Sierra Metals Inc.
Q2 2018 Earnings Call Transcript

Published: 14 Aug 2018

[Operator:]

Good morning. My name is Matthew, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Sierra Metals Inc. Second Quarter 2018 Financial Results. 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, Vice President, Corporate Development, you may begin your conference.

[Mike McAllister:]

Thank you, Operator, and good morning, everyone. Welcome to Sierra second quarter 2018 results conference call. On today's call, we are joined by Igor Gonzales, our President and CEO; Ed Guimaraes, our Chief Financial Officer; and Gordon Babcock, our Chief Operating Officer. 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 website at www.sierrametals.com. Monday’s press release, the financial statements, and the Management Discussion & Analysis are posted on the company's website. 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. The 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 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 a projection as reflected in the forward-looking information is contained in the company's Annual Information Form which is publicly available on SEDAR or EDGAR via the 40-F Form or on the company's website. Please note all dollar amounts mentioned in today's call are in U.S. dollars, unless otherwise noted. With that, I would now like to turn the call over to Igor Gonzales, President and CEO of Sierra Metals.

[Igor Gonzales:]

Thank you, Mike. Good morning everyone. Q2 2018 represented a very strong quarter for Sierra Metals as we continued to build upon the solid first quarter results. We are continuing to realize good returns on the capital employed and on operational improvement efforts especially in our Mexican operations. These improvements have generated improved financial performance with record adjusted EBITDA growth, strengthening our asset base, and continued increases to our mineral reserve and resources at each of our mines. With the completion of preliminary economic assessment of each mine have also demonstrated expansion plans with positive economics. Our management team are very encouraged with the continuous progress and strength in the achievements seen in the second quarter and the first half 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 highlights, Gordon Babcock will take us through the operational highlights, and then, Ed Guimaraes, will take us through the 2018 second quarter financial highlights and then we'll open the call to questions. Turning to Slide number 4, the company remains focused on improving operating and financial performance in 2018. The second quarter builds on the momentum from the first quarter 2018 and previous quarters with improvements in revenue, adjusted EBITDA, operating cash flow, before movements in working capital and throughput. The company achieved notable improvements year-over-year with a 29% increase in revenues to $62.7 million, a 64% increase in adjusted EBITDA to $28.9 million which is a record for the company, and a 70% increase to the operating cash flows before movement in working capital of $29.5 million. We continue to maintain a strong liquidity with $21.8 million in cash and cash equivalents and have $15 million in available credit facilities. On the Slide number 5, during the second quarter of 2018, the company processed 602,000 tons which represents a 32% increase over Q2 2017 and an 8% increase over Q1 2018. Sierra Metals achieved record quarterly throughput both from the Yauricocha and Bolivar mine continuing the successful production increases realized during Q1 2018. Sierra's consolidated production of copper increased 62%, silver increased 12%, zinc increased 10%, gold increased 38%, and lead decreased 16% as compared to Q2 2017. On Slide number 6 the company continues to see positive gains and momentum from the progress of the operational turnaround programs implemented in Mexico. Bolivar realized a 41% increase in throughput, with a 45% increase in copper equivalent production. And Cusi realized a 95% increase in throughput, with a 46% increase in silver equivalent production in Q2 2018 compared to Q2 2017. We continue to modernize operation improving production and lowering cost with further benefits expected to continue in Q3 and beyond. Improvements include new mining equipment purchases which allow more minable stocks to be incorporated in the mine plant at Bolivar. A change in focus from existing narrow vein structures to the Santa Rosa de Lima Zone which has larger widths and higher grades. In addition to our recently delineated high grade silver area within the structure of Santa Rosa de Lima as well as continuing with the successful improvements made to the metallurgical recoveries at both mines. Turning now to Slide number 7. I'd like to bring to your attention; the three recently completed preliminary economic assessments for each of our three mines, which we believe demonstrates the value opportunity that Sierra Metals represents. The Yauricocha PEA determined a 66% output expansion from the current 3,000 tonnes per day capacity to 3,600 tonnes per day in Q1 2019 to a potential 5,500 tonnes per day in 2021. The report demonstrated a net present value of U.S. $393 million using a 8% discount with a return on investment of 486%. The estimated life is 10 years but is expected to grow with subsequent drilling completed in late 2017 and 2018 which will be included in an upcoming 43-101 Reserve and Resource Update in addition to future drilling programs. The Bolivar PEA examined a 67% output expansion from the current rate 3,100 tonnes per day capacity to 3,600 tonnes per day in Q1 2019 to a potential 5,000 tonnes per day in 2020. The report demonstrated a net present value of U.S. $214 million using that 8% discount with a return on investment of 550%. The estimated mine life is 11 years but again is expected to grow with subsequent drilling completed in late 2017 and in 2018 which will be included in the next 43-101 Reserve and Resource Update in addition to future drilling programs. The Cusi PEA examined a 315% outlook expansion from the current 650 tonnes per day to 1,200 tonnes per day in Q1 2019 to a potential 2,700 tonnes per day in 2021. The report demonstrated a net present value of U.S. $92 million using that 8% discount with an internal rate of return of 75%. The estimated mine life is nine years but it's also expected to grow with subsequent drilling completed in late 2017 and 2018 which will be included in an upcoming 43-101 Reserve and Resource Update in addition to future drilling programs. Slide number 8 in 2018, the company continued with its aggressive Brownfield exploration program and that initial drilling 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 in any 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 and Cieneguita at the Bolivar Mine; and San Nicolas 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 success into the production schedule in the near future. With that, I will now turn the call over to Gordon Babcock, our Chief Operating Officer, for the operations and exploration update.

[Gordon Babcock:]

Thanks, Igor. Good morning everyone. Please turn to Slide number 9. The operational highlights as noted in Slide number 9, the second quarter of 2018 Sierra processed a total of 602,087 tonnes which represented a 32% increase year-over-year compared to Q2 2017. The company achieved record quarterly throughput from both the Yauricocha and Bolivar Mines which is a continuation of the production increases and our improvement plans that we incorporated. In the second quarter of 2018, consolidated production of copper increased 62% to 8.6 million pounds, silver increased 12% to 0.7 million ounces, zinc increased 10% to 20.3 million pounds, lead decreased 16% to 7.1 million pounds, and gold increased 38% to 1,814 ounces as compared to Q2 2017. Yauricocha mine achieved consecutive record quarterly ore throughput during Q2 2018. Zinc equivalent metal production increased 9% due to higher ore throughput, higher copper and gold head grades, higher copper, lead and gold recoveries also Zinc head grades. Bolivar also saw record ore throughput in the first quarter and realized a 41% increase in production as the company gained momentum in the progress of the operational turnaround program in Mexico. Higher ore throughput, copper and silver head grades, copper and gold recovery resulted in the 45% increase in copper equivalent production in Q2 2018 as compared to Q2 2017. At Cusi, total ore processed increased 95% as compared to Q2 2017 and increased 73% as compared to Q1 2018. Silver production of 270,000 ounces increased 46% compared to Q2 2017. The company continues to focus and develop higher grade wider width Santa Rose de Lima zones as well as targeting things in other zones such as San Nicolas and Promontorio and continues to ramp up production from this area while selectively mining structures in the older part of the mine I just mentioned. We are pleased to report that the existing mill reached its throughput capacity of 650 tonnes per day during the second quarter of 2018. Please turn to Slide number 10. This details the outlook for the remainder of 2018, having completed the PEA studies for all three mines; we are now working on feasibility studies with the intent to production optimization at all sites and to finalize future operational production increases. In addition to these work programs the company will also focus on including reviews of plant optimization strategies, mine shaft and ramp and infrastructure improvements and review of processing plant efficiencies. At the Yauricocha mine, the final infrastructure for the Yauricocha tunnel will be completed in the third quarter of this year and commissioning will take place at the end of Q4. There is some detailed work that has to occur on surface, the infrastructure to tie into the existing mill facility as well as the existing Klepetko tunnel roadways and some work to improve the whole structure that has to take place by the end the Q4. This will enable the mine to have a direct run to the plant which will result in a faster turnaround in cycle time of the Charlie Locomotives we will be running 520 tonnes plate in locals to be our ore and waste movement in the mine. In the long run, this will give us the capacity to handle larger volumes of waste and ore. This tunnel will also provide another ventilation inlet to the mine and that will be a huge benefit to the ventilation system we have currently in place. The tunnel should be fully operational in the earlier part of Q4 2018 towards the beginning. There's another program that we're working on right now, it's called the Mascota maintenance program. In Q4, we're going to be working on the shaft of Mascota from the 970%, 1070 levels. We have some timbers to replace, we have some cleaning jobs to do, we’ve accessed the bottom of the Mascota shaft with a tunnel from 1170 level, so we have everything in place and that's going to start to beginning Q4 so we will see a drop in production during that time, we won't be doing the same amounts. Turning now please to Slide 11. Work continues to progress at the Yauricocha mine with the sinking of the Yauricocha shaft at 1270 level plan is to cut the loading pocket below the 1170 working level this pocket will handle waste and work from two streams in a multi feed three race configuration will handle waste, will handle ore and will handle winter ore with humidity. Three low points will be estimated under 1170 level each having grossly cover and independent discharge points for locomotive track haulage and trackless haulage equipment and mobile rock breaker will handle any oversized counter in the grizzly platforms and the company expects the make of this facility will be completely operational in 2020. Companies emphasis here at Yauricocha will continue in the production of high value ore including an estimated 250,000 tonnes of feed coming from the Esperanza zone during 2018. This effort is expected to continue to improve to seven years. Okay, this is going to expect to improve the company's operating margins and cash flow generation with an recently improved and historically softer metals price environment. Turning to Bolivar, the installation of a new refurbished mill at Bolivar will provide the company with flexibility in terms of grind size and tonnage. The company has reached its throughput rate of 3,100 tonnes per day at Bolivar during the second quarter and expects to grow that 3,500 tonnes per day in the second half of 2018. We have made huge improvement in the Bolivar tailing management system, we are using a process using a little bit of creativity in handling the slurry tails. We're using cells or ponds, dewatering the slurry, then accessing the deposition of the new dewatered tail similar to a dry stack, so this is working quite well, we’re controlling a great deal of production in this fashion. At Cusi, improvements are also playing in 2018 with the installation of another new refurbished mill 8/14 which will be installed to allow production decline 1,200 tons per day starting in January of 2019. Components of the new refurbished mills have arrived that at the Bolivar and Cusi mine sites and we have begun the assembly and installation of these additional mills and expect to see completion by year-end. It's important to mention rate in Cusi, we have the presence of stockwork system which is open at depth, width, and in length. This offers cut the opportunity to increase production, to give us a single source to the plant and that will give us some real positive opportunities here. We also have a dewatering decapture onsite at the Mal Paso plant and that is in play to give us another opportunity in team's management, in other words you won’t be depositing Sierra depositing a semi-based type material, close to a dry stock. Please turn to Slide 12, exploration has been and continues to be a very important part of the company's growth strategy and we have committed significant resources and capital to grow the mineral reserve and resources. In 2017, Sierra drilled 83,000 meters across all three mines and the investment as we know is well spent. Mineral reserves for Yauricocha increased 134% and the mine life more than doubled. We also saw significant increases in contained metals. At Bolivar, mineral resources the reserves pardon me increased 83% and the mine life went from four years to seven years. Also at Cusi, the company increased mineral resources by 129% from the previous report. Company highlighted several new discoveries in addition to extending the current mineralized zones was fixed to the Brownfield exploration potential at all three process. In 2018, the company plans to drill over 71,000 meters across all three properties which have already led to the discoveries of new zones such as the Contacto Oriental, Contacto Sur Medio Oeste, and the extension of Cuye-Mascota at the Yauricocha mine. At Bolivar, drilling is identified and extension on to the Bolivar West Zone and that means Cieneguita to its proximity to little town of Cieneguita. At Cusi, the drilling has identified a 40 meter wide high grade silver stockwork within the Santa Rosa de Lima Zone which is what I just referred to previously. Subsequent drilling has extended the width of that zone to 50-meters and the zone remains open at depth and along strike going forward, exploration will remain a key aspect of our growth plan at all three mines. During Q2 2018 company drilled 45 holes totaling 8,366 meters at Yauricocha exploration drilling included 33 holes 4,013 meters at various zones including Contacto Oriental, Contacto Sur Medio Oeste, Esperanza-Cuye, and Escondida Norte to explore continuity and verify potential mineralization. Definition drilling comprised of 52 holes 3,440 meters at Antacaca, Esperanza, Catas, and the Central Mine zones, Butz and Mascota to define and determine the continuity of the ore zones. During Q2 2018, surface exploration was continued in the southern end of the Central Mine Zone, mainly in the areas of the Chonta Fault III and in where our diamond drilling program will be carried out. A highlighting here we’re in the process right now, the drill sites are prepared, we have two small shops for the have discussions with the community, so we expect to be drilling in four weeks in advance. At Bolivar, the company drilled 7,403 meters at El Gallo and within the Bolivar Northwest, Bolivar West, and Cienguita Zone. At Cusi, the company drilled 11,376 meters to verify the continuity of the orebodies and support development work on the various veins. We are currently waiting active results from recent drilling and are modeling the zones. We expect to be in a position to perhaps release further results in Q3 2018 which are expected to further define the current orebodies and highlight further mineralization potential. With that, now I will turn the call over to Ed Guimaraes, our CFO, for a financial update.

[Ed Guimaraes:]

Thanks, Gordon, and good morning everyone. Turning now to Slide 13, the company had its fourth 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 the Cusi mine. The company has continued to be successful in maintaining positive cash flow generation from its existing operations in order to 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 continuing in 2018, which resulted in significant increases to the reserves and resources at the Yauricocha, Bolivar, and Cusi mines. Continued production growth is expected to be realized from the strategic allocation of operating cash flows towards growth efficient capital in order to provide the infrastructure and scoping studies necessary to monetize the reserve and resource increases as quickly as possible. During Q2 2018 the company earned revenues of $62.7 million which was $14.1 million higher than Q2 2017 as well as adjusted EBITDA of $28.9 million and operating cash flows before movements in working capital of $29.6 million. During the second quarter, the company maintained the significant improvements in revenue and adjusted EBITDA realized during the previous quarters. The all-in sustaining costs during Q2 2018 trended lower than the previous quarters as consolidated throughput and metal production increased. In the second quarter of 2018 the company earned net income of $10.8 million compared to a net loss of $2.8 million in Q2 2017 or $0.07 per share both on a basic and diluted basis compared to a negative $0.02 per share in Q2 2017. A large component of the net income for every period is the non-cash depletion charge in Peru which was $2.8 million for Q2 2018 compared to $9.7 million in Q2 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 Q2 2018 was due to the 134% increase in proven and probable reserves reported in the companies NI 43-101 Technical Report issued on October 26, 2017. Higher revenues are primarily attributable to the 19% increase in throughput, the increase in copper and gold head grades and higher recoveries for copper, lead and gold at Yauricocha. And the increase in the prices of copper of 21%, zinc prices increased 15%, lead prices 10%, and gold 2% in Q2 2018 compared to Q2 2017. The 41% increase in throughput, higher copper and silver head grades, copper and gold recoveries, and the higher copper price resulted in Bolivar’s revenues being 61% higher than Q2 2017. And the 95% increase in throughput and higher silver recoveries resulted in Cusi’s revenues being 102% higher than Q2 2017. Record quarterly adjusted EBITDA of $28.9 million increased 64% compared to $17.6 million in Q2 2017. The increase in adjusted EBITDA was primarily due to the $14.1 million increase in revenues. Cash flow generated from operations before movements in working capital of $29.5 million increased 70% when compared to $17.4 million in Q2 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 Q2 2018 on Slide 14. During the second quarter of 2018 our operating cash flows before movements in working capital were $29.5 million. We had negative working capital adjustments of $8 million, paid $6.1 million in taxes in Peru, spent $14.2 million on capital expenditures in Peru and Mexico, and paid $4.1 million in principal repayments and interest on our credit facilities in Peru and Mexico, as well as paying dividends to non-controlling shareholders of $0.6 million. These items decreased our cash balance from $25.5 million as of March 31, 2018, to $21.8 million as at June 30, 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 reduced debt levels. During Q2 2018 the company spent $4.1 million on sustaining capital expenditures mostly consisting of purchases of equipment and concentrator plant improvements and $10.1 million on growth capital expenditures consisting mainly of $2.1 million of Brownfield exploration drilling, $3.3 million of mine development, $1.5 million of plant enhancements to increase throughput and $2.1 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 tunnels as well as the recently completed PEAs and feasibility studies underway which are necessary to monetize the recent reserve and resource increases as quickly as possible. Management will continue to review metal prices and retain the option to adjust the capital expenditures should metal prices experience any dramatic changes within the year. The company has principal payment obligations on its loans and credit facilities of approximately $12.5 million to be paid in 2018, $22.5 million to be paid in 2019, and $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 this call. We would now like to open the call to questions from participants. Operator, could you please open the lines.

[Operator:]

Thank you. [Operator Instructions]. Our first question comes from the line of Jake Sekelsky with ROTH Capital Partners. Your line is open.

[Jake Sekelsky:]

Hey guys, thanks for taking my questions. Maybe at Cusi how much material is coming from Santa Rosa right now, should we expect rates to gradually trend higher throughout 2019 and into 2020?

[Gordon Babcock:]

Right now, the predominant -- thanks for the question Jake. Right now the predominant fee is coming from Santa Rosa de Lima we have the areas that we’re developing in the stockwork zone as well as some areas to the south to higher grade and some of the areas to the north. That’s the target.

[Igor Gonzales:]

To complement the response from Gordon we are also finalizing the improvement of the ramp to Santa Rosa de Lima, we're widening the ramp and this has allowed us to bring larger trucks to mobilize the ore and waste.

[Jake Sekelsky:]

Got it, okay. In assuming the second ball mill will arise in the second half of this year, is it fair to assume will be at 1,200 tons a day call it by mid-year, next year?

[Gordon Babcock:]

Yes, that's correct.

[Jake Sekelsky:]

Okay, perfect. And then just lastly on exploration, what’s the budget for the remainder of the year and if you could just break it down between the three months that will be helpful?

[Ed Guimaraes:]

Hi Jake thanks for your question. Go ahead, no, no go ahead. That's fine.

[Gordon Babcock:]

[Indiscernible].

[Mike McAllister:]

Jake did you get that response, Jake.

[Jake Sekelsky:]

I didn’t, it cut out.

[Mike McAllister:]

Okay, go ahead Gordon.

[Gordon Babcock:]

The budget date, the estimated runs can be close to 6 million.

[Jake Sekelsky:]

Okay. Do you break out between the three mines that will be helpful?

[Gordon Babcock:]

I would say -- I would split it fairly evenly between the three mines roughly two at each one.

[Operator:]

Our next question comes from the line of Lee Cooperman with Omega Advisors. Your line is open.

[Lee Cooperman:]

Thank you. Let me first ask my questions for the entire management team for the excellent job [indiscernible] and particularly for the high quality financials you actually disclosed for a company of that size. [Indiscernible] extension, we’re talking about somebody who controls 52% to the company, so the question w should be asking and I’m asking is are you guys going to distribute areas not you but you should know the answer, we shouldn’t hear middle of August, we’re talking five, six weeks away as the areas going to ask his fund investors for the extension, or is it going to distribute and if it distribute how it's going to distribute, common sense tells me with the net present value of 428 U.S. and stock price of 254, that distribution would make sense because it will give up the control premium, so the choice to me would be either sale of the company at private market value of buyer or ask for an extension to give yourself time to develop say the Yauricocha mine facility which might be a elephant given all the stuff you disclosed. But I think it’s relative that you should try to give us some insight into what is likely to happen in October? Thank you and hope you could help and again congratulations and your performance is excellent.

[Igor Gonzales:]

Okay, this is Igor. And I will ask also Ed to participate right after, what we’re doing as operators, we presented a strategy to our board last year and we're well into the execution of this strategy and we have continued to do that. As a matter of fact, next month we have a strategy review session to update ourselves on what have we completed on the strategy which is what you guys been getting all along throughout our press releases to our 43-101s through our PAs et cetera. Regarding our funds, we don’t know and we cannot answer unfortunately what they’re going to do I mean they are a shareholder for Sierra but we don't control their activity, so we cannot comment on what they will be doing on -- in six weeks. Ed, you want to comment also?

[Ed Guimaraes:]

Thanks Igor. No just to add that the company and its shareholders we’re completely aligned in terms of maximizing shareholder value and any decision that the art fund ultimately takes is not impacting our day-to-day decisions and running our minds and pursuing shareholder maximizing, optimizing our assets as best we can.

[Lee Cooperman:]

I have no question about that but I think with this event six week away as a management you would like to know who you'll be working for and I would like to know since I'm a buyer in the market do I want to buy in front of the possibility of distributing 52% of the equity. So I think that we're close enough to the event we're, Alberto should feel obligated to inform you guys what his plans are that's all but I want to beat a dead horse but that's kind of my view. Thank you and again you’re doing a very fine job, in running the company which is most important.

[Igor Gonzales:]

Thanks, Lee.

[Gordon Babcock:]

Thank you.

[Ed Guimaraes:]

Thanks.

[Operator:]

Thank you. Our next question comes from the line of Mark Reichman with Noble Capital Markets. Your line is open.

[Mark Reichman:]

Good morning. I'd also like to commend management on the strong results and solid execution of this plan. I'm looking at page 37 of your corporate presentation the breakdown of the CapEx guide and I kind of use that as a scorecard and so what I'm showing is I'm sustaining CapEx you've spent about $7.1 million of your $13.1 million budget the exploration I think you spent about $5.7 million to $9.2 million, where I’m little less clear is progress to-date on the bottom by mine, the exploration drilling, so could you just of that by mine the totals after the 71,250 could you just let us know kind of how many meters have been drilled in the first half that would be helpful.

[Igor Gonzales:]

Ed, do you want to comment on CapEx and then Gordon will comment on the --

[Mark Reichman:]

Yes, I mean if he can just confirm those numbers that will be fine. But just on that last line on exploration drilling, so for example Yauricocha, you’re planning to drill 33,500 meters. Just looking at your first and second quarter conference call presentations I get about 15,285 but I'm not sure that’s correct. So if you could just kind of walkthrough the meters drilled to-date in the first half by mine that would be really helpful.

[Igor Gonzales:]

Yes, and that was touched on already Mark by Gord I believe or might have been --

[Mark Reichman:]

Yes, okay. Well, could we go through one more time?

[Gordon Babcock:]

Sure, I’ll actually. So we've in Q2 --

[Mark Reichman:]

Yes, the reason I was asking is I was a little confused just looking at the first and second quarter conference call slides, I was getting like 13,684 for Bolivar and I know that’s not the case so I had to include something else.

[Gordon Babcock:]

Yes, at Bolivar we did about 7,400 meters in Q2, so I don’t think it’s quite that high.

[Mark Reichman:]

Right. The first quarter showed 6281 and the second quarter showed 7403 but your budget is 10,000. So that can’t be right, so I was just wanting to clarify those numbers.

[Ed Guimaraes:]

That is not right; we just allocated a little bit more than budget to Bolivar. I think in total, we’re going to be coming in around that 71,000 meter Mark but again it’s tough to really our budget is still something that we retain the right to modify.

[Mark Reichman:]

Yes. So what you're telling me is 13,684 is correct, so you're just gone little over the 10,000 and so you’re little over you’re little under the halfway mark in Yauricocha and you’re probably what about two-thirds there on Cusi and so okay well that’s helpful and that’s why I wanted to clarify it. In terms of the exploration dollars per meter when you look out kind of when you’re 18 to 22 plants on the 330,000, what are you kind of seeing in your dollars per meter cost or I mean are you seeing some escalation there or when you kind of look out kind of what are your expectations?

[Gordon Babcock:]

Right now, what we’re seeing on the exploration front, we’ve managed to do some more negotiations with our contract drilling services here in Peru as well as in Mexico, our rates have actually gone down. The deep wells are expensive as you probably can gather. Also I wanted to add a little bit more concerning the drilling, in the case of Bolivar the reason there is a delta change in the drilling meters is because we discovered the Cieneguita Zone. So one hole drilled in the Cieneguita came back with good copper results, so we drilled more holes, the whole concept here is to take us from where we are in the resource base to reserve. So we’re trying to up our definition program and take advantage of that back. So that’s why that delta is there, we have that right by the board, so we maximize it whenever we can.

[Mark Reichman:]

But still you end so like you have your exploration budget; you spent $1.1 million of your budgeted $1.2 million you actually gone over in terms of the meters. So in other words your cost per meter have been a little lower than expected at Bolivar?

[Gordon Babcock:]

Yes, that’s right, that’s right.

[Mark Reichman:]

Got it. Okay. And I just wanted to pivot back to the Cusi Mine PEA and I think I discussed this with before and I just wanted to kind of better understand it, so the plants call for increasing the throughput capacity at the Mal Paso Mill, the 1200 tonnes per day in 2019 and then to put it in a new 1500 tonne per day processing plant that would begin in mid-2021 and you would run those in tandem and I think currently the Mal Paso plant has about 1.5 years of storage, so it doesn’t quite get you to the point where you’ve got that new -- the new way site so to speak it comes with the proposed plan. But as I recall, I mean there is a lot of savings and that new plant is scalable, so I just wanted to revisit the rationale in terms of why not size that new plant in a much -- at a higher level say 3000 tons per day and just phase out Mal Paso?

[Gordon Babcock:]

That’s the long-term plan. So the idea is in this next round of feasibility studies, we’re going to look at those options. So in the case of Cusi and in the case of the Mal Paso plant, we do have some upside potential for more storage. So there are opportunities, there is four sites that we can choose from, we can add to them right now. So the idea was we get to 1200, we construct new plants again after our feasibility run and then the idea is that plant we have access to a mill that could certainly give us our 3,000 tons per day milling capacity, so we’ve got some optionality here.

[Igor Gonzales:]

The design for the new mill is so far is 1500 tonne per day modular mill and we have allowed space for a second module. And as Gordon says, when if we build the second module of course economics have to make sense which we think is they will and then at that point we’ll build a second module right next to the first module under which have found the Mal Paso mill at that point.

[Mark Reichman:]

Okay. And then for the Mal Paso facility going back to the existing tailings facility that had 1.5 years of storage capacity based on 1200 tons per day, I think there was a mention that prior to you’re kind of contemplating a new site that would accommodate like 5.4 million tonnes of waste ore but I think you identified like four additional storage sites that could offer varying levels of storage capacity, are those -- have those been kind of confirmed or do you feel pretty comfortable with the tailings facilities in terms of when you’re operating that period between to extend that 1.5 years until you get the new site up and running?

[Gordon Babcock:]

Yes, we do -- remember we’re in the processing right now of doing test work with the decanters. So just a when would be dewatering these, so when we do that the idea is to deposit semi-dry tails and we will use that with the drystack facility, so that’s the concept. So then we were not going to be concerning ourselves with slurries and handling slurries and so forth.

[Igor Gonzales:]

In a more general terms, what we have done with the tailings at both the Bolivar and Cusi is we hired engineering firms to do short-term plan which we’re executing and a mid and long-term plan which are now understudy. That’s why Gordon mentioned that in Cusi in that Mal Paso we have three or four options, we’re also looking at a new tailings facility onsite for the 1500 tonne per day module, so and in Bolivar there is also a study going on for a new site for additional tailings for the expansion. So all that is being engineered as we speak.

[Gordon Babcock:]

Another further comment is both sites are going to requiring a future fill. So the other concept would be backfill possibly a key factor going into Cusi as well as Bolivar, so those options are also out there as well. That’s part of our full program the feasibility one.

[Operator:]

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

[Matt Barry:]

Hey guys, congrats on the quarter. This is Matt Barry here for Heiko. Unfortunately he is on a flight, he couldn’t call himself.

[Igor Gonzales:]

Hey, Matt.

[Gordon Babcock:]

Okay, fair enough.

[Matt Barry:]

We noticed your trade and other receivables have continued to increase they’re about $35 million right now compared to that $28 million at year-end and $29 million at the end of the first quarter, any ideas where we can attribute this to sluggish metal prices or some other factors and as per the MD&A only some of that is attributable to the obvious factor which drove the Mexican value-added tax receivables that went from about $4 million to about $6 million.

[Ed Guimaraes:]

Hey Matt, it’s Ed. Thanks for your question. So that higher receivable balance is largely attributable to the higher than normal zinc concentrate shipments that we’ve done pretty much at year-end, there are two big shipments done on June 28 and on June 30 where no amounts we weren’t paid for any of that and it’s really timing, we can’t really control when the plant will have the concentrates ready to be loaded on to trucks and shipped and it just still happened to be the case that a large amount of this physical concentrate we shipped at the end of the quarter. So and that was subsequently, yes and that was all those received within two weeks pretty much, so by July 15th we had that receivable come way down.

[Matt Barry:]

Perfect, perfect, thank you for that. And then I believe you guys touched on this briefly earlier but the second Ball Mill at Cusi when exactly does it get to site and as far as we know it’s been ordered, coded and pricing is locked? Correct?

[Gordon Babcock:]

Okay, I’ll answer that. Hi Matt, Gord here. This the second Ball Mill is in Cusi now, it’s mounted it’s pretty much ready to go, it’s on an infrastructure structural steel infrastructure, we’re in the process now of preparing the concrete pad and the way we go it should be in place by the end of the year we should be -- that should be in place and ready to go.

[Operator:]

Our next question comes from the line of Chris LaFemina with Jefferies. Your line is open.

[Chris LaFemina:]

Hey good morning, thanks for taking the call guys and to echo the comments earlier, I would definitely agree that we appreciate the level of transparency in your financials, it makes it very easy to modeling and easy to understand, just a couple of questions, you guys beat my expectations on -- at all three of your mining operations in the quarter pretty significantly and you’ve giving us very good guidance around how those operations should progress, I’m wondering about the copper costs, should we expect copper costs to rise as well as production ramps up from your operations or is there any reason why the corporate and SG&A cost would potentially go down over time. And the second question I have is kind of a bit longer-term conceptually you guys obviously have significant expansion potentially at Yauricocha, at Cusi, even at Bolivar, and over various time horizons, I’m wondering what Sierra could look like in your mind in I suppose 2021, 2022 if you’re able to deliver this growth and in line with where unit cost likely will go, what sort of EBITDA do you think do you guys could generate on an annualized basis, I don’t know if you have done a math on this but if you assume kind of where prices were in the last quarter, where prices are in spot, what sort of annualized EBITDA run rate are you looking at for your company in three or four years time because obviously the investment case here depends a lot on the growth and the market is not valuing your stock on what you look like today but once they value will look in three or four years time and it will be helpful to have just some insight as to what you think you would look like, I think the 43-101s have some details as well. But just wanted to kind of hear from you guys how you think you're looking in few years time? Thank you.

[Ed Guimaraes:]

Thanks, thanks Chris, yes thanks for your questions. In terms of G&A, I think G&A should we'd expect that G&A to come down a little bit, there has been some additional costs over the last couple of years in terms of last year for instance taking the company dual listed into the New York Stock Exchange American also the ATM that we worked on we also did a spin-out of Cautwo which was Northern Exploration properties we had in Peru as well as bringing on just supplementing our staff to handle the more of the technical aspects of the scoping studies and planning. So I -- again after its -- I would expect the cost not to increase unless there is a significant event that would cause it to increase if that's so, so little bit of sucking and blowing but I don’t foresee anything that would drive G&A costs higher. But again it all speaks to scale of the operations and the staffing requirements and consultants used. So that’s the first point/ In terms of EBITDA, the company policy really isn’t to forecast out or provide guidance to EBITDA but I think you can do the math of just looking at the throughput expansions and using a consistent metal price scenario and the fact that your cost should overall should decline with these additional throughputs. I think you can get to an EBITDA number that’s look I leave it to you but it’s much higher than where we are today that’s for sure.

[Chris LaFemina:]

It looks like it could be more than double your current run rate assuming commodity prices stay where they are, so if you could wither that growth your shares are clearly not priced correctly?

[Ed Guimaraes:]

Right, right, that's a fair comment, yes.

[Chris LaFemina:]

Okay, well thank you for that.

[Operator:]

[Operator Instructions]. Our next question comes from the line of Jim Young with West Family Investments. Your line is open.

[Jim Young:]

Yes, hey, a couple of questions. First is a follow-up to Chris’s question regarding your EBITDA, can you I recognize you don’t forecast EBITDA or give guidance but can you give us a sense regarding the EBITDA margin so for example you did a great job of increasing your EBITDA at the corporate level from by 170 basis points from the first quarter through the second quarter at 46.1% but Yauricocha EBITDA was 52.5%, so when I think about the different operations, different mines at Yauricocha, Bolivar and Cusi can you give us a sense as to the African growing scale are EBITDA should more normalize EBITDA for the whole company be at Yauricocha level which obviously will increase over time but I’m just wondering if you can give us a feel for directionally where those EBITDA margins should or could go? Thank you.

[Ed Guimaraes:]

Hi Jim, it’s Ed. Thanks for your question and you’re right that Yauricocha’s EBITDA was about 52% and I believe overall for Cusi, Bolivar that’s kind of in the 40s. I don’t think it’s a stretch to say that the company at all three levels can’t be at the 50% EBITDA level and I will leave it at that.

[Igor Gonzales:]

And I like to complement that Jim with the reason we’re moving quickly with the feasibility studies and our life of mine estimates and calculations is that that will help us to define the operating cost at all levels and the capital costs and then at that point we will be in a position to estimate the financials to make a reasonable estimation in our financials. So I think we are halfway there, we’ve done the PA but I think in the feasibility studies we’re going to narrow the option and we’re going to be more precise in the defining operating costs, capital costs for all of our units.

[Jim Young:]

Okay, thank you. And then the second question is for Gord, Gord can you help us understand the size and significance of this Santa Rosa de Lima news where you mentioned that the width goes from 40 to 50 meters which they just seems substantial but is the what is the ore rate on this incremental 10-meters and overall just from this one part of Santa Rosa de Lima, how much ore does this suggest is contained in this one area and will this supply, the Mal Paso mill for a year, three years or just can you give us a sense or magnitude and the opportunity that you see really with this area? Thank you.

[Gordon Babcock:]

Okay, thanks Jim. Jim, that area is a series of stockwork, it’s a vein system, it’s a series of systems. So what we’re seeing is in the development plan this is going to be a sub-level drilling plus a fill operation, so it’s almost like a welcome method, so it’s going to be a volumetric plus to the whole operation. And the grades range from one end to the other end, we’ve got some high grade intercepts in the center can’t really disclose what the average grade is going to be because we’re in the process right now of putting together our definition program, defining our targets in the zone, we’ve got average grades running from 160 to 250, 300 grams. So they run the math. The idea is looking at this for possibility, it’s more in the possibility it’s in the actual plan, we run this with a sub-level stope and technique with long-hole roughly 12 meter levels, 12 meters between levels and we will bump it up to 16 meters down the road. So it’s going to give us some productivity opportunities here. The idea is in the next plan, the next quarter we’re going to be reviewing our plan for next year, this area could supply the complete mill with one years of supply and we continue with a ramp in selling going down and then following that the lower levels as we go down the next 16 to 32 meters below, we’re pretty confident this zone continues at that. So roughly the dimensions run 70 meters in depth that we know now. We’ve got approximately 100 meters long and in the center looking a little solid, so big frac section in the middle runs anywhere from 40 to 50 meters away and we’re driving development drills right now in that zone, it’s basically to our point and we’re going to structure it, so we can long-hole the complete area and retreat that and then on the area above this zone we have an end-to-sight contact and that’s the area we’re going to be filling. So we’re going to be doing a progressive fill behind this stoping program. So it’s a modified sub-level case, sub-level long-hole drilling program and that will give us bulk tonnage immediately, that’s the concept. So if all goes correctly we have one year's capacity then we follow it up with the next year with another year’s capacity just in that zone what we know but we need to do this definition drilling program below the 1744 level where we are mining remaining. This is a great opportunity. There are other opportunities like this in the mine as well, the other area we spoke about before called the [indiscernible] and there are some opportunities in the upper part of the mine we have to look at the possible potential after drilling program is complete, there is a possibility that we can get some bulk tonnage in the form of small open pit on surface, that is in the future.

[Jim Young:]

Okay, thank you and Gord all of our -- can you update us with respect to training for trying to process ore out of the Bolivar Northwest and the Bolivar West areas you decide -- does that recall that El Gallo is a much lower grade than Bolivar West and Bolivar Northwest but can you give us a sense as to when this ore is starting -- is going to get processed in those areas and also in the Cieneguita Zone, what’s the timing of that? Thank you.

[Gordon Babcock:]

Okay, all right. Thanks Jim. Jim concerning Bolivar right now our definition programs have delineated that we need to work on the El Gallo inferior area of the mine. We do have grades that are close to the 1% mark in that area, we have programs now we’re actually going after the pillars in the upper part of the Gallo Superior mantle and that’s giving us some opportunity and better grade. So we’re going to target the Gallo Superior as well as the Gallo Inferior area, we’re going to continue with the access, we’re in the process right now in the next month, we’re going to be reviewing our strategy to attack these zones in the future we’re going to get a complete strategy review with our mine teams going to be here and we’re going to review the Gallo -- Gallo area that has opportunity, we’ve more than doubled the resources in that area, so there is an opportunity with that warrants attacking, we’ve changed the mining method from the room & pillar and approximately our target is for next year to be about 85% to around 87% long-hole drilling, long-hole stoping in the mantle zone as well our continued drives to Bolivar West and Bolivar Northwest that those ramps will continue. But we’re going to review everything we’re looking at now; we got to concentrate on what opportunities are right there in front of our basis first and then go after these other zones. There is a considerable amount of development to do. There's also a review that we have to do targeting a tunnel to run from the pardon me the Piedras Verdes plant to the Gallo and the Bolivar West areas of the mine that would give us some other opportunities fulfill and so on in the future. We have to review all of those. So to answer your question in one shot Gallo Inferior is our target that we’re developing.

[Jim Young:]

Thanks. And then lastly if I could Gord, can you just help us -- just update us on like Yauricocha where your priorities are at that mine because you have so many opportunities that you’re pursuing but and then also as particular the Chonta Fault, what’s happening in that area?

[Gordon Babcock:]

Okay. In the mining plan, we have been very optimistic in our runs and we've delivered for the first half of the year excess production in many other zones. One of the opportunities that we've been able to access has been these zones of these corpus-cheapless this has been a result of our definition program in the area of Cachi-Cachi that’s one, also in the areas close to Mascota and the immediate area near the Central Mine Zone. We've targeted some new areas; our definition drilling program has picked up some more of these corpus-cheapless so that's why our head grades have been above the norm, so that opportunity has been well received. So our target is to continue with that area, continue with the Esperanza area as far as mining is concerned, so Esperanza, Cachi-Cachi and the Central Mine Zone are the same opportunities we're going to go after those carry on with that. On the exploration front, we're drilling on a potential pour fleet from the 720 level down we're going to approximately 1,500 meters and we're in process right now. We've picked up [indiscernible] so there's we have to target that drilling programs, so that's an opportunity for the future. In the surface program, we've got targets and by the way that one potential pour fleet is also based on the Titan 24 geophysical survey. We also have delineated the drilling program under the Cuye area of the mine that's also noted in the Titan 24 program, also underneath the Esperanza zone again another program. Our future run for the next few years is going to be a horizontal run to try and access as much ore as we possibly can from that 1070 level. We know that we have drill intercepts at the 1070 horizon to between the Esperanza zone and Cachi-Cachi we've got that target area, so we know that there's opportunity there. Now we have to start to look at this as with an opportunity to increase our resources. On the case of the Chonta Fault, as I mentioned the program there's a program of approximately 8,000 meters of drilling to do on surface and we've got out, we’ve made the presentations to the communities to detail what we want to do is two communities the community of [indiscernible] and that first presentation was done and we expect that it's a process, it's an informative process and we've got a total of 21 different sites, all targeted in that same program with the communities but we expect to see the go signal coming from them from the government in four weeks time. We're ready to go with two drill stations now on the Chonta Fault and we have geochemical anomalies as well as the area has some prospecting done before, so we know that there's good targets there for lead, zinc, silver. There is good opportunity there.

[Jim Young:]

Okay and my last question if I could for Igor and Ed is that on page 11 of your corporate presentation you have both your 2018 production guidance and 2018 cost guidance since we're more than halfway through the year at this stage and you seem to be exceeding expectations can you get us a better sense on the production are you going to be towards the higher end or exceeding your production targets and likewise on the cost guidance, your cost guidance and your performance so far Yauricocha and Bolivar are notably below your targets. And Cusi making progress, so can you share with us some thoughts and maybe potentially narrow some guidance for both production and cost for this year. Thank you.

[Igor Gonzales:]

I will respond part of your question and then I will let Ed to compliment. Remember what board mention we have maintenance program on the Mascota shaft and Yauricocha and so that during those three months on the fourth quarter Yauricocha will not be able to deliver the higher tonnages that have been delivering in the first three quarters so that’s something we have to keep in mind. This maintenance has been budgeted that was part of our plan all the way so and this is the main reason why we would like to be cautious. I mean staying on budget, so in terms of production we would like to keep our guidance the way it is and I guess that's going to impact also the cost. So I don't know if Ed you want to compliment that?

[Ed Guimaraes:]

Thanks Igor. I think Jim as in terms of production guidance until where the Igor was saying as well, I think we're going to be pretty much like right down in the middle between the low and the high is a fair assessment for the year, so zinc is £200 million, copper out of in that 93ish range and same for so silver, so I don't see any variation from a low perspective and I don't think we're going to knock it out of the park either in terms of hitting the highs but somewhere in the middle of low9s is a good guidance. In terms of 2018 cost guidance, I think those are still, those are the numbers where we're striving for and I know where little below are Yauricocha and Bolivar and Cusi has a potential to come down, so I think those are still attainable.

[Operator:]

Your next question comes from the line of Lee Cooperman with Omega Advisors. Your line is open.

[Lee Cooperman:]

It is a difficult question with, I don't have the industry knowledge that you guys possess I’m just curious from your historical experience at this corporate transaction in this space is it generally take place to premium or discount to the present value of calculation of the asset base. In other words 428 is your NAV generally speaking not so much for Sierra but I know growth would enter into with the growth prospects of the company or but typically have these transactions occur relative to NAV or Net Asset Value?

[Igor Gonzales:]

Ed, do you want to comment on that?

[Ed Guimaraes:]

Thanks Igor. So Lee in terms of -- it all depends usually it’s based on a share price and there is usually a premium to the share price. Again there are so many scenarios it all depends right if someone's going, it's a private transaction it changes there's no rhyme or reason but typically what you see is in terms of acquisitions of public companies is that there is a premium associated to share price. And that could be 20 day VWAP six month VWAP but there's really no template.

[Lee Cooperman:]

If they would work for us rightly because we're so far below at NAV but okay, it’s a difficult question so I was curious if you had any insight. Thank you very much for taking a shot at it.

[Operator:]

No further questions at this time. I’ll turn the call back over to the presenters.

[Mike McAllister:]

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

[Operator:]

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