Pan American Silver Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2023

Key Takeaways

  • Pan American has integrated four Yamana mines while selling non-core assets (Mara, Morococha, Agua de la Falda) and repaying $280 million of high-cost debt, leaving $750 million of undrawn credit and targeting ~$90 million annual cost savings plus $40–$60 million of synergies.
  • In Q3 the company produced 5.7 million ounces of silver and 244.2 thousand ounces of gold at all-in sustaining costs of $18.19/oz (silver) and $1,451/oz (gold), though La Colorada faced ventilation constraints and El Peñón saw lower-than-expected grades, prompting infrastructure work (mid-2024 completion) and a mining sequence review.
  • Management has reaffirmed 2023 guidance for precious and base metal production and unit costs, anticipating results at the low end of ranges and marginally higher silver costs due to La Colorada delays and expanded security measures.
  • The La Colorada Skarn preliminary economic study (PEA) is on track for year-end release, evaluating a sublevel caving method and funding options; Escobal’s ILO 169 consultation in Guatemala continues with three site visits, next meeting Nov. 10 and care-and-maintenance ongoing.
  • Financially, Q3 showed a net loss of $22.7 million (EPS ‑$0.06) and adjusted earnings of $3.1 million ($0.01/share), with operating cash flow of $114.6 million; Pan American has paid $130.5 million in dividends YTD and holds $386 million of cash and short-term investments.
AI Generated. May Contain Errors.
Earnings Conference Call
Pan American Silver Q3 2023
00:00 / 00:00

There are 15 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Pan American Silver Third Quarter 2023 Unaudited Results Conference Call and Webcast. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Wednesday, November 8, 2023. I would now like to turn the conference over to Siren Pasecki, Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you for joining us today for Pan American Silver's Q3 2023 conference call. This call includes forward looking statements and information and makes reference to non GAAP measures. Please see the cautionary statements in our MD and A, news release and presentation slides for our Q3 2023 All of which are available on our website. I'll now turn the call over to Michael Steinmann, Pan American's President and CEO.

Speaker 2

Thanks, Yaron, and thank you, everyone, for joining our call today. Let me begin with an update on our progress integrating the assets we acquired The 4 new operations into Pan American's organization and advanced on streamlining the new company with the sale of non core assets. We have also reorganized the Humana Latin American Regional Offices in line with focusing support to the mine operations and continuing to enhance Corporate oversight, leadership, systems policies and procedures by taking advantages of substantial synergies and business improvement opportunities. Working with the new teams, we are evaluating many We look forward to sharing more with you on that in the coming quarters As we advance detailed studies and near mine exploration programs and update the life of mine plans. We committed to rationalizing our portfolio following this transformative transaction, and we have made significant progress on that objective Earlier than I think most would have expected and with additional opportunities yet to come.

Speaker 2

In Q3, we completed the sale of our interest in the Mara project in Argentina and the Morococha mine in Peru. And on Monday, we completed the sale of our interest in the Agua de la Falda project in Chile. In Q2, we divested certain non controlling Investments, which are largely inherited from Yamal. We increased our equity interest in New in Q3 to 11.6 percent of New Pacific's outstanding common shares, helping to further advance interesting Bolivian silver projects, Deleveraging our long standing operating success we have enjoyed at San Luisente over the past 24 years. We also committed to paying down certain higher interest that incurred for the Yamana transaction.

Speaker 2

We repaid the amounts drawn on the sustainability linked credit facility and as of September 30, We have the full $750,000,000 available on our credit facility in addition to working capital of $832,000,000 which includes cash and short term investments of $386,000,000 Total debt of $809,000,000 is largely related To 2 senior notes, Pan American assumed to the amount of transaction as well as lease and construction loans. These notes have attractive terms, dollars 500,000,000 with a coupon of 2.63% maturing in 2,031 and $283,000,000 with a coupon of 4.625 percent maturing in 2027. Pan American has an enviable strong balance sheet, which gives us the flexibility to manage business cycles And capitalize on growth opportunities. The steps we have taken to divest non core assets and repay debt will also significantly reduce costs going forward. We expect to save approximately $90,000,000 in cash annually, Primarily from the elimination of care and maintenance, project development and reclamation costs associated with Mara and Morococha.

Speaker 2

In addition to interest expenses from having repaid the $280,000,000 that was drawn on the credit facility at the end of June 30, 2023. We expect further savings from the Yamana acquisition in the form of synergies, which we continue to estimate will be about $40,000,000 to $60,000,000 annually. Finally, it is important To remember that we retain future upside on both Tamara and the Agua de la Falda projects to the precious and base metal royalties we retained With the strong counterparties in those projects. With that, let's move on to our results for the Q3. Acquisition of the 4 Yamana operating mines has provided a significant increase in production with reduced unit operating costs and enhanced Diversification.

Speaker 2

We produced 5,700,000 ounces of silver and 244,200 ounces of gold in Q3. All in sustaining costs for the silver segment were $18.19 per ounce and $14.51 per ounce for the gold While operating performance at most of our mines was in line with expectations, 2 operations faced unique challenges, which waited on Q3 results. In the silver segment, La Colorada continued to be impacted by ventilation constraints. These constraints resulted in reduced throughput, limited access to higher grade zones of the mine and required intensive ground Port renovations in areas where high heat and humidity have rendered older ground support methods ineffective. We do not expect an improvement in La Colorada's performance until the new ventilation infrastructure is completed around mid-twenty 24, And we are able to increase development and mining rates in the deep East part of the mine thereafter.

Speaker 2

We are making good progress on that work. The excavation of the concrete lined shaft reached a depth of 5 22 meters by the end of Q3 2023 and is expected to be fully excavated to a depth of 593 meters by year end. We expect installation of 2 large exhaust fans on the surface of the shaft will be completed by mid-twenty 24. Commissioning of this large primary ventilation system will deliver the refrigerated fresh air we currently produce Directly to the heat source in the deep eastern area work phases and immediately exhaust vertically to the fully concrete lined shaft. This will avoid sending hot air back through the mine, where it is damaging our ground support systems.

Speaker 2

In the gold segment, mined gold grades were lower than we were expecting at El Penon. Based on recent reconciliation data, We have initiated a review of our mining sequence in certain sections of the mine to achieve a more stable gold production. Over the next several months, we will be adapting to the mine development schedule for El Penon that should provide more flexibility when encountering unexpected grade in this highly variable deposit. The delineation drilling strategy has been reviewed to reduce the grade variation risk we are currently encountering. El Penon remains one of our core assets with excellent exploration potential And excess mill capacity, supporting that mine as being an important contributor to the company's future cash flow.

Speaker 2

Given year to date production and our outlook for the next 2 months, we are reaffirming our annual 2023 guidance ranges for silver and gold production With the expectation that production for both will come in at the low end of the ranges, we expect the gold segment cash costs and all in sustaining costs to be within our guidance ranges from 2023. We expect Silver segment cash costs and all in sustaining costs To be marginally above our guidance range, largely due to ventilation constraints at La Colorada, I mentioned earlier, And the 2 weeks expansion of operations at that mine in early October to address security concerns as previously disclosed. We are maintaining our 2023 guidance for base metal production and sustaining and project capital expenditures as well. We reported a net loss of $22,700,000 in Q3 or a basic loss per share of $0.06 Adjusted earnings were $3,100,000 or $0.01 per share. Operating cash flow was $114,600,000 Net of $35,800,000 taxes paid, including the cash dividend of $0.10 per common share we declared yesterday, We will have paid $130,500,000 in total dividends this year.

Speaker 2

Turning to the La Colorados Carne project, we are on track to release the preliminary economic study by year end. The study will be based on using a sublevelcasing mining method, which we believe offers superior economic benefits given the size and geometry of the large silver baron polymetallic deposit. We will carefully consider potential alternatives for the optimum funding structure for the Skyrm project Once the preliminary economic study is released and all of the development details, risk and opportunities can be thoroughly discussed and debated. The ILO 169 consultation process for the Azkopale mine in Guatemala continued to progress in Chile. Pan American has now hosted 3 visits to the mine for Chinca indigenous representatives and their advisors, and several other meetings have been held.

Speaker 2

This included working meetings with Cinco representatives and Guatemala's Ministry of Energy and Mines, or MEM for short. I know many of you check MEMS website for the Escobal consultation, which does provide very transparent reporting on the process. I noted that the MAM had intended to complete the consultation by the end of October. Although the schedule was not met, All the participants continue to engage in a peaceful, comprehensive, transparent and good faith consultation process. The next consultation meeting is scheduled for November 10.

Speaker 2

And as usual, we are not providing a time frame for completion of the consultation While the consultation process moves ahead, we are also continuing with our care and maintenance activities for Escobar. I would like to congratulate the Pan American team in Guatemala for receiving 1st place in the environment category from Guatemala's Chamber of Industry for their work on reforestation and conservation project. The project involves an innovative approach to reproduction of oak trees within the Escobar mine area with the primary objective of revitalizing forest regions If you would like to learn more about this, we have a video posted on Pan American's LinkedIn page, where we regularly Post updates on some of our company's initiatives and events. In closing, we are pleased with our progress on the integration of the Yamana assets, It is delivering Pan American with significant production growth and reduced unit costs. We are currently preparing our plans for 2024, Focusing on safe, reliable, cost efficient operations and the development of additional value enhancing future growth opportunities.

Speaker 2

We will continue to evaluate ways to streamline our overall portfolio with the aim of remaining the world's premier silver mining company. Together with the other members of our management team, we would now be happy to take your questions.

Operator

Thank you. Ladies and gentlemen, we will now conduct a question and answer session. Your first question comes from the line of Cosmos Chiu. Your line is now open.

Speaker 3

Thanks, Michael and team. Maybe if I can start off with El Penon first. And I guess you know what I'm going to ask in terms of The shortfall in grade. Am I reading it correctly? I guess in Q3 your head grade was 98 gram per tonne and 2.7 gram per tonne for gold.

Speaker 3

If I look at the proven and probable, it's closer to 213 gram per tonne For probably $148 per tonne, so the grade in the quarter was about half Gold and silver compared to your reserve grade. Is that correct? And maybe if you can elaborate on kind of what happened?

Speaker 4

Yes. Cosmos, Steve here.

Speaker 3

Hi, Steve.

Speaker 4

How is it going? Yes. Basically, if I can talk first about in Q3, we had anticipated mining and we've been developing For most of the year according to a mine plan that was developed previously in 2022 and we were planning to develop into these high grade Structures that would be mined in the second half of this year, 3 of those structures and keep in mind, El Penon is Spatially quite vast. We're mining several phases across vast areas about 12 kilometers by 5 kilometers. So it's Spread out quite a bit.

Speaker 4

So there's a lot of development that goes into these areas all over the different mine. And there were 3 of these areas that were particularly high grade Gold, not so much silver that we go into. So when you look at the reserves, that average is correct, But the distribution depends the sequencing can affect that grade quite a bit. Now when we mined into these areas, What we discovered is that looking back now and evaluating what happened there, 3 of those areas that were particularly high grade had very limited drilling information on it. It was Spatially drilled quite a bit wider than the normal reserves that we'd like to see.

Speaker 4

So we're reconfiguring our Drill programs to target these higher grade areas in the future. If it was really a Q3 impact, it's going to carry us over into Q4, Because they were scheduled to be mined this quarter. So we're going to be looking at those areas, drilling more and kind of Increase in the density of drilling, if you will, particularly in the higher grade zones of the reserves, we're just finding it's not to the level That gives us the risk tolerance that we want to see. So that's going to work into our plans for next year. And depending on how that increased Drilling goes, that will kind of adjust those higher grade zones that we're seeing.

Speaker 4

I think we're going to see positive and negative surprises as we do that, Just the variability of the ore deposit. But according to your question on was the silver grade really half of that, The answer is yes, and that's sequencing. We do have higher grade silver zones, but the average grade is about 158 gram Sober on the reserves when you put the P and P together. So we were 98. That's just sequencing, yes.

Speaker 4

Just to add, Cosmos,

Speaker 2

As Steve explained, with an undercapitalized exploration project here that Yamana was running With not enough drill density as we would do it. And in order to fix that, we increased now drilling on-site About 10,000 meters a month, we actually will spend quite a bit more. I mean, that was like paring back greenfield drilling like far, Far away and focusing really on further drilling on-site. So we'll further increase that drilling to kind of catch up with What should have been done in the past? And then I'll be very confident here that I mean, I was just at the mine Couple of weeks ago and I've seen some really interesting intercepts there.

Speaker 2

So that drilling, as I said, back now at 10 or more 1000 meters a month and we'll increase further here in the coming month.

Speaker 4

And Cosmo, if I can kind of add a little bit more detail As we mined into those high grade zones and we didn't see the ores that we expected, at El Penon, there's quite a bit of feed that goes So the plant that's low grade, so when we're not producing off the mine, we supplement rather from the low grade stockpiles, which are quite a bit lower silver grade, And that's what drives that.

Speaker 3

For sure. And if I can follow-up on that question. In terms of Q4, I don't know how much you can share with us, but You've maintained your guidance for the year, but how much of these higher grade stopes have you factored into your Q4 number and how much of hitting those Q4 numbers is dependent on getting some of these higher grades up. I'm just trying to figure out how much conservatism you factored in, in light of what in light of the great shortfall that you realized in Q3?

Speaker 4

Yes. So we're moving into Q4, Cosmo, anticipating we're not going to see that high grade that we had anticipated in the original mine plan. So where we say we're going to still make the gold guidance on the low end, it's really looking at our other operations to kind of make up some of that difference.

Speaker 3

Of course. Okay, great. Maybe if I can switch gears a little bit, going to Escobar and Guatemala. Thanks, Michael, for the update. On top of the conversation, I think we're all aware that there was a presidential election earlier on this year.

Speaker 3

There could be a there will be a presidential transition early next year. However, there seems to be a bit of noise in terms of the Supreme Court And validity of the runoff in terms of election, how much should we monitor that situation? How much of that situation Could potentially impact the timing of Escobar.

Speaker 2

Yes. Of course, I hand you over to Sean McAleeris here, who is running Guatemala for In contrary, so please, Sean? Yes. I think

Speaker 5

yes, it's hard to speculate what the outcome will be with some of that noise that you mentioned. The President of Guatemala has publicly stated his commitment to smooth transition. At the Ministry of Energy and Mines, the transition team from the newly elected has met on several occasions with the MEM, and so they are moving forward to have a smooth transition in January. As well, we've met with members of the incoming team a few times. And it's hard to say What's going to be the timing and if there's going to be any delays, certainly if there's a transition and

Speaker 2

the process isn't completed by the end

Speaker 5

of the year, we would expect That would take some time to continue that on. But they're committed as well to the ILO 169 consultation process. And so we're looking forward to a government transition in January, and we'll continue working with the government as needed.

Speaker 3

Great. Thanks, Michael, Sean and Steve and Suraj. Those are all the questions I have. Thanks again.

Speaker 2

Thanks, Cosmos.

Operator

Your next question comes from the line of Ovaiz Habib

Speaker 6

Hi. Some of my questions have already been answered and thanks for the color on opinion. But I did have 2 more questions. Just number 1, post Yamana transactions, obviously, one of the priorities was to sell non core assets. It was really great to see the sale

Speaker 7

of Mara as well.

Speaker 6

Are you expecting to continue to monetize non core assets? And are we expecting any sort of release Or any sort of update on asset sales by the end of this year?

Speaker 2

As you know, this is Selling assets is a very dynamic process in doing deals. So I can't give you exact timing, but we're definitely working, as I mentioned in the Preamble to this call that we are working on further optimization of our portfolio. So that's continuing. There is Quite a few more assets from that we have in our portfolio that don't really impact our operations Our production profile right now and we got some inbounds and interest. So we definitely will continue that process.

Speaker 2

I'm really, really pleased what the team has been able to achieve and really short like I think we announced in summer after only 3 months. If you look at the big numbers, that really allowed us to repay for the full year or for the last, what is it now, 10 months, Just about below just quickly about $398,000,000 in debt. We also for the full year paid about 100 and $30,500,000 in dividend, including the dividend payment that just has been announced yesterday. So A huge change obviously to our already strong balance sheet before, which was really supported Despite this asset sales, just let me mention again that I put it there in the press release, we're looking at about a 90 $1,000,000 annual saving in care maintenance costs, project development costs from Mara and Moroccocha. And then plus, as you saw, we repaid our line of credit fully.

Speaker 2

So there is savings, substantial savings on interest payment there as well. So these three things together amount to about $90,000,000 Now you have to add on top of this, synergies, we talked in the past, we always guided somewhere around $40,000,000 to $60,000,000 synergies. I think we are pretty confident here that we're going to be at the upper end Of that range on the synergy side, I think there is still a bit more to do on the optimization we're working on and Some further synergies that are coming in, and we have to wait for the really end of the year when we have all the final tally and numbers. And Early, I guess, early next year, we'll have the final number there on the synergies. So big changes from those disposition of assets, And that theme will continue.

Speaker 2

Do we have something ready to share it with you This year still or early next year, as I said, look, that's a very dynamic process. So I can't really pin the team down On 1 month here more or less, but we'll for sure try the best here to advance that theme and continue that theme that we started

Speaker 6

Thanks for the color on that, Mike. And just in regards to the synergies, obviously, you mentioned 40,000,000 to 60,000,000 Have you already started seeing those synergies kind of going into Q3? Or I'm guessing we are expecting more kind of going into Q4 and more into 2024?

Speaker 2

Yes. Some is in Q3, but very little. On the synergy side, for sure, Not on the care and maintenance costs. As remember, the closing of those deals Happened really, especially Maramorogocha, which are the biggest ones on the care and maintenance, closed like later in, I think like just a week before So no advantage reading Q3 on that. But from Q4 on, we will see the full effect Of those savings and then of course that will go into the next year, 2024, together With some additional synergies that we will be able to harvest there as well.

Speaker 6

Okay. Sounds good. And just switching gears a little bit, last question from me. We saw that you had increased your stake in New Pacific this quarter. How do we think about Pan American's position on the solar science project and then on Bolivia as well?

Speaker 2

Yes. Look, we are in Bolivia since 1997. It took a long time with San Vicente. It has been a very That's the place for us. And also this quarter, Sami Sands did really, really well.

Speaker 2

So that's To continue and it's a place that we are very happy doing business. Now you look at New Pacific and there are big discoveries there. There are Exploration discoveries is still earlier stage, but they're all of the size that are absolutely It would be of interest for Pan American if they come through as a mine. And with our experience in Bolivia and as I said and combined with that large size on the silver side, Of course, that's of interest for us and that's really the reason why we continue we have been in New Pacific from the beginning We liked the project very early stage, and we did some of the first financing to help bring in that exploration and drilling forward. And when New Pacific look for financing, we were happy to increase slightly our stake and continue to advance and help to advance those projects in Bolivia.

Speaker 6

Perfect. And that's it for me in terms of questions. So thanks for taking my questions, Michael.

Speaker 2

Thanks, Orest.

Operator

Your next question comes from the line of Carey MacRury from Canaccord Genuity. Your line is now open.

Speaker 8

Hi, good morning guys. Just a question on Cerro Moro. There was a big jump in the on-site direct operating cost this quarter versus last quarter. Just wondering if you can give any color on what drove that increase?

Speaker 4

Yes. So I think Hi, Carrie. This is Steve. Overall, I think the cost at Cerro Moro, It's reflecting the development we have to do to get to some of these really high grade variable ore deposits. So Our development rates increased, the mining widths have kind of decreased according to schedule.

Speaker 4

So it was pretty much on plan Relative to what we anticipated for overall spending there. And then I think financially, we had some impacts on the effect of the cost.

Speaker 9

Yes. Hi, this is Ignacio. In addition to what Steve just mentioned, it's worth mentioning that there was a buildup of inventory At the end of Q2, the production in Cerro Moro was backloaded into Q2, the last couple of weeks of June and that inventory flushed out during Q3. So that was another factor contributing to the higher costs for Cerro Moro Q3 relative to Q2. Right.

Speaker 2

But just in general, I think we talk quite often about what are cost drivers On our side, so there's a big difference between our silver segment mines and the gold segment mines because the silver segment mines In many cases, come with base metal. So as these are byproduct credits, our base metal prices have a big impact to our costs Both places to go up or down, it can be headwind or tailwind for us. And another big impact is exchange rate. So depending on Any given country, that the impact can be quite big because we have quite a lot of spending in local currency. So We always have to keep that in mind.

Speaker 2

Of course, we look at it and not always at the per ounce base, but per Tom based, which is more like a neutral way for us to track the cost. So there we see obviously that variability, which is Often driven, as I said, up and down by other factors as well.

Speaker 8

Maybe just a follow-up to that maybe for Ignacio.

Speaker 2

So last quarter there was

Speaker 10

yes, last quarter there was

Speaker 8

I think $32,000,000 of fair value adjustments relating to the Amana transaction. Like I'm just wondering Are there still fair value adjustments flowing through these numbers this quarter? Or have those pretty much worked out now?

Speaker 9

Yes, those were minor PPA adjustments. So to keep in mind that our initial purchase price allocation that's just preliminary. We have a year to finalize those numbers. We didn't see any more changes In Q3. So I'd say stay tuned.

Speaker 9

As I said, we have a year to finalize those numbers. But I think all those small changes are mostly flushed out in Q2. And as I said, we have a year and we'll see how those numbers end up when we finalize our analysis on the purchase price.

Speaker 8

All right, great. That's it for me. Thanks guys.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Don DeMarco from National Bank Financial. Your line is now open.

Speaker 11

Thank you, operator, and good morning, Michael and team. We'll start off with Escobar. We're seeing some a lot of activity in In terms of the meetings here, number of visits, but I think to the mine and other engagements with the Ministry of Mines and so on. Appreciate these details, but can you share what is discussed at these meetings? I mean, why would this be the need to go to the mine Are they impressed by the minor?

Speaker 11

Or what's the nature of their visit? And what are they looking at when they go?

Speaker 2

Obviously, I mean, this is a very open process as we always described, and our doors are open to a lot of visitors. And we had those visits by the Sinca representatives as well. So where I see it is very positive. And Yes. A lot of activity around the consultation and mine visits during this quarter.

Speaker 2

Maybe Sean, do you want to give some more color to that?

Speaker 5

Yes. The first visits we had in August, that was over 40 members of Shinkah Parliament came to the mine site. It was the first time a lot of them had well, first time all

Speaker 2

of them have been to

Speaker 5

the mine site. So just a general site tour, an overview of what the mining activity is, what the operation is, Visit to the underground mine, to the processing plant and tailings facility. So obviously, You can imagine that a day long tour and then lots of questions around those tours. And then there were 2 other visits where we talked about water and then another visit, which focused on our filtered tailings facility And questions around the design of that facility and some of the other aspects of that facility. So And during the meetings, we're going into some detailed discussions about water quality, water quantity.

Speaker 5

And so it's always pretty dynamic meetings and lots of learning and Q and A. So it's been pretty productive and really good dialogue over the last quarter.

Speaker 2

Thanks, Shaun. As I said, look, a very positive and open dialogue here, That is, of course, the way that the consultation has been held so far, and we obviously support that way.

Speaker 11

Okay. Well, thank you for that, Michael. And so looking ahead at this consultation, the process we have a judge that will A quarter judge will weigh on the process and determine if it was carried out to true ILO 169 standards. But what happens beyond that? I mean, at that point, the consultation would largely be concluded.

Speaker 11

Is it will you then be negotiating or Having continuing your discussions with Tresynka or other members, what happened beyond that or decision?

Speaker 2

I think the process is outlined in our On our slides as well on our website, once the consultation is finalized, the report We'll be handed over about the consultation to the Supreme Court in Guatemala, And the Supreme Court will then determine if everything has been followed in the process. And I would assume in the court ruling that's afterwards after that decision, Ma'am, can we decide to reinstate our mining license? So, John, is that Yes,

Speaker 5

that's pretty accurate. I think, yes, and I think we'll get some more color around that over the coming months, Incoming weeks and future meetings, so yes.

Speaker 11

Okay. Fair enough. Because the court can say the process Follow the ILO-one hundred and twenty nine, but that doesn't necessarily mean that the mine gets restarted. But anyway, we'll look for color In the coming months, but we're encouraged by this activity that took place this quarter.

Speaker 2

Yes, definitely.

Speaker 11

So, La Caulada, some of the previous callers touched on helping on. Ventilation is going to be completed by mid next year. So, what should we be modeling for AISC in the next

Speaker 4

Yes, I'd say we're going to be trending towards the upper $20 We are seeing some improvements. There has been some work done In reducing dilution, we're seeing better grades. It's really a tonnage play right now. We're trying to get air Pumped into some areas so we can get some higher throughput. And I think we're going to see some marginal improvements in that, but until that new shout I don't think we'll see a major change there.

Speaker 11

Okay. Thank you, Steve, for that on La Colorada. And then final question, just company wide cost They're actually heading into the Q4 last quarter of the year. Are you expecting an improvement versus Q3?

Speaker 4

Yes. From an operation standpoint, when we look at all the operations, I'd say, we're Seeing pluses and minuses and they seem to be balancing out. So I think Q3 is probably a reasonable projection for the operations side.

Speaker 2

Yes. I mean, really a lot depends on when we see a higher oil price again, it's coming up again a bit. Always a big, big impact to our operations, not only the cost, obviously, of diesel, but translating in higher cost across Support, there's definitely some more pressure on some inflation, but then there's some other costs that are also coming off. So Steve, so probably pluses and minuses here for next quarter.

Speaker 11

Okay. Thank you again. Good luck with the rest of the year. That's all for me.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Craig Jason from TD Securities. Your line is now

Speaker 12

open. Hi, guys. Good morning. Thanks for taking my question. Just on Lac Courant's follow-up question.

Speaker 12

On the throughput, should we assume the throughputs that we saw in Q3 are representative Are the throughputs we can expect until sort of mid next year until the ventilation is all up and running?

Speaker 4

Yes. Thanks, Craig. Steve here. Simple answer is yes, I think that's correct. I mean, we are focused on advancing development rates, which will generate a bit more ore.

Speaker 4

We brought additional contractor on. We are getting a little bit some of the areas with a little bit more air. So I think you'll see some marginal improvement In overall tonnage, but yes, once again, until that shock comes on, we won't see a material change in throughput.

Speaker 12

Thanks for that.

Speaker 2

Just to weigh in there, and I think Steve talked about there, we expect to

Speaker 4

We're on track to finishing the excavation by year end, And then we'll be installing the big ducting systems and the big fans or 2,000 horsepower fans each That we'll be putting on the surface and commissioning by midyear next year.

Speaker 2

Right. So all on time and as we indicated already like I think a couple of quarters ago.

Speaker 4

And on budget as well.

Speaker 2

Yes. Okay.

Speaker 12

And maybe just a question with Sarah Moore or maybe the Umana assets in general. The lack of drilling density that impacted the grades expected grades through El Pinon, is that a concern in some of the other operations like Cerro Moro? Do you have more confidence in terms of the drilling work that's been done to date and the great profile there?

Speaker 13

Yes. Hi, Craig. It's Chris here. Yes. Certainly, when we look at El Penon and we look at the spacing of the 60x60 and going down to 30x30 meters for that initial Gridding and drilling, when we look at Saramora, certainly see a higher ratio of drilling and certainly the ore shoots have behaved More consistently, even though very within the major structure of Escondida and Zoe.

Speaker 13

So no, we certainly don't have that Feeling in Cerro Moro and really, as Mike mentioned, the increase in El Tenon drilling Up to 10,000 meters on a monthly basis. We're certainly trying to catch up with some losses at the beginning of the year due to a change in contractors, which was completed in January this year before we got on to site. So certainly, we see that we're going to be catching up there.

Speaker 4

And if I can add, Craig, I will say reinforce that Jacobina absolutely no concern. We're seeing really good horizontals there and Good continuity. And even Florida, to that matter, we're seeing we need to get drilling out of hedges to get some more Tons into the reserve category, but that one's looking really good too to just share what Chris was talking about.

Speaker 13

Just to mention, in El Penon, we see some ice upside in the exploration, sort of more blue sky stuff. So it's certainly something we'll be concentrating on in 2020 4.

Speaker 12

Okay, great to hear. And maybe one last question for me. Just La Arena, the sustaining CapEx is tracking well below guidance.

Speaker 9

I think some of that has

Speaker 12

to do with lack of development of leach pad construction, some downpour preparation. But

Speaker 2

Is that something that's going

Speaker 12

to impact production next year or something you guys need to catch up on?

Speaker 4

Yes. Hi, Craig, it's Steve again. The main driver there is this pre strip capital and that's the way we account for pre stripping of the open pit. And what's happened is a big chunk of that got shifted to operating costs, this quarter and probably you will see that in Q4 as well. So I think, the East Coast, we're solid.

Speaker 4

It's just where we distribute that pre strip, whether it's capital or expenses. There are some dollars that you alluded to being pushed out into 2024 for PADD V expansion. And it's we're working through that. Right now, we seem to be on schedule to where it won't disrupt production, but we're definitely It's one of our key focus areas.

Speaker 2

Okay. Thanks, guys. Thank you.

Operator

Your next question comes from the line of John Tumazos from Very Independent Research. Your line is now open.

Speaker 14

Thank you very much for taking my question. Concerning new projects in general And the Colorado SCARN in particular, do you have a minimum hurdle rate threshold rate of Or do you rely on some qualitative instincts like exploration potential, Size, synergies with the next line next door, etcetera. Tell us how the Board approval I'm actually wondering what Colorado Skarn project will go in the context of your approval process.

Speaker 2

Sure. And just there's no Board approval at this point. We're obviously on a kind of a late stage exploration phase here with La Coloradas Tan and Asa said, we'll come out with our study at the end of the year. That will give us much more information and to the shareholders How big? Well, we already know it.

Speaker 2

So it's a very large discovery and how we think mining could look like over a very long time. When you look at hurdle rates, you mentioned a few things that play in this. There's a lot of factors that, of course, play into this. Long term metal prices have a very, very big impact to that calculation. So You especially in a project like the Skarn that goes over very, very long time, there's Obviously, some impact big, big impact on the capital number upfront and then big impact on the metal price You are using your model for later on.

Speaker 2

So there's a lot of things to play in there. But of course, it's At the end, it's all about the quality of the asset. It's about the mine life. It's about the exploration potential. We already know at La Colorada's Garden that We keep drilling and we just keep finding more and more.

Speaker 2

So we know this asset is still growing. We for the current study, obviously, have a cut off. I think it was like December 22. December 22, we drilled a lot of meters Since then, actually, it's Chris has told me it's 50,000 meter additional drilling. So that deposit is still to grow.

Speaker 2

This is just a Point in time that we're looking at it. But as I said and as you mentioned, a lot of factors to play into calculating An IRR for a project and a lot of decisions to what we like to see Depending on country, jurisdiction, size, location to other mines, as you mentioned, synergies with other operations, Etcetera, etcetera. So there's a lot of factors in there and lots of them will be discussed in our study.

Speaker 14

So for example, is 5% or 10% a minimum hurdle rate of return?

Speaker 2

5% would be a very, very low number, of course. That's not something we are looking really for. But as I said, look, it really depends what the metal prices are that are used, and that's probably one of the most critical and also Difficult decision when you look at very, very long mine life. Way easier obviously to Kind of come up with the metal price, if you look at a normal precious metal kind of projects that normally run like, let's call them, 10 to 12 or 15 years, very different when you look at long lives like the Skarn and not only that, but you're dealing with Not only silver on this side, but also lead and zinc and of course, concentrate Contracts that play a lot of into this as well. Just one side note here, which is really nice.

Speaker 2

Obviously, La Colorada polymetallic, a lot of zinc in there, a lot of silver as well. Just as a side note, La Colorada is producing a really, really clean Zinc and black concentrate already now from the veins and the metallurgical testing we do shows that this Tarn will produce the same. So that's very attractive concentrates in this term. So again, a lot of plays in there, but We would expect quite favorable concentrate terms for that kind of quality.

Speaker 14

So Michael, someone might be listening and reading between the lines in a way maybe you don't want to. Should someone infer from your explanation that this project requires higher lead and zinc prices than current prices, But because it's a many decade project, you're going to you might wait for lead and zinc to recover to $2 and Go ahead assuming that lead and zinc recovers to $2

Speaker 2

No. My point John is that The beauty of long life assets like everywhere in the world is that you don't have to kind of try to time For a zinc price or lab price or precious metal price cycle, we all know that it's very difficult to do because you have construction time Upfront and none of us knows where the prices go exactly, but that's exactly the beauty when you look at this very, very long mine lives That you're going to catch a few of quite a few of those cycles anyway, and that's the beauty that's the reason why Mining companies, especially large mining companies look for very large long life assets because it takes that risk out of the equation.

Speaker 14

Michael, one last one. I'm sorry to be so interested this morning. Some investors are impatient and their Clients have quarterly performance pressures on them and stuff like that. And they don't understand that it takes a long time, 4 or 5 years just to get to the PEA point here.

Speaker 3

And

Speaker 14

Sometimes in the stock market, they love Brex that publishes 150,000,000 ounces of gold that don't exist, And they disrespect meticulous engineers that take 5 years to plan the project. Do you think that it would be appropriate to buy back a little bit of your stock since Some of these short term investors might give up.

Speaker 2

We're thinking of a

Speaker 14

stale project It's like a junior stock that's going nowhere stale.

Speaker 2

Let me first answer on the timing. This has been incredibly If you think it's like, what, 5 years since the first drill hole in this car, resourcing up Tonight, a quarter, 1,000,000,000 tons of resource are still to grow as I said. If this will be a pure greenfield discovery, we were Talking probably about 15 or more years to bring a project to that place. The reason why it went so fast is obviously it sits below In Ola Colorada, one of our silver mines, so that of course helps with infrastructure and drilling way faster And got that work done. So the team has done an excellent job to advance that project that quickly To kind of an economic study here, so that's pretty impressive and would not be possible if it wouldn't be on-site discovery, which I may say it's very unusual to make that large of a discovery.

Speaker 2

Talking about share buyback that you mentioned, look, I said, we this year, the Board opted to return capital to shareholders in form of dividends. It's over $130,000,000 We're still working on finalizing the new dividend policy. We will probably put that in place at the beginning of the year, which is the normal Logic plays for us to do that. And it will be at the Board's discretion How we returned further capital to shareholders. We're paying dividend uninterrupted since 2010.

Speaker 2

Of course, we disposed quite a few assets, which had a very positive effect, as I mentioned, on our balance sheet. And And our shareholders participated with that with the dividend payment. So we'll see next year what the Board's decision will be, In what form and shape that return to shareholders will happen. As I said, this year, very strong dividend payments and

Operator

Your next question comes from the line of Lawson Winder from Bank of America Securities. Your line is now open.

Speaker 10

Yes. Thank you, operator, and thank you for fitting me in. Good morning, Michael, Steve and team. Thanks for your time today. Hopefully, I can keep my questions pretty snappy.

Speaker 10

I wanted to ask About Jacobina, so you guys provided the R and R update back in late August And the reserve grades at Jacobina for gold, the M and I and inferred grades M and I, in particular, declined quite materially. I wanted to ask the question Some of the drill spacing issues that you experienced at El Penon and what are some of the potential other factors? Thank you.

Speaker 7

Yes. Hi, Lawson. It's Martin Waffen here. Pretty much the change that you saw in the reserve grade at Jacobina It was related to looking at the metal prices and the cutoff grade, the operating costs going forward. We have a slightly different approach than the way that the Yamana was doing it.

Speaker 7

They were using A lower gold price than we use. We bumped up the gold price, We were also looking at the cutoff grade and how that works. And we were able to use a lower cutoff grade For our reserve estimation, it's based on our sort of methodology and that's brought in quite a lot of balances And took the overall breakdown.

Speaker 2

And my belief was it was being mined

Speaker 7

anyway. And so that's what happened there. That's what you see.

Speaker 4

Lawson, if I could add from an operating point of view, I think from my perspective, the operation is much more comfortable With a slower grade cut off, at higher grade cut off, there was a lot of piecemealing, if you will, of the deposits. And it wasn't it opens up the mining. It opens up some opportunities for us to lower that cutoff, to where we can look at more bulk mining Even above what they're doing now that could drive costs lower again yet. So that's really where we're trying to drive to It's looking for efficiencies and it may come at a little bit less grade, but it's that's what we're trying to That's what this whole optimization study that we're talking about is for Jacobina is where is that best sweet spot And can we mine more volume at a lower cost per ton and withstand a bit lower grades? That's going to be many months of study, but we're pretty optimistic walking into this.

Speaker 4

And I think that's kind of the taste what you're describing is Kind of a taste of where we see we'd like to take optimization, if you will, at Jacobina.

Speaker 13

And just drilling at Jacobina, I mean, it's By far, our most productive mine in terms of drill meters per ounce is added, and it's

Speaker 11

definitely an excellent asset.

Speaker 10

Now what would the implication be then for potential production growth?

Speaker 4

Great question. I get that a lot. Yes, Lawson, Steve here. I don't want to Speculate on what that's going to be. I just look at the ounces and reserves, the tons of grades.

Speaker 4

I look at the ounces and resource Sounds great. And it makes me excited. There's some opportunities here, but I don't want to speculate how big that happen. It's going to take us months to get through this stuff.

Speaker 3

Well, I

Speaker 10

can definitely hear the excitement in your voice. That's great. I just wanted to touch on that. But just Maybe you could just share with us today what the base case is for throughput? And then as a follow-up question to that, with respect to financing its construction, I mean, you mentioned That as potential consumers of funding going forward and have even sort of Suggested some cautiousness with respect to potentially more aggressive capital return.

Speaker 10

What are the prospects for partners that can help alleviate some of that some of those funding demands?

Speaker 2

I can start. I'm sorry, you're cutting in and But I think I got the question on this, Karn. So let me know if you need more details there. But Look, we need to finish the study, of course, and it will be out. And then we have a lot of numbers and details to discuss how this is going forward.

Speaker 2

We are very, very open to any way to look at this project later on. I think there is a lot A way to optimize return for our shareholders. That can be in different form and shape I can go from finding a partner or focusing on the silver to many other ways how to do that. And I really don't want to fix that yet because there will be a lot of details that need into that Need to go in that position, but I think a large deposit like this Karn opens up huge opportunity for us To optimize that return to our shareholders. So I think you should not just think in the normal K is just building the mine and mining it out over the next, whatever, 30, 40 years and doing it all ourselves.

Speaker 2

That could be one outcome for Sure, but there can be many different outcomes to optimize that return. So it's a little bit early, Lawson, once we have to study out there. I'm sure there will be a lot of activity going on, on how we can Optimize that and a lot of ideas, and we already have a lot of ideas how to do that. And we'll start sharing those ideas, of course, with Everyone, I think once we come out with the study and early into next year.

Speaker 4

And if I can add, Lawson, this is Steve, Relative to throughput on the Skarn, that is one of the most debated subjects we have here internally right now. And we are going to have to pick a base case as I understand it to present a base case. But I think we're going to open that debate even beyond ourselves and show some alternatives because it's very interesting to And show some alternatives because it's very interesting to look at throughput on this project. It's such a massive project. There are so many opportunities, Michael alluded to.

Speaker 4

And the more people we get, the more ideas we get, the better right now. So we're going to open that up a bit when you see the study coming up. Yes.

Speaker 10

Great. I apologize for the sound quality on my end, but I think you guys captured the nature of my question very well with your response.

Operator

There are no further questions at this time. I will now hand over the call back to Michael. Please continue.

Speaker 2

Thank you, everyone, for calling in today. Like usual, we will provide early 2024, our outlook for the New Year. I know it was later this year because of the transaction, but normally we do that in January, and we'll do that in January 20

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

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