Q2 2015 Sierra Metals Inc Earnings Call
Aug 17, 2015 AM EDT
SMT.TO - Sierra Metals Inc
Q2 2015 Sierra Metals Inc Earnings Call
Aug 17, 2015 / 02:00PM GMT
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Corporate Participants
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* Mike McAllister
Sierra Metals Inc. - Director of Corporate Development
* Mark Brennan
Sierra Metals Inc. - President and CEO
* Ed Guimaraes
Sierra Metals Inc. - CFO
* Matt Wunder
Sierra Metals Inc. - VP Exploration
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Conference Call Participants
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* Lee Cooperman
Omega Advisors - Analyst
* Alec Meikle
Cormark Securities - Analyst
* John Tumazos
John Tumazos Independent Solutions - Analyst
* Jim Young
West Family Investments - Analyst
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Presentation
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Operator [1]
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Good morning. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sierra Metals second-quarter results conference call. (Operator Instructions) Thank you. Mr. Mike McAllister, Director of Corporate Development, you may begin your conference.
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Mike McAllister, Sierra Metals Inc. - Director of Corporate Development [2]
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Thank you, operator, and good morning, everyone. Welcome to Sierra's second-quarter conference call. On the call today, we are joined by Mark Brennan, President and CEO; Ed Guimaraes, CFO; Matt Wunder, Vice President Exploration; and Andrew Dunlop, Corporate Controller. Today's call will be followed by a question-and-answer period. Today's presentation is available for download both through the webcast and through the homepage of the Company's website at www.SierraMetals.com. Wednesday's press release is also posted on the Company's website for your review.
Before we start, I would like to remind everyone about our disclaimer that certain statements made by the executive management team today may contain forward-looking information. Anything not historical is considered forward-looking. For more information, please refer to our detailed cautionary note in Wednesday's press release and the disclaimer on slide 2 of today's presentation.
With that, I will now turn the call over to Mr. Mark Brennan, President and CEO.
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Mark Brennan, Sierra Metals Inc. - President and CEO [3]
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Thank you, Mike, and good morning, ladies and gentlemen. It is my privilege to be hosting this call today. I'd like to begin with introductions to the new management team and highlights to the new management team's activities since we have joined Sierra, followed by an overview of the second-quarter results for the Company. Following my remarks, Ed Guimaraes will take us through our financial results for the second quarter, followed by Matt Wunder giving us an exploration update for the second quarter as well as an outlook of what can be expected in the second half of 2015.
Sierra has seen quite a few changes in the management team in the last six months which complement the strong management that was already in place. We believe we now have assembled a great team with the breadth of experience, skill, and know-how to bring Sierra to the next level.
Introducing the new management, I joined Sierra in April of 2015. My background is 30 years in financing and operating in North America and Europe in junior mining entities. I most recently served as President and CEO of Largo Resources. We built the world's highest-grade, richest Canadian deposit lowest-cost producer and commenced production in 2015. I spent my early career as an investment banker in London, largely focused on Canadian equities, covering both London and Continental Europe.
We brought in in July 2015 Gordon Babcock, our new Chief Operating Officer. Gordon has over 34 years of experience in the mining production management, is a second-generation miner with extensive experience in Peru. And his specialty is in project development, engineering, and consulting -- mine consulting in precious base metals and aggregate operations in the Americas. Most recently, Gordon was at Jaguar as the Chief Operating Officer and previously worked for Nyrstar, Breakwater Resources, Coeur Mining, The Hochschild Group in Peru, and Muscocho operations, as well as Noranda. He is an extensively experienced operator and is coming into the Company to focus on modernizing our operations.
As our VP Exploration, we brought in Matt Wunder in July as well. Matt is a professional geologist with over 25 years of international experience in exploration. Previously, Mr. Matt held a position of Vice President Exploration with Rubicon Minerals, where he was recognized as co-recipient of the Colin Spence Award for excellence in global mineral exploration. Matt has gained extensive experience in ore deposit exploration with various companies including Noranda and Aur Resources.
We've also brought in Mike McAllister as our Corporate Development Manager -- Director. Mike has 10 years' experience of working with public companies, five as a mining specialized investor relations professional with companies such as Avion, Savary, Alder, and Black Iron. Mike previously worked with BMO Capital Markets in the mining and metals group.
During the last six months, the Company -- the new management has come into the operation and have really done their own due diligence as to the strengths and weaknesses of the Company. What we have found is that the assets of Sierra are very strong, and we are expecting steady production increases and resource growth. The assets are -- the quality to be low-cost producers that will continue to make money even at depressed prices.
We see very strong organic growth potential coming to resources which are very close to existing operations. This will be a theme in terms of the Company moving forward. In the short term, the -- we expect to bring a number of new resources immediately adjacent or very close to the existing mining operations into the -- into the production schedule. We will also see new mining practices which will further expedite and further provide greater returns with the existing operations.
Turning to Sierra's second-quarter results, slide 7, in the second quarter we saw production of 3.1 million ounces of silver equivalent ounces. This represents a second consecutive quarter of record silver equivalent production. We also saw record silver production of 911,000 ounces, which was a 21% increase over Q2 2014 numbers due to higher plant throughput at all three mines and higher silver grades at Yauricocha and Cusi.
We also saw a record tonnage throughput of 483,000 tons in Q2 2015. We saw 14% increase in copper production for a total of 6.5 million pounds over Q2 2014. The increase was due to increased copper oxide production at Yauricocha and the mill ramp-up at Bolivar to 2,500 tons per day, which in part was due to the new power line connection in March 2015, which resulted in 22% higher throughput for Bolivar in Q2 2015.
Lead production decreased by 7%, zinc by 4% and gold by 13% compared to Q2 2014 due to lower head grades at all three mines, decreases in lead oxide production at Yauricocha and lower recoveries at Cusi. But our base metal production still provided healthy byproduct credits, which kept cash costs low. The quality of our assets operated by our skilled teams has enabled us to continue on the path towards meeting our 2015 production guidance. Negative cash cost per ounce of payable silver decreased from $19.67 to $14.42 at Yauricocha, and cash cost increased from $5.29 to $8.46 at Cusi. Increased costs were mainly due to the reduction of byproduct credits due to lower metal prices and lower head grades.
Cash cost per payable pound decreased from $1.51 to $1.37, or 9%, due to increased copper payable pounds and lower production cash costs. Cash flow generated from operations before movements in working capital was $18.8 million for the quarter compared to $21.3 million in Q2 2014, again, mainly due to lower commodity prices.
Investments made at Bolivar and Cusi have helped increase the Company's metal production during the first half of 2015. Investments in Yauricocha today will help increase production over the next 24 months. Consistently strong performance in Yauricocha as well as growth at Bolivar and Cusi have resulted in the Company achieving a solid first half for 2015, with strong metal production and consistently lower operating costs.
With that, I'd like to turn over the mic to Ed Guimaraes for the financial overview.
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Ed Guimaraes, Sierra Metals Inc. - CFO [4]
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Thanks, Mark. Good morning, everyone. I would like to start by announcing that subsequent to quarter end the Company has successfully refinanced the remaining $48 million due on the Corona acquisition credit facility with Banco de Credito del Peru, or BCP. This was a very successful refinancing for the Company, where almost $20 million of debt principal repayments and $4 million of dividend payments to our non-controlling interest shareholders in Corona are no longer due for the remainder of 2015 and 2016. Additionally, quarterly principal repayments thereafter have been reduced from $3.4 million to $1.25 million.
The new facility provides the Company with increased financial flexibility during these difficult times of continued declining metal prices and allows for the completion of the Company's capital expenditure programs, which will benefit the Company with production -- with potential production increases and reduced risk exposure.
Now I would like to review our cash flows, which is on slide 10, which provide the clearest perspective on our financial performance. I have summarized our changes in cash for Q2 2015 on slide 10. During Q2, operating cash flow before movements in working capital was $18.8 million. We incurred $11.9 million on capital expenditures in Mexico and Peru, and we paid $4.2 million of income tax in Peru and realized negative working capital adjustments of $4 million. We paid $6.2 million of interest and principal repayments on our debt, as well as $0.9 million of dividends to our non-controlling interest shareholders in our Corona subsidiary. This reduced our cash balance from $38 million at March 31, 2015 to approximately $30 million as of June 30, 2015. Of note, the Company received $6 million in payments for concentrates on July 1, 2015, which was the main reason for the decrease in cash and increase in trade receivables as of June 30, 2015.
On slide 11, we show the same build-up to our cash flow for the first half of 2015. Our operating cash flow before working capital adjustments was $33.5 million. We incurred $20.2 million on capital expenditures in Mexico and Peru, $6.8 million on income tax in Peru, and had negative working capital adjustments of $12.4 million.
We paid $12.3 million on interest and principal repayments on our credit facilities, received proceeds of $8 million from the FIFOMI loan in Mexico, and $0.9 million in dividends to our non-controlling interest shareholders. This reduced our cash balance from $41.3 million at the end of 2014 to $29.8 million for the six months ended June 30, 2015.
The $20.2 million of capital expenditures for the first half of 2015 have been focused on key development projects and processing plant expansions. Total expenditures at Yauricocha were $7.3 million and included tunnel and shaft construction, mine development, and exploration. At Bolivar, we have spent $4.2 million on mine development and exploration, including completion of the power line project. Capital expenditures at Cusi totaled $8.7 million and were mainly directed toward shaft construction, mine development, exploration and increasing the mill processing capacity.
Slide 12. Turning to the financial highlights, despite declines of 18%, 12%, 7%, and 9% in realized silver, copper, lead, and gold prices respectively during the second quarter of 2015 compared to the second quarter of 2014, the Company reported revenues of $45.9 million, consistent with $45.6 million for the same period in 2014. Revenues of $80.6 million for the first half of 2015 decreased 7.5% compared to the same period for 2014. The decline in revenues due to the declining metal prices was mitigated by increased throughput at all three mines, along with the increase in silver and copper grades and recoveries of all metals except copper at Yauricocha.
Additionally, a build-up inventory of concentrate at the end of the first quarter was sold in the second quarter, resulting in higher revenues during the quarter. The adjusted EBITDA for Q2 2015 was $18.3 million compared to $21.3 million in Q2 2014. Adjusted EBITDA for the first half of 2015 was $32.2 million, down 16% compared to the same quarter in 2014. The decrease in adjusted EBITDA is due to the decrease in metal prices and increase in operating in general and administrative expense costs.
Turning to the balance sheet and liquidity on slide 13, we have ended the first half of the year in a strong financial position with $30 million of cash and $52 million of undrawn credit facilities, which combined gives the Company total liquidity of $82 million. The Company's net debt was increased by 22% during the first half of 2015 to $49.7 million at the end of Q2 compared to 2014 mainly due to the decrease in cash on hand at June 30, 2015. The Company has principal payment obligations on its loans and credit facilities of approximately $7.3 million to be paid in 2016, $11.8 million to be paid in 2017 and 2018, and $8.1 million to be paid in 2019.
Metal prices continue to weaken during Q2 2015. We continue to monitor the price environment and its potential impact on long-term cash flows and will set initiatives to protect our cash balances.
I would also like to highlight the sensitivity of our profit to changes in the exchange rates. Approximately 70% of our costs at Yauricocha are denominated in Peruvian nuevo sols, and approximately 60% of our costs in Mexico are denominated in Mexican pesos. At December 31, 2014, the sol to US dollar exchange rate was 2.98, and the Mexican peso to US dollar exchange rate was 14.77. Thus far, in 2015, the sol and peso have weakened further against the US dollar by 6% in both cases. A 10% decrease in the value of the sol and peso against the US dollar would result in an increase of $2.7 million and $1.6 million in the Company's net income, respectively, assuming that our operational performance during 2015 is consistent with 2014. We are confident that our financial position, together with future cash flow from our 3 producing mines and available credit facilities, will be sufficient to support the Company's financial commitments for the remainder of the year and beyond.
With that, I will now turn the call over to Matt Wunder for an exploration update.
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Matt Wunder, Sierra Metals Inc. - VP Exploration [5]
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Thanks, Ed. Please turn to page 15. This illustrates a simplified regional geology map of the Sierra Metals land position in the Yauricocha area. The regional targets outside the mining area are highlighted in red and are currently being advanced through geological mapping and surface sampling. These targets have the potential for similar poly-metallic replacement style mineralization as well as large-scale epithermal mineralization.
If we turn to page 16, this is a focal looking to the southeast over the Yauricocha area. You can see the central mine area highlighted in red in the central-left -- or east-central right side of the photo. In the upper right, you have the La Fortuna target area, and you have the new discoveries of the Mascota West, the Mascota East areas just on the left side of the photo. This photo demonstrates the relatively ease in which it is defined in new discoveries in the mine area through little work with the continued surface exploration on the property.
If we turn to page 16 -- 17, 17 is a simplified geological map over the Yauricocha mine area. The dark blue represents marble replaced limestone in the area, with the main targets highlighted in black-dashed ovals. There are many targets available for exploration along these contact areas, and the main targets have not seen significant updated technology applied to the mineralized zones. So the ability to explore and discover new mineralization should be relatively easy with the application of IP magnetics, geochemistry, Landsat and various other mapping tools available to us at this stage.
If we turn to page 18, 18 is a -- we're moving to Bolivar mine. This is a simplified cross-section. Through the Bolivar mine area with the El Gallo Superior and Inferior mantos demonstrated on the left side of the photo, you can see the size of the mineralized in system represents over 2 kilometers down-dip of potential striking sands, and the system is open to the north.
For the new developments at the El Fierro mine area is that the underlying area of El Fierro -- we've got a cross-cutting mineralized structure crossing the underlying intrusion, which represents a feeder to the overlying mineralization. These feeders represent very strong mineralized targets that have previously been unrecognized in the Bolivar mining area and may point to a large mineralized deep intrusive related style mineralization underlying the main skarn.
If we now turn to slide 19, slide 19 is a schematic cross-section immediately west of the Bolivar mine target area. You can see the Lilly breccias off to the west, which represents a tourmaline intrusive breccia which, again, may represent a porphyry-style mineralization down-dip from the main reactive limestone stratigraphy over 2 kilometers west of the main Bolivar mine area. This target is -- has relatively seen very limited drilling and represents a significant target west of the mine area. The Bolivar mine camp in itself has seen relatively little mineral exploration. With modern technology and the application of recent geophysics, airborne and remote sensing, we feel that the ability to discover additional resources at depth and in new areas at Bolivar is very strong.
If we now turn to page 20, 20 is a -- represents a plan map of the Cusi project. The areas that we are currently following up with the exploration at Cusi are illustrated in black on the -- on this map. Cusi represents an epidermal vein system associated with a resurgent dome complex. On this map, the orange represents the felsic dome -- resurgent portion of the felsic dome. The interesting development at Cusi is that as we go deeper in the mineralizing system, we are seeing an increase in polymetallic mineralization, which will have a significant impact on the valuation of the cash flow as we move forward.
That's it for the exploration update. I'll pass it back to Mike.
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Mike McAllister, Sierra Metals Inc. - Director of Corporate Development [6]
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Thank you. Operator, we would like to now open up the lines to questions from the participants.
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Questions and Answers
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Operator [1]
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(Operator Instructions) Lee Cooperman, Omega Advisors.
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Lee Cooperman, Omega Advisors - Analyst [2]
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First, let me complement you on a very comprehensive report; very professionally done. But I have a question. 51% of the equity is owned by Arias Resource Capital, and I believe that is owned within a private equity fund that has to distribute or dissolve next year. I'm just curious whether the Board and management have focused on this and if you have any comments about the likely outcome. By the way, very professional presentation.
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Mark Brennan, Sierra Metals Inc. - President and CEO [3]
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Thank you for your comments, Lee. And with regard to the Arias 51%, they have two funds that own the 51%. Fund number one has 31%; fund number two, 18%. Now, the expiration of fund number one concludes at the end of October 2016. We have learned that the fund does not have to liquidate that position until at least October 2018.
So it's something we've obviously focused a lot of our attention on for two purposes. One is obviously for the event that we may see requirement for liquidity of that position. And two, because it has -- we are generally concerned as to the level of liquidity in the Company in general. So, we don't see that 31% having to be sold until October 2018. So from that perspective, that issue really doesn't seem to be on the horizon. However, we are still very concerned with the overall liquidity for Sierra shares, and that's something we're working on very, very aggressively to remedy.
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Lee Cooperman, Omega Advisors - Analyst [4]
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Thank you very much. Good luck.
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Operator [5]
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Alec Meikle, Cormark Securities.
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Alec Meikle, Cormark Securities - Analyst [6]
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Thanks for that color on that FX. That was very helpful. I was just wondering if you could actually break out a little bit of the cost savings we are seeing at Yauricocha and how much of that is due to FX and how much is kind of due to just changes in the mine plan. I notice that in the mine plan, the costs are around $58 a ton, and it seems like it's coming in below that. If you could provide any color on just how we should be modeling that going forward, that would be very helpful. Thanks.
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Ed Guimaraes, Sierra Metals Inc. - CFO [7]
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Thanks for your question, Alec. I think $58 in terms of modeling is appropriate going forward. I think you should see that cost come down over the next 12 to 24 months as we continue to modernize the mine and introduce operational efficiencies. In terms of FX, there is about roughly, I believe, $2.6 million -- $2 million would be FX-related in the costs in that number for Yauricocha. I hope I answered your question.
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Alec Meikle, Cormark Securities - Analyst [8]
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Okay. That's helpful. I was just noticing that if you try to reconcile the costs in the last, say, four quarters versus the what's in the mine, it just seems like you are consistently under almost $10 a ton if you average it. Is that something -- is there something we should be adjusting compared to the mine plan?
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Ed Guimaraes, Sierra Metals Inc. - CFO [9]
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Historically, the mining costs have tended to be around $50. And then your mill costs -- sorry, $40, your mill costs are about $10. And we have seen the mining costs creep up a little bit. And then you've got selling costs of about $4 a ton. So, your plant costs have really -- they've been pretty steady at $10, and it's just been the increase in the mining costs.
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Alec Meikle, Cormark Securities - Analyst [10]
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Okay. That's helpful. Thanks.
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Operator [11]
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John Tumazos, John Tumazos Independent Solutions.
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John Tumazos, John Tumazos Independent Solutions - Analyst [12]
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Congratulations again on very good results and a very admirable cash position and cash flow. And favorable financing terms. As we waver through a historic downturn in metals prices, similar or worse to 2009 averages, in terms of your big-picture strategy, should we expect an emphasis on reinvestment to pursue exploration and expansion opportunities in the existing suite of mines versus acquisitions where so many companies are weaker than Sierra Metals, versus opportunistic share buybacks if blocks are available such as what Lee Cooperman alluded to earlier?
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Ed Guimaraes, Sierra Metals Inc. - CFO [13]
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Thanks for the question, John. With respect to the -- we were just coming off of a fairly extensive CapEx program for the Company. We probably spent in the last three years -- including this year will have spent about $120 million on fairly extensive CapEx, particularly at Yauricocha. We've driven two shafts, and we are in the process of completing those shafts, those new shafts. We are building four mill -- four-kilometer tunnel that's just coming to its conclusion. I would hope that these programs will be concluded by the end of the year. If not, they may slip into the first quarter, but I don't see much room beyond that.
What we are looking at is -- you know, we've really been setting ourselves up or the Company has been setting itself up to be in the position to really look at expanding production, particularly at Yauricocha. We've seen consistent growth at both Cusi and Bolivar. But what I would say here is, looking at the potential exploration opportunities -- and they are various and they are several and they are numerous and they are extremely exciting.
But we will look to be feathering our own nests, I guess, in terms of bringing in our own resources and dramatically increasing the potential, which will have a direct impact on the modernization process and the mining process. As it will be, we're only looking for new resources that will be able to be brought into the mining plan within the next couple of years.
So the first focus will be to grow our own operations and to focus on maximizing the utility from our own operation, which we hope will be -- will provide greater value to our corporate shares. But beyond that, I think in terms of -- you know, we are in an enviable position. We are very strong from a liquidity position. I think we would consider looking at other opportunities, but I think initially it's really to focus, get our own house in order, get everything ship-shape, drive strong margins and then move on from there. And we will be opportunistic if the right event or the right opportunity arises.
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John Tumazos, John Tumazos Independent Solutions - Analyst [14]
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Do you think your human resources or management resources are enough to add a fourth operation or venture outside of your core in Peru? You know, if you said on this call you were looking for acquisitions, you might get 50 submittals in the next week. So I know there's a lot of -- there's a lot of stuff going around.
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Ed Guimaraes, Sierra Metals Inc. - CFO [15]
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We've probably had 50 submittals in the last week, John. So, we are -- you know, we feel that we've got -- as you can see by the very strong second-quarter results that we have generated, we feel we have high-quality assets that are best-of-breed assets. It speaks to the quality of the deposits, to the resilience of the deposits to how well they have been able to produce. In certain circumstances, using what I would deem as less than best-of-breed mining and older-style mining -- which bringing in Gordon Babcock will certainly modernize the facilities through technology, through techniques, through equipment. So I figure we're going to see a tremendous increase in yields just from the existing deposits.
And so long story short, we will not venture, and we will not dilute the quality of our assets for the sake of growth. We will look, and if there are opportunities that happen to fall in the wheelhouse, whether they are in close proximity to our existing operation, whether they are best-of-breed assets that we can find it at a very contagious pricing -- or frankly, it could be an operation where -- and I put this as the greatest outlier, where perhaps you've got an extremely strong group who can -- who perhaps have been cash-deprived who can drive an operation. But that certainly is not going to be our focus. Our focus is certainly to drive our existing operation. And we will be opportunistic only if we can find the best of a combination of items.
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John Tumazos, John Tumazos Independent Solutions - Analyst [16]
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Thank you.
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Operator [17]
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Jim Young, West Family.
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Jim Young, West Family Investments - Analyst [18]
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In your August full press release you state that you are on track to meet 2015 production guidance. But in the MD&A on page 8 it states that the Company is on pace to exceed 2015 production guidance for all metal. So I'm just wondering which case is this from a production perspective?
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Ed Guimaraes, Sierra Metals Inc. - CFO [19]
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Well, I guess in terms of -- thank you, Jim. Nice to hear your voice. With respect to the -- if you look at our production guidance, we are actually looking for -- we put out production guidance for between 10.8 million ounces and 12.6 million ounces of silver-equivalent production. We are now running at 6.2 million ounces. And so as it sits today we are at the higher end of our expectations of the guidance placed out there. So I think we are very -- extremely comfortable to say that we will meet those -- that guidance, but our hope is that we will exceed the guidance.
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Jim Young, West Family Investments - Analyst [20]
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Okay. And then secondly, with respect to the production numbers, you got an approval for the Chumpe Mill at Yauricocha to expand from 2,500 to 3,000 tons a day. How long is it going to take to ramp up that production? And then secondly, at the Bolivar, with the power line in place, what is the outlook for the production on a tons per day for the second half of the year?
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Mark Brennan, Sierra Metals Inc. - President and CEO [21]
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I would say at Yauricocha, the -- with Gordon coming into the operation, I think you're going to see perhaps a consistent production that we've seen for the earlier part of the year. I think what we are looking at is we want to bring in -- and we need to bring in new systems, new technologies, new equipment, new methodologies. We want to focus on safety. There's a lot of cleaning up that we want to do here. And as a consequence, I think what you'll see is you'll see some -- let's call it some rejigging of the existing operations and re-modernization that I don't necessarily think you are going to see an immediate impact.
I think what will happen is that will all come to fore in the next nine to 12 months, where we'll see a -- my belief will be to see a surge coming out towards the first, second quarter of next year. But until that time, we'll be focusing on bringing in this new modernization. And I think we'll probably see things fairly stable, although we will focus on cost reduction and rationalization as we go forward.
With regard to Bolivar, Bolivar just continues to ramp up, and obviously bringing in the new transmission line was a tremendous accomplishment. What's interesting with Bolivar, if you look at 2012, we are producing at 900 tons per day, now at 1,000 -- sorry, 2013 at 1,000. We are now producing at 2,500-plus per day. We are hitting days where we are at 2,700 tons per day. We'll continue to drive Bolivar, not only through existing operations. Again, I think that we can improve significantly the operations at Bolivar. However, I think they are probably in a better state than -- they are more advanced perhaps than Yauricocha.
But, again, we are seeing -- just as Matt tried to highlight in a very succinct fashion, we are seeing just tremendous opportunity for exploration upside. And, again, I think that I'm hopeful that in the next year, Jim, that will see a transformation of Yauricocha and Bolivar in terms of their capabilities, in terms of their scope and scale that will be very significant. So that's the focus. I think we can continue to see Bolivar thrusting ahead, broaching that 3,000-ton level. Yauricocha, again, I would just put expectations to be consistent as we bring -- as we modernize the facilities and techniques up until, let's call it, the end of the first quarter next year.
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Jim Young, West Family Investments - Analyst [22]
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Okay. And then with respect to the capital expenditure budget that you've had, as you had mentioned, you spent almost $120 million over the last three years. Could you just clarify when the tunnel is going to be completed and how much in CapEx has been spent for the tunnel? And then secondly, when are the two shafts going to be completed and how much of that $120 million has been spent on the two shafts? And are those -- both the tunnel and shaft, are they going to be coming on time and on budget?
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Ed Guimaraes, Sierra Metals Inc. - CFO [23]
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Maybe I'll just address the -- just with respect to the tunnel, I rode along it last week. You know, we are expecting that we'll see that tunnel completed by the end of the year. It could slip a little into the new year. And, again, I think Gordon is bringing some very needed and very positive change in terms of how we are progressing with that. I think we are -- these changes are having an impact of substantially increasing the productivity of the advancement.
So I would target, Jim, the end of the year to early in the first quarter for the tunnel. And for the shaft, the shaft are -- they've made substantial progress. The Cachi Cachi shaft and likewise the Yauricocha shaft, I would hope to be completed by year end. And probably Yauricocha will have the hoists in by October, and we'll be operating through the hoist system in October.
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Jim Young, West Family Investments - Analyst [24]
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How much has been spent on those three? Have they come in on budget?
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Ed Guimaraes, Sierra Metals Inc. - CFO [25]
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Jim, I don't have the exact details because these projects have been ongoing over the last 2.5 years. They have been on budget for the most part. The Yauricocha tunnel is anywhere from $10 million to $15 million, and then you've got your shafts at roughly about $8 million to $10 million each. But I don't have the specifics on me, and I could provide that at a later date.
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Mark Brennan, Sierra Metals Inc. - President and CEO [26]
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What's very interesting there, Jim, is that once -- the completion of the shafts and the tunnel are going to have a very long impact in terms of the productivity of the Yauricocha and Cachi Cachi. And as a consequence, that $40 million a year that we have been spending in CapEx, that program going into 2016 is going to decline very significantly.
And so obviously we are moving into a very, very difficult commodity environment. And what will happen is that we'll be able to have more cash flexibility moving forward. And our inclination is to be tightening up as much as we can. But being very opportunistic with any projects, how making sure that they've got a definitive ROE prior to their implementation.
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Jim Young, West Family Investments - Analyst [27]
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Okay. Then lastly, with respect to your exploration program, in 2015 there have been very few announcements about exploration progress and results. And I appreciate that there's been a change in management. But compared in 2014, there were significant announcements and enhancements and reserves and resources from your exploration program. So the question is, what is the outlook that we can expect here in the second half of 2015 and out into 2016 with respect to your exploration program?
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Matt Wunder, Sierra Metals Inc. - VP Exploration [28]
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Well, the exploration program continues. We are expanding and continuing drilling. We feel that we need to have a significant number of intercepts and data to be able to provide a rational resource update. Internally, what we are planning on doing is bringing on internal resource specialists to do internal resource modeling to work with our third parties. And once we have that, we'll be in a position to provide some updates at that time.
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Mark Brennan, Sierra Metals Inc. - President and CEO [29]
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Just to maybe elaborate a little bit, Jim, is, we have a -- in our geological programs, for the -- historically have really focused on near production growth and really just making sure that the pipeline was full for the approaching drilling. What we are seeing is that very close to these -- very near to the mines and where the operations are ongoing, there is a very, very significant potential. But it's going to take time for us to collate the data. It's going to take time for us to build the model. But I would expect that between now and year-end, you'll see some very good evidence of the potential to substantially and significantly improve and increase our resource base.
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Jim Young, West Family Investments - Analyst [30]
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Okay. Thank you.
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Operator [31]
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(Operator Instructions) There are no further questions at this time. I'll turn the call back over to management for any closing remarks.
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Mike McAllister, Sierra Metals Inc. - Director of Corporate Development [32]
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Thank you, everyone, for joining us today. We appreciate your time. And if there are any follow-up questions, our contact information is available on the website. As well, the conference call webcast replay details and PowerPoints, all information is available on the investors page on our website at www.sierrametals.com. Thank you, everyone, for joining us, and have a great day.
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Operator [33]
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This concludes today's conference call. You may now disconnect.
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