Q2 2017 Sierra Metals Inc Earnings Call
Aug 16, 2017 AM EDT
SMT.TO - Sierra Metals Inc
Q2 2017 Sierra Metals Inc Earnings Call
Aug 16, 2017 / 02:30PM GMT
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Corporate Participants
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* Edmundo Gontardo Guimaraes
Sierra Metals Inc. - CFO
* Gordon J. Babcock
Sierra Metals Inc. - COO
* Igor Alcides Gonzales Galindo
Sierra Metals Inc. - CEO, President and Director
* Michael McAllister
Sierra Metals Inc. - VP of Corporate Development
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Conference Call Participants
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* Heiko Felix Ihle
H.C. Wainwright & Co, LLC, Research Division - MD and Senior Metals and Mining Analyst
* Heiko Felix Ihle
Rodman & Renshaw Research - Analyst
* James Young
West Family Investments, Inc. - Investment Analyst
* Leon G. Cooperman
Omega Advisors, Inc. - President, CEO, and Chairman
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Presentation
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Operator [1]
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Good morning, ladies and gentlemen. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome, everyone, to the Sierra Metals Second Quarter 2017 Results Conference Call. (Operator Instructions) I would now like to turn the call over to Mike McAllister, VP Corporate Development. You may begin your conference.
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Michael McAllister, Sierra Metals Inc. - VP of Corporate Development [2]
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Thank you, operator, and good morning, everyone. As mentioned, welcome to Sierra Metals Q2 Results Conference Call. On today's call, we are joined by Igor Gonzales, our President and CEO; Ed Guimaraes, our CFO; Gordon Babcock, our COO. Today's call will be followed by a question-and-answer period. And today's presentation is available for download, both through the website and from the company's website at www.sierrametals.com. Monday's press release, the financial statements and the management's discussion and analysis are also posted on the company's website.
Before I start, I would like to remind everyone about our disclaimer and that certain statements made today by the executive management team may contain certain forward-looking information. Anything not historical is considered forward looking. For more information, please refer to our detailed cautionary note in Monday's press release and to the disclaimer on Slide 2 of today's presentation. Please note that all dollar amounts mentioned on this call are in US dollars unless otherwise noted.
With that, I will now turn the call over to Igor Gonzales, our President and CEO.
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Igor Alcides Gonzales Galindo, Sierra Metals Inc. - CEO, President and Director [3]
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Thank you, Mike, and good morning, everyone. I would like to begin with an overview of 2017 second quarter results for Sierra Metals. I will also discuss the operational and exploration highlights for the quarter. Overall, we're very encouraged by the continued progress and achievements in the financial, operational and exploration results at Sierra in the second quarter. We are optimistic that 2017 will be a year of growth at all 3 mines and for Sierra Metals as a company. Following my summary highlights, Gordon Babcock will take us through the operational and exploration highlights. And then Ed Guimaraes will take us through the second quarter financial highlights and then we'll open the call for questions.
Looking at Slide 4, the second quarter of 2017 represents a fourth consecutive quarter of solid financial and operational results. During this quarter, the company maintained the significant improvements in revenue and adjusted EBITDA realized during the previous quarter. Sierra Metals achieved significant improvements in the second quarter of 2017 versus the same period last year, with a 32% increase in revenues and a $12.1 million increase in adjusted EBITDA. Additionally, the company saw lower all-in sustaining cost for silver equivalent payable ounce accounts and copper payable pound. During the quarter, consolidated metal production was 3% lower when compared to the second quarter of 2016. While Yauricocha experienced higher throughput, higher copper and zinc head grades and higher recoveries for all metals except gold, a decrease in metal production was due to lower throughput, head grades and recoveries for all metals except gold at Bolivar; and lower throughput lead and zinc grades and lower silver and zinc recoveries at Cusi.
Similar to the successful operational improvement program at Yauricocha, the company is now working on an operational improvement program in Mexico to address productivity, head grades and recoveries. As an example, the company has purchased 13 new pieces of equipment for Bolivar including scoops and trucks to improve equipment availability and production.
Continuing on Slide #5. At Cusi, the company has refocused its development plans at the mine. And it's placing all efforts on the recently discovered Santa Rosa de Lima zone. Mine operations have reached the actual structure via a ramp and are currently focused on its development, preparation plus detailed planning to incorporate this for its mill feed. Sierra Metals continues to make significant progress on its new discoveries and exploration.
At Cusi, the company announced the results of an initial 15,000-meter drill campaign at the Santa Rosa de Lima zone, which saw an average of 371 grams per tonne of silver equivalent with an average width of 4.1 meters. The company has just completed a second 14,000-meter infill drilling program, which was designed to move this resource into a measured resource category. These results will form the basis for an upcoming updated technical report expected in the fourth quarter at Cusi.
At Bolivar, the company is also very active and have recently completed a Titan 24 Geophysical survey on the property, which identified 8 high-value targets, which are currently being prepared for drilling. Drilling continues at the Bolivar West and Northwest areas with an aim of finding higher-grade material to feed the mill. We will also release an updated technical report for Bolivar in the fourth quarter, which is expected to demonstrate improved tonnage, grade and mine life.
Continuing on a Slide 6. On May 1, 2017, the company announced a new high-grade oxide zone referred to as the Esperanza North zone. This new zone is an addition to the extension of the high-grade sulfide zone referred to as the Cusi-Mascota zone (sic) [Cuye-Mascota zone], which included 69 meters of continued sulfide mineralization. Both of these zones are located at our Yauricocha Mine. The company is also currently completing a Titan 24 Geophysical survey over the entire Yauricocha property. The survey is expected to be completed in the third quarter of this year. Yauricocha has seen a significant amount of drilling completed this last year, which will all be included in an upcoming Mineral Resource and Reserve Estimate report. This report is expected to be published for the Yauricocha Mine early in the fourth quarter of 2017.
The company will continue its aggressive brownfield exploration programs and also its definition drilled programs at all 3 mines. We're also reinforcing our technical teams to meet the upcoming challenges of putting our brownfield findings into production in the near future.
With that, I will now turn over the call to Gordon Babcock, our Chief Operating Officer, for the operations and explorations update.
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Gordon J. Babcock, Sierra Metals Inc. - COO [4]
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Thanks very much, Igor. Turning now to the operational highlights on Slide #7. In the second quarter 2017, Sierra processed a total of 455,000 tonnes, which as previously mentioned and noted, represents a decrease of 10% approximately compared to Q2 2016. The company produced 2.7 million silver equivalent ounces or 23.1 million copper equivalent pounds in the second quarter. This sort of represents a 3% decrease compared to the second quarter 2016. The primary reasons they're attributed to lower throughput, head grades and recoveries of all metals except gold at Bolivar and lower throughput lead and zinc head grades and lower silver and zinc recoveries at Cusi. This was offset by a strong quarter at the Yauricocha operation where higher throughput provided higher copper, higher zinc grades, higher recoveries of all metals except for gold.
The company continues to benefit from the improvement program completed at the Yauricocha mine continued with a similar program at the Bolivar mine in Mexico. Our objective is improving productivity in metal production in all of our assets. At Cusi, current efforts are -- are currently focused on reevaluation of the mine development and definition drilling program plan, focusing on a new resource estimate including new areas such as Santa Rosa de Lima zone. Currently, we have ridged the actual zone in both Promontorio and Santa Edwiges via ramps and we're focused on developing and detailed planning of the Santa Rosa de Lima zone to include this material in future mill feed.
Focusing now at Yauricocha. Silver equivalent production in Q2 '17 was 2.1 million ounces representing a 14% increase over Q2 2016. Sierra saw increases in the production of copper 129%, zinc 33%. Yauricocha in Q2 2017 versus Q2 2016 with decreases in production of silver 3%; lead, 16%; and gold, 54%.
At Bolivar, the company had planned throughput of 192,937 tonnes processed, which was -- which represents an 18% decrease compared to Q2 of 2016. The lower throughput and recoveries of all metal along with the lower head grades encountered resulted in a 27% decrease in copper equivalent production compared to Q2 2016. Copper production decreased by 27% at Bolivar in the second quarter of 2017 versus the second quarter of 2016, along with a 31% lower silver production and 17% lower gold production. The company's focus at Bolivar in 2017 has been to improve production volumes through procurement of new equipment such as Jumbos, Scoops and trucks. 13 new pieces of equipment have been ordered, 8 of which have arrived and put into operation, remaining equipment is to arrive in stages and will be completely full by year-end, and then we'll be in the process of evaluating the gear that we have and basically getting -- replacing this old equipment.
So we expect full delivery by the end of the third quarter with the intent of moving more material from available production stopes within the mine. We expect to see the effect of the inclusion of new equipment at the mines in the latter part of 2017.
At Cusi, the company processed total ore of 23,956 tonnes, which represents 54% decrease in Q2 2017 compared to Q2 2016. Lower head grades for lead and zinc and lower recoveries for silver and lead also contributed to the 54% decrease in silver equivalent production. Silver production decreased 55%, gold production decreased 42%, lead production decreased 59% and zinc production decreased 49% compared to Q2 2016.
Despite the decreases in tonnage in metal production at Cusi, it's important to note that Cusi only represents approximately 5% of Sierra Metals' current total production. Cusi's contribution to the company's overall production is expected to increase depending on this exploration and development program success that's expected at the Santa Rosa de Lima zone as well as other zones that are contiguous to that parcel. Company has ramped down this new zone, is now developing and planning for the inclusion of ore from the zone which has a wider mineralized ore zone and improved grades over our current known zones. This will aid the company in increasing resources at Cusi.
Turning to Slide 9, exploration remains a key aspect at all 3 of the mines. And during Q2 2017, the company drilled 82 (sic) [87] holes totaling 10,321 meters at Yauricocha. Exploration drilling accounted for 20 holes or 3,905 meters at various zones including Cuye, Contacto Oriental, Escondida, Karlita. And these were done to test the continuity of mineralization to explore new mineralized zones, explore skarns and orebodies at depth. And the Titan 24 geophysical survey commenced in Q2 in the southern part of the property at the Yauricocha Mine and as we speak, we are in this -- we're approaching the central mine zone with our geophysical work right now.
Definition drilling accounted for the remaining 67 holes or 4,516 meters (sic) [6,416] at Antacaca, Catas, Esperanza, Esperanza North and Angelita. On May 1, 2017, the company announced the discovery of a new high-grade lead and silver oxide zone referred to as Esperanza North zone, which is located between Esperanza and the Cachi-Cachi mine. Drilling took place from the Yauricocha tunnel located on this -- on the 720 level and that area had never been drilled before. And this discovery is important for the interpretation of the orebody extensions between Esperanza and Cachi-Cachi. And they're located approximately 1 kilometer apart.
On May 1, 2017, the company also announced drilling results, which demonstrate the extension of the high-grade sulfide zone referred to as Cuye-Mascota, which was discovered in November of 2016. Results included 69 meters of continuous sulfide mineralization, that zone is located 200 meters north of the central mine area along strike from current mining activities. The diamond jewel intercepts at the Cuye ore zone are some of the widest intercepts of sulfide mineralization discovered in the company's recent history and will be a priority for continuing explorations during the remainder of 2017.
The results of this current program confirm the Cuye orebody continues below the 1270 Level and now our company geologists have identified the transition zone of oxides to fresh sulfides in it's drilling program. And that has important relevance to the mine, especially due to its high grades particularly for zinc and copper. Cuye was one of the main cash flow generators 10 years ago and this appears to be at depth with similar widths and grades.
All drilling that has taken place will be included in an upcoming Mineral Resource and Reserve Estimate report that's expected to be published for the Yauricocha Mine in the early portion the fourth quarter of 2017. Opportunities exist to expand our high-value near mine tonnage in the near-term and the opportunities are numerous and by no means exhausted. As mentioned one of the key drivers of opportunity is now the application of the Titan 24 Geophysical program, which is being carried out by Quantec. And that will enable us to locate deep-seated sulfide targets. The program has commenced and should be complete by late September. This type of geophysical program has never been implemented before at the Yauricocha mine site. Sierra is very optimistic the program will bring positive results and further high-grade value targets.
Now, turning to Slide 11. At Bolivar, during Q2, company drilled 11,236 meters in the following areas: Bolivar West fault in -- Bolivar West area, we drilled 7,523 meters; 3,423 were drilled at Bolivar Northwest; 289 meters were also drilled in El Gallo area with the objective finding the continuation of the El Gallo inferior orebody between the Mina de Fierro and the Bolivar Mine. A Titan 24 geophysical survey was also completed during the first half of 2017 in the areas of Bolivar West and Northwest. The survey included 11,500 meters and identified 8 high-value targets for the follow-up drilling program expected to occur in Q3 of this year.
Turning to Cusi, the -- on June 5, 2017, the company announced initial assay results from a 15,500-meter drill program at Santa Rosa de Lima and that's located within the Cusi Mine property. The discovery of the Santa Rosa de Lima zone came as a part of a reinterpretation of the Hydrothermal model and the drilling program confirmed a high-grade mineralized deposit, located adjacent to the current operations. The zone is a regional structure that has been identified in the area extending for some 12 kilometers. The main mineralized zone currently extends over 1,000 meters in length and 400 meters in depth and is open along strike to the northeast and southwest. The structural mineralization widths range from 1.5 meters with an average width of 4.16 meters and contain an average silver equivalent grade of 371 grams per tonne.
Subsequent to the completion of the initial drilling campaign, the company has also completed an additional drilling campaign consisting of 14,000 meters of infill drilling. The company awaits assay result from the labs -- Chemex labs -- ALS labs on the second phase of the infill drilling program and we will be reporting on those in the next coming months. Future drilling will continue along the Santa Rosa de Lima zone to the northwest and southeast to continue working on defining that 12-kilometer zone.
In summary, in the first half of 2017, we have continue to build upon the achievements of 2016 and the company is on track to see a strong production growth for the brownfield exploration's success. Sierra continues to execute a solid plan, which is expected to lead to a future -- a stronger future benefiting company and the shareholders.
With that, I will now turn the call over to Ed Guimaraes, our Chief Financial Officer, for a financial review.
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Edmundo Gontardo Guimaraes, Sierra Metals Inc. - CFO [5]
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Thanks, Gord. Turning now to Slide 14. The company had another exceptional quarter of financial results benefiting from the continued stabilization in metal prices as well as strong production at Yauricocha. Along with the strong operational results realized during the quarter, cash flow generation continues to improve and provide the company with a healthier balance sheet and increased liquidity. The company earned revenues of $48.6 million in the second quarter of 2017, which represented a 32% increase compared to the second quarter of 2016. Realized metal prices in the second quarter were also higher for all metals including 1% higher for silver, 20% higher for copper, 35% (sic) [25%] higher for lead, 40% higher for zinc and 2% higher for gold. In addition to the higher metal prices realized, the increase in annual revenues are primarily attributable to the 10% increase in throughput and the increase in copper and zinc head grades and higher recoveries for all metals with the exception of gold at Yauricocha. This was partially offset by the 18% decrease in throughput, lower head grades for all metals and lower recoveries for all metals, except gold at Bolivar and a 54% decrease in throughput at Cusi along with lower head grades for lead and zinc and lower silver and lead recoveries.
Adjusted EBITDA of $17.6 million for the second quarter of 2017 increased compared to $5.3 million in Q2 of 2016. The increase in adjusted EBITDA was primarily due to the $14.5 million increase in revenues at Yauricocha. Yauricocha's Q2 2017 cash cost per silver equivalent payable ounce was $8.49 versus $9.60 in Q2 of 2016, and all-in sustaining cash costs per silver equivalent payable ounce was $13.47 versus $14.72 in Q2 of 2016. The decrease in the all-in sustaining cash cost per silver equivalent payable ounce during Q2 2017 was due to an increase in silver equivalent payable ounces as a result of higher throughput and ore feed head grades from the increase in available production from higher grade zones in the mine. Also, lower treatment and refining costs incurred during Q2 2017 resulting from improved terms within renegotiated sales contracts with our off-takers.
Bolivar's Q2 2017 cash cost per copper equivalent payable pound was $1.35 versus $1.02 in Q2 2016. And the all-in sustaining cash cost per copper equivalent payable pound was $2.49 versus $1.96 in Q2 of 2016. The increase in all-in sustaining cash cost per copper equivalent payable pound was due to a decrease in copper equivalent payable pound as a result of 18% lower throughput and reduced equipment availability during Q2 of this year. Cusi's Q2 2017 cash cost per silver equivalent payable ounce was $20.60 versus $10.77 in Q2 of 2016 and the all-in sustaining cash cost per silver equivalent payable ounce was $49.13 versus $18.74 in Q2 of 2016. The all-in sustaining cash cost per silver equivalent payable ounce increased due to a 54% decline in throughput, which resulted in fewer silver equivalent payable ounces as the company reevaluates its development plan at Cusi and focuses on exploration and development of the recently discovered Santa Rosa de Lima zone.
Cash flow generated from operations before movements in working capital was $17.4 million for Q2 2017 compared to $6.2 million in Q2 2016. The increase in operating cash flow is mainly the result of higher revenues generated and higher gross margins realized.
I would now like to review our cash flows, which provide the clearest perspective on our financial performance. I have summarized the changes in cash during Q2 2017 on Slide 15. During the first -- during the second quarter, our operating cash flows were $14.7 million, we spent $9.9 million on capital expenditures in Mexico and Peru and paid $10.4 million in principle repayments in interest on our credit facilities in Peru and Mexico. We also paid $1.3 million in dividends to noncontrolling interest shareholders. These items decreased our cash balance from $38 million as at March 31, 2017, to $31.1 million as at June 30, 2017.
Turning to the balance sheet and liquidity on Slide 16. We have ended the second quarter of 2017 in a strong financial position with $31 million in cash and have an additional $16 million in undrawn credit facilities giving us a total liquidity position of $47 million. We have total debt of $66 million and a net debt position of $35 million. The company is confident that the 2017 EBITDA will be much greater than the current debt outstanding at the end of the year.
The company has principal payment obligations on its loans and credit facilities of approximately $16 million to be paid in 2017, $14 million to be paid in 2018, $8 million to be paid in 2019 and $29 million to be paid in 2020. We are confident that our financial position, together with a potential future cash flow generation from our 3 producing mines, including the recently discovered Esperanza, Cuye-Mascota zones and Santa Rosa de Lima zone will be sufficient to support the company's financial commitments in 2017 and beyond.
I would like to take a moment now to highlight two noteworthy events that have taken place subsequent to the end of the second quarter. The first is our U.S. listing. On July 6, 2017, the company announced that it's common shares were approved for listing on the NYSE American and they began trading under the symbol SMTS on July 11, 2017. The common shares have continued to trade on the Toronto Stock Exchange and the Lima Stock Exchange. The listing of our common shares on the NYSE American, formally known as the NYSE MKT Exchange, represented an important corporate milestone for Sierra Metals and another step in our plan to enhance shareholder value by increasing stock liquidity and exposure to institutional as well as retail investors. The second event was the spin out of Peru Northern properties.
On August 8, 2017, the company announced the completion of the previously announced distribution of Cautivo's Mining Inc.'s common shares, issuance of rights pursuant to Cautivo's Rights Offering and listing of the Cautivo Shares and the rights on the Canadian Securities Exchange. The distribution was completed by distributing to holders of Sierra common shares other than ineligible holders of record on July 26, 2017, all of the issued and outstanding Cautivo Shares being 3,253,588 Cautivo Shares as a return of capital, reducing Sierra shareholdings in Cautivo from 100% to nil. The Cautivo Shares were distributed pursuant a spin off by Sierra on the basis of 1 Cautivo Share for every 50 Sierra Shares held on July 26, 2017. Sierra did not receive any proceeds from the distribution.
Immediately following this distribution, Cautivo issued 11,904,641 rights pursuant to the Rights Offering, whereby holders of Cautivo common shares received 3.6589638 rights for every Cautivo common share held. For every whole right held, a holder is entitled to subscribe for 1 Cautivo share at a price of CAD 0.84 per share at any time from August 8 to August 29 of 2017. Effective August 8, 2017, the Cautivo Shares and the rights commenced trading on the Canadian Securities Exchange under the trading symbol CAI and CAI. RT, respectively.
With that, I will now turn the call back to Mike.
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Michael McAllister, Sierra Metals Inc. - VP of Corporate Development [6]
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Thanks, Ed. That ends the presentation portion of this call. We would now like to open the call up to questions from our participants. Operator, please open up the lines.
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Questions and Answers
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Operator [1]
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(Operator Instructions) Your first question comes from the line of Lee Cooperman with Omega Advisors.
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Leon G. Cooperman, Omega Advisors, Inc. - President, CEO, and Chairman [2]
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I have really 3 questions but you said something, which I'm sure is not what you meant to say. You said that you were confident that at the end of the year that your EBITDA would exceed your debt outstanding. That already is the case now. Your net debt is $34 million, your EBITDA for 6 months is $42.98 million. So I assume that you meant to say something different or whatever. But anyway, can you fill in on Page 10, you have various captions, your revenue, adjusted EBITDA, CapEx, could you fill in your best expectations for the year? In other words, I've been assuming that you would get EBITDA of about $100 million for the year. Is that realistic, and the other numbers? So that would be question 1.
Question 2, what is the priority of management of the board for the use of the free cash flow because on the trajectory you're on, you'll probably be debt-free at the end of the year with cash. What is the priority for the use of that cash? And third, as -- if you could talk about, I think that the private equity fund that owns somewhat 60% of the equity has to distribute by October. If you could explain the rights they have to extend et cetera and what the plan to deal with that is, that would be very helpful.
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Edmundo Gontardo Guimaraes, Sierra Metals Inc. - CFO [3]
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Okay. Thanks for your questions, Lee. And I'll answer them. I believe there's 4 of them. Just to clarify on the debt. What I meant there is, it's not the net debt. What I meant to say is that our EBITDA will exceed our debt outstanding of $66 million, and not referring to a net debt.
In terms of EBITDA, in terms of EBITDA and free cash flow projections, we have gone on record to say that our EBITDA would exceed our previous high watermark of $82 million reached in 2012. We're confident that we can exceed that. You've mentioned $100 million, I don't want to hold us to that. But that's not a long shot by any stretch.
In terms of free cash flow, I will say just that in terms of CapEx, we are planning to spend approximately $25 million in sustaining CapEx and an additional $20 million to $25 million on exploration activities. So which should take us to approximately $50 million and I'll let you determine the free cash flow based on that.
In terms of the priority for use of cash, we -- there is a concerted effort to really repay down our debt. And it's a debt that resided -- it's in our wholly owned subsidiary Dia Bras Peru, which owns the 82% interest in Corona. We would like to pay that off as quickly as possible. That's -- there's about $45 million remaining in that -- with that. So that really is a priority of cash -- or use of cash for us as well as expanding and increasing our exploration activities, brownfield exploration, which we have done. And depending on the results of these exploration drill programs as well as our contemplated 43-101 technical reports, which we expect to complete for all 3 mines of the end of Q4 or during Q4. That will also trigger possible plant expansions depending on -- we'll look at those results and there could be potentially feasibility studies that come out of that depending on the changes to our reserves and resources and mine plan -- mine life. So that's really the priority of use for cash.
Your last question touched on the majority shareholders' position. The ARC Fund, which currently owns 50.1%. I can't speak for the fund, but I can say that the fund is extremely bullish with Sierra Metals and the results that Sierra Metals is achieving. I think it does have some options available to it in terms of what happens in October of 2018, but...
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Leon G. Cooperman, Omega Advisors, Inc. - President, CEO, and Chairman [4]
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Well that's what I would like you to discuss. What are those options? I mean it's important for the company, 60% -- 50% of the stock is held by someone that may have to make a decision, but does he have extension options?
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Edmundo Gontardo Guimaraes, Sierra Metals Inc. - CFO [5]
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Lee, I don't want to skirt the issue, but essentially that those are really up to the private equity fund and up to -- it's in their court. And I can't speak for...
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Leon G. Cooperman, Omega Advisors, Inc. - President, CEO, and Chairman [6]
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I'm not asking you what they're going to do. What I'm asking -- you should know this as an executive of the company. Somebody owns 50% of your stock, what is their right to do with that stock? Do they have the right to extend the October date? Do they have to act on October date? I'm not asking you what they're going to do, I'm asking what the rights they have?
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Edmundo Gontardo Guimaraes, Sierra Metals Inc. - CFO [7]
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I'm sure the fund will go to its limited partners and the limited partners will be given a choice of either to wind up the fund or extend. And it's really up to a vote of the limited partners. And sure, there's options available there. They can decide on all sorts of parameters, if you will. But that's really in the hands of the limited partners and what is recommended and the recommended course of action from the fund manager.
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Leon G. Cooperman, Omega Advisors, Inc. - President, CEO, and Chairman [8]
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I guess I'm asking you a little bit more of a simple question, which you're not really answering. But that's okay, I'll find out the answer on my own.
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Edmundo Gontardo Guimaraes, Sierra Metals Inc. - CFO [9]
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Okay, Lee. Sorry about that and I would have a call with Alberto Arias, he'd be in the best position to explain that.
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Operator [10]
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Your next question comes from the Heiko Ihle with H.C. Wainwright.
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Heiko Felix Ihle, H.C. Wainwright & Co, LLC, Research Division - MD and Senior Metals and Mining Analyst [11]
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You guys drilled 2,200 meters at Esperanza and almost 1,400 meters at Esperanza North. Mostly just to get the continuity of the orebody, which makes lots of sense. But can you just sort of walk us through the results of this drill program. And just a little bit more details on the plans for the remainder of the year? I mean these were 2 very important areas? Please.
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Igor Alcides Gonzales Galindo, Sierra Metals Inc. - CEO, President and Director [12]
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Gord?
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Edmundo Gontardo Guimaraes, Sierra Metals Inc. - CFO [13]
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Gord, do you want to...
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Gordon J. Babcock, Sierra Metals Inc. - COO [14]
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Yes. I can answer that question. So our program -- we're discovering things in this property as we're going through definition drilling programs. We're discovering -- we discovered the Esperanza North program just to the north. Those targets are now defining zones that are between the 870 Level and the 920 Level. And they're much higher grading copper. As well, we're defining areas that are contiguous to that zone and adjacent to that zone and these are high-grade sulfide orebodies within the limestone unit and right now, we're exploiting those areas. In fact, there's a definition program going on now that just got completed and we're drilling into the drop point system to set up some sublevel of cave stopes. So we're -- that's one of the reasons the grade has improved, it's the addition of these, what we call these Cuerpos Chicos.
So this whole program once we complete our resource and the reserve review, this is going to be coming out in the next few months. Once that's complete, we're going to -- it's going to change things up quite a bit for us. We're expecting to see some increases in resources, definitely. And also the reserves. So right now, we have a group of people that are working on the resource side in the mine as well as SRK. Matt Hastings is our lead geologist for SRK, we're doing the same thing on the reserve side. And that's the focus in that point. Is that clear? Or do you need some more input?
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Heiko Felix Ihle, H.C. Wainwright & Co, LLC, Research Division - MD and Senior Metals and Mining Analyst [15]
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Well that's a fair answer, that's a fair answer. Moving on to Cusi, obviously, I still think it's a good asset for your firm. That said, Santa Rosa de Lima is probably going to become a game changer for the asset, I think. And walk me just a little bit more through the development time. I mean, you said you've essentially reached it, spending for the next couple of quarters at the site and just sort of time lines to get the material into the mill if you could please.
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Gordon J. Babcock, Sierra Metals Inc. - COO [16]
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Okay. The objective right now, we've got a new team of people, new team of professionals involved with us now. We've got a higher level of planning engineer, a VP of planning. And we've got a new VP in corporate metallurgy as well as special projects in capital -- major capital projects. And we have 2 folks that are on the ground in Cusi now, one's a geotechnical engineer and the other's a planning engineer. So we've gone through the first phase of planning the macro side of things, so we've got the layouts of the stopes. What we're waiting to get back from the geologies is the block model of that zone, so we can start the mine plan accordingly. So we've got a program that's initiating now, which is development on the Santa Rosa de Lima zone. And we've got to improve the infrastructure internally in the mine and get services set up and so on things like that.
So we're going to be pushing that through. So I'm expecting that by next year, we'll be in a position to start to stope on some of these zones. But the key point for us right now is to finish our geological review, get our asset into a reserve status and with that, we have the plans to walk us through our mine plan, and take us to the next stage. So we're going to be fast tracking this on the development side. What's that?
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Heiko Felix Ihle, H.C. Wainwright & Co, LLC, Research Division - MD and Senior Metals and Mining Analyst [17]
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Next year, can you quantify that just a little bit more?
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Gordon J. Babcock, Sierra Metals Inc. - COO [18]
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Well right now we're in August. We're still in the development stage. It takes a while to get the stopes developed on -- in any kind of a long hole program. So we'll be initiating some test stopes, probably in the latter part of this year. Once we do that, then we'll be in position to move forward. It takes a while to develop the stopes to drill them off, to get the program's going, to train the people. Like -- that's the focus right now.
Once the plan established this is going to be in place for budget for next year. So right now we're working on getting all these details filled in.
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Operator [19]
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(Operator Instructions) Your next question comes from Jim Young with West Family Investments.
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James Young, West Family Investments, Inc. - Investment Analyst [20]
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I got several questions. If we could first start with the use of the free cash flow and your priorities. I believe, as I recall at a prior presentation there was a possibility of buying the -- either all or portion of the remaining 18% of Corona. I'm just wondering where that would end at this time?
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Edmundo Gontardo Guimaraes, Sierra Metals Inc. - CFO [21]
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Thanks, Jim, for the question. That's still under consideration. I guess it becomes less of an issue if we -- by repaying the debt, the debt that remains on the acquisition credit facility, which I mentioned was about $45 million. That really will -- that will limit the amount of dividends that we have to pay out of Corona up into Dia bras, which then repays the debt.
So I think if we can pay that debt off with our free cash flow that we have, that really puts the priority to increase our share position, which isn't -- doesn't trade that frequently. But we still look at opportunities should they present themselves to increase their ownership in Corona.
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James Young, West Family Investments, Inc. - Investment Analyst [22]
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Okay. And then if we can move on to Cusi. As I recall, when you announced your initial assay results in June, that you -- this is focused on about 1 kilometer out of the 12. And the question is, with the additional infill drilling and other drilling that's been done, does this orebody extend beyond the 1 kilometer length? And secondly, what do your preliminary infill drilling results show at the Santa Rosa de Lima?
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Gordon J. Babcock, Sierra Metals Inc. - COO [23]
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Well the infill -- I'll answer that Jim, if you will. The infill drilling program was designed to take the resource portion, which was an inferred resource on that block and get some better definition and bring it into a measured category. And we've ascertained that the results from that program are collaborating the initial program, so that's a good -- that's a piece of good news.
And with regards to the other zones that we're drilling in the area. When we make the publication, which is shortly coming up, we see an extension to this zone. So that's another piece of good news. I can't talk about grades right now but definitely the zone continues. Both good pieces of news.
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James Young, West Family Investments, Inc. - Investment Analyst [24]
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Okay. And anything of note regarding the San Nicolas vein at Cusi. This -- does this appear to be an economical opportunity?
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Gordon J. Babcock, Sierra Metals Inc. - COO [25]
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Listen. In Cusi, there are many economic opportunities with the veins. It's defining the limits of the vein systems that we have, San Nicolas is one, Promontorio is another. There are whole series of veins that are perpendicular to the Cusi structure or the Santa Rosa de Lima vein system. There's San Nicolas, which is another one that's parallel to it. And there are other offshoots that come in and wherever they meet, sometimes they have high-grade nodes or high-grade shoots. So there's a lot of opportunity there.
And with this new design that we've incorporated in the planning portion, this ramp access gives us a position to access all of these zones at roughly 10-meter intervals between the levels. So it's going to open up a lot more ground for us for the future. And it's looking very good. With our new team of people, I want to say something here just to put it out, we have a new operations manager that's in charge of both mines in country right now. And we're in a process of making improvements and making changes as we speak.
We're working on the milling side of things on the plants. We've taken our mill manager from Yauricocha. He is in place in Mexico now in Bolivar. We're working on the whole plant facility. The same thing is going on in Cusi with Mal Paso plant and similar improvement programs are going on. The ongoing program in Yauricocha continues. So we haven't stopped any of our CI programs at all. In fact, we've enhanced them.
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James Young, West Family Investments, Inc. - Investment Analyst [26]
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Okay. My last question at Cusi is regarding when -- what is your best estimate as to when will the ore from the Santa Rosa de Lima start to get processed at the Mal Paso mill?
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Gordon J. Babcock, Sierra Metals Inc. - COO [27]
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Well the objective is to get things prepared as I told [Heiko] to get things prepared so that by next year and the beginning of the year where we're shipping material over to the plant and processing it. That was our objective. We may have some bumps along the road but that's the objective.
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James Young, West Family Investments, Inc. - Investment Analyst [28]
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Okay. And if you could move over to Bolivar. The -- in the MD&A you had mentioned that you're in the permitting process to increase your capacity to 3,000 tonnes per day from where you had been running around 2,700 tonnes a day -- per day except for this quarter, which was a little bit of an anomaly. And my question is over what time frame do you think it will take for you to increase the Piedras Verde mill capacity to 3,000 tonnes per day?
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Gordon J. Babcock, Sierra Metals Inc. - COO [29]
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Well right now, the permit's not an issue over there. The issue is internal, in the plant itself and the process we're going through right now in the revision process. We have to review crushing, we have to review metallurgy, we have to review recoveries, we have to go through a process review on flotation and we're doing this as we speak.
In a matter of speaking, we have to identify what the grind is, what the optimum grind is for recoveries, so we're doing all of these test work to move it forward. Then we'll see where we're at that -- at the finalization of all these results. The permits are not an issue, it's the actual production coming under the mine and the plant itself.
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James Young, West Family Investments, Inc. - Investment Analyst [30]
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Okay. And then for Bolivar West and the Bolivar Northwest, when do you expect that this ore grade will start to get processed at the Piedras Verde mill?
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Gordon J. Babcock, Sierra Metals Inc. - COO [31]
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Well, right now we're going to focus on the assets that are readily available, which is Gallo, Gallo Inferior, Gallo Superior, and anything that's close to our Brecha zones, zones like that. The development program that we have to undergo to get to Bolivar West, Northwest is pretty substantial. It's going to take better part of a year. And we have to focus on what's the best bang for the buck right now. And that's going to be the area that we know, it's very close to us. We're going to concentrate on that, we're going to change up some mining techniques and we're looking for more volume. And we're going to definitely assess the asset in more detail up above because there's some areas of Gallo Superior that may have some potential we're not aware of right now. We have to carry on a little bit more drilling, more definition work to outline those areas. But Bolivar West, Northwest, it's going to be the better part of a year to maybe 1.5 years.
Again, these priorities may change, may change on our movement forward. But right now, capital -- we want to invest in getting that plant to a point where it can handle all of the available ore to it. There is, in the past, this mine did produce zinc. So we've got to look at other byproduct credits. Not just copper. So there could be an opportunity in attacking some of the other areas of the mine, fill our recoveries and so on. But we're investing in getting that now. I want to get this operation to a point where it's steady-state and the long-term objective is to push a lot more volumes through this plant. So that's our focus.
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James Young, West Family Investments, Inc. - Investment Analyst [32]
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Okay, and then if we could move over to Yauricocha where it seems like there are many opportunities that you're pursuing in this operation. Can you talk about the size, the Cuye-Mascota, like -- how -- what is the size and quality of this ore grade and how that compare to, like Esperanza?
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Gordon J. Babcock, Sierra Metals Inc. - COO [33]
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Esperanza is a bit better than the central mine zone. Esperanza has -- let's put it this way, it's got an average of around 56 to say 60 grams of silver so a couple of ounces of silver. About 1.5% to 1.8% lead and zinc varies anywhere from 2% to 5% depending on where you're at in the Esperanza zone. And Cuye-Mascota the -- in the transition, there's zones in Cuye-Mascota that have copper in excess of 2%, they have a little lead, some silver, some of the zones in Mascota have high-grade silver. So all in all, it's probably like 100 -- I'm just going to guess right now but our MSRs are going to be probably 25%, 30% more than Esperanza. So the Yauricocha is a mine that works on a blending basis. We blend 25% to 30% of the Cuerpos Chicos with the massive zones, the massive sublevel cave zones such as Esperanza and the central mine zone. That's the secret to Yauricocha. So you're not going to go -- Cuye-Mascota is not going to come into play until 2, 3 years down the road because it's so deep. To tell you where we're at right now, basically, we're on development program on the 1070 level, but mining up above the 1070 level. So we're going to continue doing that as we come down, we've already taken the ramp in the Mascota zone below 1070, so we're approaching 1120 level now and in a matter of 2 months, we'll be on the 1170 level in the Mascota zone. Mascota just keeps going to depth.
And in Mascota, we've discovered more copper, copper oxides as well as massive sulfides. And the grade in the massive sulfide is pretty good. But there are pockets that are good, there are pockets that are lower grade. So all in all, I'm confident that the head grades that we're feeding now are going to be consistent for the next few -- in the next year and the years in the future. And what's really important for us is that we've discovered new small zones of these Cuerpos Chicos. And these are our sweeteners to the pot, if you would have it. Also in the drilling program that we've just conducted in Antacaca and Catas, we've discovered more Cuerpos Chicos that are contiguous to the parcel. We also see a trend now between the central mine zone and Mascota and Cuye, that whole zone it appears like it's 1 massive zone, it's not separated. It's going to be 1 continuous zone. So we're doing drilling and it looks like things are going into Mascota and Mascota is going into Cuye. And so all in all, with the drilling program that we've defined here it's opening up this mine for a lot new -- a lot more new opportunities.
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James Young, West Family Investments, Inc. - Investment Analyst [34]
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Okay. And to date have you realized any limitations on the Esperanza area, or is that still open to depth and open to the North and the like?
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Gordon J. Babcock, Sierra Metals Inc. - COO [35]
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we're discovering it's open to the north. We already know that it continues further north than -- Esperanza North is an extension to the 920 level, 870 level area. So that continues to the north. And it also goes further north because the drill program that we conducted from the 720 level, it delineated zones that were roughly on the 1,000 to 1020 level and it carries on to the north. So this whole structure, if you have it, is kind of plunging off to the north and once we're in place and we drive our tunnel to the Cachi-Cachi zone, when we have our tunnel moving forward, we're going to have drill stations on that tunnel. And we're going to be drilling that section from 870 level up as well as down. So we're going to -- this zone is -- I'm very confident it's going to continue. That's all looking pretty positive here. At depth this will go...
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James Young, West Family Investments, Inc. - Investment Analyst [36]
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Okay. And then at Yauricocha, you had a nice improvement year-over-year from the second quarter of '16 to '17. But sequentially, the ore process at Yauricocha declined from the first quarter of '17 to the second quarter. And I'm kind of curious as to why that occurred given that the shaft has been installed and that -- and was this decline in the volume that you processed the only reason for the cash cost to increase from $67.81 in the first quarter to $61.13 per tonne in the second quarter. And what is the outlook for cash cost at Yauricocha going forward into the third and fourth quarters?
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Gordon J. Babcock, Sierra Metals Inc. - COO [37]
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Well the answer to that is development. In order to operate the mine with sublevel cave technique at 16-meter intervals, you need to do a pretty intensive program of development. One of the shortfalls of Yauricocha is development. Last month, for instance, our development increased from a normal 1,650 meters per month to 2,000. So when you'd see that, this is in OpEx, this isn't CapEx. So this is in our operating cost, so this is going to reflect in the next few months but we're going to be going through a major development program which we have to get is going. We're going to be getting into a different mining technique with a sublevel cave mining. We're going to be looking at more development so we can be mining at different levels and truly induce a proper sublevel cave in the operation. Right now, we're doing single-face jaws and we're -- we want to optimize our draw. So we're going to be working on more development. Subsequent to that, our volume will increase. I'm predicting that our cost will go up slightly but we're going to be pushing where volumes through the plant. So I think it'll work out in the longer run. You can pick things to death there, Jim, on mining because there are all sorts of variables that come in to kick you in the teeth when you're not expecting it. So in our case here, they're ventilation issues we have to contend here with the Yauricocha Mine. We have to contend with the lack of development. And then in that orebody, in that Esperanza orebody and all of these sublevel caves is because of the nature of sublevel cave, sometimes the grade that you're anticipating doesn't come out. So you need to go to the next drop point. Like you've got interlacing of fingers of waste of intrusive material. I mean, it's the nature of the beast that you have here. That's why for us the critical part is having those sweeteners in these Cuerpos Chicos. We moved a lot more material through a better grade because we were able to access these points on the 870 and the 920 level. So we're in position to make a really decent blend of our zinc and our silver credits.
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James Young, West Family Investments, Inc. - Investment Analyst [38]
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Okay. Then my last question at Yauricocha is actually, I think this is where I misspoke earlier about the Bolivar permits is that, at the Chumpe mill, have you received the permits to expand the capacity to 3,000 tonnes per day? And over what kind of a timeframe do you think it will be until you are able to realize this improvement to 3,000 tonnes per day?
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Gordon J. Babcock, Sierra Metals Inc. - COO [39]
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We have permitted capacity right now for 3,000 tonnes per day, with a little upside of 5%. So we technically can be providing to the mill 3,150 tonnes per day. Right now in the milling, we've milled up to 3,300 tonnes a day. As long as your throughput doesn't exceed the max, you're good. So we're -- on the permit side, all of that -- that's all in place. Our next step is to go bigger than that. We want to go higher. That's the plan -- the improvement plan's that we're working on right now. At some point...
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James Young, West Family Investments, Inc. - Investment Analyst [40]
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Gord, can you just elaborate a little bit about how much higher do you think the Yauricocha ores could provide to the Chumpe mill? And again, do you think if you're, again, I guess, looks like you did -- you processed 2,719 tonnes a day in the second quarter, will you be able to get to 3,000 tonnes per day in the third quarter or the fourth quarter?
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Gordon J. Babcock, Sierra Metals Inc. - COO [41]
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Well, our push -- it all depends on the development plans that are undergoing right now. Our push is to get the mine to produce 3,000 tonnes of sulphides. I'm talking of future now. And we can process -- we want to process 600 tonnes -- 500 to 600 tonnes of oxide. So all in, the plant in the future should be able to handle up to 3,500 tonnes a day.
And what we're looking at right now in the operation itself, we're going through a major restructuring in the planning. We've got a group from Chile that are -- they are very proficient in sublevel cave. So we're studying the possibility of getting some consistent draw in excess of 3,000 tonnes a good day, just on sulfides. And then our upside will be the oxides. So right now, we're in the process of studying the overview or the prognosis looks very positive. Once we can get a proper sublevel draw established, there should be no reason that we can't start pushing some better volumes through the plant. My only concern is when you do things like that you have to be ready with your blending material as well. So you have to be able to do the blend. So we have to -- the key -- the critical part to this type of thing is the development.
So we have to make sure that our development plan matches our plant production plan. And we've always been chasing our tails in this -- in Yauricocha. We've been successful because we've been lucky we were been able to find these Cuerpos Chicos, adjacent -- directly adjacent to the sublevel cave stopes. And that's been a huge bonus for us. In 2013 we did not have this opportunity.
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Igor Alcides Gonzales Galindo, Sierra Metals Inc. - CEO, President and Director [42]
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Operator, can we go to the next question please? So we can provide the opportunity to all other people to do questions?
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Operator [43]
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There are no further questions at this time. I will now turn the call back over to Mike McAllister for closing remarks.
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Michael McAllister, Sierra Metals Inc. - VP of Corporate Development [44]
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It's -- I'll actually close out the meeting. Thanks, Julie. Thank you operator. That concludes today's call. On behalf of the management team I would like to thank all participants for joining us today. A replay of the webcast and all materials can be found on our website at www.sierrametals.com. If there are any further questions or concerns, you may reach out to us at any time after today's call. Our contact information can be found in today's presentation as well as on the company website. Thank you, operator. Please conclude the call.
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Operator [45]
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This concludes today's conference call. You may now disconnect.
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