Sierra Metals Inc.
Q2 2017 Earnings Call Transcript

Published: 16 Aug 2017

[Operator:]

Good morning, ladies and gentleman. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sierra Metals' Second Quarter 2017 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session [Operator Instructions]. I would now like to turn the call over to Mike McAllister, VP of Corporate Development. You may begin your conference.

[Mike McAllister:]

Thank you, Operator and good morning everyone. As mentioned, welcome to Sierra Metals’ Q2 results conference call. On today's call, we are joined by Igor Gonzales, our President and CEO; Ed Guimaraes, our CFO; Gordon Babcock, our COO. Today's call will be followed by a question-and-answer period and today's presentation is available for download both through this webcast and from the Company's Web site at www.sierrametals.com. Monday's press release, the financial statements and the Management Discussion and Analysis, are also posted on the Company's Web site. Before I start, I would like to remind everyone about our disclaimer, and that certain statements made today by the executive management team, may contain certain forward-looking information. Anything not historical is considered forward-looking. For more information, please refer to our detailed cautionary note and Monday's press release and to the disclaimer on slide two of today's presentation. Please note that all dollar amounts mentioned on this call are in U.S. dollars unless otherwise noted. With that, I will now turn the call over to Igor Gonzales, our President and CEO.

[Igor Gonzales:]

Thank you, Mike, and good morning everyone. I would like to begin with an overview of 2017 second quarter results for Sierra Metals. I will also discuss the operational and exploration highlights for the quarter. Overall, we’re very encouraged by the continued progress and achievements in the financial, operational and exploration results at Sierra in the second quarter. We are optimistic that 2017 will be a year of growth at all three mines and for Sierra Metals as a company. Following my summary highlights, Gordon Babcock, will take us through the operational and exploration highlights. And then, Ed Guimaraes, will take us through the second quarter financial highlights and then we will open the call for questions. Looking at slide four, the second quarter of 2017 represents our fourth consecutive quarter of solid financial and operational results. During this quarter, the Company maintained the significant improvements in revenue and adjusted EBITDA realized during the previous quarter. Sierra Metals achieved significant improvements in the second quarter of 2017 versus the same period last year, with 32% increase in revenues and $12.1 million increase in adjusted EBITDA. Additionally, the Company saw lower all-in sustaining cost for silver equivalent payable ounce and copper payable pound. During the quarter, consolidated metal production was 3% lower when compared to the second quarter of 2016. While Yauricocha experienced higher throughput, higher copper and zinc head grades and higher recoveries for all metals except gold; a decrease in metal production was due to lower throughput head grades recovers for all metals, except gold at Bolivar and lower throughput lead and zinc grades and lower silver and zinc recoveries at Cusi. Similar to the successful operational improvement programs at Yauricocha, the Company is now working on an operational improvement program in Mexico to address productivity, head grades and recoveries. As an example, the Company has purchased 13 new pieces of equipment for Bolivar, including scoops and trucks to improve equipment availability and production. Continuing on slide number five. At Cusi, the Company has refocused its development plans at the mine, and is placing all efforts on the recently discovered Santa Rosa de Lima Zone. Mine operations have reached the actual structure via a ramp and are currently focused on its development, preparation plus detailed planning to incorporate this for mill feed. Sierra Metals continues to make significant progress on its new discoveries in exploration. At Cusi, the company announced the results of an initial 15,000 meter drill campaign at the Santa Rosa de Lima Zone, which saw an average of 371 grams per ton of silver equivalent with an average width of 4.1 meters. The Company has just completed a second 14,000 meter infill drilling program, which was designed to move this resource into a major resource category. These results will form the basis for an upcoming update technical report expected in the fourth quarter at Cusi. At Bolivar, the Company is also very active and have recently completed a Titan 24 geophysical survey on the property, which identified eight value targets which are currently being prepared for drilling. Drilling continues at the Bolivar West and northwest area with an aim of finding higher grade material to feed the mill. We will also release an updated technical report for Bolivar in the fourth quarter, which is expected to demonstrate improved tonnage, grade and mine life. Continuing on slide six, on May 1, 2017, the Company announced a new high grade oxide zone referred to as the Esperanza North Zone. This new zone is in addition to the extension of the high grade sulfide zone, referred to as the Cuye-Mascota Zone, which included 69 meters of continued sulfide mineralization. Both of these zones are located at our Yauricocha Mine. The Company is also currently completing a Titan 24 geophysical survey over the entire Yauricocha property. The survey is expected to be completed in the third quarter of this year. Yauricocha has seen a significant amount of drilling completed this last year, which will all be included in an upcoming mineral resource and reserve estimate report. This report is expected to be published for the Yauricocha Mine early in the fourth quarter of 2017. The Company will continue its aggressive brownfield exploration programs and also its definition drill programs at all three mines. We're also reporting our technical teams to meet the upcoming challenges of putting our brownfield findings into production in the near future. With that, I will now turn over the call to Gordon Babcock, our Chief Operating Officer, for the operations and explorations update.

[Gordon Babcock:]

Thanks very much, Igor. Turning now to the operational highlights on slide number seven. In the second quarter 2017, Sierra processed a total of 455,000 tons, which as previously mentioned and noted, represents a decrease of 10% approximately compared to Q2 2016. The Company produced 2.7 million silver equivalent ounces or 23.1 million copper equivalent pounds in the second quarter. This represents a 3% decrease compared to the second quarter of 2016. The primary reasons they're attributed to lower throughput head grades and recoveries of all metals, except gold at Bolivar, and lower throughput lead and the same head grades and lower silver and zinc recoveries at Cusi. This was offset by a strong quarter at the Yauricocha operation where higher throughput provided higher copper, higher zinc grades, higher recoveries of all metals, except for gold. The Company continues to benefit from the improvement program completed at the Yauricocha mines continuing with a similar program at the Bolivar Mine in Mexico. Our objective is improving productivity and metal production in all of our assets. At Cusi, current efforts are currently focused on reevaluations of mine development and definition drilling program plan, focusing on a new resource estimate, including new areas such as Santa Rosa de Lima Zone. Currently, we have reached the actual zone in both Promontorio and Santa Eduwiges via ramps, and we're focused on developing and detail planning of the Santa Rosa de Lima Zone to include this material in future mill feed. Focusing now at Yauricocha. Silver equivalent production in Q2 2017 was 2.1 million ounces, representing a 14% increase over Q2 2016. Sierra saw increases in production of copper 129%, zinc 33%, Yauricocha in Q2 2017 versus Q2 2016, with decreases in production of silver 3%, lead 16% and gold 54%. At Bolivar, the Company had planned throughput of 192,937 tonnes processed, which represents an 18% decrease compared to Q2 2016. The lower throughput and recoveries of all metals along with lower head grades encountered resulted in 27% decrease in copper equivalent production when compared to Q2 2016. Copper production decreased by 27% at Bolivar in second quarter of 2017 versus the second quarter of 2016 along with a 31% lower silver production and 17% lower gold production. The Company’s focus at Bolivar in 2017 has been to improve production volumes through churning of new equipment, such as jumbo scoops and trucks; 13 new pieces of equipment have been ordered, eight of which have arrived and put into operation; remaining equipment is to arrive in stages and will be completely full by year end; and then we'll be in the process of evaluating the gear that we have and basically getting -- replacing the sold equipment. So we expect full delivery by the end of the third quarter with the intent of moving material from available production stopes within the mine. We expect to see the effect of the inclusion of new equipment at the mines in the latter part of 2017. At Cusi, the Company processed total ore of 23,956 tonnes, which represents 54% decrease in Q2 2017 compared to Q2 2016; lower head grades with lead and zinc and lower recoveries for silver and lead also contributed to the 54% decrease in silver equivalent production. Silver production decreased 55%, gold production decreased 42%, lead production decreased 59%, zinc production decreased 49% compared to Q2 2016. Despite the decreases in tonnage and metal production at Cusi, it's important to note that Cusi only represents approximately 5% of Sierra Metals’ current total production. Cusi's contribution to the Company's overall production is expected to increase depending on its exploration and development program success, which expected at the Santa Rosa de Lima Zone, as well as other zones that are contiguous to that parcel. Company’s wrap down this new zone is now developing and planning for the inclusion of ore from the zone, which has a wider mineralized ore zone and improved grades or current non-zones. This will aid the Company in increasing resources at Cusi. Turning to slide nine. Exploration remains a key aspect at all three other mines; and during Q2 2017, the Company drilled 82 holes totaling 10, 321 meters at Yauricocha; exploration drilling accounted for 20 holes or 3,905 meters at various zones, including Cuye, Contacto Oriental, Escondida and these were done to test the continuity of mineralization to explore new mineralized zones for scans and ore bodies at depth; and the Titan 24 geophysical survey commenced in Q2 in the southern part of the property at the Yauricocha Mine; and as we speak, we’re approaching the central mine zone with our geophysical work right now. Definition drilling accounted for the remaining 67 holes or 4,560 meters at the Catas Esperanza, Esperanza North and Angelita. On May 1, 2017, the Company announced the discovery of a new high grade lead and silver oxide zone, referred to as Esperanza North Zone, which is located between Esperanza and the Cachi-Cachi Mine. Drilling took place from the Yauricocha tunnel located on the 720 level, and that area had never been drilled before and this discovery is important for the interpretation of the ore body extensions between Esperanza and Cachi Cachi; and they are located approximately 1 kilometer apart. On May 1, 2017, the Company also announced drilling results which demonstrate the extension of the high grade sulfide zone referred as Cuye-Mascota, which was discovered in November of 2016; results included 69 meters of continueus sulfide mineralization; that zone is located 200 meters north of the central mine area along strike and current mining activities. The diamond drill intercepts at Cuye ore zone has some of the widest intercepts for sulfide mineralization discovered in the Company's recent history, and will be a priority for continuing exploration during the remainder of 2017. The results of this current program confirm the Cuye ore body continues below the 1,270 level. And now our company charges have identified the transition zone of oxide to sulfides in this drilling program, and that has important relevance to the mine, especially due to its high grades, particularly for zinc and copper. Cuye was one of the main cash flow generators 10 years ago, and this appears to be at depth with similar widths and grades. All drilling that has taken place will be included in an upcoming mineral resource and reserve estimate report that’s expected to be published for the Yauricocha early portion of the fourth quarter of 2017. Opportunities exist to expand our high value near mine tonnage in the near-term and the opportunities are numerous, and by no means exhausted. As mentioned, one of the key drivers of opportunity is now the application of the Titan 24 geophysical program, which is being carried out by Quantec, and that will enable us to locate exceeded sulfide targets; program has commenced and should be complete by late September. This type of geophysical program has never been implemented before at the Yauricocha mine site. Sierra is very optimistic the program will bring positive results and further high grade value targets. Now turning to slide 11. At Bolivar, during Q2, Company has drilled 11,236 meters in the following areas; in the Bolivar West area we drilled 70,523 meters; 3,423 meters were drilled at Bolivar northwest; 289 meters were also drilled at El Gallo area with the objective of finding the continuation of the El Gallo Inferior ore body between Mina de Fierro and the Bolivar Mine; a Titan 24 geophysical survey was also completed during the first half of 2017 in the areas of Bolivar West and northwest. This survey included 11,500 meters and identified eight high value targets for follow up drilling program expected to occur in Q3 of this year. Turning to Cusi. On June 5, 2017, the Company announced initial assay results from a 15,500 meter drill program at Santa Rosa de Lima, and that’s located within the Cusi Mine property. The discovery of the Santa Rosa de Lima Zone came as a part of reinterpretation of the hydrothermal model, and the drilling confirmed the high grade mineralized project located adjacent to the current operations. The zone is a regional structure that has been identified in the area for some 12 kilometers. The main mineralized zone currently extends over 1,000 meters in length and 400 meters in depth and result in along strike to the northeast and southwest; the structure of mineralization, which range from 1.5 meters to 10 meters with an average width of 4.16 meters and contain an average silver equivalent grade of 371 grams per tonne. Subsequent to the completion of the initial drilling campaign, the Company has also completed an additional drilling campaign consisting of 14,000 meters of infill drilling. The Company awaits the assay results from the labs, Chemex labs and ALS labs on the second phase of infill drilling program, and we will be reporting on those in the next coming months. Future drilling will continue along in Santa Rosa de Lima Zone to the northwest and southeast to continue working on defining that 12 kilometer zone. In summary, in the first half of 2017, we have continued to build upon the achievements of 2016, and the Company is on track to see a strong production growth for the brownfield exploration success. Sierra continues to execute solid plan, which is expected to lead to a future, a stronger future benefiting the Company and the shareholder. With that, I will now turn the call over Ed Guimaraes, our Chief Financial Officer for a financial overview.

[Ed Guimaraes:]

Thanks Gord. Turning now to slide 14. The Company had another exception quarter of financial results, benefiting from the continued stabilization in metal prices, as well as strong production at Yauricocha. Along with the strong operational results realized during the quarter, cash flow generation continues to improve and provide the Company with a healthier balance sheet and increased liquidity. The Company earned revenues of $48.6 million in the second quarter of 2017, which represented a 32% increase compared to the second quarter of 2016. Realized metal prices in the second quarter were also higher for all metals, including 1% higher for silver, 20% higher for copper, 35% higher for lead, 40% higher for zinc and 2% higher for gold. In addition to the higher metal prices realized, the increase in annual revenues are primarily attributable to the 10% increase in throughput and the increase in copper and zinc head grades, and higher recoveries for all metals with the exception of gold at Yauricocha. This was partially offset by the 18% decrease in throughput, lower head grades for all metals and lower recoveries for all metals, except gold at Bolivar, and a 54% decrease in throughput at Cusi, along with lower head grades for lead and zinc and lower silver and lead recoveries. Adjusted EBITDA of $17.6 million for the second quarter of 2017 increased compared to $5.3 million in Q2 of 2016. The increase in adjusted EBITDA was primarily due to the $14.5 million increase in revenues at Yauricocha. Yauricocha's Q2 2017 cash cost per silver equivalent payable ounce was $8.49 versus $9.60 in Q2 of 2016, and all-in sustaining cash cost for silver equivalent payable ounce was $13.47 versus $14.72 in Q2 of 2016. The decrease in the all-in sustaining cash cost for silver equivalent payable ounce during Q2 2017 was due to an increase in silver equivalent payable ounces as a result of higher throughputs and ore feed head grades from the increase in available production from higher grade zones in the mine. Also, lower treatment and refining costs incurred during Q2 2017, resulting from improved terms within renegotiated sales contracts with our off takers. Bolivar's Q2 2017 cash cost for copper equivalent payable pound was $1.35 versus $1.02 in Q2 2016, and the all-in sustaining cash cost for copper equivalent payable pound was $2.49 versus $1.96 in Q2 of 2016. The increase in all-in sustaining cash cost for copper equivalent payable pound was due to a decrease in copper equivalent payable pounds as a result of 18% lower throughput and reduced equipment availability during Q2 of this year. Cusi's Q2 2017 cash cost for silver equivalent payable ounce was $20.60 versus $10.77 in Q2 of 2016 and the all-in sustaining cash cost for silver equivalent payable ounce was $49.13 versus $18.74 in Q2 of 2016. The all-in sustaining cash cost for silver equivalent payable ounce increased due to 54% decline in throughput, which resulted in fewer silver equivalent payable ounces as the Company revaluates its development plan at Cusi and focuses on expiration and development of the recently discovered Santa Rosa de Lime zone. Cash flow generated from operations before movements in working capital was $17.4 million for Q2 2017 compared to $6.2 million in Q2 2016. The increase in operating cash flow is mainly the result of higher revenues generated and higher gross margins realized. I would now like to review our cash flows, which provide the clearest perspective on our financial performance. I have summarized the changes in cash during Q2 2017 on slide 15. During the second quarter, our operating cash flows were $14.7 million. We spent $9.9 million on capital expenditures in Mexico and Peru and paid $10.4 million in principle repayments and interest on our credit facilities in Peru and Mexico. We also paid $1.3 million in dividends to non-controlling interest shareholders. These items decreased our cash balance from $38 million as at March 31, 2017 to $31.1 million as at June 30, 2017. Turning to the balance sheet and liquidity on slide 16. We have ended the second quarter of 2017 in a strong financial position with $31 million in cash and have an additional $16 million in undrawn credit facilities, giving us a total liquidity position of $47 million. We have total debt of $66 million and a net debt position of $35 million. The Company is confident that the 2017 EBITDA will be much greater than the current debt outstanding at the end of the year. The Company has principle payment obligations on its loans and credit facilities of approximately $16 million to be paid in 2017, $14 million to be paid in 2018, $8 million to be paid in 2019 and $29 million to be paid in 2020. We're confident that our financial position, together with the potential future cash flow generation from our three producing mines, including the recently discovered Esperanza, Cuye-Mascota zones and Santa Rosa de Lima Zone, will be sufficient to support Company's financial commitments in 2017 and beyond. I would like to take a moment now to highlight two noteworthy events that have taken place subsequent to the end of the second quarter; the first is our U.S. listing. On July 6, 2017, the Company announced that its common shares were approved for listing on the NYSE American and they began trading under the symbol SMTS on July 11, 2017. The common shares have continued to trade on the Toronto Stock Exchange and the Lima Stock Exchange. The listing of our common shares on the NYSE American, formally known as the NYSE MKT Exchange, represented an important corporate milestone for Sierra Metals and another step in our plan to enhance shareholder value by increasing stock liquidity and exposure to institutional, as well as retail investors. The second event was the spinout of Peru Northern Properties. On August 8, 2017, the Company announced the completion of the previously announced distribution of Cautivo Mining Inc's common shares, issuance of Rights pursuant to Cautivo's Rights offering and listing of the Cautivo shares and the Rights on the Canadian Securities Exchange. The distribution was completed by distributing to holders of Sierra common shares of event and eligible holders of record on July 26, 2017; all of the issued and outstanding Cautivo shares being 3,253,588 Cautivo shares as a return of capital, reducing Sierra's shareholdings in Cautivo from 100% to nil. The Cautivo shares were distributed pursuant to a spinoff by Sierra on the basis of one Cautivo share for every 50 Sierra shares held on July 26, 2017. Sierra did not receive any proceeds from the distribution. Immediately following this distribution, Cautivo issued 11,904,641 Rights pursuant to the Rights offering, whereby holders of Cautivo common shares received 3.6589638 Rights for every Cautivo common share held. For every whole Right held, a holder is entitled to subscribe for one Cautivo share at a price of CAD0.84 per share at any time from August 8th to August 29, 2017. Effective August 8, 2017, the Cautivo shares and the Rights commence trading on the Canadian Securities Exchange under the trading symbol CAI and CAI.RT respectively. With that, I will now turn the call back to Mike.

[Mike McAllister:]

Thanks Ed. That ends the presentation portion of this call. We would now like to open the call up to questions from participants. Operator, please open up the lines.

[Operator:]

[Operator Instructions] Your first question comes from the line of Lee Cooperman of Omega Advisors. Please go ahead, your line is open.

[Lee Cooperman:]

I have really three questions, but you said something, which I'm sure is not what you meant to say. You said that you were confident that at the end of the year, the EBITDA would exceed your debt outstanding. That already is the case. Now, your net debt is $34 million, the EBITDA for six months is $42.98 million. So I assume that you meant to say something different or whatever, but anyway. Can you fill in on page 10 you’d have various captions, revenue, adjusted EBITDA, CapEx. Could you fill in your best expectations for the year? In other words, I was assuming that you will get to EBITDA of about $100 million for the year. Is that realistic? And you have the number that will be question one. Question two, what is the priority of management and the Board for the use of free cash flow, because on the trajectory you're on, you probably be debt free at the end of the year with cash. What is the priority for use of that cash? And third, if you could talk about, I think that the private equity fund that owns 60% of the equity asset distributed by October. If you could explain the rights to have to extend, et cetera and what the plan to do with that is, that would be very helpful. Thank you.

[Ed Guimaraes:]

Thanks for your questions, Lee and I’ll answer them, I believe there is four of them. Just to clarify on the debt. What I meant there is it's not the net debt. What I meant to say is that our EBITDA will exceed our debt outstanding of $66 million, and not referring to a net debt. In terms of EBITDA and free cash flow projections, we have gone on record to say that our EBITDA would exceed our previous high watermark of $82 million reached in 2012. We're confident that we can exceed that. You mentioned the $100 million, I don’t want to hold this to that. But that’s not a long shot by any stretch. In terms of free cash flow, I will say just that in terms of CapEx, we are planning to spend approximately $25 million in sustaining CapEx and an additional $20 million to $25 million on exploration activities. So which should take us to approximately $50 million, and I will let you determine the free cash flow based on that. In terms of the priority for use of cash, there is a concerted effort to really repay down our debt, and it’s the debt that resided -- it's in our wholly owned subsidiary Dia Bras Peru, which owns the 82% interest in Corona. We would like to pay that up as quickly as possible, so there is about 45 million remaining with that. So that really is a priority of cash or use of cash for us, as well as expanding and increasing our exploration activities, brownfield exploration, which we have done. And depending on the results of these exploration drill programs, as well as our contemplated 43-101 technical reports, which we expected to complete for all three mines at the end of Q4 or during Q4. That will also trigger possible plant expansions depending -- we’ll look at those results and there could be potentially feasibility studies that come out of that depending on the changes to our reserves and resources and mine plan -- mine life. So that’s really the priority of use for cash. Your last question touched on the majority shareholders position, the ARC Fund, which currently owns 50.1%. I can't speak for the fund, but I can say that the fund is extremely bullish with Sierra Metals and the results that Sierra Metals is achieving. I think it does have some options available to it in terms of what happens in October of 2018, but ultimately…

[Lee Cooperman:]

Well, that’s what I would like to discuss, what are those options? I mean, it's important for the Company, 0% of the stock is held by some that may have to make a decision. But does he extension options?

[Ed Guimaraes:]

Lee, I don’t want to skirt the issue, but essentially, those are really up to the private equity fund and up to -- it's in their court and I can't speak for…

[Lee Cooperman:]

I'm not asking what they’re going to do. What I'm asking, you should know this as executive of the company, somebody owns 50% of your stock, what is their rights to do with that stock? Do they have the right to extend the October date? Do they have to act in October date? I'm not asking what they are going to do, I'm asking what the rights they have?

[Ed Guimaraes:]

I'm sure the fund will go to its limited partners and the limited partners will be given a choice of either to wind up the fund or extend, and it's really up to vote of the limited partners. And sure, there is options available there. They can decide on all sorts of parameters if you will. But that’s really in the hands of the limited partners and what is recommended and the recommended course of action from the fund manager.

[Lee Cooperman:]

I guess I'm messing little bit more of a simple question, which you’re not really answering. But that’s okay, I’ll find out the answer on my own.

[Ed Guimaraes:]

Sorry about that. And I would have a call with Alberto Arias he’d be in the best position to explain that.

[Operator:]

Your next question comes from Heiko Ihle with H.C. Wainwright. Please go ahead, your line is open.

[Heiko Ihle:]

You guys drilled 2,200 meters at Esperanza and almost 1,400 at Esperanza North. Mostly just to get the continuity for ore body which makes lots of sense. But can you just walk us through the results of this drill program, and just little bit more details on the plans for the remainder of the year. I mean, these are two very important areas.

[Igor Gonzales:]

Gord?

[Gordon Babcock:]

Yes, I could do. I can answer that question. So our program, we're discovering things in this property. As we're going through definition drilling programs, we're discovering -- we discovered the Esperanza North program just to the north. Those targets are now defining zones that are between the 870 level and the 920 level, and they're much higher grading copper. As well we're defining areas that are contiguous to that zone and adjacent to that zone, and these are high grade sulfide ore bodies within the limestone unit. And right now, we're exploiting those areas. In fact, there's a definition program going on now that just got completed, and we're drilling into the drop point system to set up some sub-level cave stopes. So that's one of the reasons the grade has improved since the addition of these, we call these cuerpos chicos. So this whole program, once we complete our resource and our reserve review, this is going to be coming out in the next few months. Once that's complete, it’s going to change things up quite a bit for us. We're expecting to see some increases in resources definitely, and also reserves. So right now, we have a group of people that are working on the resource side in the mine as well as SRK, Matt Hastings is our lead geologist for SRK. We’re doing the same thing on the reserve side. And that's the focus in that point. Is that clear, or you need some more input?

[Heiko Ihle:]

No, that's a fair answer. Moving on to Cusi, obviously, I still think it’s a good asset for your firm. That said, Santa Rosa de Lima is probably going to become a game changer for the asset, I think. Walk me just a little bit more through the belt time, I mean you said you’ve essentially reached this; spending for the next couple of quarters at the site and just time lines to get the material into the mill, if you could please.

[Gordon Babcock:]

The objective, right now, we've got a new team of people, new team of professionals involved with us now. We’ve got a higher level planning engineer, a VP of planning, and we've got a new VP in Corporate Metallurgy, as well as special projects and major capital projects. And we have two folks that are on the ground in Cusi now; one is a geotechnical engineer and the other is a planning engineer. So we've gone through the first phase of planning the macro side of things, so we've got the layouts of the stopes. What we're waiting to get back from geologies is the block model of that zone, so we can start to mine plan accordingly. So we've got a program that's initiating now, which is development on the Santa Rosa de Lima Zone. And we've got to improve the infrastructure internally in the mine and get services set up and so on, things like that. So we're going to be pushing that sure. So I'm expecting that by next year we'll be in a position to start to stope on some of these zones, but the key point for us right now is to finish our geological review, get our asset into a reserve status. And with that, we have the plans, we’re working through mine plan and take us to the next stage. So we're going to be fast [multiple speakers] on the development side. What’s that?

[Heiko Ihle:]

The next year, can you quantify that just a little bit more?

[Gordon Babcock:]

Well, right now, we're in August; we're still in the development stage; it takes a while to get these stopes developed on -- in any kind of a long haul program. So we'll be initiating some test stopes probably in the latter part of this year. Once we do that then we'll be in position to move forward. It takes a while to develop the stopes, to drill them off, to get the programs going and train the people. That's the focus right now. Once the plan [multiple speakers] this is going to be in place for budget for next year. So right now, we're working on getting all these details filled in.

[Operator:]

[Operator Instructions] Your next question comes from Jim Young with West Family Investments. Please go ahead, your line is open.

[Jim Young:]

I've got a couple of questions, if we could first start with the use of the free cash flow and your priorities. I believe, as I recall, at a prior presentation there's a possibility of buying either all or portion of the remaining 18% of Corona. I am just wondering where that would stand at this time? Thank you.

[Gordon Babcock:]

That's still under consideration. I guess it becomes less of an issue if we -- by repaying the debt, the debt that remains on the acquisition credit facility, which I mentioned was about $45 million. That really will -- that will limit the amounts of dividends that we have to pay out of Corona up into Dia Bras, which then repays the debt. So I think if we can pay that debt off with free cash flow that we have that really puts the priority to increase our share position, which doesn't trade that frequently. But we still look at opportunities should they present themselves to increase their ownership in Corona.

[Jim Young:]

And then if we can move on to Cusi. As I recall, when you announced your initial assay results in June that you -- this was focused around about 1 kilometer out of the 12. And the question is with the additional infill drilling and other drilling that’s been done. Does this ore body extend beyond the 1 kilometer length? And secondly, what do your preliminary infill drilling results show at the Santa Rosa de Lima?

[Gordon Babcock:]

Well, the infill, I'll answer to that Jim if you will. The infill drilling program was designed to take the resource portion, which was an inferred resource on that block, and get some better definition and bring it into a measured category. And we've ascertained that the results from that program are collaborating the initial program so that’s a piece of good news. And with regards to the other zones that we're drilling in the area, when we make the publication, which is shortly coming up we see an extension to the zone so that’s another piece of good news. I can't talk about grades right now. But definitely, the zone continues, both good pieces of news.

[Jim Young:]

And anything of note regarding the San Nicolas Vein at Cusi, does this appear to be an economical opportunity?

[Gordon Babcock:]

Listen, in Cusi, there are many economic opportunities with the veins. It's defining the limits of the vein system that we have; San Nicolas is one, Promontorio is another; there are a whole series of veins that are perpendicular to the Cusi structure or the Santa Rosa de Lima vein system; there is San Nicolas, which is another one that’s parallel to it; and there are other off-shoots that come in; and wherever they meet, sometimes they have high grade nodes or high grade shoots. So there is a lot of opportunity there. And with this new design that we've incorporated in the planning portion, this ramp access gives us a position to access all of these zones at roughly 10 meter intervals between the levels. So it's going to open up a lot more ground for us for the future, and it's looking very good. With our new team of people, I want to say something here just to put it out. We have a new operations manager that’s in charge of both mines in country right now, and we’re in the process of making improvements and making changes, as we speak; we're working on the million side of things and the plants; we've taken our mill manager from Yauricocha, he is in place in Mexico now in Bolivar; we’re working on the whole plant facility with the same thing is going on in Cusi with Malpaso plant; and similar improvement programs are going. The going program in Yauricocha continues. So we haven’t stopped any of our CI program at all, in fact, we’ve enhanced them.

[Jim Young:]

And my last question, on Cusi, is regarding what is your best estimate is to when will the ore from the Santa Rosa de Lima start to get processed at the Malpaso mill?

[Gordon Babcock:]

Well, the objective is to get things prepared, as I told, to get things prepared. So that by next year and the beginning of the year, we're shifting material over to the plant and processing it. That is our objective. We may have some bumps along the road, but that’s the objective.

[Jim Young:]

And if you can move over to Bolivar. In the MD&A you’d mentioned that you’re in the permitting process to increase your capacity to 3,000 tonnes per day from where you had been running around 2,700 tonnes today per day, except for the third quarter, which was little bit of an anomaly. And my question is, over what time frame, do you think it will take for you to increase the Piedras Verde mill capacity to 3,000 tonnes per day?

[Gordon Babcock:]

Well, right now, the permit is not issue over there. The issue is internal, in the plant itself, and the process we're going to right now and the revision process; we have to review crushing; we have to review metallurgy; we have to do recoveries; we have to go through a process review on flotation; and we’re doing this as we speak. In a matter speaking, we have to identify what the grind is, what the optimum grind is for recoveries. So we’re doing all of these test work to move it forward. Then we’ll see where we’re at that at the finalization of all these results. The permit is not an issue it's the actual production coming out of the mine, and the plant itself.

[Jim Young:]

And then for Bolivar West and the Bolivar Northwest, when do you expect that this ore grade will start to get processed at the Piedras Verde mill?

[Gordon Babcock:]

Right now, we’re going to focus on the assets that are readily available, which is Gallo, Gallo Inferior, Gallo Superior, and anything that’s close to [indiscernible] [50.07] zones, zones like that. The development program that we have to undergo to get to Bolivar West northwest is pretty substantial. It's going to take better part of the year. And we have to focus on what's the best bank for the buck right now and that’s going to be the area that we know. It’s right close to us; we’re going to concentrate on that; we’re going to change up some mining techniques; and we’re looking for more volume. And we’re going to definitely assess the asset in more detail up above, because there is some areas of Gallo Superior that may have some potential that we’re not aware of it right now. We have to carry on a little bit more drilling, more definition work to outlay in those areas. But Bolivar West, northwest it's going to be the better part of the year, to maybe year and half. Again, these priorities may change on our movement forward. But right now, the capital we want to invest in getting that plants to a point where it can handle all of available ore do it. There is, in the past, this mine did produced zinc, so we’ve got to look at other byproduct credits, not just copper. So there could be an opportunity in attracting some of the other areas of the mine, recoveries and so on but we’re investing and getting that now. I want to get this operation to a point where it's steady state and the long term objective is to push lot more volumes through this point. So that’s our focus.

[Jim Young:]

And then if we can move over to Yauricocha where it seems like there are many opportunities that you’re pursuing in this operation. Can you talk about the size, the Cuye-Mascota -- what is the size and the quality of the ores grade, and how that compares to Esperanza?

[Gordon Babcock:]

Esperanza is a bit better than the central mine zone. Esperanza has -- let's put it this way; it's got an average around 56 to say 60 grams of silver, so a couple ounces of silver; about 1.5% to 1.8% lead; and zinc varies anywhere from 2% to 5% depending on where you’re at in the Esperanza zone. And Cuye-Mascota -- in the transition, there is zones in Cuye-Mascota that have copper in excess of 2%; they have a little lead some silver, some of the zones in Mascota have high grade silver. So all-in-all, it's probably 100 -- we're just going to guess right now, but our MSR’s are going to be probably 25%-30% more than Esperanza. Yauricocha is a mine that works on a blending basis. We blend 25 to 30% of the cuerpos chicos with the massive zones, the massive sublevel cave zones, such as Esperanza and the central mine zone. That's the secret to Yauricocha. So you're not going to go, Cuye-Mascota is not going to come into play until two-three years down the road, because it’s so deep. To tell you where we're at right now, basically, we're on development program on the 1,070 level, but we're mining up above the 1,070 level. So we're going to continue doing that. As we come down, we've already taken the ramp in the Mascota zone below 1,070, so we're approaching the 1,120 level now. And in a matter of two months, we'll be on the 1,170 level in the Mascota zone. Mascota just keeps going to depth. And in Mascota, we've discovered more copper, copper oxides, as well as massive sulfides. And the grade in the massive sulfides is pretty good, but there're pockets that are good, there are pockets that are lower grade. So all-in-all, I'm confident that the head grades that we're feeding now are going to be consistent for the next few -- next year and the years in the future. And what's really important for us is that we've discovered new small zones in these cuerpos chicos and these are our sweeteners to the pot, if you have it. Also, in the drilling program that we’ve just conducted in Antacaca and Catas, we've discovered more cuerpos chicos that are contiguous to the parcel. We also see a trend now between the central mine zone and Mascota, and Cat-Cuye, that whole zone it appears like its one massive zone; it's not separated, it's going to be one continuous zone; so we're doing drilling. And it looks like things are going into Mascota and Mascota is going into Cuye. So all-in-all, with the drilling program that we've defined here, it's opening up this mine for a lot new, lot more new opportunities.

[Jim Young:]

And to-date have you realized any limitations on the Esperanza area, or is that still open to depth and open to the north and the like?

[Gordon Babcock:]

Now we're discovering its open to the north. We already know that it continues further north than Esperanza North is an extension to 920 level 870 level area so that continues to the north. And it also goes further north, because the drill program that we conducted from the 720 level, it delineated zones that were roughly on the 1,000 to 1,020 level and it carries on to the north. So this whole structure, if you have it, is plunging off to the north. And once we're in place and we drive our tunnel to where the Cachi Cachi zone, when we have our tunnel, moving forward, we're going to have drill stations on that tunnel and we're going to be drilling that section from 870 level up, as well as down. So we're going to - this zone is -- I'm very confident, it’s going to continue. It’s all looking pretty positive here.

[Jim Young:]

And then at Yauricocha, you had a nice improvement year-over-year from second quarter of '16 to '17. But sequentially, the ore process at Yauricocha declined from the first quarter of '17 to the second quarter. And I'm curious as to why that occurred given that the shaft has been installed. And was this decline in the volume as you process the only reason for the cash cost increase from 6,781 in the first quarter to 6,113 per tonne in the second quarter? And what is the outlook for cash cost at Yauricocha, going forward, into the third and fourth quarters?

[Gordon Babcock:]

Well, the answer to that is development. In order to operate the mine with sublevel cave technique at 16 meter intervals, you need to do a pretty intensive program of development; one of the shortfalls of Yauricocha is development. Last month, for instance, our development increased from a normal 1,650 meters per month to 2,000. So when you see that this is in OpEx, this isn't CapEx. So this isn't our operating cost so this is going to reflect in the next few months. We're going to be going to a major development program; we have to get this going; we're going to be getting into a different mining technique with the sublevel cave mining; we're going to be looking at more development, so we can be mining at different levels; and truly induce a proper sublevel cave in the operation. Right now, we're doing single phase draws and we want to optimize our draw. So we're going to be working on more development. Subsequent to that, our volume will increase. So I'm predicting that our costs will go up slightly, but we're going to be pushing more volumes through the plant. I think it'll work out in the long run. We can't fix things to depth there, Jim, on mining because there're all sorts of variables that can come into kick in the piece when you're expecting it. Though, in our case here, there're ventilation issues we have to contain it with Yauricocha mine; we have to contain with the lack of development. And then in that ore body, in that Esperanza ore body and all of these sublevels caves, because of the nature of sublevel cave sometimes the grade that you're anticipating doesn't come out but you need to go to the next drop point; like you've got interlacing of fingers of waste of intrusive material; it's the nature of the beast that you've here. That's why for us the critical part is having those sweeteners in these cuerpos chicos. And we moved a lot more materials through a better grade, because we were able to access these points on the 870 and 920 levels. So we were in position to make a really decent blend of our zinc and our silver credits.

[Jim Young:]

And then my last question at Yauricocha is actually, and I think this is where I misspoke earlier about the Bolivar permits is that at the thumping mills, have you received the permits to expand the capacity to 3,000 tonnes per day? And over what timeframe do you think that it will be until you are able to realize this improvement to 3,000 tonnes per day?

[Gordon Babcock:]

We've permitted capacity right now for 3,000 tonnes per day with a little upside of 5%. So we technically can be providing to the mill 3,150 tonnes per day. Right now, in the milling, we milled up to 3,300 tonnes a day. As long as your throughput doesn’t exceed the max, you're good. So on the permit side all of that, that’s all in place. Our next step is to go bigger than that. We want to go higher. That’s the plan, the improvement plans that we're working on right now.

[Jim Young:]

Can you just elaborate a little bit about how much higher do you think the Yauricocha ore could provide to the thumping mill? And again, do you think if you’re -- again, I guess looks like you processed 2,719 tonnes a day in the second quarter. Will you be able to get to 3,000 tonnes per day in the third quarter or the fourth quarter?

[Gordon Babcock:]

Well, our push, it all depends on the development plans that are undergoing right now. Our push is to get the mine to produce 3,000 tons of sulfides, I am talking the future now, and we can process the once process 600 tonnes, 500 to 600 tonnes of oxide. So all-in, the plant in the future should be able to handle up to 3,500 tons a day. And what we're looking at right now in the operation itself, we're going through a major restructuring and the planning. We’ve got a group from Chile that are -- we've very proficient in sublevel cave that we're studying the possibility of getting some consistent draw in excess of 3,000 tonnes a day, just on sulfides; and then our upside will be the oxides. So right now we're in the process of studying. The overview or the prognosis looks very positive. Once we can get a proper sublevel draw established, there should be no reason that we can start pushing some better volume through the plan. My only concern is when you do things like that you have to be ready with your blending material as well. So you have to be able to do the blend that we have. The critical part to this type of thing is this is development, so we have to make sure that our development plan matches our planned production plan. And we've always been chasing our tails in the Yauricocha. We’ve been successful because we’ve been lucky; we were able to find these cuerpos chicos, directly adjacent to the sublevel cave stopes; and that’s been a huge bonus for us.

[Igor Gonzales:]

Operator, can we go to the next question please. So we can provide opportunities to all other people to do questions.

[Operator:]

There are no further questions at this time. I will now turn the call back over to Mike McAllister for closing remarks.

[Mike McAllister:]

I’ll actually close out the meeting. Thanks Julie, thank you operator. That concludes today's call. On behalf of the management team, I would like to thank all participants for joining us today. A replay of the webcast and all materials can be found on our Web site at www.sierrametals.com. If there are any further questions or concerns, you may reach out to us at any time after today's call. Our contact information can be found in today's presentation, as well as on the Company Web site. Thank you, Operator. Please conclude the call.

[Operator:]

This concludes today's conference call. You may now disconnect.