Sierra Metals Inc.
Q3 2018 Earnings Call Transcript

Published: 13 Nov 2018

[Operator:]

Good day. My name is Jodie, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Sierra Metals Inc. Third 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, Vice President, Corporate Development, you may begin your conference.

[Mike McAllister:]

Thank you, Operator, and good morning everyone. Welcome to Sierra third quarter 2018 results conference call. On today's call, we are joined by Igor Gonzales, our President and CEO; Ed Guimaraes, our CFO; and 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. Monday’s press release, the financial statements and the Management Discussion & Analysis are 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 conclusion, forecast, or projection in the forward-looking information and the material factors or assumptions that were applied in drawing a conclusion or making forecast or 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 Form 40-F or on the Company's Web site. 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, our President and CEO.

[Igor Gonzales:]

Thank you, Mike, and good morning everyone. Q3 2018 was a solid quarter and build upon the strong results that the Company reported in the first half of 2018. We continue to realize good returns on the capital we employed, improving and growing the mine, while continuing to improve the operating performance with solid production results. This helped to further lower our costs. Also, despite the weaker realized metal prices and harsh weather events at the Bolivar Mine during Q3, the Company has still generated positive cash flow at its three operating mines of over $18 million. Additionally, we continue with successful exploration programs and have discovered copper-molybdenum porphyry at our Yauricocha mine with more promising brownfield opportunity to further increase our mineral reserves and resources at each of our mines. We have also now filed preliminary economic assessments for each mine, which both part of it economic and demonstrate the path to stage and responsible expansion plan. The management team and I are very encouraged by the continuous progress and strength in the achievement seen in the third and in the nine months of 2018. The Company is at an inflection point, having improved the performance of all of our mines and now embarking on a growth program to grow the Company. This includes segmented production increases at all three mines, which provide for responsible and economically prudent production growth with increased revenue and cash flow opportunities. We’re optimistic that 2018 and the years ahead will be growth years, not only for Sierra Metals but also for its shareholders. Following my summary highlights, Gordon Babcock will take us through the operation highlights and then Ed Guimaraes, will take us through the 2018 third quarter financial highlights and then we will open the call to questions. Turning to Slide number 4. The Company remained focused on improving operating and financial performance in 2018. The third quarter growth on the momentum from the first half of 2018 and despite weaker realized metal prices and torrential rainfall events at Bolivar, we still reported solid revenue, adjustment EBITDA and operating cash flow and throughput. On a year-over-year basis, the Company achieved a 4% increase in revenues to $53 million, a 3% decrease in adjusted EBITDA to $18.2 million, and 17% decrease to the operating cash flows before movements in working capital of $18.1 million. We continue to maintain liquidity with $29.1 million in cash and cash equivalents. Also of note are the significant reductions to the all-in sustaining cost at all three mines in Q3 2018. All in sustaining costs were 19% lower at Yauricocha, 32% at Bolivar and 63% lower at Cusi compared to Q3, 2017. Moving to Slide number 5, during the third quarter of 2018, Sierra has processed 566,000 tons, which represented 12% increase over Q3 2017. Sierra's consolidated production of copper increased 20%, silver increased 44%, zinc increased 5%, lead was flat and gold increased 26% compared to Q3 2017. Turning now to Slide number 6. The Company continues to see positive gains and momentum from the progress of the operational turnaround program implemented in Mexico. At Bolivar, the Company exceeded our year-over-year production levels with 2% increase in throughput but due to torrential rainfall events in the third quarter, which impacted operations, we experienced lower quarter-over-quarter production. We are hopefully through the worst of the rainy season and are back on track for the fourth quarter. However, Bolivar is still realized at 13% increase in copper equivalent production year-over-year compared to Q3 2017. Cusi production was much higher with a mill running at 650 tons per day rate for the third quarter. With the mine realizing at 316% increase in throughput and 186% increase in silver equivalent production in Q3 2018 compared to Q3 2017. We continue with the first stage of expansion plans at both mines, which are estimated to be completed in Q1 2019 and is expected throughput production and further lower cost. Looking now at the Slide number 7. In 2018 aggressive brownfield exploration program and definition drill program are an important part of our strategy at all three mines. We have completed over 100,000 meters of Brownfield exploration this year, and subsequent to the current dates for the previous resourse estimates. Management expects that the Company will continue to provide further extensions to existing zones such as Esperanza and Cuye-Mascota, Central and the Porphyry discovered at Yauricocha. Also, the Bolivar West, Bolivar Northwest, and Cieneguita Zones at Bolivar and the Santa Rosa and San Miguel-La Zones at Cusi. Additionally, our technical teams have been reinforced to meet the upcoming challenges of putting our recent brownfield exploration successes into production and 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 explorations update.

[Gordon Babcock:]

Thanks very much Igor. Turning now to the operational highlights on Slide number 8. In the third quarter of 2018, Sierra processed a grand total of 566,194 tons, which as mentioned before, represents 12% increase year-over-year compared to Q3 2017. The Company achieved this increase despite significant rainfall events experienced at our Bolívar mine, which caused interruptions to production during Q3 of 2018. In the third quarter of 2018, consolidated production of copper increased 24% to 8.3 million pounds, silver increased 44% to approximately 700,000 ounces, zinc was flat at 20.8 million pounds, lead was also flat at 6.4 million pounds and gold increased 26% to 1,906 ounces compared to Q3 2017. The Yauricocha mine maintained solid production rates during the third quarter of 2018 with 6% throughput increase compared to Q3 2017. Zinc equivalent metal production increased 16% due to higher ore throughput, higher copper and gold head grades and higher recoveries for all metals, except for gold. Bolívar had a tougher quarter as previously mentioned with significant rainfall events but still realized the 2% increase in production over Q3 2017. Again, higher ore throughput, higher head grades for all metals and higher copper and gold recoveries, resulted in 13% increase in copper equivalent production in Q3, 2018 as compared to Q3 2017. At the Cusi Mine, the operation was able to see the benefit of the existing mill operating and its capacity rate of 650 tons per day for the entire third quarter and saw total ore processed increased 316% in Q3 2018 compared to Q3 2017, and increased of 18% compared to Q2, 2017. Silver equivalent production increased 186% compared to Q3 2017. Please turn to Slide number 9. At number 9, we’re looking at the output or the outlook for the remainder 2018. Since we've now completed PA studies for all three mines we're working to complete the first segment of production increases at all three of the mines. Additionally, we are also working to complete life of mine plans, prefeasibility and feasibility studies with the intent of production optimization at all sites, and to finalize future operational production increases at all those three mines. 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. At the Yauricocha mine, Yauricocha tunnel has now been completed and we’re now working to complete the final payment to the existing surface infrastructure. We expect all remaining work to be completed in the fourth quarter with commissioning to take place late in Q4. The new tunnel will enable the mine to have a direct run to the mill, which will result in a faster turnaround in cycle time of the Charlie locomotives. In the long run, this will allow for more capacity to handle larger volumes of waste and ore. This tunnel also provides ventilation inlet to the mine, which benefits current ventilation system. And as noted, it should be fully operational by the end of the year. Slide 10. Please have a look at Slide 10. We continue to detail progress at Yauricocha and the sinking of the Yauricocha shaft to the 1,270 level, and we’re going to a loading pocket below the 1,170 working level. And this pocket will handle waste and ore from two streams in a multi-feed raise configuration. Three loading points will be excavated on the 1,170 level, each having adversely covered and independent discharge points for locomotive track haulage and trackless haulage equipment, the infrastructure on the 1170 level, as noted will feed these three raises and the related feeders on 10 level, which will include conveyer loading pocket be drift on the level. The mine will be able to accommodate ways tightening EBITDAR following metallic ore and have the optionality in dealing with different ore quality, such as copper ores and oxides. And move out rock breaker will be handling the oversize muck encounter on the platforms, and this whole facility should be operational in 2021. The Company's emphasis at Yauricocha for Q4 will be to continue prioritizing no feeds from the massive sulfide ore zones, such as in Catas, Esperanza and Mascota, and that amounts to approximately 73% total production with the remaining production coming from regulator stopes, in other words, high-grade stopes in areas of Cachi-Cachi and then in the central mine, and those represent what we call our Cuerpos Chicos, which are the high grade smoke stopes. This effort is expected to continue to improve the Company's operating margins and cash flow generation within a softer metal price environment. Please turn to Slide 11. Turning to Slide 11, we’re highlighting Bolivar in this one. The installation of newly put refurbished mill at Bolivar is currently underway, and this will provide the company with flexibility in terms of grind size, future recoveries and tonnage. The Company reached a throughput of 3,100 tons per day at the Bolívar mine at the end of the second quarter and expects to grow that to 3,600 tons per day in the first quarter of 2019. Please turn to Slide 12 and this slide highlights Cusi. And at Cusi, improvements are also planned in 2018 with the installation of another newly refurbished mill, which was currently being installed and this will allow us to increase production, decline from where it is at 650 tons per day to 1,200 tons per day starting in Q1 2019. The Company continues to focus and develop the higher grade wider width Santa Rose de Lima zones, as well as San Nicolas and continues to ramp up production from this area, while selectively mining structures in the older part of the mine. Please turn to Slide 13. Slide 13 details exploration, the exploration programs. And it's important to note that exploration has been and continues to be very important part of the Company's growth strategy. We have committed significant resources and capital to grow the mineral reserves and resources for the Company. Sierra metals drilled over 114,000 meters in 2017 across three mines and the investment was well placed. Mineral reserves and mine lives were increased at Yauricocha and Bolívar and mineral resources were also increased at the Cusi operations. The Company highlighted several new discoveries in addition to extending the current mineralized zones, which speaks to the Brownfield exploration potential at all three properties. In 2018 and subsequent to the cut-off dates of previous resource estimates, the Company has drilled well over 100,000 meters across all three properties. And those, as mentioned before, have already led to discovery of several new zones, such as Contacto Oriental, Contacto Sur Medio zones to the extension of Cuye, Mascota, Escondida, copper-molybdenum porphyry at Yauricocha and in Bolivar's case, drilling is identified and extension to Bolívar West zone and Cieneguita. At Cusi drilling is identified at 50 meter wide high grade silver stock work zone within the Santa Rosa de Lima zone, which remains open at depth and along strike. Going forward, exploration will remain a key aspect of the growth plan at all three mines. During Q3 2018, the Company drilled 38 holes, totaling 9,074 meters at Yauricocha, exploration drilling included nine holes 4,840 meters at various zones, including Escondida north, including to explore the continuity and verified potential mineralization, as well from 720 level of Klepetco Tunnel to define a potential sulphide mineralization zone at depth and ultimately decline the existence of the copper-moly mineralized porphyry. Definition drilling comprised of 29 holes, 4,190 meters at Antacaca, Esperanza, Butz and Yoselin to define and determine continuity of ore bodies and for information to help plan potential mining of these ore bodies. Turning to Slide 14 please. At Bolivar, the company drilled 7,717 meters at El Gallo and within the Bolívar Northwest, Bolívar West and Cienguita zones, there were also 615 meters drilled at La Campana, a new exploration target to explore the potential copper and zinc and storage mineralization. Side 15 please, at Cusi, the Company drilled 1,322 meters to support the development of the Santa Rosa de Lima vein system and to verify the size and continuity of the zones. The Company also drilled 5,247 meters from surface to define a portion of the San Antonio pits and Santa Rosa, as well as explore continuity of the mineralization at the depth at the San Nicolas vein near Promontorio. We are currently awaiting asset results from recent drilling and are modeling the various zones, and we expect to be in a position to press release further results in Q4, 2018. With that, I now turn the call over to Ed Guimaraes, our CFO for our financial update.

[Ed Guimaraes:]

Thanks, Gord. Good morning everyone. Turning now to Slide 16, despite lower realized metal prices, the Company had a solid quarter with relatively strong revenues and adjusted EBITDA compared to previous quarters. Aided by lower costs, stable throughput at Yauricocha mine and improving production at Cusi. The Company has continued to be successful in maintaining positive cash flow generation from its three operating mines 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 into 2018, which have resulted in new discoveries and significant increases to the reserves and resources at the Yauricocha. Bolívar and Cusi mines. Incremental production growth is expected to be realized at all mines from the strategic allocation of operating cash flows toward 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 Q3 2018, the Company earned revenues of $53 million, $2.1 million higher than Q3 2017, as well as adjusted EBITDA of $18.2 million and operating cash flows before movements in working capital of $18.1 million. During the third quarter, the Company realized slightly lower but relatively strong revenues and adjusted EBITDA compared to the previous two quarters. The all-in sustaining costs during Q3 2018 trended significantly lower than the previous quarters as consolidated throughput and metal production increased. In Q3 2018, the Company earned net income of $1.9 million compared to a net loss of $6.5 million in Q3 2017, or $0.01 per share on both basic and fully diluted basis compared to negative $0.04 in Q3 2017. A large component of the net income for every period is the non-cash depletion charge in Peru, which was $2.6 million for Q3 2018 compared to $9.9 million in Q3 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 depiction charge in Q3 2018 was due to the 134% increase in proven and probable reserves reported in the Company's latest NI 43-101 technical report, which was issued in October 2017. Higher revenues are primarily attributable to the 6% increase in throughput, the increase in copper and gold head grades and higher recoveries for all metals except gold at Yauricocha when compared to Q3 2017. The 2% increase in throughput, higher head grades and recoveries of all metals, except silver, resulted in Bolívar's revenues being 19% higher than Q3 2017. And the 316% increase in throughput and higher silver head grades resulted in Cusi's revenues being 135% higher than Q3 2017. Adjusted EBITDA of $18.2 million decreased 3% compared to the $18.8 million in Q3 2017. The decrease in adjusted EBITDA was due to the decreases in the price of silver of 12%, copper 5%, lead 13%, zinc 16% and gold 6% in Q3 2018 compared to Q3 2017, which negatively impacted the Company's revenues. Cash flow generated from operations before movements in working capital of $18.1 million decreased 17% when compared to $21.8 million in Q3 2017. The decrease in operating cash flow was mainly the result of lower gross margins realized due to the decline in metal prices in Q3 2018 compared to Q3 2017. I would now like to review our cash flows in more detail. I have summarized the changes in cash during Q3 2018 on Slide 17. During Q3 2018, our operating cash flows before movements in working capital were $18.1 million. We had positive working capital adjustments of $10.5 million. We paid $6.3 million taxes in Peru. We invested $10.1 million on capital expenditures in Mexico and Peru. We paid $9.2 million in principal repayments, and interest on our credit facilities in Peru and Mexico, and paid dividends to non-controlling shareholders of $0.7 million. We also had proceeds from the issuance of loans and credit facilities of $5 million. These items increased our cash balance from $21.8 million as at June 30th to $29.1 million as of September 30 2018. Looking now at Slide 18, along with the strong operational results during the quarter, the Company's solid cash flow generation allows the Company to be self-sufficient and fund its Brownfield exploration and capital projects, as well as reduce debt levels. During Q3 2018, the Company invested $1.7 million on sustaining capital expenditures, mostly consisting of purchases of equipment and concentrator plant improvements, and $8.3 million on growth capital expenditures consisting mainly of $1.2 million of Brownfield exploration drilling, $2.4 million of mine developments, $2.3 million of plant enhancements to increase throughput and $2.2 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 retains 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 $9.9 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 the call. With that, we would now like to open the call to questions from participants. Operator, can you please open the line.

[Operator:]

[Operator Instructions] Your first question comes from the line Jake Sekelsky of ROTH Capital Partners. Please go ahead.

[Jake Sekelsky:]

There has been some good progress on your moving Yauricocha towards the 3,600 ton a day run rate in 2019. Can you maybe just speak to the remaining permits required there and timeline for them?

[Gordon Babcock:]

Right now, we’re in the process of submitting all of our details to the local government agencies. We've got the first review and that has been handed back to the government agencies. We're waiting on their response back. Timeline here improve varies depends on who you’re dealing with. We’re expecting response back within 15 working days from the government group on the EIA, the environmental impact assessment and that will follow through perhaps with another round of questions from their end. And we will carry on. So I’m expecting that timing wise, I would say, somewhere around the end of the first quarter, we should see something from the government agencies and the EIA.

[Jake Sekelsky:]

And at Bolivar, you mentioned it was -- production was obviously impacted by the rainy season. Can you just provide some more color on this and maybe just quantify the impact of the weather during the quarter?

[Gordon Babcock:]

Basically, the rain event caused a great deal of turmoil in the whole area. It was a cyclone that went through the Western Coast of Mexico. We were impacted as other operations were also impacted. But one of the things to realize is that with all of this, the rain event that occurred, we only lost a day and half production in the operation. We have a lot of the roads had to be cleaned up and refurbished. We had a failure of the -- a dam that we use for freshwater for the mill, so we’re in the process of rebuilding that. The most important thing that occurred is the work that preceded the tailings facility that we have, we had a whole series of diversion canal and everything work like it should. We didn’t lose and any issues with regards to tailing such as a real concern with weather like that in Mexico and we're in the process right now of feeding the mill with water coming from corner of the faults into the mine, as well as the reclaim water ponds in the milling tailings facility but we’re on catch up mode right now.

[Igor Gonzales:]

I would like to complement what Gordon said. We will also manage to install clean fresh water pumping stations in the nearby streams. So we have additional freshwater to sustain our operations while we fix the water storage facility.

[Jake Sekelsky:]

And I just want to clarify. Did you say that you only lost a day and half of production?

[Gordon Babcock:]

Yes, that’s when we were down. The mill was shut down for day and half.

[Operator:]

Your next question comes from the line of Lee Cooperman of Omega Advisors. Please go ahead.

[Lee Cooperman:]

I actually have four questions that I can just get them out. One, what is your CapEx plans for this year and next year? Two, do you have any EBITDA guidance for this year and next year? Three, there was a lot of talk over the last year about Yauricocha being -- the drilling there, partially leading to a so-called elephant. Is it too early to tell, whether you have an elephant there? And how much more drilling do you have to do to determine whether it's just an ordinary find or something that you guys would qualify as an elephant? And fourth, a little confused the areas fund one was the largest shareholder. And I thought they had an obligation to distribute at the end of October. And I'm just wondering if you have any insight into what they've done with their stock and what their plans might or might not be? So those four questions, any help you could do would be appreciated?

[Ed Guimaraes:]

I'll address the first two questions you had and then I'll pass it over to Gord and then Igor can touch on the fourth question that you raised. In terms of our CapEx plans, we are on track. As far as our 2018, we should be coming in around $50 million. We haven't finalized our 2019 plans yet or our budgets, that’s why we're -- this week we are working towards that. In terms of EBITDA guidance, we don't necessarily comment on EBITDA, it hasn't been established for 2019 yet. And the 2018 with three quarters of the year complete, I think it wouldn’t take much based on production and just assumptions for metal prices to get you to a year-end figure. With that, I'll turn it over to Gordon as far as the porphyry.

[Gordon Babcock:]

So in the case of the porphyry or the potential porphyry of site, this mineralized zone is a zone that was known to the company prior to us showing up here. This is basically discovered in the earlier part of 22,000. Some other companies came in and looked at it on the 720 level. And since we started the drill program in the Cuye zone, we noted that we've had to presence of molybdenum in our assets that highlighted the interest to go back and have another look at the main porphyry zone. So that one drill hole that we drilled, we drilled 1,500 meters and we drilled right through what we believe is the part of the porphyry zone, I'm not sure now exactly if we are in the site and the height and the halo, or we are in the center. So there is a drill program that's forthcoming that’s going to define we are going to cross the structure recalls or planned in the future. Does that clarify things a little?

[Lee Cooperman:]

I'm thought you guys would refer to what you have as an elephant, or you still don’t know the answer?

[Igor Gonzales:]

I would like add a little bit on what Gordon said. Where we found the drill hole is a fit in the completely different where we have seen in Yauricocha to-date. In other words, in Yauricocha we have oxides, we have some sulfides and poly metallic ores. Now this is a pure copper-molybdenum sulfide ore that’s why we have seen in that drill hole. So, it's a complete different animal. In order to verify whether it's an elephant or not, I think we need to complete this hole, but it is definitely a porphyry, there is 900 meters of continues mineralization that’s -- it's not definitely a structure, it's disseminated deposit. And now what we need to do is we need to add value by dueling and defining the size and the quality of the resource, and we’re doing that precisely as we speak. We continued our drilling programs and we will have more news for you in the next quarter or so. Regarding your fourth question, just like you mentioned, we have the same information regarding fund number one from Arias Resource fund. And today, we don’t have any official information from the fund, what was the outcome of the fund number one. So unfortunately, we cannot comment on the outcome of what the fund decided to do at the end.

[Operator:]

Your next question comes from the line of Mark Reichman of Noble Capital Markets. Please go ahead.

[Mark Reichman:]

First, I guess I would like to acknowledge the strong operating results and solid execution, which was a real differentiator during what's been a challenging quarter for mining. But first, I thought I would ask about the first stage expansions, those seem -- like those are pretty much running on plan, visible growth from that. But how are you thinking about the second stage plans for growth? For example, getting Yauricocha, the 5,500 tons per day in 2021. Could you talk a little bit about now that you're pretty close to the first stage expansions and you're starting to turn your attention looking further out. What are your thoughts around the second speech expansions and how those tie into your exploration efforts and the preparation of the PFS and feasibility studies?

[Gordon Babcock:]

As with porphyry right now on the details, the pre-feas and the feas and the life of mine, we’re in the process. We have to work through the Peruvian government in the case of Yauricocha and our permits and so on. So, it's always the interesting factor with the Peruvian government and how they move, and how fast they are or slow in our case. But basically speaking, our next focus is to get the operation up to 3,600 tons per day. Once the permits are in hand and then we focus on improvements to the plant, improvements in our operating development plan to move forward. So one of the key issues for us is to terminate the shaft project to get the mine in a position that we have hoisting capacity to move the operation from where it is today to a higher production rate. So that’s the main driver here. And we're in the process for next year. We’re going to do some improvement in infrastructure in the mine. We made improvements to the Mascota shaft, so that’s going to be finished. We're going to be operating on Monday. So that was a positive move. And with regards to our plans moving forward, we have move waste out of the mine. We have complete overview on handling facilities for tailings stands, so all of these things are coming into place. And we are going to see an organic growth in the next few years. But the key thing for us is to get hoisting capacity up. We have got the tunnel complete. And in the future, we are going to be adding three new locomotives to our haulage fleets on the 720 level, and we will be in a position to move well over 9,000 tons per day of ore and waste out of the operations but without the shaft, that’s going to be the problem. So that’s basically where we are at.

[Igor Gonzales:]

I would like to comment Gordons response. In our current expansions, especially Mexico, we're doing the expansions with our own resources, meeting local engineering refurbish equipment and local contractors and our own people, to help out with the project. And of course for us, it's the most efficient way to deploy capital. When we move to the next level, which is 5,000 tons in Bolívar, the 2,700 in Cusi and 5,000 in Yauricocha now we have to do a -- it’s a different level of expertise that we need. We will have to do feasibility studies. The feasibility will include new power requirements, new water requirements, tailing and coastal long-term and the plant design itself and all the tie-ins. So that requires a lot of engineering and we will probably -- we are going to hire external engineer in-house to do the feasibility for us. And of course that’s going to be first phase and then we have to go to basic engineering and then detailed engineering in order to determine the size of -- what is the best sites of expansion and the capital cost and schedule, and then to present it to our board for approval. So those are the next steps for the larger expansions. I think we cannot do them, the thing we will be doing, the smaller expansions and requires a different level of expertise and involvement. So that’s in essence what we will be doing for the large expansions.

[Mark Reichman:]

And then I guess near term on Page 10 where you talk about defining the higher grade or sources at Bolívar West and Bolívar Northwest, which are expected to come into the mine plan by the second half of 2019, and then you have got a short-term strategy with El Gallo. Can you talk a little bit about how you see that transitioning?

[Gordon Babcock:]

The plan for next year is we're going to incorporate that into the mine plan, the Bolívar West Northwest, we are going to terminate the ramp and access it. And there will be some other developments as well that we are going to highlight and share with everyone. We have got a tunnel that’s planned from the milling complex into the mine. So there is a series of different development plans that we are structuring to move forward. But we're going to start targets to try and get there next year.

[Operator:]

[Operator Instructions] Your next question comes from the line of Jim Young of West Family Investments. Please go ahead.

[Jim Young:]

Couple of issues to explore here, first, off, can you just help us understand when you think about the capacity additions or the growth initiatives of all three mines. What the future cost trends going forward? What I’m just trying to say, are you going to -- how much of a benefit of scale will you realize as you expand Cusi from 650 to 1,200 or you get Bolivar at higher levels as with Yauricocha? Thank you.

[Igor Gonzales:]

That’s precisely why we’re oriented to do the feasibility study. At the feasibility study level, we’re going to allow several options for the expansions, what’s the best option for our capital deployment. And for example, as you mentioned indicate of Cusi, our initial intension based on the PEA work is to do a modular plant expansion right at the mine sight. Well, the feasibility study is going to review that and see what's best for us in terms of capital deployment, where this molybdenum should be there or should we move everything closer to the current mill site, et cetera. So those are the types of things that the feasibility study will study for us. The other element, which is very important and is water availability and power, so that's the thing that we need to come to terms at the feasibility study level, the level of costing and the effort that will require to get it to same levels.

[Jim Young:]

I guess with little more specificity though or maybe Ed could chime in here. Your cash costs per ton processed for the three months ended September was $48.43. And what I’m just trying to get a sense of is that are you looking at that number to stabilize, to go to mid-40s, low 40s or high 30s as you get more to a normalized run rate if you have all of these three mines expand their production?

[Ed Guimaraes:]

I will just chime in a little bit on that one. As we get volume increases, we should see a trend towards lower cost given our fixed the fixed component of the operating costs. But I am not prepared to say how much. But just to say that depending on the production increases, you should be able to extrapolate those expansions and tie that into your cost. But we’re not anywhere near to determining what those costs are, as Igor mentioned we're still -- until completion of those feasibility studies.

[Jim Young:]

So I’m hearing that after the feasibility studies are completed then you'll have a better sense that you can share with us the future cost expectations, going forward?

[Ed Guimaraes:]

That’s correct.

[Jim Young:]

And then moving over to Gord. Gord, could you talk a little bit more about some of the exploration activity that you have ongoing? For example, at Yauricocha, there's lot of discussion about the Cuye area where we had a deep drill that was completed. Have you been continuing to conduct further delineation drilling in that area? And if so, can you share with us what's your initial findings are about the Cuye zone? Thank you.

[Gordon Babcock:]

With regards to exploration at Yauricocha, one of the highlights is we have been targeting the area with Cachi Cachi. We have the zone where there is a Brecha. We have also the discovery of some other smaller zones, which were basically fingers in the upper part of the mine. Now they are blossoming up to the larger zones. So those drilling programs are still ongoing for Cachi Cachi, carrying on with the same program. We have drilled under the central mine zone. We drilled one hole under the Catas zone and we have got two more to drill in that area, so we are highlighting the Central mine zone. We are looking to confirm our inferred resources in that area. In the case of Cuye, we have terminated the drill program at Cuye and we are carrying on with the drill program in -- talking about the area around Cuye, remember that the highlight for this porphyry, the identifier, was the moly that showed up in the Cuye holes. So then that prompted us to go after the joining that porphyry zone. So we are going to carry on drilling in the porphyry as we mentioned to Lee before on his question. So that’s going to carry on. So we are basically -- November 15th right now and we are terminating these programs. Definition drilling is working well. We're defining the zones and highlighting some other areas that always come in and it’s a small high-grade ore bodies, these just Cuerpos Chicos.

[Jim Young:]

Lastly, at that Cusi. Can you just share with us as you have done defining the Santa Rosa de Lima ore body. How the quality of the ore at Santa Rosa de Lima has changed as you go from different levels and you are getting deeper into the structure? Thank you.

[Gordon Babcock:]

Jim, in Santa Rosa de Lima complex is the classic epithermal deposit. And in the upper part of the deposit, we have variable ore zones. And as we go deeper, the grade quality is improving. We have that stockwork carrier that -- those identified some few months ago. So that’s bringing us some constant mill feed. And the whole operations team and they are learning -- as they are going through these processes they are determining where the zones are and there they have an incorporated drill definition program upon its way and that will help them move forward as we go through our operational increases at the site. Also, in our drilling program at Santa Rosa de Lima, we drilled half Santa Rosa de Lima and we'll go into the structure called San Nicolas, so that’s another plus. So that’s been very encouraging the drilling in that area as well.

[Igor Gonzales:]

And what Gordon has said on Cusi, as you know, we have this dump work but we are also developing the sub-levels for the long haul mining, which is following the structure. We have two sublevels already developed and we are working on the third one. And of course the method itself of the long haul is selective in terms of just mining the structure in lieu the good orientation in the drill hole. So that’s what we are doing now. We are trying to drill, and blast, and secure ore for the plan from the long hole operation and we will have also the ore available from the stockwork

[Operator:]

And there are no further questions. I’ll turn the call back over to Mike McAllister.

[Mike McAllister:]

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