Americas Gold and Silver Corporation (USAS) Q2 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Americas Silver Corporation Second Quarter Investors Call. During the presentation, all participants will be in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded Tuesday, August 14, 2018. I would now turn the conference over to Darren Blasutti, President and Chief Executive Officer. Please go ahead, sir.

Thank you very much, Daisy and sorry for the late start. We had a number of people dialing in just at 8:30 and little bit after. So we decided to wait. So, [indiscernible] call. This is our Q2 earnings conference call. I will move the slide to our forward-looking statements. Obviously we try and predict the future as best we can, but obviously very difficult, especially given the very dynamic pricing market we have today, but we are going to try and do our best to tell you what is going to continue to happen over the rest of the year. We just caution you that we do our best, but we can't get it all right all the time. Our call participants today, myself; Daren Dell, our Chief Operating Officer is calling in from Mexico; Warren Varga, our Chief Financial Officer is also with us on the phone, and Shawn Wilson, our Vice President, Technical Services is here with us for questions as we go through. We brought you the slide before, but just to recap very quickly who are we, who is Americas Silver. Well, we are dual listed TSX and YSE silver company. We are a producer. We feel that we are going be the lowest cost silver producer in the world given our new mine that has started up. We have two operating silver assets; one development asset called San Rafael, and we also have the Zone 120 project that is rapidly becoming a development project. So we will talk a little bit about that. The San Rafael mine has ramped up from its start in October last year. We went very quickly from an end of October start to December kind of 21st commercial production date. We saw the mine ramp up in the first quarter to about 1300 tons into the second quarter processing about 1500 tons. The mine is now capable of outperforming the mill so far and so far in the third quarter we have seen days of greater than 1700 tons a day. So we are working hard to ramp up the mine. It is going very well. It is generating a lot of free cash flow for the company. We have these long-term mine plans that we have talked about before, optionality really to silver and to base metal prices. We have been focused more on our base metal production given higher prices, but we have a lot of silver leverage that we will show you later in the presentation. We have got a tier one institutional shareholder list that have backed the company for a long period of time, and we have got six analysts that cover us; three in Canada, and three in the United States that do a great job working with us to tell the story. Capital structure, we have just under 43 million shares right now. Obviously share price has been under pressure given silver going to the low $15 and the lead and zinc price dropping. It has been the same across the industry for everyone. We have felt the same debt and downturn, but we are working very hard to make sure we make money, and keep our balance sheet strong as we weather low prices. Our 2018 objectives were to achieve production and cost guidance. In the press release we put out the guidance yesterday. It just said that we are pointing towards the lower end of silver and silver equivalent production as a result of Galena being down for 27 days. And it is not just the 27 days, it is the days when you got to get back up, inspect the shafts. So the shafts were down for 27 days, but it was more like over a month by the time we got up and producing. It is hard to make up a month in the next five months of the year, but we are going to do our very best. But we are not changing our cost guidance. We still feel that that is in good stead given the budget and prices we used. We want to fully ramp up San Rafael in H2 2018. That is going forward. The name plate capacity of the mill was 1600 tons. We are pushing it beyond 1700 tons and we hope to go higher and we expect to explore a lot of that in the third quarter. We want to generate free cash flow from our San Rafael mine to grow our silver production and we want to do that without having to go to the markets for equity, especially in not a great market that we are seeing today. I think our shares are undervalued and we like to use our cash flow to do that. The Zone 120 exploration was completed in April of this year. It is in with our resource estimators at MDA in Reno. We expect to get something from them in late August that allows us to get it out kind of in mid-September to talk about not only Zone 120 but our resources generally across the company. Despite lower prices, our costs continue to come down. We expect our reserves and resources to be replaced and likely grown. So we are excited about that as we go forward. We have got to evaluate the Zone 120 development options. We are going to get a model. We will talk a little bit about this later in the presentation where we are trying to get as much information out to the market as we can as early as we can, so that you can understand why we are excited about this project. And finally we have got a $6 million payment at the end of the year for San Felipe. We continue to make payments on this. We think it is a great project where it has got great infrastructure. So we are moving it forward. But we have got to make the final decision on whether we are going to make that $6 million payment ourselves, or whether we are going to keep the project or joint venture or do some things whether it is overlooking it, making that decision this year as well. So we are on tap to accomplish all of our objectives this year. Obviously the main driver of our stock this year is that we are dropping our costs so rapidly, you have got silver equivalent production going up over 50%. You have got costs coming down; very big numbers on cost reduction and [zinc] reduction. So we are excited about that and we are seeing that with average costs around 540 already this year – sorry, 580 this year in the first half of the year. To talk a little bit about the operating highlights on Slide 6. You see that from Q1 to Q2 we modestly were higher but you have to remember that there was almost 14,500 tons from Galena that didn't get processed in the quarter as a result of the 27 day [hoist down]. So on a year-over-year basis we would have been roughly the same as prior years but with a lot more metal coming through. There was 100,000 silver ounces that obviously were left in the ground and there are around 220,000 silver equivalent ounces that were not produced. So as a result of that and the other thing that factors in is that you had $1 million roughly of current maintenance and operating costs charged against the mine without any revenue. So despite all of those things happening in the quarter we still managed to deliver $5.40 on sustaining costs number, which we are very proud of our guys for doing that. So, we are seeing zinc production up. Obviously you will see lead production come up in the second half of the year again San Rafael ramps up. And of course, we have got Galena. We are not expecting any more setbacks at Galena. That was unusual, something that happens every 20, 25 years. So we don't expect that issue to happen. The problem was solved and we don't expect any more issues. So the San Rafael ramp up is on target. We have shown the reduction in cash costs year-over-year and the second half of the year will produce more silver, more zinc and more lead and we will do it at lower unit operating cost, again as San Rafael starts to increase tonnage above the 1500 tons. Financial highlights. Revenues again were down from the first quarter but up from the last year but again recognizing that you had a whole month at Galena that wasn't produced. So again we would have expected revenues to be above – again we generated net income of $1.4 million. We averaged much higher prices than we are seeing today. Obviously that is the one thing that we are continued – diligent and watching and making sure we make money making sure that we do a good job spending our capital and our exploration dollars, but we have generated $4.3 million in the first half of the year despite the million dollars spent as I said. We have made positive net income cash flow. We have spent $1.5 million drilling Zone 120. We have spent $2 million making our payments on the San Felipe project and despite all that our cash went up from 3.3 to 7.8. Our working capital has gone up and we have also made a couple of million dollars of repayments of debt on our Glencore offtake. So we are doing the things that we said we would do. I'm very satisfied with the quarter. It was disappointing that we didn't get an extra month of production out of Galena to show you what we can really do. But you will see that in the third and fourth quarter as we go forward. With San Rafael operations at Cosala I have got my Chief Operating Officer at Mexico. So I won’t make and try and do this on the phone. But the mine is performing well. Our primary decline to the main part of the main zone is expected to reach designed depth by year-end. We expect to be developing in that area. It is the [guts] of the asset. We have been in the southern loop of the main zone, which was the first kind of 18 months of production. We have done very well there. It was obviously one of the key reasons why we are able to come in at capital 30% lower than estimated by getting in there quickly and getting that production out. The primary incline is started towards the upper zone. The upper zone contains very highly silver grades. Right now as you guys know we have been mining around 44 grams of silver. The resource is over 100. So again as we go through 18 months of lower grades, when we get into that high-grade you are going to start to see a very big increase in silver production, a doubling almost probably of silver production as we get into the upper zone. So we are keen to get into that halfway through next year. The mill steadily improves; as I said 1370 on a calendar day, 1524 in the second quarter. We are seeing days well over 1700 tons a day right now, but it is days because we have one major problem, which is the rainy season and the rainy season often causes the hydroelectric power, or sorry the power lines to go down. So we can have a day or two of two hours out here, two hours out there. So we are only doing maybe 1600 tons, but we are starting to see this thing ramp-up getting well above capacity. We would like to get it to 1800 tons a day. That is going to be not an easy task but we are up to it I think. And we are going to continue to ramp that up through the third and fourth quarter. And then as I expect, you will see that we are going to be in the main part or the [guts] of the ore body at the end of the year, which provides a little bit higher on the grade side we think on lead and zinc according to the model. The geological model in the southern zone has performed well. We are seeing what Daren Dell would describe as a much more homogeneous ore body. We are seeing more ore on the outskirts. We probably took more ore into the mill and have a stock pile as a result of that more homogeneous area and are hoping the model will provide us with some better upside on grades as we get into the main zone. Operating costs have been great. Both the mine and the mill we have done better than expected productivity. We are seeing lower electrical consumption. We are seeing reagent use being lower. So we are seeing good operating costs probably about 20% below our budget. We are also seeing capital savings in the first half of the year. We have managed to either eliminate or defer 3.5 million dollars of capital out of the mine. So that has taken – helped us deal with some of that production shortfalls. But we are continuing to look at that. We are stewards of your capital. We need to do a good job in evaluating – we don’t just do a budget and spend whatever is in there. Even when we have a budget we go and we try and beat it each year. And so we are doing that and I'm very happy with the work the guys have done so far this year on the cost side. On Zone 120 again 12,000 meters was drilled. We expect this ore body to be growing in size and also upgrading the confidence level. I'm not sure we are going to continue to see 240 and 280 ounce sustaining grades – silver equivalent grades, but as the ore body gets bigger it is going to get more disseminated. You are going to see grades come down. But you are going to see a much bigger project. There is going to be high-grade areas inside that project. So this will be reported again before the shows at Beaver Creek in Denver we will get our resource estimate out. Again we expect to see our resources either replacing or growing despite depletion this year and we also looking at development options for Zone 120. So given that we are only going to get these numbers at the end of August it is hard to expect that mid-September we are going to come out with some form of pre-feasibility study. We are looking at an internal scoping study. We have some great experience here. The mine is 800 meters away from El Cajon. That was also a silver [copper]. We have got the San Rafael ore body basically adjacent to it that we just built the mine and have good costs around development costs and the mill, which could be expanded to 1000 tons a day, which is the only option we can look at in a very short period of time. We just expanded the mill with respect to the backend on zinc and lead concentrates. So we are going to look at an option that is very simple. That is very quick, small option of 1000 tons a day using our existing mill and then that will be the basis of how we move forward to get a pre-feasibility study done. But the great thing about Zone 120 is that any disturbance there is at the mine itself. It is permanent. So we can get it from underground at El Cajon. We can get it underground from San Rafael. We can put a portal in its surface if we want to. We have all of those options available to us and all of those are permanent and with the mill, it is also permitted to 4,000 tons a day. If we are talking about getting to our upper limit of 1,800 tons then we have got lots of – under the permit have lots of ability to do that. So we are excited about it because it gives us a project in our control that we can build. We would like to see obviously higher silver prices, $14 or $15 is not something you want to take really good resources. We have been very good at being disciplined about producing our silver at a nice profit. So we are not out to do it at all costs, but we want to show you that we have got a great project here and we are moving that forward. At Galena, we continue to say this, it is our mantra. In Galena, we want to make progress towards the goal of consistency of profitability. We saw that in the first quarter. We were seeing that in the second quarter, and then we had the brake shoe failure, which meant that we saw a little bit less production at Galena by losing that month. But as we have gotten back into it, July was a little bit slower but August has come on like gangbusters and we are expecting to see – we going to see that good progress going forward. We are making mine improvements. We had early success with the long haul mining. We have never done it before this year. We are probably on – what number 9, Shawn now. So, we are making good progress there to get tons out. We have changed almost the entire mindset of the organization. We have changed the senior management. We are very excited about our new team that is there. They are making improvements to mechanize. They are very focused on profitable ounces and tons as opposed to just more tons and more production. It is one of the reasons when we sat down and said, can we make up this 100,000 ounces on Galena, I think our view was we can make up the 100,000 ounces, but we may not make money on some of those ounces. And so that is not what we are in business for and we are certainly not in business for that when we got prices as low as they are now. So we are more focused on making profitable ounces. We have done after a long period of time – we have had the Galena since the end of 2012. We have finally been able to rework our life of mine plan. Most of the resources were on spreadsheets. Now they are on block models. So we have got a new life of mine plan, and we have not made big investments in Galena because we haven't had the long-term ability to determine whether we can make pay-back on those investments. And so, we are excited again with our new resources. We will have a new life of mine plan that will allow us to focus on exploration, drilling, mill and mobile equipment upgrades and things in the mill that we can improve. But the property has a really big known silver resource and it has great potential at higher prices. We want to just keep it humming, and making a little bit of money as we see it return to profitability. And so it really can produce a lot of silver for us. To talk a little bit of our strategy last time. I think it continues, when we took over and getting into the silver industry in 2012. Silver was at 31 bucks. We are now at $15, averaging $16.40; seeing a very big drop in silver price although zinc and lead have come up. They are still well above their pricing – long-term pricing numbers. We are very bullish on zinc and lead. We believed that the China and US trade war and all things that are happening have affected the price, but we are still very, very bullish on the fundamentals of zinc and lead as we go forward and we don’t think that strategy is going to change now. We would obviously love to see a higher silver price, so we could bring on things like Zone 120 and new silver copper asset ore out of Galena, but right now, we are going to keep that in the ground. But even without that you have seen a very big drop on our costs. You have seen a very big increase in our silver equivalent production, and we are going to continue on our strategy of moving forward, getting our silver growth ready for when silver has a better price and we can make some real money there. As we look at our silver leverage. You can see our reserves and resources, and you can see of our peer group. We are second just slightly behind Endeavour on our total resource slide. We have reserves. A lot of our competitors don’t have reserves. I mean, look at silver production if you invested $1000 in us, even at these lower silver amounts that we are going to produce this year because of the San Rafael being at such low grade, as we get into 2019 we get into 2020 and our silver starts to go up by close to a million ounces. Our silver leverage is going to get even better as we bring in zone 120 that leverage is going to go up even better. So even today at this lower amount with a lot of base metals we're still giving you the second best production leverage and we're certainly giving you the best resource leverage. So we're very excited about how we can affect the silver price but again right now we're using our base metals to make money and grow that balance sheet So why invest in Americas Silver? Well we're clearly reducing our own sustaining cost. You've seen that over two quarters that's not going to stop. It's going to continue. We're growing our silver equivalent production, the San Rafael mill will be wrapping up to peak capacity we feel in Q3 and if not Q3 then Q4. So we're getting there. We're seeing, we're testing the higher limits on a daily basis, we hope just to get through the rainy season so that we don't have those kind of power changes. We're improving our silver production and we have that leading resource leverage in the industry we feel. Our assets 100% owned. They are long life. They are 10 years at least in mine plans. Large defined and they are largely defined mostly permitted almost all of our projects are permitted given our mills situation on zone 120. We have no royalty streams or silver hedging so we're very clean. We're strengthening our balance sheet every day and we believe that we're going to revalue against our peer group now and we have been re-evaluating peer group it's just that we haven't been doing very well given the silver price that we've seen out there and I think all of the companies are in the same boat but we continue to move up the ranks of the silver industry and that's our job and we're going to continue to look at more precious metals as we move forward but we want to see prices that justify us actually putting those into production because we've got 125 million ounces of production we're only producing 1.6 to 1.8 say this year. So have got a long life ahead of you if you want to produce it and we want to be ready for what that turn happens and that's what we're doing inside the company. So with that Daisy I'll turn it back over to you for any questions that we have from participants.

Thank you. Certainly. [Operator Instructions]. Our first question comes from the line of Jake Sekelsky. Please proceed with your question.

Good morning. Thanks for taking my questions.

No problem Jake.

Looking at San Rafael how should we view grades going forward? It looks like we're running towards reserve grade as we get to the upper zone as you mentioned? But is from a modeling perspective should we expect a reserved grade to be reached by the end of 2019 or is that more of a 2020 event?

I'll let Shawn Wilson answer that because he's got it. I can tell you but I think he's going to be more precise Jake for you.

Yes. Morning Jake. How are you? So as we head into 2019 as Darren mentioned we're going to be reaching the upper zone. The upper zone as mentioned before again contains higher silver grades, lower zinc grades but with that we will also be reaching the guts of the lower body in the main zone which again has our higher zinc. So we will expect to be targeting our sort of average reserve grade by the end of 2019.

And I'm silver if you could be a little precise from because I think what it adds on --

Yes. So with that, with reaching that upper zone silver grades are well above our average reserved grade of just over a 100 grams per tonne when we blend the upper zone material with the main zone material we should be seeing realizing our average reserve grade on the silver side of 111 grams per tonne or so.

Yes. So basically we start to see that in the early second half of the year next year Jake we start to see that we get into that upper zone. It's got areas that are 300 grams, 200 grams all around there and if you're blending that with kind of 50 or 60 from the main zone, then you're getting smaller amounts obviously out of the upper zone but you're getting very high-grade silver. So our view is by the exit of 2019 will be at reserve grade for silver and there will be some years of 2020 where we're probably higher than our reserve grade.

Okay. Yes.

So that's why we're going to see doubling of the silver production coming out of out of San Rafael by 2020.

Okay. Perfect. And this is more of a high-level question but with precious metals prices coming off for the last quarter and base metals for that matter too do you see this changing your broader strategy at all? I mean I guess what I'm asking is with silver at $15 today do you consider leaving zone 120 in the ground until prices recover and are there options to focus on more base metal rich areas until we see prices come back up?

Yes. So obviously there's two things to your question. First one is what do we do with zone 120. I think the first thing we're to do is get the resource. I think we are very confident in what we want what we're going to get at the end of August and we are going to do as I said we've already started some very quick math on cost to develop into areas and on the mill side and we're going to see how robust it is and we know obviously the grades are better than El Cajon and we know that the net recovery is going to be pretty similar but I think the issue we have is if you're talking about $15 silver and you're talking about a mine that would have say roughly a $35 cost per tonne cost and you're going to get $42 a tonne at $15 but you're going to get $70 a tonne revenue with $20 you got a real decision there right. I mean you're going to make money on it. We know we'll make money on it but do we really want to produce it and I think the answer for us is it's really going where the market is because we've got a short term to get into development given how close to this through other assets we've got only in some slight mill modifications. We are putting silver copper concentrate on the back end. So I think those timelines are relatively short in months; six months to eight months. So we can afford to be a little slow on the development there I think. Get the plans in place and then we don't have to do it right away knowing that we have permits in place, knowing that we maybe have the equipment on order and then we can bring it in when we need it because the hardest part in our business is when I was at [Varick] we had this great mine called [indiscernible] and it was the greatest producer I think in the history of gold except it never saw greater than $250 gold and so it made gold at 60 bucks an ounce or its average life of mine and outstanding cost basis but it never saw more than 250. So we think about these things and we want to be able to bring out a plan where you guys can value this in your models as analysts and investors can see with the potential we have but it doesn't mean that we need to bring it into production immediately and it really is where the prices and $15 an ounce I'd be less likely to bring it in than it would be at $20 an ounce it's a no-brainer. So that's how we think about it and then on the base metal side I think what we're seeing through our modeling is we're seeing more homogeneous or so we're seeing more ore out of the ore blocks than we expected better grade out of those ore block. So what we are contemplating now is if we want to get more base metals out and we don't want to build zone 120 then we can expand that existing mill for the base metals and so we're looking at that option too if base metal prices stay as I said I think what we've seen zinc drop from a $1.61 at the peak to a $1.13 is not really supply-demand fundamentals. We feel that as more outward issues and again we feel that as we get towards the end of the year that we're going to start to see those and prices kind of go back up you're seeing the stocks’ decline, you're seeing [TC and RCs] continuing to drop, you're seeing us negotiate better deals with off takers and suppliers. There's still people looking for the product. So again the way we can deal with that Jake is really just to put use that billing capacity that we could expand and use that for base metals and so those are decisions that are on our plate but we're going to look at the zone 120, first we're going to get that out in a preliminary basis to the market in the mid September and then we're going to go do a more robust study later in the year. So that's the plan as we see it today and again that we've had massive changes in metal prices and our job is to provide optionality to our shareholders on pricing but our first objective is to make money and so that's how we're going to kind of take our strategy going forward; how do we make the most money for our shareholders.

Got it. Okay. That's all for me and congrats again on a good quarter in a tough market. Thanks.

Thank you.

Thank you. [Operator Instructions]. Our next question comes from line of Heiko Ihle. Please proceed with your question.

Hey guys. Thanks for taking our questions. This is Matt here for Heiko. Unfortunately he couldn't make a call.

No worries.

So you guys are still looking at 8.3 million of long-term debt as per your financials that's down from about 11 million from 1231? You also have about 5.1 million in your prepayment facility. Just if you could you sort of walk us through your balance sheet expectations for the remainder of the year and where we should expect to see all that at the end of the year?

Yes and if you if you look at Matt, I mean I can't tell you exactly where cash is going to be at the end of the year because prices are changing but I can tell you that our debt is going to continue to come down that' match with the Glencore offtake agreements. So every quarter or every shipment we're paying down that balance and so we paid as of today we paid just about $2 million of that. We expect another $2 million to go for the remainder of this year for $4 million over the year and then in 2019 if you look at our shipments it's about $5.5 million and then another $5.5 million in 2020. So that takes our debt down to zero and again it's the thing, we don't think about it as money changing hands. There's a charge for every tonne that they're processing that's really for that credit facility. So they're going to continue to take that off and obviously if things get worse there are different ways that we can deal with that debt and what I mean by that is if we see another 2015 situation and the ‘14 be it ‘15 what we can do is we can extend that credit facility by extending the offtake agreement with Glencore. So again this is on terms that we've negotiated for a four-year offtake and but if we had some issue where the market just really went bad we would just extend that debt and those debt repayments out farther. So we've got a very good interest rate on it. We're making those pre-payments because we'd like to get all of the debt off our balance sheet but there are ways that we can deal with that. So again with $2 million down and $2 million to go for this year and that's factored into our plan and our budget and so we expect the cash balance to be higher than it is today but I just don't know where it is because obviously if we average that $1.40 zinc in the first quarter and right now it's a $1.13 and but we're going to have more zinc and more lead production coming out. So we're going to offset that down in terms of price but whether we can offset all of it is another question or not but expect that we're going to have good production and again continuing to have zinc and lead ramp up and it's really where pricing goes that's going to define where the balance sheet is. So – but it's – we are not – we don't see ourselves in a situation that prices stay the same over the rest of the year that we have any issue with the balance sheet. It's going to be stronger.

Perfect. Thank you. And then just speaking of the prepayment facility you guys are currently paying LIBOR plus 5% to Glencore. Given the current interest rate environment and also the fact your firms come a long way since January 2017 when this was initiated. Is there potential to refinance this or we understand the precious metals price environment isn't too favorable right now but given the strength of borrowers in the market is there anything you can do or that you guys might be considering?

Yes. We've had a tier one Canadian bank down to visit the property and they're doing some work on looking at a facility for us, line of credit and we'll see where that comes out and obviously they would get rid of the Glencore portion and give us a facility on top of that if we needed it. So we are looking at that. Obviously it's very difficult for them. They're the same boat everybody else's is that prices have moved very materially, very quickly. So as they look at their debt coverage ratios and they look at things they're looking at a $1.40 a month and a half ago looking at a $1.13 today and looking at downside cases. So we're not in a rush to do that. Again our relationship with Glencore is very good. So again if there's an issue we can deal with it but we are looking at that. We have started the process they've been down to site. They are doing their due diligence and they're putting formulating something but we don't want to make them do something today if they're going to use $0.90 the zinc price. So we'd much rather take our time and see the mental price recover as we move forward.

Okay. Perfect. Thanks a lot and have a good one.

Thanks Matt.

Thank you. Our next question comes from line of Bhakti Pavani. Please proceed with your question.

Good morning guys.

Hey Bhakti.

Quick question on Galena. If you could maybe quantify as to how much was the last revenue in the quarter because of the shutdown?

Yes. So I could just give you broad terms. So it was about 14,500 tons. It was about 90,000 ounces of silver, okay and about a 1.5 million pound of lead. Just make 1.6 and then on top of that – so you didn't see the revenue but you saw all the costs come through right.

Yes.

So some went to care and maintenance of some went into the operating cost depending on where we were in the cycle or what we could mill or what days we could mill and couldn't. So ultimately we had I think an extra probably 600,000 of maintenance costs on top of normal care and maintenance for [indiscernible] and then you probably had about $400,000 of operating cost. So you had $1 million of cost which you saw in the costs or through the balance sheet and net income but you didn't get the 90,000 ounces of production, you didn't get the 1.6 million pounds of lead.

Got it. Got it. So going forward I think -- so what was the actual cost of the fixing of the repairs that you have to undergo this quarter?

I'll have to ask [Albert] or Warren.

Yes. The amount that's in the new care and maintenance line Bhakti is about $640,000. I know the total amounts more that we have some marginal care maintenance with some historical properties we have in there as well and through the cost line you could probably put another 250 at least capitalized in the cost as well into a machinery as well.

So we're talking about roughly 900,000 of that includes labor and the fix and all that stuff. 250 is the capital part and 640 is the labor and all the other associated costs of having the mine open without running so that it operates.

Right. Thank you so much for the color. Just quick question on the grades. The grades have actually improved from second quarter in the second quarter and compared to Q1, so are the silver grade and the lead grade are they representative? Are they expected to continue through the rest of the year or that was just where you were mining in the ore for the quarter?

I'll let Shawn answer that.

Yes. No worries. Hi Bhakti. Yes you did notice an increase improvement in the grades. We do expect that to continue as we move forward. We are as Darren alluded to making some progress with our long haul [stoking] we've made some improvements along the way in terms of minimizing some of that dilution associated with our long haul [stoking] as well as the veins and areas that we are focused on in mining for a mechanized drift and fill again focused on keeping things narrow and minimizing dilution, excuse me. So we do expect as we move forward into Q3 and the remainder of the year to share grades, make a slight improvement.

Perfect and with regards to mining cost do you expect that to reduce given that you have changed to long haul mining or do you anticipate it to be at the historical level?

Given the amount of long haul material that we've mined to-date and where the mine plans moving to in the future we probably expect to see the mining costs remains similar. We haven't identified enough of the reserves to make a significant difference in terms of the percentage where the long haul still stoking tonnes are coming versus our mechanized and versus our conventional. So I expect that our mining cost should stay similar to the recent levels.

Okay.

Yes. So Bhakti we're always obviously try to improve but we don't -- we haven't any of that improvement in there I think we've got a team in there now that's basically from all aspects. We've got a new mill person. We have got a new senior mining person. We've got a new GM. All of those things are – we're very positive about but we're not reflecting any decreases in cost yet.

Got it. Got it. Moving to zone 120 I know you would not be willing to bring that mine online at this silver prices but just kind of curious once you have the results estimate out hopefully by the end of Q3 what are your plans when it comes to zone 120? I mean would you want to do more exploration at this point or would you want to just wait for silver prices to improve before making a move there?

Daren would you want to go ahead? It’s early in Mexico. Okay I don't think we have him, but so I would just say this part I mean obviously if we work with MDA and we have our own internal resource geologists now we work with them and we see areas that we think we can continue to increase the high grade area of the deposit, we're absolutely going to drill it out and the great news about getting a new model is it gives you that 3D ability to look at things. Obviously we don't want to just drill out more material, we want to drill out more of that high-grade material that we were seeing in our last drill holes and so we're going to probably for sure chase that to the southeast a bit and we're going to look where the model is deficient in and it has some more high-grade. At this metal price though again I think putting another $3 million program together may or may not be a reality but again I think we think we got enough size here getting towards that 5 million tonnes or whatever we think it's going to come out to be to have a project. So then it's about optimizing that project and so I think the focus will be on optimizing the project after we get the first initial blush and then chasing out any high-grade areas that we believe that can be added to that and I would expect that we would have that formulated by the end of the year to start early next year.

Got it. Perfect. That's it for me. I think. Thank you very much guys.

Thanks Bhakti. Operator maybe we have time for one more question.

Certainly. Thank you. Our last question comes from the line of [indiscernible]. Please proceed with your question.

Hi guys, I have few questions. I didn't look at your [Edgar] site, what's your cash balance at the end of June?

So it's $7.8 million U.S. and working capital at $12.1 million.

One did I hear that the long-term debt is 8.3 and you hope to get it down to 6.3 by year-end?

Yes, roughly, yes.

Okay. And finally using earning plus depreciation and amortization what was your cash inflow for quarter two as well as the first half?

That's a great question. Give me one second. I can get you that. So we have $8 million offices – $7.8 million.

Can I take that?

Yes go ahead Darren.

Your cash generated some operation of the 4.34 for the quarter. You can add back the depreciation of 2.4 on top of that.

So that's what? 6.7?

I think roughly.

Yes. That's just second quarter.

Second quarter and does that include changes in working capital or is that real cash inflow from operations?

That is I would include the – that is not including a cash flow from working capital.

All right. So 6.7 give or take for the second quarter and was it double that for the first half?

No. We were probably around 5 in the first half.

So you had a cash outflow in the first quarter. I forgot.

No. Yes. We are still doing all that drilling and we were still doing all – so we had a payment for San Felipe Bay. So you saw cash going down. We were spending a lot of money still developing into San Rafael. It was still positive but the cash balance was down as a result of a number of corporate things too.

But you mentioned drilling and the CapEx that comes after cash inflow. So excluding that what was it in the first half?

So we were 3.7 of operating cash flow. That was the first quarter, sorry. We don't have year-to-date numbers.

3.7 and the depreciation was about 2.3?

Yes.

So 6. Yes. Six. Okay. Good. That's quarter one. So a little more in the second quarter than the first quarter.

Yes and again of course, the second quarter was impacted by the fact that we were down for a month right at the [indiscernible]. So obviously we would expect it better numbers but –

Yes. Sure. All right. I just wanted to get those so I understand them. Thanks guys.

Yes. No problem. We will just sign off and thanks everybody for listening very early morning on the west coast especially it's a very difficult market. We're working very hard to not only make money but conserve our cash to ensure that there's no issues on the downside and we're continuing to move forward with our projects and we believe we will enhance the company moving forward as well and appreciate your patience and your working with us as we move forward through some difficult markets here but I think the company's primed and ready for a move up as we see prices that return. With that I'll look forward to talking to you individually and thanks very much for calling.

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.