Pan American Silver Corp. (PAAS) Q3 2017 Earnings Report, Transcript and Summary

Welcome to the Pan American Silver Third Quarter 2017 Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Ms. Siren Fisekci, Vice President of Investor Relations. Please go ahead.

Thank you, operator, and welcome everyone to Pan American Silver's third 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.

Thank you, Siren. Welcome everyone joining us today to discuss our third quarter results. Q3 was a solid quarter with net earnings of $17.8 million or $0.11 per share. Adjusted earnings were $23.3 million or $0.15 per share. Cost performance continues to be very strong leading us to reduce our guidance for 2017 cash cost for the second time this year. And we are maintaining our annual production guidance for gold and silver in 2017. Most important, we are starting to see the expansions at La Colorada and Dolores mine ramping very nicely, which underpins the rising production profile. Revenue in Q3 2017 was about $191 million compared with $233.6 million last year mainly because of lower quantity sold for silver and gold and lower realized prices. In addition, the value of our inventories increased by about $12 million during the quarter. Base metal sales were up quarter-over-quarter with higher productions and prices for zinc, lead and copper, all up around 30% compared with Q3 last year. We produced 5.89 ounces of silver in the quarter at cash cost of $3.12 per ounce. Given cash cost year-to-date of $5.04, we have again reduced our estimate for 2017 cash cost, this time to $4.50 to $5.20 per ounce, that's a 30% reduction from our original guidance provided in January, based on the midpoint of the ranges. Year-to-date, silver production totaled 18.4 million ounces and given our outlook for Q4, we're on pace to reach our annual guidance of 24.5 million to 26 million ounces. Silver production in Q3 was down largely because of discontinued production at Alamo Dorado. We finally complete the processing of all the residual ore at that mine, and due to lower production at San Vicente and Manantial Espejo. We had very strong production from La Colorada and we're just starting to see production ramp up from Dolores. I will provide more detail on each mines Q3 operating performance shortly. Gold production was 40,800 ounces, down 19% from Q3, 2016. We had expected gold production to decline primarily because of Manantial Espejo where we have completed open pit mining and done our supplementing underground production with lower grade stockpile material. With year-to-date gold production of 116,300 ounces, we're on track to achieve our gold production forecast for 2017 of 155,000 to 165,000 ounces. We’ve made some revisions to our outlook for base metal productions. Based on the midpoint of the guidance range, we have increased copper by 46% and modestly adjusted lead and zinc production. The specific guidance ranges are provided in our Q3 disclosure. I will now spend a few minutes discussing operations at each of our mines and how we see thing unfolding over the coming month. We have been very pleased with how the expansion of La Colorada ramping up. Mining and processing rates averaged just over 1,900 tons per day during Q3. Our target was to reach 1,800 per day by the end of this year, so clearly the expansion is ramping up better than expected. La Colorada produced 1.8 million ounces of silver in the quarter, up 32% from Q2 last year and accounted for roughly a third of our consolidated silver production. Zinc production was up 60% and lead up of 81% further benefiting cash cost, which dropped 74% to $1.71. All-in sustaining costs at La Colorada were down 50% compared to Q3, 2016 coming in at $3.48. At Dolores, we're currently ramping up the new pulp agglomeration plant which started in August, with the plant processing a total of 120,000 tons of high-grade ore in Q3. Total heap leach stacking rates have already achieved the expanded design capacity of 20,000 tons per day. Development of the underground mine is proceeding well. Our target is to have the first open production by the end of this year. Cash coast at Dolores came in at negative $0.57 per ounce while all-in sustaining costs were $8.03 per ounce of silver. At our mine improved, we've made several upgrades to the flotation circuit, which have improved recoveries, while maintaining concentrate qualities. The resulting increase in throughput has helped offset lower grades due to mine sequencing. Silver production of 939,000 ounces in Q3 was comparable to Q3, 2106. Copper and zinc production at Huaron was up quarter-over-quarter, our lead production was down. Overall, the increase in zinc and copper production and higher base metal prices resulted in cash cost of $0.31 per ounce and all-in sustaining cost of $2.94 per ounce. In addition to higher by-product credits all-in sustaining cost benefitted from improved concentrate terms. At Morococha mine, silver production was down 8% with a decrease in sliver upgrades by the same amount. Cash cost were negative $8.16 per ounce while all-in sustaining costs were negative $0.46 per ounce, a 22% increase in copper production compared with higher base metal prices contributed to those very low cash cost. Turning now to our San Vicente mine in Bolivia, operating performance has been impacted by our efforts to transitioning mining of the Huaron mine to more mechanized matters, similar to what we did at our Peruvian mines. That transition delayed our access to high grade stopes and led to higher mining dilution. As a results silver production declined 30% quarter-over-quarter and cash costs were $12.99 per ounce in Q3 2017. All-in sustaining costs were $18.62. At the Manantial Espejo in Argentina, we've completed mining from the open pit with production now coming from the underground mine plus lower grade material that was stockpiled during operation of the open pit mining. As a result and due to lower grades for mine sequencing, silver production was down 20% and gold 36% compared with Q3 2016, as cost came in $12.73 and all-in sustaining costs were $19.25. As you may know, we plan to take advantage of your excess capacity at Manantial Espejo to process two deposits we acquired earlier this year. At COSE, we are expecting to begin development of the decline this quarter. We are targeting production to start at the end of 2018 and run for about 18-months, producing approximately 112,000 ounces of silver and 2,300 ounces of gold per month. Further details on the working project will be provided in the preliminary economic assessment which will be available by year-end. Overall, our operations generated cash of $63.8 million in Q3, enabling us to fund our operations and repay all of our bank debt. We now have only $7.5 million of that which relates to capital leases. Our net-cash provision cash and cash equivalents and short-term investments unless total that grows to $178.8 million at the end of Q3 2017, an increase of $27.3 million since Q2 2017. At September 30, 2017, we had working capital of $409.7 million and the full 300 million available under our revolving credit facility. Given this strong financial position and the outlook for higher free cash flow generation as our Mexico mine expansions ramp-up, Pan American Silver is in a very strong position to grow value for our shareholders. That concludes my formal remarks. I'd now like to open the call to your questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Cosmos Chiu of CIBC Capital Markets. Please go ahead.

Just a few questions from me here, maybe first off on the La Colorado expansion, clearly it's performing better than we had expected, over 1,900 tons per day. But at this point in time, can you remind me once again, what's the capacity here? What sort of like the high watermark? What's the potential bottle neck? Is it the underground mining that's sort of catching up? Could you give us a bit more color?

I'll pass this on to Steve, Cosmos.

Cosmos, this is Steve. Yes, basically, it is our underground mining rates, as I mentioned in the past, our mining shaft has been designed to go ultimately drill a 1,000 meters in this first stage for our current 10-year reserve plus it's down to the 620 meter mark. So there's excess capacity even in the shaft at this current stage. We did build sulfide plant, it does have some excess capacity plus we have old sulfide plant available, if we really start the utility to grow. So, the bottleneck is clearly in the underground mining and it's the development and it’s the combination of development and balancing of the waste fill for the cut and fill operation, and today we feel this 1,800 tons a day designed -- give or take a 100 more tons a day, over's and under's 1,800 tons a day it's a design and feel pretty comfortable with that, we would have to do some other things to really think about trying to increase that underground.

And what kind of -- in terms of meters of advancement underground you're averaging per quarter?

I think we're -- our overall is about 9,000 to 10,000 meters a year in that neighborhood.

And then Steve can you remind me again in terms of the shaft, what's the capacity here? And how much -- are you hoisting all the waste backup to surface or you're leaving some behind?

Most of the waste stays behind the shaft, it's capable, it was designed for 2,200 tons a day in total, again I think there's probably little bit more capacity of that at our current stage, but most all of the waste we mine does stay underground, we don't really bring much to the surface at all, and actually we supplement that waste towards tailings from the plant to help with the fills.

And maybe switching gears a little bit and turning to Dolores here, the gold grade was a bit lower this quarter compared to last year, but comparable to what we've seen so far in 2017. Is that sort of par for the course for Dolores until some of the higher grade underground ore comes out?

Yes, I think Cosmos that's the reflection that we did start pile high-grade ore during the quarter in anticipation of the start up of the plants. So we did actually mine overall probably a higher gold grade then what we felt through the plant, or what you saw feed the plant is because we did stockpile probably 0.5 million tons or so ahead of the plan.

And then I guess you know, as you said Steve, the pulp agglomeration plant has started. Should we start to see some kind of, I don’t want to call recovery, you call the stack versus produced ratio? Should we start seeing that increase in Q4?

We expect to see it starts to steadily increase, yes. We're seeing really good recovery rates in the pulp agglomeration plant for the first stage of recovery. We do produce about 60% of the gold and 40% of the silver right away in the pulp agglomeration that has about $80 retention time and we get those kind of extraction rates. So that’s above the early stage recovery and then ultimately we're bumping now in the high grade ore, that goes to pulp agglomeration about 10% more gold and 20% more silver but of course that takes quite a bit of time out in the pad. So overall yes, I would say we are going to tent to see the recovery ratios kind trend upwards, it's going to be slow. These heaps are big and they are slow to react, but we're seeing that incremental recovery right from and we're really pleased, it's actually exceeding our expectations that we thought we would see there.

Just in general I would like to say how pleased I'm personally with this two projects in Mexico and how they call Morococha. They're in-house build first-class topnotch constructions obviously build at a time where metal prices soft for the few years ago, and that really reflected in the cost for those, project that was relatively low cost builds with really high client companies and contracts that help us achieving this great results, and I'm really pleased they are coming along either on time or faster than we expected, my congratulations to the team here.

Yes, I'd agree. I guess with the higher grades that you mentioned, Steve and Michael. I guess you're getting to some of the underground stopes in Q4. So should we be expecting some of that higher grade stope work coming from the underground? And also in combination, what you stockpiled in Q3 to be put through, the pulp agglomeration plant in Q4?

Yes, it's one thing in keep in mind Cosmos is we do have quite a bit high grade in the open pit as well, and the open pit mining rates on reality the kind of overwhelm the underground mining rates. So that additional tonnage as we start to stope mine in the underground, it won't really generate a big difference that you're seeing there and overall grade going to the plant. We will trip out some of the low grade from the open pit into the stockpile, but the reality is and certainly some of our best grades that we see throughout the deposits probably occur at the lower depths of the open pit. And there are probably areas in the open pit that they are higher grade in what we will see even in some of the underground, not a lot different in what we see in Manantial Espejo to reach life, some of our best grades came through the open pits there as well.

And Steve you mentioned the high of the heaps at Dolores here and getting pretty tall and pretty high enough. Is everything getting stocked on to the Valley heap leach, the leach path? And how high is it now like where are you stacking it.

Very good question, it is a very deep Valley filled heap. I think ultimately, our ultimate stack height will be about the just some under 200 meters or 180 meters or probably the thing it buries all the way around from the edges where you are stacking right against the liner to the center where it may reach depths of the 100 meters today. And as we started the pulp agglomeration plant, one of the factors was we wanted to keep the agglomerated or kind of on the edges where we would; one, see a quick turnaround; and two, really understand the permeability characteristics of this ore before we started stacking in the center, just to make sure it was performing well before we started putting it in a real deep stack. But things are really good or permeability of results are as good or better than we expected on the agglomerates, we are really pleased with the characteristics of the agglomerate. So we now are starting stack it, but it is a big heap like you're saying and the dilution aspects of that freight solution, if you will as a percolate down through big heap. It does tend to slow this I'd like to term it as a big ball of momentum, it's a big ball of momentum as we build it and that's everything just reacts very slowly.

Our next question comes from Robert Reynolds of Credit Suisse. Please go ahead.

Going back again to Dolores. Could you just provide a little more color around, what's the actual mining rate was in the quarter, not the process rate in that? As you mentioned, you stocked pile about 0.5 million tons, and then also what the separation was?

Yes, I don’t have that data right handy but I want to say we're just following up here. Can we get back to you on that, Robert? I'm sorry I don’t have that data right in front of me.

Yes, that’s fine. And then just looking at the pace of sustaining capital spent at Dolores 22 million year-to-date the outlook was 38% to 39%. Is there a big catch-up we should be looking for in the fourth quarter?

Yes, there will be -- Q4 is definitely going to be our heaviest quarter for sustain capital so there will be a catch-up there and then lot of that's reflected in our mining equipment, replacements and rebuilds there, that kind of all got stacked in the Q4 this year. So those will come through fairly quickly and we should see a pretty heavy quarter relative to then what we've seen so far year-to-date.

And just moving over San Vicente, the transition to mechanize mining. Is this something that's been planned for a long time at that asset? Or is this a newer strategy there? I guess I'm trying to gage whether you would have planned for this transition in your prior 2018 or 2019 outlook that was released at the beginning of this year?

Yes, what's happening there is, San Vicente has always been a combination of conventional kind of older stock hold mining or labor intensive mining systems and the mechanized mine from day one when we started the operation, the expanded operation in 2009. So, we have been running a mechanized mine there for virtually eight years already for half of the fee roughly to the plant over the last eight years and the other half was conventional. The issue was that conventional mining in the past was done on the Litoral vein, our high-grade vein which was a fairly large structure. I think overall the average width of that structure that we mined was eight meters. So what's happening now when we talk about mechanization of the mine we're starting to slowly mechanize some of the more conventional mining, which is on now onwards vein structures that may go down as small as two meters or so. So our next -- we've kind of mined out of that Litoral, that big high grade zone, that was heavily mechanized and we're mining in now our high-grade zone is called the Union Vein. And the Union Vein is about three meters wide on average. So it's still a mechanized approach but it's directed towards more narrow vein mining, and that's really where we've had a lot of our success in technology improvements in Peru was those narrower veins. So that's when we talked about bringing that technology over the San Vicente, it's slowly starting to increase the amount of ore in the targets of the veins that we mine at San Vicente, increased the number of those areas that we do that out.

And then just a question on exploration ahead of the annual reserve resource update, which assets have you guys been seeing the best result year-to-date, maybe if you could just talk about where we should be looking for potential reserve resource increases at the end of the year? And then also you'll be taking a look at all on the metals price assumptions that you use to calculate, those reserves and resources?

I'll start here on the last part of your question, and then hand it over to Chris. Looking at metal price assumption we have seen fairly flat silver and gold prices during the year. So I would say from now until the end of the year, I don't see anything really any reason why we would change on those assumptions. Base metals are a bit high and maybe to a little correction there, but I would see very similar kinds that we implied last year for the reserve update, and to look in more details what we're doing I'll hand over to Chris Emerson.

I mean obviously we at the beginning of the year, posted a relative aggressive drilling program through the mines at around 115,000 meters, and then ramped 30,000 meters in exploration and more regional. I'm happy to report that all of our mines have been performing exceptionally well, we've actually increased the drill budget for the Peruvian operation and Morococha, Huaron which have all pretty much completed 50,000 meters drilling, and really that's where I would focus on potentially gains the next year in those particular assets. Yes, they're historic, yes, they have been in the past viewed more polymetallic and they are. And of course that is obviously helping in the exploration volumes with the current polymetallic pricing coming in. And these -- Morococha for instance with Toromocho and you've got all of those intrusive and limestone's, we're finding good results in specifically in Morococha and Huaron as well and I was very-very pleased. And La Colorado has essentially been an outstanding performer over the past years. Yes, we're drilling out sort of more lateral and having to go deeper. So that has a long resource base, and Dolores, we've actually started exploration again in Dolores going south of the vein and San Francisco. So, we're expecting some nice numbers at the end of the year and certainly Peru, watch out for Peru.

The next question comes from Mark Mihaljevic of RBC Capital. Please go ahead.

I'll kick things off down at Dolores. Just wondering how the underground development REIT's are progressing and how much stope inventory you've got opened up in front of you. Do you think you'll be able to kind of hit the ground running and ramp up to that 1,500 tonnes per day target pretty quickly or should we be expecting pretty gradual ramp up over the next 12 months or so?

Hi, Mark, this is Steve. Yes, our underground mine developments rates right now, we're developing probably about 2,500 meters a quarter, somewhere in the neighborhood. We're already starting to develop obviously we have been quite some months now along the ore zone, so we’re producing some more that goes directly pulp agglomeration plant already. I think year-to-date may be 30,000 tons of ores been mine now, kind of our first stopes that were moving into, they are looking like roughly 50,000, 60,000, 70,000 stopes are they are fairly large stopes. We probably will start to see a kind of slow ramp up to that 1500 tons a day as we get into those stopes. We kind want to open up may be three or four stopping there as to as to eventually get the 1500 tons a day that may take us 6 months or so into next year, but the initial stopes they are fairly good size and we should start to see to those come in. The grade should be a little bit better then what we're seeing along with development but the developments that we been that bad grade. I mean overall this is Dolores 2.5 gram old equivalent type bride stopes is what we’re looking at, so that’s kind where we're moving with that underground.

So just Mark one comment here to, what the Steve alluded in the formal question. We reached our kind of our match stocking rate now of about 20,000 tons per day and that includes obviously the martial that goes to the pulp agglomeration which in the future will included part of the underground, but the sufficient high grade material available from the open pit as well. So you will not see a difference obviously, if you look at the end results which came from high grade open pit or high grade underground mining. So to make that short it doesn’t really, they will compete as the underground story a lot of higher grade long-term ore but at shorter term, it doesn’t really matter for us to local and we take the high grade from the pit to underground the results will be the same.

Perfect, thanks. I guess, Moving on down to Bolivia with San Vicente. Obviously, you guys had, had great success in Peru bringing cost down when you transitioned a lot of conventional mining to mechanize. So I was just wondering how much or what type of impact you are expecting once you get all these teasing issues sorted out. Obviously, you're losing some of the wider zones as you were mentioning earlier, but how do you see the cost structure evolving there?

Great question, Mark, the short answer is yes, we do expect to see some general cost improvement as we mechanism despite overall instructors will be mining they are narrower, but one thing that complicate San Vicente a little bit as we have a very large royalty payment to our joint venture partner with Bolivian government through COMIBOL and that flows through our cost. So as you see our cost come down profitability goes up we actually see our royalties go up so there is kind of an offsetting dilution there. So we think the cost there are going to be fairly flat we are seeing some high inflation rates on labor kind of 8% a year type numbers we've seen over the last four years were trying to have to proceed that with this productivity of the mechanize mining, so generally our feeling is as we mechanize you'll probably see the cost being fairly flat.

Okay. And, I guess, as you kind of build a little more mechanized mining into your mine planning, should we be expecting a bit of a lower diluted grade going forward, just if you're taking some wider width be able to do mechanized mining versus the conventional?

Yes, the quick answer there is yes. We did see some heavy dilutions over the last kind of six months as were making this transition, we've got some cavity monitoring systems and survey equipment that's that we've been very proficient in using them in proving and it take some time to really understand how to use this equipment to our fullest advantage and as we're brining that stuff in we did see some fairly high dilutions early on as our miners get used to how the control is kind of mechanize mining systems if you will. But were confident were seeing some really good progress were pretty encouraged by what we see going in the Q4, October has been a really positive month for us so I think everybody is going to be happy as we see these things come online.

And I guess one final one for me, obviously a bit of a bump on the base metal production outlook. How much of that is the reflection of you guys kind of changing the sequencing to capture the higher metal prices that we've seen versus just kind of outperforming to your original plan?

I think Mark what we’ve really see here is the geology and reflected in our base metal production but we also see the improved productivity that we have at La Colorada and we have mining more and more self heights there. High grade silver wane but also increasingly higher grade of zinc and lead so the more increased production at La Colorada the more base metals will mine as well. So you see that there as well, but we feel lose to Morococha and the higher copper production as you know I'm sorry we remember for the last few years actually we have been very successful mining that those small deposits with a small ore bodies with copper so, which was obviously upgrade. But we are silver miner that's what we mine, but if you find the base metal from the way for sure, we take it as especially right now with the current base metal prices.

The next question comes from Mark Morgan with UBS. Please go ahead.

But I just wanted to ask about guidance for next year in 2019 from your presentation, is that still looking on track?

Yes, we are in the midst of the budget process right now. We'll have our budget meetings here in a couple of weeks, going to define those numbers and then like every year. We'll come out with our guidance and numbers in January with new three year guidance. There will obviously be some difference as to what we showed last year because we added two projects in Argentina COSE and Joaquin. We expect the technical report on COSE -- on Joaquin, sorry, to be out at the end of this year, so you will see some additional production coming in later on, on the long term guidance, and as I said the shorter term for 2018 guidance we'll have in January.

It sounds like there's been nothing which has impeded that guidance and there potentially some longer term projects to be added in at the back end?

That's correct.

The next question comes from Lucas Pipes with B. Reilly FBR. Please go ahead.

Most of my questions have been asked and answered. I appreciate all the detail, color on various operations. I was may be looking for summary in terms of updated cost guidance cost guidance applies this year. When you look back and think about your original expectations, what do you think you exceeded them? What has been become most pricing on the cost of leading this year?

I can start this, Lucas this is Steve and then I'll turn it over to Michael to add to it. The only area that I think when I look back over the year that I think was the positive results that maybe we were being a bit too conservative on with the cost at Dolores, with the pulp agglomeration plant coming on with the underground mine coming on and kind of these new systems in place, I look back and yes I can say we were clearly been conservative and what we thought those things would cost us as we get them up and running. So, I think that was been a strong driver from a direct operating cost basis, that we've seen reductions. There have been some offsets, we had some unpleasant surprises I think this year in some of the inflationary effects on some of -- particularly in labor across the Board, but clearly some of those savings at Dolores is overwhelmed.

Now don't forget Lucas when we do this cost estimates for the year and obviously that will -- you will see something similar again, then in January we've to make estimates for the full year and beyond that on our by-product metal prices, base metals goal, we have to make estimates on exchange rates for all the countries we're working in. So, there's a lot of moving parts that we have to estimate and then obviously it all change up and down and some going in our favor, some not, but, what I -- and one analyst said at the beginning, the expansion that is now in full swing already at La Colorado, will sure provided us with a lot of low cost production, and has helped us greatly on this cost reduction we see at end of year.

Got it. And then speak back upon this last point and also what Rob mentioned with the assumptions going into Dolores. Is it fair to assume that as we look into 2018, '19, et cetera, that there was some conservatism which also baked into those cost guidances?

That’s really for out there, as we said when we do the three year guidance we kind of apply to similar measures that taking that, and we want to call it like that apply similar input data, so many things can happen now and the OpEx side and price in the next two, three years. So I won't be really able to tell you that estimates, that long how it will be conservative or not.

[Operator Instructions] Our next question comes from Trevor Turnbull of Scotiabank. Please go ahead.

It looks like a pretty good quarter from my perspective. And I notice that the share price reaction in the market has been surprising, at least, in my estimation. Seems like all the silver companies, Pan American's actually had a rough day of it. And on the back up what looked like really strong results across-the-board, whether would be costs or renewed guidance and beating consensus. Do you guys have any sense or have you heard anything what people are concerned about with respect to the share price?

It was a very strong quarter actually and not the similar one but you mentioned, we're very pleased with the number are, we guided cost down again, strong cash flow numbers, probably the earnings you've seen we've been able not only to pay for all our capital and sustaining capital and process capital but I know pay back most of our debt actually that only some capital leases back there all, there all the bank that has been paid up. So our net cash position increased by over $27 million so that was a really strong quarter and on the back nothing credibly strong precious metal prices. I'm very pleased with the quarter. The market reaction at one day is what it is. We focused on long-term very profitability business fee around keep growing it and general rate value for our shareholders that’s our focus.

Okay, fair enough. I had a couple of questions, then, I guess, on the more technical side, maybe foreign steel yourself. I had a chance to visit La Colorada and saw the expansion firsthand. One of the things, it did seem that, as you are mining more of the ore body, you're getting laterally quite a waste out from the shaft. And I just wondered, is that a potential challenge for you guys in terms of getting the backfill out to those far headings, while you are pulling ore from a fair distance away from the shaft? Any thoughts on kind of how you are addressing that?

Hi, Trevor it's Martin here, we will be looking at our systems coming up next year in our capital spends, so we will see need to expand our hydraulic back foot circuit to really get us to that some of those lateral area that we’re talking about. But at the moment things are going very, very well.

Okay, thanks, Steve. And then my final question. Interesting that the copper guidance has jumped, you're really making quite a bit of money on that as a byproduct. Again, looking kind of back at the model over the years or near term, it didn't look like copper went through any sort of major step change at Morococha or Hauron. I was just curious while copper seem to be working so well for you all of a sudden? Like I said, just been see there was effusive change in the grade, at least at the first glance of the information I saw?

It's a good observation and we saw that as well and I can tell you we put a lot of investigation into that our result were solid we're pretty comfortable with the reserve. As we went into this expanded program and maybe you saw while you were there and we did see some areas of dilution that craft in on us and some of the higher grade stoops and there was some tricky geometry there on the dip of the wane and trying to capture all of the recovery without the over diluting that so we put some additional systems in place there some additional filing techniques and marking techniques to improve on that and more comfortable that we're going to overcome now little dip that we saw during the quarter and we are very confident of our results and we just know issues there what's were in.

And then my final question. Interesting that the copper guidance has jumped, you've really making quite a bit of money on that as a buy product. Again looking kind of back at the model over the years or near term it didn’t look like copper went through any sort of major step change at Morococha or Huaron. I'm just curious why copper seem to be working so well for you all of the sudden? Like I said I just didn’t see that there was a huge change in the grade at least with the first glance of the information I saw?

Yes, if you go back the couple of years Trevor you will see a pretty good bump in both Huaron and Morococha on copper grades and that reflected some exploration success we have in the zones that gave us some decent I'm talking in multi-percent the copper zones they don’t represent all of our fee to the plant but they represented more and more significant amount to that as the exploration success to find more on that material. We also have some zones of high zinc and I think I've mentioned in previous quarters that Huaron and both Huaron and Morococha it's a little bit tricky to predict the zinc and the copper grade because we can move in and out of both of those right now on today it's fairly easily so we kind of capture the ones that give us the best opportunity unfortunately today that won't given us really good opportunities so it's a bit of coin toss as to which one we might go into over the other. So it's kind of hard to sometimes guide out too much distance because you can flip-flop between those two types of ore zones economically they are fairly similar with each other so economically were pretty positive on our outlooks on these mines were pretty confident on them. But that distribution on what's going to come in as copper or zinc yes that can flip on as one way or the other depending on exactly in which zone we are mining.

Our next question comes from Robert Reynolds of Credit Suisse. Please go ahead.

The first is on the provisional pricing of your concentrates. I was surprised that if there wasn't a greater realized price benefit from the sort of quarter-over-quarter jump in the base metals prices in particular, zinc and the copper, I mean if prices jump again in Q4 do you often see those tailwinds or is there something I'm missing here in terms of how your provisional pricing works?

Hi, Robert, it's Rob Doyle here. No you're thinking about it the right way, to the extent that we have opened QPs at any period that we'll take hold in the future, obviously as prices go up then we get positive adjustments to revenue. So there was a modest adjustment, somewhere in the sort of $3.5 million, $3.6 million benefit in the quarter to our revenue from previously shift and reported revenue, so there was an uptick but the nuance that it also depends on when the pricing is during the quarter. So, it maybe -- you may see some strong prices to end the quarter but if you have large shipments settling in the first month of the then you may not quite get the expected results, but overall the way you're thinking about it it's great.

Just back to San Vicente once more, the throughput rate it does looks like it's improved in Q3 back about 87,000 tons, where do you ultimately want to get that mine to on a underground throughput rate?

Yes, Robert, it's Steve. I think that's where we want to be, when we look at our reserves, and we look at the kind of staged exploration we're doing and replacements in those reserves as we mine, it all looks pretty well balanced at that rate, we don't really have a strong desire to really push that rig right now as we look at our current resources there.

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

Just on I guess more of a strategy question you guys have paid down all of your debts so I think you can check that off of your potential usage of cash left, so just in terms of usage of cash going forward how do you think about balancing that between sort of dividend exploration, M&A, project spending looks like it's going to be quite a bit lower going forward maybe there's something in the pipeline that you guys hope to keep the powder dry for, any thoughts on that would appreciated?

Yes, Lawson, yes, you mentioned all the parts of it actually are ready, it is -- it's a distribution and it means exploration and on the exploration side, the distributions between shorter term just replacing reserves or having project cost operations to project like the ones we acquired in Argentina this year. That allows us to track high grade or to an existing plant to some projects that are further out there and have may or may not the potential to be a standalone operation selling our pipeline over a multiyear timeline. At the same time, the like returning value to shareholders in the form of either dividends share buybacks, what we did in the past, that's our $400 million since 2010 that we returned to shareholders likely most in dividend that we believe that’s a very good way to recover that money to our shareholders and you know now as we are nearly out of the big spending that lower it and start the rating substantial free cash flow and we will defiantly have to look at those dividend payments as well. And then the last point, we always out on the market or looking at what there is in the silver space and we’re strong company, a lot of experience in mine building and mine operating and we always looking out therefore really good high quality project that we can add to our pipeline to our producing mines if that would come along. You see we have a very low cost profile right now and we obviously looking around for project that kind of in the similar range, so to assure that we create here very really substantially value for our shareholders with any acquisition.

Our next question comes from John Bridges of JP Morgan. Please go ahead.

Just following on from the last one, you mentioned before in some of your comments stated the industry in terms of opportunity. How we do characterize the opportunity to pick up new assets out there at the moment?

Actually, we're always finding kind of the same management time to look for those opportunity, we know where they are but then they come up different times, they are available and other just come up like the one in Argentina, some project come up that not been discovered before, as I said there are different stages, I'm actually really pleased with the pipeline and opportunities I see in the market right now with difficult silver market for a lot of companies, if we look at us think we're in a very fortunate situation with demands we have to cost profile we have and the balance sheet that we have, so actually see pretty strong markets for opportunities here and I would expect this stay for same and gold price stay the same that should continue into next year.

As to extend your, expanded drilling at proven mines, giving us an indication as to mindsets as to expanding reserves there, long and going often to, mine of the people reserves.

Correct, I mean Peru has been very successful for us, reducing cost, strong production replacing our reserves you know that we replace our reserves every year since the last 14 year, replace actually totally more than really mine in that period for our accessing assets. That’s been a big value driver for us and our shareholders and is always one of our main focus as well.

Okay great and just finally a bit of book keeping, the stock mine in Manantial. How long is that going to last until to bring on the new projects? how should we model that?

Hi, John, Steve here, it was last through the new projects, there is pretty good size start there but hoping to find even more of these satellite deposits and keep string in amount we are also having some exploration success underground at kind of string that one out two. So right now I think our long-term plan has always showing that going out to 2019, 2020 we think we will easily make that and maybe even a little bit longer.

Obviously, the addition of COSE and Joaquin, John will change the time we are going to use the plant at at Manantial beyond that time frame as part of our standup this year. We have the technical report add and working and then as soon as we have outing channel our 2018 and three year forecast you will see the impact of those two additions as well.

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