Pan American Silver Corp (PAAS) 2015 Q2 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Pan American Silver second-quarter 2015 conference call and webcast. As a reminder, all participants are in listen-only mode, and the conference is being recorded.

(Operator Instructions)

At this time, I'd like to turn the conference over to Ms. Kettina Cordero, Manager Investor Relations. Please go ahead.

Thank you, operator. Good morning, ladies and gentlemen.

Welcome to Pan American Silver's 2015 second-quarter results conference call. Today I'm joined by our CEO Geoff Burns, our President Michael Steinmann, our Chief Operating Officer Steve Busby, and our Chief Financial Officer Rob Doyle.

I would like to start this call by reminding our listeners that this call cannot be reproduced or retransmitted without our consent and 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 that reflect the Company's current views with respect to future events and are 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 newest release dated August 13 as well as factors identified under the caption Risks Related to Pan American's Business in the Company's most recent form 40-F and annual information form. Investors are cautioned against attributing undue certainty 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 pass the call to Geoff.

Thank you Kettina, and good morning, ladies and gentlemen.

I will start with a brief recap of what was a very strong operational quarter, both production and cost wise. And then I will let Steve, Michael and Rob provide additional detailed commentary on our operations and projects, our exploration programs and our financial performance during the second quarter before opening the lines for a Q&A session.

To begin, I am pleased to announce that yesterday, our Board of Directors approved a third quarterly cash dividend of 2015 in the amount of $0.05 per common share. The dividend will be payable on or about Tuesday, September 8, 2015 to holders of record of common shares as of the close of business Tuesday, August 25, 2015. Pan American's dividends are designated as eligible dividends for the purposes of the Income Tax Act of Canada, and as is standard practice, the amounts and specific distribution dates of any future dividends will be evaluated and determined by the Board of Directors on an ongoing basis.

A quick look at our production performance during the second quarter of 2015, we produced 6.65 million ounces of silver, 1% more than a year ago and 9% more than the first quarter of this year.

With the exception of Alamo Dorado, which produced 250,000 ounces less silver, all of our operations achieved silver production gains which were more than sufficient to offset Alamo Dorado's decline. In addition we produced 44,400 ounces of gold, 18% more than both a year ago and in the first quarter of this year, thanks to larger quantities of gold produced at the Manantial Espejo and Dolores.

We also saw a nice decline in our cash costs, which were $9.44 per silver ounce, 24% less than a year ago and 20% less than in the previous quarter. This was achieved thanks to lower operating costs at all our operations, higher by-product credits from increased gold and copper production, the benefits of depreciation of local currencies and lower diesel and reagent costs.

We also saw a good improvement in our all-in sustaining costs per silver ounce, which were 14.46 net of by-product credits, some 20% lower than a year ago. This is primarily achieved due to the reduction in cash costs just mentioned, lower G&A, lower sustaining capital expenditures, and an increase in silver ounces sold. Even with significantly lower metal prices, both our cash costs and AISCSOS were well below our annual forecast, and we believe that if by-product prices remain near current levels, that our annual cash cost and AISCSOS will be below or at the low end of our guided ranges for the full year of 2015.

As we increased our silver and gold production, reduced our costs, our financial results this quarter still suffered from the decline in silver, gold and base metal prices we have experienced as compared to the same period last year. On the positive side, even with these price headwinds, we were still able to generate $20.6 million or $0.14 per share in operating cash flow, enough cash to pay for our sustaining capital and to fund our dividends, which means we only had to use our Treasury to cover our long-term value-adding growth projects.

I believe this is a pretty impressive accomplishment and a testament to the efforts our operating teams have expended to increase productivities while simultaneously reducing costs. We have and we will continue to fight the good fight as we adjust to the now extended period of lower prices.

Now over to Steve for an update on our operations and projects.

Thank you, Geoff.

As Geoff mentioned, in comparison to the second quarter of 2014, we managed to successfully increase silver production at six of the seven mines we operate that effectively offset the expected reduction from our Alamo Dorado mine in Mexico which is reaching the end of its reserve life, all the while reducing our unit operating costs per ton across the board, registering a 14% reduction on a consolidated basis.

Furthermore, in terms of a bounceback quarter, we managed to meaningfully increase silver production at all seven mines for this 9% increase on a consolidated basis and registered a 19% reduction in our consolidated cash cost per ounce compared to the first quarter of 2015. But for disruptions to our excellent safety records, Q2 2015 marks one of the most successful operating quarters we have had in the Company. I would like to make a few more comments on each of our individual operations with the following comments.

Starting off in Argentina, our Manantial Espejo mine overcame some incredible challenges to produce 900,000 ounces of silver and 44,400 ounces of gold, representing increases of 11% and 34% respectively over the same quarter of 2014 due to the expected mine sequencing. Fueled by these production increases, particularly in gold, cash costs fell 66% from the previous year to $6.18 per ounce for the quarter. Looking forward, we expect similar silver and gold production performance for the remainder of the year with average cost perhaps closer to $9 per ounce given lower expected gold prices and some additional cost escalation expectations barring a significant currency devaluation.

In Bolivia, our San Vicente mine produced slightly over a million ounces of silver at a cash cost of $11.44 per ounce, which was 6% greater production at 12% lower cost compared to the same quarter of 2014, largely due to mine sequencing and benefits from lower operating costs and royalty payments. We are expecting reasonably steady state production and costs for the remainder of the year at San Vicente.

In Peru, our Huaron mine produced similar silver production during the quarter to that of the same quarter of 2014 with 31% more copper, 7% more lead, and 19% less zinc due to mine sequencing pushing towards more productive mechanized mining areas within the mine. This mechanization effort also served to reduce our cash costs 21% from the previous year to $8.96 per ounce despite lower by-product prices, thanks to a 20% reduction in unit operating cost per ton. We are expecting reasonably steady state production and costs for the remainder of the year, albeit with not quite as much copper being produced as we've seen during the first half of 2015.

Our Morococha mine on Peru produced 560,000 ounces of silver during the quarter, which was slightly more than the same quarter last year but with nearly 450% increase in copper production, partially offset by a 42% decrease in zinc and a 60% decrease in lead production, driven by the changes in mine sequencing I discussed last quarter as we push towards more mechanized mining areas that happen to contain higher copper grades. This push towards mechanization drove our unit cost per ton down 28%, which when coupled with the changed base metal production mix slashed our cash cost per ounce 45% compared to last year to $9.78 per ounce. We are expecting reasonably steady state production and costs for the remainder of the year at Morococha, perhaps with some offsetting differences in the polymetallic byproduct mix.

At our Alamo Dorado mine in Mexico, silver production fell 25% as expected from the year before to 770,000 ounces at 37% greater cash cost of $15.25 per ounce as we deplete the last remaining ore from the open pit blending greater amounts of lower grade stockpile ore. We expect steady state conditions for the remainder of the year after which we will have completely exhausted the open pit ore and will begin processing only low-grade stockpile ores into 2016 for as long as is economically possible.

Our La Colorada mine produced 1.3 million ounces of silver at a cash cost of $7.85 per ounce for the quarter, improving on last year's results thanks to throughput increases being realized with some of the expansion equipment brought into service. The operation is expected to remain in steady state throughout the remainder of the year as we advance on the exciting exploration project that is fully underway.

With regards to the expansion project, we managed to complete the critical pilot hole for the 5.1-meter diameter, 600-meter deep raised bore shaft and actually began full diameter boring in July post quarter end. In addition, civil works for the new sulfide plant are in full swing, and the grinding mill concrete foundations were poured literally just a few days ago.

We continue to work on authorizations to allow construction of the new power line while completing the engineering works and fabrications for both the new shaft and plant construction. We spent approximately $7.1 million on the expansion project during the quarter, bringing total spending to approximately $42 million thus far with about 50% of the total expected capital expenditure being committed. Despite the greater time than expected we needed to complete the critical pilot hole on the raised bore shaft, we expect the overall expansion project will be completed reasonably on time and within budget, allowing us to progressively increase throughput to the 1800 ton per day target beginning in 2018.

Our Dolores mine in Mexico produced 1.1 million ounces of silver and 20,200 ounces of gold, which was 6% and 19% greater than production from the second quarter of 2014 respectively. We are benefiting from savings in diesel, some reagents and a favorable exchange rate on currency which combined with production increases drove our cash cost down 33% to $8.34 per ounce despite the lower gold prices. For the remainder of the year, we are expecting reasonably similar production, but with perhaps slightly higher cash costs being negatively affected by lower gold price assumption.

We are also mindful of a possible production dip that may occur during the heavy seasonal rains expected to begin at any time now. Meanwhile, our project teams are deploying effectively on the expansion project with our underground ramp now advanced to 282 meters, our power line installation is nearly 30% complete, and we have launched the engineering effort for the new pulp agglomeration plant which should begin construction before year end.

Before I conclude my commentary, I must report that we were struck with a stark reminder of the hazards associated with our business this quarter, and I'd like to take this opportunity to make it clear that safety of our employees and contractors is absolutely paramount at Pan American Silver Corp. We will never sacrifice safety under any circumstance, period. We have proven our mines can be built and operated safely, and we will relentlessly endeavor to prevent harmful accidents from occurring at our sites.

With the half year completed, we can confidently reaffirm our full-year 25.5 million to 26.5 million ounce silver production target and 165,000 to 175,000 ounces of gold while anticipating cash costs to come in at the lower end of our guidance of $10.80 to $11.80 per ounce.

With that I will now turn the call over to Michael Steinmann.

Thank you, Steve, good morning.

During Q2, we drilled a total of 29,000 meters around our seven operations for our resource and reserve replacement programs. We spent a total of $2.9 million in the quarter on drilling-related costs.

Looking at the first six months of the year, we drilled a total of 53,200 meters, or 64%, of our 83,000 meter annual plan. But due to the industry-wide cost decreases, we spent only $4.2 million of the $10 million budget. These lower than planned drill and personal costs would allow us to expand our annual drill programs, focusing on the exceptional results from La Colorada, Huaron and Manantial Espejo.

Most drilling took place at La Colorada with over 8700 meters and at Huaron with over 7100 meters. The exploration program at La Colorada is on budget, but substantially smaller compared to the last few years as exploration activities are restricted in certain areas due to the development work for the mine expansion. These restrictions will continue during 2015 and early 2016.

The geology team at Huaron is still exploring and expanding the Pozo D ore body in the northern part of the mine, and at Manantial Espejo, we have been focusing on the Maria East expansion. Let's start with Huaron. You should see now a long section of the Pozo D ore body on your screen, which is sandwiched between the Pozo D vein and the [Sucha] split vein. Holes highlighted in red were drilled during Q2. The ore body's currently about 200 meters long and shows in some areas impressive width.

In the central zone, one hole returned to the down hole intersect of 80.6 meters containing 182 grams silver per tonne, 4.3% lead and nearly 8% zinc. The true width of the ore body at that location should be around 65 meters.

Another hole returned 18.4 meters with 199 grams silver, 4% lead and 6.5% zinc. Of the more variable outer fringes, the Pozo D ore body shows impressive wide mineralization in the central part with over 30 meters in several locations.

We will continue our drill efforts in this zone in order to convert larger parts of the ore body into the reserve categories by the end of the year. Production of Pozo D ore body continues along level 250, with a monthly mill feed of about 5,000 pounds.

As mentioned above, we drilled about over 8700 meters at La Colorada. Similar to Q1, we focused our drilling on the Amarillo and Recompensa structures located in the Estrella and Recompensa zones. The Amarillo vein is now one of our largest producers and keeps returning high grade exploration results like 2.36 meters wide intersection with 450 grams silver, 5.6% lead and 4.2% zinc, or over 2 meters containing 1020 grams silver, 3.6% lead, and over 22% zinc.

On this slide, you can see a long section of the Recompensa vein which is located to the north of Amarillo. Recompensa is currently the vein with the smallest reserves and resources. Proof and probable reserves are indicated in red and blue respectively. Resources are colored in green.

Drilling in Q2 expanded the high-grade mineralization substantially to the east, returning impressive intersects like 1.1 meters with 1057 grams silver, 1.65 meter with 993 grams silver, 3.7% lead and 6% zinc, or 2.9 meters with 904 grams silver, 6.9% lead and 4.5% zinc just to mention a few. Drilling will continue along both of these veins, and I expect substantial resource additions at the end of the year.

On my last slide, I would like to discuss Manantial Espejo. As mentioned before, we completed our 4700 meters of drilling at Manantial during Q2, which includes about 1600 meters of RC drilling.

Similar to the first quarter, we focused our drill efforts on the east side of the Maria vein east of the current Maria pit and on underground development which is shown on the long section in orange colors. Drilling extended the vein about 460 meters to the east, returning impressive results. The vein shows variable width between about 1.6 to 4 meters. One drill hole returned up to 14 meter down hole intersect.

Silver and gold grids are very high, running in the range of 500 gram per ton silver equivalent of up to multi-kilogram silver equivalent which are typical grades for the Bonanza zones at Manantial Espejo. An underground infield drill program will start later this month and continue for the rest of the year, which will hopefully increase the resources for our December 31 estimate.

Overall, our exploration programs are advancing as planned at all of the mines, and I'm very pleased with the results so far. Resource replacement for 2015 is right on track and even with the limited drilling at La Colorada. The impact of these new resources to the year-end reserve statements will obviously depend on the metal prices used for the estimates, but I'm sure that many of the impressive exploration results we have achieved during the first six months of the year will make it into the reserve update on December 31.

I'd like to pass it on to Rob for a review of the financials.

Thank, Michael and good morning.

As Geoff touched on, we generated healthy operational cash flow before interest and taxes of $30.1 million in Q2, which was sufficient to fund all of our sustaining capital, which amounted to $17.7 million, our dividend payment of $7.6 million, and our tax payments for the period of $7.7 million.

We did utilize our Treasury to fund our expansionary project capital of $11.8 million, which together with the net repayment of leases reduced our cash and short-term investment balances by $17.5 million to end the quarter at $274.9 million. We remain in a strong liquidity position with total debt of only $61.8 million.

Our Q2 all-in sustaining cost per silver ounce sold is presented by mine site in the graph that you should see on your screens now. We calculate a consolidated AISCSOS of $14.46 per ounce for Q2, and that's 20% lower than the comparable quarter of last year. For the first six months of the year, our AISCSOS was $14.35, 13% better than for the same period of 2014 and nicely ahead of our guidance for the full 2015 year of $15.50 to $16.50 per ounce.

The main drivers causing the lower AISCSOS for Q2 were lower net realizable value or NRV adjustments, lower sustaining capital and G&A, as well as more ounces of silver sold in Q2 2015 than in Q2 2014. AISCSOS for the first six months of 2015 benefited from the same factors other than the fact that we sold less silver in the first half of this year than last year.

The mines that showed the largest declines in AISCSOS were Dolores, where lower NRVs and higher gold by-product credits were generated, and at Morococha, where significantly higher copper by-product credits were produced. The only mines where AISCSOS increased were Alamo Dorado and Manantial Espejo, both primarily due to lower by-product gold credits and selling less silver in Q2 2015 compared to a year ago.

Select information from our Q2 income statement should be on your screens now compared to the previous quarter of 2015, as well as the comparable quarter of 2014. Our revenues in Q2 2015 were slightly below revenues from last quarter, primarily as a result of $4.5 million negative sales adjustments while higher quantities of metals sold were offset by higher TCRCs from our increasing copper sales.

Our sales for the quarter were roughly equal to the value of metal produced as we drew down on silver inventories but built up gold and copper inventories. Q2 2015 cost of sales included an NRV charge to inventory of $1.5 million, which, together with the $4.5 million of downward settlement adjustments, negatively affected our mine operating earnings for the quarter.

We saw the Canadian dollar strengthen during the quarter, which was the main driver behind the FX gain of $1 million. As of June 30 we reduced our cash and short-term balances held in CAD to 9% with a further 10% in Mexican Pesos and the remainder held in US dollars.

The main factors that caused the deterioration in adjusted earnings from the comparable period of 2014 are shown on the waterfall graph on your screens now with the $40 million effect of lower metal prices on revenue being the main one, exacerbated by higher realized FX losses. Although we sold significantly more silver and copper in Q2 2015 than we did in Q2 2014, which together with a drop in our taxes and operating cost reductions partially offset the lower prices, we ended up with a net decline in adjusted earnings of some $13 million from a year ago.

Now a brief review of our working capital portion of our balance sheet. We saw a decrease of $18.7 million in our overall working capital balances with working capital just below $470 million at quarter end. The change in working capital was principally reflected in lower cash and short-term balances previously described, in higher accounts and loan payables and low inventory balances resulting from the NRV charge and partially offset by higher accounts receivable and lower lease balances.

Together with our strong balance sheet, we are pleased to have established a senior secured credit facility with a syndicate of eight lenders during Q2. This is a four-year $300 million secured revolving line of credit that matures in April 2019 and is available for general corporate purposes including acquisitions.

No drawings have been made under the facility to date, when combined with our excellent balance sheet liquidity with cash and short-term investments of some $275 million, working capital of $470 million and debt of only $61.8 million, this facility puts us in a very strong position to fund our future growth plans. With that I will hand it back over to Geoff for closing comments.

Thanks, Rob. After a slow start to the year, our production rebounded nicely during the second quarter such that in the first half of the year, we now produce 12.17 million ounces of silver and 81,900 ounces of gold, pretty much right on target for our silver production and slightly ahead of where we thought we would be for our gold production.

Our operating costs continued to decline. For the first half of 2015 we posted AISCSOS of $14.35 per ounce and cash cost of $10.53 net of by-product credits, both below our annual consolidated forecast.

As you heard from Steve, our La Colorada expansion project advanced as planned with good progress made on all fronts. We kicked off the Dolores pulp agglomeration and expansion project with detailed engineering for the pulp agglomeration plant and have already advanced the development for the new underground mine ramp close to 200 meters. Both projects are now in full swing, and we look forward to updating you on the progress again when we discuss our third-quarter results in November.

Before opening up the call for some Q&A, I just wanted to close my remarks by looking at how our organic growth projects at La Colorada and Dolores are going to transform Pan American silver. As you can see from the slide on your screen right now, we are going to be losing silver and gold production from our hugely successful Alamo Dorado mine as we finally exhaust its reserves.

However, with the expansions at both La Colorada and Dolores, we will more than be able to offset this loss with new incremental silver and gold production. In fact on a consolidated basis, we expect our silver production to grow by another 5% to 10%.

But most importantly, the new incremental production will be at a significantly lower cost base, which will meaningfully lower our consolidated cash costs in AISCSOS. Net-net, we will be increasing our silver production, while simultaneously lowering our costs, and we will be doing so with lower risk organic projects where we don't have to absorb premium driven acquisition costs. These projects when complete will make Pan American a stronger and even more competitive silver producer, and we will be financing this growth not from debt, not from equity, but from our own cash reserves.

With that, I'd like to ask the operator to open the call to questions.

Thank you.

(Operator Instructions)

Thank you. Our first question is from Craig Johnston from Scotiabank.

Hi guys, thanks for taking my call. Congrats on a solid quarter. A couple questions, mainly just housekeeping. Firstly with Morococha and the revised guidance given the change in mine sequencing, just wondering if you guys could provide some guidance in regards to grade for the base metal production for the second half of the year?

Yes, Craig this is Steve. It's probably best I follow up with you on that. I don't have those right in front of me right now. Can I give you a call later on?

Yes, for sure, that sounds good. My second question might be the same answer, but just on Alamo Dorado, just trying to get a sense of where you expect the stockpile grade to be at the end of the year and what we should think about in terms of 2016 and 2017 as it winds down, what type of grade you will be processing?

Yes, we're expecting somewhere in probably the 40 to 50 gram range. We do have areas that's a little higher than that, but probably on the low side 40, and the high side 50, 55.

Okay thanks, Steve, and maybe Geoff, more question for you. Just in regards to the $300 million revolving credit facility and talking about where things are in the market right now with silver prices, any update on strategy in terms of growth?

Obviously you highlighted how you have a very good growth profile, but anything else that you're seeing on the market, has your view changed on acquisitions at all? Just wondering if you could highlight that.

Sure, Craig. I think as we probably have said just about every conference call, we continue to monitor our sector very carefully and look for opportunities where we think we can create value either through exploration or improving operations, et cetera. The $300 million is obviously sitting there to take advantage of perhaps one of those opportunities should we decide to move on it.

I will say this, I will say that since the last time we spoke in May that we have started to see some values come down where they are becoming of interest. For the longest time, you compare everything on a relative basis, and it seemed like -- I'm going to say exploration and development, silver companies were deteriorating at the same relative rates as the producers like ourselves.

But we've seen that gap start to grow which is a good thing from our perspective. And we're very aware of what we would like to do and adding another asset to our portfolio and doing it at a time when frankly values are fairly low.

Okay, great. Thanks everyone.

Craig before we leave, this is Steve again. I just looked up while Geoff was speaking, but our base metal and silver grades at Morococha for the second half of the year they should be reasonably close to what we saw during the first half.

Okay, great. That's helpful. Thanks guys and have a good weekend.

Thank, Craig.

The next question is from Jim [Boleyn] from [Ulbarmin] Asset Management.

Thank you for taking my question. This fall, Argentina is going to have another election, Cristina Fernandez is not eligible to run. I'm just curious, if you were to get a change in attitude toward investments by the Argentine government, what impact would Navidad have on the Company going forward?

Jim, Navidad is probably the best undeveloped silver deposit in the world today and has been for awhile. And an ability to actually move that project forward would be the classic sea change for Pan American, particularly given that I would suspect that there's almost no value remaining in our current share price attributable to Navidad.

For that to happen, I think there's a few things we would need to see. The primaries were held last weekend, and Daniel Scioli came out of the pack as the leading presidential candidate. He has been at least publicly very supportive of the mining industry and has made it a platform of his re-election campaign, and that seems positive.

The final elections are in October of this year, and we will see who comes out of that group ahead at the end of the day. But not only does there have to be I'm going to say the platforms that -- we have to actually see some changes, and it is still a difficult environment with inflation running in the 25% to 30% range. It is still difficult to import certain critical materials for our current operation at Manantial Espejo.

I sincerely hope that with a change in the regime that we might see a more friendly environment on both those fronts which would allow us to move ahead and develop Navidad. There's nothing I would like more having participated in the purchase of that asset some almost five years ago now and looking at what a wonderful asset it is, there's nothing I'd like more than to be able to bring that forward and create value for all our shareholders. So I'm going to say I'm cautiously optimistic, but time will have to tell.

Thank you very much.

The next question is from Troy Beristain, Deutsche Bank.

Hi Geoff, it's Jorge Beristain, DB. I will go by Troy today. Just on your CapEx, wanted to ask -- you've recently pulled your numbers down significantly, your mid point range now down to $95 million-odd.

And was wondering where those reductions are originating from, is that really driven by FX, industry costs, consultants, what have you, parts, steel, whatever, and how does that impact the La Colorada and Dolores CapEx? Have there been any changes and any deferrals into 2015 and 2016 we should be aware of?

Thanks, Jorge, this is Steve. I will address that one. In terms of La Colorada, we're now forecasting somewhere in the $55 million to $60 million range for the full year of 2015 spending, which is quite a bit down from our original forecast.

A lot of it is driven by the delays we had in getting the pilot hole completed for the raised bore shaft. We had anticipated completing that pilot hole some time in the April/May time frame and that took us into June, and we started the full bore in July. So what that's done is pushed is some of those dollars into next year.

In addition on the plant site, we were held up a little bit on getting our final permit for construction by about two to three months longer than we expected. We still anticipate we will get that plant completed well in advance of when the shaft's actually going to start delivering some significantly increased throughput, but it does push those dollars off into next year.

So it's really schedule driven. It's not anything more than that, and we still don't anticipate that's going to impact the overall capital at the end of the day. Our overheads were reasonably managed through that period.

In the case of Dolores, we're now forecasting somewhere around $35 million, maybe as much as $40 million to be spent this year on the various projects between the underground, the agglomeration power line and pad 3 extensions, and that's a matter of getting things kicked off. So we hadn't provided guidance to my knowledge beforehand on what we would spend this year, but that's the range we will be in.

Jorge, just to add to that, we are seeing some reasonable decreases in prices of various things, particularly as we source them through Canada and through Mexico and directly related to the change in the Canadian dollar exchange rate and the Mexican peso exchange rate. I think it would be fair to say that a little bit of the delay we've seen at La Colorada has been probably absorbed by some of the benefits that we've seen there. So net-net as of today, we're still thinking our capital cost is pretty damn accurate from what we put out in our PEA.

And it's just too early on the Dolores side. I think there is the ability to take advantage of those two items I just mentioned, as well as lower diesel prices and a few other things that factor into our capital cost estimate. But we just haven't done the work and we're still in detailed engineering at Dolores. And I know that Steve is going to be reluctant to put out any new forecast numbers on capital until at least that piece has been completed.

Okay, great, and then if I could just maybe ask you guys about how sensitive your current reserves are as stated year-end 2014 to the current silver environment, what you're thinking there or are we going to see any potential offsets as we rebase currency and input costs that may absorb some of the expected decline.

Jorge, it's Michael. It's obviously pretty early in the year to define the reserve metal price right now.

We've seen some strong declines in metal prices and quite a strong rebound in the last few days, so as usual, we will define the price that we're going to use for the year-end reserve update somewhere around November. A lot of things can happen until then, for sure if there are any cost savings available that we see through the year, they will be included in our cut-off calculations.

Thanks, Michael. Can you remind me what you were last using for your cut-off?

Metal price used $18.50 or -- sorry, what was the question, Jorge? $18.50 silver price was used last year.

Got it. Thanks very much.

Thanks, Jorge.

The next question is from Mark [Mahovlich] from RBC Capital Markets.

Hi guys. Actually most of my questions have been answered, but couple little things to touch off. So just following up on Craig's question with respect to M&A. Just wanted to know or make sure that I understood your views correctly, you're still focused and you think the most value creation would come from the developer side of things, or would there be potentially interest in the producing asset?

In general terms Mark, I think our strength is very much in building and operating. So as a target for us, a development stage asset is probably where we see the best opportunity to create value.

And it's oftentimes where in the nicest sense the discoverers and the current owners are oftentimes not versed in building and operating, so there's I'm going to say a clear alignment of opportunity between both. I'm not saying I would exclude other things, but to me that's a logical ground or hunting ground for us to look because of the strength of our group.

Okay, and as a couple people touched on with the material weakness in a lot of these currencies, what are your views on hedging? I know you took awesome hedges on the diesel side of things, but what are your thoughts in terms of the currencies and whether you'd be willing to lock it in at these types of levels?

Well I think in particularly, the Mexican peso has been hit fairly strenuously over the last 8 to 12 months, and I think the last time I looked it was trading somewhere over MXN16.30 to $1. Our two biggest projects we've got going right now which in total are about $250 million in capital, I believe both of them made assumptions either [MXN]14 or [MXN]14.50 in that range in our estimates, so when you're sitting at MXN16.30 there is a clearly an arbitrage there that could help us save some money.

I think that we will aggressively put in place some protection likely on a put call basis to at least ensure a minimum exchange rate north of MXN15, MXN15.5 to $1, while leaving us some further upside if we see further deterioration. But certainly for the projects, we're very capital sensitive. We're going to manage that very tightly, and I think that would just be prudent management at this point.

Makes sense, and that's it for me. Thanks guys.

Thanks Mark.

(Operator Instructions)

There are no more questions at this time. I will now hand the call back over to Geoff Burns for closing remarks.

Thank you, operator. Thank you, ladies and gentlemen for joining us this morning. It was a very solid first quarter but for some incidents on our safety side -- but second quarter, pardon me.

And we've got lots going on with our two projects, and I very much look forward to talking to you again in early November to update you on our third quarter and where we're at. Thank you very much.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.