exploration mostly intact, keeping our focus on reserve replacement in our operations. Our greenfield plans have been reduced by $6 million, cutting back on early-stage projects in Mexico, Peru and Argentina. Let's move on to the results and start, like every quarter, with La Colorada, which experienced again the largest program of our operations. We focused on the NC2 and HW veins in Candelaria and the Amolillo vein in the Estrella mine. Both zones are expanding at depth and, especially Amolillo, to the east and west. The Amolillo vein extends now over a horizontal length of 1,200 meters, only about 400-meters shorter than the main structures at Candelaria. On the slide, you can see the HW vein to the left and then see vein to the right. You can see the access ramp in red colors and our current shaft in yellow. The numbers on this side are level numbers roughly in meters below surface. Mined-out areas are shown in white, proven reserves in red and probable reserves in orange. By the way, these are the reserves as of December 31, 2012, representing nearly 65 million ounces of silver. Green blocks are inferred resources and in blue, I put some of the potential, which will be partially drilled during this year. The 3 green blocks down to the 1,010 level are centered on the deepest drill holes. We drilled them in 2012 and intersected in the deepest one, still 370 grams silver and nearly 14% combined lead and zinc. The 3 empty spaces in [indiscernible] are either past mineralized branches or low-grade zones, which will require further drilling during this year. Current reserves reached down to 700 level. Our deepest workings are at 498 level. And as I mentioned before, the deepest holes are at 1,010 level. 700 and 1,010 levels are for illustration purposes only. They do not exist yet. Exploration drilling in these veins has been very successful during Q1. As an example, we intersected in HW 2 meters containing 1,530 grams silver and nearly 8% combined silver, zinc and lead, 45 [ph] meters at 854 grams silver and 8.6 meters true width containing 780 grams silver. The footwall split returned 1.9 meters with 2,390 grams silver and nearly 4% lead and zinc. Let's turn the model about 90 degrees to the west. Now you can see the additional major structures like the prolific Amolillo structure vein and the underexplored Recompensa structure, which is very short and small there all the way to the right. This covers in the Amolillo vein, which is located between the 2 main structures, we're responsible for the lion's share of the 25.7 million ounces of new silver reserves we added in 2012. Looking from this angle, I'm sure you share my excitement for this structure. Our deepest holes at Amolillo reach only to 600 level, over 400 meters higher than the NC2 vein, leaving us with a huge vertical area for future exploration. During Q1, we intersected Amolillo with many drill holes which returned, for example, 878 gram silver, 1 gram gold and 7% combined lead and zinc over a true width of 2.8 meters, or 2.7 meters containing 700 grams of silver, 0.5 gram gold and nearly 6% lead and zinc. Beside the main structure, we also found mineable splits not shown in this model. For example, 2.5, 5 meters wide, with 872 gram silver and 4% zinc and lead or 1 meter containing 937 grams silver. By the way, in purple, you can see our planned new shaft which would service both main structures. Details on this expansion will be available in Q3. Let's keep turning the model another 90 degrees. We are looking now to the south, and you can see Amolillo from the back. Again in red, the access ramp; in white, the mined-out areas; and in red and orange, the reserves. As I mentioned, we already extended the strike length of the vein during Q1, but there is still a very large potential to expand reserves along strike and dip. I think it is very easy to see why we are able to add every quarter another year of production in our reserves and why I'm so bullish on the potential of La Colorada. One more 90-degree turn, we are looking now towards the east, showing clearly the very large exploration potential of all main veins, at least down to 1,000 level. We are currently drilling about 5,000 meters per month at La Colorada and it is always one of my highlights during the month to review the drill results. Now to our other mines. Drilling at Dolores is advancing very well. We finalized in Q1 10,930 meters drilling on the East Dike zone, on the northeast side of the pit and to the south end of the pit. Drilling in the south, we turned 18 meters containing 1.71 gram gold and 10 gram silver, including 13.2 meter interval with 2.26 gram gold and 12 gram silver. Another hole intersected 16.5 meters with 0.8 gram gold and 43 gram silver. Drilling on the East Dike was finalized in Q1 and we are currently revising the model. Results show a bit of lower grade than in the south, but are still very respectable, like 20.3 meters with 47 grams silver and 0.28 gram gold. The East Dike will be included in our new pit model at the end of the year. The south zone will most likely be an underground target. The many positive results from this zone will increase the resources but will only be added to the reserves once an underground mine plan is established. One highlight of the Huaron exploration in Q1 was the discovery of a wide disseminated zone on the 420 level. Drill results returned 17.6 meters containing 243 gram silver and 21.7 meters containing 168 gram silver, 2.8 gram percent lead and 4.3% zinc. Much more drilling will be required to understand the exact size and geometry of this ore body, but it is for sure an encouraging development at Huaron. I would like to finish my presentation with some remarks on Waterloo. We finalized Phase II drilling in Q1. And up-to-date, we drilled 53 holes, which largely confirmed the Asarco intersect from the '60s. There are truly impressive intersects, like 62.5 meters containing 130 gram silver or 77.7 meters with 114 gram silver, starting right at surface. Focus is now on the metallurgy. And test results will guide our next steps forward on this project. Some of the initial mineralogical evaluation suggests some fine-grained encapsulation of silver in silica. Metallurgical results will be available in Q2 and Q3. I'll pass on now to Rob.

[A. Robert Doyle:]

Good morning, ladies and gentlemen. As Geoff highlighted earlier, Q1 was another respectable quarter for Pan American from a financial perspective. The current slide shows a summarized income statement for the period, reflecting a bottom-line adjusted earnings of $40 million, which was $0.26 per share. As expected, our gross margin for Q1 2013 of 31% was lower than the margin we enjoyed a year ago as a result of lower realized prices with silver down 9% and gold down 5% from our Q1 2012 realized prices and also, due to the effects of the Dolores production. Remembering, that we acquired the mine at the end of Q1 2012 and therefore, it was not part of our results in the comparative quarter. And items of significance to point out on the income statement are

[Geoffrey A. Burns:]

Thank you, Rob. We've had a good start to 2013 and I'm happy to be able to reaffirm that we are right on track to achieve our original production forecast for the year at 25 million to 26 million ounces of silver and 140,000 to 150,000 ounces of gold. We're still reviewing our forecasts for cash costs over the balance of the year. We were well below our full year guidance in the first quarter. However, with lower by-product prices, particularly gold, our cash costs are likely to rise. The lower byproduct effect will be offset with lower operating expenditures. We have already identified some low-hanging cost fruit that we can quickly trim. However, we are still in the process of identifying and quantifying potential savings and then balancing them with our clearly stated goal of maintaining our production. I expect this work will be completed and implemented over the next couple of months, and at this point -- at that point, we'll be in a position to revise our forecasted cash costs, if necessary. Like Steve, my expectation today is that we are most likely to find that we'll be able to maintain our full year guidance at $11.80 to $12.80 per ounce. As most of you on the call this morning are painfully aware, we have seen a decided shift in the equity markets, particularly as it relates to the precious metal and silver sector. For instance, in spite of our excellent financial results in 2012 and production records, our share price declined 21%, and we saw investors shift out of precious metals on fears of political or fiscal changes in some jurisdictions and operational risks associated cost increases at operating mines and development projects. In this new environment, investors' past demands of continued production growth have clearly given way to desires for real return in the form of dividends and share repurchases and demonstrated capital discipline. This trend was exacerbated last month when speculators pulled away from the gold and silver markets and the prices of both precious metals declined sharply in just a couple of days. Interestingly enough, while the speculators left or went short, the fundamental buyers in Asia and India came rushing back and physical metal sales in both locations have left dealers scrambling to find metal. It will be interesting to see over the next couple of months which of these groups will dictate the price

[Operator:]

[Operator Instructions] Our first question today comes from Rahul Paul of Canaccord Genuity.

[Rahul Paul:]

Just at Dolores, the tonnage stacked in Q1 seemed to be quite a bit below what we've seen in the past. Just wondering what were the reasons for that. Is it the mine holding you back or the crushers or is it something else?

[Steven L. Busby:]

Rahul, this is Steve. Yes, the mine's producing pretty good tonnage and we also have a fair amount, probably a couple of million tons, of stockpile available to us. So the bottleneck's not up at the mine. We did experience some unexpected downtimes in the crushing plant during Q1 where we had some screen failures, and we have a crusher mainframe that we're addressing as well. In addition, we're a little bit constrained on this leach pad, too, we're having to move conveyors around. Trying to make the final fill of that leach pad has constrained us to some degree. So our tonnages are down from what they used to be. But they are -- I will say that the tonnages are in the range that we expected with our guidance. We didn't expect a slight decrease from last year on overall throughput as we get this Leach Pad 3 construction finished.

[Rahul Paul:]

So for the rest of the year, should we expect something similar to what we saw in Q1 or should we expect it to pick up in the second half of the year?

[Steven L. Busby:]

Yes, when you look at our forecast, we pretty well kept that kind of throughput certainly through Q2 and into Q3, and a slight improvement in Q4. And that all depends on when we actually bring Pad 3 online. If we bring it on in October, we should have a pretty good Q4.

[Rahul Paul:]

Okay. And then staying with Dolores, you also mentioned that you were mining in zones where the silver grade was lower than expected. How much lower was that compared to your block model?

[Steven L. Busby:]

The silver grade looks pretty good, actually. It was the gold grade I was referring to. We were anticipating 0.5 gram per tonne gold and we achieved about a 0.45. And I would say, right now, probably 3/4 of that difference could be attributed to just mine sequencing and where we're mining relative to where we planned to mine. And the other 1/4 is still in question relative to the reconciliation to the model. But it is totally directed to the gold, not the silver.

[Rahul Paul:]

Okay. So silver is fine. Because the MD&A had a sentence that said lower-than-expected silver grades, so I just wanted to clarify that. And you also mentioned that, for Dolores, a revised mine plan was nearing completion. Is that something separate from the pulp agglomeration scoping study that we're expecting in Q3?

[Steven L. Busby:]

Pardon me, Rahul, can I ask you to repeat the question? I'm not sure I understood.

[Rahul Paul:]

Sure. I thought you mentioned during the call that the revised mine plan at Dolores was nearing completion. Is that something separate from the pulp agglomeration scoping study or is it something else?

[Steven L. Busby:]

I understand the question now. Yes, it's actually a good question. It's a combination thereof. We are looking at a mine plan with the all heap-leach-only case. Simultaneously, we're doing a mine plan with the pulp agglomeration. We've even done mine plans with the full-scale mill and an underground as well. So we've got probably 4 kind of iterations of mine plans going on simultaneously, and we're kind of narrowing in. As I say, we're narrowing in on the mine plan. It is a mine plan that will likely include the pulp agglomeration circuit. And the key in these mine plans is how we sequence the pits. We have -- the original design had 8 different phases of sequencing the pit. We're looking at opportunities to maybe add 1 more phase and change the sequencing of each of those phases to try to access some of the higher grades in a more smooth fashion, so we don't have these ups and downs with grades as we currently see in the current mine plan.

[Rahul Paul:]

Okay. So if that's the case, then should we expect the results to be available in Q3 with everything else?

[Steven L. Busby:]

Yes, exactly. Come August, we should have a real good feel for that mine plan and how it looks overall for the short and long-term periods.

[Operator:]

The next question comes from Jorge Beristain of Deutsche Bank.

[Jorge M. Beristain:]

My question is a few. Could you just clarify what's happened with the large change in the noncontrolling interest, and if that's expected to be a recurrent issue or is there something going on with some of the assets that have been put up for sale there?

[A. Robert Doyle:]

Sorry, Jorge, that doesn't -- I'll have to come back to you on that one. There shouldn't be any large factors driving that noncontrolling interest in the period. I'll have to investigate that and come back to you.

[Jorge M. Beristain:]

In the table you have in your presentation, you're saying that in Q1 '13, you had a $72 million, I believe that's a loss or a sharing of minority interest there. And in the year ago period, it was de minimis. So it seems like you have a very -- a large change...

[A. Robert Doyle:]

That must be an error on the slide. I'm sorry about that. It's actually, the noncontrolling interest is de minimis in both periods. It was actually a $72,000 loss in the current period to...

[Jorge M. Beristain:]

Maybe it is a typo there, but it does reflect there a large change on Slide 20.

[A. Robert Doyle:]

Okay, sorry about that. Yes, that's $72,000.

[Jorge M. Beristain:]

Okay, okay. My other question was maybe just for Geoff, in terms of increasing -- in this current environment, how can you increase your silver leverage per share for investors? And if you could talk a little bit toward M&A and what you would plan to do with your very strong balance sheet in an environment where some of your competitors may be under more pressure, either operationally or due to recent large acquisitions or projects.

[Geoffrey A. Burns:]

Certainly, Jorge. Certainly on the M&A side, we are very actively looking at opportunities. It has not gone unnoticed by ourselves and I guess by the market that assets have been devalued kind of universally within the silver sector, and that has certainly been noticed by us. And we're actively looking at things that perhaps even as little as 5 months ago did not look value-accretive. And we're going to continue to do that. And I hope over the next coming months that we might find an opportunity that will strengthen our overall portfolio by either, I guess, say, providing additional production or providing an additional development opportunity at lower cash costs and lower investment thresholds than what we're currently doing. So we're going to keep looking very carefully. The intention would be in that environment to use cash. I don't think at this time, we're at all inclined to issue shares to do any further growth. I'm not sure I fully understand your first question, Jorge, in terms of leverage to silver prices. We are currently, in terms of our income statement, we are 71% or plus 70% leveraged to the silver price. And I don't see that changing in the short term with our production mix. And I don't have plans to actually, today, change that production mix materially from what we've talked about and what we've guided.

[Jorge M. Beristain:]

Sorry, I just meant leverage in terms of having more ounces of attributable silver production per share In other words, that you could engineer that through a potential transaction.

[Geoffrey A. Burns:]

Again, if that opportunity is there, absolutely, which provides some good accretive returns, both on cash flow, as well as earnings, rest assured, we will take advantage of it.

[Jorge M. Beristain:]

And sorry, maybe just a quick follow-up for Michael. Is there any update on the drilling at Waterloo? I understand that you've been exploring some of the issues with the metallurgy with the ore out there. And if you could talk if there's been any advancement on the metallurgy.

[Michael Steinmann:]

Yes, Jorge. As I said, we finished the drilling. We drilled 2 phases there right now. We drilled 53 holes, most of them RC holes to compare with the drilling done by Asarco in the '60s. So far, all the twin holes we drilled came back very similar or slightly higher in grade. So compared to it, we're probably around 10% to 14% higher in grade. But keep in mind that the study done by Asarco was not done after 43-101 standards, obviously, in the '60s and not completely clear what all they included in that grade. But so far, when I do a direct comparison, we're about 14% higher. What we see is a very fine-grained mineralization in this deposit, and we are full-on working there on the metallurgy. We drilled 2 -- 3, sorry, 3 large PQ holes to get very large samples, shipped them out and we are waiting for results right now. I don't know if Steve wants to add something here on the metallurgical side.

[Steven L. Busby:]

No. I think Michael mentioned, Jorge, in his talk about probably the most prevalent issue we're dealing with now is a silica encapsulation. We are seeing mineralogically, there is silica encapsulation. So we're working with the met labs at trying to look at alternative ways to try to liberate some of that silver. And that seems to be a key driver to us in terms of defining what the flow sheet could be, which will, in turn, define what the potential economics could be. So we're hoping during Q2, Q3, more and more metallurgical results will start flowing out that we'll report on.

[Operator:]

The next question comes from Dan Rollins of RBC Capital Markets.

[Dan Rollins:]

My question is regarding Morococha. If I were to take guidance as the sort of the gospel right now, I'm looking at the cash costs, I guess, between $20.5 to $22, $25 an ounce, and then baked back on the CapEx you're spending there, about $15 million. It looks like you're going to be, all-in cash costs, in the $27 to $29 range rough estimate. Right now, that mine is going to be bleeding pretty significant cash at the current spot silver prices. How much more low-hanging fruit can you pick off of this mine? Because it's been one of the ones that I know you guys have focused on keeping the costs under control and trying to rein in costs. But how much more work can really be done here to bring those costs down to a breakeven on a free cash flow basis?

[Steven L. Busby:]

Yes, Dan, this is Steve. We are pretty encouraged by what we're seeing right now at Morococha in terms of the benefits of this mechanization program. We are seeing costs starting to trend better than we anticipated even. And as we start to implement some of these cost-saving initiatives, they've kind of had a head start, if you will, in Peru, because the economics of our Peruvian mines in our budget estimates were fairly tight. So we launched a number of these initiatives already that are starting to bear fruit today, and we are starting to see some movements that are going in the right direction. The other key aspect of Morococha is we are still mining below reserve grades due to a combination of access and where we can get to those reserves, as well as mining methods and dilutions, that we think there's some opportunities there as well. We're currently feeling pretty comfortable that we can readjust our plans without changing cutoff grades, per se, at our current price forecast for the rest of the year and keep it at a reasonably breakeven price going forward.

[Dan Rollins:]

Okay. So we should sort of expect to see some improvement over the next, say, 2 to 6 quarters, especially as you get the underground development up and running [indiscernible] grades, and you'll also see those unit costs coming down?

[Geoffrey A. Burns:]

Exactly.

[Operator:]

The next question comes from Trevor Turnbull of Scotia Bank.

[Trevor Turnbull:]

Yes, I guess the first one is related to Dolores. I was wondering, given that you've had a little bit of a reconciliation issue with the gold that Steve was talking about, when you put out the new mine plan later this year at Dolores, will there have been infill drilling or anything that might address that and help tighten up the reconciliation there?

[Steven L. Busby:]

Yes, Trevor. This is Steve. The exploration drilling is really focused outside of the pit area itself to extensions in the pit and some of the underground targets that we're looking at. So that drilling by itself won't really factor in to this reconciliation review. What we'll do is we are doing RC drilling now, we have been doing it since Minefinders' time, for ore control. And we have been looking at that RC drilling. We have been doing a number of blast movement studies and mineability studies to try to improve our ability to cut the ore away from the waste there. And we're seeing some pretty good progress in that. So those are the kind of things that'll feed this new mine plan. We'll see it as an outcome of the new mine plan there.

[Trevor Turnbull:]

Okay. And then I guess, while I've got you, with respect to the direct cost savings, I heard you say that you're looking at things that should be able to hold the line on costs given that you're likely to see lower byproduct credits. But I wasn't sure if you said this or not. Does that also include trying to keep the production relatively stable? Or is that one of the things that might be on the table, is slightly reducing production, if that's what it takes?

[Steven L. Busby:]

Yes, no, we actually said we want to keep the production stable right now. We feel that we're in a pretty good position to bring in our costs at the current production rates. And we don't want to see a drop in production at all.

[Trevor Turnbull:]

And that's certainly understandable. Does -- I guess that implies that either there is a fair bit of low-hanging fruit like you were being asked about just previously, or potentially, you might be looking at slightly higher cutoffs. Is that something you would also take a look at?

[Steven L. Busby:]

Yes, right now, we don't see a need to go to higher cutoffs. I would say of our 7 operations, Morococha is clearly the one that's probably at the most risk. It'll be the first one that we'll probably start to look at changes in cutoffs if we have to. But as of today, we feel there are some low-hanging fruits, some cost savings out there that we can gather without changing the cutoff grade right now today.

[Trevor Turnbull:]

Okay. And then maybe just a couple of quick financial questions. You mentioned that Q1 is when you tend to make your final payment on 2012 taxes. Is that something that is likely to recur every first quarter, you'll be kind of making that last cash tax payment?

[A. Robert Doyle:]

It's Rob here. Actually, 2012 Q1 and 2013 Q1 were extreme cases of that. We would always expect slightly elevated payments in Q1, but not as elevated as we've seen in the last 2 years. There's some very specific reasons why that's been the case in the last 2 years. But ordinarily, it should be relatively even with a slight increase in Q1 as we finalize our tax returns.

[Trevor Turnbull:]

And so for the remainder of the year, we would expect it to be fairly even?

[A. Robert Doyle:]

We would certainly expect so as we pay installments, although, obviously, the lower-price environment would likely lead to lower installment payments.

[Trevor Turnbull:]

Okay. And then just a final question maybe on the share buyback. It seems that the pace of the buyback's been fairly slow. Is that something that's by design or just more a nature of volumes and liquidity?

[Geoffrey A. Burns:]

Trevor, it's Geoff. No, that's very much by design. When we looked at early in the quarter, and quite frankly, we're trading at levels much higher than where we are today and we were active in the market. And as we saw prices being squeezed in literally about 1 month ago, we thought it at least prudent in a short term to let the, A, let the prices settle and see where we're at, and they seem to have done that to a certain degree as of today, and see the impact on our share price. And as a consequence, we were less active in the market. I think going forward, we'll again reevaluate looking at what we believe our NPV is internally relative to the share price. We'll look at other opportunities for using our cash. As Jorge questioned a little while ago, we're certainly very actively looking at opportunities in the M&A field. And should circumstances warrant and our Finance Committee decide, we would happily pick up that activity again if we see stable prices and continued share price pressure.

[Operator:]

The next question comes from Chris Lichtenheldt of Dundee Capital Markets.

[Chris Lichtenheldt:]

First, I just wanted to ask on Manantial Espejo. If we -- if I think back to the past few conference calls, it hasn't sounded like that asset's been the best place to put your capital. But with a bit of a currency devaluation and potentially some better operating prospects ahead, what is the outlook for that asset? Has there been enough capital being put in there to move forward pretty steadily or do you have to do some upkeep beforehand?

[Steven L. Busby:]

Chris, this is Steve. No, I think Manantial Espejo, the next few years look pretty good with where we've capitalized right now. If we can get these costs to continue to trend downward, it looks like upside is ahead of us for the next few years for sure.

[Chris Lichtenheldt:]

Okay great. Second, I just wanted to come back to the M&A topic quickly. You talked about potentially some opportunities out there. Asset prices have obviously come down, but as have the silver prices, which I think most investors are willing to plug into their models when considering potential returns on investments. Can you talk a little bit about your philosophy around, when you're looking at these things, do they have to work under higher metal prices or you've -- at the point where they'd have to work at spot silver or lower for you to go ahead? And where -- what sorts of opportunities are these? Are these exploration stage, where there's still some years of capital ahead, or can you just talk a little bit about that?

[Geoffrey A. Burns:]

Sure, Chris. Right now, we still have our reserves pegged at $25 silver. We've yet to make a change to that, and I'm not sure we will. To be quite honest, it's pretty short term to be making long-term pricing decisions based on a 1-month dislocate in the silver and gold prices. And so I would say as it stands today, we'd be looking at things at $25. I would say in terms of returns, we're now applying higher return rates, and those rates would be adjusted relative to jurisdiction. With countries like Argentina or Bolivia, I'm not saying we would move in those directions, but if there were projects in those locations, they would have to demand much, much higher returns, in the at least plus 20% neighborhood or higher. And even in jurisdictions like Mexico, which is fairly favorable and remains fairly favorable, we're now looking at returns of at least 15% before we would get very excited. As for the style of project or style of opportunity, i.e. exploration/development stage and/or an operations stage, I would say, first and foremost would be an operating project where we saw upside either in the associated reserve and/or in an ability to run it better, is the best way to describe it, an ability to rationalize or improve productivity. That would be #1 target. #2 target would be a late stage development project. I'm not as excited about those projects, only insofar as they would add additional capital risk. And as we've seen of late, my impression is that our shareholders are not particularly excited by taking on more capital risk today. And I would say I'm least excited about late stage exploration that requires a lot of discretionary exploration funds just to get it to a point where you could even contemplate doing a PEA study or even a scoping study. So #1 is, does it have some production that would meaningfully change our profile? And 2, does that -- do we think we can do better with that current production than perhaps the current operator is doing?

[Operator:]

Our last question today comes from Andrew Kaip of BMO Capital Markets.

[Andrew Kaip:]

Look, I've just got 2 quick questions. I noticed on your CapEx spend for both San Vicente and Manantial Espejo that your CapEx spend during the quarter was quite light relative to what you had guided. And I'm just wondering, is this -- are these expenditures we should see flowing through the remaining of -- the remainder of the year or are these areas where you feel that you can reduce overall CapEx spend?

[Steven L. Busby:]

Andrew, this is Steve. They were light mostly on timing of the projects and when we brought the projects online. There is some savings we're looking at, at both of those mines going into the rest of the year, however, I don't think they're going to be large. Again, we've got some real requirements to raise the dam at San Vicente and some of the pre-stripping that we have to do at Manantial Espejo on the pit that we have to do to maintain our productions into next year and the years beyond. So I don't anticipate a big change, but there may be some reductions there.

[Andrew Kaip:]

Okay. So we should be expecting those to flow in through the remainder of the year.

[Steven L. Busby:]

Yes, correct.

[Geoffrey A. Burns:]

Ladies and gentlemen, thank you very much for joining us today for our first quarter call. Certainly, and as always, we look forward to updating you again in August during our second quarter call and with some ideas and some further details on where we're at with some of our cost reduction programs and what we look like going forward over the balance of the year. Thank you very much.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. You may now disconnect your lines. Thank you for participating and have a pleasant day.