Pan American Silver Corp (PAAS) 2012 Q3 法說會逐字稿

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  • Operator

  • Good morning. My name is Denise and I will be your conference operator today. At this time I would like to welcome everyone to the Pan American Silver Third Quarter 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.

  • Kettina Cordero, you may begin your conference.

  • Kettina Cordero - IR

  • Thank you, operator, and good morning, ladies and gentlemen. Welcome to Pan American Silver's third quarter 2012 earnings conference call. Joining me here today are our President and CEO, Geoff Burns; our Chief Operating Officer, Steve Busby; our Executive Vice President of Geology and Exploration, Michael Steinmann; and our Chief Financial Officer, Rob Doyle.

  • Before Geoff takes over, I would like to remind our listeners that this call cannot be reproduced or re-transmitted without our consent and that -- and to indicate that certain statements and information in this call will constitute forward-looking statements and forward-looking information within the meaning of applicable securities laws.

  • All statements, other than statements of historical fact, are forward-looking statements. These statements reflect the Company's current views with respect to future events and aren't necessarily based upon a number of assumptions and estimates that, while considered reasonable by the Company are inherently subject to significant business, economic, competitive, political and social uncertainties and contingencies. Many known and unknown factors could cause actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements.

  • And the Company has made assumptions and estimates based on or related to many of these factors. We encourage investors to refer to the cautionary language included in our news release from November 7th, 2012 as well as those factors identified under the caption Risks Related to Pan American's business in the Company's Form 40F and on our information form. Investors are cautioned against attributing undue uncertainty or reliance on forward-looking statements. And the Company does not intend or assume any obligation to update these forward-looking statements or information other than as required by law.

  • With that, I will turn the call over to Geoff.

  • Geoff Burns - President and CEO

  • Thank you, Kettina, and thanks, everyone, for once again taking the time to join us on the call this morning. I am going to start with an overview of our third quarter results and as become our custom, will then pass the call over to Steve, Michael and Rob for a more thorough description of the highlights of our operations, our development projects, our exploration programs and our financial performance.

  • I am happy to report that we had a solid quarter from our production perspective at all of our operations with the exception of Manantial Espejo in Argentina. Our mines in Peru continued to show improvements, largely as a consequence of the investments we have been making in additional underground development over the last 12 months at both Huaron and Morococha.

  • In Mexico our Alamo Dorado and La Colorada mines performed right in line with expectations, again, showing the mature and reliable nature of these ore bodies and our ability to mine them productively. Our newly acquired Dolores mine was modestly behind where we thought it would be, as we continued to correct previous operating deficiencies and made solid strides in bringing the mine towards a sustainable and predictable operating base.

  • In Bolivia our San Vicente mine produced a truly excellent quarter, solidly increasing its silver production and gaining a reputation within Pan American's portfolio as one of our most consistent and reliable operations.

  • Our one blemish during the quarter was the performance of Manantial Espejo mine in Argentina, where production was below forecast and, as a result, costs were well above expectations.

  • As we discussed, have discussed in the past, import restrictions have had a devastating impact on our ability to keep our mining equipment operational at anywhere near normal availabilities. As a consequence, we had fallen some two million tonnes behind our plan over the last 12 months in removing waste material to access and release new higher grade ore. We made a conscious decision at the start of the quarter to focus on catching up this accumulated waste mining shortfall.

  • While we focused on waste removal, our ore release from the open pit suffered and we dipped into our lower grade stockpiles to feed the mill. The result, lower silver and gold production and higher costs. Why did we make this choice? I think the logic is pretty straightforward. At the current time our ability to repatriate US dollar profits out of Argentina is restricted. Consequently accumulating and holding a large cash balance in argentine pesos, which was essentially frozen, didn't seem like the best use of our depleting resource. So instead we effectively reinvested in the Mine to set it up for the future.

  • In spite of the shortfall at Manantial, we still generated adjusted earnings of $38 million or $0.25 a share. Our cash flow from operations was $0.44 per share. During the quarter we returned $15.1 million to our shareholders through dividends and share repurchases. Paid for all our sustaining capital, covered our exploration expense, paid our taxes and still banked close to $30 million.

  • So far this year we have generated operating cash flow of $114 million after paying 133 million in taxes. We reinvested in sustaining a project capital, distributed $48 million to our shareholders through share repurchases and dividends, paid for our exploration programs and overheads and have still banked almost $60 million, very respectable results in my opinion, particularly given the fact that silver prices have averaged close to $30 per ounce this year, down almost 20% from last year.

  • We produced 6.3 million ounces of silver in the third quarter. This was the third highest silver production total in our Company's history. We also produced 28,100 ounces of gold, our second highest quarterly gold production on record. Our cash costs increased to $13.87 per ounce net of byproduct credits, higher than our full year guidance. However, if you exclude the effect of Manantial, our cash costs were actually right in line with our forecasts. We closed the quarter with working capital of close to $785 million of which almost $550 million was cash in the bank and the balance sheet with virtually no debt, a very strong end to any quarter.

  • And, in keeping with our stated intention of returning value directly to our shareholders, I am pleased to announce that yesterday our Board of Directors approved the payment of our fourth quarterly dividend of the year of $0.05 per common share and I look forward to 2013 when we will again look at materially increasing our dividend and sharing even more of our success directly with our shareholders.

  • I would now like to turn the call over to Steve to review our operations and development projects and I'll be back later to make some closing comments. Steve?

  • Steve Busby - COO

  • Thank you, Geoff, and good morning, ladies and gentlemen. It is my pleasure to report additional details of our third quarter 2012 operating results and project development advances. Our operating teams continue to address their unique challenges delivering yet another solid quarter in line to achieve our full year consolidated production and cost guidance.

  • During the quarter we had started to realize performance improvements in Peru where Huaron produced 735,000 ounces of silver, which was 10% greater than the third quarter of 2011. Huaron's cash costs increased as expected to $19.88 per ounce compared to $15.07 per ounce in Q3 of 2011, as we successfully increased the underground development rates to nearly 4.6 kilometers during the quarter.

  • Morococha improved production to 544,000 ounces, nearly 42% greater than Q3 of 2011. Morococha's cash costs also increased, as expected, to $25.66 per ounce, as development rates were substantially stepped up to nearly 5.5 kilometers during the quarter. The increased development rates at Huaron, and in particularly at Morococha, are starting to release better quality ore than we've seen at these mines for the last couple of years.

  • Couple that with our initiatives to mechanize more of our mining at these operations, and we are expecting to see productivities and eventually cash costs to improve during the next couple of years. Our intense efforts on miner training over the last year has successfully converted 100% of all of our ore mining at Morococha to Company employees who focus more on ore quality than we had experienced with the contract miners we had been relying so heavily on in the previous years.

  • I am pleased to report we have completed our ancillary relocation project at Morococha, well within budget and relocation efforts have been initiated simultaneously with the Morococha town site relocation being conducted by Chinalco at the neighboring Torremocha project. We are confident these new modern facilities are going to bring us significant operational enhancements not yet even contemplated in our planning. There is even additional excitement being generated in Peru with some recent exploration successes that Michael will be touching on at both operations.

  • I must say it is a pleasure to describe the positive developments we are seeing at our Peruvian operations and we will continue our quest to realize the true potential of Huaron and Morococha mines for a great many years to come.

  • As Geoff mentioned, after more than a year of struggling to adapt our business to the intense importation and currency controls put into place in Argentina, we literally found ourselves dug into a hole that was severely limiting our ability to mine quality ore productively. As such, we made a strategic decision during the quarter to redirect our open pit mining fleet towards catching up on waste movements, deferring planned higher grade ore production into 2013.

  • In addition, we'd managed to substantially complete a ventilation raise and haulage ramp extension during the quarter that had been holding back some of our underground high grade ore production. All of these factors led us to processing lower grade ore in lieu of high grade ore, driving our silver production down to 858,000 ounces, about 25% below plan, and gold production down to just under 9,000 ounces, or about 35% below plan.

  • Direct production costs were impacted with logistical challenges preventing full operation of our new virtual gas pipeline for power supply, which coupled with the deferred high grade ore production drove our cash cost to $21.61 per ounce, well above the $8.60 to $10.40 per ounce guidance we had provided. We have started to see the critical spare parts that we need to rebuild our mobile equipment fleets beginning to arrive in country and we have a new shovel delivery that's expected before year-end.

  • We anticipate beginning to see steady and continual improvements in our critical equipment availabilities, which will drive production up and drive costs down over the next four to six months at Manantial Espejo, as we get back into mining the higher grade ores.

  • Our San Vicente mine in Bolivia performed exceedingly well during Q3 of 2012, producing nearly 1 million ounces for the Company at a cash cost of $18.59 per ounce including the full effects of the increased COMIBOL share of the operating cash flows now that the capital investment has been recovered. Despite the notable conflicts with certain mining assets in the country and the recent empowerment of the cooperative mining sector, our employees, unions and communities remain solidly in support of our business and our operation remains calm and productive.

  • San Vicente has proven to be a solid asset with a strong committed operating team and we are expecting the valuable contributions from this mine for all Pan American shareholders and certainly all of the local stakeholders for many years into the future.

  • The addition of the large Dolores mine to our La Colorada and Alamo Dorado mines has now firmly established the stable mining district of Mexico as our solid foundation for strong reliable and profitable production. La Colorada continues to perform producing 1.1 million ounces of silver at a cash cost of $9.93 per ounce during the quarter. We have successfully completed a new pump station underground, as planned, and have begun discussions on possible expansions given the huge exploration successes that we've been seeing over the last couple of years. We have started conceptualizing a new shaft and possible haulage system improvements that would be necessary to fuel a possible production expansion over the next few years once we lock into the optimal approach and complete the necessary feasibility and development works.

  • Alamo Dorado delivered 1.3 million ounces of silver during the quarter at a cost of $5.87 per ounce, as we have begun laying back the open pit towards the west that will yield some additional ores to our remaining life. We are still conducting additional drilling around the perimeter of the open pit and will be looking at a new open pit design that will include a relatively modest increase to reserve to what was reported the beginning of 2012.

  • Our newly acquired Dolores mine is settling in nicely and starting to make strides towards enhanced efficiencies as we schedule out our mobile equipment, fleet rebuilds, focus on the leach pad construction and operations and advance exploration efforts around the perimeter of the open pit.

  • We did suffer a disruption to production in August when we had an unanticipated cone crusher failure, which was temporarily mitigated and brought back on line until replacement parts can be acquired in 2013. Meanwhile we completed some additional metallurgical studies aimed at simplifying and improving the potential mill development concept, which is yielded excellent results which will be rolled up into the mill study and new mine plan now being scheduled for completion in early 2013.

  • I am starting to see our efforts at Dolores being divided into two distinct initiatives. The first initiative is focused on optimizing and securing production in the current crushed ore heat bleach configuration and is highlighted by intensive effort to extensively build out leach pads to allow us much better efficiency of recovery, flexibility of operation and overall reliability in production according to the existing ore reserves as defined by Minefinders.

  • This effort is in full swing as we took advantage of placing our Navidad project on care and maintenance pending a law reform in Chubut, Argentina and simultaneously completing the Morococha relocation project, allowing us to reassign our strong projects group towards the Dolores leach pad expansion efforts. We anticipate getting ahead of our leach pad needs that will help stabilize and improve the existing operation in the latter part of 2013.

  • Meanwhile the second initiative is focused on defining and optimizing the incredible long-term potential of this deposit including a careful evaluation of the mill opportunity as well as optimizing the life of mine plan and defining additional exploration potential that may also lead to a future underground development at Dolores.

  • As Geoff mentioned again, despite the shortfall in Argentina due to factors largely outside of our control, I remain confident that we will achieve our full-year consolidated silver production guidance of 24.25 million to 25.5 million ounces in our annual [couch] and cost guidance of $11.50 to $12.50 per ounce net of by product credits, while aggressively refocusing our talented project development group towards significant opportunities that exist at our newly acquired Dolores mine in Mexico.

  • With that, I'll now turn the call over to Michael Steinmann for the exploration update.

  • Michael Steinmann - EVP, Geology & Exploration

  • Thank you, Steve, and good morning, everybody. Like every quarter, I would like to start with the [growth] statistics. Between Brownfield and Greenfield exploration we achieved our 57,000 meters of diameter in Q3. Our annual program calls for 220,000 meters drilling and we completed in the first nine months of the year about 141,000 meters, or 64% of it. The largest drill contribution on the Brownfield plat came from La Colorada, Morococha, Dolores and Huaron. And on the Greenfield side from the La Virginia project.

  • But let's go directly to La Colorada and discuss the outstanding results there. Since Q2 we increased the annual exploration program by over $3.2 million for additional 21,000 meters of diamond drilling. The total 2012 program for La Colorada stands now at a record of 42,500 meters and we plan to spend about $5.9 million. Most of the increased exploration drilling is taking place at the [Amelia vein], where we added two additional surface rigs drilling now with three machines.

  • As discussed in Q2 conference call and in the August press release, the results have been and still are outstanding. For example, the [intersective] 2.3 meters true width containing 1,470 grams silver, 0.6 grams gold, 4.34% lead and 10% zinc and sulfides or 3.4 meters true width containing 465 grams silver and 0.38 gram gold in oxides. In addition we discovered a split structure of the main Amelia vein, which is nearly two meters wide and returned 1,295 grams of silver. The strike length of Emilio vein containing positive true results increased now from 300 to over 900 meters.

  • This is a very important discovery for two main reasons. First, it confirms strongly mineralized veins in higher levels than most of the current mine reserves. All the drilling confirmed the continuation of the high grade Emilio vein down to 600 level, the current Emilio reserves reach only down to 275 level, 325 vertical meters higher than in the rest of the mine.

  • And second, it is adding to the mineralized footprint at La Colorado opening the door for a potential production increase in the coming years. The main NC2 and HW structures, which are currently producing 88% of the ore, returned exceptional results as well. Extending the vein along strike to the east ended up with two to five meters wide intersections returning 300 to 650 grams silver and 3% to 10% let's say in [combined].

  • Our current reserves on these two main veins reach currently down to 600 level but the structures are open ended with positive results in the deepest hole drilled so far at level 1,008, over one kilometer below surface. I simply can't say enough about the exceptional exploration results and enjoyed at La Colorada during the last couple of years and I am convinced that we will see once again in December such tonnes of reserve and resource addition from La Colorada.

  • Steve mentioned Huaron already. For the first time in several years we discovered again some wide ore bodies at Huaron in addition to the normal vein mineralization. We stepped up drilling in these zones and working on underground access. Mineralization is wide and returns some high grade results. For example, 22 meters containing 254 grams silver, 5.99% lead and over 10.5% zinc. We increased drilling and results will be reflected in the new reserve and resource statement at the end of the year.

  • Our Dolores mine in Mexico saw an important road program in Q3 as well completing over 9,000 meters of drilling. Like in Q2, we focused on the east strike zone as we need to define the possible fit expansion to the east in order to plan the final leach pad outline. The main exploration focus from Q4 onward will be on a potential north and south pit expansion as well as in underground mining targets.

  • Drilling on the east strike has been mostly finalized and new resource estimation is in progress. Results will be incorporated in the year-end reserve estimation, which will be published in February.

  • The Waterloo project in California did not see any drilling in Q3, as we are preparing or were preparing for the large phase two program during the much cooler fall and winter months. Drilling resumed last week with one rig and we plan to add a second one before the end of November. Meanwhile, we are working on metallurgical tests, geological and structural interpretation. We plan to spend about $1.1 million at Waterloo for the rest of the year and remain on track for a new resource and reserve estimation towards the end of 2013.

  • The exploration program at all of our operations and projects are shaping up nicely. Drilling has added substantial new resources in most of our mines and we will hopefully more than replace the mine reserves at the end of the year once the results are incorporated into our mine plans. I am looking forward to update you in details on the new corporate wide reserves and resources and final 2012 exploration results in February next year, first with a press release and then followed up during the Q4 conference call.

  • Now to Rob for the financial review.

  • Robert Doyle - CFO

  • Good morning, ladies and gentlemen. As Geoff mentioned, Q3 was another quarter of steady financial performance for Pan American and a significant improvement over our Q2 results. Our adjusted earnings after adjusting for unrealized losses on derivatives and commodity contracts and adjustment on the sale of Quiruvilca and unrealized FX gains where $37.6 million or $0.25 per share considerably better than the adjusted earnings of $17.1 million or $0.11 per share in Q2 2012.

  • This increase in adjusted earnings was largely driven by a 21% increase in mine operating earnings from Q2 2012, up to $68.2 million, a result of higher quantities of silver and gold sold as there was very little change in our realized metal prices from Q2 to Q3. Our mine operating earnings over sales margin, or gross margin, remained in the 28% range similar to Q2.

  • Adjusted earnings in Q3 also benefited from a return to more normal levels of G&A and exploration costs and a lower tax expense relative to Q2. The higher quantities of precious metals sold in Q3 ensured that we achieved record quarterly revenue of $251.8 million, 26% higher than Q2 revenues.

  • Cash flows from operation before working capital changes was a healthy $65.7 million, an 88% increase from the $35 million in the previous quarter. As you would expect with such strong operating cash flow, we were able to bank $28.2 million during the quarter, which was after investing $45.8 million in our capital projects and operations and returning $15.1 million to shareholders in the form of dividends and share buybacks. All told, a satisfying performance relative to the previous quarter, although some way off the profitability levels we enjoyed a year ago when our gross margin was 48%, a consequence of a significantly higher price environment in 2011, and also the impact of additional depreciation from Dolores and higher royalties in Bolivia.

  • Overall Q3 was a relatively clean quarter with very few unusual items having an impact on our results. We were able to sell down some of the metal inventories that we built up during Q2. In total we sold some 6.3 million ounces of silver and 32,800 ounces of gold, thereby reducing inventories by some 0.4 million ounces and 4,500 ounces of gold. These inventories were drawn down mostly from Manantial Espejo and Dolores, where after tax margins are relatively thin. We calculate an after tax contribution to earnings of approximately $3.6 million from the sale of inventory during Q3 2012.

  • Steve has touched on some of the impacts that cost escalation is having on our business. Overall we've seen about an 11% increase in our average cost per tonne in Q3 over costs from a year ago compared to our budget expectation of a 9% increase. Ironically it is our most profitable mine, Alamo Dorado, where throughput rates have been challenged by harder than expected ore that have taken our consolidated cost per tonne above our expectations. Alamo's cost per tonne are up about 20% compared to an average increase at our other operations of 7% year-over-year.

  • The higher production costs that you see on our income statement compared to Q3 of 2011 with a combined effect of more sales volume by an incredible 41% on an equivalent silver ounce basis and the cost escalation just described.

  • Price adjustments relating to previously reported sales were not a material item for us in Q3 as they were in the prior quarter. The combination of price and quantity adjustments from our concentrate contracts resulted in a $1 million negative adjustment to revenues in Q3.

  • We recognized a downward adjustment of $3.4 million to the gain that we had previously recognized on the sale of Quiruvilca. The adjustments related to final settlements on working capital balances at the time that the mine was sold and capital projects that we had undertaken to complete. No further adjustments are expected from the disposal of Quiruvilca other than the potential for income from the ongoing silver stream and royalty interest that we retain.

  • Our effective tax rate for the third quarter was 45% which was higher than the 30% to 35% we would expect in the long term, principally due to the effect of the loss on derivatives, which added 8.5% to our effective tax rate.

  • Moving to the balance sheet, we saw a $15.8 million increase in working capital reflected primarily in higher cash and short-term investment balances, partially offset by normal cost increases in accounts payable.

  • Cash and short-term investment balances ended the quarter at $548 million with working capital at a solid $784.6 million.

  • We completed our share buyback program during the quarter spending $7.5 million to buy back and cancel an additional 0.5 million shares. In total we have bought back and canceled 5.4 million shares at a cost of $124.9 million.

  • We also obtained approval to buy back an additional 7.6 million shares up until the end of August 2013 as a potential way to continue returning value to our shareholders.

  • With that, I'll hand it back to Geoff for some closing comments.

  • Geoff Burns - President and CEO

  • Thanks, Rob. There's not much we need to report with respect to our Navidad project. As we discussed last quarter, we have throttled back our spending and are waiting to see what will happen with the provincial legislation. Navidad is an amazing deposit and I know that we will have a chance to unlock its value one day but for the moment it's stalled. The provincial government has continued to study the situation carefully and I am still of the opinion that it was not the provincial government's intent to render Navidad uneconomic and dissuade further potential investment in mining in the Province. I still don't think the draft legislation as it was presented in June is going to pass. There will be some modifications. We'll just have to be patient and let the political process work and evaluate our next steps when the final legislation is passed, which I believe might well happen before the end of this year.

  • We, as Steve mentioned, we are not sitting idle though. We have redeployed our project team and are working out some other pretty interesting organic opportunities to grow our production. As Michael described, drilling at La Colorada continues to return wonderful results and we have clearly reached a point where the size of the resource dictates that we reevaluate the optimal mining scenario at La Colorada and we have started, as Steve mentioned, the process of evaluating a mine expansion.

  • In addition, we are cranking up our work program at waterloo. Having been equally encouraged by the positive drilling results we have seen and the warm reception we have received from the San Bernardino County. It is still early days but I am hopeful we will be able to create some real long-term value from this plus 100 million ounce resource.

  • Lastly, we have been progressing our evaluation of the milling option at Dolores. Without going into any further details, the project is really starting to take shape. We were hoping to have the scoping level study done to share with you before the end of this year but it now looks like it might slip into the first quarter of 2013. Suffice to say at this point I really like what I am seeing.

  • I'd like to close by making a short observation. In spite of a plus 20% decline in the price of our primary commodity, silver, and some difficult obstacles to manage around in Argentina, Pan American continued to generate solid earnings and cash flow, continues to return cash directly to our shareholders, continues to be responsive and innovative and move forward with growth projects and while I remain optimistic that we will see the prices for both silver and gold move materially upward, given the ever worsening government debt levels, I am comforted to know that Pan America remains in excellent condition even as prices have drifted lower.

  • With that, I would now like to open the call to questions.

  • Operator

  • (Operator Instructions). Your first question comes from Chris Lichtenheldt with UBS.

  • Chris Lichtenheldt - Analyst

  • Situation at Manantial, first you said -- I think you said the equipment availability has improved a little bit and your ability to bring parts in is a bit better. Can you describe a little bit what's happened there to make that better and will that last?

  • Steve Busby - COO

  • Hi, Chris, yes this is Steve. It's really the situation is finally starting to resolve itself relative to the government recognizing what they can actually produce in country and what they can't so there's a lot more clarity there. There's a lot more systems in place now that if we'd worked through the systems of importation of parts we kind of know the ropes, if you will, of how to get parts into the country better now under this new scenario and things are starting to flow. Our availabilities on some of our critical pieces of open pit gear fell even below 50% here over the last three months or four months.

  • During October we've seen that turn around; in October lots of that gear was up into the 60% and even 70% availabilities and we know we still have some major rebuilds to do. We still have those parts coming in. We're seeing them at the port and coming through the ports, so we're optimistic we've reached bottom and we're pulling ourself out on those availabilities right now.

  • Chris Lichtenheldt - Analyst

  • Okay that sounds good and secondly, you said you'll be going back in. You've achieved some of the waste removal that you needed to. Will there be potentially an improvement in your ability to repatriate funds in conjunction with higher cash flow or is that still a chance?

  • Steve Busby - COO

  • Hi, Chris. That remains a challenge right now. We have been able to repatriate funds through the repayment of interest and scheduled loan repayments on our investment going into the country but in terms of our ability to repatriate dividends while we have applied and have not been rejected, essentially nothing is moving and it isn't in a rejection; it's just there is no response. So, as it stands today, no we have not seen any light I guess at the end of the tunnel in terms of moving cash back out of the country. And offhand I don't expect that to change in the near term. I think it's going to be a little while before the Central Bank in Argentina had decided that it has sufficient reserves to allow for a freer flowing of US dollars out of the country.

  • Chris Lichtenheldt - Analyst

  • Okay good to know and so we should expect production to return somewhat normal, sales to improve but then an accumulation of pesos?

  • Geoff Burns - President and CEO

  • Yes, Chris, I just -- we're not going to push hard. Just there's no other way to say this nicely and but it does not make sense to me to try and crank production back up and take advantage of our highest grade material when we're ending up leaving pesos in the country of Argentina, which I think are at the moment are very susceptible to further exchange rate deterioration relative to US dollar so we are going to improve our production. I mean we can do better than we did last quarter as we fight through, as Steve mentioned, some of our availability issues but I am not going to push that asset at the moment. It just doesn't make sense to do that.

  • Chris Lichtenheldt - Analyst

  • Yes makes sense, and then finally just actually is there any practical way to hedge against some of the potential devaluation of the currency if you are sitting on pesos or do you?

  • Geoff Burns - President and CEO

  • We're investigating alternatives but, as it stand today, the forward market that is available gets you out to about seven to one relative to today's current exchange rate, which is 4.75 to one, so there really isn't -- the most effective way and it is frankly what we did, which is reinvest into the setting the mine up for better performance in the future. As Steve mentioned, we did acquire a new shovel and again that's a reinvestment but we're investing in essentially hard assets versus just leaving the money in the bank.

  • Chris Lichtenheldt - Analyst

  • Right okay thanks a lot.

  • Operator

  • Adam Graf, Dahlman Rose.

  • Adam Graf - Analyst

  • Question maybe for Geoff, on a global basis outside of the issues in Argentina, what are you guys seeing as far as labor and capital cost inflation here?

  • Geoff Burns - President and CEO

  • In Mexico I would say it's a little bit country specific so I am going to through them in order. In Mexico we're seeing relatively low levels of inflation in the sort of under 5% range, both for labor and commodity inputs into our operation.

  • In Peru it's a little bit higher than that, largely driven by labor. Some of the labor increases are a little higher than the kind of 5% range, in the 7% range. And we have seen some increases in energy and the costs of energy, but in general it's not but and I am talking operations specifically now, pardon me. It hasn't been out of line.

  • And in Bolivia, again, it's been relatively stable in the under certainly the under 10% range on an operating cost basis outside of Argentina, as you mentioned, where things are 25% and 30% and then they have remained at that level.

  • On a capital cost basis we're not at the moment engaged in any major projects, partly by circumstances and also partly by choice to be honest, because we're still seeing some pretty hefty cost inflation on capital projects. I think you're seeing the same thing announced by other very large companies that are facing those issues but we are starting to see it turn a little bit with some of the announcements of it's on the very large mining companies, [Tech] and Newmont and others of that size are deferring projects. It is going to take some of the pressure off capital costs and where that ends up it's probably too early to make a call on how much that pressure will ease off in the coming months.

  • Adam Graf - Analyst

  • Great. Thank you very much.

  • Operator

  • John Bridges, JPMorgan.

  • John Bridges - Analyst

  • Wondered, we were thinking that there might have been a concentrate, a positive concentrate adjustment, which would have given you better than market lead/zinc prices. Was there any? What was the concentrate just on this quarter?

  • Robert Doyle - CFO

  • Hi, John, Rob here. Actually in total it ended up being a small negative. I was a little bit surprised by that too and then when we dug into the details what ended up happening actually was a lot of QPs with [x ed] in the early part of the quarter when rate prices were -- you know, when you look at most of the metal price graphs really September was a good month though we saw a lot of -- you know, a good run up in metal prices, but the first couple of months of the quarter were relatively soft and that's when we had an over weighting of pricing.

  • There were also, specific to your Mexican operation, there were some quantity adjustments that flowed through in the quarter, which were negative and pulled that over to a negative overall adjustment in the quarter.

  • John Bridges - Analyst

  • Okay it was primarily timing.

  • Robert Doyle - CFO

  • Correct.

  • John Bridges - Analyst

  • Okay and then I just wondered, how much money are you going to put at risk in California prior to getting permits and being able to have the right to mine there?

  • Geoff Burns - President and CEO

  • Yes we're -- you know, as Michael said we're looking at about $1.7 million program right now. We'll probably look at something around $2.5 million to $3 million next year, which should put us in a pretty good position to have defined a 43-101 level resource, as well as probably get, at least on paper, an early stage scoping study done. We probably aren't going to go much further than that so in total that's about $4.5 million to $5 million and we probably wouldn't go much further than that without getting some real clarity on our ability to permit and move that project forward.

  • John Bridges - Analyst

  • Okay good and then just a silly question, I just wondered if you knew how good La Colorada is turning out to be would you have bought Dolores?

  • Geoff Burns - President and CEO

  • Yes, John, absolutely. I mean we had indications of how positive the results were at La Colorada and even a year ago at this time had started talking about gee whiz maybe it's -- maybe we better start looking at what the optimum mining rates are there and what our potential is to expand. I mean I really like what we're seeing at Dolores. We're a little slow in getting where we thought we were going to be.

  • There is, to be blunt, there was a few more issues to overcome than we had assessed during our due diligence but the issues I am seeing they're all solvable. They're just -- they're we're not -- we're talking a few months of delay relative where we thought we'd be and the ore body it's a 16, 17-year ore body and, as the guys described, I think there is a significant potential to go underground somewhere during that 16 or 17-year mine life.

  • You know, we still need to determine that and with the mill option that we're looking at right now, again I don't want to -- I can't go too far because we don't have enough preparation but we've seen some very positive results in our metallurgical testing and how we relate that to our remodeling of the ore reserve. So no I am pleased that we have Dolores and I am pleased that we're now, as it's turned out, much more overweight Mexico than we were several -- at the start of the year, frankly.

  • John Bridges - Analyst

  • Okay great; thanks for the question. Good luck, guys.

  • Operator

  • (Operator Instructions). [Robert Alpert], [Cutlass].

  • Robert Alpert - Analyst

  • Joined your call a little late so I apologize. Can you review your capital allocation, stock buybacks, what you're doing with cash flow, where you expect that to be? Thanks.

  • Geoff Burns - President and CEO

  • Actually pardon me; could you -- we only caught about half of your question there, Robert. If you wouldn't mind could you repeat that?

  • Robert Alpert - Analyst

  • Sure. I apologize again if it's another -- if it's repetition for you but could you review your capital allocation going forward in terms of stock buyback, where you expect -- how much CapEx, where you expect free cash flow to be and where you're going to allocate your capital expenses?

  • Geoff Burns - President and CEO

  • In terms of our current planning, we don't have any major projects that we have completely defined at this moment in time, so our capital expenditures relative to our operating cash flow will be limited to sustaining capital. And I'd see that as probably the case at least for the next 12 months until we get more definition on our organic growth opportunities.

  • We're spending in the neighborhood of about $4.5 to $5 per ounce on average per ounce of production on capital or sustaining capital, so give or take to bode $100 million a year.

  • In terms of our ability to generate cash flow, at these pricing, price levels, I'd see us anywhere from $150 million to $200 million of bankable cash over an annual basis and we will be looking predominantly towards the dividends and a potential increase in dividends as a way of distributing that cash back directly to our shareholders. We looked at it very briefly. We did increase our dividend literally last quarter.

  • We looked at it very briefly this quarter but we're right in the middle of our annual budgeting process and I think I certainly would be more comfortable once I've gone through that entire process and know with certainty what next year is going to look like subject to variances in silver and gold prices before I bring that topic back up with our Board of Directors. But I am confident that we'll be in a very good position come February to look at increasing our dividends substantially from where we are today.

  • Robert Alpert - Analyst

  • And stock buybacks?

  • Geoff Burns - President and CEO

  • We have a program in place right now, as we mentioned. I can tell you right at the moment we're not active with that program. It's available to us. We did complete our full program last year and I would say at these price levels I don't see us entering the market to repurchase. We continually reevaluate our share price and what we believe our net asset value is and cash flow generating capacity is and should we see more softness in the price, we would probably go back and enter the market again. But, as I said, our preference predominantly is to try and increase our dividend.

  • Robert Alpert - Analyst

  • Thank you.

  • Operator

  • Ladies and gentlemen, this concludes the question and answer session. I will now turn the call back over to Mr. Burns.

  • Geoff Burns - President and CEO

  • Thank you, operator, and thank you participants. It's always a pleasure to be able to update you on our progress and status and I look forward to doing it once again in mid February. Thank you.

  • Operator

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