Pan American Silver's (PAAS) CEO Geoffrey Burns on Q4 2015 Results - Earnings Call Transcript

| About: Pan American (PAAS)

Pan American Silver Corp. (NASDAQ:PAAS)

Q4 2015 Earnings Conference Call

February 18, 2016, 01:00 PM ET

Executives

Kettina Cordero - Investor Relations

Michael Steinmann - President, Chief Executive Officer

Steven Busby - Chief Operating Officer

Robert Doyle - Chief Financial Officer

Christopher Emerson - Vice President of Business Development and Geology

Analysts

Chris Terry - Deutsche Bank

Bill Fleckenstein - Fleckenstein Capital

Lucas Pipes - FBR & Co

Operator

Thank you for standing by. This is the conference operator. Welcome to the Pan American Silver Fourth Quarter 2015 and Year-End Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions [Operator Instructions]

I would now like to turn the conference over to Kettina Cordero. Please go ahead.

Kettina Cordero

Thank you, operator and good morning ladies and gentlemen. Welcome to Pan American Silver's 2015 fourth quarter and year-end unaudited results conference call. I'm joined by our President and CEO, Michael Steinmann, our Chief Operating Officer, Steve Busby, our Chief Financial Officer, Rob Doyle, and our Vice President of Business Development and Geology, Chris Emerson.

I’ll remind our listeners that this call cannot be reproduced or retransmitted without our consent and that certain statements and information in this call will constitute Forward-Looking Statements and forward-looking information within the meaning of applicable securities laws.

All statements other than statements of historical facts are forward-looking statements that reflect the company's current views with respect to future events and are necessarily based upon a number of assumptions and estimates that will considered reasonable by the company, are inherently subject to significant business, economic, competitive, political and social uncertainties and contingencies. Many known and unknown factors could cause actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements and the company has made assumptions and estimates based on or related to many of these factors.

We encourage investors to refer to the cautionary language included in our news release dated February 17, and February 18, 2016 as well as the factors identified under the caption, Risks Related to Pan American's Business in the company's most recent Form 40-F and Annual Information Form. Investors are cautioned against attributing undue certainty or reliance on forward-looking statements and the company does not intend or assume any obligation to update these forward-looking statements or information, other than as required by law.

With that, I will leave with Michael.

Michael Steinmann

Thank you, Kettina and good morning ladies and gentlemen. I’ll start with the short overview of our fourth quarter, then I’ll let Steve, Rob and Chris to provide you with more details on our operations and projects. Our financial performance during the fourth quarter and for the fiscal year 2015 and of course our exploration programs and reserve update before moving on to a Q&A session.

But before we go to the results, I would like to take a moment to discuss our dividend distribution, which as you may have already seen will change as of this quarter. As announced on to careful consideration, our Board has decided to reduce the dividend by 75% to $1.25 per share per quarter. This brings our dividend back to the level of Q1 of 2010, when we paid the dividend for the first time.

The dividend will be payable on or at Wednesday, March 9, 2016 to holders of record of common shares as after close of business on Monday, February 29, 2016. Cutting dividend was not an easy decision, but given the current market conditions and more importantly with all the M&A opportunities starting to emerge, it makes perfect sense to preserve more of our cash and position ourselves to add meaningful new projects to our portfolio.

You may have seen the announcement we made on Tuesday together with Kootenay Silver and Northair Silver. Now this are these are early stage projects and are not of material size for us right now, they have the potential to add significant silver resources through further expression.

In addition, this was an ideal entry point for us into a highly prospective mineral belt located in a preferred jurisdiction which should allow us to add value by utilizing our proven expertise in exploration and approach our development. In my opinion and that of the Board, this is an ideal use for our precious cash resources. As we look for more opportunities to reload our development pipeline.

Now let's have a look at our production performance, 2015 was arguably the best production year in the history of Pan American Silver. We posted 37 new production records last year, including tonnes processed, precious and base metals produced as well as head grades and recoveries at several of our operations. I'm sure Steve will provide more details shortly.

We produce a new company record of 26.12 million ounces of silver and the record of 183,700 ounces of gold in 2015, banks to record silver products at our Dolores, La Colorada, and San Vicente mines and record gold production at Morococha, Dolores, Alamo Dorado and Manantial Espejo.

Our cost control strategies took full effect during the year, the combination of outstanding production performances, lower energy, supply and labor cost as well as devaluate local currencies reduced our cash cost for the year to $9.70 per ounce of silver net of by-product credits. This is a reduction of 15% compares to our cash cost in 2014 and well below our already lower cash cost guidance of $10 to $10.50 per ounce.

The cost savings have been even larger on our all-in sustaining costs, which came in at $14.92 per ounce of silver net of by-product credits, representing a 17% cost reduction compared to the net all-in sustaining costs experienced in 2014. Similar to the cash cost our AISCSOS were well below management reduced full-year forecast of $15 to $15.50 per ounce. It is worth pointing out that we were able to comfortably beat our forecast for AISCSOS even though we had to include in negative $0.76 per ounce in net realizable value adjustments on our heap reach and stopped inventories due to lower metal prices.

These production records allowed us to generate the very healthy cash flow from operations of 23.4 million or $0.15 per share in Q4 and $88.7 million or $0.58 per share for the year, which more than covered our sustaining capital and contributed to our growth projects. And with this in spite of continuous deteriorated metal prices.

Now I will let Steve provide you with a detailed account in our operations and expansion projects during the quarter and for the year.

Steven Busby

Thank you, Michael. It is my pleasure to provide additional details on Pan American's numerous record breaking operating results and expansion in projects advances accomplished during the year. There will be some slides with some photographs of some of our expansion projects on our website, I’ll follow through on narration here.

Starting off our La Colorada mine in Mexico, achieved record silver production in 2015, 7% more than in 2014 on account of increases in throughput, grades and recoveries. Core mining rates have increased with the benefits of the new mining equipment purchases to the maximum rates possible, until our new shaft installation is completed.

The increased throughput particularly from deeper sulphide resources also brought a 16% increase in Zinc production to 8,900 tonnes and a 14% increase in led production to 4,300 tonnes both achieving new annual records for the mine. Cash cost during 2015 declined 9% on account of lower unit operating cost per tonne given the higher throughput, the favorable depreciation of the Mexican peso and lower cost of certain consumables while the increased base metal by-product production was entirely offset by lower base metal prices.

Our Dolores mine also achieved record silver production in 2015, 7% greater than in 2014 due to record throughput and higher silver grades. Gold production also grew 18% from the previous year to a new annual record in 2015. Despite lower gold price, cash cost declined 28% on account of the higher gold by-product production, favorable currency exchange rate movements, and lower cost of certain consumables particularly diesel fuel.

Silver production at Alamo Dorado in 2015 fell 14% from 2014 as the final open pit mining ramp down and concluded by year-end, which resulted in less feed from mined ore being supplemented with greater fee from lower grade stockpile ores. Whereas gold production rose 16% to a record at Alamo Dorado during 2016 due to higher grades and recoveries from the mining of a high grade gold zone in the final stage of the open pit.

Despite lower gold prices, cash cost per ounce declined by 61% due to the combined effects of higher gold production and lower unit operating cost per tonne given the reduced mining grades, the favorable depreciation of the Mexican peso and the lower cost of certain consumables. Huaron silver production improved during 2015 was similar to that of 2014. However, production of copper increased 14% to 6,900 tonnes and lead 15% to 6,700 tons, both establishing new annual records given the mine sequencing.

Cash cost declined 6% as a result of substantially lower unit operating cost per tonne driven by benefits from the ongoing mechanization efforts while the increased copper and lead by-product production was entirely offset by lower copper and lead prices. During 2015 Huaron also produced 13,500 tonnes of zinc, 5% less than in 2014.

Morococha’s annual silver production declined 9% from 2014 as a result of a previously reported change in mine sequencing that targeted higher value ores during the year, partially aggravated from the impact of intersecting unexpected water flows in the high value Esperanza copper rich zones during the last four months of 2015, which is now since been resolved.

During 2015 the company share of Morococha’s copper production increased 165% to a record 8,200 tonnes while zinc production decreased 28% to 11,400 tonnes and lead 46% to 2,600 tons. Cash cost per ounce for 2015 at Morococha were similar to that achieved in 2014 as substantially lower by-product metal prices were offset by reductions in unit operating cost per tonne realized from the mine mechanization efforts despite addressing the unexpected water issue at Esperanza.

San Vicente in Bolivia achieved record silver production in 2015, 4% higher than in 2014 due to higher throughputs and silver grades offset by lower recoveries. The higher throughputs also drove a 17% increase in the company’s share of zinc production to 6,800 tonnes and 67% increase in lead production to 840 tonnes both setting new annual records for the mine. Cash cost declined 12% aided by higher zinc and lead by-product production as well as royalty payments due to lower metal prices.

At Manantial Espejo in Argentina, silver production in 2015 decreased 4% on account of lower throughput largely caused by a two week shutdown in the open pit operations that was reported during the second quarter of 2015. Irrespective of the two week disruption the mine achieved record gold production during 2015, 10% above that of 2014 on account of significantly higher gold grades with the mine sequencing into the final hike gold grade horizon of the Maria open pit during the last half for the year.

Cash cost per ounce in 2015 decrease 28% compared to 2014 on account of substantial productivity improvements that drove unit operating cost per tonne lower while the 10% increase in gold production was mostly offset by the 8% lower gold price.

Turning over the area of photo of our new shaft and headframe and hoist room installation on the slide illustrates. Substantial progress was made on the La Colorada mining expansion project during 2015, particularly with respect to successfully completing the new 617 meter deep shaft bore that navigated through some challenging ground conditions. By year-end the top 30 meters of the shaft has been concrete lined allowing the suspension of the pre-fabricated galloway work platform structure in the shaft bore bringing the total shaft project advance to approximately 50% complete at year-end.

As this next photo shows, the hoist control room, the company anticipates completing the construction and commissioning of the new headframe, the sinking winches and the hoist during Q1 of 2016 this year. That will allow us to advance the shaft outfitting the top down with concrete lining supports and all the necessary steel installations. Pan American expects that the new shaft will be fully commissioned by year-end 2016, allowing hoisting to mark from the 588 loading pocket level which is 588 meters below surface.

The company also continues to advance on underground developments, necessary to prepare additional production phases in time to begin steady ore production ramp up beginning in late 2016 with the new shaft operation. The expect is that ramp up will continues steadily through to the end of 2017 when the full design of 1800 tonnes per day of ore production capacity will be achieved.

Meanwhile as the next photo highlights, construction of the new sulphide plant which began in April of 2015 was approximately 70% complete by year-end. Well within the schedule necessary to accept the ore production ramp described previously that’s driven by the commissioning in the new shaft at the end of this year. The company has making provisions to provide temporary power supplies as necessary while anticipating completion of the new 115kv power supply line to site by early to mid 2017.

Overall I'm quite pleased to report that the La Colorada expansion is advancing on budget and we anticipate overcoming the three month delay in the shaft excavations that occurred during 2015, while navigating the challenging ground conditions in calendar in the shaft raise boring, in order to achieve the planned 1800 tonnes per day ore production rate by the end of 2017.

Moving over Dolores as this next photo shows the new underground ramp decline that started early in 2015 advanced 866 meters by year-end and the pulp agglomeration plant engineering and procurement effort preceded well during the year. The company anticipates advancing the underground mine developments to intersect the main ore body, install the first ventilation rays, commence lateral development and perform initial stoke definition drilling during 2016 all in accordance with the projects schedule.

The company also anticipates completing engineering continuing procurement of all major equipment and begin ground breaking excavations for the new pulp agglomeration plant during the first half of this year. Overall, the Dolores project expansion is proceeding on budget and the company anticipates meeting a schedule start up of the pulp conglomeration plant by mid 2017 while ramping up underground operations to the full 1,500 tonne per day design capacity by the end of 2017.

In addition, the new 115kv power line installation is approximately 74% complete and remained on budget and on schedule for an anticipated commissioning by mid-year 2016. Apart from the expansion project, the company’s project team has also initiated the next phase of leach pad sustaining capital expansion at Dolores as shown in the photo which is scheduled for completion by mid-2016 and will provide an additional 18 million tonnes of ore stacking capacity on leach pad-3.

Looking forward to 2016 and as previously reported, the company expects to produce between 24 million to 25 million ounces of silver at a cash cost between $9.45 to $10.45 per ounce; we expect gold production of between 175,000 to 185,000 ounces, primarily due to higher grades at Dolores according to the mine sequencing as we move deeper into that deposit. Furthermore, we expect our zinc, lead and copper by-product production at between 46,000 to 48,000 tonnes of zinc between 15,000 to 15,500 tonnes of lead and between 13,000 to 13,500 tonnes of copper.

The company plans to invest between $65 million to $75 million in sustaining capital during 2016 primarily for open pit pre-stripping and leach pad expansion at Dolores, long-term underground development and infrastructure enhancements at our underground mines as well as equipment replacements and overhauls, planed upgrades and debottlenecking and mine side exploration across all operations. In addition, we plan to spend $64 million to $66.5 million on our La Colorada expansion project and between $71 million to $73.5 million on our Dolores mine expansion during 2016.

Before I pass the call along, I would like to explain my personal gratitude to all our dedicated employees and contractors for all their efforts that actually led to the 37 new company operating production records during 2015 that Michael mentioned. I would also like to mention that there has been nothing short of impressive to witness the breadth and the depth of our project team capabilities at work as they safely advance several critical projects simultaneously that are all designed to transform Pan American Silver into an even stronger leading low cost silver producer for many years to come.

With that I will now turn the call over to Rob Doyle for the financial update.

Robert Doyle

Good morning ladies and gentlemen. As Michael and Steve have described, it was much to be pleased about in 2015 including our financial performance. Clearly, the metal price declines put tremendous downward pressure on our revenues causing $129 million drop of 2014 revenues. However, we were able to counteract that by selling higher quantities of metal particularly gold and copper adding $65 million to revenues and halving the negative price effects.

Revenue was further hurt by downward settlement adjustments on provision past concentrates as you would expect in our lower trending market to the tune of about $6 million in Q4 and $9.5 million for the full-year of 2015. But hopefully, we would see the reverse of that in Q1 of this year with the recent uplift in metal prices. While our cash flow generation for the year and for Q4 was strong, we did see some significant non-cash charges causing net losses with $121.5 million of pre-tax impairment charges recorded in Q4 and $150.3 million for the full-year of 2015.

In addition, we recognized reductions to deferred tax assets in Q4 2015 which amounted to a $25 million charge to earnings in a quarter. On an adjusted earnings basis, the decline in revenue that we experienced in Q4 2015 relative to a year-ago was more than offset by a reduction in our production cost, allowing us to narrow the adjusted loss that we reported in Q4 2015 to $17.5 million or $0.12 per share. For the full-year $77.3 million decrease in revenue was partially offset by production cost reductions and lower taxes, resulting in an increased adjusted loss relative to 2014.

Our balance sheet position and liquidity remained extremely strong at the end of 2015, which positions us well for the year investments ahead. Working capital portion of our balance sheet decreased by $27.9 million during Q4 2015, with working capital of around $392 million at year-end, the change in working capital was principally reflected in lower cash and short-term investment balances, in lower inventory balances partially offset by a net $42 million decrease to current liabilities driven by the repayment of convertible notes in December 2015.

We decided to draw down on our revolving credit facility to send the repayment of the notes, leaving our outstanding data unchanged. We ended the year in a healthy liquidity position with $227 million in cash in short-term investments and total debt of only $59.8 million. Together with our strong balance sheets, we have $264 million of undrawn revolving lines of credits that material in April 2019.

As mentioned, we generated strong operational cash flow during 2015, $106 million, which was sufficient to fund all of our sustaining capital expenditures of $74 million, tax payments of $14 million and about half of our dividend payments of $42 million during the year. Our treasury was used to finance our expanse in project capital of $77 million and the net repayment of loans and leases of $6 million and about half of our dividend payments.

To with this in the story for Q4 2015, with operational cash flow covering all of our sustaining needs that’s for part of our dividend payments. Spending on our high quality growth projects increased to $33 million during Q4 2015, a level of spending that we expect will continue throughout 2016 with approximately $135 million ear-marked over the next 12 months for projects. At current metal prices, we forecast our cash balances to reduce over the course of 2016 as we complete expansion that La Colorada and Dolores. However, our liquidity shift starts to board again in 2017 as we begin to harness the benefits of those who robust mine expansions.

Michael mentioned the reduction achieved in our AISCSOS during 2015. And in this slide we present a table showing you the changes from 2014 on per ounce basis. We calculate a consolidated AISCSOS of $14.92 per ounce for 2015, 17% lower than last year. The main drivers for the lower AISCSOS in 2015 were low sustaining capital and net realizable value adjustments, lower direct operating cost and higher by-product credits on a back of larger quantity sold. We are guiding to lower our AISCSOS further in 2016 to between $13.60 and $14.90 per silver ounce sold.

With that over to Chris for the exploration update.

Christopher Emerson

Thanks Rob, good morning. I'm pleased to share with our new resource and reserves as of December 31, 2015 improvement probable reserves are estimated to contain 280 million ounces of silver and 2.1 million ounces of gold. These numbers are down by approximately $0.07 and $0.08 respectively, compared to last year. This is mostly due to 2015 mine production and more stringent factors used for the estimation including lower metal prices.

It's important to note that at the same time the average reserve silver grade increased by 5% and gold grade by 2%. So in 2015, we spend $10.9 million on exploration, completed over 105 kilometers of time drilling. Our reserve metal prices assumptions decreased by $1.50 to $17 per ounce $70 to $1,180 per ounce for gold. These are posted results and maintain our proven probable reserve as one of the largest in the silver industry.

During the last 12-years our mine exploration efforts have been highly effective. We have added nearly 293 million ounces of silver to our reserves in that period excluding acquisitions, more than replacing 291 million ounces of silver mined. The average cost of the new silver reserves added during this period is approximately $0.44 per ounce only assuming drill cost resulting in the excellent return on investment and exploration.

On the current slide, you will see the December 31, 2015 reserves by mine. The separate columns from left to right show the silver ounces contained within the reserves as of December 31, 2014 the contained ounces mined in 2015, additions through exploration losses due to recategorization of reserves and the resulting current reserves as of 31, 2015. Please note that we discovered approximately 22.5 million ounces of new silver mineral reserves while at the same time depleting 33.5 million ounces of contained silver through production and recategorizing 8.9 million ounces of silver.

La Colorada mine which holds the company’s largest silver reserves once again retuned outstanding exploration results in 2015 with an addition of 11 million ounces of silver. Net of 2015 production La Colorada finished the year with a record 91 million ounces of silver mineral reserves, a 5% increase year-on-year. This result is even more impressive taking into account that exploration activities were restricted in certain areas of La Colorada due to development work for the mine expansion. It's worth noting that over the past two-years we have found and increased the amount of mineralized structures being identified in mine within the structural corridor of La Colorada such as the four additional MC veins, 6, 7, 8, and 9 as well as the Luna Roja to name but a few.

The Amolillo vein holds 37% of reserves and continues to deliver in terms of higher silver grade and continued depth and strength potential. The 2016 La Colorada drilling will continue to build on the exploration success and target the 23 million ounce estimated in inferred resource. Besides La Colorada, the second largest addition came from our operation in Manantial Espejo. Focused drilling in the Maria vein east extension from surface and underground has added an additional 4 million silver ounces resulting and 11.8 million ounces being maintained on the reserve book.

San Vicente had the strong year by replacing 80% of the produced silver ounces by finding and converting 3.5 million ounces and mainly in the union and Litoral-R2 vein. As expected mine production lower metal prices assumption, re-estimations on reserve resource spot parameters meant at any exploration gains in one annual culture were offset by loss of silver ounces from the reserves. Mineral reserves at Dolores declined by 11 million ounces of silver with a total of 53.1 million ounces of silver and gold at 706,000 ounces mostly due to mining completion and the smaller amounts due to lower metal prices.

In 2016 Pan American expects to invest $7 million to complete approximately 91 kilometers of diamond drilling at six of its operating mines. In addition, the company also plans to spend $2 million on [indiscernible] sales exploration activities. Once again our strong core assets are proven their exploration potential and our high grade assets such as La Colorada, San Vicente, Manantial Espejo shown that important reserve replacement and additions are possible in the declining metal price environment.

We have one of the largest reserve and resources in the silver sector and have no doubt that we will continue to deliver good exploration results in 2016 from our quality asset base. Pan American continues to aggressively explore and review ore deposits and good silver opportunities in the Americas. As part of this ongoing work commitment Pan American has signed the option with Kootenay Silver on the Promontorio mineral belts. The deal is an option earn in with $8 million cash payment U.S. dollars and $8 million in expression investment of four years, plus a product placement in CAD2 million subscribing for 4 million share or roughly 10.3% of the undiluted share of Kootenay Silver.

The Promontorio mineral belt has two silver discoveries in a perspective trend, Promontorio’s team hosted silver polymetallic system which is low grade and would likely require higher prices or better grades to move forward. However, La Negra deposit sits close to this surface and shows high grade intersect within a hydrothermal [indiscernible] and low sulphidation overprint. Kootenay has done a great job in drilling in La Negra and I would just like to mention a few of drills results which has delighted led us to where we are today.

November 26, 2015 press release from Kootenay, we are drilling LN1314 hit 114 meters from surface of 61 grams silver, LN 2114 showed an average silver grade of 156 grams per tonne, over 200 meters from surface. Press release May 20, 2015 gave result such as LN3015 with 120 grams per tonne over 60 meters from surface. All right it is going forward we will need to define a resource at La Negra, while exploring in the surrounding line packages and further mineralization. Post discoveries for [indiscernible] expression potential and a large prolific land package. This is a perfect entry point for us into an advance expression plain.

Back to Mike.

Michael Steinmann

Thank you Chris. So let's quickly review our plans for 2016. As Steve mentioned, we plan to produce between 24 million and 25 million ounces of silver, slightly below our 2015 production. As we are heading into an important construction year for our two expansion projects, we expect to produce 175,000 to 185,000 ounces of gold basically in line with a 2015 gold production. And we think we will be able to do this for a cash cost of $9.45 to $10.45 per ounce net of by-product credits.

Perhaps most importantly we are forecasting a further 9% drop in our all-in sustaining costs in 2016 to between $13.60 to $14.90 per ounce, which is a function of lower sustaining capital and slightly lower operating and expression expanses, but it doesn’t stop there. Taking the transformational nature of the company's mine expansion at La Colorada and Dolores, we publish for three-year production and cash cost forecast in mid January.

The slide we should be looking at now with a graphic representation of our production and cash cost for 2014 and 2016 and three-year forecast until 2018. While our production indicated in gray color, got reduced slightly during the intense construction period in 2016 and 2017, we expect it to increase to somewhere between 25 million and 27 million ounces by 2018.

But more importantly our consolidated cash cost showed in green most probably decline during the next three-years and should reach a level between $5.50 and $7.50 per ounce by 2018. Thanks to increase efficiencies and additional low cost productions from La Colorada and Dolores. This is an impressive graph showing the importance and transformational nature of our expansion projects and highlights the strength and potential of our current mine portfolio.

Before we move on to the question-and-answer session of our call, I would like briefly review the highlights of our 2015 performance. We produced not only new records for both silver and gold, but also for copper and lead. We substantially reduced our cash cost to $9.70 per ounce for silver. We discovered over 22 million ounces of new silver proven and probable reserves not enough to overcome our annual depreciation and reclassification of some of our reserves to resources due to lower metal price assumption, but an excellent result on a significantly reduced budget.

Our expansion project with La Colorada and Dolores which we are able to fully fund from our cash on hand are advancing nicely and will provide significant cost reductions and additional silver production over the coming years. Lastly as I mentioned, we decided to reduce the dividend to $0.1.25 cents per share per quarter in response to current market conditions and to M&A opportunities which are emerging. By the way, the dividend will be payable on or about Friday, March 11 as indicated in press release.

Under these circumstances it makes perfect sense to preserve our cash to be able and to add meaningful projects to our development pipeline. The recently announced option deal with Kootenay Silver is a prime example for projects, which could potentially add meaningful resources to Pan American Silver in one of our preferred jurisdictions.

We have seen a nice price recovery in gold and silver over the last couple of weeks, but I would not be surprised to see further price volatility during 2016. In anticipation of this, we formulated our 2016 plans using the price of $14.50 per ounce of silver and $1,100 per ounce of gold, this today seems reasonable.

I am confident that with our experience, flexibility, financial strength and outstanding team, we will continue to weather this currently challenging time now successfully expanding two of our most important operations, positioning ourselves to handsomely reward our shareholders even more when metal prices inevitably improve.

And with that operator, I would like to move on to the question-and-answering session.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session [Operator Instructions] The first question comes from Chris Terry of Deutsche Bank. Please go ahead.

Chris Terry

So well done on a good production year in 2015, I just got a couple of questions. Starting with the CapEx outline so your two growth projects. How much of that I guess is booked at this point looking forward and how much is still variable to some extent we’re saying with a number of other companies they are able to reduce the CapEx in the current climate. So I'm just wondering whether there is any downside to the current estimates.

Steven Busby

Chris this is Steve, thanks for the question. Our current commitments at the end of 2015 for La Colorada was on the neighborhood of about $94 million which is out of the $132 million that we had for the full project to give you a feel for that. The commitment at Dolores is much smaller on a ratio basis I don’t have that number handy for me, but it's much smaller at the end of the year.

Chris Terry

Okay, no problem.

Steven Busby

Maybe on the order of about $10 million you know.

Chris Terry

And then just on the operating cost, you obviously had a good year in 2015 stepping down from 2014 with some tailwinds from currencies, et cetera. Looking into 2016 I'm just looking at some of the assumptions you’ve got on the currency side in particular. I appreciate your by-product credits are going to be down a bit given the pull back in copper and zinc et cetera. But is the 2016 forecast are they on the conservative side they look to be from what I'm saying in the presentation I guess on the Slide 30?

Steven Busby

To a certain degree you’re probably right on the exchange rates for the currencies. For example we use the 2017 exchange rate in Mexico for the currency it's trading much higher much lower value than that now, so that’s definitely a tailwind. Likewise in Argentina as you probably are aware they had a pretty dramatic evaluation on that currency.

We did anticipate a devaluation in our budget but this is in exceeding of what we had anticipated. As of this date we’ll have to see how things shake out over the next few months. But there are some tailwinds that we have there that are probably suggesting some better cost than what we had guided, but we’ll have to see how the year plays out.

Chris Terry

And then just the last one on Argentina specifically give you’ve got some exposure there. How are you viewing that country now that there has been some changes in the leadership and also the tax target in the last couple of months?

Michael Steinmann

Lots of changes Chris, its Michael. Look we have been watching the changes there obviously very carefully, very closely what happened and what has been introduce newly by the federal government in Argentina, especially also as a foreign investor, we are interested in that and I’ll say we are very pleased with the steps that we have seen so far, which I believe make Argentina globally much more competitive and attractive place to perform investments.

So you mentioned a few of the cost saving or cuts that - for us cost save initiatives and cuts that the government undertook they obviously impact Manantial Espejo, you mentioned some taxes that have been cut. Steve mentioned to devolution of the peso we have been hit on the cost Manantial Espejo in the last few years very heavily by inflation, taxes and import restrictions just to mention a few.

They have been remove, but there will for sure be some positive impact on the Manantial Espejo cost, it just happened a few weeks ago as you know, so I don’t have final details yet on how much that impact will be but for sure we will share that with you in our Q1 results.

Chris Terry

Thanks very much.

Operator

The next question comes from Bill Fleckenstein of Fleckenstein Capital. Please go ahead.

Bill Fleckenstein

Thank you. Michael I was just curious on the Argentina topic, does the regime change there, change the dynamics going forward about [indiscernible].

Michael Steinmann

Bill, we are obviously looking at that very closely as well we know that our biggest silver project that we have in our pipeline. There is more to that that has to be changed and on the taxes, and import restrictions and devaluation et cetera that I mention. As you know it's located in the Shaboot province, there is no clear way at the moments forward to that.

We are very respectful obviously up to legal process that has to go on in Shaboot. And we recognize that there has to be a change in the mining law, before we can advance now with that. But what I see so far in our Argentina from the federal government, the changes we have experienced are defiantly going in the right direction.

Bill Fleckenstein

Thank you.

Operator

The next question comes from [Larson Winder] (Ph) of Bank of America Merrill Lynch. Please go ahead.

Unidentified Analyst

To first of, I guess for what it’s worth. I think the cut with the dividend obviously was not an easy decision is all, but I feel one defiantly commence to move, I think it was the right move. And in that vein, I guess my question would be when you are debiting this did you consider just completely eliminating the dividend all together?

Michael Steinmann

As we indicated before in many occasions, the decision to pay dividend which started in Q1 of 2010, the Board made a decision to stop paying dividends was very long-term decision and I think we rewarded our shareholders with a substantial dividend during the high time of the metal price and it's backing out to the same level than when we started at $0.0125 per share.

So it's quite a low dividend right now, but we are still paying a dividend, I think it's not a big impact to our cash holding at this levels and allow us - just have to move forward maybe with the few other projects, to add the few other projects to our pipeline. So as said the Board sees the dividend as a long-term decision and that was the reason why a smaller dividend has been maintained.

Unidentified Analyst

Okay that’s very fair, thank you for the explanation. And then also curious on the depreciation, in light of the impairments at Morococha, Dolores and Alamo Dorado, does that in any way impact where you think depreciation maybe going in 2016 vis-à-vis 2015? In terms of that sort of absolute numbers.

Robert Doyle

Larson yes, Rob Doyle here. Absolutely we would see the offset of the impairment charge in 2015 with lot of depreciation rates in 2016 certainly at Morococha and Manantial Espejo the impairment at Dolores and [indiscernible] were very modest in the month. So no real change to that expectation rates, but certainly improve and in Argentina we would see those go down and especially given the relatively short nature life of Manantial Espejo we should see quite a significant drop there in depletion rates.

Unidentified Analyst

So in terms of overall depreciation, I guess what you’re saying is you would see it going down but can you give any guidance in terms of the magnitude of the change at least?

Robert Doyle

I don’t have any calculations in front of me to be honest, happy to do some back of the envelope after the call, if you like to give me a shot we can work through it. But I would expect it should be a fairly simple calculation, at the end of the day we try to deplete the carrying value effectively to there by the end of the life, the impairment at Morococha will have a significant change in that depletion rate probably in the order of 60% or 70% reduction to the depletion rate going forward.

Unidentified Analyst

I know traditionally you guys don’t provide any sort of quarterly guidance, but is there anything you might want to feel comfortable adding in terms of the seasonality of your operating outlook for 2016?

Robert Doyle

We don’t typically have seasonal impact to our operational performance. There are always the timing of concentrate shipments is probably the biggest thing that we grapple with around period ends particularly out of Bolivian mine where we have very high value shipments, because of the high grade nature of the silver concentrate. So depending on the timing of shipments can impact revenue recognition and therefore the financial performance of a particular period, but smoothes out certainly over number of periods that tends to smooth out and we don’t have any particular seasonal impact to be considered.

Steven Busby

Yes, Larsen from the production side, typically we don’t have variability quarter-to-quarter when you look back through our history depending our mine sequencing, our mines particularly mines like Manantial and Dolores come to mind because the high grade nature of those mines are segregated into pretty discrete areas. So as our mine develops we move in and out of those kind of areas. With all that said, I think generally speaking we don’t see 2016 to be quite as bumpy of a ride as we’ve seen in years past, there will be some bumps, we will be in and out of some high grade particularly at Dolores. But it won’t near to the degree we probably seen in years past.

Unidentified Analyst

OKAY that’s great, thank you both. That was extremely helpful. I'll leave it there and let somebody else have a chance to ask some questions. Thank you.

Operator

[Operator Instructions] The next question comes from Lucas Pipes of FBR & Co. Please go ahead.

Lucas Pipes

Good morning everybody and great job income the presentation, very helpful. Appreciate all the detail and good job operationally as well. I wanted to hone in a little bit on the M&A side, it sounded like there were more opportunities now than what you’ve articulated in the past. Could you give us a flavor for geography, size, how it should fit in with the rest of your portfolio any additional color would be appreciated.

Christopher Emerson

Lucas honestly I can’t give you too many details on that but geography wise, where we are working, we are in the countries where there is the silver, so we are silver miner and that’s where we are going and looking for deposits, so it's Mexico, Argentina, Bolivia, Peru for us. Preferably as large as possible and as close to our current operations as possible to make it short that makes obviously deposits much more attractive and if it’s close to one of our operations, it can be quite a bit smaller and still potentially economic for us. If it's further rate has to be much bigger, but I am always interested in large additions as well.

I think the changes we have seen over the last two, three-years is really that there are few very interesting earlier stage projects that we identified. And there is changed their valuation quite a bit in the last few years and as you know capital is very scarce for early stage expression companies. And in combination with being in Mexico and if you go back to the Kootenay deal and being relatively close to our operations there that addition fit very well to us for our M&A activity. But I think we will leave it there pretty general, I can’t give you much more detail on it.

Lucas Pipes

No that’s already helpful, appreciate that. And then in this contacts when you think about kind of in house exploration versus M&A, clear favor of one or the other in this market, is that a good interpretation?

Michael Steinmann

We are very active, as Chris explained, we always in our brown field expression. This is one of the most important pillar for us to add variety and expand and continue our operations. The expansions that we are looking at building right now are direct results of our brown field expression activities, so this huge addition of variety here especially La Colorada with the big mines that we have there over a last I would say six to eight-years. So that will always continue on the brown field side. On the green field side, as I said we have a quite a large portfolio of land package in most of the countries that we are currently or always looking at. Plus additions like Kootenay and so that’s what I count as the green field side of our expressions, which always has obviously a space in our exploration program was low.

Lucas Pipes

Great, thank you for that. And then maybe one last question. Rob, just in terms of FX there has been an a lot of volatility in the market could you give us sense for sensitivity kind of color, 10% change in the peso exchange rate, what should we be thinking about in terms of magnitude on the foreign exchange guide?

Robert Doyle

Well I think from a cost point of view, for sure the two currencies that we have the largest exposure to would be the Mexican peso and the Peruvian sol. So 10% move in mix would equate to about a $2 million change in our net cash flow is the way that we calculated it. So I don’t have that on a per ounce basis, but you could probably work the math backwards and figure out what that might mean from a cash cost point of view. So 10% on the mix would be about $2 million change in our net cash flows and the mix is -- sorry the Peruvian sol is a little bit less and that its probably about 70% of that impact.

Lucas Pipes

Perfect, great well I appreciate it and good luck in 2016.

Robert Doyle

Thanks.

Operator

This concludes the question-and-answer session. I would now like to turn the conference back over to Michael Steinmann for any closing remarks.

Michael Steinmann

Thank you operator and thank you very much for everybody sitting through the call here. I'm looking forward to serve with you in May our Q1 2016 results and give an update on our development projects at that time. Have a pleasant day.

Operator

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

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