Pan American Silver Corp (PAAS) 2017 Q2 法說會逐字稿

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  • Operator

  • Thank you for standing by.

  • Welcome to the Pan American Silver Second Quarter 2017 Results Conference Call.

  • (Operator Instructions) And the conference is being recorded.

  • (Operator Instructions) I would now like to turn the conference over to Siren Fisecki, Investor Relations.

  • Please go ahead, Ms. Fisecki.

  • Siren Fisekci

  • Thank you, operator, and welcome, everyone, to Pan American Silver's Second Quarter 2017 Conference Call.

  • We released our results after yesterday's market close, and a copy of the press release and presentation slides for today's call are available on our website.

  • In a few moments, I will turn the call over to Pan American's President and CEO, Michael Steinmann, who will provide some quick highlights for 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; Chief Financial Officer, Rob Doyle; Senior Vice President, Technical Services and Process Optimization, Martin Wafforn; and Vice President of Business Development and Geology, Chris Emerson.

  • Before we get started, I'd like to remind everyone that our press release and certain statements and information in this call constitute 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.

  • Michael Steinmann - CEO, President and Director

  • Thank you, Siren, and welcome, everyone, to our call today.

  • We're very pleased with our performance in the first half of this year.

  • Costs are down leading us to lower our guidance for 2017, cash costs and all-in sustaining costs.

  • Production is on pace and we have made good progress on our mine expansions and newly acquired projects in Argentina.

  • Financial performance in the quarter was very healthy.

  • I'll quickly review the highlights before providing more detail on operating performance.

  • Revenue of $201 million was up $9 million from Q2 last year.

  • Higher realized prices for silver and zinc had the biggest impact on revenue.

  • Lead and copper prices were also up quarter-over-quarter while gold prices were flat.

  • In addition to higher metal prices, 2017 Q2 revenue benefited from lower concentrate treatment and refining charges.

  • Offsetting this positive impact was a negative settlement adjustment on concentrate shipments and lower gold and copper sale volumes.

  • Net earnings in Q2 were $36 million or $0.23 per share, similar to Q2 2016 earnings of $34 million.

  • While revenue was up quarter-over-quarter, cost of sales were up a similar amount.

  • The increase in cost of sales reflects higher quarter-over-quarter production costs, royalty charges, depreciation and amortization.

  • Earnings quarter-over-quarter also reflect $2 million less in income tax expenses recorded for Q2 2017, which was more than offset by the roughly $18 million gain recorded in Q2 2016 on the sale of the Shalipayco property.

  • Adjusted earnings in Q2 2017 were $22 million or $0.15 per share.

  • Cash flow in Q2 2017 totaled $42.9 million, $23.1 million less than we generated in the same quarter 2016.

  • The decrease was largely due to changes in working capital, the gain on the Shalipayco sale in Q2 2016, and higher taxes paid in Q2 2017.

  • Capital expenditures in Q2 totaled about $42 million, about $16.7 million was directed to project capital, largely for the expansion at Dolores and close to $27 million for sustaining capital.

  • We exited Q2 in a strong financial position.

  • Cash and short-term investments stood at $198 million.

  • The decrease of about $7 million from Q1 balance relates primarily to the acquisition of COSE project in Argentina.

  • Total debt was about $47 million.

  • Turning now to the operating performance.

  • Production is on track to achieve our guidance for 2017.

  • Silver production in Q2 was 6.3 million ounces, level with last year's Q2.

  • For the first half of 2017, silver production totaled 12.5 million ounces, in line with our guidance for the full year production of 24.5 to 26 million ounces for the year.

  • Gold production of 37,700 ounces in Q2, and 75,400 ounces for the 6-month period.

  • This is down from last year as we expected because of lower ore grades at Manantial Espejo and the wind up of operations at Alamo Dorado.

  • We expect gold production to increase going forward, as shown in our 3-year outlook, largely from the ramp-up in Dolores production.

  • We are maintaining our guidance for gold production in 2017.

  • We are also maintaining our guidance for 2017 for zinc, lead and copper production, given rates achieved during the first 6 months of the year.

  • Consolidated cash cost have been better than expected.

  • For Q2 2017, they were $5.71 per ounce.

  • This includes the $0.54 per ounce of severance cost incurred at Manantial Espejo and Alamo Dorado.

  • Cash cost during the first half of the year were $5.94 per ounce, about $0.50 below the bottom of the original guidance range.

  • As such, we've lowered the guidance for 2017 cash costs to between $5.50 to $6.50 per ounce net of by-product credits.

  • All-in sustaining costs were $10.73 in Q2, $0.58 lower than Q2 last year.

  • With first half, 2017 all-in sustaining costs of $11.66 being at the low end of our guidance range, we have also reduced the guidance for 2017 for all-in sustaining costs to $10.50 to $11.50.

  • Taking a closer look at operating performance at each of our mines, we continue to see the positive impact of the expansion of the La Colorada.

  • Silver production was up 26% quarter-over-quarter with throughput rates up nearly 30%.

  • The new sulfide processing plant is running well.

  • Production of zinc and lead were both up 55% in the quarter compared to last year.

  • That contributed to a significant decline in cash costs and all-in sustaining costs, which were down 56% and 34%, respectively from Q2 last year.

  • Development of the underground mine at La Colorada advanced ahead of plan, achieving the targeted 1,800 tonnes per day mining and processing rates during the last month of the quarter, 6 month ahead of schedule.

  • We also completed construction of and energized the new 115-kilowatt power line.

  • At Dolores, we produced 1 million ounces of silver at a cash cost of $0.12 per ounce.

  • Yes, those are very low cash costs, but they were actually up $0.76 per ounce compared with Q2 2016, largely because of a decrease in gold by-product credits.

  • As I indicated, we expect gold production at Dolores to dip in 2017 due to lower grades from mine sequencing before we begin moving into higher gold grades beginning of 2018.

  • All-in sustaining costs at Dolores were down almost 50% to $7.28 in Q2 2017, compared to the same period last year.

  • We achieved good progress on the Dolores expansion over the quarter.

  • Construction of the pulp agglomeration plant was completed and commissioning is underway.

  • We are currently concentrating and bringing the 3 large plate and frame filter process online.

  • The crushing and grinding circuit performed well during initial testing.

  • And we continue to expect that production from the plant to ramp up to the designed rate of 5,600 tonnes per day by the end of this year.

  • Development of the underground mine at Dolores is also going well.

  • We completed about 1,200 meters of drift advance as well as definition diamond drilling of the central and south zones.

  • We are pleased with the drilling results from the south, which are showing excellent grades.

  • We expect to begin production from the central zone in early Q4 2017, ramping up to the full design mining rate through the course of 2018.

  • Simultaneously, we will complete definition and mine planning for the south zone.

  • Turning now to Peru.

  • Our Huaron and Morococha mines continue to generate very attractive margins due to higher by-product credits from the improvement in zinc, lead and copper prices in 2017.

  • Cash costs were down about 60% at Huaron from Q2 last year to $2.24 per ounce.

  • And we were at a negative $2.35 per ounce at Morococha.

  • All-in sustaining costs at both Morococha and Huaron were down 50%, coming in at $3.30 at Morococha and $5 at Huaron for Q2 2017.

  • In addition to higher by-product credits from higher base metal prices, improved concentrate refining terms led to the decline in costs.

  • Silver production was up 10% at Morococha from an improvement in silver head grades while lower grades at Huaron led to the 6% decline in silver production quarter-over-quarter.

  • The lower head grades, we've encountered at Huaron for silver and base metals is due to mine sequencing and masks the more sustainable benefits we are seeing from improvements in mill recoveries.

  • We have made several upgrades to the flotation circuit at Huaron, which are now resulting in incremental improvements in metal recoveries while maintaining concentrate qualities.

  • Comparing Q2 2017 with the same quarter in 2016, silver recoveries were up 2.8%, zinc up 3.5% and copper recoveries are up 2.9% despite slightly lower head grades for each metal.

  • At our San Vicente mine in Bolivia, silver production was down 1/3 compared with last year's Q2, primarily due to a reduction in head grades and 8 days of unscheduled downtime.

  • The downtime was required to address a combination of plant maintenance, employee work stoppages and safety matters.

  • The reduction in ore grades at San Vicente was due to delays in developing and preparing higher-grade stopes for mining.

  • As well, we experienced some additional mining dilution which we believe stem from transitioning some of the conventional mining areas to more mechanized mining methods.

  • Lower ore grades led to cash cost of $14 per ounce at San Vicente in Q2, up 14% from Q2 last year.

  • All-in sustaining costs declined 19% to $13.81, largely on account of lower royalties.

  • The decrease in royalties is a timing difference related to royalty payments at the time of export compared to payments received from the concentrate sales.

  • At our Manantial Espejo mine in Argentina, Q2 2017 silver production was up 24% from Q2 2016.

  • Gold production in Q2 2017, however, decreased by 37% due to lower grades from mine sequencing.

  • Cash cost at Manantial Espejo were $15.11 per ounce, up $17.51 from Q2 2016.

  • The main factors behind this significant increase were the decrease in by-product credits from lower gold production and severance payments associated with the end of open-pit mining activities in the past quarter.

  • While the majority of open-pit mining activity has now come to an end, as we expected, we will continue to mine underground into 2019.

  • Higher inflation in Q2 2017 compared with last year and the loss of the Patagonian import/export credit also contributed to the increase in quarter-over-quarter costs.

  • The same factors plus increased negative NRV inventory adjustments led to Q2 2017 all-in sustaining costs of $18.13 at Manantial Espejo.

  • During Q2, we also advanced plans to develop our Joaquin and COSE projects.

  • As you know, we acquired these projects earlier in 2017 to leverage the invested capital we have at our Manantial Espejo mine.

  • Both are high-grade silver deposits offering synergies with Manantial Espejo.

  • At COSE, we plan to construct an underground mine over the next 18 to 24 months.

  • We expect to encounter the first stoping area towards the end of 2018, after about one kilometer of development.

  • The material mines will be trucked to our Manantial Espejo plant for processing at the rate of approximately 200 tonnes per day for 18 months.

  • On average, the project is expected to produce approximately 112,000 ounces of silver and 2,300 ounces of gold per month.

  • The estimated total capital investment of $21 million including the final -- excluding, sorry, the final $7.5 million project acquisition payment.

  • At the Joaquin project, we started the drill program and begun an engineering analysis to determine the quantity of potential economic material that could be trucked to the Manantial Espejo processing plant for treatment.

  • We expect to complete the Preliminary Economic Assessment on the project by year-end.

  • In 2017, we expect to spend approximately $11 million to $12.5 million on Joaquin and COSE.

  • It is important to note that the 3-year outlook we provided in January of this year does not reflect any contribution from Joaquin and COSE.

  • In addition to the drill program at Joaquin, near mine and regional explanation drilling is progressing on plan.

  • In Mexico, we are exploring the exploration of the La Negra deposit where we have an option agreement with Kootenay Silver to earn the 75% interest.

  • We expect to provide a resource estimation for La Negra later this year.

  • As I noted at the beginning of the call, we've made some positive revisions to our 2017 guidance.

  • We've lowered the guidance for 2017 cash costs to between $5.50 to $6.50 per ounce from a prior range of $6.45 to $7.45 per ounce.

  • We've reduced estimated all-in sustaining costs to a range from $10.50 to $11.50 per ounce from the prior range of $11.50 to $12.90.

  • The revised estimates per mine for both cash costs and all-in sustaining costs are provided in our MD&A.

  • The guidance for estimated sustaining capital in 2017 remains at $82 million to $88 million although we've made some adjustments to the allocation among our mines.

  • The detailed -- the details again, are available in our MD&A.

  • We have increased the estimate for 2017 project capital to a range of $73.5 million to $78.5 million compared with the prior range of $58 million to $62 million, mostly for the development of the newly acquired Joaquin and COSE projects in Argentina.

  • Consolidated production remains on pace with our original guidance, and we've made no changes to our production guidance.

  • That concludes my formal remarks.

  • And I would like to ask the operator to open the call for questions.

  • Thank you.

  • Operator

  • (Operator Instructions) The first question comes from Lucas Pipes from FBR & Company.

  • Lucas Nathaniel Pipes - Analyst

  • Great job on the cost side.

  • In fact, that's my first question.

  • I wondered kind of looking forward, how sustainable do you think the cost structure is?

  • Would appreciate your thoughts on that.

  • Steven Luis Busby - COO

  • Lucas, this is Steve.

  • Yes, right now, actually we feel most of the jurisdictions we're operating in, the costs are reasonably stable.

  • We have seen a movement of the Mexican peso, obviously, strengthening relative to the U.S. dollar over the last few months.

  • That is going to have an effect on our costs at Dolores and La Colorada.

  • We've seen that depreciation here recently of the Argentine peso, so that will help our costs in Argentina.

  • Peru, we're generally pretty stable.

  • And of course, Bolivia is very stable at this time.

  • We do face the annual escalations of costs, particularly, wages in Bolivia that we talk about each quarter.

  • And that happens usually around March of each year.

  • We do anticipate that to continue there.

  • So I think, in general, there is going to be these constant cost escalations that we generally manage through efficiencies and improvements in our operations.

  • So although I would say we would expect some modest increases into the future periods, they're not going to be severe as we can see it today.

  • Lucas Nathaniel Pipes - Analyst

  • Great.

  • Great.

  • And then maybe a follow-up question on Argentina.

  • You've been very active in that jurisdiction.

  • You're moving forward with the COSE project allocating dollars.

  • How would you describe the regulatory environment?

  • Is it getting better at a satisfactory pace?

  • What are still some of the obstacles?

  • So as you think about COSE, for example, what are the main challenges at this point, if any?

  • Would appreciate your perspective.

  • Michael Steinmann - CEO, President and Director

  • Yes, I mean, Argentina, as I mentioned already before in many occasions, has improved greatly since the new administration took place, what is now 1.5 years ago.

  • So very positive changes there.

  • And there are challenges that the administration is working through for sure.

  • And we are feeling some of them, especially, on the inflationary side but definitely very positive improvement there.

  • I think the strategy is and was always very clear with this addition of COSE and Joaquin, which has high-grade truckable ore for Manantial to use -- get a better use out, even better use out of the capital that we invested in that plant.

  • It's not a long trucking distance for Argentina for Patagonia.

  • It's easy trucking there.

  • And although, as you see there, COSE is relatively small, it's a very high-grade deposit.

  • And we'll have more results and detailed results on Joaquin, which will be larger obviously in size.

  • So I think, the strategy there, very clear.

  • We invested that money in Argentina to build that plant years ago.

  • And any opportunity that we see to even get a better return on that, we're obviously taking.

  • And as I said, Argentina greatly improved so we're happy to make that investment.

  • Lucas Nathaniel Pipes - Analyst

  • That's very helpful.

  • And maybe one last one on -- since you mentioned Joaquin.

  • Should we be thinking of a rate of return similar to COSE?

  • Or could you maybe elaborate on where would it kind of stack up versus the other projects you've pursued in that region?

  • Michael Steinmann - CEO, President and Director

  • I mean we don't have the numbers ready yet to share that with everybody.

  • As I said, it will come in later this year.

  • We are -- obviously, if you look what we do in the past and what the company is doing with project, we're kind of targeting healthy return for our projects.

  • So I'm sure we're looking for something similar at Joaquin.

  • But as I said, I don't have any numbers yet to share.

  • Operator

  • The next question comes from Lawson Winder from the Bank of America.

  • Lawson Winder - Associate

  • Just on the Mexican peso cost, I know you do hedge.

  • And actually it looks like those hedges have been working out extremely well, and look like they'll probably continue to work out very well in the second half of 2017.

  • I was just curious, in terms of percentage of your Mexican peso cost for H2 '17, how much is actually hedged at this point?

  • Michael Steinmann - CEO, President and Director

  • I'll pass it down to Rob here for the details.

  • But just in general, obviously, we saw an opportunity here on this Mexican peso hedge at the beginning of the year.

  • When obviously, the Mexican peso was under great pressure, and we had a big need of Mexican peso in country for our operations and for the expansions.

  • And we took advantage of that opportunity.

  • And I'll pass it down to Rob to give you some more details on what percentage is still outstanding.

  • A. Robert Doyle - CFO

  • Yes, Lawson.

  • We have about $36 million with the positions left for the second half of the year.

  • Obviously, all of them deeply in the money that covers about 70% of our operating and project needs in Mexico over that period.

  • So next year, we do expect our exposure to go down with Alamo Dorado obviously tailing off and the project expenditures at Dolores finishing up.

  • Lawson Winder - Associate

  • Is that 70% of cost consistent between OpEx and the CapEx or is it on -- heavier on one versus the other?

  • A. Robert Doyle - CFO

  • It's -- it'd be heavier on OpEx, to be honest, because most of our CapEx is -- if not -- it's usually paid in U.S. dollars or dollar index.

  • So most of the exposures are on the operating side.

  • Lawson Winder - Associate

  • Okay.

  • That's great.

  • And then Rob, maybe a second question for you -- perhaps a second question for you.

  • The Peru TC/RCs, you mentioned that the terms had improved.

  • Do you see those as sustainable?

  • And then secondly, correct me if I missed it, Michael, in your discussion, but I don't think you mentioned anything about the TC/RCs at La Colorada, but they look like they improved dramatically quarter-over-quarter.

  • I'm just curious if those are sustainable going forward?

  • Michael Steinmann - CEO, President and Director

  • Well, again, I will pass it on to Rob for the details.

  • But for sure, across the board, we see shortage of zinc concentrate in the world and treatment charges and sales conditions for zinc concentrate for sure improved but not only for zinc and again Rob will give you some more detail.

  • A. Robert Doyle - CFO

  • Yes, Lawson, I mean it's difficult to predict, these are obviously markets that can be volatile.

  • But as Mike says, it's for sure, a very, very dire shortage of zinc concentrates today.

  • We're seeing very aggressive tenders for zinc and (inaudible) not only in Peru but also certainly at La Colorada.

  • And then we're also benefiting from a huge demand for high silver concentrate.

  • So our lead and copper concentrates, which is where most of the silver that we produce in concentrate reports to also being very highly bid at the moment.

  • There just seems to be a tremendous amount of silver refining capacity available and not enough feed for those facilities.

  • So nothing that we can see is going to change that dynamic quickly.

  • For sure, there may be some more zinc concentrate being talked about kind of waiting in the wings but nothing that we can see being turned on very quickly.

  • So we imagine that there will be strong fundamentals in the zinc market and for the foreseeable future.

  • And likewise on the silver concentrate side, that seems to be a fairly long-term factor in the market.

  • So we are feeling good about these terms being at least persistent for the time being.

  • Lawson Winder - Associate

  • Okay.

  • That's great.

  • And then also Michael, did you say in your prepared remarks -- please correct me if I'm wrong.

  • Did you say that Dolores grades are to be lower in the second half of 2017?

  • Michael Steinmann - CEO, President and Director

  • Well, Dolores gold grades due to mine sequencing are lower in 2017.

  • That's why -- the reason why our gold production for the entire year is a bit lower, but they're going to come back stronger in 2018.

  • I don't know, Steve, if you want to weigh in on...

  • Steven Luis Busby - COO

  • Yes.

  • It's a combination of that, Lawson, as well as starting up on this pulp agglomeration plant.

  • That additional tonnage that we'll be putting out, we build an inventory on the heap.

  • So there is a timing of when you get all that out.

  • But yes, I think, overall, we were projecting right at pretty much the same gold production from last year this year, but we are moving more tonnes with the pulp agglomeration plant.

  • So we were projecting a lower grade this year and then that grade starts to come on again next year.

  • Lawson Winder - Associate

  • Right.

  • And then just in the commentary on your guidance, you sounded very confident that overall gold production will be higher at Dolores in the second half of 2017.

  • So I'm gathering that you're expecting to see some quarter-over-quarter improvements in recoveries with gold at Dolores too?

  • Steven Luis Busby - COO

  • Yes, it all stems from the startup of this pulp agglomeration plant.

  • I mean, that's where we're getting additional tonnage.

  • We're getting additional recovery with that plant.

  • So that increase in gold in the second half is related to the commissioning and the ramp-up of production of the pulp agglomeration plant.

  • Michael Steinmann - CEO, President and Director

  • I think it's fair to say that most of that will come in and start coming in, in Q4 and not in Q3 because of the timing of the heap.

  • Lawson Winder - Associate

  • Okay.

  • Okay.

  • That's very helpful.

  • And then maybe just one more for me if you could, just on San Vicente, you mentioned some worker issues.

  • Maybe a tiny bit of detail on what those are?

  • And have those now been resolved at least for the rest of 2017?

  • Steven Luis Busby - COO

  • Well, I mean, that's a fairly complicated question.

  • I guess the best way to summarize it is, we are trying to adopt some more mechanization at that mine at this time and there are some narrow vein sections of that mine that we do mine conventionally, we have since we took control of the operation.

  • So that transition period is -- we're finding a bit more challenging.

  • I mean, it was challenging in Peru when we went through this and it took us many years to get through it to the point where it's performing marvelously today.

  • We're finding it even more challenging in Bolivia, it's a new concept, it's a new method that we don't have the experience and the technical expertise readily available I'll say in Bolivia like we had in Peru.

  • So yes, that's kind of what we're facing.

  • Operator

  • The next question comes from Robert Reynolds of Crédit Suisse.

  • Robert Reynolds - Research Analyst

  • Congrats on a good quarter and improving the cost guidance.

  • Just on that cost guidance improvement, I was hoping you could provide a rough split out as to how much of it would be attributable to better by-product pricing and better TC/RCs versus operational improvements?

  • If you have that.

  • Steven Luis Busby - COO

  • Yes, Robert, we don't have it broken out in those percentages, to give you an idea because there is a another factor too to consider is the higher cost operation like Alamo Dorado is phased out now.

  • So we get the benefit of the dilution of high cost, if you will, helping the lower cost.

  • We haven't really went through and itemized to that detail, those cost impacts.

  • But I think in general terms, the list you gave are probably in the right order, for sure.

  • Robert Reynolds - Research Analyst

  • Okay.

  • And then just in terms of the cost in 2018 and 2019, is -- I mean, there are a few questions about whether the reductions are sustainable.

  • When do you typically review your outlooks for those years?

  • Will it be at the end of the year or would you be looking at that sooner?

  • Michael Steinmann - CEO, President and Director

  • Yes.

  • That's right.

  • We will come out like every year, the last 2 years we did, we did 3-year guidance in January.

  • Some are mid-to-end January and we'll revise the cost for the future years.

  • It's just that there are so many factors that play in that and soon we start with the budget and look into these details.

  • That it doesn't make sense to do that more frequently for the long-term outlook.

  • But of course, we adjusted the cost now for this year.

  • Robert Reynolds - Research Analyst

  • Okay.

  • And then at the COSE project, is there any potential to extend the mine life beyond 18 months?

  • Michael Steinmann - CEO, President and Director

  • I'll pass it on to Martin.

  • Martin G. Wafforn - SVP of Technical Services & Process Optimization

  • Well, it seems to be a fairly defined, fairly small high-grade deposit that we have there at COSE.

  • So who knows?

  • When we get in there and we start developing around maybe we will have some success we'll find some more but not a lot of hope for that.

  • Michael Steinmann - CEO, President and Director

  • It's quite a limited land position there.

  • So yes, at this time, we are not counting on a big addition there.

  • But as Martin said, when we start producing and exploring a bit more, we'll have an answer to that question.

  • Robert Reynolds - Research Analyst

  • Okay.

  • And then just my last question is on the TC/RCs.

  • Have you looked at or do you lock into any longer-term concentrate sales contracts?

  • Or what's your typical structure for selling your concentrates at your mines?

  • A. Robert Doyle - CFO

  • Yes, Robert.

  • Rob Doyle, here.

  • We certainly do enter into some longer-term contracts, 12 months or more.

  • The market isn't particularly liquid beyond that.

  • The terms are certainly not nearly as aggressive in the longer term as they are in the shorter dates.

  • So we employ a variety of tactics and strategies around our concentrate marketing.

  • But long-term contracts are certainly an important part of that just to give us the stability and help us with our planning decisions and investment decisions.

  • Michael Steinmann - CEO, President and Director

  • And just to make that very clear, Robert.

  • That's only for the base metals in our concentrates.

  • A. Robert Doyle - CFO

  • That's correct.

  • Michael Steinmann - CEO, President and Director

  • Our silver and gold production remains and is always absolutely unhedged.

  • Operator

  • Next question comes from Mark Mihaljevic from RBC Capital Markets.

  • Mark Mihaljevic - Analyst

  • So first off, obviously, La Colorada delivering very well.

  • I just wanted to get a sense of how that underground development is tracking and whether you're comfortable with that 1,800 tonne a day rate will be sustained through the second half?

  • Or should we expect a bit of a dip back and then ramp up or sustainably beyond 2017?

  • Steven Luis Busby - COO

  • Yes, Mark, this is Steve.

  • No, we had good success on that development.

  • We did accelerate that development rate, and we got into the areas we wanted to ahead of plan.

  • So we do anticipate pretty stable performance going forward at 1,800 tonnes a day.

  • Mark Mihaljevic - Analyst

  • Perfect.

  • That's what we wanted to hear.

  • Secondly, I guess, is there an update on that Calcatreu option you'd given?

  • Michael Steinmann - CEO, President and Director

  • I don't have an update yet.

  • I think, Chris, I think -- do you want to weigh in here with drilling?

  • Christopher Emerson - VP of Business Development & Geology

  • Absolutely.

  • And Patagonia Gold have a option on this.

  • They are currently doing some twin drilling on the property.

  • And within a couple of months, we hope to have an answer on that.

  • Mark Mihaljevic - Analyst

  • Okay.

  • And I guess kind of circling back on San Vicente.

  • Just trying to get a sense of how you see the operation evolving over the next 6 months and then into 2018 in terms of sequencing of the grades and when you think you'll be back into the higher grades?

  • Steven Luis Busby - COO

  • Good question, Mark.

  • Yes, that's under pretty intensive analysis right now.

  • And we do see some challenges through the rest of this year.

  • We do know there is still some really good high-grade zones at San Vicente.

  • Some of our challenges are in those high-grade zones.

  • They are extending to depth that we don't know, really the full extents of some of these zones.

  • We got some exploration work to do around those zones.

  • That all leads to not wanting to mine it too soon because then we end up leaving pillars and leaving some very high-grade ore that we don't like to do for the long-term value of the project.

  • So those kind of analysis are going on pretty intensely at the moment.

  • And I wouldn't want to project out into 2018 if there's any changes to our long-term guidance until we go through our budget cycle this year and come out with the new figures in January.

  • But now, we are confident in deposit.

  • We are confident the reserves are there and the value is there.

  • We're kind of going through a bit of a hump in the road, if you will, as we try to sort out some of these more newer zones, newer of the high-grade zones that we're opening up and then we don't fully understand those zones at this stage.

  • Mark Mihaljevic - Analyst

  • And just to wrap up, I guess, I'll ask the obligatory question that obviously you guys have a very solid balance sheet at this point and we do expect a pretty meaningful kick up in free cash flow over -- actually really starting in the second half of this year and definitely ramping up into 2018.

  • So do you want to just discuss that capital allocation strategy and whether anything's evolved in the last 3 months since we last chatted on this?

  • Michael Steinmann - CEO, President and Director

  • Look, I mean we have now COSE and Joaquin, although they are small projects, and obviously, easily covered from our cash flow from production.

  • We're wrapping up here to spending in Mexico greatly in the second half of this year.

  • There will be obviously some work still to do at Dolores and some of the invoices will come in a bit later, so we'll have a final number, I guess, when we go into Q4 on that result.

  • So looking forward, next 2 years, where it stands right now with the 2 projects, there are -- there should be a lot of substantial free cash flow if everything stays the same, if metal prices stay the same available to us.

  • We are always looking for new projects.

  • You have seen that we have been active.

  • We are quite picky in choosing those.

  • We like good returns in those projects.

  • Have to be accretive.

  • You see the suite of our assets we have, they are low-cost mines, great producing mines, with long mine life.

  • So we're looking for kind of similar style additions.

  • We are active there, but there is nothing ready to share yet.

  • And obviously, we're still paying a dividend.

  • And once all the capital spend will be over this year, as I mentioned before, the board is looking at dividend payments quarter-by-quarter.

  • Operator

  • (Operator Instructions) The next question comes from Chris Thompson from Raymond James.

  • Chris Thompson - Mining Equity Research Analyst

  • A couple of quick questions here, we'll start off with Dolores.

  • I guess the sense that we have right now is that modeling the gold production similar sort of gold production to last year for the remainder of this year, obviously on an annualized basis but just honing in on the expectations for next year, you were mentioning that it's going to be a -- growth in gold production is going to be grade driven.

  • Can you give us a sense of what sort of gold grades you'd be -- we can expect?

  • Steven Luis Busby - COO

  • Yes, Chris, this is Steve.

  • I guess the best way to answer that Chris, is really look at that 2-year forecast that we provided beyond our guidance for '17 this year.

  • That's largely driven by Dolores gold production when you look at that gold production growth there.

  • As you know -- as we discussed, Manantial and we hadn't factored in COSE or Joaquin into that 2-year forecast.

  • Manantial, we're pretty flat now on gold production with just underground mining and low-grade stockpile processing.

  • So that's the best guidance I can give.

  • We're not seeing much change to that.

  • That's kind of what we're forecasting.

  • Chris Thompson - Mining Equity Research Analyst

  • Okay.

  • Great.

  • And can you give us a sense on the remaining CapEx spend, I guess, at Dolores as far as the pulp agglomeration underground for the remainder of this year?

  • Steven Luis Busby - COO

  • Yes, we're estimating somewhere around $14 million to $16 million in that project, the 2 projects combined.

  • Chris Thompson - Mining Equity Research Analyst

  • Yes.

  • Okay.

  • All right.

  • And then just quickly moving onto La Colorada.

  • Slightly better sort of silver grades, I guess, in the Q2 versus Q1.

  • Again, are we expecting an uptick again in silver grades in the back half of the year or pretty much like what we saw in the Q2?

  • Steven Luis Busby - COO

  • Yes, Chris, I would say we're seeing pretty stable grades through the rest of this year at La Colorada.

  • We are heavily developing in the zone of kind of ox -- oxidized and mixed ores that tend to have lower grades than the sulfide ores.

  • And it's just a matter of sequencing where we're at.

  • So it's pretty reflective, I think, of where we're going to see it for a while.

  • Chris Thompson - Mining Equity Research Analyst

  • All right, Steve.

  • And just -- and the CapEx remaining, I guess, as far as the expansion CapEx?

  • Is it all done at La Colorada?

  • Steven Luis Busby - COO

  • We just have a little bit left, maybe somewhere around $3 million to $5 million, I would think.

  • That's it -- and it's just finishing up some of the development.

  • We got a ventilation raise bore we're trying to get finished up there.

  • Chris Thompson - Mining Equity Research Analyst

  • Okay.

  • And then just moving on, I guess, to the base metal production.

  • I guess, just a sort of a broad general sort of comment, if you would.

  • Are we looking at stability as far as base metal production in the second half versus the first half or?

  • Steven Luis Busby - COO

  • Great question, Chris.

  • One of the things we see -- I would say, relative to La Colorada, yes, it looks pretty stable going forward.

  • Relative to Huaron and Morococha, it's a very interesting question.

  • There is -- it's a fairly dynamic situation between the exploration we're doing between the optionality we have on the various ore deposits that we mine, whether we're into a heavy copper zone or a heavy zinc zone, we kind of got some optionality there that we're playing with.

  • And it can go either way.

  • So there's a chance you'll see more zinc production with less copper.

  • And there is a chance you'll see more copper with less zinc, and it kind of depends on the way the team directs their mine sequencing down there.

  • Chris Thompson - Mining Equity Research Analyst

  • Perfect.

  • And then final question guys, if you would, just this COSE development.

  • Obviously, you mentioned the CapEx.

  • You mentioned the throughput.

  • What should we be looking at from a cost perspective just plain operating cost for this asset?

  • Steven Luis Busby - COO

  • I'll let Martin give you some -- we got some rough general cost per tonne figures probably.

  • Martin G. Wafforn - SVP of Technical Services & Process Optimization

  • Yes.

  • And I don't have it actually -- I think the overall cost per tonne for the project that we're looking at right now is when we put it into the fact that mining is going to be expensive and then we got to transport it from the project to Manantial Espejo, which is in the order of $60 a tonne to do that.

  • The actual processing is going to be a little bit more expensive.

  • But Manantial, I think that's another $57 a tonne that we're counting on for that but it's a bit more reagent consumption at Manantial.

  • And then we've got mining as well and because it's going to be fairly low production rates and quite challenging ground conditions, we're counting on about another $160, $170 a tonne for that.

  • This is very high grade but small and going to be quite expensive.

  • So we're in the $250 to $300 a tonne range for mining -- for overall operating costs for the project.

  • We'll come out with some more details on that shortly.

  • Chris Thompson - Mining Equity Research Analyst

  • Sure.

  • Since we're talking about great grades there, can you quantify that, just ballpark?

  • Martin G. Wafforn - SVP of Technical Services & Process Optimization

  • Sure.

  • We can give you an idea of that, Chris.

  • Overall we're looking at grades of -- in and around, if we include the inferred resource which we've done for the purposes of this press release, we're looking at about 15 grams of gold, so 0.5 ounce of gold.

  • And we have 775 grams per tonne of silver.

  • Actually, the indicated resource by itself is quite a bit higher grade than that.

  • Sounds funny enough but it's just the way it works out.

  • We'll come up with those --

  • Michael Steinmann - CEO, President and Director

  • For sure qualifies as high grade.

  • Chris Thompson - Mining Equity Research Analyst

  • I'd agree with that.

  • Operator

  • The next question comes from John Bridges from JPMorgan.

  • John David Bridges - Senior Analyst

  • I was just wondering the tax rate or the tax paid this quarter was on the low end.

  • I just wondered what sort of tax rate we could look forward to in the second half.

  • A. Robert Doyle - CFO

  • I'm the unfortunate one that has to answer that one.

  • Yes, I mean the tax rate is obviously quite variable when you look back over time.

  • We're still targeting somewhere in the mid-30s as a long-run effective tax rate based on the taxes we pay in each jurisdiction.

  • So I'm going to stick with that even though we very seldom seem to come anywhere close to that, it's either way more or way less.

  • The factors that pushed us down to 4% effective tax rate this period, you'll notice we did adjust out in our adjusted earnings because those were predominantly FX-related and a one-time tax windfall that we had.

  • So we did adjust those out of the adjusted earnings to reflect that those are not kind of part of our core business.

  • John David Bridges - Senior Analyst

  • Okay.

  • Okay.

  • And then the increased projects' capital that's all related to the acquisitions in Argentina?

  • Or is there any change of scope at Dolores and/or La Colorada?

  • Steven Luis Busby - COO

  • Yes, John.

  • This is Steve.

  • We do have a little change of scope at Dolores the underground primarily.

  • We are coming in under budget on the pulp agglomeration.

  • We are coming in over budget on the underground net-net, we're probably looking at about a $10 million to $15 million overrun on the combined project, which I believe was around $112.5 million.

  • So that's part of it.

  • And then the rest of it is all at COSE and Joaquin spending.

  • John David Bridges - Senior Analyst

  • Okay.

  • And I know you don't sort of know what the shape of Manantial is going to be when you've got these 2 -- the satellite deposits up and running.

  • But what is it you're targeting there?

  • What's your vision for that deposit or for that mill?

  • Michael Steinmann - CEO, President and Director

  • The vision, I think, for Manantial still stays the same, as I mentioned, concluded most of the open-pit mining underground mining at Manantial will continue into 2019, which is supplemented by low-grade open-pit ore that has been stockpiled and will go to the plant now and basically what we are kind of treating or toll treating or treating that high-grade ore that Martin mentioned starting at COSE and later on coming in from Joaquin as well.

  • So until we have the final numbers on Joaquin, I think we can't answer that question yet.

  • So meanwhile, we gave you the numbers on COSE.

  • Manantial stays the same.

  • And we give out the 3-year guidance and have the PA ready end of year on Joaquin where we will have the final answer to your question.

  • John David Bridges - Senior Analyst

  • And is this like a sort of Australian situation where a mill sort of just goes on and on for a long period, it's trucking in ore from long distances?

  • Or is -- what's the sort of target market for acquisitions in that part of the world that they're within trucking distance?

  • Michael Steinmann - CEO, President and Director

  • Well, there has been a lot of exploration in Santa Cruz in the past.

  • As you know, there are a lot of junior companies, Argentine, and a lot of Canadians as well.

  • Several discoveries have been made and most of them have been too small to justify building own plant.

  • We'll see what else is there.

  • At the moment, these 2 came up on our list as being the highest grade, as Martin said, this is especially for the smaller ones who are very high-cost mining.

  • So you have to look at very high grade to make that work.

  • We'll for sure keep our eyes open to see what else is around there.

  • Operator

  • The next question is a follow-up question from Lucas Pipes, FBR and Company.

  • Lucas Nathaniel Pipes - Analyst

  • I wanted to circle back on the royalty payments that were kind of different from the quarter of the sale.

  • And maybe I missed it, but did you tell us what that impact was in the second quarter?

  • And then how should we think about maybe normalizing that impact there going forward?

  • Michael Steinmann - CEO, President and Director

  • Actually, did not give you the number.

  • I know there is -- there are some ups and downs there nearly every quarter.

  • As I said, there is a timing difference.

  • We pay the royalty when the concentrate leaves country.

  • And we obviously don't get paid immediately for it.

  • I think, that's correct, Rob?

  • A. Robert Doyle - CFO

  • Yes, that's right.

  • It does relate specifically to Bolivia where we pay a government royalty upon the concentrate exiting the country and -- but the actual revenue recognition only occurs when the concentrate is shipped from a port in Chile.

  • So you can imagine that any concentrate that's left Bolivia but hasn't yet been shipped is stuck in this situation where we paid the royalty to the Bolivian government but haven't yet recognized the revenue.

  • So in isolation, the revenue in that period would be 0, but you'd have a royalty charge.

  • So that's the timing difference.

  • Of course, it all washes out over time.

  • There's some periods where we benefit, some periods where we pre-pay it effectively.

  • But it all washes out -- from memory, I think it was about $1.5 million difference this period.

  • But I can circle back to you if that's important.

  • Lucas Nathaniel Pipes - Analyst

  • No, just wanted to get a sense of magnitude.

  • Operator

  • This concludes the question-and-answer session.

  • I would like to turn the conference back over to Michael Steinmann for any closing remarks.

  • Michael Steinmann - CEO, President and Director

  • Thank you, operator.

  • Obviously, a solid quarter.

  • We have been very happy with the performance we've seen here.

  • As you saw, expansion of our mines in Mexico is nearing completion.

  • And capital spending there will come to an end or will be greatly reduced here in the coming months.

  • Really looking forward to get the benefits of that capital that we spend over the last 2 years there and looking forward to the rest of the year.

  • And have a great rest of the summer, everybody, and we'll talk again in November.

  • Thank you very much.

  • Operator

  • This concludes today's conference call.

  • You may disconnect your lines.

  • Thank you for participating and have a pleasant day.