U.S. Silver & Gold's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug.13.13 | About: U.S. Silver (USGIF)

U.S. Silver & Gold Inc. (OTCQX:USGIF) Q2 2013 Earnings Conference Call August 13, 2013 4:30 PM ET

Executives

Darren Blasutti – President and Chief Executive Officer

Robert Taylor – Chief Operating Officer

Warren Varga – Chief Financial Officer

Analysts

Annie Zhang – Octagon Capital Corp.

Doug Dyer – Heartland Advisors, Inc.

Operator

Good afternoon, ladies and gentlemen, and welcome to U.S. Silver & Gold’s 2013 Second Quarter Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session for analysts and investors. Instructions will be provided at that time for you to queue up for questions. (Operator Instructions) Please note that management will be reviewing a presentation during this call. This presentation is available for download on the homepage of U.S. Silver & Gold’s website at www.us-silver.com. I would like to remind everyone that this conference call is being recorded today, Tuesday, August 13, 2013 at 4.30 pm Eastern Time.

Before turning the call over to U.S. Silver & Gold’s management, I will remind listeners that certain matters discussed in today’s conference call or answers that maybe given to questions asked, could constitute forward-looking statements that are subject to risks and uncertainties relating to the company’s future financial or business performance.

Actual results could differ materially from those anticipated in these forward-looking statements. Certain material factors and/or assumption are applied in arriving at any forward-looking information and additional detail about the material factors and/or assumptions employed to arrive at forward-looking information as well as the material factors that may affect the actual results, are contained in the company’s Annual Information Form, which is available on the company’s website or on SEDAR at www.sedar.com. Please note that U.S. Silver & Gold is under no obligation to update any forward-looking statements discussed today, except as required by applicable law and investors are cautioned not to place undue reliance on these statements.

I will now turn the conference call over to Mr. Darren Blasutti, President and Chief Executive Officer of U.S. Silver & Gold. Mr. Blasutti, you may begin.

Darren Blasutti

Thank you, Rob. Before we start with this, I’ll introduce management in the room and in Montana, we’ve got Warren Varga, our Chief Financial Officer, joining me; Peter Mcrae, VP and Legal Counsel, and Jim Atkinson, our Vice President, Exploration; and then on the phone from Montana for questions, we have Bob Taylor, our Chief Operating Officer.

I’m going through a brief presentation, 20, 25 minutes, which is on the website and we’ll be referring to each of the pages as we go through by page number, so you’ll know where we are at. So we’re going to start on Page 3 after the forward-looking statements. The operator is happy enough to do that for us. So we’ll talk a little bit about what we’ve done in Q2. Obviously, we are happy to see silver up almost $3 from its lows in late June and early July. We are obviously unhappy as most shareholders are about the share price, but we are proactively managing our cost down to be profitable even in the current silver price environment.

We believe silver prices will perform better during the second half of the year and even though, we’ve done all those cost cuttings, we will be disciplined, when the price goes back up, to ensure that we are making money and that is a key that we focus on, shareholder value and creating profits for our shareholders.

So let’s get to the Q2 2013 achievements. We produced over 650,000 ounces of silver at $0.67 per ounce. We had a very good quarter. Cash costs at Galena were $16.40 an ounce and they continue to come down as we start Q3. We executed operational and capital cost savings across the board at Galena and at the corporate office, and we put Drumlummon on care and maintenance during the quarter, again, to protect the balance sheet.

With much stress, we replaced our existing debt with Hale Capital with a three-year deal with Royal Capital Management. We’ll talk a little bit about that. The main reason for replacing the extension with Hale is we didn’t like the royalty and we found that we think is a better deal.

We delivered strong exploration results at Caladay Zone again during the quarter. We continue to get exciting results, very large widths of greater than 10 ounce silver equivalent in the lead-silver areas, and we are currently starting to mine in some of the areas that are adjacent to the Caladay Zone that are high grade copper silver veins, and so we’re excited to get that going in Q3.

And finally, on July 16, we implemented a Small Mine Plan at the Galena Mine to reduce all in costs to under $20 per ounce on a silver basis. We had prepared for the possibility that silver could drop, but certainly, we are not prepared for the speed in which silver went from $30 to $20 over $18.60, I guess, but management was proactive in getting the Small Mine Plan implemented and we are operating under that right now, and we’ll talk a little bit about that as we move forward in the presentation.

We’re going to move to Slide number 4, which is our silver guidance slide, it’s 2.1 million ounces to 2.2 million ounces of silver at $15.50 to $17.50 cash cost per ounce. The second quarter production was in line with our expectations. We obviously saw a pretty large reduction between cash costs in the first quarter and second quarter. We did revise our guidance down from 2.6 million ounces to 3 million ounces, and although, the cash cost differential of $16 to $18 versus $15.50 to $17.50 isn’t all that large on a cash cost basis, it’s the all in cost that we’re focused on.

We have almost 25 stopes in production and lower grade stopes take just as much capital as high grade ones to get the production out, but we obviously yield much less ounces on a low grade stope. So we’re reducing our number of stopes. We’re reducing our cash cost, but also our all in cost. And with us we’ve got a slide later in the presentation that talks about how we’ve done since we’ve taken over the Galena Mine a little bit later.

With that, I’ll turn it over to Warren to talk about the production highlights and the financial highlights of the quarter.

Warren Varga

Okay. Thanks, Darren. On Slide 5, we show the increase in consolidated production for the second quarter of 2013, compared to the same quarter in fiscal 2012. During the second quarter, silver production increased by 23% from approximately 528,000 ounces to 651,000 ounces. Lead production increased by 210%. Copper production increased by almost 13% compared to Q2 2012. Year-to-date silver production increased by 16% from approximately 1.08 million ounces to 1.25 million ounces. Lead production year-to-date increased from 2.4 million pounds to 4.4 million pounds or an increase of 81% and copper production increased year-to-date increased by almost 13% compared to 2012. All these metals experienced a significant increase in the production for both the second quarter and year-to-date.

Moving on to the next slide, the company generated revenue of $16.9 million during the second quarter of 2013, consisting of $13.5 million from the Galena Complex and $3.3 million from the Drumlummon Mine, which is compared to revenue of $13.9 million during the second quarter of 2012, representing a decrease of $0.4 million in Galena Complex standalone revenues.

Year-to-date revenues totaled $39.8 million for 2013 as compared to $36 million for year-to-date during 2012. The company generated a net loss of $8.3 million during the second quarter of 2013 or $0.14 per share compared to a net loss of $2.3 million for the second quarter of 2012 or a loss of $0.04 per share. Year-to-date, the company generated a loss of $11.7 million for year-to-date June 2013 or $0.20 per share compared to net income of $500,000 for year-to-date 2012 or earnings of $0.01 per share.

The second quarter and year-to-date losses can be attributed to three main factors; the lower realized silver price as a result of the decrease in commodity prices compared to year-to-year, provisional price adjustments related to the company’s smelter contracts and the cessation of operations at the Drumlummon Mine, including an impairment charge of $1.4 million resulting from continuing low equity market valuations.

During the second quarter, the company sold approximately 685,000 ounces of silver on a consolidated basis at a realized price of $23.20 and $2,100 ounces of gold at $1,340 per ounce. At the Galena Complex, the silver sold was 661,000 ounces compared to 532,000 ounces for Q2 last year. However, at a lower realized price of $23.26 as compared to [$28] last year, which represented 17% decrease in the realized price between the periods.

Year-to-date realized silver prices fell from $3.73 for year-to-date 2012 to $26.56 for year-to-date 2013, a decrease of about 14% year-over-year. The impact of the decrease in price is estimated to be a reduction in revenue of $5.2 million when applied to our year-to-date production. Also impacting our quarterly and year-to-date performance was the nature of our smelter contracts, the way that revenue is recognized and associated provisional payments. As outlined in our MD&A, revenues at Galena are recorded based on provisional prices at the time of initial acceptance by the smelter.

An embedded derivative was created by the variations between the price recorded on the initial acceptance date by the smelters and the final price set under the contracts, which must be mark-to-market as an adjustment to revenue until the final metal content and sales value is determined. This period can take four to five months depending on the time it takes to process the concentrate at the smelter. This venture had a snoopy impact on our revenue and cash flow for both the quarter and year to-date.

Negative price adjustments recognized for the three months ended June 30, 2013, totaled $2.6 million and $3.5 million year-to-date compared to 2012, when announced, were negative adjustments of $1.9 million for the quarter and $0.2 million year-to-date. The Drumlummon Mine ceased operations on May 31, 2013 due to adverse market positions and recent mine performance. The net loss for the second quarter was $3.9 million and year-to-date was $6.7 million, including an impairment charge of $1.4 million in the second quarter. The spend for the remainder of the year for Drumlummon is projected to be less than $500,000, consisting largely of remediation activities as the mine is put on care and maintenance. The market based carrying value of Drumlummon will not be amortized going forward, but will be subject to continuing quarterly impairment testing.

As of June 30, 2013, the company’s cash balance totaled $3.6 million, compared to $18.9 million at December 31, 2012. As of July 2, 2013, two days after the quarter-end, the company’s cash totaled $7.4 million. The difference was due to a wire transfer error by one of the company's smelting partners totaling $3.8 million that was not received. It was supposed to be received prior to the quarter-end, but it was received subsequent to the quarter-end on July 2, 2013.

Working capital decreased to $1.9 million at June 30, 2013 from $16 million at June 31, 2012. Majority of the decrease in cash can be attributed to the items previously addressed with specific details available in the company’s financial statements and MD&A. And this was partially offset by management’s continuing efforts to reduce spending on capital, exploration and operating and corporate costs. Also adjusting for the new credit agreement, the pro forma working capital will increase by $7.9 million to $9.8 million.

And as Darren mentioned earlier, the company has entered into an agreement with an affiliate of Royal Capital Management Corp to replace its previously announced extension on the existing debt of $7.9 million. Company has signed a Credit Agreement for CAD$8.5 million for a term of three years at an interest rate of 12% per annum, payable on a monthly basis. Securities provided by first charge on all material assets of the company, the company has issued 10,625,000 warrants to RCM in connection with the agreement, further details on this credit agreement also available in the MD&A and financial statements.

Now on Slide 7, we have shown a number of Q2 operating statistics for the Galena Complex that are also once again in MD&A as well. I will run through each number, but we’ll highlight a few items. First of all, tons processed have increased by 10% from 53,000 tons up to 58,000 tons. Silver grade, we have increased both, silver and lead, lead significantly as we have transitioned through a high grade lead zone during the second quarter. This has had a definite positive impact on number of coverage and cash flow during the second quarter, and lead prices and silver.

And lastly, our efforts to control costs is showing a positive result, and Darren will talk a bit later, with a decrease in cash costs from $17 maybe $0.01 in Q2 2012 to $16.41 in the second quarter of this year.

Now with that, I’ll pass the presentation back to Darren.

Darren Blasutti

Okay. Thanks, Warren. We’re now on Slide 8, which is the exploration update. Jim and Steve and their teams down at Galena have basically drilled 58,000 feet of drilling mainly focused underground obviously, first of all, in the Caladay Zone. That will allow us to expand the 7 million ounces that we put on the books in March and April, expand that we believe quite considerably at year-end. So drilling was spent – the majority of that was spent in the first four months of the year. We then focused on the 353-370 Vein System, which is adjacent to the Caladay Zone, it’s intermingled with the Silver Halo.

We are starting to see some good results from that and that we put out in the press release that we have basically 102 feet of strike at 11.7 feet wide and about 19 ounce per ton silver equivalent. We’re developing into one of those zones now and getting some development or that expect to be mining at for bore towards the end of the third quarter and fourth quarter. So that drilling obviously proved to be very variable to us and then we also supported mining and some of the higher grade veins that we’ll be mining in the Small Mine Plan for the rest of the year.

The drilling for the remainder of 2013 obviously as we did our cost containment, we cut the exploration budget quite significantly, so it’s really a very focused drill plan are improving the overall grade of the Small Mine Plan and just to put it in context that I think our plan was to mine around 11 ounces per ton in the plan at the beginning of the year. We’re now trending towards 15 ounces or 16 ounces per ton as the grades have a Small Mine Plan.

So when you do a little bit of drilling I’m sure that the areas that we’re going into are going to meet the cutoff grade there. It’s also been used to improve the confidence on our grade and tonnage of our reserves and resources that are going to shop at our longer-term mining plan. And there will also be some drilling coming through with the Caladay’s as we move forward. And then we’re also focused as we said a little bit earlier increasing year-over-year total resources for the company.

It’s a process of understanding what’s important and what’s not important and I think the silver price helps us out and gets a little bit higher when we may do some more drilling, but right now, the focus is to remain disciplined and put cash on the balance sheet as we move forward. And so I expect that our exploration has cuts some about $6 million to probably about $3 million for the year, we’ll stay at that point as we move forward.

And so a little bit of on page nine, which is called the Caladay Zone in the long section. Which I guess, what you see when you first look at the page, is a very, very large area in the red dots, which is the existing Caladay Zone as we know it. We believe that it extends the depth we believe it gets wider as it goes deeper. You can see that there is an existing resource that the green blobs, the dark green blobs on the page, those are about 700 million ounces. You can see how big and how significant the area is. This continues we believe to be the future of the mine, as we go forward, given it’s recently its (inaudible) mining, so we’ll continue to move forward lastly with very little capital and hope in the fourth quarter we break in to some lead, silver areas and start to mine those.

Turn over to the next page to the Caladay Zone 4,900 level plan. It shows you how big this mineralization is. Generally, we mine very high grade and very small areas four-foot wide, two-foot wide, six-foot wide. What you see here and what you are struck with is 5 to 8 ounces of continuous mineralization across 300 or 400 meters, with a 100 meters wide, 100 to 150 meters wide. It’s a very interesting core body.

If you look at the two intersections of the long drifts, one coming from the bottom of the page and one coming from the top left of the intersect. You see a very large area of purple mineralization that’s where what we are calling silver halide the 53 70 range. You can see greater than 15 ounce per ton silver equivalent that’s where we’ve starting to drift in and are mining now. And once we get through that and develop in to those areas, we’ll address over straighten work to the higher grade lead and silver areas in the fourth quarter getting them ready for production hopefully in the first quarter of 2014.

The last two that is very close to the existing mine infrastructures that we don’t have a lot of work to do and it’s not very expensive, and so we are going to go for the highest grade first obviously and get our costs down. Some of the purple areas you see or some of the pink areas you see are in the mine plan, but a lot of the targets are not and as we get closer and get more comfortable with them, we will be adding those to the plan hopefully this year.

With that we’ll turn over to exploration section to Page 11, which is, what we are going to do to be successful going forward. I think we need to continue to execute on our cost savings and our operational improvements.

Our goal evolving under $20 cash costs, I think are achievable and put the plan in place and now to execute against it. We continue to take with that on the system and some of the important thing people have talked to me is, well what if the silver price comes back, we have to make sure that, that’s doesn’t go back into systems, so we’re going to be very disciplined about that.

The second objective is we got to protect the balance sheet, we started with a $30 plan and we’ve spent a lot of money in the first half of the year getting a way to get in to these Caladay Zones and these areas and now we’ve got the cargos back, the money was well spent, well we need to, we cut those costs in the second half of the year. We want to continue even with less money to fast track the Caladay Zone as you can tell by the description on the last slide, we are very focused on that. We’ve got some very good targets and we will be mining in the third quarter. We were developing in order today in some of those copper silver areas and we will be getting production out very soon.

We want to continue to align our exploration processing capital in the region with our assets and we want to see accretive acquisition opportunities as we move forward if there is any of those that we see fit. We still have a goal of driving 5 million ounce of silver production by the end of 2015. We can do a lot of that internally as we ramp up the Caladay production, but we’re in a [need] that that help and the silver price to do that.

Turning over to Page 12, which is what have we done since new management has taken over. Well, the truth is kind of in the pudding it’s been four quarters. We came in two-thirds of the way through the third quarter of 2012. Cash costs were $20, all-in costs at Galena were around $32.50. We’ve now taken those costs to in the $16.40 range on cash costs and in the mid or in the early $20.23 and projected in the third and fourth quarter to get those costs to $20 all-in and that’s been the focus of management at Galena. We’re trending in the right direction. It takes time. We can’t make it happen in one quarter, but you can see the progress we’re making quarter-over-quarter at a very good start to the small mines and we exceeded our production in July. We’re on budget in August. We’re confident we’re going to see those costs coming down.

Page 13, we talk about what we did to protect the balance sheet. The first thing we did is we financed our current debt into a long-term three-year debt with Royal Capital Management. Again, I talked about why we did that, the rate was the same as really the Hale debt, but the Hale debt had an NSR, one of the things we proud ourselves on at not having any royalties on our property. We wanted to have that silver optionality, so we exchanged that effectively for some warrants that put money on the balance sheet. I will take that trade every day, at the end of the day, when silver prices go up, we want our shareholders to benefit from that rather than costs going up, because you have an NSR royalty tied to the project. We also make it more attractive for other companies as they potentially look at us as an acquisition target not having royalties on it. So we view that as very important.

Talking a little bit about, I think we mentioned even in previous conference calls and slides what we’ve done for cost control. We’ve cut $12 million to $14 million in exploration capital projects and development projects in the budget for this year. We’ve reduced the G&A costs of $1 million at both Galena and the corporate office. Myself and the Board have taken 20% cash take-ups as well as the rest of the executive management team has taken 10% again to ensure the viability of the operation in the company. We implemented the small mine plant early in 2013 that reduces headcount and increases grade, which thereby increases profitability and as I said that was implemented on July 15.

We also discontinued production at Drumlummon as soon as it seemed that we weren’t going to be able to make money on it. We did this as quickly as we could. There are some charges and it cost us some money in 2013 as Warren described, there’s very little cash to be spent at the operation as we move forward. We’ve got some offers. We’re looking at what we’re going to do with it. We believe that higher gold prices we can still produce, but at this gold price we don’t believe it’s the right time to be doing that.

Over to Slide 14, what are we doing on fast tracking Caladay Zone production, again, we established a new team that focus on this potential of the Caladay Zone. The plan is to commence mining in the high-grade silver-copper zones that I described on Slide 11. We’re targeting initial production of 100 tons per day. We’re seeing grades well above the cut-off and what we’re doing is once we’ve spent the money to get into these copper, silver areas and we’re getting production from there, we will then drift over into some of the silver lead equivalent at the silver lead areas that have cut-off grades higher than our Small Mine Plan cut-off grade and we’ll be doing that in the fourth quarter through the production early next year.

Those areas are wider. There are higher grade lead stopes than we usually have and as I said, we’re quite excited about the potential of that as we’ve been talking about it for quite some time. As we had resources towards the end of the year with the drilling we’ve done, we’ll be able to better map out where we’re going to mine in next year. And then again, exploration drilling program continues to extend those areas and deployments. but what it really does is it provides the future revenue growth with very, very modest capital outlays. We have a lot of excess mining capacity. We are doing about 750 tons a day on an operating basis. Through the first half of the year, we have the Small Mine Plan; we’re going to be closing to 450 tons a day. And we’ve got 1,500 tons of hoisting oil capacity and processing capacity. so as we find more high grade stopes, that we cut off, we’ll continue to not – we thought we’ll have the capacity with very little capital outlages, development costs could be able to get that production into the queue and get it up and make some money from us.

Turning to the Slide 15, which is a 2013 milestones, we did the Reserve and Resource Update, the first resource estimate for Caladay. We were a little slow on Q2 debt refinancing took a little longer given the $18 total price drop. We can get it done and we can get at a pretty good rate. We’ve taken very severe cost cutting initiatives, it was not with the MeV part that we have to lay a lot of our workers off that have done a very good job in the second quarter, getting those good results, but in the current silver price, we did not have any choice and we could look with that for the company.

In Q3, you’ll see us; of course, we’ve executed the Small Mine Plan, which basically on the July 16 by September 16, will be down to roughly 225 people at the mine. Mining is sort of at a higher grade and we’re just trying to get that 100, we’re still targeting 100 tons a day as some of those copper, silver as the Caladay that we can ask an incremental production between now and end of the year.

In Q4, again, it’s to develop, it’s developed over from the Silver, Copper areas adjacent to that Caladay Zone and into those higher grade lead stopes. So we’re delivering on our cost reduction in Caladay’s potential, I think again, we’re going to do somewhere between 850,000 ounces, 1 million ounces. In the second half of the year, we are trending higher than obviously, 850,000 giving a good start, but it’s an underground mine. so we always, Bob or someone will be chatting on wood, but we think we can execute our plan and own cost below $20.

So why invested U.S. Sliver & Gold today, it’s really because we’re producing today. 100% free of 100% owned and still royalty free, we’re fully permitted. We have excess hoisting and milling capacity. We have a Caladay Zone that’s very close to production in your existing infrastructure.

we continue to try and reduce our costs in a very experienced managing team that had made great strides in reducing costs over the first nine months of our, I guess almost 11 months now, being in the chair, and we think there are catalysts in place to improve valuation, not just the higher silver price, but as we continue to bring our costs down, I think people will be more adjusted in the story as we move.

With that, 25 or 28 minutes, I’ll turn it over back to Rob for any questions. We’ll take three or four questions, and then let everybody go and we’ll be available in the queue and I’ll be available for any calls if you move forward, if we can’t you in the queue. Thanks very much. Rob?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now conduct a Q&A session. (Operator Instructions) Your first question comes from the line of Annie Zhang from Octagon Capital. Your line is open.

Annie Zhang – Octagon Capital Corp.

Thank you, operator, and good afternoon everyone.

Darren Blasutti

Hi, Annie.

Annie Zhang – Octagon Capital Corp.

Hi, it’s good to see that you’re trending the costs with that. Good job on that. Since you have cut some budget already, can you just look at capital for me, what are your current budget for your second half of the year on CapEx, exploration and corporate G&A?

Darren Blasutti

Okay. So just to walk through the exploration is basically somewhere around $700,000 or so, really $670,000 around for the second half of the year, got corporate spend expenses about 1.6 to 1.8 depending on certain things that do or don’t happen. And on capital, generally, we’re probably around $3.5 million.

Annie Zhang – Octagon Capital Corp.

That’s for both quarters, for the second half…

Darren Blasutti

That’s for the whole second half of the year, all those numbers.

Annie Zhang – Octagon Capital Corp.

Okay. That’s good numbers. Okay, and also since you have started the Small Mine Plan in July, could you just share with us, how you currently schedule your mill processing?

Darren Blasutti

Okay. I’ll take a shot at that and then I’ll turn it over to Bob who probably has a more detailed answer. But Annie, on an overall basis, we’re planning to shut the Coeur Mill down and campaign through the Galena mill. We have had some warrant stopes in July where we had a new soviet to pretty high lead grades that were still being processed through July. but we expect by the time we implement the warrant notices over in September to have be running just at Galena mill, Bob is there anything that I didn’t get ahead of that?

Robert Taylor

No, that’s right Darren, that the Caladay upgrades, the Coeur Mill has done the better job, you’re correct. Thank you.

Annie Zhang – Octagon Capital Corp.

Okay. So both mills are still currently running?

Darren Blasutti

Yes.

Annie Zhang – Octagon Capital Corp.

Okay.

Darren Blasutti

But we think Annie, because of the way we operate, but we can operate only two days a week.

Annie Zhang – Octagon Capital Corp.

Yes.

Darren Blasutti

And then we wail until we get a full batch and then we run a couple of days and then the mill will be down by, I guess mid-September, we’re paying, under that the WARN Act as you may know, we’re paying people for two months, so that we have that they’re going to be laid off or not they’re getting paid. So some of them we’ve called back like some of the mill gradual, call them back twice a week, right.

Annie Zhang – Octagon Capital Corp.

Yeah.

Darren Blasutti

That will end once those people become officially laid off in mid-September.

Annie Zhang – Octagon Capital Corp.

Okay. And then under the Small Mine Plan and with your vision to cut on the workforce, what are you unit across in terms of mining?

Darren Blasutti

That’s a great question, I don’t have the answer. Bob, have you got that?

Robert Taylor

Just on mining costs?

Annie Zhang – Octagon Capital Corp.

Yes, please.

Darren Blasutti

Bob?

Robert Taylor

I’m looking, I have to look at the spreadsheet here.

Annie Zhang – Octagon Capital Corp.

Okay. My another question is on your upgrades going forward, and in the second quarter, as you mentioned that you were in the transition through the high grade, silver and the lead area. How sustainable do you think it is, high grade it would be going forward?

Darren Blasutti

Bob?

Robert Taylor

Well, this is a pretty big area and there’s quite a bit more drilling to be done on it as Darren was talking about, but we are expecting good things out of it. Annie, I think it’s sustainable.

Annie Zhang – Octagon Capital Corp.

Okay. You had mentioned that…

Darren Blasutti

Yeah. So Annie, our overall rate….

Annie Zhang – Octagon Capital Corp.

In between 15 and 16, as per ton for the second half of the year, that’s coming from both silver lead and silver copper or primarily from silver lead?

Darren Blasutti

More silver copper 70%, 30%, roughly I think.

Robert Taylor

Yes.

Darren Blasutti

So what we did experience, Annie, is a big change through the second quarter on ounce, on ton basis over 70%, 30%, but make more ounces in 70%, 30% because the grade will vary up.

Annie Zhang – Octagon Capital Corp.

Yeah.

Darren Blasutti

While we’re expecting for the second half of the year that production range we’re talking about to be 70%, 30%, not just tons, but also production from silver lead versus 30% silver lead, 70% copper silver. So, and the average rate of all of both the lead and the cut-off grade is obviously much higher. and so we’re talking about mining grades we sell it’s in 16 ounce range. And so obviously, it needs to be high grade to be able to make that cut-off grade, right?

Annie Zhang – Octagon Capital Corp.

Yeah. so are you going to like stop prior to lower grade or you just do focus on mining a high grade, you’re still owning?

Darren Blasutti

Focus on the high grade, and focusing on drilling, developing and mining the high grade stopes that we’re currently on. And then transitioning into the some of these copper areas and hope we can get some production even though we haven’t done as much drilling as we would have liked. We’d obviously develop into that 350-370 Vein System, because it was good grade and we saw the results of that, and accretive in the development. And then hopefully, we see some good results out of some veins that are there and as well as the Silver Halo going into the third and fourth quarter. We can’t guarantee anything, because we don’t have enough drilling, but we’re going to get in there. The $348 million paid for a lot of which we’re in good results there that we mined before paid for the development over there as supporting 111 and we’re hoping to get some bonus production out of that, given that drifting has been paid for.

Annie Zhang – Octagon Capital Corp.

Okay, I’ll ask a last question, and then let other people ask you questions. Would you be able to shed some light on what average head grades have been for July and August?

Darren Blasutti

Well, July is a bit misleading, because we cleaned up all the low grade stopes we still have. So I think it was still on the 11 ounce and 12 ounce, that’s maybe 12 ounce.

Annie Zhang – Octagon Capital Corp.

Okay.

Darren Blasutti

And what we’ve been seeing in August is, about 15 for sure and some of that I mean in its early days in August. and so like 17 ounces, 18 ounces, we can’t calculate it, that’s going to last forever, we hope it does. But again, we’re planning for 15, 16. We’ve seen higher grades in August as all the lower grade stopes got cleaned out. Bob, did I get any of that wrong?

Robert Taylor

No, that’s right. We had put some of those folks to bid, so there could be filled. and now, we wouldn’t have a deterioration of the ground support in that fall, so we’re going to get back into them, we got a better price of them.

Darren Blasutti

Right. We won’t have that optionality in any if we can.

Annie Zhang – Octagon Capital Corp.

Yeah. Okay, thank you very much.

Operator

Your next question comes from line of Doug Dyer from Heartland Advisors. Your line is open.

Doug Dyer – Heartland Advisors, Inc.

Hello, as far as the expenses drove for the second half of the year, do you anticipate capitalizing any of the expenses or will they all be cash expenses?

Darren Blasutti

Those will be sort of business, is there a specific expense that you’re thinking of, like business with the exploration expense, I think, approximately of the 700 spend that we had planned I think, probably about 500 of that will be capitalized and 200 expensed. So what…

Doug Dyer – Heartland Advisors, Inc.

Okay.

Warren Varga

Again, we’ll able to try and understand the cash cost. So we say all in cost, Doug, of $20 that’s everything. That’s cash, whether it’s capitalized or expensed.

Doug Dyer – Heartland Advisors, Inc.

Okay.

Warren Varga

So we’re not playing on the capitalization versus cash in.

Doug Dyer – Heartland Advisors, Inc.

Yeah, yeah.

Warren Varga

So, we’re trying to do is we’ve got 3.8 on capital, $1.5 to $1.6 or $1.7 on corporate expenses at around 700 in that region, all of that is included in that $20 all in number.

Doug Dyer – Heartland Advisors, Inc.

Okay. Thank you very much.

Warren Varga

Okay. Thank you.

Operator

(Operator Instructions) Your next question comes from the line of [Bill Stein], Investor. Your line is open.

Unidentified Analyst

Yes, gentlemen, I happen to notice about the selling of the 10,625,000 warrants for a $0.68 for five years and that seems like a tremendous amount of delusion of the company, like one-sixth of the company. Where there was no other option that you could have done except for that or?

Warren Varga

Yeah, Bill, well, the other option was a 1.5% NSR that was basically, last – in every unit of production we have at the mine. That for as long as the mine operates and when we find new reserves and resources, we still have to pay that. So the cost of that we thought that was more than giving up warrants in the company where the gentlemen who gets the $0.68 has to put the cash. We think if they exercise the 10.6 million warrants, it obviously puts $7 million odd in the balance sheet right?

And so it was – I can tell you that the financing market was not open for a junior producer with those cash costs and with our cash cost, the junior market generally is not open for financing. This was the best deal that we could get out of all of the deals that came forth in getting it done. We recognized it’s a lot of dilution. I am also a large shareholder, but I thought it was the best thing to do in the circumstances.

Unidentified Analyst

They don’t put the money upfront, they just get the warrants and when they…

Warren Varga

Yeah.

Unidentified Analyst

Is that right?

Warren Varga

Yeah, absolutely. So they get a five-year term if the stock never hits $0.68 again. So it’s highly unlikely they won’t make any money, but if it goes to $2, they’re going to make a whole lot of money.

Unidentified Analyst

Okay, but it’s not going to affect the company that much is it, I mean, can we afford that?

Warren Varga

I mean, in order to exercise those warrants, they have to put money on the balance sheet. So obviously, one of the things we’re trying to do is protect the balance sheet in these low silver prices and we think our warrant structure is a more effective way to do that than to put an additional costs, which is a royalty on the Mine.

Unidentified Analyst

Okay. Well, the price of silver, I guess, has gone up for about $2 an ounce in the last week or so, and many people think that price of silver and gold is going to go down and I don’t know how many think it’s going to go up, what do you think is the future of the price of silver and gold?

Warren Varga

Well, first of all, our job is to manage the downside, because the upside is a lot easier. So we focus most of our time unfortunately worrying about what happens if silver goes to $17 or $18 or whatever. My personal view as a shareholder and somebody who buys stock on a quarterly basis, who thought it’s going to be better, I mean, I think the macroeconomic trends point to a much higher silver and gold price, when you look at the state of the world and the debt. And I think people’s views of the rosy economy in the United States, is overdone in my own opinion. And right now, it’s trending against, it’s weak against the strength of the U.S. dollar and the U.S. economy, and I just don’t see that.

I don’t think the U.S. is out of that, what I think with every municipality and every state going bankrupt and I’m not sure how it’s getting better. But, again, I have my views, every individual investor has their views, but I expect that we are going to see a run in the fall again, towards $30. But the charge-offs its management to protect against worrying more about whether it goes to $17 or not. And the beauty of the mine we have is we had 25 stopes that we are working on. We’ve cut them down to 15 stopes, with sliver, gold up $3 or $4, you can add two or three more stopes that are profitable, and we can add that with a minimal cost and with minimal capital to increase production. So that’s what I like about the plant going up or down. So as I say from my perspective, I think, silver is going to go up, and I think in the third and fourth quarter, much better quarter based on that.

Unidentified Analyst

Okay, thank you very much.

Darren Blasutti

You’re very welcome Bill, thank you for the call.

Operator

Your next question is a follow-up from Annie Zhang from Octagon Capital. Your line is again open.

Annie Zhang – Octagon Capital Corp.

Thank you. Just the two follow-up questions. Warren, I probably missed the price adjustment for the second quarter.

Warren Varga

You missed, you just pinged out I couldn’t hear your question.

Annie Zhang – Octagon Capital Corp.

Sure. The price of the adjustment for the second quarter is a 2.4, 2.6?

Warren Varga

2.6 is you are talking about the market as well as the embedded derivative?

Annie Zhang – Octagon Capital Corp.

Yes.

Warren Varga

Yeah, yeah, it was 2.6 for the second quarter.

Annie Zhang – Octagon Capital Corp.

Okay, thank you.

Warren Varga

Yes, thank you.

Annie Zhang – Octagon Capital Corp.

And are you still planning on coming out of these golden studies on the Caladay zone?

Darren Blasutti

Yeah. Annie, so we will do something towards the end of the year, obviously, when prices collapse to $20, we had risen to start of it at over $28 silver price and get the cut operated and all the engineering work on a much higher price.

Annie Zhang – Octagon Capital Corp.

Yeah.

Darren Blasutti

and so when we did that, it took the 7 million ounces roughly kind of 4.6 minable. and then we obviously used mining costs and associated with a much higher sliver price. and so it hung in at 25 and it hung in at, I think 22 and 21 and then with a gap below that we need to go back and reinvent the wheel. So also when you can get some thought process on, it’s a lot of the base work’s been done, probably, we got to figure out, we probably got to get more ounces and from June at the year-end to make the system bigger, because obviously, there is capital on the front-end of the grade.

Annie Zhang – Octagon Capital Corp.

Yes.

Darren Blasutti

Yeah. Or we’ve got to use the higher sliver price, and coming out with a $25 silver price in an $18 sliver environment. It’s going to be tough, so I think what we did is, we just decided to defer till the end of the year till we ought to more ounces in, from the exploration results or we could use a better silver price. but we think it works at lower silver prices, but when you’re starting all the capital and you’re only doing it over 7 million ounces and you’re only getting 4.5 minable under that. It’s pretty tough to make that whole project work. When we think it’s 150 or 200 million ounces, right.

Annie Zhang – Octagon Capital Corp.

Yeah. Okay, my last question, I promise. Thinking with all the budget kind of on your CapEx in this year, how many months ahead with your development, ore development, I’m still afraid that with the cover this year, you got to speed up next year to catch up with stock development?

Darren Blasutti

Well, I’ll let Bob answer, but I’ll just say obviously, we thought about this in the plan.

Annie Zhang – Octagon Capital Corp.

Yes.

Darren Blasutti

and so a lot of the $3.8 million we’re spending is really the keep-up development on the higher grade stope mining and that’s one of the reasons why we decreased the number of stopes, because of decreases in the amount of capital and you’re getting more ounce out of your higher grade stopes, but our view is this plan can continue for the rest of this year and next year. Bob, if you got any comments to that?

Robert Taylor

No, that’s I think for deal, we’re all like for this year and well into next year where we’re going to (inaudible).

Annie Zhang – Octagon Capital Corp.

Okay, there is another one.

Darren Blasutti

But it’s not a solution that last five years. I mean, again, I think we can do this level of development and keep producing. I think if the silver price comes back, we can quickly get into some stopes that have been post properly and can be started up quite quickly, but as we talk about, three or four or five years from here, either one anybody that for you to be thinking that we can just continue at $7 million a year in capital development, right.

Annie Zhang – Octagon Capital Corp.

Right, okay.

Darren Blasutti

For long-term.

Annie Zhang – Octagon Capital Corp.

That’s good. Thank you very much, everyone.

Robert Taylor

Thanks.

Darren Blasutti

With that, operator, are there any more questions?

Operator

There are other questions.

Darren Blasutti

Okay.

Operator

Your next question comes from the line of [Gordon Steingard] from U.S. Silver & Gold. Your line is open.

Unidentified Analyst

Hello.

Darren Blasutti

Well, hi, Gordon.

Unidentified Analyst

Hi, I was just wondering was there no major miner that would have wanted to buy into the company like through a private placement instead of doing this deal with this capital company?

Darren Blasutti

Well, I don’t really discuss corporate transactions by nature, as you know, the last year, a major corporate miner had an interest in buying the whole company.

Unidentified Analyst

Okay.

Darren Blasutti

Whether he had an interest in buying a piece of the company, I mean, there are a couple of candidates, one is on west of us and one is on east of us.

Unidentified Analyst

Right.

Darren Blasutti

And to the answer to you, we don’t really talk about those kind of transactions, I think there’s interest in the company from both of those, but one guy getting 20% versus the other guy getting 20% clearly makes it harder for us to create value for all the shareholders, right. And so we thought what our options, we reached out to everybody and this is the best deal we thought we could do.

Unidentified Analyst

And if the price of silver is going to go up, it’s obvious they’re going to exercise their warrants. So…

Darren Blasutti

Yeah.

Unidentified Analyst

So we could, why not just sell off 15 million shares and get some cash, buying the company, run a balanced budget and pay the debt. I mean that’s what I’m, why not just get rid of this debt?

Darren Blasutti

Yeah we would like to and we’ll work on that as we go forward, but you can imagine when silver has gone to 18.61 and you’re trying to refinance your debt…

Unidentified Analyst

Yeah.

Darren Blasutti

It’s not a lot of people that want to help you. They’d rather see as go down, so they could buy it even cheaper.

Unidentified Analyst

I don’t know how cheaper could get?

Darren Blasutti

Well, I mean again, it’s all about, I mean it can grow from 60 to zero.

Unidentified Analyst

Yes.

Darren Blasutti

I’m not saying that we’re not cheap, I’m just saying if you’re sitting in that position at the end of the day, again, well I’ll reiterate, we did the best deal that we could do at the time that preserves the best optionality for shareholders going forward.

Unidentified Analyst

Right, okay.

Darren Blasutti

Okay.

Unidentified Analyst

Yeah.

Darren Blasutti

No problem. Thanks, Gord for the call. With that operator I think we’ll finish unless if there’s any other questions.

Operator

There is one last question from the Rick Tylor from (inaudible). Your line is open.

Unidentified Analyst

Yeah. Hi, I just have a quick question, as you get further into the Caladay Zone, will you be transitioning over to more bulk mining kind of long haul sloping type equipment. Do you have such equipment and are your miners, do you have some miners you’re familiar with using that because that’s different than what your current, is it correct?

Darren Blasutti

Yes, yeah. So Rick, thanks for the question. I’ll take it in a few parts.

One, we do have some equipment, we took some long haul drills over from Drumlummon and we do have some at the mines, at Galena already. We do have, you can imagine at this point in the mining cycle is not very difficult to find miners, as there have been lay-offs and reductions and closures of mines from all over the globe.

So I think, those two questions are easily answered and the answer we have, we have the equipment and we do have the capability, we have some miners and we can get more. The third question is slightly more complicated as we haven’t mined a mill yet, but I think what we are seeing is broad areas of mineralization that are bulk mineable and certainly in the level, we are talking about the 4900 level kind of between 45,500, we do believe that a large chunk of the Caladay lead silver zone is bulk mineable.

As we drift over there in the fourth quarter and get ready for the first quarter that will be the assessment of Bob and his team. And Bob, what are your views today based on with what work we’ve done with (inaudible)?

Robert Taylor

We have a geotechnical study that supports our beliefs that we can mine at that level and mine bigger thicknesses. That was part of the (inaudible) study scoping study you were referring to earlier. Yeah, we’ve done some of the technical work to confirm it, and we will have an opportunity, all of the $49,100 as we get over to thicker areas and then we are talking about getting a little more hands on experience.

Unidentified Analyst

Okay, thank you.

Darren Blasutti

Thank you.

Operator

There are no further questions. I will turn the call back to Mr. Blasutti for closing remarks.

Darren Blasutti

Thank you. Well, I think from that perspective, we are void by some decreasing costs. And I think, we were feeling good about the execution of our Small Mine Plan between year and end of the year. We’ve had a good start for the third quarter and we’re very focused on creating value for shareholders. And so with that, I want to let everybody know that management is doing everything it can to ensure that we get our costs down and our efficiencies up in order to produce profits at the Galena Complex and at the company. And I certainly, appreciate everybody, who is the shareholder staying in with us, it’s been a very difficult time for silver producers and junior companies in general. And I think, we have a very good management team and board that’s focused on the right thing and I hope we can create some value as we move forward from the summer doldrums and these really low silver prices.

So with that, I’ll end the call, and appreciate your attention. And if you have any questions, please call Nicole or I will be happy answer any of them. Thanks very much.

Operator

Ladies and gentlemen, thank you for your participation. This concludes today’s conference call. You may now disconnect.

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