Sierra Metals Inc.
Q1 2018 Earnings Call Transcript

Published: 11 May 2018

[Operator:]

Good morning. My name is Jessie, and I’ll be your conference operator today. At this time, I would like to welcome everyone to Sierra Metals' First Quarter 2018 Financial 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]. Thank you. Mike McAllister, VP of Corporate Development for Sierra Metals, you may begin your conference.

[Mike McAllister:]

Thank you, operator, and good morning, everyone. Welcome to Sierra Metals first quarter 2018 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. Today's presentation is available for download both through the webcast and from the company's Web site at www.sierrametals.com. Wednesday’s press release, the financial statements and Management Discussion & Analysis are also posted on the company's Web site. Before I turn the call over to Igor, I would like to indicate that this 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 projections as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusions, forecast or projection in the forward-looking information and material factors or assumptions that were applied in drawing a conclusion or making a forecast or a projection as reflected in the forward-looking information is available in the company's Annual Information Form which is publicly available on SEDAR or EDGAR or on the company's Web site. Please note that the dollar amounts mentioned in today's call are in U.S. dollars, unless otherwise noted. With that, I would like to now turn the call over to Igor Gonzales, our President and CEO.

[Igor Gonzales:]

Thank you, Mike, and good morning, everyone. Q1 2018 represents an inflexion point for the company as we begin to realize returns on our capital employed and operational improvement efforts, especially in our Mexican operations through our improved operating performance, production of higher value ore, improving financial performance with record adjusted EBITDA growth, strengthening our asset base, and continuing to increase on our mineral reserves and resources at each of our mines. Management was very encouraged by the continued progress and achievements seen in the first quarter of 2018. We continue to be optimistic that 2018 will be a strong year of operational and financial performance at Yauricocha, Peru and for our Mexican operations. Following my summary, Gordon Babcock will take us through the operational highlights. And then Ed Guimaraes will take us through the 2018 first quarter financial highlights and then we'll open the call to questions. Turning to Slide 4. The company remains focused on improving operating and financial performance in 2018. During the first quarter, the company continued the momentum from previous quarters with improvements in revenue, adjusted EBITDA and throughput. The company achieved notable improvements year-over-year with a 13% increase in revenue to 61.7 million and an 8% increase in adjusted EBITDA to 27.4 million, which is a record for the company, and at the same time maintaining strong liquidity with 25.5 million in cash and cash equivalents and 50 million of available credit facility. Moving to Slide 5. During the first quarter of 2018, the company processed 558,000 tonnes which represents a 5% increase over Q1 2017. Sierra Metals achieved a record quarter improvement both from the Yauricocha and Bolivar mine continuing the successful production increases realized during 2017. Sierra’s consolidated production of copper increased 11%, silver increased 15%, zinc was flat, lead deceased 31% and gold increased 10% as compared to Q1 2017. Turning to Slide 6. The company continues to see positive gains and momentum from the progress of the operational turnaround program implemented in our operations in Mexico. Quarter-over-quarter, Bolivar realized a 14% increase in throughput with a 16% increase in copper equivalent production. And Cusi realized a 66% increase in throughput and a 12% increase in silver equivalent production in Q1 compared to Q4 2017. We will continue to modernize our operations in both production and lower costs with further benefits is expected to continue in Q2 and beyond. These improvements include new equipment purchases, which allow more minable areas to be incorporated in the mine plan at Bolivar; a change in focus from existing narrow vein structures currently being mined at Cusi to the Santa Rosa de Lima Zone which has larger widths and higher grades; as well as continue the successful improvements made to the metallurgical recoveries at both mines. Looking now at Slide 7. In 2018, the company continued with its aggressive Brownfield exploration program and definition program at all three mines. We have targeted approximately 71,000 meters of Brownfield exploration this year with the ability to ramp up drilling further with success at any one of the zones. Management expects that the company will continue to provide further extensions to existing zones such as Esperanza, Cuye-Mascota at the Yauricocha mine; Bolivar West and Bolivar Northwest at the Bolivar mine; and Santa Rosa de Lima at the Cusi mine. Additionally, our technical teams have been reinforced to meet the upcoming challenges of putting our recent Brownfield exploration successes into production scheduled in the near future. I would also like to mention that the company will provide an updated mineral reserve and resource estimate for the company’s Bolivar mine on May 22, 2018 with a NI 43-101 Technical Report to be filed on SEDAR and EDGAR within 45 days of mineral reserve and resource estimate press release. SRK Consulting from the U.S. will prepare the technical report. With that, I will now turn the call over to Gordon Babcock, our Chief Operating Officer, for the operations and explorations update.

[Gordon Babcock:]

Thank you very much, Igor. Turning now to the operational highlights on Slide 8. In the first quarter of 2018, Sierra processed a total of 557,710 tonnes which represented a 5% increase year-over-year compared to Q1 2017. The company achieved record quarterly throughput from both Yauricocha and Bolivar mines, continuing the successful production increases realized during 2017. We should mention also it had a decent safety record during that time, so we’re moving positively in that direction. The first quarter of 2018 consolidated production of copper increased 11% to 8.1 million pounds, silver decreased 15% to 0.6 million ounces, zinc was flat at 18.2 million pounds, lead decreased 31% to 6.3 million pounds and gold increased 10% to 1,952 ounces compared to Q1 2017. The company had another consecutive strong quarter at Yauricocha where record throughput led to an increase in production, however, lower head grades and recoveries of all metals, except for copper, resulted in a slight decline in equivalent metal production compared to Q1 2017. Bolivar also saw record throughput in the first quarter and realized a 6% increase in production as the company gained momentum from the progress of our operational turnaround program in Mexico. Higher throughput silver head grades and silver and gold recoveries resulted in a 1% decrease in copper equivalent production in Q1 2018 as compared to Q1 2017. At Cusi, total ore processed increased 66% in Q1 to 26,945 tonnes when compared to Q4 2017 but decreased 22% when compared to Q1 2017. Total production of 108,000 ounces increased 3% in Q1 2017 with the metallurgical work performed during 2017 increased silver recoveries by 35%. We’ve been fairly consistent maintaining that good recovery. Despite the lower throughput, metal production decreased raw metal to Cusi. The company continues to focus and develop the higher grade wider width Santa Rosa de Lima zone and continues to ramp up production from this area, while selectively mining structures in the older part of the mine. We expect that the existing mill meet a throughput exceeding 650 tonnes per day in the second quarter of 2018. For example, in Cusi recently drilling in Santa Rosa de Lima zone intercept that mineralized zone well over 30 meters of width. So this was approximately 50 meters below the last level depending – 160 level. So these are all positive events that are occurring at Cusi. Please turn to Slide 9. Looking at the output the remainder of 2018, the company’s continued focus this year is to complete the preliminary scoping and preliminary economic assessment studies for all three mines with the intent of production optimization at all sites. These PEAs will be followed by a prefeasibility and feasibility studies to finalize future operational production increases and/or maintain operations at a status quo. In addition to these work programs, the company will also focus on including reviews of plant optimization strategies, mine shaft and infrastructure improvements, and review of processing plant efficiencies. So in essence, these are our production increase movements. At the Yauricocha mine, the final infrastructure for the Yauricocha tunnel will be completed in the tail end of the second quarter and commissioning will take place in Q3. This will enable the mine to have a direct line to the mill which will result in a faster turnaround in cycle time of the trolley locomotives. In the long run, this will allow us to handle more capacity and handle larger volumes of waste and ore. The tunnel also provides another ventilation inlet to the mine and it also provides a better access point for bringing the material into the mine. The dimension of the current tunnel is tight and this new one is much larger. This will also benefit our ventilation system. The tunnel will be fully operational in the earlier part of Q3 2018. Please turn to Slide 10. At Slide 10, you can see that work continues to progress at Yauricocha on the sinking Yauricocha shaft to the 1270 level and we’re planning to cut a loading pocket at the 1200 level which is below the 1170 working level. This pocket will handle waste and ore from two different streams in a multi-feed raise configuration. Three loading points will be excavated on the 1170 level, each will have a grizzly structure over top and independent discharge points for locomotive track haulage and track less equipment, so we’re going to be able to handle both track and trackless. Our mobile rock breaker we’re handling on both sides because of the encounters on the grizzly platforms and this facility should be operational in 2020. The company's emphasis at Yauricocha will continue to be on the production in higher value including an estimated 450,000 tonnes of ore feed from the Esperanza zone during 2018. This effort is expected to continue the company’s operating margins and cash flow generation within a recently improved, plus historically softer metals price environment. Now, we turn to Bolivar. Installations of a new refurbished mill in Bolivar will provide the company with flexibility in the term of grind size tonnage. The company has reached a throughput rate of 3,000 tonnes per day at Bolivar during the first quarter and we’re expected to move that up to 3,500 tonnes per day in the second half of 2018. At Cusi, improvements are also planned in 2018 with the installation of another new refurbished mill which will be installed and allow production to climb to 1,200 tonnes per day starting in January 2019. Components of the new refurbished mills are currently arriving at Bolivar and the Cusi mine sites. We are in the process this week of moving both mills into Mexico. And we expect to begin a sampling installation of the additional mills in second half of 2018 with a target completion by year end. Please turn to Slide 11. Slide 11 deals with exploration. Exploration has been a very important part of the company’s growth strategy and we’ve committed significant resources and capital to growing the mineral reserves and resources. Sierra drilled 83,000 meters last year across all three mines and the investments were well spent. Mineral reserves for Yauricocha increased 134% and the mine life more than doubled. We also saw significant increases in contained metals as a result of that exploration program. At Cusi, the company increased mineral resources by 129% from the previous report. The company highlighted several new discoveries in addition to extending the current mineralized zones, which speaks to the Brownfield potential at all three mine properties. Going forward, exploration remains a key aspect of our growth plan at all three mines. We have to mention as well Bolivar where there are drilled targets in our geophysical anomalies, we have good results. Those also contributed positively to our movement forward. During Q1 2018, the company drilled 66 holes totaling 6,919 meters at Yauricocha. Exploration drilling accounted for 14 holes or 3,083 meters at various zones including Contacto Sur Medio, Contacto Sur Medio Oeste, Gallito, Esperanza-Cuye to explore continuity and verify potential mineralization. Definition drilling consisted of 52 holes for 1,410 meters on the Central Mine zone, Antacaca, Esperanza Breccha, Catas, Contacto Occidental and Mascota. These were necessary to define and determine continuity of the ore bodies. At Bolivar, the company drilled 6,281 meters within the mine at the El Gallo zone and at Bolivar West and Northwest zones. At Cusi, the company drilled 8,846 meters to verify the continuity of the ore bodies and support development work. We are currently awaiting assay results from recent drilling and are modeling the zones. We expect to be in good position to press release these results in Q2 2018, which were expected to further define the current ore bodies and highlight further mineralization potential. With that, now I’ll turn the call over to Ed Guimaraes, CFO, for a financial update. Ed, go ahead.

[Ed Guimaraes:]

Thank you, Gordon. Good morning, everyone. Turning now to Slide 12. The company had its third consecutive quarter of higher revenues and adjusted EBITDA compared to previous quarters, aided by stable metal prices, record throughput at the Yauricocha and Bolivar mines and improving production at Cusi. The company has continued to be successful in maintaining positive cash flow generation from its existing operations in order reduce debt levels, fund required capital expenditures and maintain liquidity. The company remains focused on capitalizing on the successful drilling campaigns executed during 2017 and 2018, which resulted in significant increases to the reserves and resources at the Yauricocha and Cusi mines. Continued production growth is expected to be realized from the strategic allocation of operating cash flows towards capital efficient growth in order to provide the infrastructure and scoping studies necessary to monetize the reserve and resource increases as quickly as possible. During the first quarter of 2018, the company earned revenues of 61.7 million which was 7.1 million higher than Q1 2017 as well as adjusted EBITDA of 27.4 million and operating cash flows before movements in working capital of 27.3 million. During the first quarter of 2018, the company maintained the significant improvements in revenue and adjusted EBITDA realized during the previous quarters in 2017. The all-in sustaining costs during the quarter remained consistent with the previous quarters during 2017. In Q1 2018, the company earned net income of 8.7 million compared to 2.6 million in Q1 2017 or $0.05 per share on both the basic and diluted basis versus $0.02 per share in Q1 2017. A large component of the net income for every period is the non-cash depletion charge in Peru which was 2.6 million during Q1 2018 versus 9.2 million in Q1 2017. The non-cash depletion charge is based on the aggregate fair value of the Yauricocha mineral property at the date of acquisition of Corona of 371 million amortized over the total proven and probable reserves of the mine. The decrease in the non-cash depletion charge in Q1 2018 was due to the 134% increase in proven and probable reserves reported in the company’s NI 43-101 Technical Report issued on October 26, 2017. Higher revenues are primarily attributable to the 5% increase in throughput, the increase in copper and gold head grades and higher recoveries for copper at Yauricocha as well as the increase in the prices of copper of 19%, lead of 11%, zinc of 23% and gold of 8% in the first quarter of 2018 compared to the first quarter of 2017. This was partially offset by a 22% decrease in throughput and lower head grades and recoveries for all metals, except lead recoveries at Cusi, while the 6% increase in throughput, higher silver head grades, silver and gold recoveries and the higher copper price resulted in Bolivar’s revenues being consistent with Q1 2017. Record quarterly adjusted EBITDA of 27.4 million increased 8% compared to 25.4 million in Q1 2017. The increase in adjusted EBITDA was primarily due to the 8.1 million increase in revenues at Yauricocha. Cash flow generated from operations before movements in working capital increased 15% compared to 23.7 million in Q1 2017. 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 in more detail. I have summarized the changes in cash during Q1 2018 on Slide 13. During Q1, our operating cash flows were 11.5 million. We spent 9.7 million on capital expenditures in Mexico and Peru and paid 4.2 million in principal repayments and interest on our credit facilities in Peru and Mexico as well as paid dividends to non-controlling shareholders of 1.1 million. We also had proceeds from the drawdown of a credit facility of 5 million. These items increased our cash balance from 23.9 million as at December 31, 2017 to 25.5 million as at March 31, 2018. Along with the strong operational results realized during the quarter, the company’s strong cash flow generation allows the company to be self-sufficient and fund its Brownfield exploration and capital projects as well as reduce debt levels. The company has access to various lines of credit of 15 million and when combined with the company’s 25.5 million of cash and cash equivalents, as at March 31, 2018 provide available liquidity of 40.5 million. During Q1 2018, the company invested 3.1 million on sustaining capital expenditures, mostly on equipment and concentrator plant improvements and 6.6 million on growth capital expenditures consisting mainly of 1.3 million of Brownfield’s exploration drilling, 1.9 million of mine development, 1.7 million of plant enhancements to increase throughput and 1.4 million on the Yauricocha shaft and tunnel projects. The company’s focus for 2018 remains on allocating operating cash flows towards efficient growth capital to provide funding for the significant capital expenditures planned in 2018, as well as mine development, plant improvements, infrastructure work on mine shafts and the tunnel as well as completing scoping studies necessary to monetize the recent reserve and resource increases as quickly as possible. Management will continue to review metal prices and retains the option to adjust the capital expenditures should metal prices experience any dramatic changes within the year. The company expects to reduce its debt obligations by approximately 21 million in 2018, 7.5 million to be paid in 2019 and a further reduction of 27 million to be paid in 2020. The company expects to be able to continue to fund its short-term capital and debt commitments through the generation of operating cash flow. With that, I will now turn the call back to Mike.

[Mike McAllister:]

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

[Operator:]

[Operator Instructions]. Your first question comes from Jake Sekelsky with ROTH Capital Partners. Your line is open.

[Jake Sekelsky:]

Hi, guys. Thanks for taking the questions.

[Mike McAllister:]

No worries.

[Jake Sekelsky:]

It looks like cash cost was slightly elevated at Cusi during the quarter. Could you just touch on that and speak to expectations there going forward? Was this just a function of lower production during the quarter or Santa Rosa de Lima ramps up or what?

[Gordon Babcock:]

Yes. It’s a result of lower production.

[Igor Gonzales:]

And just to complement, remember that in Cusi we are following a ramp and we’re gradually increasing the throughput to the plan but also increasing the mine production as we’re developing new levels. So we will continue to increase the throughput until we reach 650 tonnes per month. That’s our target.

[Jake Sekelsky:]

Got it. That’s what I figured. And I guess staying in that vein, can you just quantify the amount of ore that’s now coming from Santa Rosa de Lima and when you guys might expect to be processing ore solely from there?

[Gordon Babcock:]

Right now, Santa Rosa de Lima is contributing approximately 85% of the ore and the rest is coming from areas like Promontorio, Santa Edwiges and San Nicolas. Because the zones are so close together, we had the opportunity of going after these other zones as well.

[Jake Sekelsky:]

Do you expect it to stay at that ratio or do you expect to transition solely to Santa Rosa de Lima at a certain point once development work is done?

[Gordon Babcock:]

We’re going to target our opportunities as they come along. But basically speaking because these zones are so close together, I’d like to say that we’re going to stay within that target. Other zones have other contributing factors like they have more lead, they have more zinc. Santa Rosa de Lima is more silver. Everything helps in the long run here.

[Jake Sekelsky:]

Okay. And then lastly just on the potential expansions beyond the levels that you guys have targeted currently, should we still expect scoping studies or economic studies coming out at each of the mines and do you have an update on timing of these?

[Gordon Babcock:]

Yes, that’s going to happen. The one that truly is a preliminary economic assessment really, our target is Cusi. We’re still in the development stage of the operation. In the case of Bolivar and Yauricocha, we have studies that have been done on our plants. We know our plants capacities and we know where targets are and we’re doing the same thing for three mines. The target is – our objective is to issue three PEAs, one for each mine.

[Jake Sekelsky:]

Got it. And do you have the timing on when we should start to see those roll in or you guys still working on that?

[Gordon Babcock:]

We’re working on that right now. Our target is to get this done before year-end.

[Jake Sekelsky:]

Perfect. That’s all for me. Thanks, guys.

[Operator:]

Your next question comes from Mark Reichman with Noble Capital Markets. Your line is open.

[Mark Reichman:]

Just a few questions here. If we use the first quarter as a baseline, could you just walk us through the pluses and minuses to consider through the balance of the year? While you have the work on Mascota shaft in Q2, it seems the Mexican operations will only strengthen throughout the year as mill capacity and throughput increases and the better grades of ore are mined in the Santa Rosa de Lima zone, for example?

[Gordon Babcock:]

Go ahead, Igor.

[Mark Reichman:]

Did I answer my own question?

[Igor Gonzales:]

I was going to comment that yes, we have a maintenance program on the Mascota shaft. And right now we are preparing all the work, we have the contractor on site reviewing the work and that will be executed in the third quarter of this year. And for that we are also, as you mentioned, we’re trying to upgrade and tidy up our operations in Mexico. We’re doing upgrades in the crushing and the screening and also in the milling. So yes, that’s part of our plan and that’s all in the budget. If you review the Q1 results, we are pretty much on budget and we expect to remain in the other three quarters as well.

[Mark Reichman:]

Yes, well, that’s what I was getting at. You had a pretty strong quarter in the first of the year and so you just kind of expect to see strengthening through the year. So I was just kind of wondering if there was any other – any negatives out there that maybe I hadn’t thought of? I know the work on the Mascota shaft has a little bit of an impact on average production throughout the year. But on balance, you should expect to see kind of a step up in performance each quarter because you’re looking at – especially in the latter half of the year when you see the expanded mill capacity at both Bolivar and Cusi?

[Gordon Babcock:]

Right. So our targets are to maintain that, that same flow from Mexico. In the case of Yauricocha, what we’re trying to do is achieve the work programs that were delineated, do these repairs for these areas, a complete tunnel and so on. And then we’re trying to stick to our original budget.

[Mark Reichman:]

Okay. And then second question is just with the potential for tonnes mill per day to reach 3,600 in '19 at Yauricocha, 3,500 tonnes per day at Bolivar with a possibility of ramping up to 5,000 tonnes per day in 2021 and Cusi rising from 1,200 tonnes per day in '19 to potentially doubling to 2,400 tonnes per day. How are you thinking about the current resource and the reserve base? What kind of average mine life are you targeting that would give you confidence to move forward with these plans? And how do your thoughts kind of dovetail with the current EE&D plan?

[Gordon Babcock:]

Currently right now in the case of Yauricocha, once our environmental impact assessment is complete, the government and all the permit process is in play, that 3,600 is an achievable number. The current mill capacity in Yauricocha is in excess of 4,000 tonnes per day. So the mill is not an issue. So in the Yauricocha side, it’s the permit side and then the development program to get up to that level of steady state production. In the case of Bolivar, we have been delivering consistently over 3,000 tonnes per day on a minable basis to the mill. So that part is coming through. We’ve got the equipment purchases that have come through. We have another long-haul drill. We’ve got a fleet of 8 yard [ph] equipment in place, 30 tonne trucks. So that portion of it is moving forward. We’ve got manpower increases in our staffing. So Bolivar is moving forward in the right direction. I think the 3,500 is very achievable. And in the future to get to 5,000 it’s going to be an incremental, it’s going to be an organic growth program and that’s definitely a plus. Bolivar of course is a mine that warrants a production rate close to the 5,000 tonne per day mark. And in the case of Cusi, we’re in the process right now driving our ramps, accessing the Santa Rosa de Lima as well as when we access Santa Rosa de Lima’s main structures. We just encountered one section that’s over 30 meters of [indiscernible] down there. So it’s an interesting intercept if not necessarily indicative of the whole ore zone, but it’s a very positive find. So we move from 650 tonnes per day and buff it up to 1,200. We have an 8x14 mill that’s going to be installed. All these things are happening as we speak. So at the end of Q4 2018, we’re targeting a mill installation in the case of Cusi. And in the case of Bolivar 12.5x16, a bigger ball mill from Canada that will be installed and in place. And then we’ve got the ramp up on the whole program to get things commissioned and so on to get it up to production. So in the future, our scoping studies are going to delineate where we’re really at. So in the case of Cusi, it’s very feasible that we’ll be in excess of 2,200 to 2,500 tonnes per day.

[Mark Reichman:]

Okay.

[Gordon Babcock:]

It’s looking good.

[Mark Reichman:]

That’s very helpful, Gordon. And then just the last question for Ed. As a result of all these efforts, one would expect the company’s cash flow generation to accelerate over the ensuing years and at some point your EE&D expenditures probably would go down, trend down a little bit. So would you just expect most of that cash flow to get reinvested back in the business, or would you ever consider returning capital to shareholders in the form of say like special dividends?

[Ed Guimaraes:]

Thanks, Mark, for your question.

[Mark Reichman:]

Or it’s too early to think about?

[Ed Guimaraes:]

Yes, I think in the near to midterm, it’s on internal growth expansion. But again, should those opportunities not exist or be utilized, returning dividends to shareholders would definitely be a consideration at that point. But right now we’re focused on growth at all three of our mines.

[Mark Reichman:]

Okay. Thank you very much.

[Operator:]

Your next question comes from Heiko Ihle with HCW. Your line is open.

[Heiko Ihle:]

Hi, guys. Thanks for taking my questions.

[Gordon Babcock:]

Hi, Heiko.

[Heiko Ihle:]

The additional ball mill that you guys sort of putting in at Piedras Verde during the second half of 2018, obviously it’s going to provide you with more flexibility. And just sort of check my head, the mill was purchased in Q4 obviously but you already paid for this mill, correct?

[Gordon Babcock:]

No, Heiko. We just picked it up here just now in Q1. We’re in the process of the last – delivery is the last portion of the payment for both as well as other components.

[Heiko Ihle:]

Okay. So I’ll phrase the question differently. How much in expenditure should we see in Q2 and in Q3 productive capacity improvement?

[Ed Guimaraes:]

We’re running excess of 2 million in the case of Bolivar and approximately 1 million – it’s in our CapEx run for the year for Cusi. We’re covered for the installation as well as the purchase on both sites.

[Igor Gonzales:]

The work that we’re doing in Bolivar, Heiko, is right now we’re doing upgrades on the crushing and in screening. So it can accommodate the increased capacity and we are refurbishing our existing crushers as we also have in the capital an additional crusher that we can purchase and we will probably most likely purchase that. We also are trying to fix – because we have a fixed floatation capacity and so this mill will go in and we’ll have the additional floatation capacity we’re not using at this time and make it useful. We’re also working on the filters and on the cadence. So it’s all a work in progress in Bolivar to accommodate the new capacity of the mill.

[Heiko Ihle:]

Okay, fair enough. And then do you expect to complete the tunnel at Yauricocha in Q3? When I was down there a couple of months ago, I was quite impressed of all the work they had already done at the site. And then between now and then, how much more in CapEx – I assume it’s included in the run rate as well. How much more in CapEx you would need to spend there?

[Gordon Babcock:]

In budget – we’re in the run for our completion of the CapEx investment in budget. So there is not going to be any additional charges if that’s where you’re going.

[Heiko Ihle:]

No, that’s not where I was going at all. It really was to model out when we can start seeing the pricing and the cost improvements. Q3 is starting in, what is that, 50 days. I guess do you have any more granular visibility on when the tunnel can – I assumed it turns on, right? It doesn’t go – there is not a whole lot of ramp up. Either it functions or it doesn’t.

[Gordon Babcock:]

[Indiscernible]

[Heiko Ihle:]

Sorry?

[Gordon Babcock:]

Once our trolley line is installed and tracks laid, we have the outside infrastructure to complete and then the trains will be running on that site. And I think we will start to see things happening in 2019. I think it’s not fair to say 2018 you going to have a marked drop in numbers right away. They have to get the whole thing in place and get everybody trained on it. It’s definitely going to increase our cycle time, so that’s going to be a positive. So it means we have to move – we’ll be in format to move more waste as well as ore.

[Heiko Ihle:]

Got it, very helpful. Thank you, guys.

[Igor Gonzales:]

Thank you.

[Operator:]

[Operator Instructions]. Your next question comes from James Young with West Family Investments. Your line is open.

[James Young:]

Hi. A couple of questions. First, regarding Cusi, I’m just trying to reconcile the larger widths you’re kind of citing and higher grade with the fact that you’re seeing the silver grade decline from the fourth quarter of 178.6 down to 143.47 in the first quarter of '18. So can you help us understand in the mine plan when we will start to see this higher grade ore from Santa Rosa de Lima to getting processed at Cusi please? Thank you.

[Gordon Babcock:]

Okay, Jim, thanks for the question. On the basis of Santa Rosa de Lima, the upper portion at Santa Rosa de Lima’s grades are not as high as the lower portion. As you go down structure, the grades improve. So we have to start our mining as we access these points on the upper part of the mine. And as we go deeper, the grades are going to improve. The one thing that we have to remember is that this is a development program that’s underway. So we exit the ore zones, we get into the ore zones, we’ve drilled on the ore zones and then we basically layout our scopes. And we’re in – it’s a similar situation to where we started off with Esperanza. We’re basically exploring, developing and mining all at the same time and we’re fast tracking things as we go. Then you have your operational issues that occur; water, things like that. So on that basis, as we go deeper and as we intercept into Promontorio and Edwiges and these other zones that are contiguous and cross-cut, the Santa Rosa de Lima structures we have improvements in grade, so we get more – a couple more lead and more zinc. So that’s where we’re going on that basis. That’s why the grades dropped off at the very beginning.

[James Young:]

Okay. And then secondly, I think I heard you say that the widths that you saw at Cusi were 30 meters, 3-0 meters wide.

[Gordon Babcock:]

No. I was talking about one drill intercept. There was one drill hole that – in the area it’s about 50 meters below the 1160 level. Below that level, we have a cross cut and we drilled from that cross cut and we’re drilling the lower part to lay out the scoping plan as part of the definition drilling program. And in that drilling program, we delineated a zone [indiscernible] system had blossomed out into a large pocket and that pocket’s total width was 30 meters. We can’t say that it’s going to be – this is the new width for Santa Rosa de Lima. This is just one drill hole and one really nice intercept. So the possibilities of that level having those kinds of widths is very encouraging. So this is for the future. That’s positive, so we had anticipated that from the drilling from surface. So as we go along, Jim, when we drill these zones, we’re doing our definition drilling program that’s going to be similar to what we find in places like Yauricocha. So we’re going to find other things that are interesting to production plans at the mine.

[James Young:]

Okay. But with the grades that you saw in that area that was 30 meters wide, were they consistent with the average Santa Rosa de Lima grade of 372 grams per tonne or --?

[Gordon Babcock:]

I cannot make a comment on the grades because we just drilled this just recently. I don’t have those assays in front of me. They haven’t reported to ALX.

[James Young:]

Okay, great. If we can transition to Yauricocha then. Gord, could you give us a little update as to what you’re seeing and the products you’re making with the Cuye-Mascota area because during the recent New York City Analyst Day, you kind of highlighted the progress and the positive results that you’re seeing there and we’re just wondering can you give us an update to what’s happening with the Cuye-Mascota area? Thank you.

[Gordon Babcock:]

Sure. So in the Cuye zone, we had like we were talking about in that period of time, we had 15 holes. We started drilling programs from the 1070 level and we drilled one hole and we hit a highly – a sulphide zone. We had copper as well in that sulphide zone. All these things are going to be published in our next round of press releases. So the zone still continues in depth. We just started to drill directly under the Cuye zone. So we haven’t hit anything just recently. In the case of the drilling that was done between Cuye and Mascota and Esperanza, it was kind of just off of Esperanza, that was where we hit that large mineralized area. It ties into the geophysical anomaly. These holes are long. They are about 700 to 800 meters long. It takes a good month to drill them and it takes some time to get assay results and so on afterwards. So this program has just been ongoing. We had some excellent intercepts in the case of Cuye. So that’s work in progress, Jim.

[James Young:]

Okay, great. And one last question if I could regarding Yauricocha. In the past you talk about, Gord, the Chonta Fault. And in the MD&A I believe you referred to it as Yauricocha 2. Could you just discuss what you’re currently doing at Chonta Fault and what are your future plans for this area? Thank you.

[Gordon Babcock:]

Okay. The Chonta Fault as you described, Jim, is about 2.5 kilometers less of the Yauricocha Fault. And in that specific area, we’ve got three drill platforms for surface drilling on our property and we’re going to be drilling from our property into the three target zones at the Chonta Fault. We’re drilling on a plan of six holes. And we just finished the installation of the platforms and we’re in process. It’s going to take about three weeks to get a drill rig in there because now the drilling in Peru has gone – I would say it’s gone ballistic, but there’s certainly been a resurgence in drilling programs undertaken by all the mining companies. So we’ve got a three-week period finishing up our platforms and then we’ll be drilling on the Chonta Fault. There are going to be long-hauls as well. So we’re going to be drilling on those geophysical anomalies in Line 13, Line 16 on our previous publications that we had.

[James Young:]

Okay. Thank you very much.

[Operator:]

There are no further questions. I’ll turn the call back to the presenters.

[Mike McAllister:]

Thank you, operator. That concludes today's call. On behalf of the management team, I would like to thank everybody for participating today. A replay of the webcast and the 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's Web site. Thank you. Operator, please conclude the call.

[Operator:]

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