Pan American Silver Corp (PAAS) 2015 Q3 法說會逐字稿

Welcome to the Pan American Silver third-quarter 2015 conference call.

(Operator Instructions)

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

Thank you, operator. Good morning, ladies and gentlemen. Welcome to Pan American Silver's 2015 third-quarter unaudited results conference call. Today I'm joined by our CEO, Geoff Burns; our President, Michael Steinmann; our Vice President of Business Development and Geology, Chris Emerson; our Chief Operating Officer, Steve Busby; and our Chief Financial Officer, Rob Doyle.

I'd like to remind 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 were 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 dated November 11, 2015, as well as the factors identified under the caption Risk 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 leave you with Geoff.

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

First of all, I'd like to welcome Mr. Chris Emerson to our call this morning. Chris joined Pan American this past August as our Vice President of Business Development and Geology, reporting to Michael Steinmann, our President. Chris will be commenting shortly on our brownfield and greenfield exploration programs. Welcome aboard, Chris.

I'll start with a brief recap of what was a very strong operational quarter, from both a production and cost viewpoint. And then I will let Steve, Chris and Rob provide additional detailed commentary on our operations and projects, our exploration programs, and our financial performance during the third quarter, before handing the call over to Michael Steinmann for some closing comments, and then opening the lines for a Q&A session.

To begin, I am pleased to announce that yesterday, our Board of Directors approved a fourth quarterly cash dividend of 2015 in the amount of $0.05 per common share. The dividend will be payable on or about Friday, December 4, 2015, to holders of record of common shares as of market close on Monday, November 23, 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.

Let's have a look at our operating performance during the third quarter of 2015. We produced 6.61 million ounces of silver, 7% more than a year ago, and basically flat from what we produced in the second quarter of this year. In addition, we produced a new quarterly Company record of 53,600 ounces of gold, 57% more than a year ago, and even 21% more than in the second quarter of this year, thanks to larger quantities of gold produced at our Manantial Espejo mine and our Dolores mine.

We also saw another nice decline in our cash costs, which were $8.74 per silver ounce, net of by-product credits, 31% less than a year ago (sic - see press release, "32%") and down a further 7% compared to where we were last quarter. This was achieved thanks to lower operating costs at all our operations; higher by-product credits, which benefited from the increased copper and gold production; the continued devaluation of local currencies, in particular the Mexican peso and the Peruvian sol; and specifically to lower diesel prices and lower reagent costs. We also saw good improvement in our all-in sustaining cost per silver ounce sold, which were $16.29 net of by-product credits; some 20% lower than a year ago. This was primarily achieved due to the reduction in cash costs I just mentioned, lower G&A expenses, and lower sustaining capital expenditures.

I think it is also worth noting that excluding the net realizable value adjustments of $2.71 per ounce primarily related to Manantial Espejo stockpiles, which have been accumulated over the past several years of mining, that our AISCSOS would have been $13.50 per ounce (sic - see press release, "$13.58"). Even as by-product metal prices have declined, both our cash costs and our AISCSOS were well below our annual forecast, which, as is noted in our press release of earlier this morning, we have now lowered our guidance for both for the balance of 2015. In light of the continued slide in metal prices, I am quite pleased with our financial results this quarter, as we clearly benefited from our strong operating results.

Focusing on cash, we generated $32.9 million, or $0.22 per share, in cash flow from our operating activities, a significant improvement over the first and second quarters of this year. Our third-quarter operating cash flow does include an $8.2 million tax refund related to overpayments in 2014. But even excluding this item, we still generated sufficient cash from our operations to cover our exploration spending, our corporate G&A, pay all of our sustaining capital, and fund our current quarter's dividend distribution. In my opinion, a very acceptable result, given the decline in gold and silver prices we witnessed during the third quarter.

Our balance sheet remains strong. Cash and short-term investments at September 30 were $266.1 million, down approximately $9 million from the previous quarter, even after funding $15 million in long-term expansionary project capital for La Colorada and Dolores, and repaying approximately $5 million in leases. Our working capital position also remains very good at $420 million. And we were actually able to modestly reduce the small amount of leverage we have employed on our balance sheet, as our total debt declined to $58 million at quarter end.

Yes, we continue to use a portion of our treasury to cover our long-term value-adding growth projects. I firmly believe that this is an excellent use of our cash, as it will help transform Pan American into a lower-cost producer. And the projects we are currently executing are exactly the type of investments that I believe our shareholders want us to make.

With that said, I would now like to turn the call over to Steve for an update on our operations and growth projects. Steve?

Thank you, Geoff.

As Geoff has alluded, and despite some significant challenges, we delivered another strong production quarter with better-than-expected cash cost per ounce on a consolidated basis. It is my pleasure to provide you some additional details on each of our individual mine performances and project advances with the following commentary.

Starting off in Argentina, our Manantial Espejo mine produced 928,000 ounces of silver and 22,700 ounces of gold, compared to 972,000 ounces of silver and 13,200 ounces of gold in the comparable quarter last year, despite falling 9% in mill throughput due to an unexpected SAG mill trunnion failure that has since been repaired. Cash costs per ounce were slashed to $4.16 compared to $15.54 the year before, thanks to higher gold production driven by our open pit mine sequencing into higher grade ores and operating cost savings.

Looking forward into Q4, we're expecting fairly similar silver production with perhaps 20% less gold production, which could raise our cash costs up to around $11 per ounce based on the ore quality expected in the final bit to be mined out of the Maria open pit by year end. Meanwhile, we are actively mining the Conception open pit that will provide a significant amount of the mill feed during 2016.

In Bolivia, our San Vicente mine produced slightly over 1 million ounces of silver at a cash cost of $11.23 per ounce, very similar to Q2 of this year, and 36% greater production at 30% lower cost compared to the same quarter of 2014 due to a two-week work stoppage that we had at the mine last year. We are expecting reasonably steady-state production and costs at San Vicente during Q4.

Our Huaron mine in Peru also suffered from an unscheduled mill failure that led to an 8% reduction in mill throughput, resulting in less silver, zinc and copper production, partially offset by more lead production during the quarter compared to the third quarter of 2014. Our Huaron operating team is having excellent success in improving productivities and reducing operating costs, yielding a 16% reduction in direct operating costs per ton, which helped to partially offset lower by-product metal prices and lower production, raising our cash cost per ounce to $11.51, or 7% above last year's Q3 performance. We have completed provisional repairs to the mill, awaiting a full analysis of the precise cause of the failure. We are expecting to see slight increases in metal production, offset by the current low metal prices, which will likely raise our cash cost slightly somewhat during Q4 this year.

Our Morococha mine in Peru produced 564,000 ounces of silver during the quarter, which was 12% less than the same quarter of 2014 (sic - see press release, "11%") due to the change of mine sequencing I announced last quarter where we are targeting higher-value, higher-copper-grade ores. This change in mine sequencing also resulted in producing over 2,000 tonnes of copper for the quarter, which was more than double produced in the same quarter of last year. The changed mine sequencing also results in reduced zinc production by 18% and lead production by 51% compared to last year's quarter. Unfortunately, the erosion of by-product prices, particularly copper, drove our cash cost per ounce up 49% compared to Q3 of last year to $12.59, despite a 21% decrease in direct operating cost per ton that's been achieved with the push towards mechanization.

In addition, we intersected an unexpected water flow in one of our critical exploration [drafts] around the valuable Esperanza high-copper-grade ore zone that has forced us to shut down production in this valuable area in September of this year. We are in the process of installing a bulkhead to control the water flows, and expect to fully regain production in Esperanza in the next few weeks. As such, we are expecting to see a temporary increase to our cash cost to perhaps as high as $15 an ounce during Q4, given the expected reduction of copper production with similar silver and slightly higher zinc and lead productions. So far in November, we have recovered a significant amount of Esperanza production, and we hope to have the area back in full production, which will lower cash costs, by year end.

Our Alamo Dorado mine in Mexico produced 692,000 ounces of silver at a cash cost of $9.50 (sic - see press release, "$9.58") an ounce, benefiting from reduced waste mining rates compared to the third quarter of 2014 as we mine out the final benches of the open pit. We expect similar silver production and costs during the fourth quarter, which will likely be our last full quarter of open pit mining, processing only low-grade stockpile ores in 2016 for as long as is economically possible.

Our La Colorada mine again produced 1.3 million ounces of silver at a lower-than-expected cash cost of $6.76 per ounce for the quarter, thanks largely to throughput increases and a reduction of underground development advances while we finished the new shaft excavation. The operation is expected to remain in steady-state during the fourth quarter, with the operating development rates returning to normal upon completion of the shaft excavation.

This brings me to one of our most notable accomplishments for 2015, and that is, a week ago on November 5 with the outstanding support of Master Drilling of South Africa and Redpath of Ontario, Canada, we have managed to complete the deepest large-diameter raise bore shaft in the history of Mexico. Safely adapting to the more challenging ground conditions than we expected, our team successfully excavated the 617-meter deep raise bore, that is the full 5.1-meter in diameter for the bottom 411 meters of the shaft and neck down to 2.4-meters diameter in the top 207 meters, to safely get through the area of poor ground geotechnical conditions.

Furthermore, post completion of the raise bore, we have successfully cement-grouted the poor ground condition zone, which provides us additional assurances of stability while we work our way back down, slashing the top part to the full 5.1-meter diameter, installing the final supports and equipping the shaft. We are estimating this work will be completed over the next 12 months, targeting a completion in late 2016, or about three months behind our original schedule. I'd like to personally congratulate all of our employees and contractors for completing this critical element of our expansion project, which several people in the industry questioned if it would even be possible.

Meanwhile, civil works advanced well, and structural steel works began on our new sulphide plant during the quarter. We spent approximately $12.7 million on the expansion project during the quarter, bringing our total spending on this project to approximately $45 million. Despite the three-month delay in completing the raise bore, we still expect to deliver the overall expansion project on budget, while progressively increasing plant throughput ultimately to 1,800 tonnes per day in the first half of 2018.

Our Dolores mine in Mexico delivered a strong quarter, producing 1.2 million ounces of silver and 22,600 ounces of gold, which was 24% and 46% greater than production from the third quarter of 2014, respectively, largely due to heavier range experienced last year, as well as higher grades from the expected mine sequencing. We are also benefiting from savings in diesel fuel and a few key reagent prices, in addition to favorable currency exchange rates, which, combined with the increased production, drove our cash costs down 40% compared to the third quarter of 2014 to $8.70 per ounce, despite the lower gold prices. We expect a slight reduction in silver and gold production during Q4 due to our mine sequencing, which will increase our cash cost to roughly around $10 an ounce.

Meanwhile, we've invested $5 million on our expansion and power line projects during the quarter, including advancing the underground ramp to a total of 609 meters from the portal. We have advanced engineering on the pulp agglomeration plant and started purchasing of the major long-lead-time equipment needs. We expect to complete the power line installation by mid-2016, and begin construction of the pulp agglomeration circuit during the first half of next year.

In summary, on the back of the strong production results so far this year, we again reaffirm our full-year 25.5 to 26.5 million ounce silver production forecast, and are now increasing our gold production forecast from the original 165,000 to 175,000 ounces up to now 175,000 to 180,000 ounces. This increase in gold production, combined with the successful reductions in direct operating costs, leads us to reduce our full-year consolidated cash cost forecast from the original $10.80 to $11.80 an ounce, down to $10 to $10.50 per ounce.

With that, I'm very pleased to now turn the call over to Chris Emerson for the exploration update.

Thanks, Steve, and good morning.

As you can see from the first slide, I summarized the current performance and listed the main mines with drill meters completed in the quarter. A total of 25,649 meters was drilled in Q3, which was 12% lower than the previous quarter, at a total cost of $2.6 million. Year to date, we have completed nearly 81,000 meters, which accumulates to 92% of the budgeted drilling for 2015.

We have been successful in controlling costs, and have spent only 81% of budgeted dollars. On a cost basis, the star performer has been La Colorada, with consistently lower cost per meter using the Company's own drill rigs. From Q3, over 60% of the drill meters has come from Morococha and La Colorada mines combined. And I'll focus on some of the encouraging exploration results we have seen from this work later on in the presentation.

At Manantial Espejo, we have restarted exploration on the Maria [Esta] structure and have had good results in defining and infilling a high-grade portion of the structure, which in turn could open up further exploration to the east of the current resource. San Vicente continues to drill the Litoral Ramal 2 structure, which we will talk about in the next slide. The exploration in Bolivia San Vicente mine in 2015 has been targeting the eastern extension of the Litoral Ramal 2 structure. The cross-section you see on the screen shows two drill holes, which forms part of the infill program concerning the extension of the vein over 250 meters from the development gallery on Level 170.

The [Litoral on] Ramal 2 makes up 30% of the current resource and reserve. So, confirmation of this important structure further to the east bodes well for replacement of resources. In particular, the deep drill hole has two intersects of 1.96 meters at 467 grams a ton of silver and 2.3 meters at 614 grams a ton of silver along the same structure. Step-out drilling 300 meters further east will be planned for 2016, while exploration results will be integrated into the reserve update at the end of December.

As mentioned before, we drilled over 8,000 meters in Q3 in Morococha, and a lot of this work has been focused on the [Manuelita] section of the mine, and the continued evaluation and development at depth of design. Several structures including veins 10 and 11 have been targeted with the same drill holes. This area below the 510 level was drilled in 2007, and returned grades between 150 to 250 grams a ton of silver over plus-1-meter width. Results and reserve confirmation drilling in Q3 has highlighted increased grade intersect, as shown in the slide, for veins 11 with examples such as 1.6 meters at 1,165 grams a ton of silver and 2.6 meters at 365 grams of ton silver. In vein 10, the drilling is wider spaced, and confirms new inferred resources at depth in the structure.

I would like to finish with a slide from one of the principle structures at La Colorada mine and Amolillo vein located in the Estrella zone. Underground drilling has been very successful this year, both in performance and cost per meter, as well as returning good results. Drilling took place from the 365, 498 and 528 levels, and the insets shown on the slide speak for themselves. If we look at the long section, you'll note the proven reserve blocks are showing in red; blue are probable; and the inferred resources are shaded in green.

The far east portion of the vein, to the right of the slide, shows several high-grade insets with one hole at 2.7 kilograms of silver per ton at just under 1 meter width. This shows the high-grade nature of the vein, even at the eastern extent of the main structure. Drilling at depth within and beyond the inferred resource has also delivered good results, with combined high-grade intercepts ranging from 300 grams a ton to 0.5 kilo of silver of a 2-meter width.

The fact we're drilling in Q3 at the western side of the Amolillo vein means that we now have a structure with identified mineralization striking over 1.4 kilometers. As previously highlighted earlier on in the year, La Colorada becomes increasingly difficult to drill from surface due to depth and fit of the vein. Underground drilling is currently limited due to availability of draw chains and crosscuts, as our development teams are busy on expansion projects. Having said this, I'm confident at the end of the year, La Colorada will be adding sufficient resource and reserves to replace this year's production.

My teams have done an excellent job this quarter in controlling costs, as well as advancing our understanding of the mineralized structures. (Inaudible) drill meter targets will be met at all mines, and done so within budget. Reserve and resource replacement and definition is on track for year end. How much of this material will make it into the reserves at the end of the year will obviously depend on metal prices used for the estimation, which we will have -- which we have yet to decide.

Now over to Rob for financial review.

Good morning, ladies and gentlemen.

As Geoff mentioned, despite the challenging price environment, we continue to generate strong operational cash flow in Q3, $32.9 million, which was sufficient to fund all of our sustaining capital expenditure of $16 million and our dividend payment of $7.6 million during the quarter. This strong cash flow generation meant that we only needed to utilize $8.8 million of our treasury to fund our expansionary project capital of $15.1 million, and the net repayment of loans and leases of $4.8 million (sic - see press release, "$4.7 million"). We ended the quarter in a healthy liquidity position, with $266.1 million in cash and short-term investments, and total debt of only $57.9 million.

The changes in our year-to-date all-in sustaining costs per silver ounce sold, or AISCSOS, are presented in the table that you should see on your screens now. We calculate consolidated AISCSOS of $14.99 per ounce for the first nine months of the year. That's 15% lower than the comparable period of last year.

Based on this performance, we have revised our AISCSOS guidance downward for the full 2015 year from $15.50 to $16.50 per ounce to a new guidance range of $15 to $15.50 per ounce. The main drivers causing the lower AISCSOS in 2015 year to date were lower net realizable value, or NRV, adjustments; lower sustaining capital, royalties and G&A; and higher by-product credits, partially offset by lower quantities of silver sold and higher TCRCs compared to the first nine months of 2014. So, on the cost side of our Business, we have been able to achieve meaningful decreases compared to prior periods on the back of a vast number of operating efficiency initiatives, cost containment measures, and weaker local currencies.

What has remained an extremely challenge is the revenue side. The current slide gives you a breakdown of the factors that explain the changes in our revenue for the three- and nine-month periods ended September 30, 2015, compared to the revenue from a year ago, as well as how revenue moved compared to Q2 2015. In all comparisons, we see that the negative variances caused by metal price declines was by far the dominant factor, partially offset by positive quantity variances, mostly due to selling more gold and copper than in prior periods. The biggest price declines since Q3 2014 have been seen in our base metals, with much of that occurring since Q2 2015. Our copper hedge book has given us some protection against falling prices, but we are currently exposed to the full movements in the other metals we produce.

A quick look at our sales quantities in Q3 2015 against what we produced -- you'll see from the current slide that we built up about 260,000 ounces of silver inventory, almost entirely due to timing of shipments from our San Vicente mine in Bolivia, which produces very high-grade silver concentrate. On the by-product side, we also built up about 2,000 ounces of gold. The total revenue effect of these inventory buildups was approximately $6.9 million that will be carried over into subsequent periods when that inventory is sold.

That brings us to our adjusted earnings for Q3 2015, which came in at a loss of $9.3 million compared to an adjusted loss of $14.3 million in Q3 2014. The loss was narrowed, as a combination of lower cost of sales, decreased taxes, and realized FX losses and reduced G&A expense outweighed the negative impact of $18.9 million less revenue in Q3 2015. The main items reversed out of adjusted earnings in Q3 2015 were the write-down of carrying values at Manantial Espejo, an associated valuation allowance recognized on long-term receivables, and unrealized FX and commodity contract losses. Our adjusted earnings resulted in a loss of $0.06 per share compared to $0.09 per share loss in Q3 2014.

For the year-to-date period in 2015, our adjusted loss was $40.5 million versus essentially breakeven for the comparable period of 2014. The slide [into a loss] situation in the first nine months was driven mostly by a $77.1 million decrease in revenue, partially offset by lower costs and taxes.

Lastly, a brief review of our working capital portion of our balance sheet. We saw a decrease of $49.7 million in our overall working capital balances, with working capital around $420 million at quarter end. The change in working capital was principally reflected in lower cash and short-term investment balances previously described, in lower inventory balances resulting from the NRV charge, in lower accounts receivable, and in lower taxes receivable after a healthy tax refund of $8.2 million during Q3, and in a net $1.6 million increase to current liabilities. Together with our strong balance sheet, we have an undrawn $300 million secured revolving line of credit that matures in April 2019, which is available for general corporate purposes, including acquisitions.

With that, over to Michael for some closing comments.

Thank you, Rob, and good morning.

As you heard from Steve, Chris and Rob, our solid operational performance from Q2 continued seamlessly into Q3, with similar silver production, a 21% higher gold production, and lower cash costs. Based on this set of positive production and cost results, we decided to provide new updated guidance for 2015. Our silver production forecast remains unchanged at 25.5 to 26.5 million ounces, but our gold production will increase by about 10,000 ounces for a total annual production between 175,000 to 180,000 ounces. Due to higher by-product credits and important cost-reduction programs during the year, our predicted cash costs will decrease substantially to between $10 and $10.50 per silver ounce for 2015, net of by-product credits. Of our all-in sustaining costs, we'll also see a reduction of a new forecast, estimate [face] cost between $15 and $15.50 by year end.

Steve already gave a detailed overview of our two expansion projects at La Colorada and Dolores. In spite of slight delay at the construction of the new shaft at La Colorada, the expansion advanced as planned during Q3, and the raise bore for the shaft to reach the surface in early November. The expansion of La Colorada will increase our silver production by about 2.7 million ounces per year at a cash cost between $6 and $8 per ounce.

The underground ramp at Dolores is ahead of schedule, and advanced by over 670 meters year to date, and construction continues on the new power line. The addition of the pulp agglomeration plant at Dolores will increase the annual silver production by about 2.2 million ounces of silver, and add about 128,000 ounces of gold to our annual production. Due to the increased by-product credits, our cash costs per ounce of silver are forecast to be negative at Dolores once the expansion is completed

Adding high-quality and low-cost production is crucial to our long-term success, particularly given the current market conditions. These two projects are designed to do exactly that, to add nearly 5 million ounces of silver and over 128,000 ounces of gold to our annual production, while substantially reducing our consolidated cash costs by the end of 2017, and all for a very reasonable capital investment of about $250 million.

Before opening up the call for some Q&A, I would like to give you a quick summary of a very respectable first nine month of 2015. We are right on track with our silver production, and increased our gold production forecast due to strong performance at Dolores and Manantial Espejo. Our cost-control measures, coupled with favorable exchange rates, a lower oil price, continue to deliver positive results, bringing our cash costs for the first nine month below $10 per ounce of silver, net of by-product credits, which allowed us to revise our full-year forecast for cash costs and all-in sustaining costs down to lower levels.

Thanks to the strong production performance we were able to maintain our balance sheet strength, with over $266 million in cash and short-term investments, over $420 million of working capital, and an untapped credit facility of $300 million. We are in the enviable situation to finance our organic growth projects from our cash reserves, and still have access to sufficient credit to react to new business opportunities, should they arise in the future. In summary, we are in the process of transforming Pan American into a stronger and lower-cost producer, able to thrive and grow in a lower metal price environment.

And with that, I would like to ask the operator to open the call to questions, please.

(Operator Instructions)

Our first question is from Ralph Profiti of Credit Suisse.

Good afternoon. Thank you for taking my question. Michael, you just talked about this transformation at Pan American. And it looks like you've added some quality bench strength on the geology side. Is this part of a greater effort to reinvest in the business through the drill bit over and what we've seen before, meaning that sort of reserve replacement and expansion is now more of a priority, given the alternatives of capital deployment?

Hi, Ralph. Good morning. Exploration has always been very important for us. As you know, we have a long history of resource and reserve replacement in our Company, during the last I would say 10 to 12 years. So especially brownfield exploration is always very important to us.

Obviously based on that success, you see now the expansion at La Colorada. So I don't think so that that's a big change, but it's definitely, if you look around in the market, and although valuation of new projects are getting in, I would call, forever from our point of view, in a more reasonable level. Drilling projects by ourselves and finding new reserves and expanding our existing assets is for sure the best use of our capital right now. So you will see over the next few years increased drilling. I think we have a few more examples in our portfolio where we hopefully could add some more value with the drill bit.

Okay, great. Maybe a question for Steve. How much incremental metallurgical test work is being done at Dolores on the pulp agglomeration? You already have significant positive recovery impacts. Has that analysis run its course, or could we see upside versus the updated PEA?

Hello, Ralph. Very good question. Yes, we have done some pretty extensive testing on the pulp agglomeration circuit. In these -- the unique thing of these heap leach models for silver is the long leach time.

We actually have just -- we're just completing a pretty significant series of tests with and without the pulp agglomeration circuit to show that incremental recovery benefit. Some of these tests are completing as we speak have run over 760 days of testing. So it's quite a long, extensive process that we started back when we first acquired the mine.

And what we're seeing is definite confirmation of the assumptions that we made in the model that we built for the 43101. Generally, we're seeing 10%, maybe even a bit of upside to that recovery boost with the pulp agglomeration circuit on the high grade ore for gold and about a 20% on silver. That's being confirmed. We're very pleased with the results. We're very confident of the 43101 that we put out, that the results are supporting that.

That's great. Thank you very much.

Yes.

Our next question is from Chris Terry of Deutsche Bank.

Hi guys. Chris Terry, part of Jorge Beristain's team at DB. Just a question on the CapEx. You've obviously been pulling that down as the year has gone on, and most of that related to the growth projects. Is it fair to assume that we basically put the reduction of about $25 million into 2016 and just look at that as a delay, or are you getting meaningful savings from peso devaluation, et cetera that we should actually be lowering the numbers?

Yes. Good morning, Chris. This is Steve. Yes, basically it is a timing. So the best thing to do is to push that spending that we didn't do this year into next year. We'll come out with some better guidances early in the New Year on the capital spending on these projects. But right now we are seeing some benefits on the peso exchange, and even the Canadian exchange as it affects us in certain services and equipment. However, as of this stage, we're basically still forecasting to bring these projects in on budget, as we're currently showing it.

Okay, thanks very much, Steve. And then just on the cost-out opportunities generally, aside of currencies and what the diesel price might do, do you think you're at the latter stages of the opportunity set there, or is it more efficiencies and self-help that you can do heading into next year?

Yes. Chris, again this is Steve. Clearly, on looking at next year, I think our biggest opportunities are in the efficiencies. We continue to focus on productivities and efficiencies. And I think we're get the biggest bang for our buck in those areas.

With that said, I don't think we're at the bottom of the cycle. When you see these low oil prices sustaining like they are, they do start to feed through a lot of the materials and supplies that we consume a lot of. It just takes time. So I do think we're going to see some additional savings as these prices kind of hold where they're at now. But I think our biggest upside as we look into the future is finding additional productivity and efficiency gains going forward.

Thanks very much.

(Operator Instructions)

Our next question is from Chris Thompson of Raymond James.

Hi. Good morning, guys. Congratulations on a solid quarter, despite weak metal prices. I've got two real questions, or maybe three. But I guess the first two relate to operations, then just a quick question relating to Argentina.

So on the operations, looking at Huaron and Morococha at the moment, I mean understanding what you said relating to some operational challenges in Q3. Are you implying that those mills will not be running at capacity in Q4?

Yes. Hi, Chris. This is Steve. No, right now we are feeling pretty comfortable that they will run at capacity. Huaron is running strongly. Morococha, the problem we're having in the area with the water, we're able to compensate with other areas that are just not as profitable areas as the problem. We find more profitability in that high copper zone. That's why we want to get back in there quickly.

The mill at Huaron, I've got to be honest, we're a little concerned because we're not precisely sure exactly what caused the failure. And until we are, we're a little bit worried about the fix and whether it's going to last. At this stage of the quarter, it's been running fully since the repair was done back in late August, a couple months ago. So I feel pretty comfortable we'll get through this quarter without a problem. But we do have a lot of effort going in, a lot of expertise going in trying to figure out exactly what's going on on that mill.

Thanks for that, Steve. And I guess this is for you, Geoff. Maybe just a comment on the tone of what's happening in Argentina at the moment relating to the elections?

Hey, Chris. Well, as you're aware, there is a run-off election in less than a couple of weeks time on the November 22. It's pretty tough sitting where I am right now to pick a favorite or pick a winner between Scioli and Macri, although there's a lot of commentary that Macri may end up actually taking the election.

From the perspective of what goes on past that election date, I think both candidates have talked about foreign exchange and exchange controls. And both candidates have talked about essentially letting the peso trade more on a market basis versus a control basis. I suspect that if Scioli gets in, he will go down that path, but at a much more restrained rate. I think there's a higher probability that Macri lets the peso float.

Obviously from our perspective, any change in or devaluation of the peso that helps offset some of the inflation we've been experiencing would be viewed very, very positively, not only for our Manantial Espejo operation but what it could mean going forward for Navidad. The other commentary I've heard relates a lot to some of the import restrictions that have been on and some of the difficulties in moving money in and out of the country. Again, I think both candidates have come out and indicated that they are looking at fiscal changes that would allow for a freer flow of goods and services, as well as a freer flow of money. And that would certainly be welcome to us.

So I guess my comment is I'm optimistic that with the change in government that's on its way, that we may see some more favorable conditions for people like ourselves who are foreign investors. And as the -- Argentina adapts to the current economic reality, and that can only be favorable for both Manantial and Navidad.

There was a change in the governor in Chubut where Navidad is located where the Governor das Neves will be taking power in January of next year. He was President for a very short period of time when we first acquired Navidad, and we're hopeful that we'll be able to establish a positive relationship with him going forward, which will hopefully see Navidad able to be developed and unlock some -- a huge value that's available to Pan American, and for that matter available to Argentina. So net/net that was a long discussion, Chris. But I'm guardedly optimistic that some of the things are going on right now politically will lead to some positive change for Pan American.

Well that's great, Geoff. Thanks for that. Congratulations, guys.

Thank you.

Our next question is from John Bridges of JPMorgan.

Hi Geoff, everybody. This answer should be short. Just bookkeeping, really.

I see a comment in your Peru commentary about smelter costs going up. It's a bit of a [pick] area for us, obviously. Just wondered if that was Peru specific, or what you're seeing generally with respect to silver smelter costs?

Hi, John. Rob Doyle here. Yes, I can respond to that. The increase that we've seen generally in our TCRCs is mostly related to the increase in our copper production. We do see higher smelter costs associated with that concentrate, given the typically complex nature of the Peruvian copper concentrates that we produced.

So in terms of that market, it's obviously fluctuating all the time. We don't expect any huge changes into next year. So I would expect our TCRCs to remain roughly stable with where they are today, given our outlook for copper production.

Okay. Is that copper staying domestic or is that going international, that concentrate?

It's typically blended and then sent internationally.

Okay, cool. Okay guys, well done. Thanks a lot.

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

Thank you, ladies and gentlemen, for dialing in this morning. I'm looking forward to talk to you in February again with our Q4 and year-end results. Thank you very much.

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