Sierra Metals Inc.
Q2 2020 Earnings Call Transcript

Published: 14 Aug 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Sierra Metals Q2 2020 Consolidated Financial Results Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Mike McAllister, Vice President of Investor Relations. Please go ahead sir.

[Michael McAllister:]

Thank you, operator, and good morning, everyone. Welcome to Sierra Metals' Q2 2020 results conference call. On today's call, we are joined by Luis Marchese, our CEO, Ed Guimaraes, our CFO. Today's call will be followed by a question-and-answer period and the accompanying presentation for today's call is available for download both through the webcast and the company's website at sierrametals.com. Yesterday's press release, the financial statements, and the management discussion and analysis are posted on the company's website. Before I turn the call over to Luis, I would like to indicate that the earnings call contains forward-looking information that is based on the company's current expectations, estimates and beliefs. This forward-looking information is subject to a number of risks, uncertainties and other factors. Actual results could differ materially from our conclusions, forecast or projection as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast, or projection in the forward-looking information and the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projections as reflected in the forward-looking information is contained in the company's annual information form which is available publicly on SEDAR or EDGAR via Form 40-F or on the company's website. Please note that all dollars amounts mentioned on today's call are in U.S. dollars unless otherwise noted. With that I would now like to turn the call over to Luis Marchese CEO of Sierra Metals.

[Luis Marchese:]

Thanks Mike. Before I speak about our Q2 highlights and insights, I would like to take a quick moment to update you in the most recent COVID-19 developments in Mexico and Peru. Turning to slide 4, at the beginning of June, the Peruvian and Mexican government allowed for the resumption of full mining and mining related activities. The [indiscernible] activities have been carried in the previous months. The company first recorded [indiscernible] Yauricocha and Bolivar mines. And also [indiscernible] looking place at Cusi to ensure work and community safety we recall [indiscernible] as well. We are starting operations in late July. We are proceeding cautiously and [indiscernible] in the community which we operate as well as to mitigate the potential for further work to process. The employees are first tested, quarantined and tested again before joining the active work. Also the mine employees are monitored daily with self checks. While this system has served us well, it's not the perfect solution. We still have had some positive cases [indiscernible] in the workers and have been quarantined and send those employees for medical attention. We also needed to remove any employees identified through contact tracing from the workers until they are medically clear to continue. For example, two weeks ago we had two [indiscernible] to the sanitary fencing system which is taking place and at the of the day which had to remove over 100 employees from the Yauricocha mine, so this is sort of the situation that we are looking at. I cannot understand the difficult situation due to COVID-19 currently both in Peru and Mexico and we must continue to be very diligent on that. Taking care of the communities where we operate is also very important to us for the safety and their well being. We’ve worked communities and [indiscernible] and medical supplies including a donation to a local fund-raising effort near the Yauricocha mines for the purchase of two oxygen production plants. Oxygen remains in short supply and is critical for those who are ill with COVID-19. We will continue strengthening our engagement and support to our workforce, their families and the local communities in our area of influence at all three mines the situation evolves. Then to Q2, 2020 highlights turning to slide 5. The company achieved remarkable results despite the negative implications of COVID-19 related shutdowns. While consolidated throughput copper equivalent production and revenue were lower adjusted EBITDA was positive and we finished the quarter with $40.7 million in cash. These are strong results given the shutdowns experience in the second quarter. Our uranium mix by metal continues to migrate with copper taking a leading role followed by silver. Gold has also seen a continued increase as a percentage of the mix aided by improved production and recovery at Bolivar and supported by higher gold prices. In Q2 we faced lower base metals realized prices but saw an improvement to precious metals realized prices. Precious metals have continue to improve in Q3 and base metals have also seen improvement especially in copper over Q2. Turning to slide 6. When compared to the same period in 2019 costs were down at both Yauricocha and Bolivar which was attributable to lower operating costs at the prudent management of capital expenditures to protect the balance sheet. We also realized improved head rate and favorable foreign exchange rates. I would like to commend our employees from management who despite the challenges faced in the quarter maintain a high level of productivity, a solid balance sheet and strong cash. While Cusi remaining carrier maintenance during Q2 it did have a positive EBITDA of $0.2 million and revenue $1.7 million from the sale of silver concentrate remaining at the end of Q1, 2020. Cusi started earlier than anticipated in late July and in some tracks are performing well on its way to the 1200 tonnes per day throughput level. Cash costs at Cusi are expected to be lower in the latter half of 2020 as we ramp up production. Overall we are certainly optimistic that with improvement rate efficiencies and potential higher metal prices we will see a strong third quarter in 2020. Looking ahead in 2020 turning to slide 7. We will see a strong growth for the company as operations return to full capacity. At Yauricocha we have the flexibility to recover some of the lowest production from the second quarter shutdown during the second half of the year. We are also excited to see what Bolivar and Cusi ramp up to their targeted capacities of 5000 and 1200 tonnes per day respectively. Furthermore we will also continue to see the required permits to increase Yauricocha throughput to the 3,600 tonnes per day level for next year. I am also pleased to announce that as per the ongoing strategy of the company the board of directors has approved a proposal by management for the expenditure to study further expansions at all three miles beyond their current capacity ramp-ups levels. This [indiscernible] will incorporate the latest 43-101 mineral resource updates including the significant mineral resource increases at Bolivar reported in December 2019 and March 2020. The company has excellent land packages with tremendous source growth potential to support further organic growth at all mines. The company has issued revised 2020 production guidance. We now anticipate that 2020 copper equivalent production will range between 110 million pounds to 122 million pounds. Silver equivalent production will range between 17.4 million ounces and 18.4 million ounces or single equivalent production will range between 286.8 pounds to 318.7 million pounds. The revised guidance assumes no further shutdowns of work stoppages because of the COVID-19 pandemic and is based solely on what management expects the company's operations can produce this year. In conclusion on slide 8, the company has had a solid quarter despite the adversities we face for the COVID-19 pandemic and we're still able to emerge with a strong balance sheet and cash position. While we certainly continue to operate in a vulnerable environment due to COVID-19 we remain optimistic that further cash flow and liquid improvements are expected in the second half of the year as a benefit of higher production and metal prices as compared with the first half. We remain committed to the prudent and sustainable growth of the company and more importantly it is proving the first share value of the company which benefits all shareholders. With that I will now turn the call back to Mike.

[Michael McAllister:]

Thanks Luis. That ends the presentation portion of the call. With that we would now like to open the call off to questions from participants. Operator could you please open up the lines?

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Mark La Reichman from NOBLE Capital Markets. Your line is open.

[Mark La Reichman:]

Good morning. Luis, when you look at the COVID-19 situation in Peru and Mexico how are you thinking about required functions and activities versus what's discretionary?

[Luis Marchese:]

Thanks for the question, Mark. I think it's extremely relevant with this task, COVID-19 in both [indiscernible] is very worrying situation. In Peru yesterday we had the highest number of infected people since the start of the pandemic and we are having the highest number of death people and this is all across the country and it's certainly the case near our [indiscernible] at Yauricocha.\ In Mexico, the situation is also quite worrying. Although where we are operating it's still hopefully will remain at the lower level of infection than the rest of the country. What we are doing is we are prioritizing a non-discretionary capital expenditure, particularly in the areas of health, safety and environment. And also we are prioritizing operational CapEx. So as we speak we are trying to spend more on the required CapEx to maintain our operations at the level that we require. In the last quarter provided we could only do essential mining activities we had to stop some of our development which we are at currently bringing back at the right level. So we have the right amount of work available for production. In the future, certainly we expect to have some cash flow to start looking at different CapEx initiatives from nondiscretionary and we're going to look at expansion studies that I've just mentioned among other studies that we have to make for the future of the company as part of the growth strategy.

[Mark La Reichman:]

My follow-up is when you think about the potential to increase production capacity at all three mines beyond what is already planned at this juncture which ones appear to be the easiest versus the toughest to accomplish and what are the most critical questions that you hope to study will provide help with?

[Luis Marchese:]

Well, thank you Mark. The end of this study is to provide answers to the design and relevant variables of the three expansions. The right sizing, the right layout, the potential bottlenecks in terms of infrastructure, power, water, roads, the environmental impact, assessment, the financial requirements and eventual financial needs. So we're going to look at all of those variables to decide between the options that we have at hand to see what the option that is the most value equity for the company is the one that we would develop in the future. So that's what the studies are aiming for and the board has supported that we do these studies for the three mines because we are very optimistic that provided where we are in terms of resources, in terms of cost based on the jurisdictions where we are that we will be able to bring all this value to the company and to the shareholders.

[Mark La Reichman:]

Thank you very much.

[Operator:]

Our next question comes from the line of Heiko Ihle from H.C.W. Your line is open.

[Heiko Ihle:]

Hi guys, thanks for taking my questions there. So just went through a couple of past press releases, January 23rd you initiated guidance of 135 million copper equivalent pounds. You suspended May 13th now you're at 110 million to 122 million pounds. I mean all things considered it's really only a 14.1 decrease at the midpoint. So that's actually really strong. We're sort of halfway through Q3 at this point can you just sort of tell us what you're seeing in the quarter and how much room for error this guidance actually allows?

[Luis Marchese:]

Thank you, Heiko. While we were maintaining essential mining activities we work on the most profitable areas of the mine that's where we try to stay while also maintaining all the right variables in place. So that's why if you see our guidance as compared to 2019 we have, we are aiming to reach more production in gold, silver and copper. Even though actually in silver, we stopped Cusi for almost 4 months. So that's why you can see that the drop in production is not that much and we aim to remain there. Well, looking ahead we are also very carefully planning what we do for the rest of the year and so far we're getting there. My only concern, I will reiterate this COVID that it can impact us in the development of cost [indiscernible] that we are currently planning. So that's why we are providing this low and high guidance for the rest of the year.

[Heiko Ihle:]

Okay. And then just building on that it states the release that the guidance “assumes no further shutdowns of work stoppages as a result of the COVID-19 pandemic” can you just sort of walk us through some factors that may have changed on your internal outlook in the last 14 days and what has started to concern you more or maybe also things that started concerning you less in the very recent past?

[Edmundo Guimaraes:]

Okay. In terms of COVID if you compare actually our operations with other operations in Peru, we have been able to manage it fairly well. We have not stopped operations at any moment. Our strategy of sanitary fencing and daily controls and we have a crisis committee that meets fairly often has worked quite well. So that's a good part of it and we certainly are planning to remain that way but on the other hand the overall situation in the country in Peru and in Mexico is really concerning. As I said as we speak yesterday was the worst days since the beginning of the pandemic. So we cannot state that we won't have any leaks or actually dire consequences from these pandemic in the future. We are having as we speak also some operational restrictions like I said we had to quarantine over a hundred workers that were in Yauricocha which is pretty much 15% of the workers that we had at the mine at the time from one day to the other because we had to isolate some cases that had appeared, even though we had this sanitary fencing strategy. So these sort of situations can happen. We are doing our best to control but we are part of a community. We are part of the environment. So it's very difficult to finally say that we're not going to have any sort of issues in the future.

[Heiko Ihle:]

Okay. Thanks and then just finally and I know I asked this question on one of these calls before and we were actually an even lower cash figure then but I mean just thinking out loud you currently have over $40 million in cash that's essentially in line with the end of 2019 but it's double the cash you had at the end of ‘18 and ‘17. I mean at what point in time do you think that's a little bit too much firepower and you'd be willing to spend that down a little bit or return it to shareholders or do something else with it? And that's it for me. Thank you very much.

[Michael McAllister:]

Hi Heiko. Thank you. I will take that question on. Yes, that's a very good point. With the cash position that we have and assuming Q3 and Q4 continue as Q3 has started off, we will continue to build cash. We have opportunities to continue with our original 2020 approved capital expenditure plan which if you recall on the original guidance back in January was $52 million. So we've only spent approximately $15 million halfway through the year. So there would be another $38 million available for that. As well as consider further spending for other growth programs and expiration as well and yes should there still be excess cash a portion of that could be returned to the shareholders but it's important to note that we're still nowhere near out of the woods with COVID and as Luis just mentioned yesterday was one of the worst days that Peru has seen in terms of COVID. So it's still very much [indiscernible].

[Heiko Ihle:]

Yes. Unfortunately you're right with COVID being nowhere near over. Thank you and I appreciate it.

[Operator:]

Our next question comes from the line of Leon Cooperman from Omega Family Office. Your line is open.

[Leon Cooperman:]

Thank you. I have a few questions maybe I can put them out there. The market capitalization of the company is $275 million which is almost an irrelevancy in today's market as people want larger more established companies, present management and predecessor management done a good job. So we really can't criticize the management it's just that nobody's interested in this. So I'm just curious whether you guys are willing to undertake a strategic review with the idea of maximizing value to shareholders and in that regard, we used to publish a slide where you listed out your NAV. Again that disappeared because you're going through this preliminary economic assessment and waiting for the results but I will be curious if you looked at M&A activity in the mining industry, what is the typical multiple EBITDA NAV on these transactions that are taking place and what would that portend for us? That'd be question number one. Question number two you really almost yourself opened up the Pandora's box. You made a reference in your press release about looking at returning money to shareholders. What do you got in mind? We announced the intention of doing a buy back earlier this year. I think the stock price is actually unchanged from where it was at the beginning of the year, even though the fundamental performance of the company looks to be better. So my second question in terms of the buyback. Third I looked at the tonnage that you're projecting to produce in 2021 versus 2020, would that should one assume that your production in gold and silver is likely to be greater in 2021 than it is in 2020? Those are my questions for now.

[Edmundo Guimaraes:]

Thanks Leon. I will take that on and then Luis could compliment but in terms of strategic reviews yes, that's something that is ongoing. We do strategic reviews management to presenting to the board and we do these twice a year and just recently we approved studies for possible expansion scenarios at all three of our mines and that can go a long way in terms of --

[Leon Cooperman:]

I was referring to a strategic review as regards to the possible sale of the company to a larger entity. There was $275 million we just don't attracted any interest. Silver and gold are at record high prices yet have stock price is no different than it was a decade ago. So my question is whether there you have a 50% owner, 59% the stock is owned by management and Alberto is the time not come for you guys to step out and see if there is an alternative home for Sierra that would get proper value for us. So I'm not talking about strategic review of your expansions?

[Edmundo Guimaraes:]

Okay. Thanks for clarifying me but I think that question is more, I think should be posed to Alberto into the fund in terms of what their strategic plans are for their interest in the company and because it is 52% what they decide ultimately whether it's 52% or 100% at that point. They can control what takes place. Luis, I don't know if you want to add anything in that regard? You are on mute.

[Luis Marchese:]

I would maybe the next question Leon on the excess cash flows but I can mention is that we have a CapEx backlog there. We carried $10 million from CapEx backlog from 2019 to 2020 and we certainly have a larger CapEx backlog due to the COVID. We have been able to do -- not even what we believe was non-discretionary in terms of cooperation.

[Leon Cooperman:]

That wasn't my question obviously, my question let's focus on the first question was, if you look at M&A activity in the mining space in terms of multiples of EBITDA and NAV what would you think the value is of Sierra in the merger market versus the auction market? The auction market is the market where one or two shares trade or 100/200 shares trade. What is the value of Sierra to a strategic buyer? And will the company consider that?

[Luis Marchese:]

Leo, I think we are providing guidance in terms of production. We have provided guidance in the past. I think there is a group of analysts that have certainly a view on the value of the company and they certainly support your view that the company have room to grow in terms of first [year] value. That's what I can comment on that. In terms of the strategy that you mentioned, I think it just clarified that the company is controlled by one party. So quite a bit of that well that decision is in the hands of that controlling party.

[Leon Cooperman:]

What about the question, I assume if I look at your tonnage that you're expecting to produce in 2021, would it be fair to reason that you would anticipate that your production of gold and silver in ounces would be higher in 2021 than you forecast in 2020?

[Luis Marchese:]

Absolutely. We're aiming to reach full capacity of the three mines at Bolivar and Cusi by the end of the year and we are aiming to have a permit to go to 3,600 tonnage per day at, so which is 20% more throughput in Yauricocha by the start of the next year. So by the likes of throughput and grades and recoveries we are certainly aiming to have a higher production and let me add that we are also aiming to have lower costs, lower unit costs.

[Leon Cooperman:]

That's a good combination. More production lower cost.

[Luis Marchese:]

Absolutely and that's what we're aiming for and we are certainly committed to that.

[Leon Cooperman:]

The cash, any ability to make a guess as to how much cash you would generate in the second half of the year? In other words we currently have $40.7 million in cash and 99.5 million debt. Do you think you'll generate, how much cash you think you generate in the second half of the year? You having a view of that at this point in time?

[Edmundo Guimaraes:]

Because we've suspended earnings guidance we're not prepared to make that statement. What we can say that we expect the second half of Q2 to be much stronger than the first half assuming there is no COVID related work stoppages and if metal prices stay where they are closer to spot as opposed to consensus. Yes. We should be in a position to generate cash but I'm not prepared to comment.

[Leon Cooperman:]

Okay. That's understandable. Again I think we have to pay a little bit more attention to looking at strategic alternatives for the company because I think the stock is disconnected from the fundamental value of the business and I think it's incumbent upon the board and mysterious to basically look at this and try to decide the best way to deal with it but thank you and good luck. Stay healthy.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of James Young from West Investments. Your line is open.

[James Young:]

Yes. Hi. Thank you very much and thank you for the strong performance in the second quarter, a couple of questions. I've got several questions for you. Number one is, can you just remind us are there any upcoming labor contracts that are due for negotiation that we should be aware of at any and all of the three mines?

[Luis Marchese:]

Hello James. Thanks for the question. Not in the very near future. The next discussion with the Yauricocha union should be early next year. But we are certainly in constant conversations with them. This COVID-19 situation has certainly disrupted the whole relation with the workforce because we've had to put some of their workforce in suspension. There have been some changes in the shift. So they didn't have to go up so often to the mine and go through this quarantine process. So we are constantly talking to them and agreeing on different things but at the contract as itself we have to negotiate by the end of the year or early next year.

[James Young:]

Okay. Secondly at Yauricocha, could you just help us understand where exactly do we stand with respect to the permit that will enable you to expand your production from 3,000 tons a day to 3,600 tons a day and what specific permits are required like how are there, is it just one permit or are there multiple permits? Can just help us understand that process? Thank you.

[Luis Marchese:]

Yes. Thank you, James. What we require to expand Yauricocha to 3,600 as a permit is apparently called the IPS. The IPS is a shortened version for the environmental permits which applied to this sort of 20% expansion size. We have already contacted the government. They have already given us their views on what we require to get that permit. So we are currently completing the documentation and the studies that have to be sent to the government. So this process should take into early next year to get this environmental instrument approved. Once that environmental instrument is approved then we go to the ministry of energy mines for the production permit which should be right away. So all in all we're expecting to have that journey by early next year.

[James Young:]

Okay. And so have there been any other permits that have been granted to you as part of this whole process or this just this is the IPS that you're really waiting for? Is that the key one?

[Edmundo Guimaraes:]

That's the key one. The IPS, yes.

[James Young:]

Okay. All right. Third, in the M&A on page 10 you mentioned that about copper and it's the strong demand you're seeing out of China and supply constraints from like Peru and Chile, can you help us better understand, I mean the demand that you're seeing out of China overall and kind of, if you can quantify any of these numbers would be helpful because while you've done a very good job on COVID I would assume and this is something on the supply side that there have been other mines, the miners who have not done as well in Peru, Chile or around the world. So can you help us better understand how the demand recovery in China is benefiting the pricing environment for copper and also the supply constraints that we're seeing in the markets?

[Luis Marchese:]

Okay. Thank you, James. Well what we see I mean the demand from China has grown and we see a strong demand coming into the market and on the supply side certainly as you mentioned both Peru and Chile have had have been hit by the COVID and the production for Peru, Chile having hit. So the result of that is what we see in the market that the price went to the level of 240-ish in the peak of the pandemic a few weeks ago and now it's in the 290. We are no experts in copper markets in [indiscernible] but certainly we are optimistic that in the long run and hopefully in the short run copper is a key component of our asset, of our strategy of our assets and we're going to be very successful on the development of our resources. Bolivar is a great mine. It has a low cost base and as you can see from the first half and hopefully you'll see in the second half, we're having great results on that mine and we are certainly expecting to do so for the future.

[James Young:]

Okay. And then speaking of Bolivar, you mentioned on page 7 of the MD&A, you had a comment of the porphyry system that is present at Bolivar where you are drilling 549 meters. Previously the previous CEO had at one point in time commented about the porphyry-like characteristics and now you seem to be officially defined this is a porphyry system. So my question is have you actually found a porphyry at Bolivar or what are your plans to develop this porphyry potential at Bolivar?

[Luis Marchese:]

Okay. Porphyry have some defining characteristics like certain alterations and certain components in the rocks and some type of rocks and we have found that in Bolivar and it's there. So we are going to keep our strategy to keep searching for the sweet spot. That hopefully will be there with the right grace to have a porphyry mine. So that's where we are at the moment. We have found that there is a porphyry system in the area and we are going to keep exploring. For that we're engaging with consultants that are specialized in this sort of mineral systems. Myself I've worked in porphyries in the past. So we're certainly working on it at Bolivar. Actually the same thing applies to Yauricocha where we are also aiming to work pursuing that opportunity in the future.

[James Young:]

Okay. So it's just, so it sounds like you think it's think it's highly probable that there's actually a porphyry at Bolivar has the same party as I understood there's in the prior discussions with management that there was another mining company that signed NDA at Yauricocha has this same party been engaged to look at the potential opportunities at Bolivar?

[Luis Marchese:]

Well, we cannot discuss the specifics of this party, James. What I can tell you about Yauricocha is that we have stopped exploring because of the COVID. So as soon as we can get back to fairly normal operations there in terms of COVID we will start looking at exploring back again there.

[James Young:]

Okay. The next question really pertains to the production levels that if you seem to be quite convinced that you're confident that you're going to be able to achieve Bolivar at 5,000 tons a day by the end of the year and Cusi at 1,200 tons a day by the end of the year and continue to operate and recover a lot of the lost production that you hear -- so my question really is, as you've been able to reinstate the production at all three mines, can you help us get a better sense as to how that ramp in production looks like? So like how many tones per day were you able to mine at all three mines in the month of July, in August we're, we're halfway through the month already. So where how is August unfolding?

[Luis Marchese:]

Well, July in Cusi we started operating on July 27. So it's not relevant. In Bolivar and Yauricocha we're ramping up still. We are having as I mentioned these sort of distractions from COVID. So it is a fairly fluid situation James. So it's difficult for me to say a number but what I can state is that the teams are doing a great job in bringing as much production as possible at both mines. And I'm certainly proud of the job that they're doing.

[James Young:]

Okay. Well, I would assume though that you're getting some daily production numbers and reports out of all three mines. So can you help us understand at least where, I mean like Cusi for example you started in early July you got a month into it so like can you give us a sense to like what's the highest level of production you've been able to produce at Cusi since it restarted?

[Luis Marchese:]

James, those numbers are not public yet. So I'd rather make them public altogether. What I can tell you is that as I said the teams are doing a great job. They're really doing a great job. So I hope that, I'm sure that the numbers are going to be where the shareholders and we all want them to be.

[James Young:]

Well, I recognize you do not publicly put them in the press release but this is a public call for your earnings call and so this is an opportunity to share that with the marketplace in a public forum. So I guess again, I will come back to you one last time, can you help us understand like in Bolivar what levels of production are you currently producing at Yauricocha? What levels of production are you producing at Cusi because this is critically important for the company and for shareholders too?

[Michael McAllister:]

Luis can I pop in here? James, this is not considered public forum enough that it meets disclosure requirements for all people. The only way that we disclose requirements for everybody is through a press release. So because right now we currently have seven people on the line and so that's not considered public disclosure in the sense that we can put something on the press release. So we cannot disclose the actual numbers as to what the mines are doing right now. We can tell you that we're very optimistic. Things are going well but that's all we can say the production press release will be out mid-September for Q3 and at that point I think you'll be happy with the numbers but that's all we can say.

[James Young:]

Okay. And do you think you'll be prepared to provide some better guidance going forward after when the mid-September release is provided to markets or is just going to be a historical number?

[Edmundo Guimaraes:]

Hi James, the third quarter numbers will come out in it's going to come out around November and at that point we should have a much better grasp in terms of where cash flow, cash position is. Again there is still possibly a COVID risk but having three quarters of the year in place we should be in a better position.

[James Young:]

Okay. If I can move over then to Cusi for a second. Can you help us understand this new system that you talked about you had a press release of the northeast southwest system. How I guess you put the press release out on June 18 and how much production and how much ore are you expecting to be able to process at the Malpaso mill?

[Luis Marchese:]

From the area Jim, what we found it is very encouraging and very positive in the geological interpretation in Cusi was that a fault was like a hard boundary between an area with ore and with an area with no ore. Okay. So the interpretation of the ore that was fine along that fault was that it was [indiscernible] stock work, so it was ore mix with the rock that I’m very simple here with the rock that was cracked at the fault okay. The geologists have looked very carefully at what we found once we are mining near the area and the interpretation now has changed that it's more that the ore actually extends to the other side of the fault. Before we felt that on the other side of the fault we wouldn't have ore now we feel that there is ore on the other side. So and this stock work has become a system of base that go into the other site. So that's where we are. As we speak we are drilling into that area and the numbers that we released on that press release, some time ago the numbers that we have found from some drills in the area. Now we are working on more drills to quantify what sort of tonnage and grade we are going to have on that area for mining. We are very excited about the area. It's higher grade than what we have found in the nearby areas and since it's very close to where we are mining we are planning to bring this into production in the next six to seven months part of it. So that's where we are working at the moment. We're very excited. We hope that it helps in terms of great profile for the future but we have to do the drills, the numbers and the planning and the mining to make sure that it's there.

[James Young:]

Okay. So this new system, the Northeast southwest system that you're talking about here is your sense that the grades are higher or lower than what you're seeing at the Santa Rosa de Lima.

[Luis Marchese:]

So far what we found for the deals is that it's higher but we still – well, it's drills it's in all samples, we have to drill more and make sure what the volume is and what the final tonnage and grades will be for mining. We have to account for dilution, grades, all of these variables but from what we found we are optimistic that they are going to be higher.

[James Young:]

Okay. And then what about how wide are, what's the width that you're fining in this new system because the one issue with the Cusi over the years has been they've been quite narrow which has made them difficult to be economical. So can you help us understand how are the widths compared to what you are seeing out of Santa Rosa de Lima.

[Michael McAllister:]

James as per the public disclosures Santa Rosa de Lima on average is about up to four meters and the press release actually stated that the widths go up to 17 meters in this new area. So what we have from the information that we've seen so far is that they're wider. That's about all we can say right now.

[James Young:]

Okay. And when would you expect to be able to release some more information about the overall tonnage and quantity and other characteristics of the northeast southwest system for the markets?

[Michael McAllister:]

The drilling is ongoing right now. As soon as the drilling is complete and we have assays we'll get that out to the market as soon as possible. We're excited about this and we want to share it as soon as we have it. So we're not holding back information here. As soon as we have it we'll try to get it up to you as soon as possible.

[James Young:]

All right. I understand that Mike, but I mean are we looking at something like say, in September or we’re you talking about by the end of the fourth quarter of 2020 or just 2021 event?

[Luis Marchese:]

We are -- as Mike said, Jim we are drilling at the moment. Hopefully by the end of the year or early next year we will have some of the numbers out in the market but look we are really into it. So we are expecting to have the numbers as soon as possible and make sure that we bring that ore into the plant and silver out of it.

[James Young:]

Okay. If we can move back a little bit towards the Bolivar where can you help us understand the incremental margins where the incremental EBITDA margins add, whereby in the latest quarter, we're producing it 3500 tons a day. As you ramp towards 5,000 tons a day, I would assume that these incremental margins should be fairly really robust. So can you just help us better understand what is the incremental EBITDA margin for Bolivar please?

[Edmundo Guimaraes:]

Hi James. So in Q2 we saw some real increase in our incremental margins if you will operating almost at a 53% percent margin H1 Bolivar was around 50% very strong. We would expect that as we increase our throughput up to the 5,000 ton per day you are going to get the advantage of the lower fixed unit basis, your lower costs per ton, per pound. So we're highly optimistic but I'm not prepared to say to give you a firm number at this point but very solid margins coming out of Bolivar.

[James Young:]

Okay. Well, can you help us better understand then with these benefits from the economy the scale that you're alluding to add what kind of cost per pound, would you like the cash cost and all in sustaining cost, as you move from 3,500 tons a day to 5,000 ton today, would you expect to see at Bolivar?

[Edmundo Guimaraes:]

James, I think with the benefit of Bolivar is that Bolivar would be you could say it's in the very close to the bottom quartile in terms of its cash cost C1 costs and I'd expected to maintain that and going forward but I'm not prepared to give you cash cost per pound at this point.

[James Young:]

What additional information do you need to see and when would we expect to know what these, what your cost trends look like at Bolivar?

[Edmundo Guimaraes:]

The cost trends James are going, they're going lower and it's just, there is a lot of things that go into. There is grades. There is all sorts of things that impact the amount of development you're doing. The amount of machinery you're having, so to really put your neck out on the line I'm not prepared to do that and say that, yes I can say that Bolivar is going to be X dollars per pound going forward at a 5,000 ton throughput and much higher or lower depending on the throughput. As we speak at the end of June, cash costs for Bolivar were around a buck 16 which is very good and there is also the FX component as well which does make a difference as well as the if you have a weakening Mexican Peso and that has gone into the cost profile as well.

[James Young:]

Okay. Well, I guess the last question here is that, it would seen that given your optimistic view towards the ability to deliver on the production increases excluding any negative impact from COVID and the pricing environment that we're seeing here that the upcoming, that the record quarter that you guys produced on EBITDA basis in June of ‘18 of about around 29 million bucks is there any reason why that number should not be exceeded by the fourth quarter of 2020, given that you've got rising volumes and the pricing environment is so much better today than it was back in ‘18.

[Michael McAllister:]

I'm assuming there's no COVID interruptions and as Luis mentioned on the call earlier we expect a stronger second half than first half. There is no question and it's all a matter of if spot prices, if metal prices remain at spot prices that we should see a nice big bump. Again just to remind you that we do base our planning efforts on consensus pricing and consensus prices are still very much they are way below where we have spot prices right now. So it's really highly dependent on that.

[James Young:]

Right. Yes, I totally understand the importance of pricing but again the question really is though if the pricing environment remains where it is today, again we're halfway through the third quarter and if it continues out into the fourth quarter like this, is there any reason why we should not be able to exceed the June quarter of ‘18 that was at $28.9 million?

[Luis Marchese:]

There shouldn't be taking COVID out of the equation James there should be really no reason.

[James Young:]

Okay. Great. Thank you very much. I appreciate your time and all your thoughts here and most importantly wish you all the best and all the safety to all the employees at Sierra Metals.

[Luis Marchese:]

Thank you, James.

[Operator:]

Our next question comes from the line of Leon Cooperman from Omega Family Office. Your line is open.

[Leon Cooperman:]

Yes. I had to come back in the line because I listened to this exchange between you and James. And I want to make an observation and I have a question. The observation is you guys are working very hard trying to create value. The market doesn't seem to give a damn. You have more press releases per dollar of market cap than any company I've ever been involved in the 55 years I've been in the business. We have seven people on the line. Nobody gives a damn. Okay. They don't care about us and I hope Alberto is listening because he should understand that there is a growing sense of frustration of those people like Mr. Young that have been a long-term support of the company. Stock has unchanged for a decade. The price of the commodities more recently is way up. Yes, we have the uncertainty of the COVID, which is another factor but the reality is that it certainly should give us an opportunity. So I would say the time has come for us to explore strategic alternatives and it may be the best thing is to do nothing if people can't pay us or won't pay us for what you guys have created. My second thing is a question when earlier this year before COVID hit you announced intention of pursuing a Dutch auction tender I guess it was. Given just your assessment of the environment today, the financial position of the company, your production capacity, the price of the commodities you sell. Is the stock cheaper today than it was in January or where you have no opinion on that?

[Luis Marchese:]

I am not prepared to comment on that.

[Leon Cooperman:]

Well, I will comment everything you said would suggest that the stock which is unchanged from January is more attractively priced today than it was in January. You have more production. You have higher prices of the commodity. Either you made a mistake in the intention of buying back stock earlier this year, where you basically should really re-enter the market. The uncertainty is what creates the opportunity. That's it. I have said enough. Thank you.

[Michael McAllister:]

Leon just to rebuttal on that. When we announced that share buyback COVID was not anticipated and this was supposed to be a much stronger year. We have not seen COVID actually impacted operations significantly. Metal prices came [off] and the other thing is we had no debt repayments this year. We're just paying the interest on that line and so now going into next year, we have to take everything back into consideration again and everything has to be looked at. So we do believe that the company is in strong footing. We do believe there's a lot of upside. We do believe in the metal price. We have to reevaluate because we have to look at how much capital we're going to need to meet the capital expenditure.

[Leon Cooperman:]

Excuse me. I don't want to interrupt you but you did re-evaluate. You understandably withdrew the intention of doing the buy-back. The question I am asking and I have an opinion on that question is, now is the appropriate thing to reassess that decision whereas the commodity price today is materially higher than it was in January I believe. Your production outlook assuming COVID doesn't upset it again is for materially greater production 2021 than you had in January of 2020. The price of stock is unchanged. Okay. I think at that time you thought the stock was at a big discount to the value of the business and I would say that the discount today should probably even be greater. That's just an observation. I was just trying to see whether you agree with that or not but guess what time will tell. Time will tell. I'm not even though I'm 77 I'm not in a rush. I'm patient but I would suggest to Alberto if he listens to this call there's a growing sense of frustration amongst those who've been the loyal, most loyal and longest shareholders in the company. That's all.

[Michael McAllister:]

Right. Thanks Leon. Operator [indiscernible].

[Operator:]

We have no further questions in queue. I will turn back to the presenters for closing remarks.

[Michael McAllister:]

Thanks operator. That concludes today's call. On behalf of management's team I'd like to thank all the participants for joining us today. A replay of the webcast and all the materials can be found on the website sierrametals.com. If there are any further questions please feel free to reach out to us anytime after today's call. Our contact information can be found in today's presentation or on the company's website. Thank you operator. Please conclude the call.

[Operator:]

Thank you. Ladies and gentlemen this concludes today's conference call. Thank you for participating. You may now disconnect.