Silver Standard Resources Management Discusses Q4 2012 Results - Earnings Call Transcript

Mar. 1.13 | About: Silver Standard (SSRI)

Silver Standard Resources (NASDAQ:SSRI)

Q4 2012 Earnings Call

March 01, 2013 11:00 am ET

Executives

John Smith - Chief Executive Officer, President and Director

Ronald Burk - Vice President of Exploration

Gregory John Martin - Chief Financial Officer and Senior Vice President

Andrew Sharp - Vice President of Technical Services

Analysts

Ralph M. Profiti - Crédit Suisse AG, Research Division

Dan Rollins - RBC Capital Markets, LLC, Research Division

Andrew Kaip - BMO Capital Markets Canada

Jeffrey Wright - Global Hunter Securities, LLC, Research Division

Adam P. Graf - Dahlman Rose & Company, LLC, Research Division

Operator

Good day, everyone, and welcome to the Silver Standard's Fourth Quarter 2012 Year-End Finals Results and Product Update Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to John Smith, President and CEO.

John Smith

Thank you, Kevin. Good morning, ladies and gentlemen. Welcome to Silver Standard's Fourth Quarter 2012 Conference Call, during which we'll provide a review of our financial performance and give an update on our business.

Joining me on the call this morning is Greg Martin, our CFO; Ron Burk, Vice President, Exploration. Also present is John DeCooman, Vice President, Business Development and Strategy; and Andrew Sharp, our Vice President, Technical Services. We also welcome into the company Alan Pangbourne, our new Senior Vice President of Projects.

Our financial statements and management's discussion and analysis have been filed on SEDAR and are also available on our website. To accompany our comments today, there is also an online webcast, and you'll find the information on this in our news release relating to the call. We will be making forward-looking statements today, and I refer you to the disclosure accompanying our slides, news release and also on SEDAR.

So now we will review progress in driving value within our business and positioning us strongly for the future. In my time as CEO of Silver Standard, we have focused on unlocking the value from our business. Each year, as a management team, we have systematically planned and delivered with this objective in mind. In 2010 and '11, it was ensuring funding was in place to allow us to develop the business and address the skills and experience we needed to be a truly successful mining company, and that included both technical and commercial capability.

In 2012, we focused on operating Pirquitas to plan quarter-by-quarter, notwithstanding the challenges in Argentina. We also made a significant step forward in driving value from the portfolio with the completion of a feasibility study for Pitarrilla, a large long-life mine that underpins our future.

As we step into 2013, we will keep delivering at Pirquitas and we are well-funded for our development opportunities. The convertible debt that we raised in January not only allows us to repay the existing convertible note due in March, but adds to our actually already strong balance sheet for Pitarrilla construction.

We have the people, the projects, a unique portfolio and an enviable balance sheet, the right elements for a great business. So now let me review our operations development activity, and I'll start with Pirquitas Mine in Argentina.

Our operating team at Pirquitas have delivered strong results, allowing us to exceed the high-end of the 2012 production guidance. We have had exploration success in the Cortaderas Valley, expanding the resource and identified future targets for 2013.

Mining cost for 2012 were $12.61 per ounce of silver produced, in line with our guidance of $11.85 to $12.85 per ounce. Costs are always a challenge in a high inflationary environment, but our management team in Argentina completed the year within guidance range. In 2013, cost management will continue to be a major focus area.

Over the past 2 years, we have successfully worked to make Pirquitas a reliable, steady-state silver mine with consistent operating performance, and I'm pleased to report that we enjoyed our fourth quarter of strong production. With 2.3 million ounces produced this quarter, we achieved a full year production record of 8.6 million ounces. Zinc production for the quarter was 3.2 million pounds, bringing our full year to 11.2 million pounds. Mining operations continued strongly, slightly exceeding forecast material movement for the quarter and for the full year. We have now mined Phase 1 of the San Miguel pit and are advancing new benches in the Phase 2 of the pit shell.

Operations and maintenance crews continue to maintain a high availability and efficient use of our mobile equipment, notwithstanding the challenging importation regime for critical parts and supplies into Argentina.

In 2013, as we advance into Phase 2 of the San Miguel pit, we mined through oxide and transition ore to reach the sulphides at the bottom of the pits. Managing this change in mining and processing is critical to our success in 2013, and hence, the reason our 2013 silver production guidance is unchanged from 2012. The qualities of sulphide ore are expected to increase through the year with the main challenge being quarter 1 and quarter 2. And on the marketing of concentrates, we are now delivering into our new sales agreements, allowing us now to fully optimize margin and value.

At our Pitarrilla Project in Mexico, we completed the feasibility study and delivered the 43-101 report to the market in December. We are very excited about this very significant project, which represents an opportunity for the company to build one of the largest silver mines in Mexico and one of the world's best business climates for mining. This is also a long-life mine of 32 years, with reserve totaling 479 million ounces of silver. It will produce 15 million ounces per year for the first 18 years of its life. With net cash cost of less than $11 per ounce, in real terms, this is, by any assessment, a significant project in the silver space.

The cost to construct the mine is $741 million, and that includes $157 million of preproduction operating costs and $131 million of preproduction revenue. At $25 per ounce silver price, the project delivers economics of $737 million NPV and an IRR of 12.8%.

At the higher silver prices we have seen in the past 6 months, the project can return an IRR of over 21%. So we're now targeting a construction decision late this year with current activity focused on permitting, securing the remaining surface rights, finalizing financing and setting the project up for successful construction.

Having Alan join us as part of the executive team, this now provides program and experience project leadership capability, and we look forward to delivering this cornerstone project for our shareholders.

At San Luis in Peru, we received government approval for our EIA for the mine and we are now focused on obtaining the Ecash community agreement to proceed. Formal negotiations with this community are now well in train. And a social baseline study was completed in December 2012, which gave us access to the Ecash villages, allowing us the opportunity to discuss the project and benefits with them. This was a significant step forward and that agreement will allow us to put the San Luis Project in the queue for development.

In exploration, while field work continued through the fourth quarter, the main focus was on assessing and modeling. And Ron will take you now through these activities.

Ronald Burk

Thank you, John. In terms of exploration activities, particularly drilling, the fourth quarter proved to be the most productive for the company in 2012. We completed a major drilling campaign on the Pirquitas Mine property, significantly enhanced our geological and resource models that form the basis of our positive feasibility study for the Pitarrilla Project and advanced the potential of our property portfolio.

Drilling programs were undertaken at 3 of our properties in Mexico, Northern Argentina and the Southwest United States. In addition, in order to strengthen our capacity to identify and explore mineral projects in a highly effective manner, we added 2 seasoned explorationists to our team, a Chief Geologist and a Director of Exploration.

Our 2012 brownfield exploration program at Pirquitas was completed in the fourth quarter, with a total of 52,800 meters drilled and 142 diamond boreholes. This drilling campaign was success-driven and the final meterage more than doubled the original program. The bulk of this drilling was done in the Cortaderas target area, centered above 500 meters north of our San Miguel open-pit, where modest inferred resource had been defined in 2011. The 2012 drilling campaign at Pirquitas was a success in that it substantially increase the Cortaderas mineral resource and allowed a significant portion of it to be classified as indicated.

Our recently completed resource block model for the Cortaderas deposit estimates an indicated mineral resource of 3.6 million tonnes, averaging 137 grams per tonne silver and 5.1% zinc. This translates to a contained metal resource of 15.6 million ounces of silver and 403 million pounds of zinc classified as indicated. In addition, we estimate there are 14.1 million ounces of silver and 326 million pounds of zinc in an inferred mineral resource at Cortaderas, consisting of 2.7 million tonnes with an average grade of 162 grams per tonne silver and 5.4% zinc.

Ultimately, our goal for exploration at Pirquitas is to discover and define new mineral reserves. The combined indicated parts and inferred resource at Cortaderas is currently being evaluated by our Technical Services team to determine how the deposit can be best economically mined and processed.

In 2013, our exploration at Pirquitas will focus on assessing the potential for additional silver zinc resources east of the open pit. We have planned a minimum of 7,000 meters of diamond drilling that will probe at least 4 prominent gravity survey anomalies that we defined in 2012, and which we interpret to be possible zones of sulphide mineralization. The body of iron and zinc sulphide mineralization forming the Cortaderas deposit is, in fact, marked by a strong gravity anomaly that extends a few hundred meters beyond the easternmost Cortaderas drill hole.

At Pitarrilla, our 2012 drilling program of 67 diamond boreholes benefited this key project in 2 ways: Assay results from half of the holes gave us a modest increase in the total silver resource of the deposit, while the other drill holes provided important geostatistical information that was incorporated in the engineering work done for the feasibility study.

Another important result of the 2012 drilling at Pitarrilla was the intersection of 2 of the drill holes of significant silver to zinc mineralization between the deeper portions of the main Breccia Ridge Zone and the South Ridge Zone. These 2 intersections of mineralization provide encouragement for future expansion of the deposits reserves within that plant pit shell.

The drilling campaigns completed in 2012 at Pirquitas and Pitarrilla accounted for 94% of the 74,200 meters that were drilled by the company last year. The remaining 4,400 meters of drilling was put between our Saddleback Project in New Mexico, the Diablillos Project in Argentina and the San Patricio Project in Northern Mexico. Diamond drilling at these 3 projects started late in the fourth quarter with the programs at Saddleback and San Patricio continuing into January.

The 19 drill holes completed at Diablillos resulted in the discovery of 2 new zones of gold and silver mineralization, which warrant follow-up drilling. And at the San Patricio project, the 8-hole program was successful in delineating a mineralized structural zone that is more than 650 meters long, has a vertical extent of more than 100 meters and a thickness estimated to be 5 to 10 meters. To date, our best results at San Patricio come from hole FPD 01,which produced a 23-meter long interval, creating 132 grams silver from 70 meters in the hole, followed by a 29 meter section from 362 meters down the hole that averaged 107 grams per tonne silver.

A key attribute of Silver Standard over the past decade has been its ability to execute successful exploration programs that have resulted in significant organic growth. In 2013, we plan to continue on this path. With the drilling campaigns we have planned at Pirquitas and Diablillos, we anticipate finding new resources that should add significant value to these projects. We will be drill-testing high-potential precious metal targets on at least 3 properties within the Central Mexican Silver Belt, where we believe our chances are very favorable for making important new discoveries.

And to round out this year's objectives, our exploration teams will be generating new opportunity through generative field programs, assessments and acquisitions of third-party properties, as well as early-stage evaluations of properties that exist in our own extensive asset portfolio.

Now over to you, Greg.

Gregory John Martin

Thanks, Ron, and good morning, everyone. The fourth quarter concluded a successful financial year for Silver Standard. We closed 2012 delivering on our objectives.

Record silver sales resulted in significant year-on-year increase in revenues. We exceeded our production target and met cost guidance, demonstrating the stability brought to our business, both of which led to a substantive increase in our liquidity.

So we entered 2013 well-positioned to continue on this success. Sales of 3.2 million ounces of silver in the quarter, a record for the company, resulted in revenues of $86.8 million, despite a negative valuation adjustment on outstanding accounts receivable in the quarter of $5.3 million. This positive quarter brought our full year sales to 9.4 million ounces, which drove revenues of $241 million, an increase of 63% over 2011.

For the fourth quarter, we realized silver prices of $32.69 per ounce. However, with silver prices dropping towards the end of December to $29.85, this downward pricing impacts the negative valuation adjustment of outstanding receivables.

For the full year, we realized silver prices of $31.13 per ounce, right at the average spot price of silver for the year. Strong sales drove our year-end silver concentrate inventory to its lowest level of the year, closing at 3,600 tonnes, containing 2.1 million ounces with a book value of approximately $35 million. Strong revenues led to fourth quarter income from mine operations of $16.6 million, the highest quarter of the year and $20 million higher than the comparative quarter of 2011.

For the year, income from mine operations totaled $46.1 million, a strong outcome driven by our improved production performance and sales. For the year, net income totaled $54.8 million, or $0.68 per share. The net income was impacted by a number of items, including higher plan exploration expense at Pirquitas, Pretium-related gains, increased accretion on the Pirquitas ARO provision and a recognition of a deferred tax asset on Pirquitas, all of which are described in the financial statement disclosures.

Direct mining costs in the fourth quarter totaled $12.52 per ounce of silver, approximately 4% lower than in the third quarter, bringing our annual direct mining cost to $12.61 per ounce, well within our guidance range of $11.85 to $12.85 per ounce.

The Pirquitas Mine showed solid cost performance in the quarter aided by strong production. As announced on January 8, we have revised our presentation of cash and total cost to make those metrics more useful for investors to assess our performance and to be consistent with other concentrate producers. The principal change is reporting cost on a payable ounces sold basis instead of on a production basis.

As a result, cost of inventory sold becomes the main determinant of site-based cost. Additionally, the volatility that had existed in our reported cash cost due to the very relationship between produced ounces and sold ounces is eliminated. The export tax accrual, a noncash item, has been reclassified from cash cost to total cost to better reflect the nature of this accrual. As a result of this change, we will no longer be providing direct mining cost per ounce guidance going forward, but as noted, we have provided cash cost guidance.

Consistent with this methodology, cash cost for the fourth quarter totaled $19.12 per payable ounce sold, bringing our full year cash cost to $19.14 per payable ounce sold. Total costs for the fourth quarter were $27.31 per payable ounce sold and $27.06 per ounce for the full year.

We continue to strengthen our already substantial liquidity position in 2012. Our cash position in the year increased by $38 million to $367 million, which is significant, considering we also invested $62 million in our property portfolio and $13 million in expensed exploration.

Our trend of predictable and consistent production at Pirquitas, supported by a stronger, diversified and higher value sales strategy, is demonstrated by the growth in operating cash before changes in working capital from $7 million in 2011 to $42 million in 2012.

Cash generated by investing activities totaled $32 million, as the realization of continued proceeds from the Pretium spin-out, value-added tax recoveries and asset-backed commercial paper sales more than offset the investments in our portfolio.

2012 saw significant investments in the properties, as we completed the Pitarrilla feasibility study, a tailing lift at Pirquitas and remained aggressive in our exploration activities. The strength of both our operating assets and our investment assets to continue to provide the funding required to invest in our business was evident through 2012.

Excluding the reclassification of the 2008 convertible notes to a current liability, our working capital position strengthened by $118 million during 2012, showing the overall strength of our business. Even with the reclassification, our working capital position remained very strong at $379 million at the end of December. Our interest in Pretium remains a further source of value for the company. Our equity interest dipped -- has just dipped under 20% due to the recent financing, but it remains an important opportunity for our shareholders. The Pretium stop -- stock has come under pressure, like many mining equities, recently. And with the current market value, our stake is approximately $145 million.

Subsequent to quarter-end, we further strengthened our financial and liquidity position by taking advantage of strong credit markets to issue $265 million of senior unsecured convertible notes. The issue refinances our $138 million of 2008 convertible notes and provides capital to advance our development projects.

The notes generated significant interest in the market, due to the opportunity we have, and investors recognized to unlock significant value from the development portfolio. The notes have an interest rate of 2.875%, significantly lower than the existing 2008 notes, are for a minimum term of 7 years, and are convertible at $20 per share over 42% above the price at issue. The financing provides us with a strong financial position for an important year in 2013, as we progress Pitarrilla and San Luis through the construction decisions and it maintains our capacity to act on opportunities.

We saw some pressure on the share price upon issue as one would expect through a convertible offering, which has certainly been amplified by the weak equity markets in the mining space. However, we take these strategic decisions to position the company for success and remain confident the current situation will normalize, as we continue to execute our strategy and deliver the portfolio.

In early January, we issued our 2013 guidance. We're expecting to produce and sell between 8.2 million to 8.5 million ounces of silver, similar levels to 2012. The first quarter will be the focus of the transition in the pit with ore delivery gradually improving through the year as we fully source ore from the Phase 2 area of the pit later in the year.

Zinc production is expected to almost double to 20 million pounds next year, a planned increase as we mined a higher proportion of the zinc-rich Potosi area. It provides us high leverage to zinc, if prices rise through 2013.

Guidance for cash cost is between $17 and $18.50 per payable ounce of silver sold. In 2013, we are required to adopt the new deferred stripping accounting standard for '20, which will impact our percentage cash cost in our income statement.

As 2013 is a high strip year at the San Miguel pit at Pirquitas, we expect to defer a significant amount of stripping cost, which will be amortized in subsequent periods.

Capital expenditures at Pirquitas are anticipated at $25 million, of which $15 million is for tailings expansion and approximately $2 million for an increase to the zinc circuit to handle the higher production levels.

Development expenditures are forecast at $17 million, almost exclusively at Pitarrilla and San Luis. Of course, those amounts would change materially if construction decisions are made. Exploration expenditures are expected to total $15 million, with allocation and total of spend being very results-driven.

The focus for 2013 is on continuing stable production, high attention to cost at Pirquitas and locking in our next phase of growth. The delivery of the strong Pitarrilla Project feasibility study demonstrates the value the project can bring to our shareholders over 3 decades of operations.

So we exit 2012 with a balance sheet that provides the platform to deliver value from Pitarrilla and San Luis. Silver Standard has a similar number of shares outstanding as it has had since February 2010. Yet, as we sit here today, after our recent offering and redemption of notes, we have approximately $480 million in cash and an interest in Pretium worth over $145 million. With this, we are well-positioned to deliver on our business plan.

I'll now turn the call back to John for concluding remarks.

John Smith

Thanks, Greg. Ladies and gentlemen, at Silver Standard, we have systematically delivered on our strategy. We have done what we said we would do.

Revisiting our goals that we shared with the market at the beginning of the year, we are producing consistent quarterly operating performance at Pirquitas. Our sales strategy is in place, and we can see the benefit of that through the revenue line and improved margins. And we're also managing the Pirquitas export-import supply chain well, thanks mainly to our in-country team. The experiences and learnings we have at Pirquitas, operating one of the largest open pit silver mines in challenging circumstance, validates our operating capability for future mines.

And speaking of a future mine, the completion of the Pitarrilla feasibility study was another major milestone for us. Recent market activity validates our strategy and the value we will create for Pitarrilla producing in our business.

The convertible financing we completed earlier this year was necessary for funding the retirement of the existing convertible, but very significantly adds to the financing for our growth, another critical achievement.

Now, our employees make our business successful. Having an excellent experienced team in place, further augmented with Alan coming aboard, allows us to focus on building real value for our investors, underpinned by experience and good process.

We have done what we said we would do. And while the equity markets, particularly resources, are difficult just now, we are committed to delivering value for our shareholders.

So now, with that, let me pass over to the operator, who will open up for any questions you may have.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Ralph Profiti with Crédit Suisse.

Ralph M. Profiti - Crédit Suisse AG, Research Division

I have 2 of them. Firstly, the drilling success you've had at Cortaderas is showing significantly higher zinc grades, quite compelling, 5x higher than what you're seeing at Pirquitas. Just wondering -- I know it's early, but do you envision mill modifications being required? How scalable is that mill? And will this PEA that we're receiving in the first half of 2013 include any scope changes at the mill?

John Smith

It's John. I'll let Andrew speak about that.

Andrew Sharp

So Ralph, at the moment, we're modifying our circuit. If you remember, we have float sales available to us. We're putting in some extra plumbing right now and starting up some trials. Chemicals are in place. We're looking good at this point in time to put that into service.

Ralph M. Profiti - Crédit Suisse AG, Research Division

Understood, great. Next question is sort of this thing in Argentina. The stability agreement and this 10% export tax. Just confirming that the Federal Supreme Court is really the last line of judicial review, would that be subject to appeal? And if you can provide any idea on clarity on terms of timing, that would also be helpful.

John Smith

So just addressing that one, Ralph. Where we're at fiscal stability agreement, we've been back and forth. We're -- our view is that will continue. And I think, it's a matter of being resolved. But I think it's going to continue back and forth. But we believe we've got a strong position here.

Ralph M. Profiti - Crédit Suisse AG, Research Division

And to the best of your knowledge, would the ruling coming at the Federal Supreme Court level be subject to appeal?

John Smith

Yes.

Operator

Our next question comes from Dan Rollins with RBC Capital Markets.

Dan Rollins - RBC Capital Markets, LLC, Research Division

John, a quick question for you. On San Luis, you described that you've made significant progress with the Ecash community. Could you maybe just give some color on where it stood this time last year and where you stand now?

John Smith

Yes, Dan. I think for me we have made good progress. We've got the EIA now for the mine. We've got the agreement with the Cochabamba community. The other community is Ecash. And as -- at the end of year, we got in there, into the community and were talking to their villagers, being able to explain the project and the benefits. We're now in negotiation directly with Ecash to try and complete the agreement. So significant progress for me. And I think we're well-positioned around that project.

Dan Rollins - RBC Capital Markets, LLC, Research Division

So have you -- have the -- have you been able to get the Ecash to put in like one negotiating team? Because I think, I was under the impression that at one-time, they're looking for a lot of people to be in discussions at once.

John Smith

That's right, Dan. And we used to have those big sessions. But now, we've got a much better than -- they've got a new board there that works well, and we're able to have those discussions with them. True, in terms of approvals, it goes through plenary sessions. But ultimately, we've got a good negotiating team to work with.

Dan Rollins - RBC Capital Markets, LLC, Research Division

Perfect. And then just moving to Cortaderas anyways. You guys mentioned that you've added resource there. Is that resource reflected in the numbers you published at the end of December?

Gregory John Martin

Yes.

Dan Rollins - RBC Capital Markets, LLC, Research Division

Okay. How much -- because what I'm seeing is you actually look like you depleted your reserves by about 1.8 million tonnes, which equates to what you processed during the year. But your total, including inferred and M&I resource actually declined by 2 million tonnes. So if you added at Cortaderas, where are the other resources coming out of?

Gregory John Martin

The remaining resources are below the pit.

Dan Rollins - RBC Capital Markets, LLC, Research Division

Okay. But I'm just wondering, if you added at Cortaderas, did you pull resource out of the current resource that was in it last year from the main pit?

John Smith

No, Dan. We'll come back to you with more detail.

Dan Rollins - RBC Capital Markets, LLC, Research Division

Okay. It's just the math does -- not working, at all.

John Smith

That's fine. We'll have to do that. We'll catch you up.

Dan Rollins - RBC Capital Markets, LLC, Research Division

Perfect. And then maybe just for Greg. The $48 million recovery tax benefit for Argentina, that's a non -- that's noncash, correct?

Gregory John Martin

That's correct, Dan. That is a deferred tax adjustment that would be -- the benefit of that will be the recognized in future periods.

Dan Rollins - RBC Capital Markets, LLC, Research Division

Okay. And then just sort, so I understand, was there -- why was that not adjusted from the adjusted earnings?

Gregory John Martin

It was. If you look at our non-GAAP note, you will see the adjustment related to that amount in that note.

Dan Rollins - RBC Capital Markets, LLC, Research Division

Where is that? We can take it off-line, but I don't see that.

Gregory John Martin

Okay, sure. We can discuss it later. But if you look at the non-GAAP disclosure documents and the MD&A, it's there on the -- it's in the table on Note 14.

Dan Rollins - RBC Capital Markets, LLC, Research Division

Okay. And just sorry, I'm looking at that, I'm just wondering what's it disclosed as? Because the biggest one there is 49 million gain on the disposable at associate.

Gregory John Martin

Yes, correct. And it's -- sorry, Dan, I'll have to...

Dan Rollins - RBC Capital Markets, LLC, Research Division

Okay, that's fine. We have a call later. And then just on Pitarrilla, how does it -- where is everything standing with the permanent process there?

John Smith

So where we are, specifically on permits just now, we're working with someone at the authority. We've got 21 of the 24 packages you submit as part of your EIA in with them. And what we're getting them to do is a technical review. And then when we complete the land issues, we then do the formal submission. So we're in the process of that one, Dan.

Dan Rollins - RBC Capital Markets, LLC, Research Division

And when do you think you might be able to submit the full package?

John Smith

Very soon, very soon.

Dan Rollins - RBC Capital Markets, LLC, Research Division

Okay. And then is there a sort of a defined time limit they have once you have final submission to get back to you with a response?

John Smith

Yes, they've got a defined time and a defined process. And by doing the technical review here, we are started compressing the timeline for the EIA.

Dan Rollins - RBC Capital Markets, LLC, Research Division

Perfect. And then, I guess with negotiations on potential partners or financing options, that will be dictated by the -- once you have the permits in place and the land issue taken care of, correct?

John Smith

Yes, we've got 4 sort of tracks that we're running just now through this year to get to that decision. The one, as you mentioned, is financing and looking at partners. Also, the getting the permits submitted, is another important part. And we're also doing this sort of preconstruction activities, getting ready to make choices and looking at design and so forth. So...

Operator

Our next question comes from Andrew Kaip with BMO Capital Markets.

Andrew Kaip - BMO Capital Markets Canada

John, just a follow-up on what Dan was asking about San Luis. You've got the EIS. You're working on the final community agreements. Are you progressing water right acquisition as well as detailed engineering for submission of a construction permit as well?

John Smith

We are moving these things along as well, Andrew. In the process of working, which sort of -- we've got jewel things -- and clearly, we've got feasibility study done. We're having a look at that as we move forward. So there's a sequence of activities we're going with just now. Critical path item for us is this agreement. But in conjunction with that, we're looking at all the permits we need, getting them set up and trained, and we'll be with those.

Operator

Our next question comes from of [indiscernible] with CIBC.

Unknown Analyst

John, just another follow-up on San Luis. Understanding that the permitting submission cannot go ahead unless this land agreement issue is sorted out, could you give us a sense of timing? And when does that start to encroach on your own sort of project timeline?

John Smith

Yes, it's a good point. For us, we've been working hard with San Luis and the communities for a number of years. I think the point is we're now getting really close to that decision point. And I think through this year, we'll make some decisions around San Luis. But where we're sitting just now, we're working really hard, very focused around Ecash agreement, then we've got an offer in to them. So that is a process we haven't seen now.

Unknown Analyst

Okay. Do you have a sense on how long the permitting will take once you submit?

John Smith

No, it would be wrong to have a guess at that. But certainly, our people in Lima know what the permits are that we're going to get, an got them scheduled and being worked on.

Unknown Analyst

Fair enough. Just switching to Argentina, if I may. You've been mining at a grade that's really quite above the reserve grade. How should we think about the profile as you know move into sulfides from Phase 1 to 2?

John Smith

In terms of?

Unknown Analyst

In terms of the grades, silver grades.

John Smith

Well, we are working through grades, and we are working to life-of-mine grades. We've got to beneficiate at coming through into the jigs, before we sent into the mill. So we are work on life of mine grades.

Operator

Our next question comes from Jeffrey Wright with Global Hunter.

Jeffrey Wright - Global Hunter Securities, LLC, Research Division

First question I have was going back to Pirquitas and the significant ramp up in zinc in 2013. What should we be thinking in terms of zinc grades? And how to kind of rectify our models to what's on the ground there?

John Smith

Andrew, do you want to have a go?

Andrew Sharp

Sure. So what you'll see in this coming -- this year and coming into next year is a slightly elevated grade of zinc as we run down the side of Phase 2, if you like, bringing down Phase 2 around Phase1 , which is really focusing us on the Potosi area. And then after we get through that, zinc price will decrease again back down to the San Miguel grades that we've been seeing in the last year. So it will be a roughly a tripling of grade from the Pot -- from the San Miguel to the Potosi zone and then decreasing back down again.

Jeffrey Wright - Global Hunter Securities, LLC, Research Division

Okay. So when you say tripling the grade, we would see the grade go from, let's call it, 0.65 to 1.8. Is that a fair way to look at it?

Andrew Sharp

That will be the peak, and then we'll be back down again.

Unknown Analyst

Okay. And that would probably kick in when, Q3, Q4 this year?

Andrew Sharp

Q3, Q4.

Operator

Our next question comes from Adam Graf with Dahlman Rose.

Adam P. Graf - Dahlman Rose & Company, LLC, Research Division

I guess, just a follow-up on the previous question, as far as the zinc recoveries, what should we expect going forward? Are you going to get better recoveries with a better grade? Or do you expect your recoveries to remain about the same?

Andrew Sharp

Right, we should see grades at -- our recoveries be roughly the same. And again, we're still developing this new circuit, so we need some experience based on that as well.

Adam P. Graf - Dahlman Rose & Company, LLC, Research Division

And then, on a completely different subject, can you just quickly go through again and summarize how you guys have changed your reporting as far as your non-GAAP cost metrics?

John Smith

Okay, Greg?

Gregory John Martin

Yes. Sure, Adam. And we put a fair bit of detail on this as well in our January 8 guidance release. And I would refer you to that for some detail on it. But the fundamental change is a shift, as you recall, we used to report on a production basis. And therefore, the site costs were being driven off of direct mining cost, but the off-site costs were actually being driven by our ounces sold. So there was a misalignment between 2 parts of the metric that were both being divided by the produced ounces. As most silver producers report on a payable ounce sold and the majority of concentrate producers do as well, we have now adopted that, which results in the cost of inventory being the primary driver of site cost and the off-site costs also been driving by those payable ounces sold. So it aligns those 2 metrics and those are payable ounces sold.

Adam P. Graf - Dahlman Rose & Company, LLC, Research Division

And just a follow-up on that, Greg, in theory, as you guys go forward here, work down any inventories and better match productions to sales, the difference between the 2 measurements should, I would assume, shrink.

Gregory John Martin

That's correct. Obviously, there's some slight time lags currently because of the inventory stockpile. If that's reduced, those time lags would produce. All in all, it will provide investors with a better understanding of the performance of the asset and certainly the trajectory as cost moved around the performance of the Pirquitas Mine.

Adam P. Graf - Dahlman Rose & Company, LLC, Research Division

And then, finally, related to that, Greg, the guidance -- the forward-looking guidance that you've given on cash cost on -- is that so on a sold -- per ounce sold basis or a production basis?

Gregory John Martin

The guidance was aligned to our go-forward approach. So it is consistent with what I just described to you.

Operator

There are no further questions at this time, I'd like to turn the call back over to Mr. Smith.

John Smith

Okay. Well, thank you, everybody. Thank you for your attendance on the call and your questions. And we look forward to a good 2013 as we step into the year. Thank you.

Operator

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.

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