Sierra Metals Inc.
Q4 2017 Earnings Call Transcript

Published: 26 Mar 2018

[Operator:]

Good day. My name is Jack, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sierra Metals' Fourth Quarter and Year End 2017 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, VP, Corporate Development, you may begin your conference.

[Mike McAllister:]

Thank you, operator and good morning everyone. Welcome to Sierra's year end and Q4 2017 results conference call. On today's call, we are joined by Igor Gonzales, President and CEO; Ed Guimaraes, CFO and Gordon Babcock, COO. Today's call will be followed by a question-and-answer period. Today's presentation is available for download both through this webcast and the Company's website at www.sierrametals.com. Last Thursday's press release, the financial statements, the Management Discussion and Analysis, as well as the annual information are also posted on the Company's website. Turning to Slide 3, before I turn the call over to Igor, I would like to indicate that this morning's 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. Also results could differ materially from our conclusions, forecast or projections as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusions, forecast or projection in the forward-looking information and 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 or on the Company's website. Please note that all dollar amounts mentioned on today's call are in U.S. dollars unless otherwise noted. 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. I would like to begin with an overview of the 2017 results for Sierra Metals. I will also discuss the operational and exploration highlights for the quarter. Overall, as management, we're very encouraged by the continued progress and achievements in the financial, operational and exploration results at Sierra in 2017. We are also optimistic that 2018 should be a strong operational and financial performance at Yauricocha in Peru and for our Mexican operations as the Company continues to realize the benefits of the operational improvement program. Following my summary highlights, Gordon Babcock will take us through the operational and exploration highlights and then, Ed Guimaraes, will take us through the 2017 year-end and fourth quarter financial highlights and then we'll open the call to questions. Turning to Slide 4, in 2017 and moving into 2018, the Company was focused on improving operating performance through the production of higher value ore, strengthening our balance sheet and financial liquidity and continuing to increase our mineral reserves and resources at each of our mines. In 2017, we continue to maintain the improvements in revenue and adjusted EBITDA during the first 3 quarters of 2017. The Company achieved significant improvements in 2017 versus 2016 with a 43% increase in revenue to $205 million; and a 93% increase in adjusted EBITDA to $81 million while maintaining strong liquidity with $23.9 million in cash and cash equivalents, and $19 million of available credit facility. Moving to Slide 5; though in 2017 the Company processed 1.9 million tons which represented a 2% increase from 2016. The Company saw a 26% increase in further equivalent production of 14.9 million ounce and a 1% decrease in copper equivalent production of 9.4 million pounds and a 9% decrease in zinc equivalent production of 193.2 million pounds versus 2016 when using realized prices. The temporary decline in production in Mexico was mainly due to the implementation of a turnaround plan to improved operational performance and produce profitable silver ounces at Cusi while improving efficiency at our Bolivar copper mine. Lower production in Mexico was partially offset by year-over-year increase of 4% in zinc equivalent production and 14% increase in throughput at Yauricocha. While Yauricocha experienced record throughput, higher copper and zinc rates and higher recoveries of all metals except gold, the decrease in metal production at Bolivar was due to lower throughput head grades and recoveries of all metals except gold, and lower throughput head grades and lower recoveries for all metals, except silver at Cusi. Moving to Slide 6, similar to the successful program completed at Yauricocha in Peru, we have engaged in an operational turnaround program in Mexico in August of 2017 to modernize operations, improve production, lower cost and upgrade management. Production improvements have always been noted at the Mexican operations with a 2% increase in throughput at Bolivar and 23% increase in throughput at Cusi. These improvement are expected to continue into the first half of 2018 and the year. In 2018, new equipment purchases, which allows more minable stopes to be incorporated in the mine plan at Bolivar; a change in Bolivar's from existing narrow vein structures mined [ph] in Cusi to Santa Rosa de Lima Zone which has larger widths and higher grades; as well as continuing with successful improvement made to the metallurgical recoveries, both mined during 2017. Continuing on Slide 7, Sierra Metals continues to have good success in expanding our mineral reserves and resources, and extending our mine lives while continuing to find new exciting discoveries through our ground-field explorations program. On November 10, 2017, the company press release that it had filed a NI 43-101 Technical Report updating the Mineral Reserves and Resources at the Yauricocha Mine which was prepared by SRK Consulting U.S. And highlights of the report include; mineral reserve estimate increased 134% compared to prior reserve estimates with technical estimate to the Total Proven and Probable Contained Metal over the previous estimates. Mineral reserves increased 68% from the previous mineral reserve estimate, again, with a significant increase in measure and indicated contained metals from the previous estimate. First, mineral resources increased 77% from previous mineral resources estimates and indicated contained metals also increased significantly over the previous estimates. Thus we're going to the end of 2017 on February 12, 2018, the Company's filed an NI 43-101 sending a report updating the Mineral Resources at Cusi Mine which was prepared again by SRK Consultants, U.S. Incorporated. Highlights from the reports include; Measured and Indicated resources increased by 129% from the previous reserves estimates, Inferred Metal resources increased 30% from previous resource estimate. An update of mineral resource estimate is also expected for the Bolivar Mine in 2018 April. Continuing to Slide 8; Brownfield Exploration success continues in 2017 at all mines. Gordon will provide further details in these exploration updates. However, highlights of the Brownfield programs includes the following; at Yauricocha, the Company continues to have success at the Esperanza, Cuye-Mascota Zones, at Bolivar, the Company has also reported continued success at the Bolivar West and Bolivar Northwest Zones. Finally, at Cusi, the Company has and continues to have success at the Santa Rose de Lima Zone. In 2018, the Company continued with it's aggressive exploration program and definition drilling programs at all 3 mines and management expects that the Company will continue to provide further extension to assist in zones such as Esperanza and Cuye-Mascota at the Yauricocha Mine, Bolivar West and Bolivar Northwest at the Bolivar Mine and Santa Rose de Lima at the Cusi Mine; further, new discovery potential and expected mineral resource growth at all 3 mines. Additionally we're reinforcing our technical teams to meet the upcoming challenges of drilling our new Brownfield planning into production 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, Igor. Turning now to Slide number 9; I'm going to detail the operational highlights. On 2017 Sierra posted a total of 1.9 million tons which represented a 2% increase year-over-year compared to 2016. The Company produced 14.9 million silver equivalent ounces representing only 10% increase over 90.4 million copper equivalent pounds represents a 1% decrease or 193.2 million zinc equivalent pounds representing a 9% decrease compared to 2016. This was partially a result of differences in realized metal prices during both periods. Normalizing the metal pricing used in the equivalent metal calculations, there was a decrease in metal production which was due to lower production in Mexico which was partially offset by record throughput in Peru. The Company has a strong year at Yauricocha where record throughput led to increase in production, was driven primarily by high copper and zinc head grades and higher recoveries of all metals, except for gold. Bolivar saw an increased throughput in 2017 which was primarily attributable to reduced equipment availability, however we saw 2% increase in tonnage at Bolivar in Q4 as a result that the new equipment purchases and these permitted mining more stocks to be incorporated. At Cusi, the Company saw a significant reduction in throughput recoveries in 2017 as the Company continued to focus and develop the higher grade border with Santa Rosa De Lima, as well as targeting other grounds such as [indiscernible]. However, the Company did realize that 24% increases in throughput in the fourth quarter as the Company ramps up production from Santa Rosa De Lima as well as from other areas I just mentioned. Now we expect to see 50 mill capacity to come to 650 tons per day in April of 2018. The Company continues to benefit from the operational improvements programs completed in Mexico. The results of the program will become more apparent in Bolivar in the first half of 2018. At Cusi, the Company remains focused on completing access development and production from the Santa Rosa de Lima zone which has much wider structures and higher silver grades than the narrow vein producing mined closer to surface. As well as [indiscernible], the Company has reached the Santa Rosa de Lima structure and to all that know something about the property, all these structures are parallel structures, so we can benefit from that development. But we have the development of 3 drifts and we're looking to complete the development in 3 more drifts to mine this area. The Company is currently campaigning development ore from Santa Rosa de Lima structure which contains as mentioned before, improved head grades to the mill at Cusi. The Company is gradually increasing tonnage from Santa Rosa de Lima zone at silver mill with operating in it's capacity at 650 tons per day using primarily ore from the Santa Rosa de Lima zone. Progressing now on the production at each of the mines at Yauricocha, the Company has the highest planned throughput in mines drilled; 1,023,491 tons processed which represents a 14% increase compared to 2016. Zinc equivalent production in 2017 was 146.816 million pounds representing 4% increase over 2016. Sierra saw increases in the production of copper, 87%; and zinc 37% at Yauricocha in 2017 versus 2016 with increases in production of silver 10%, lead 23% and gold 38%. At Bolivar, the company had planned throughput of 887.237 tons which represents a 7% compared to 2016, lower throughput and recoveries of all metals except the gold along with lower head grades encountered and resulted in 15% decrease in copper equivalent production when compared to 2016. Copper production decreased by 12% year-over-year at Bolivar along with 18% lower silver production and 8% lower gold production. At Cusi, the Company processed a total of 88,011 tons which represents a 53% increase over to year 2016. Lower head grades and recoveries for all metals except zinc and silver contributed to the 51% decrease in silver equivalent production. Silver production decreased 54%, gold production decreased 56%, lead production decreased 57% and zinc production decreased 48% compared to 2016. Please turn to Slide 10; the Company anticipates that 2018 silver equivalent production will range from 15.9 million to 16.2 million ounces. So copper equivalent production will range from 89.2 million to 104 million pounds, and zinc equivalent production will range from 183.8 million to 214.5 million pounds. Copper is expected to see the largest growth in 2018 followed by silver and gold with zinc remaining relatively flat and lead decreasing. This is the result the mine plant has been focused on Esperanza at Yauricocha which has demonstrated increased copper and Santa Rosa de Lima zone in Cusi with higher silver grades. The forecasted range is a result of increased throughput production, higher recoveries of Bolivar and Cusi, and Yauricocha was consistently strong with flat levels of throughput in 2018, we thought refurbishment plan will work hard other than this coal shaft in Q3 2018. The Company also needs to drive a drift from 121 to the bottom of the shaft in [indiscernible] prior year to completing the refurbishment plant. So we're anticipating that these gaps could cause a slowdown in production rates during that time period. Please turn to Slide 11; I'd like to take a few moments to discuss a few other growth and productivity initiatives not previously mentioned. The Company's focus this year is to initiate several preliminary scoping and PEA studies for all three mines. With the intent of production is optimization at all sites, the PEA is going to be followed by prefeas and feasibility studies to finalize future operational production increases and/or to maintain operations at a status quo. In addition, to need work programs, the Company also focused on including reviews of plant optimization strategies, mine shaft infrastructure improvements, and review at all three processing plant efficiencies. Also during 2018 at the Yauricocha Mine, the final infrastructure for the Yauricocha tunnel will be completed. This will enable the mine to have a direct run to the mill which will result in faster turn-around in the cycle time of the trolley locomotives. And this will allow for more capacity to handle larger volumes of waste and ore [indiscernible] to the plant. This in turn, also provides another ventilation inlet to the mine, and our benefit of the current ventilation system. The tunnel and should be drilling in -- it's in limestone host area of the mine in more favorable grounds conditions as compared to the [indiscernible]. Turning now please to Slide 12; the 2018 work program also includes some of the Yauricocha shaft to 1270 level and a loading pocket below the 1170 level, and that will be at the 1200 level; and this pocket will hand before us and weigh from 3 strings and a mountain fee raised on configuration vastly driven on 3 raises that are down to a central conveyer system which will be the moving pockets, just the skipped size will be 12 times. We'll have the independent discharge points for both locomotive track haulage, as well as track this haulage equipment and we will facilitate any necessities for great and large rocks with mobile rock breaker. And now this should be completed in 2020. The growth improvements at Yauricocha will be to continue on the production higher value or improving an estimated 450,000 tons of direct fees from the Esparenza Zones in 2018. The effort is expected to continue to improve the Company's operating margins and cash flow generation with raising the incredible but historically softer metals price environment. Turning to Bolivar; improvement in 2018 are installations of the newly furbished Ball Mill Bolivar site, this will provide the Company with flexibility in terms of grind size, tonnage, and recoveries and the Company expects to reach a throughput of 3,000 tons per day at Bolivar in Q1 2018 but to drove that to 3,500 tons per day in the second half of 2018. As well at Cusi, improvements are plain 14 to 18 with the installation of another new refurbished mill which will be installed in well production to climb to 1,200 tons per day starting in January 2019. Please turn to Slide 13, please. Exploration remains a key aspect at all three of the mines. And during Q4 2017, the Company drilled eventful of 204 holes totaling 9,424 meters at Yauricocha. Exploration drilling accounted for 10 holes or 4,181 metres in various zones including Cuye, Contacto Sur Medio, Huamanrripa and Escondida to explore and verify geological anomalies. So basically we're talking about the areas of constant casualty based [indiscernible], as well as the central mines. Definition drilling comprised of 54 wells with 5,778 meters and at Antacaca, Esperanza, Esperanza North, Antacaca Sur, Mascota, Catas and Karlita to the point and determines the continuity of ore bodies. On December 19, 2017, the Company announced drilling results demonstrating a new lime stone replacement mineralization at the Cuye Zone. This extension was located within the Central portion of the Yauricocha Mine. This represents the existence for the high-grade polymetallic mineralization at the Northern extension of Cuye Zone and suggest the possibility of even further mineralization at depth, specifically from copper sulphide ore bodies at significant growth. Please turn to Slide 14; on February 7, 2018, the Company confirmed the extension of the wide, high-grade structures at Cuye. We carried through copper sulphide mineralization. Be there to keep it defined containing intersection the board in 99 meters which remained open and dead. One moment particular, hole number 13 intercepted over 120 meters of continued high grade polymetallic and copper mineralization that included; the intercept of poly-metallic mineralization followed by a 99-meter copper followed up Mark West [ph]. Which enables the exploration of the extension will be you're very good at wen and the best. At Cusi, drilled 846 meters in Q4 2017, in sight remains whether I can continuity of the ore bodies and support development work in various -- they have 513 meters on surface. With that, I'll now turn the call over to Ed Guimaraes, Sierra Metals Chief Financial Officer for our financial overview.

[Ed Guimaraes:]

Thanks, Gord. Turning now to Slide 15, the Company had another strong quarter in it's financial and operational results adding by stable metal prices and continued production increases at the Yauricocha Mine. During Q4, the company earned revenues of $51.2 million which was 0.3 million higher than Q3 2017 as well as adjusted EBITDA of $19.2 million, and operating cash flows before movements in working capital of $17.8 million. During the fourth quarter, the Company maintained a significant improvements in revenue and adjusted EBITDA realized during the previous quarters in 2017 when compared to 2016. There were slight increases to the all-in sustaining costs due to increased sustaining capital expenditures which included a substantial amount of in-fill drilling, mine development, equipment purchases, ventilation and planned improvements. The increase was also a result of temporary increases to the mining costs, partially due to timing, as well as slight increases related to in-fill drilling and mine development costs that will be utilized within one year and thus are included in operating costs. The Company earned annual revenues of $205.1 million in 2017 which represents a 43% increase compared to 2016. Higher revenues were primarily attributable to the 14% increase in throughput, as well as the increase in copper and zinc head grades and higher recoveries for all metals except gold at Yauricocha. And the increases in the prices of zinc of 35%, copper of 26% and lead of 26% in 2017 compared to 2016. This was partially offset by a 7% decrease in throughput, and lower head grades and recoveries for all metals, except gold at Bolivar; and a 53% decrease in throughput and lower head grades for all metals, except gold and lower recoveries of all metals, except zinc at Cusi. Annual adjusted EBITDA of $81 million in 2017 increased 93% compared to $41.9 million in 2016. The increase in adjusted EBITDA was primarily due to the $56.9 million increase in revenues at Yauricocha. Cash flow generated from operations before movements in working capital for 2017 of $79.8 million increased compared to $44.3 million in 2016. The increase in operating cash flow is mainly the result of higher revenues generated and higher gross margins realized. I would now like to review our cash flows in more detail. I have summarized the changes in cash during 2017 on Slide 16. During 2017, our operating cash flows were $54.5 million. We spent $51.6 million on capital expenditures in Mexico and Peru, paid $47.5 million in principal repayments and interest on our credit facilities in Peru and Mexico, and paid dividends to non-controlling shareholders of $3.4 million. We also had proceeds from the issuance of loans and credit facilities of $29.8 million, these items decreased our cash balance from $42.1 million as at December 31, 2016 to $23.9 million as at December 31, 2017. Along with the strong operational results realized during the quarter, the Company strong cash flow generation allows the Company to be self-sufficient and fund it's Brownfield exploration and capital projects, as well as reduced debt levels. The Company has access to various lines of credit of $15 million, and when combined with the Company's $23.9 million of cash and cash equivalents as of December 31, 2017, provide available liquidity of $38.9 million. The Company's objective of reducing debt levels equal to or less than one time's EBITDA was reached during 2017 as 2017 adjusted EBITDA of $81 million was greater than the $65 million of debt on the books at year end. The Company's operating cash flow generation during 2017 provided the ability to perform extensive in-fill definition and exploration drill campaigns at all 3 of our mines which resulted in significant increases to the Company's consolidated reserves and resources. There were also significant capital expenditures made during 2017 for equipment purchases, mine development, plant improvements and infrastructure work on mine shafts and tunnels. The Company's focus for 2018 remains on allocating operating cash flows towards efficient growth capital in order to provide the infrastructure, as well as complete scoping studies necessary to monetize these reserves and resource increases as quickly as possible. Slide 18 also provides details on the Company's 2018 capital expenditure guidance of $49 million, including $13 million of sustaining capital requirements and $36 million of efficient growth capital expenditures and further Brownfield exploration drilling. The 2018 guidance includes several capital investments for property, plant and equipment, underground development, exploration and projects including tunnel completion, shaft deepening and rehabilitation at the Yauricocha Mine, and improvements to existing tailings that position facilities at the Bolivar and Cusi Mines. 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 Yauricocha Mine plans to process upto 1 million tons at an average of 3,000 tons per day in 2018. Cash costs for zinc equivalent pound sold are expected to be $0.62 per pound. And all-in sustaining cost for zinc equivalent pound sold of $0.78 per pound. Sustaining CapEx will be approximately $8.4 million and growth CapEx will be approximately $19.3 million for Yauricocha. The Bolivar Mine plans to process upto 1.2 million tons with initial production at an average of 3,000 tons per day with an objective to reach an average of 3,500 tons per day by the second half of 2018. Cash costs per copper equivalent pound sold are expected to be $1.60 per pound, and all-in sustaining cost for copper equivalent pound sold of $1.96 per pound. Sustaining CapEx will be approximately $2.8 million and growth CapEx will be approximately $9 million for Bolivar. The Cusi mine plans to process approximately 200,000 tons ramping up from an average of 300 tons per day with an objective to reach an average of 650 tons per day in the second quarter of 2018. Cash costs for silver equivalent ounce sold are expected to be $11.12 per ounce and all-in sustaining cost for silver equivalent ounce sold of $14.28 per ounce. Sustaining CapEx would be approximately $1.9 million and growth CapEx will be approximately $7.4 million for Cusi. The Company has principal payment obligations on it's loans and credit facilities of approximately $29 million to be paid in 2018, $8 million to be paid in 2019, and $29 million to be paid in 2020. The Company expects to be able to fund it's short-term capital and debt commitments through the continued 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'd now like to open the call to questions from participants. Operator, would you please open the lines.

[Operator:]

[Operator Instructions] Your first question comes from the line of Mark [ph] with Noble Capital Markets. Your line is open.

[Unidentified Analyst:]

Yauricocha expected to operate at flat levels in 2018 due to the rehabilitation of the Mascota shaft. I was just wondering, are there any opportunities to make up for some of that in the prior and post quarters? I mean, can you run a little harder before you start to rehabilitate that shaft or just try to get an idea whether there might be any upside there?

[Igor Gonzales:]

Yes, absolutely. The plan is, we're going to push our production levels to maximize our opportunities, I mean when we're on our rehabilitation program we'll have that in the bank. Yes, so that's the plan.

[Unidentified Analyst:]

So you could do a little better than just flat levels versus 2017?

[Igor Gonzales:]

Yes, we're definitely going to be pushing to do that.

[Unidentified Analyst:]

And then, during the recent…

[Igor Gonzales:]

Our processing plants can handle over 4,000 tons a day, so we can push our production in the mine to treat the plant. On the processing side, we're in good shape.

[Unidentified Analyst:]

I remembered from the Investor Day, there was a little bit of -- there was kind of a range there; and so you can operate upto 4,000 tons per day, you think so. I mean how much in terms of in the period prior to the second quarter when you're rehabilitating that shaft; what would you say would be the maximum you would be running it? Would 4,000 be a good number or would you be…

[Igor Gonzales:]

Remember Yauricocha is driven by development. So as long as the spokes are in good shape and we're ready to pull them, we can move to over in that point but we have to prepare development to maximize our production. So in case of the mine, we'll be shooting for better than the 3,000 ton a day mark with certain limitations because you have to move quite a bit of ways to get that ore but we're going to be pushing more into that activity as best we can with what we have available. So the productions is going to come up from -- it's areas like Esperanza and Catas, as well as portion of -- a good portion covered from the area of Karlita [ph], and our focus is to try and get the best in it's entirety we can.

[Unidentified Analyst:]

Okay. And then also during the recent Investor Day, Slide 59 had discussed in a greeting, your co-gen unlocking the potential for these central mine zone. I was wondering if you could just revisit that a bit and then discuss how the different opportunities at Yauricocha, Bolivar and then Cusi may rank in terms of priority. And there has been a lot of interest around Cuye and that Cantabile [ph] which I think you had mentioned that you might be doing some geophysical studies at a later point?

[Igor Gonzales:]

Sure. In the case of the Yauricocha zone what we're seeing is the central money [ph] zone seems to be merging with the area of Mascota-Cuye as low as Esperanza gets; so this whole zone needs to be plunging off to the North, and as we go forward with our development plans of the 1070 level, we've got a tunnel that's going to be driven from the last portion of the Esperanza Zone in the 1070 level and we're headed to Cachi-Cachi. We already have interest debts during a program that we did last year from the 720 level; we have intercepts from the 1070 level and below the 1070 level between the Cachi-Cachi zone and the Esperanza zone. So in my mind what's happening is this whole zone -- like, this is a complete minimized zone with a lot of good intersections and really good expressions on the geophysical anomalies that we were seeing. So in my opinion, I think the whole structure is going to be plunging off the depth and the zones are emerging together and we have extremely high grade poly-metallurgy inspections [ph] that we did have report in the Cuye zone as well as the copper bearing zone. So the main infection of the mine I believe was [indiscernible], merging together, and basically you know that the central mine zone isn't forced effort zones at all, it's just structured like that for normal natured purposes but it's really 1-meter lying zone. And then on the surface, where we get last year, and geophysical program and we completed. Last geophysical programs winning a really high grade, high potential under clearly, and [indiscernible] the anomalies in the areas to the west of the Yauricocha falls and one of these areas has chosen support. And as I was mentioned in the Investor Day, that transferred ball is another potential Yauricocha Mine in our mines. And we're talking some potential moves to really add value to the Company. One of the programs that we have this year, late April, early May would be drilling on the [indiscernible] firm, the areas of the mine where we have permits in place, so that's the plan.

[Operator:]

Your next question comes from the line of Jake Sakawosky [ph] with ROTH Capital. Your line is open.

[Unidentified Analyst:]

Hi, thanks for taking my questions. Can you just give some additional color on the ball mills you purchase for lower? What you paid for it, how you're planning to getting it to site and when it should be down there?

[Igor Gonzales:]

We've actually purchased two ball mills, both from the Marauder [ph] operations from Brunswick that are mining in smelting area. And Buffers oh, we have 12.5/16 ball mill that we purchased at that time and we have getting many collections with two spirit murders [ph], the whole senior is liner. So on and we had an 8 backward team, god knows well; that came from Signori [ph]. And the thermal purchase, by the time we get it transported to site, I think we're going to be in new order around a $1 million. The actual purchase was much less and we're in the process right now of delivering some other components to Mexico, partially through El Paso and through the Cuye side and through Bolivar.

[Unidentified Analyst:]

And then just switching over to Cusi; we saw a strong increase in silver and lead recoveries at the mine in the fourth quarter. I mean, was this simply a function of higher grade ore or are these levels that we should expect to see going forward there?

[Gordon Babcock:]

Actually it was a result of a program that I was incorporated with the prevention of that site, there was no [indiscernible]. So it was dividing the ore zones that we were treating into separate dangerously processing plants for each type of ores. Before all the ore was treated with one time and one point with certain reagents and so on for that one point, so we didn't have any flexibility at all, and now we have a different plan to reach at ore zone. So we have areas like Promatoyo [ph] which are little different from Santa Rosa, which -- areas like San Nicolas and areas like Santé Luis that were different from now. She has 4 or 5 different -- well, let's call them recipes for treating new ore and now we're sustainable.

[Igor Gonzales:]

I guess the short answer for the question with respect to similar recoveries as the fourth quarter of -- we're obtaining similar recoveries year-to-date.

[Unidentified Analyst:]

And then lastly, just looking towards the studies being undertaken at each of the month; can you just touch on how these are coming along and when we should maybe expect some new slow out of that?

[Igor Gonzales:]

We're trying to get it completed by PAS [ph] by the end of Q2 and then move forward after that. So we have to do the first portion of the PAS first and then we'll see where we go with the pre-Ps and fees after report.

[Operator:]

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

[Lee Cooperman:]

52% of our stock is owned in a private equity fund which I believe has an obligation to distribute October 1 but has the ability to extend. I think given where we are in the calendar that some kind of comment from the Company or the private equity fund regarding their intentions would be welcome. So that's question number one, do you have any insight into the intentions? And number two, ever since we filed the shelf, the stock has kind of lost it's luck; I'm just wondering with the kind of cash flow profile you project and the unused liquidity we have -- whether we should just take that shelf out because we basically have no interest in selling the stock anyway near the current levels? So two questions.

[Igor Gonzales:]

As you know, Sierra is the operating company; we presented an operating privacy to our board. Our board then approves our operating strategy and of course, we are executing this compared to this growth by Brownfield and plant expansion which we are executing. I guess in addition of two of this execution of our strategies that the results are based on 2018 are on-budget. So I think that at Sierra we're going to continue to do that. On the fund, we know that the fund is bullish on Sierra Metals' and they have been elsewhere a driving force on Sierra Metals growth; so I think we're going to continue that, we cannot speak for the fund as they do their own analysis on the current situation and for that Mike can complement my response. Mike?

[Mike McAllister:]

Yes, I can only say further to that that the fund does have optionality; they will do whatever is best to maximize value. No decisions have been made as of yet that we're aware of or know off. And I could only offer that if you would like to discuss further, we recommend that you reach our directly to the ARC fund [ph].

[Igor Gonzales:]

Ed, can you provide the comment on the second portion or the second question that was made?

[Ed Guimaraes:]

Yes, sure. In terms of the shelf, we do have -- it was filed summer of last year, there was a 26 month shelf life if you will. So we've got approximately another year and a half. There is no intention to issue shares at these levels, I have stated in the past that it would take a significant increase in the share price before we would even consider taking down some proceeds from a swing shares. I mentioned $3 but just to reinstate that, $3 isn't where we would start to issue shares; it's where management and the board would contemplate and based on where they saw metal prices headed and valuation would we contemplate issuing shares. But there is no obligation to issue any shares and it's at the complete discretion of the board and it is something that is in place until -- we've got another year and a half left.

[Operator:]

Your next question comes from the line of [indiscernible]. Your line is open.

[Unidentified Analyst:]

I went through the 40F earlier today and I know that the receivables have gone from $28 million at the end of '17 and that compares with $80 million at the end of '16 which is -- I mean, it's plus from Q3 but nonetheless, I would have thought that the balance at the end of the year would go down a bit. And then I did some digging and I realized that both the trade and the sales tax receivables actually increased. And yes, the question is, why do your things keep dragging with the way -- the receivable things keep dragging all the way they are. And are you doing anything on reigning and receivables or is there credit risks that we should know about or anything like that?

[Mike McAllister:]

In terms of the receivables, a significant amount of those receivables comes from obviously our metal trading receivables, and it's really a function of higher metal prices compared with previous years and the way the terms work is, it's essentially -- you're getting paid on a M-plus future date, I'm not going to specify but there is a lag if you will between when you sell the material and when you receive cash for that material and it's really a function of higher metal prices. So in terms of credit risk, I don't view it as any credit risk whatsoever that the traders that we're dealing with on our uptick, they have extremely -- they have well positioned in terms of liquidity and strong balance sheet; so that's not an issue there.

[Unidentified Analyst:]

Also can you walk us through cost expectations for the new underground tunnel at Yauricocha? I mean the release date that it's going to be completed in Q3; I assumed a cost of going from mill to mine should be gradual expenses for balling mainly?

[Mike McAllister:]

Gord, do you want to handle that one?

[Gordon Babcock:]

Yes. The tunnel is basically structured to improve our availability to replace the time. So the idea is the circuit will be complete, there would be a complete circle, so you will come out with the Yauricocha tunnel and see the mill, and drop off the waste and then turn around the train and go straight back into mine via the Quebec [ph] tunnel. So right now, the way it goes, they go in and they come out quick back those tunnel. So it's going to give us some flexibility in terms of moving material, to drive our cost down; I mean, we're -- we have to move on material, as the plan. So we have bottlenecks in mind and this was one of them, this is going to make huge improvements to our total facility.

[Unidentified Analyst:]

And so the same question for the underground development; I mean with the sinking of the shaft to the 1270 level, is there any downtime or more compressed production during any time period?

[Gordon Babcock:]

Basically, the way the plan is going to work out is, we're going to sink down to the 1270 level and at the 1270 level, we're going to set ourselves up for deepening the shaft in the future. The predominant plan is driving the level development on your 1170, that will be the last working development on the bottom of the shaft and then it enables us to access approximately 8.1 million tons of the roughly 9 million tons of reserves on that 1170 level, plus the remaining 0.8 million tons is going to come from ramps in the Cuye zone and in the Catas zone, as well as the Esperanza zone. And as you know from our Investor Day, we're planning an intense drilling program, both below the Esperanza zone, Cuye zones and central mine zones; and I'm very confident that the latest structure works here at Yauricocha, we're going to be adding the resources, as well as to reserves and the future for the mine is going to be as we can see things prevailing here. So our target is to get the 1520 level which is right below our [indiscernible] that we have in the current zones.

[Operator:]

Your next question comes from the line of [indiscernible]. Your line is now open.

[Unidentified Analyst:]

As you expand different zones and make different development investments in the next several years, will the metals weightings as posted on Slide 8 change very much or will they stay about the same?

[Ed Guimaraes:]

You know, really it depends on Cusi and how much potential Cusi can have in terms of that Santa Rosa de Lima Zone. Right now we're kind of at a base metal to precious metal split, we're 80% base metal and 20%; so we could see depending -- again, it's really that the wild card I would say would be more towards Cusi and with Bolivar and Yauricocha still having strong copper contributions, it's really in Cusi where we could see a significant more silver contribution.

[Unidentified Analyst:]

If I could follow-up on Lee Cooperman's question earlier, if the Company were to be sold or a strategic mining industry investor were to take a block; would you envision marketing Sierra Metals' as one piece the way it's presented to the public? You know, how gold companies like gold and silver like silver and zinc is zinc and copper is copper; would you envision selling Cusi's silver mine to silver companies and Bolivar to copper companies and Yauricocha to zinc companies? I'm trying to exploit the tendency to pay a bigger premium for the purer play.

[Gordon Babcock:]

I'll try to respond to your question. One of the attractive elements that Sierra Metals' bullies to the market is precisely the poly-metallic nature. And when the metal prices go up and down in either metals, we have basically 4-5 metals that we produce and then we have a natural protection there on price. My response to your question would be that we will try to keep Sierra Metals as one unit because I think we can -- what we see in Sierra Metals is a combination of elements that make the 3 mines to contact each other in terms of pricing and market variations. All 3 mines have very important potential down to exploration which is normally the case with all mines; so we don't have to go very far in either mines to find additional resources and they are lower cost to obtain. So my response is that to stay within one Sierra Metals Company.

[Unidentified Analyst:]

Your behavior as a large company is confusing sometimes; in addition to being willing to pay premiums for pure plays, many of the large base metal companies like big deposits, many of the copper companies that had VMS deposits but core [indiscernible], and it excites them very, very much to have 100,000 tons as grinding mills and 400 ton trucks; and they tend to not be interested in 3,000-4,000-5,000 ton underground mines like you have. Do you think it's a good strategy to buy 2-3 more mines like Yauricocha, Bolivar, Cusi; several thousand ton a day, poly-metallic -- I don't know what the grinding mill people do to make these management so excited but they all want to have big grinding mills and big trucks and they don't have to respect for your kinds of mines, so maybe it's a market inefficiency for you to exploit?

[Igor Gonzales:]

I guess in that system analyzing -- our core deposits are obviously fit for underground development. And have been a pure play underground in Yauricocha will be very deep and so the economics of that would have to be very carefully estimated for an open big operations; the cost of overburdening would be significant. However, given the fact that we already have installations and infrastructure in Yauricocha and we already have the 1170 level, it will be easy for us to access to a décor -- I guess a similar example is the Cusi mine is an underground mine and in the case of Bolivar, we're still in early days to see if we can expand with deposit or we can then look into an open big situation.

[Unidentified Analyst:]

I'm very content that your mines are underground. It's just that the big companies, they must get wonderful Christmas presents from the grinding mill people and the big truck people. So they don't care so much about your kinds of little mines that are underground; so why don't you buy more mines like this that are undervalued or develop more mines like this that are undervalued where you work hard and you get a good return but you don't get a big Christmas present from the grinding mill people or the truck people; and the big companies, they pay too much for those things and you operate in a very good niche that's profitable?

[Igor Gonzales:]

At the moment, what we're doing is, as I mentioned earlier, we are executing a strategy that was approved by our Board. We're not looking at -- right now at mines -- open pit type mines at the moment. We're trying to maximize the value of our existing operations and we just don't have that in our strategy at the moment. I think what we need to do first is to consolidate our economics and our growth program and then look outside our capabilities.

[Operator:]

Your next question comes from the line of Jim Young with West Family Investments. Your line is open.

[Jim Young:]

Speaking of profitability, I was wondering if you could elaborate a little bit about on those two ball mills that I believe Gordon mentioned you paid $1 million for or so. And what I'm just trying to get a sense of is, when will the mill arrive at both Cusi and Bolivar? How long is it going to take for them to get installed? And what's the total all-in cost in these investments? And it looks like the opportunity to expand your production is fairly significant just on these two ball mills; and so what's your IRR that you're generating from this investment? Thank you. And of course, I do have others.

[Mike McAllister:]

Gord, I don't really want to get into specific IRR calculations. In terms of management, we view all capital expenditures in terms of -- it needs to be and I speak to in terms of official capital. Growth potential needs to have an IRR which comes with a hurdle rate that has to be above that for us to make an investment, and those mills have meet that criteria, that's really all I have to say Gordon.

[Gordon Babcock:]

Jim, the whole focus on those is to improve our productivity, our recoveries and we both profit in both of our platforms, in Cusi, as well as in Bolivar. And as we mentioned in the Investor Day, it drives our production up, basically Bolivar, we want to get upto 3,500 tons a day which is the increase we look forward and work our way up; that's the plan.

[Igor Gonzales:]

I guess to complement to what Gordon was saying, one of the assessments we've made metallurgically speaking during 2017 was to make a review of our crushing facility and as such, there were some upgrades done in our crushing facilities that are obviously during the process ahead of the grinding facility and we saw that we had sufficient crushing capacity both at Bolivar and Cusi. And so the complement to that, additional crushing capacity was of course adding more milling capacity. Subsequent to that, we did a similar exercise for rotation capacity and Bolivar also demonstrated us that they had additional rotation capacity as well as in El Paso. So it was declining that needed the upgrade, the class, the tailing management and the filtering of the concentrate; so that's again to explain why we want just for the mills and not at all planned design, we have some of the elements already in place and this [indiscernible] were a very good complement and good capacity with smaller capital investment.

[Jim Young:]

And then if I'm hearing that one of the purposes for these ball mills is to address some of the recovery rates; could you just speak to the improved recovery rates that you've been able to achieve which is due to -- I know man's hard work and focus on this issue at Cusi, Bolivar and Yauricocha; are these sustainable or have they reached their peak or do you think there is even more opportunities on the upside for the recovery rates?

[Gordon Babcock:]

On the recovery question; the Cusi operation is sustainable as is Yauricocha, there is always room for improvement, one of our focus is that Yauricocha has improved the copper recoveries; so we feel that there is opportunity there. In the case of Bolivar, there is definitely huge opportunity to increase from where we are to a much higher recovery rate, we know from studies that we've done [indiscernible] that when we approach 60% passing through we can get close to the operating 98% recoveries to 99%. So that's our target.

[Jim Young:]

And throughout the course of the MD&A and the presentations and the discussions so far today, you mentioned the improved opportunities both at the operations at Yauricocha, increasing the production rates at Bolivar, and likewise at Cusi which clearly have significant opportunities to increase given we're starting from so. I guess my question now is, relatively to your expectations how are things progressing for the first quarter this year which you basically are done? And would you be disappointed if the first quarter EBITDA does not exceed first quarter of '17 of $25 million? Thank you.

[Igor Gonzales:]

I think we're on target Jim, our budgets are on target, our metal production is on target at all the sites. Our everything should be as is mentioned before, I think we run pretty decent shape and moving along quite well.

[Gordon Babcock:]

I guess to complement that Jim, you have to bear in mind we started our Mexico turnaround program in August of 2017. The later part of 2017 we monitored our Mexican operations with the forecast that we made in August and both operations came very close at year end 2017 to the forecast. And of course, during the last part of 2017 we prepared a 2018 budget for both Mexican operations and to-date we are essentially on budget which means that the turnaround program has worked and it's providing the results and it will translate into a solid financial quarter.

[Operator:]

This concludes the Q&A portion of our call. I would now like to turn the call back over to Mike McAllister for closing remarks.

[Mike McAllister:]

Thank you, operator. As mentioned, that concludes today's call. On behalf of the management team, I would like to thank all participants for joining us today. A replay of the webcast and all materials can be found on our website at www.sierrametals.com. If there are any further questions or concerns, you may reach out to us 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 does concludes today's conference call. Thank you for your participation. You may now disconnect.