Pan American Silver Corp (PAAS) 2016 Q3 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Pan American Silver third-quarter 2016 results conference call. The conference is being recorded.

(Operator Instructions)

I would now like to turn the conference over to Ms. Siren Fisekci, Vice President, Investor Relations. Please go ahead, Ms. Fisekci.

Thank you, operator. Welcome, everyone, to Pan American Silver's 2016 third-quarter conference call. We released our results after yesterday's market closed and a copy of the press release, MD&A and presentations for today's call are available on the website.

In a few moments I will turn the call over to Pan American's President and CEO, Michael Steinmann, who will provide an overview of the quarter. We will then open up the call to questions and answers. Joining us for the Q&A portion are Pan American's Chief Operating Officer, Steve Busby; our Chief Financial Officer, Rob Doyle; and our Vice President of Business Development and Geology, Chris Emerson.

Before we get started, I would like to remind everyone that our press release and certain statements and information in this call constitutes forward-looking statements and information. Please review the cautionary statements included in our press release and presentation as well as the risk factors described in our most recent form 40-F and annual information form. I will now turn the call over to Michael.

Thank you, Siren, and welcome, everybody, joining us today for our Q3 conference call. Q3 2016 was an outstanding quarter for Pan American. We generated earnings of just over $43 million, or $0.28 per share. Adjusted earnings were $37 million, or $0.24 per share. Net cash generated from operating activities topped $102 million in the quarter, up more than 200% from a year ago. Lower income taxes in Q3 2016 played a part, but the strong financial results are largely a reflection of the improved prices and lower costs.

The cash we generated in the quarter exceeded all our capital requirements, including our expense in projects of La Colorada and Dolores and our dividend, plus we repaid $12 million of short-term debt, reducing our total debt outstanding to only $47 million. Our cash and short-term investments at the end of September increased by $41 million to over $245 million, and our working capital position reached $434 million at the end of the quarter. As I said, it was an outstanding quarter, highlighting the profitability of our business as a result of our cost-cutting initiatives and strong operational performance.

Cash costs in Q3 came in at $4.89 per ounce of silver, net of byproduct credits, down 44% from last year. Lower direct operating costs, higher byproduct credits and export incentives at our Manantial Espejo mine helped to achieve this impressive result on cash costs. We have seen substantial reductions in direct operating costs in 2016, as mechanization improved productivity in our Peruvian mines, and we pursued efficiencies and cost reductions at all our other operations.

Additionally, we see weaker local currencies, especially in Mexico and Peru, and enjoyed general lower input cost for consumables such as diesel fuel, cyanide and electric energy. We continue to be focused on the safe and sustainable cost reduction across all of our operations. We're clearly realizing that in Peru through the mechanization efforts, and we expect to see further benefits when the expansions at Dolores and La Colorada come into full operation.

All-in sustaining costs were $6.34 in Q3, which reflects positive net realizable value inventory adjustments at Manantial Espejo and Dolores, higher by-product credits, export incentives at Manantial Espejo and cost reductions at Dolores and Morococha. As well, all-in costs benefited from a drawdown in inventories, particularly at San Vicente.

Given this strong performance, we are reducing our outlook for costs for the second time this year. We now expect cash cost to be between $6.25 and $7 per ounce of silver, and all-in sustaining costs of $10.75 to $11.50 per ounce in 2016. Relative to the original guidance we provided in January 2016, that represents a 33% reduction in consolidated cash costs and a 22% reduction in-all sustaining costs.

We also revising our guidance for total capital expenditures in 2016 to $185 million to $200 million, down from $200 million to $215 million. We are expecting lower major project spending at Dolores and, as previously announced, at La Colorada, which is expected to come in 5% at 10% under budget. We're expecting sustaining capital to rise by about $13 million between $80 million and $85 million. The additional investment is earmarked for our expanded expiration programs, for additional mobile equipment replacement in Peru to continue on our mechanization success and for more pre-stripping at Dolores.

We now expect silver production of 25 million to 25.7 million ounces in 2016, up from prior guidance of 24 million to 25 million ounces. The higher silver production guidance is largely supported by continued processing of stockpiles at Alamo Dorado and marginally higher production from or other mines. Similarly, we have increased our estimates for zinc, lead, and copper production. These please refer to our Q3 press release issued last night for the specifics. We are maintaining our forecast for gold production of between 175,000 to 185,000 ounces.

Taking a closer look at each of our mines, at La Colorada we continue to enjoy solid, steady operations. Silver production was up 5% in Q3 compared with last year's period. That's a first of many future improvements from our mine expansion. The expansion project is ahead of schedule and under budget, having achieved several major milestones in Q3. The new sulfide ore plant began slow production in early August 2016, with designed production throughput of 1,600 tons per day routinely achieved. That is [ore quantities] from the mine are ramping up.

On September 8, the new 618 meters mineshaft was commissioned in fully automatic mode. Construction the mineshaft was notable on several points. It was built during a downturn in the mining business, allowing Pan American to retain the best expertise in its construction. It was executed under budget and ahead of schedule and most important, it was completed with no lost-time accidents. I would like to congratulate the team for the exceptional performance on this project.

Development of the underground mine at La Colorada is progressing very well. We are seeing ore production ramping up nicely and expect it to continue to do so through 2017, when the project should be complete and processing rates rise to 1,800 tons per day. That should decrease silver production from La Colorada to about 7.7 million ounces annually.

At our Dolores mine, we continue to see the shift to higher gold production as mine sequencing has moved to higher gold grades. Higher gold byproduct credits and lower operational costs are the main driver for the negative cash cost of minus-$5.26 per ounce and all-in sustaining costs of negative $4.70 per ounce. We also realized lower direct operating costs at Dolores and a good example of that is the new power line that was energized in early September, replacing our on-site power generation. Annually, the power line is expected to save $9 million in costs at Dolores.

In addition to the power line, the expansion at Dolores was marked by significant progress in development of the underground mine and construction of the pulp agglomeration plant. The underground mind has now advanced on the north and south lateral drifts, as well as on the two declines to the lower levels. A total of 866 meters of development was advanced during the quarter, and the first of two ventilation raise bore holes to surface was also completed.

At the new pulp agglomeration plant site, the civil earthworks were completed and we have begun concrete forming and pouring. The pulp agglomeration plant is designed to improve silver and gold recoveries of the higher grade ore. The expansion at Dolores is on track for completion at the end of 2017, with the pulp agglomeration plant reaching mechanical completion at the end of Q2 of 2017.

Moving on to Peru, our Huaron and Morococha mines continue to demonstrate the benefits of mechanization, with cash costs down 57% at Huaron and 65% at Morococha, quarter over quarter. Increased productivity and higher byproduct credits were largely responsible for those cost reductions. At our Manantial Espejo mine, we also saw significant decline in costs, with the main drivers being the devaluation of the local currency, lower diesel prices, benefits from export incentives and higher byproduct credits.

The improved economic conditions at Manantial Espejo have allowed us to extend open-pit mining beyond our anticipated completion, which had been scheduled for the middle of this year. Will be stepping up mining rates for the remainder of the year and well into 2017, to access lower grade ore extensions that were previously deemed uneconomical. All-in sustaining costs at Manantial Espejo dropped to negative $14.67, with the majority of that decrease reflecting net realizable value inventory adjustments.

In closing, we are very pleased with the results we have achieved in Q3. The over $102 million we generated in cash flow from operating activities was only surpassed a couple of times in the history of Pan American Silver. This was in 2011, when the average silver price reached over $35 per ounce. Our productivity improvements and cost reductions allowed us to achieve similar financial results today at much lower silver prices, and we expect the expansions at Dolores and La Colorada to further benefit margins when those projects reach their full processing rates by the end of 2017.

Finally, our strong financial positions allows us to pursue growth opportunities, both organically and outside the Company. We have a rich suite of assets that offer exploration and production upside and we have a solid base of long-life producing mines generating attractive cash flows.

That concludes my formal remarks. I would like the operator to open the call now for questions. Thank you.

(Operator Instructions)

The first question comes with from Cosmos Chiu with CIBC. Please go ahead.

Thanks, Michael and team, and congrats on a very strong quarter. Maybe first off a question for Rob, if Rob is there.

The NRV adjustment for the quarter was a big contribution, was a big part of the cash cost per ounce calculation. Can you remind us once again how that works? Given how silver prices have come down a bit in Q4, if that continues, would that have a negative impact on earnings in Q4?

Sure. First thing to clarify is that NRV adjustments do not get reflected in our cash costs. They are incorporated in our AISCSOS number, but cash costs do not include NRV adjustments for the period. It's done on a production basis. The NRVs are really, if you like, a [calming] treatment of marking the inventory to the lower of cost or net realizable value. To the extent that the inventory that we carry has a value less than our cost, then we would write down, have a negative NRV adjustment; and then in future periods as that inventory value gets is determined to be higher based on metal prices, then we would have a positive NRV adjustment.

Specifically to your question, yes, all things being equal there would likely be some negative NRV adjustments in Q4 given that metal prices today are lower than where they closed at September 30.

Does it really matter, Rob? As you said, it doesn't really impact your cash, it just, in terms of when we estimate our earnings we have to take that into consideration.

That is absolutely right. Again, it will only affect AISCSOS. It doesn't affect cash cost. To your point, it's a non-cash entry. In our disclosure we do very carefully show you in AISCSOS what the NRV impact is so you can either include it or exclude it depending on your view of whether that is a normal cost entry or not.

Of course. Maybe Rob, since I have you here, could you remind us again, I'm just looking at taxes. It seems like in terms of Q3 2016 there wasn't much cash taxes paid. Could you remind us once again how taxes work for the Company? And when would you anticipate paying a bit more cash taxes?

That is very true. In fact, Q3 had a net refund of taxes. There were no cash taxes paid in total. That is really a function of the fact that we pay installments based on previous year's income. We will expect these great operating results to result in higher tax payments in 2017. Probably in March of 2017 would be when we would expect to pay down on the taxes that we have accrued. In the tax expense account on the income statement, of course, we are accruing for current taxes. From a cash point of view, we will only see that accrual paid probably beginning in March of 2017.

Okay, so only the current tax portion, then, Rob, and not the deferred tax portion.

That is correct, but in our current tax portion we are, of course, accruing for the taxable income that we are generating in 2016. It's just that we haven't had to pay for that yet. It's in our income statement, but not in the cash flow.

Okay. Maybe switching gears a little bit here, just looking at your sustaining CapEx budget for 2016, it looks like you've moved or refined some of these numbers here. Maybe first off are the La Colorada and Dolores numbers. They have been revised down. I'm wondering if that is a function of, as you said, La Colorada, you are about 10% under budget. How about Dolores? Is there -- it doesn't sound like you're behind. It sounds like you are on time, on budget, or below budget. I'm just trying understand the decrease in sustaining CapEx.

On the sustaining capital portion, Cosmos, we've actually increased at Dolores. Originally we had $39 million to $42 million estimate.

I guess I was looking at the project capital number. Sorry about that.

Okay, fair enough. Project capital. The issue at Dolores is we did take longer to do the civil earthworks than we anticipated, so that pushed off a lot of the mechanical construction into 2017. That is what's driving that. We were able to do the equipment purchases and were able to get the equipment shipped to the site, so we are gearing up construction at a higher pace than what we originally planned. We're hoping to make back that schedule that we slipped on the mechanical work.

Okay. La Colorada, the increase in project CapEx is just a function of -- or the decrease in project CapEx is just a function of Pan American Silver coming in below budget?

It's a combination of that, plus we did have the power line and we have a little bit of -- well, it's really the power line that slipped into next year. We've got a couple million dollars of spending that slips into 2017, and the rest being a savings of the overall capital on the project.

It's a reflection, Cosmos, of building a project while nobody else is expanding or building mines, which, as we talked about many times, has a very positive effect to your capital expenditures.

Of course. Maybe one last question, following up on the sustaining CapEx. Hopefully I get it right this time.

The sustaining CapEx number for the two Peruvian assets increased in 2016 as a function of mobile equipment replacements. My question has two parts. Number one, what is the replacement cycle for some of this mobile equipment here in Peru? Part two is, was this something that you anticipated doing into 2016 as a possibility for replacement? And given how strong these quarters have been that is why you went ahead with it and decided to go ahead with the replacement?

Great question, Cosmos.

It's largely, and we kind of use the word replacement; we shouldn't have. It's largely we're finding, given the strength that we are seeing on those operations, and a lot of that strength is being put into mechanized mining into these larger ore bodies, we are seeing the opportunity and benefits of that and are able to pass that on to the smaller narrow-vein mining areas. A large part of that is buying new equipment that is geared more towards narrow-vein mining.

There is a company in Peru that has come out with some really high-quality narrow-vein mechanized mining equipment now, jumbos and loaders and drills. We're taking advantage of that, given the strength of both those operations, where we are seeing base metal prices today, seeing what we saw during the last three quarters there, we are going to try to expand upon that and move that into 2017. That is a large part of that capital increase. In addition to the normal rebuild cycles on that equipment, we will typically do a major overhaul after about 15,000 to 20,000 hours on those equipments.

Of course. Sorry, maybe one last follow-up question.

I saw that you also increased your production guidance for the base metals. How does it usually work? Does the base metal grades positively correlate to your silver grades? I know that's the case maybe for La Colorada, but overall how does it work?

I'd almost to turn that over to the exploration geologist. That's a tough question.

That's a tough question.

Just say yes. (Laughter) We can take it off-line.

Cosmos, I'll say in La Colorada it's normally we see higher base metal rates when we go deeper down in the assets in general. You can't say it always, but in general. In La Colorada the very nice situation where we have higher base metal and higher silver grade deeper down. In Peru, it's really also [summation] horizontally. It's very complex, depending which zone we are in the mine.

And which structure, correct.

Okay, great. Thanks once again, and congrats once again on a very strong quarter.

Thank you, Cosmos.

The next question comes from Justin Stevens with Raymond James. Please go ahead.

Hi, guys, congrats again on this really strong quarter. A couple of quick questions for me.

Vis a vis the Dolores cost that we've seen in the third quarter, how representative would you guys say those are of what we might expect going forward?

Justin, this is Steve.

The key thing about Dolores is that is really driven by that high gold production. We forecast, as we look back, if you go to our 43-101 technical report, you will see that the gold production by years steadily increases at Dolores for the next three to four years where we really peak in the gold production, where silver production is off and on again. It's that gold production that is driving those costs down. We are moving in and out of that gold zone, but every year we are getting more and more quantities of that.

We do anticipate to see the cash costs go up a little bit, the gold production to go down a little bit, I would say for the next four to six -- maybe four months; and then early in the new year towards Q2 we will move back into that gold zone and have a stronger gold zone through the rest of the year of next year. It's just reflecting as we get deeper in the pit and we expose more and more of the high-grade gold zones with each year that passes, we will see more and more gold production. If you look back in the history of Dolores, typically we are producing 60,000 ounces of gold a year. We got up to 80,000 last year. This year you'll see we'll be at 100,000 ounces. It just incrementally kicks up for the next four years going forward.

Sounds good. The only other thing is, with this strong cash position you guys have built up here, any thoughts on the dividend or room for increase there?

Yes, Justin, as you know, we are longtime dividend payers since 2010. It's the full intention to obviously keep paying dividends. Dividends will vary with metal prices as we are in a very cyclical business here. This have been very positive results, but don't forget we are still in the construction phase at Dolores. I think a really good time to look at that is once we finish these two expansions, a few months in or a half year in into 2017. For sure, the Board is looking at that very hard every quarter.

Perfect. That's it for me. Thanks, guys.

Thank you.

The next question comes from Jessica Fung with BMO Capital Markets.

Great. Thanks. Good morning, guys.

At La Colorada, now you have the shaft up and running, which is great news. What do you anticipate in terms of cost savings or efficiencies there?

Hi, Jessica. Steve here.

First off, I will say we couldn't be more pleased with the project. It's an outstanding project. It's a totally automated shaft. It's world-class. It's cutting-edge technology throughout. I was down there a few weeks ago. It's an impressive installation and our operators are getting more and more comfortable, more and more confident with their ability to operate that. I see us continuing to ramp up production and efficiencies for the next six months or so as they get more and more comfortable with it. I do, I think I can safely say that the efficiencies and the productivities we're going to see from that are going to exceed what we had projected in our 43-101. I hate to make any quantitative estimate on that at this point, but I do feel confident that we will do better than what we said.

Give us a few more months, Jessica. It just started up, obviously. I agree with Steve. I think it looks very positive and very good. I'm sure in another quarter or so we will have better numbers for you on the real savings that we achieve, but very positive outcome.

Okay, that sounds good. It's always good to beat on a quarter anyway.

Mexico, in terms of the cost there, what percentage of your cost at the Mexican operations are denominated in pesos, just to get a sense in terms of the FX we've seen recently?

We are hesitant to really give out quantitative data there because it's a complex picture. Even though a lot of our costs may be in pesos, they are denominated in dollars before they are converted and paid. Even though the percent that we actually pay may be higher, we generally say somewhere between 30% to 40% of our total costs are being paid in a peso denomination, which is primarily for the salaries and wages we pay our employees. That is really the part that we say is variable, where the other ones might be tied more to US dollar basis.

Okay, perfect. That makes sense.

As well, for the power tariffs in Mexico, now that you guys have connected to the grid, we've been hearing that the tariffs are rising in Mexico. Number one, is this true? Number two, do you guys have any contract in place?

Well, it's an industrial contract, supply contract, that we do have with the government entity that runs the power distribution throughout the country. We have forecasted and will be revealing as part of our budget, but there is a slight, I will say, 5% to 7% increase anticipated in tariffs going into next year.

That's it for me. Thank you very much.

Thank you, Jessica.

The next question comes from Bill Fleckenstein with Fleckenstein Capital. Please go ahead.

Michael, I was wondering if you could comment at all if there's any progress in terms of moving Navidad forward down in Argentina.

Good morning, Bill.

We see definitely some moving parts down there. I don't know if you had a chance to go through some local news. I think two major advancements there. The federal government is working on a new mining framework for the entire country, which should regulate [royalties], environmental aspects of mining. That is for the entire country. I'm not sure about the timing of this, probably earlier part of next year.

Second one, there was a change in the cabinet in Chubut, and the head of the cabinet was replaced last week with a new head of cabinet who I don't know yet. I will hopefully have a chance soon to meet them and discuss, but so far we had a very productive meetings with everybody and we will see how that goes forward. As you know, the project can only move ahead with the law change in Chubut and that's obviously a political process that we have to wait for.

Okay, thanks.

You're welcome.

The next question comes from Craig Johnston with Scotiabank. Please go ahead.

Thanks for taking my call. A lot of my questions have been answered and asked already.

Michael, on your commentary around the strong cash position and looking at internal and external opportunities, can maybe you just speak to your strategy and thoughts on if you are looking externally, how big would you be willing to go, locations, et cetera?

We are a large silver miner, Craig, and silver, if there are silver mines they can never be too big for us. If they exist, and you know that silver mines are normally smaller than gold mines, so all of them out there, they are in a size range that we could easily handle, so that is not a problem for us. Location wise, we have to go where the silver is. Most of the silver is located in the Cordillera in the Andes or in the Cordillera all the way from Patagonia up to Alaska. These are the biggest silver producing countries in the world and that is where we are working. That is where we are and we are very happy there.

If there's a large silver deposit somewhere else coming up in a different jurisdiction, for sure we would look at that, but additions can be smaller and very productive and very positive, could be very positive for us and profitable if they are close to some of our operations. At the same time, so we always are looking externally. We always did that. That is how the Company grew, by purchasing earlier or mid-stage projects, in some cases even early production assets, and then use our expertise to improve them and bring them into production.

I think what we did in the last few years with the change in Peru, with the huge change in Mexico, with the expansions at Dolores and La Colorada, really shows you what we can do internally as well. Easy finance that through our cash flow in this case now, and that is for sure something that will keep an eye on as well. We have very long-life assets with large reserves and see no over 12 years of 10 years of reserve replacement in the past, but also (inaudible). We'll for sure have a hard look at them as well to keep improving them and maybe look at future expansions in some of them.

Okay. Yes, thanks, Michael. That is a great answer.

Just one other question which is much more immaterial, but just something we noticed. At Manantial Espejo, it seems like silver recoveries have dipped down in the 87%, 88% range in the last two quarters. Maybe if you can just speak to the reasoning behind that and where we should we expect silver recoveries going into 2017?

Great question, Craig.

They have dipped a little bit. A large part of that is, we've been pushing the throughput pretty hard there. We have hit this harder ore in Concepcion and it seems to be a bit more encapsulated than we have seen in other ores. Some of the pit expansions and some of the expansions we're looking at going into next year, it does include more Concepcion ore, so I think that we are anticipating maybe a percent or two below what our normal average is for that operation as we mine those ores.

Okay, thanks, Steve.

Is it too early to give a sense in terms of what potentially the strip ratio could be next year, as well as, say, grades, as I'm sure some of us are modeling mining stopping, say, at some point next year?

It is too early to do that, Craig. We're still going through those budgets as we speak. When we come out with our new guidance in January we'll have all that detail for you.

Okay, sounds good. Thanks, guys.

Thank you, Craig.

Thank you.

The next question comes from Lawson Winder with Bank of America Merrill Lynch. Please go ahead.

Hi, guys, nice quarter.

Just wanted to follow up on the base metal production in the guidance. I think Cosmo had started asking about that. Obviously, as evidenced by your higher base metal production guidance, the base metal production has been higher than expected. I guess my question would be, has this been driven by a conscious decision to change the mine sequencing? Or has this just been that the sequencing you already had planned for 2016 has been surprising you to the upside?

Hi, Lawson. Steve here.

Relative to La Colorada base metal production, with the new shaft in, it is bringing more sulfide ore and that sulfide ore is grading a bit better than we expected. In that case, it's a case of finding more than we expected. In the case in Peru, in Huaron and particularly at Morococha, that is kind of a mine sequencing. We were in the high copper zones early in the year and we're moving into higher zinc and lead zones. That is really a sequencing thing and we're seeing what we expected. It's just where we are mining at the time.

On the copper production at San Vicente. I actually asked this question last quarter and got the impression that copper grades actually may have been falling in Q3 but they've remained quite strong. Copper production there remained quite strong. I'm just curious if you have a sense of how long that higher production at San Vicente can continue for, maybe in terms of number of quarters or number of months?

We touched on that last quarter when you asked the question. It's an interesting issue because we actually produce the silver concentrate there. We call it a silver con. Some people call it a bulk con. It's really high-grade, like 20 kilograms silver per ton. It does contain both lead and zinc. It will contain 8% lead and maybe as much as 10% or 12% copper. There is one zone that we mine that, that copper will go up to maybe a size 14% at times.

The concentrate we can market as either a lead con or a bulk con or a copper con, so we look at the market as to where the best terms are. So we're in and out of whether we call that lead production or whether we call it copper production. We haven't, up until this quarter, we were actually selling some copper earlier that we weren't claiming. This quarter we decided to bring that in. Our anticipation is that we will see more copper production for the next foreseeable future and in January we'll provide better guidance for the mine.

Okay, that's great. That's really helpful. Maybe just one more question for me on exploration.

In Q2 you raised your exploration budget for 2016 to $14.5 million. I think that was a pretty big increase over the original guidance, something like 30% or 40%. This quarter, you mentioned that part of the increase in the sustaining CapEx guidance was actually driven by exploration. Where does the total exploration budget now stand for 2016? And then maybe you can provide some guidance on how that's broken out between what is expensed and what is capitalized? Thank you.

Yes, we mentioned the higher exploration capital last quarter but did not reguide our capital. That is why you see now in the guidance with this increase. Part of it is exploration, so that is the reason why it's not twice in there. It's just now we reguided it, first point. Second, normally when we look at our exploration, all of the brownfield, a lot of the brownfield exploration is expensed if it's infill drilling or production, let's call it production drilling. If it's more longer-term exploration, then it's capitalized. Obviously everything away from the operation is normally expensed until we see that the project is good enough that we have a resource and the definition and all that, and then we would start capitalizing it as well.

Okay. Just to be 100% clear, the total 20% exploration budget is still the $14.5 million?

That is correct.

Okay, that's great. Thanks very much, guys.

Thank you.

The next question comes from John Tumazos with John Tumazos Very Independent Research.

I want to thank you for the $0.28 of earnings and a great performance. I'm a shareholder.

You're welcome.

It amazes me that your stock trades about for the general stock market [multiple], mid-teens. First Majestic trades almost three times as much of a PE. Your Company has a wonderful track record and a lot of production for many mines, which reduces volatility and risk. Why do you think the market doesn't pay more for Pan Am? Do you think it would be good to spend two times or three times your exploration budget to try to extend reserve lives at some of the vein-type mines where it is expensive to document reserves, to show the market your good assets better?

Hi, John.

I am absolutely convinced that quarters like this, or really last quarter was great, but quarters like this will for sure get the attention of the market. As you know, when you go back a few years, Pan American has really the view in a lot of investors as the high-cost producer. Our costs were high in Peru especially. All the mechanization efforts we did now and the improvements there resulted in this beautiful reduction of cost in Peru. It will take a few quarters, I think, for the market to absorb all of that, but I'm absolutely positive that the markets will react very positively. These are very strong results and our cost reductions really underpin and underline what we able to do with these assets.

Going to the exploration, our exploration capital that we spend is actually quite fluid because we look at it very result-driven. It's really we get good results, so many of you obviously keep investing more. We have very long-life assets. We have about10 years of reserves ahead in most of our assets. Spending much more money in exploration to increase that to 15 years, I'm not so sure that will be a wise use of capital right now. We definitely work hard on it to replace, and not only replace reserves, but replace it with higher-quality reserves. That means, if possible, wider ore bodies; if possible, higher grades.

Thank you.

You're welcome.

(Operator Instructions)

This concludes the question-and-answer session. I would like to turn the conference back over to Michael Steinmann for any closing remarks.

Thank you, Operator, and thank you, everybody, for calling in today. Great quarter, great story. I'm really looking forward to talk to you again in February, where we will share the year-end results with you. Until then, have a Merry Christmas.

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