Pan American Silver Corp. (PAAS) Q4 2016 Earnings Report, Transcript and Summary

Welcome to the Pan American Silver Fourth Quarter and Year-End 2016 Results Conference Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions [Operator Instructions]. I'd now like to turn the conference over to Siren Fisekci. Please go ahead, Ms. Fisekci.

Thank you, operator and welcome everyone to Pan American Silver's fourth quarter and year-end 2016 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 Web site. In a few moments, I will turn the call over to Pan American's President and CEO, Michael Steinmann who will provide an overview of the quarter. We will then open up the call to questions-and-answers. Joining us for the Q&A portion are Pan American's Chief Operating Officer, Steve Busby; our Chief Financial Officer, Rob Doyle; our Senior Vice President, Technical Services and Process Optimization, Martin Wafforn; and our 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.

Thank you, Siren, and welcome everyone joining us today to discuss our results for Q4 and for 2016 year. Before we begin, I would like to alert you to a change in the adjusted earnings we reported last night. And it was due to an error in accounting for inventory adjustments that we refer to as net realizable value of inventory adjustments or NRVs. Adjusted earnings are non-GAAP measures and thus there has been no change to our reported earnings for our financial statements. After correcting this error adjusted earnings for Q4 2016 were $19 million or $0.12 per share, previously reported as $27.5 million or $0.18 per share. For the full year 2016, adjusted earnings were $86.6 million or $0.57 per share, previously reported as $95.2 million or $0.63 per share. We apologize for that change. Let’s go now on to the results. Our Q4 results cap-up but has been a very good year for Pan American and our shareholders. We beat our original guidance provided in January 2016, on silver production, cash costs and all-in sustaining costs. Cash costs in 2016 declined 35% from 2015, down to $6.29 per payable ounce of silver. In addition to lower direct operation costs, increased byproduct credits helps drive costs down. All-in sustaining costs or AISCSOS also fell. 2016 all-in sustaining costs came in at $10.17, down 32% from 2015. The strong performance in cost combined with the year-over-year increase in metal price contributed to higher profitability. Net earnings in 2016 were $102 million or $0.66 per share. For Q4, net earnings grew about $22 million or $0.14 per share. As mentioned above, adjusted earnings in the quarter were $19 million or $0.12 per share, and for the year were $86.6 million or $0.57 per share. Earnings in 2016 were adjusted for the $16 million gain that we realized on the Shalipayco sale and the Maverix transactions. Cash flow generated in 2016 was very robust. We generated close to $215 million, more than double of what we generated in 2015 at an average silver price of $17.30. We are entering 2017 in a very strong financial position. We had expected to draw-down on our cash balance during 2016 to fund the heaviest period of spending on our La Colorada and Dolores mine expansions. In fact, we only saw a small decrease in our cash balance after funding not only the expansions, but also repaying $23 million of short-term and exercising borrowings in Maverix. Our cash and short-term investments at the end of 2016 were about $218 million, and the total debt had declined to $43 million. Our working capital at the end of 2016 was just under $430 million. Further, we are at the tail-end of spending on the current expansion projects with around $60 million remaining to be spent in 2017, mostly under Dolores expansion. Sustaining capital in 2017 is expected to be in the range of $82 million to $88 million, and remain in a similar range for 2018 and 2019. All of these factors support an increase to the dividend. We announced last night that we are doubling the quarterly dividend to $0.205 per common shares, effective with a dividend to be paid in March. The increase in the dividend does not constrain our ability to invest in growth projects, and we will continue to be prudent towards our capital. Our view is that the business and our outlook over the next three years support higher dividend level. In 2016, fundamental changes in the Company operations have begun to transform Pan American into a low cost silver producer. These changes position Pan American for widening free cash flow in 2017 and beyond, depending of course on metal prices. The biggest change to our operations is the expansion of our La Colorada and Dolores mines in Mexico. Investment in new facilities at these mines will enable us to produce more silver at lower costs by improving recoveries and operational efficiencies. In 2016, the La Colorada mine achieved record annual silver production of 5.8 million ounces. The new mine shaft and sulphide processing plant began operating in Q3 2016, and to ramp up to higher rates has been constrained only by development of the underground mine. This work has been progressing well, and we expect all the mining rates to rise up to the designed 1,800 tons per day by the end of 2017. The expected productions for 2017 to rise to 6.4 million to 6.9 million ounces, loaded towards the back end of the year. Silver production in 2018 is expected to rise further to about 7.7 million ounces. At Dolores, the new power line that connects the mine to the national power grid was energized in Q3 2016, resulting in annual savings of approximately $9 million. Construction of the new pulp agglomeration plant is about 65% complete, and development of the new underground mine is advancing towards delivering first ore by the end of 2017. Dolores achieved record gold production in 2016 of 103,000 ounces with silver production coming in at 3.8 million ounces. Dolores reported negative cash costs of $1.08 in 2016, demonstrating the benefit of growing gold byproduct credits. Another significant change in our operations plus the mechanization of our mines in Peru, the mechanization of these mines combined with the cost reduction efforts at all our other operations contributed to the substantial decrease in consolidated cash cost in 2016. Looking out over the next few years, we expect the structural change in costs at our Huaron mine and the expansions in Mexico to contribute to widening operating margins. On January 12th, we issued our three-year outlook for the years 2017 through 2019. This outlook is an improvement over the one we issued in January 2016. Silver production is expected to rise from a range of 24.5 million to 26 million ounces in 2017, up to 26 million to 29.5 million ounces by 2019. Gold production will also increase to reach 175,000 to 200,000 ounces in 2019 as gold production from Dolores clients. Cash costs declined from a range of $6.45 to $7.45 in 2017, down to $5.20 to $6.80 per ounce in 2019, while all-in costs declining from a range of $11.50 to $12.90 in 2017, down to $9.30 to $11.60 in 2019. Information on the assumptions used to forecast cash costs and our sustaining costs is available in our January 12th release. In terms of a quick review of operations of our other mines, we expect to continue open pit mining at Manantial Espejo through the early part of this year. Underground mining at Manantial Espejo is expected to continue into 2019. Last week, our previously announced acquisition of the Joaquin project from core mining closed, Joaquin is located approximately 145 kilometer from our Manantial Espejo mine, well within trucking distance. With available planned capacity, following the completion of the open pit mining, we have begun work on technical studies to determine how much of the high-grade portion of Joaquin walk-in’s mineralized material can be economically treated at Manantial Espejo. In 2017, we are also planning additional exploration around Manantial Espejo mine. At our Huaron, Morococha and San Vicente mines, we expect steady state operations. Last night we also released our year-end reserves. We more than replaced silver reserves in the year ending 2016 with approximately 286 million ounces of silver and 2 million ounces of gold. We added about 38 million ounces of new silver mineral reserves, which more than replace to roughly 32 million ounces we depleted through mining during the year. The highlight was again our mine La Coladada, despite our crews being busy with the development work on the mine expansion which prevented the deep drilling access we still achieved an 8% year-over-year increase in reserve, while maintaining silver grades of around 400 grams per tonne. We had good success at our other mines too, at San Vicente we increased the total silver ounces contained in the reserves by 3% to 40.6 million ounces, and increased the overall reserve grade to 478 grams of silver per tonne, the highest reserve grade of all our assets. In 2017, we are planning to invest about $21 million in exploration. In closing, Pan American demonstrated solid financial, operational and exploration results in 2016. We clearly demonstrated impressive levels of cash our business can generate. In 2017, we are looking forward to the completion of our two mine expansions. Our outlook for the next two years shows higher production and lower costs. We have the financial capacity and the discipline to invest in growth opportunities that can add value for our shareholders, while allowing them to enjoy higher dividend level now. And this concludes my formal remarks. I would like to open the line now for questions.

Thank you. We will now begin the question-and-answer session [Operator Instructions]. Our first question comes from John Bridges of JP Morgan. Please go ahead.

Just want to bring this out, but the inventory adjustment. I am just wondering you’ve got a number of adjustments in your calculation. Could you remind us what inventory, and I think there is another one, which is non-standard. Where are they coming from and what happened with this error?

Definitely a very complex adjustment that happened quarter-by-quarter, and I will pass on to Rob for further explanations.

Our overall principal with adjusted earnings is trying to come up with earnings for the core business. And so any items that are unusual or outside of our normal business or perhaps long-term in nature, and don’t relate to the specific period we will consider adjusting out. So, for instance you’ll see that we’ve adjusted out some gains on sales early on the year of about $25 million related to our sale of Shalipayco, and the spin-out of Maverix. So, there are items like that that go-through adjusted earnings. There’s also unrealized FX adjustment that occurred both on our treasury balances, as well as on our deferred tax balances, so there is some unrealized FX adjustment that go through. And then specific to the error that unfortunately was reported last night that’s related to the heap inventory at the Dolores, which unfortunately the wrong number was picked-up and put into our adjusted earnings as an add-back to earnings. And that wasn’t picked up in our review process. So, that’s the reason for the particular number.

And the philosophy behind the inventory adjustment there?

No, it's normal course, the normal inventory net realizable value where we calculate the realizable value of the heap and compare that against our cost basis.

On reserves, congratulations on outing reserves, I guess there won’t be too many companies doing that this quarter. And the problems you had at La Colorada with like of access to the deeper levels. How many ounces do you think that affected and when we’ll be adding reserves again at La Colorada next year?

Obviously, over the period of time, we’ve struggled to get those deeper drill accesses to get down deeper into the structures, which we assume there. Where we had big success in this last year being expanding out on to some additional structures, lateral which been historically mined and sort of going back into there and drilling out some additional resources and reserves, and that’s given us this happy ending to the results reserve in La Colorada this year.

John, as we’re waiting here, I think our point there is really that our sound deep exploration potential still remains. As we mentioned, we will have, hopefully in 2017, again time to build this cross-cuts and drill deeper down as you probably know from earlier release as we had. We drilled a few very deep holes from different locations, and still intersect the economic mineralization deep-down down to the 1,000 level in some of the structures. So, I think we just wanted to make clear that people understand that the down-deep exploration potential at La Colorada in some of the structures for sure remains, and has not been eliminated yet.

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

Couple of questions here, but I will start with reserves, because John was just on that topic. Dolores reserve grades down call it on average 20% between gold and silver. Meanwhile, ounces didn’t necessarily change. Can you just walk me through what happened there, and what the main reason is for the decrease in grades?

I guess, there are a number of moving parts in the Dolores reserve estimation this year. One is we’ve got lower operating unit costs broadly from operational efficiencies. We have the next competitive valuation and we’re actually increasing our production rate now 0.4 to 20,000 tonnes a day with the addition of the pulp agglomeration plant. So that gives a gain on our unit costs. We’ve got higher metal price assumptions in our reserves this year. We’ve added the underground reserves last year they were reported as resources. We had money depletion obviously during 2016. And then finally, we’ve got a new resource model with the new geological interpretation that we’ve done for this year. And so, when you put all those together, you see that we came out roughly little on ounces, but as you noted, some reduction in grades. Anyway, we’re putting all that together in a technical report, which will get the details in the next 45 days.

Just maybe going a bit deeper there, I guess I struggle all those inputs, I appreciate results in slightly lower grades by having higher metal prices, lower cut-off grades, depreciating peso, that all make sense. I guess I struggle to see how ounces, when you add-in underground resources and reserves. I struggle to see how ounces stay flat, while the grade drops 20%. To me, there must be something that was a material change to your geological interpretation?

To address out, the 43-101 will detail out a new production schedule to both the open pit and the underground, and stockpile similar to what we had in the old 43-101 that was done in 2014, May of ’14. When you see that, it’s all going to be a lot clearer there. I will say generally speaking, the new geologic interpretation relative to that study that was previously produced when you compare those two together, you might see about 15% reduction in grades between those two studies all else being equal. And that is addressing a reconciliation thing that we’ve seen over the last couple of years, and I won’t say that that’s highly variable, so we’re kind of using the last two years’ experience to take that through the rest of the mine line, and that’s the change.

And then just with respect to the higher metal prices used. Any inside or just reason the strategy behind going with higher metal prices, that’s question one. And two would be on using the same metal prices as last year. Do you have a sense of where your reserves would have been?

Well, the metal prices, if you look back we tried to be in the range, we don’t want to go crazy when metal prices go up. But our long-term prices we believe are higher than that, but we took care of that with a slight increase of $1.50 in the reserve of estimation. I mean long-term consensus prices are quite a bit higher than that. So, I think we are in a very comfortable pace. For reserves as you know you have to be always very careful when you do your pricing for the reserves to still keep a nice margin, but also not to high grade your mine. So I think we take care of that by adjusting these prices. But if you look, historically, we never went crazy highly those prices because in our businesses to create healthy margins and value for our shareholders. The answer on how much the metal price change -- maybe I'll pass that on to Chris…

Obviously, as you rightly mentioned with the higher prices and the low course, we obviously do have effect where maintenance blocks to switch back into proven and probable reserves. If I gave an estimate, I would say maybe one-third but was it down so that reclassification. And certainly we can give you further details if you would like it maybe if you would like we can get in touch with you to give further detail.

And maybe, Michael, just with respect to thinking mine plans, if I am mistaken, the 2017 through the 2019 guidance uses different prices than reserves. Is that correct?

That is correct. Craig, this is Steve. We’re using $17 silver $1,200 gold, $2,500 zinc, $2,100 lead and $5,400 copper for the three year outlook.

And so with the mine plans in the guidance be based on reserves and then just be applying those metal prices to say to get the cost figures?

That’s correct. Yes, when we do a reserve, we look at the long-term life of mine and price average price that we expect to get. In every year as we do our budgets and plans of course the prices are always different. So, we try to keep in plan and mine to the reserve as best we can with some minor modifications each year depending on prices.

And then I might have missed this, I joined the call late. But just with the Kootenay results, La Negra resultsr that were out this morning. I don’t know if you guys can give an update just your latest thinking there, and with Alamo Dorado coming to a close here, How close you guys are on the making I think big here a development decision there?

Of course, Craig, I mean we’ve been in the Kootenay joint venture now for best part of the year, I think we’ve had great good success as we go through the La Negra pressure, which was obviously found by Kootenay. We are obviously doing field drilling. We are looking to certainly build on a resource which we hope to release to the market at some point in 2017. And we’re obviously building on what we hope is the deposit as well as the regional exploration potential that we think is there.

Next question comes from Mark [technical difficulty] of RBC Capital Markets. Please go ahead.

Thanks, and good morning everyone. Good afternoon to the Toronto folks, so couple of questions for me. So, just wanted to get your thoughts on where you see the dividend playing out in other forms of capital occurrence over the next couple of years, obviously, now that you’ve reacted to dividend backup.

Sure. I think the reason really is the dividend increase is we had a great 2016. You look forward to our prediction for the next three years; our forecast, which looks very solid at the metal prices that we assumed for the forecast. And that we always like since 2010, we pay dividend, which obviously moves up and down because we are in a cyclical business here. But we always think that we have such a profitable and stable business that we can return dividend to the shareholder. And will it be -- we’ll adapt to the cash needs we have. Obviously, number one for us are always accretive new projects, growth in an accretive basis is obviously our top priority like always. And I think we’re going to provide that. You saw that in our forecast just with the operations we already have, plus we added a few projects in Argentina, Mexico, which hopefully during this year will show even further growth. So there will always be a dividend. We try to maintain that. And it was time to increase it at this point to give a bit more return to our shareholders. But as I said, don’t be worried, growth is still there and our idea to meaningful accretive projects long changed that.

Then I guess going on to Joaquin. Again, you guys are looking to target a higher grade smaller deposit than would it been previously outlined. Do you have a sense, what you’re seeing there and when you’d be in a position to provide an update to the market?

I’ll just jump in here. The technical guys are obviously working on it. As you mentioned, it's going to be quite a bit smaller, quite a bit higher grade for the reason that we have to truck that material to Manantial, as we said about 145 kilometers. So, it's not going to be the size that core has in their files. But as we know we just closed last week, we have started working on it, and we’ll have obviously all the technical information together, I guess, in the next few months where we can give you additional idea, how many of this ounces we will be able to mine and truck to Manantial. But there is definitely high-grade core in the deposit that was the reason that attracted us to that deal.

Do you have a benchmark for the trucking costs per kilometer?

Yes, it's about $0.25 a tonne kilometer, I believe, is what we’re using there, it's not in reference.

Then moving on, I guess, with the way taxes are done in Mexico, we have a pretty big true-up in Q1 as you pay the EBITDA tax and the taxes from the previous year. So, just wondering if you had a sense for what we could be expecting in Q1 this year?

That is true. There is a lag effect in our taxes, and we expect to pay much higher installments in 2017 based on our still 2016 income tax generated. So, yes, we expect in March we will be facing some fairly large payments somewhere in the $25 million range.

And then just one last one from me, again, I guess there has been some chatter about environmental royalty being put in place in Zacatecas that obviously the industry has been challenging. I was just wondering if you had an update on that and if you had a chance to work through the potential impact to you guys?

Yes, there was a environmental waste tax passed in Zacatecas, inside of Zacatecas state, and the Mining Association in Mexico and many other minors are trying to digest that tax. It's a fairly complex tax, deals with greenhouse gas emissions, deals with waste products. We’re still trying to digest what that means to us. And we’re still working closely with our counterparts in Mexico, as well as with the government in Zacatecas trying to deal with this. And at this time, we don’t really have any firm figures as to what the impact would be.

The next question comes from Chris Terry of Deutsche Bank. Please go ahead.

Couple of questions for me just first one on the base metals side of the business. Can you just talk through a couple of the moving parts in the forward guidance on an asset-by-asset level, I guess. Just to talk through how the couple items zinc moves over time?

Just in general, as Michael said, we’re seeing pretty much steady-state operations at Huaron, Morococha, San Vicente, which make up a large part of our base metals. La Colorada is going to be ramping up. We’re going to be seeing more lead and zinc coming out as that underground mining rate ramps up to that 1,800 tonnes a day by the end of the year. So, you’re going to be seeing increases there. In terms of Morococha and Huaron, the steady-state we talk about, there will be a shift out of copper that we saw heavy copper during 2016 into heavier lead over the next -- heavier zinc over the next couple of years. So, there will be a bit of a shift that takes place there. It's not real material overall but apart from that, everything else is pretty steady-state.

And then just in terms of the ramp up, maybe on more of a quarterly basis. What do you see coming up, it is the third or the fourth quarter this year? Or is it is a slow progression throughout the year, and then into next year that we see Dolores and La Colorada start to step-up a little bit?

In terms of La Colorada, we’re expecting a pretty much straight line increase throughout this year, achieving our 1,800 tonnes a day by the end of the year. We’re starting off the year just around 1,500, 1,550 and moving up for their pretty much straight line. In terms of Dolores, we’ll see the pulp agglomeration plan start, our target is mid-year July 1st. So then we’ll start ramping up. We’re expecting a ramp up over three, four, five months at Dolores up to that 20,000 tonnes a day that Martin mentioned. And going back on La Colorada, keep in mind to that 1,800 tonnes a day, 1,400 of that that we’re targeting is sulphide ore and 400 that is fixed oxide ore.

And just also maybe for Michael on the balance sheet, I mean you’ve touched on this with some of your other answers. But what is the latest thinking just on the net cash position, and what you might do with that use of cash over-time?

Well, I can tell you what we’re going to do, and we’d love to give you the numbers. I think right now since it’s always difficult to answer your M&A questions, obviously. But what you saw what we did I think in the last year is adding this sometimes smaller but potentially meaningful prospects in Mexico and Argentina, that’s very close to some of our operations, a lot of synergies and a lot of good reason for us to purchase them. But they don’t -- not going to make a big ramp obviously in our cash position as you saw than normal. Normally, what we paid now is for Joaquin it was $15 million in cash and 10 million in shares. But I’ll let Rob give you the numbers on the cash.

We certainly expect that our treasury balances will grow over the course of this year, that’s after paying for the project capital at Dolores, as well as the sustained capital that we’ve guided on. So, should end-up with a very and even stronger treasury. And of course we still have the untapped revolver of roughly $300 million available. So, we have 10-year of liquidity at our fingertips.

Just keep in mind, as Rob mentioned before, that there will be some heavy tax payments at the beginning of the year. And obviously the $15 million cash payment to core in first quarter.

Next question comes from Cosmos Chiu of CIBC. Please go ahead.

Just few questions from me here, let me first talk, again on tax, maybe a question for Rob. Rob, you mentioned that the true-up usually happens in Q1. But in Q4 2016, we also saw a large cash tax that came in. How does that usually work in terms of when -- would you expect higher taxes once again in Q4 2017 then? Is that how things work or…

Cosmos, actually the reason for the high taxes is in Q4 where mostly on withholding taxes, which are paid when we repatriate interest between our entities. So, it's rather random event to be honest with you. And so, the taxes that we see ahead of us are going to be payment on 2016 income tax and in higher installments in 2017 because of 2016 performance.

So should we -- so what it’d be like $25 million a quarter, or is it $25 million that you mentioned in Q1 2017. It's going to be lower later on during the year?

Yes, we would expect it to be much as when we pay the top-up taxes, and certainly Q1 should be the heaviest from a tax payment point of view. And then it should be low after that. But probably something like, I would say, somewhere estimating around about $10 million of cash taxes each quarter thereafter in that neighborhood.

And since I have you here, Rob, the other question I have, and sorry for dwelling on this issue in terms of this error here in the adjusted earnings. I am just not fully understanding, so I am looking at the adjusted -- your table for adjusted the earnings here. You have $6.619 million for the NRV adjustment. Is that the number that’s incorrect?

That is the number that is incorrect, yes.

But I also see a number that’s similar to it when you adjust for your cash cost per ounce to 6.35 million for Dolores. So, the number seems to be correct. So is it the sign that’s incorrect, so you have subtracted it? Is that what's happening here?

The number was just picked up incorrectly unfortunately. So the after tax effect is about $8.6 million on our adjusted earnings.

So, it should really be a negative $2 million plus minus in terms of -- if I were to adjust for that, this detailed table here, right?

Yes, then we will be publishing the correct table when we release our MD&A as part of our audited financials.

[Operator Instructions] The next question comes from Lucas Pipes of FBR and Company. Please go ahead.

So, I wanted to follow-up a little bit on the cost guidance. When I compare it to some of the previous projections that you have put out, it seems like things didn’t really change at all. But of course metal prices have changed. And I was wondering as you think about the range for 2017, and to the extent you can comment on 2019, '18 as well appreciate that. The range is fairly wide what would cause you to be at the higher or at the lower end on the cost side is that a function of mix, or other things you could point us too I would appreciate that? Thank you.

Generally speaking, the guidance for '17 and '18 has moved of anything favorably compared to the outlook we provide last year for those same years. We’re seeing little bit marginally higher production little bit marginally lower cost and then the metal price improvements. The thing that’s driving the bigger spreads I guess for ’17, one of the things that’s driving it is we do have Alamo Dorado, which is in its last few months literally of production from the stockpiles during this first quarter of ’17. And because it's not producing a lot and the cost that we assigned to that versus reclamation in the G&A and how we split that, there is a bit of uncertainty there. So that’s driving a little bit of our reasoning of why we gave a little higher spread there for ’17. And in ’18 and ’19 is kind of following our typical logic as we reach out on our outlook, we give ourselves a little bit more breathing room both on the upper-end and the lower-end. So I think it's safe to say that our targets are mid-range of each of those points going forward.

Lucas, please when you look at the forecast, make sure that you read that in together with the full note there that we put out that state, obviously our base metal and gold credit, or gold price and base metal prices, which were result as a credit. And also the exchange rates that we assumed for that calculation. So, you have to make sure you take that into account. Obviously, as Steve mentioned, numbers already changed and some of the byproduct prices are slightly higher than what we assumed there.

And then Michael changing topics, you mentioned a couple of times in the prepared remarks and then also in the Q&A section that the ability to maintain growth, having flexibility with your balance sheet, even with higher dividend. Where does M&A factor into your thinking? Has that changed at all, or are you more focused on organic growth projects? Thank you.

Look, we are looking always at both. This is growing silver, good silver assets and always not that easy. We have very great suite of assets. So adding organic growth is obviously a very efficient use of capital for us, and you saw that and we’ll see that to expansions there and hopefully we’ll see something which call kind of semiorganic growth too with the addition of Joaquin in Argentina. So, this is very efficient use of capital. So you will always see that, right with. Our teams, very strong technical teams, they always have and are out there to look what they can do on our assets and as we keep replacing reserves. This is now over 14 I believe 14 years that we more than replaced what we mined over the last 14 years. So, as long as we keep replacing reserves, we can always keep looking at this organic growth, as I said, very efficient use of our capital. But then we always look also around the new things and other opportunities. I think I stated in many occasion that we want to stay a silver producers, and we’re not going to add a pure gold mine to our mix. Our shareholders like the exposure to the silver price and that’s what we provide with our Company. And I believe it's a very strong and profitable Company that you can invest between one invest in silver. So, while I can’t tell you which project I am looking at, I can tell you that there are predominantly silver projects. There is silver as you know geologically comes with some gold and with some base metals, but we will not deviate from the strategy that we are a silver producer.

And then maybe one last question. Since November, climate in North America changed slightly. And I wondered if as it relates to tax adjustments here in the U.S., bilateral relationships between Mexico and the United States. Do these things have an impact on Pan American? Do they have an impact on how you think about capital allocation? I would appreciate your thoughts on what’s happening on the political side. Thank you.

Well, these changes are pretty fresh. And I think we don’t know yet what they all going to be. We will see what they’re going to be and react to it. I mean we have no operation in the U.S. Obviously the Mexico and U.S. relationship will have some impact to the Mexican economy, to the Mexican peso, which will have again an impact obviously again to our costs. But all-in-all that’s we’re running mining companies and mine in Latin America and Mexico. So, I think the effect all over will be, I believe over the longer term in higher gold and silver prices, because there is a certain element of instability that has been introduced right now, maybe that’s going to change over the next month, we will see. But that could have a positive impact on the prices. But beside that, I can’t tell you what the impacts will be, because I don’t know -- we don’t know what the change is going to be.

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

Just a few quick questions, I think most of them already been asked. But I was wondering if you could give me a quick breakdown on project capital between in La Colorada and Dolores both for the fourth quarter here, which is about $27 million I think in total and for the 2017 spend?

Justin, Steve Busby here. 2017 as you’re firmly right off the top, but of the $58 million to $62 million that we slated for sustaining capital, roughly $6.5 million to $7.5 million of that is for La Colorada, so not much, most of its slated at the Dolores expansion, $51.5 million to $54 million.

And I was wondering, so for the power line that’s going in La Colorada, what do you expecting the impact on costs to be from that?

We’re not expecting a big change in costs, because we are on the grid power right now. The thing is we’ve got two low voltage lines that come into the sight that we’re running on, we’re going to replace it with one high voltage line. So really the benefits going to become and reliability and run time is what we see, not on cost per kilowatt hour.

So the last thing from me then, I’ve noticed you guys -- you had some date of inventory I’ve been picking up over 2016. I think my calcs are 184 for the fourth quarter here. Is that something that we can expect going forward, or are you going to expect that to drop back down?

The biggest driver to inventory is valuation, and as prices go higher, mine value is going to go up. So that’s -- most of our revenues is in the form of concentrates about 60% of our revenues comes from concentrate. So, it does take some time to move that inventory and to monetize it, that’s the number that we track very closely as well. And we don’t see any particular change as we look forward.

And just so this hasn’t come up yet. Any updates on Navidad the Argentinean situation?

Really nothing has changed so far. Although, there are likely court or federal government there is obviously keep doing the right work to attract foreign investment. There it's still the same political process that has to happen in the Province of Chubut to allow us moving forward. So, I can’t give you any news on this one right now.

We have a follow-up question Craig Johnston of Scotiabank. Please go ahead.

Just quickly, following up on Dolores, any chance with the higher metal prices, lower cut-off grades that your strip ratio in the open pit is coming down, or has come down?

Crain, yes, that’s a good assumption. The basic outline of the ultimate pit doesn’t change that much. Again, it’s really topographically constrained. So, what you’re seeing is relative to these reconciliations of new modeling interpretations is just shifting ore, waste ore in this case, within that same volume. So, it’s safe PS, the strip ratio is coming down.

We have no further questions, at this time. This concludes the question-and-answer session. I would now like to turn the conference back over to Michael Steinmann for any closing remarks.

Thank you very much operator. And thank you everybody for being on the call this morning and looking forward to discuss with you our Q1 results in May. Thank you very much.

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