Pan American Silver Corp. (PAAS.TO) Q4 2017 Earnings Call Transcript
Published at 2018-02-16 15:45:11
Peter Marrone - Chairman and CEO Daniel Racine - EVP and COO William Wulftange - SVP, Exploration Business and Management Henry Marsden - SVP, Exploration Jason LeBlanc - SVP, Finance and CFO Gerardo Fernandez - SVP of Southern Operations
Dan Rollins - RBC Capital Markets David Hudson - CIBC Steven Butler - JMP Securities Anita Soni - Credit Suisse Josh Wolfson - Desjardins
All participants please standby, your conference is ready to begin. Thank you all for joining us this morning. Before I turn the call over I need to advise that certain statements made during this call today may contain forward-looking information, and actual results could differ from the conclusions or projections in that forward-looking information, which include, but are not limited to statements with respect to the estimation of mineral reserves and resources, the timing and amount of estimated future production, cost of production, capital expenditures, future metal prices, and the cost and timing of the development of new projects. For a complete discussion of the risks, uncertainties, and factors which may lead to actual financial results and performance being different from the estimates contained in the forward-looking statements. Please refer to Yamana's press release issued yesterday announcing Fourth Quarter and Year-End 2017 Results, as well as the Management's Discussion and Analysis for the same period and other regulatory filings in Canada and the United States. I would like to remind everyone that this conference call is being recorded and will be available for replay today at 12 O'clock PM Eastern Time. Replay information and the presentation slides accompanying this conference call and webcast are available on Yamana's website at yamana.com. I'll now turn the call over to Mr. Peter Marrone, Chairman and CEO.
Thank you very much, ladies and gentleman, good morning. I would like to mention that with me here today is Daniel Racine, our Chief Operations Officer; we have also Jason LeBlanc, Senior Vice President of Finance and Chief Financial Officer; William Wulftange is here along with Henry Marsden. Henry is a successor to Butch, who is retiring from the company Henry has been with the company for now more than a year. And it was part of an orderly succession, we thank Butch for his service at the company and we thank Henry for having stepped into the large shoes that need to be filled with Butch. We hope this is perceived as an orderly transition and when it comes time to discuss our reserves and resources and exploration opportunities and there are several of those we will bifurcate the discussion between Butch on what has happen today and what Henry plans to do going forward. We also have our operational management here, Yohann Bouchard and Gerardo Fernandez who report to Daniel, so that to the extent that are any questions or comments they can help you with any answers to those questions. We've already reported on this, but let me highlight, that our gold, silver and copper production met or exceeded our expectations. We increased our gold guidance, a couple of tones last year, silver guidance once copper as well. We exceeded not only our guidance, several tones for gold and for silver and copper, but we also exceeded our budget expectations. We've said before in prior calls that we risk adjust our budget to determine what we think is a reasonable estimate of production for guidance and I'm very happy to report that last year we produced level of metals that was not only in excess of our revised and improved guidance, but also in excess of our budgets. If you move to slide five of this presentation, I want to highlight a few points. Clearly we've talk about the increases in production and meeting or exceeding guidance, we did that across but rather better than guidance we - you see here the operational and financial achievements of the company clearly an important one is Cerro Moro and that's advancing very well to start up in the next several months. I want to highlight a couple of points on the financial flexibility, financial achievements and balance sheet improvements. The $300 million deal that we did at the end of last year, the senior note deal enhances our financial flexibility and ensures cash flows and free cash flows in the next several years are available for purposes other than debt repayment. And that's important from a shareholder perspective and from an overall financial health point of view for a company. The copper prepay of $125 million that was done post the year-end, but is significant and was planned and worked on during the course of 2017. This is a balance sheet friendly structure; the balance cash flows improve our financial leverage over the course of 2018. We show here that we raised more proceeds through the sale of some of our investment in Brio. We had always wanted to be below 50%, we are very happy to report that this morning Brio, and Brio Gold announced a consensual deal. As a result of that transaction we will no longer have to consolidate our operations and financial disclosure will be significantly simplified, we will hold in the range of 22% of the shares of the combined company. And we will maintain a significant interest in a high quality company, our investment in Brio got much better with a critical mass size and scale that has been created or will be created as a result of this transaction. On the strategic side, we've discussed before the rightsizing of operations for the purposes of optimizing not only production, but also cash flows and free cash flows that may not be immediate, but over the course of time the rightsizing of the portfolio. Let me highlight that in addition to all of the things that you see on this page of the strategic developments, one important one is the exploration successes. As we've said before we adopt a rolling approach to reserving and resource increases, exploration successes ultimately must lead to resource and reserve increases. We have applied a more stringent criteria last year to estimate reserves and resources to increase their reliability. This year we expect to reap many of the benefits of those exploration discoveries that were made over the course of 2017 that were matured in 2017 toward resources and reserves improvements. Our reserve mine life has increased in the last several years and were poised for more improvements. If we move to some of the strategic objectives, for 2018 clearly be moved one of a critical one is the ramp up and the startup of Cerro Moro. We expect to deliver a significant change in free cash flows that will begin with the completion of the ramp up of Cerro Moro. So for the second half of 2018 and more significantly in 2019 and 2020, we are advancing and continue to advance several studies relating to a range of opportunities at Chapada. Chapada started with a 17 year mine life in 2007, it continues to have more than 15 year mine life in 2017-2018 and we have new discoveries that are now being matured down the path toward ultimately determining what is the true potential of that Chapada complex, these include Suruca on the oxides and the sulfides, Sucupira which is at the pit perimeter along with Baru and we're also looking at a plant expansion that would increase copper production and maintain or improve gold production as well. On the mineral reserve front, I touched on that a few moments ago we expect to see increases coming over the course of this year and into the next several years and Butch and Henry will provide us with the details on that. Now one of the things that is important on the changing philosophy of this company as you see on this slide of the presentation is that we're placing more emphasis on the maximization of cash returns on invested capital. We recognized that we have a disproportionate portion of our portfolio in non-producing assets and this has the effect of reducing our cash flows and free cash flows returns. Our intention this year is to improve on those returns and that would require us to look at portfolio rationalization and also looking at what are the strategic alternatives for some of the assets that are presently non-cash flow generating. In some cases we may bring those to cash flow generating, we may deliver production plans and others will look at other strategic alternatives. And in the end that will provide for further and continuing balance sheet improvements as well. As you see in our production guidance, we're showing production guidance in two ways. One is with gold production and silver production and of course copper, and also on a gold equivalence basis. So gold production is expected to increase by just over 5.6% in the next several years to 970,000 ounces and we're not including Gualcamayo in this as we've designated that as an asset held for sale. Silver production will increase a whopping 37%, and so we see that very significant production both for both of our precious metals. And copper, will stay comparatively flat at about 120 million pounds per year. That silver production is very significant. Now I recognize that we've reduced our 2019 silver forecast, we plan to more gradually increase silver production so as to reduce development costs and the risks of development that are associated with any asset. And that leads to be an emphasis on cash flows. Our production guidance then on a gold equivalency basis is expected to go from 892,000 ounces last year to over 1 million ounces this year and increasing to 1.15 million ounces by 2020. Significantly if we apply copper as a credit, we are able to do that at a byproduct cash cost per unit produced of under $480 per ounce and an all-in sustaining cost basis of below $750 per ounce. And with that ladies and gentlemen as an introduction, let me pass it to Daniel on our operations.
Thank you, Peter. Good morning everyone. We continue the trend of strong performance in the fourth quarter of 2017. We produced 259,000 ounces of gold, 1.2 million ounces of silver and 34.7 million pounds of copper. We were able to deliver fourth quarter production at the byproduct all-in sustaining cost of $829 per ounces of gold and $800 per ounces of silver. As Peter mentioned, our full year co-product cash costs and co-product all-in cash sustaining cost were in line with expectation for all metals. On the byproduct basis, full year gold production was delivered a cash cost of an all and sustaining costs per ounces at $561 and $820 respectively. Looking forward, we see increasing gold and silver production in 2018 as Cerro Moro comes into production. We expect to produce 900,000 ounces of gold, 8.15 million ounces of silver and 120 million pounds of copper. Overall, the approach and parameter used for budgeting are consistent with those used in 2017. As Peter highlight we also provide geo guidance to help give us a better senses of the size of production platform. If we look on the gold equivalent basis, we are guiding approximately 1 million ounces for 2018. Total gold production is 10,000 ounces above the sum of the mine-by-mine expectation. As we have not allocated these ounces to specific mine at this time. For our existing mine, we expect to continue the established trends of delivering stronger production in the second half of the year compared to the first half of the year. Going back to 2010, we had seen a first half to second half split of 46% to 54%. In 2018 we expect approximately 47% of the gold production and 46% of the total copper production to be delivered in the first half. For Cerro Moro, we expect approximately 25% to 30% of gold mined in the first quarter of 2018 - first half of 2018. It's important to note that the guidance of 900,000 ounces excludes Gualcamayo. At Gualcamayo we're expecting approximately 110,000 ounces of gold in 2018. Looking at 2018, gold and silver costs we are expecting to deliver at a lower and all-in sustaining cost per ounce compared to 2017. Certainly the addition of Cerro Moro and its low cost structure is the main driver for cost decreases. We will also continue to pursue productivity and cost containment efforts across our existing operations. However, local currency appreciation compared to the U.S. dollar and raising input price are expected to impact our cost in the year, partially offsetting the planned reduction in total cost per ounce. That being said, we still expect to deliver precious metal production at an impressive byproduct all-in sustaining cost between $725 and $745 per ounces of gold and a $10.50 and $10.80 per ounces of silver. If we go to the operation, higher development in the second half of 2017 provide a support for 2018 production expectation. I would like to provide some commentary of the outlook for each of the operation. At Chapada we continue to have significant opportunities available to us. The cleaner circuit expansion that we commissioned in 2017 is supporting higher recoveries and we expect the positive impact to continue in 2018. We will continue looking at other initiative to further enhance recoveries. We are also looking at opportunities for planned throughput increases and the broader Suruca complex. At the time we are evaluating plans for Suruca and Sucupira and Baru, which are immediately adjacent to the existing pit, and the potential to bring forward production from these deposits. As part of this evaluation we're looking at opportunities to expand the mill capacity to treat ore from Sucupira and Baru and potentially low grade ore stockpile, which are expect to grow by 15 million tons in 2018. We continue to advance development effort at the Suruca oxide project, while considering recent drill result from Suruca Southwest and Suruca Sulphide, which is located beneath the existing oxide deposit. At this point we're assessing a broader Suruca complex. We expect to be in a position to provide additional detail on the range of development opportunities and related plan for Chapada in the second quarter. In 2018 we expect similar seasonality at what we've seen in the past from Chapada, so about 44% of gold production and 46% of copper production is expected in the first half. At El Peñón we expect continuing strong performance, in 2018 we expect the operation to continue delivering based on the successful right sizing we completed in 2017. This is allowing us to more efficiently mine our ore range. The increased development we completed in the second half of 2017 provide support for the 2018 production. On the cost side we are going to continue targeting productivity improvement and containment initiatives, such as internalizing mine development and ore outage. Exploration remains a significant focus for El Peñón and we will advance our plan in the core mine industry, while we look to develop new targets. The right sizing has been a success and we're maintaining a three year production guidance of approximately 145,000 of gold per year and all-in-sustaining cost below $950 per ounce. Canadian Malartic delivered record annual production in 2017 and we expect to exceed that in 2018. The expansion project formally Barnett is advancing according to plan and we expect to spend approximately $37 million on expansionary CapEx on this project in 2018. Additional CapEx is expected at Odyssey and East Malartic including developing and exploration around to access certain zone of Odyssey. I would to clarify one point of our planned production growth at Canadian Malartic. Barnett is expected to contribute some production late in 2019, but doesn't ramp up until 2020 and 2021. In the meantime increased production is a result of higher grade out of the main pit. At Jacobina we're continuing to see the benefit of change we made to the mining method and order effort related to cost containing and improving productivity. We continue to have about 8 to 10 months of inventory develop underground and we have added flexibility with a surface stockpile of about 50,000 tons. 2018 guidance reflect the 2017 run rate and position the operation well as we continue to target the strategic objective of 150,000 ounces per year. At Minera Florida we're advancing the transformational strategy we begun last year. We are projecting lower sustaining capital and exploration expenditure in 2018 as previously planned expenditure are expected to be spread across a number of years. We are expecting lower production in the intermediate terms, while production is expected to increase to 120,000 ounces of gold by year 2021. We will be spending 18 million of expansionary CapEx in 2018, which will support the completion of the land acquisition, we previously entered into as well as mine development in new ground including in the Hornitos and Pataguas tunnel. The longer-term strategic production objective at Minera Florida remains 130,000 ounces of gold per year. Last but not least is Cerro Moro, we advance the project according to plan in 2017 and it remains on schedule as we began mill commissioning this quarter. We then expect the ramp up operation to commercial production in the second quarter. This year we are expecting 85,000 ounces of gold and 3.75 million ounces of silver. The relatively lighter silver production is a result of our effort to optimize mine sequencing and deliver the optimal mix of gold and silver production. We are now expecting a higher proportion of production to come from gold dominant stope, which will provide additional flexibility to maximize gold production. There is about $61 million in construction CapEx expected this year as we finished our development and we currently plan to spend $9 million on exploration as we look to increase the value of this project by achieving our target of adding 1 million ounces of resources in the coming years. As you can see in the top right, this is expected to be a low cost operation with an all-in sustaining costs of approximately $650 per ounces of gold and $915 per ounces of silver. We are excited to bring Cerro Moro online, and it will be a significant contributor to our cash flow starting in the second half of this year, but more meaningfully in 2018. Thank you and I will now turn the call to William and Henry to discuss our resources estimate and exploration.
Thank you, Daniel and good morning, everyone. This first slide, the pics of mineral reserves and mineral resources as a comparison of 2017 numbers to 2016 gold category totaled in bar graph format with copper and silver totals listed below. In the 2017 bar graphic you can see the movement of inferred mineral resources into the measured and indicated resources in preparation for reserve placement into reserve categories. It is important to note that economic mining criteria, such as top cups and minimum risks have the rigorously applied to all of the resources at all the mines and all the mines are using a mine stope optimizer program for the reserves. Also not all the 2017 exploration successes are reflected in these totals. Yamana is evaluating results from Suruca Southwest at Chapada for categorization into mineral resources and mineral reserves and the drilling results at the Veronica vein in Cerro Moro continued into December - continue to be received into December. So the results there were received too late to be included in the reserve and resource tables. Next slide please. So what did we accomplish in 2017, Chapada we saw reserve growth with significant additions to resources at Suruca Southwest and expect to have more there. Canadian Malartic we added 1.2 million ounces growth and inferred mineral resources at East Malartic with additions to inferred mineral resources at Odyssey as well. At El Peñón we place production - we replace production and applied the mine stope optimizer to all structures to come up with the new mineral reserve numbers. At Cerro Moro we discovered the 1.5 km Veronica structure adjacent to existing infrastructure, so this should most likely be placed into reserves in the coming year. At Jacobina we replace production and saw a strong increase in mineral measured and indicated mineral resources. At Minera Florida we replace production and grew reserves with a very strong growth and measured indicated mineral resources. So in all 2017 was a very strong year for Yamana exploration and the results will provide a good foundation for work in 2018. I will now turn to presentation over to the new SVP of Exploration Henry Marsden.
Thank you, Butch. 2018 exploration program is fairly straight forward, we will continue to build on the successes of 2017. All of the programs at the mine sites are design to meet our life of mine plan, so will be designed to replace production replace reserves. And also to replace depletion and conversation in our resource category. The only variance really from that program this year we have two projects Chapada and Jacobina in which we have very long-term reserves. And the focus in 2018 will not be on replacing those reserves as much as increasing grade and the quality of the overall mineral resources. We also have a large discretionary budget available to us in 2018 this will give us great flexibility to follow-up and improve on programs and hopefully further increase resources in projects like Cerro Moro.
Thank you, Henry. Turning now to our financial performance, we delivered $1.8 billion of revenue in 2017, this is up slightly over last year on higher copper sales quantities and higher metal prices. Net loss attributable to Yamana shareholders for the year was $194 million or $0.21 per share, the loss was impacted by a non-cash impairment of Gualcamayo and related Argentinean exploration assets. This was partially offset by an income tax recovery related to a tax rate change in Argentina. These items are included among other adjusting items totaling $0.28 per share to attributable earnings during 2017. Cash flow before taxes and working capital changes was $594 million for the year. Looking close to our cash flows we saw the generation of free cash flow increase over the course of the year in line with the seasonality of our gold and copper production. We generated approximately $107 million of free cash during Q4 and $252 million over the year. With the completion of construction instead of our Cerro Moro this year we expect our overall net free cash flow to increase given the step change contribution from our newest operation. In anticipation of the construction wrap up at Cerro Moro, we had put in place commodity price protection for both copper and gold to ensure we will generate steady cash flows during this important time when we are investing more highly in our growth. Combined with the steady performance of our operations during 2017 you can see that this consistency of our traditional H1, H2 annual slips in cash flow generation held up during the year. We have as previously mentioned price protection in place through the startup of Cerro Moro. With the step change in cash flow generation from Cerro Moro we transition from an investment cycle to a cash flow harvesting cycle beginning this year or more pronounced in the 2019. During 2018 we will see our traditional weighting up production cash flows slightly more geared to the second half of the year because of the timing and startup at Cerro Moro during Q2. Recently, we have taken several steps to improve our balance sheet and financial flexibility and better balance our cash flows. A copper advanced sales program was completed in January that aim to better balance our cash flows during the final spending on Cerro Moro in the first half of 2018. Also during Q4 last year we issued $300 million of new bonds at attractive rates in anticipation of $110 million of debt maturity this year during Q1 and Q2. In January this year we also completed the early redemption of $181 million of debt originally due in December 2019. We have now extended our debt maturity profile and improve flexibility as no further debt maturities are due until 2020. This quarter we will also close on the sale of our jointly owned exploration properties of Canadian Malartic Corporation for $162.5 million in cash. With these efforts we will continue to improve our balance sheet and progress towards our leverage objects. New contributions from Cerro Moro among other mines at a time when our overall expansionary capital will be decreasing will further support these objectives. I'd also like to cover off some other guidance items. We expect sustaining capital to total $170 million a little higher than last year with the addition of Cerro Moro. A large portion of our expansionary capital budget $61 million and $37 million respectively relate to Cerro Moro and the Canadian Malartic expansion project. We also have expansionary capital being invested at both Jacobina and Florida in anticipation of higher production levels at both those operations in coming years. Capitalized interest of about $10 million is also included in the total expansionary number. With the startup of production at Cerro Moro DD&A will be higher year-over-year at around $450 million. Over our guidance period, we expect steady annual growth in our GEO production first from our newest line Cerro Moro, but also from contributions at Malartic, Jacobina and Minera Florida. Silver production is growing more significantly from Cerro Moro and also drives the GEO increases. We'll produce this at very favorable cost and especially when considering the benefit we get from byproduct copper credits at Chapada. All this leads to improving margins and cash flows and with a drop in expansionary capital growing cash balances. And now with some last thoughts and takeaways. First, I think it's clear that Yamana has a substantive and growing precious metals production platforms, Cerro Moro is a large part of that growth, but we also have other important contributors. On this base and with costs and margin improvements we will be increasing our cash flow and free cash flow generation. And lastly, will be generating this net free cash flow at a disproportionate rate to our current market capitalization, we think that's a compelling value proposition. With that, I'll now turn the call back over to Peter.
Jason, thank you very much. So ladies and gentlemen, that's our formal presentation, and if we can open the call up to questions.
Certainly, thank you. We will now take questions from the telephone lines. [Operator Instructions] The first question is from Dan Rollins with RBC Capital Markets. Please go ahead.
Yes, thanks very much. Peter and team I have just a few questions here and maybe just to start off on Cerro Moro, just looking for a little bit more color on how the mine sequencing has changed, looks like the gold equivalent production for 2018 is down by about 5,000 ounces, but seems to be a bit heavier drop in 2019 with only 6 million ounces of silver versus I think 9.9 million you are looking for last year. What's changed with the mine frequency and how should we envision this sort of steady state throughput what is the top out versus prior expectations goes? The 2019 level seems to be a significant haircut relative to previous estimates?
Good morning, Dan. This is Gerardo Fernandez. Well the sequence changing in the priority for cash flow and the previous plan did maximize silver and brought in two mines that were rich in silver early on in the development of the project. After review of the plans and after drilling we concluded an order [ph] deal with the execution of the project and also to maximize the cash flow generation in the first three years. And also by seeing their resource and exploration it was worthwhile to delay those two mines, wait for the result of exploration, for instance they only gather [indiscernible] gold high grade that doesn't require the development with two more ramps and it can be quicker and I would say less capital intensive in the next two years proposition for the life of mine. It's not included in the plan yet because we just discovered it. We're drilling it and we need to develop and most likely will be an open pit high grade mine that will replace in the position the two silver rich mines that were in the plan. So always strategic objective for Cerro Moro is to get a stable platform and cause cash flow and production. Gold, we are trying to keep as fixed at 130,000 ounces per year and silver will float a little bit. That float it will be between 6 million and 8.5 million to 9 million ounces depending on the grade and the contribution of the mill.
Okay. So, take it basically what you are doing is you are going to right size this project to start off with instead of looking to right size it down the road given the best things you have alluded opening on some of the other assets. So it's really more of the stable asset going forward, which allows you more time for exploration success. Is that how we should read into it?
Yes, and also we're taking a look at what we can do in terms of optimizing the cash flow generation first year. I think you guys are aware that Cerro Moro is an open pit and an underground mine open pit is something unique or mining metal very well known in that area in Argentina, Santa Cruz successful mines are in the area with a lot of knowledge underground requires more training ramp up. So we are establishing a strategy, we rely more on open pit in the first couple of years. So with the risk to execution of the project we build our strength for underground development of mining based on our experience in Gualcamayo and Peñón, but with a lower risk profile. So we don't have to rely on high graded slopes with a rich field there at the beginning. We build that capability we're not betting on having contractor for underground we develop our own gold coast we're doing that, we started doing that two years ago. And that we think is the best proposition in terms of cash flow generation for the near and long-term.
Okay, perfect. And then Peter maybe you can touch based on Gualcamayo now it's an asset held for sale won't be in the guidance, but what is the current sales process look like, how far are we down the road when do you expect to have an announcement on the divestment of that asset?
Well under accountancy principles and Jason can speak to this better than I can, but under accountancy principles an asset is held for sale for a year. We believe that within that period of time we will execute on a transaction relating to the sale of Gualcamayo. The best I can say at this point Dan is that you should anticipate that over the course of this year that's where we will be.
Okay, very good. And then maybe Butch you can just comment I noticed that the gold price assumptions used in reserves were up a little bit at some of the mines, just provide a little bit of clarity on what the rationale behind that was?
It's just to help better identify and confine the mineral resources that we have at the mines.
Okay, perfect. Thanks very much.
Dan the line went funny a little bit. So I hope that we heard the question correctly, but if you're referring to our resources and reserves estimations we're applying more stringent criteria minimum widths on reserve estimation even in our inferred resources for example at Jacobina we're now applying economic parameters. So I think this is an important point that isn't to say that the resources aren't there. We're just saying we're reclassifying them at least for now so that we can do more drilling, better assess the economic criteria as we're mining it, for example, Canavieiras South and Canavieiras central. We will have a better sense of what to expect and that will give us a better impression of what should be classified as resources inferred to start and then coming into proving a probable reserves. Those more stringent criteria have been applied across all of our operations, so in some respects if I then take it to El Peñón it is a bit comparison of apple to oranges to say what was our reserve estimates at the end of 2016 to the reserve estimate at the end of 2017 because we have applied these more stringent criteria. And we also have because of the width of the veins in applying those criteria we have reclassified some of the areas that were considered to be reserves to reflect what we can actually mine and that number has come down. So interestingly internally if we said for a moment this regard at the end of '16 and look at what we did in February of '17 with a new mine plan. Throughout the course of 2017 we actually saw an increase in reserves what we saw internally, what we saw at the end of the year. And so that's what I believe is giving Bouchard and Henry the confidence that approach will give us increasing numbers into 2018
Okay. So this continue the moves from last year to sort of reset the bar and allow you to basically add more stability production going forward and convert resources into reserves with a lot more confidence.
Correct. And again without mentioning this point I think it's an important point to address. By applying those more stringent criteria we also are in a better position to plan our production. And as you know it is a stated objective of this company it was through last year and through this year that we want to be mining our reserves. So that creates more certainty in terms of what to expect from our production platform on a year-to-year basis.
Great, thank you very much. Appreciate it.
Thank you. The following question is from David Hudson of CIBC. Please go ahead.
Yes, good morning, Peter and Team. Thank you very much for the update this morning. But just back to Gualcamayo, quite a reset of expectations 150,000 ounces last year, 110,000 ounces for this year. Can you just walk us through why that you've rationalized that production. Is that through lower mining rights or lower grade? And with the higher costs is that also reflect the fact that you got lower volume going through?
Good morning, David, this is Gerardo. This is volume adjusted, the throughput from the open pit is the one that if we do it we keep the underground mine at a 1.1 million tons and the throughput of ore going through the pressure is reduced. That allow us to reduce the savings and get a little bit more recovery in the process.
Okay. So if the underground is maintaining the 1.1 million tons per annum, would the material going from the open pit, would that be around the 3.5 million to 4 million tons per annum sort of thing?
Okay. And with that, you just have an improvement in your recovery that's just a longer lead cycle that you're looking at there or how is that working?
Well there are two parts with the recovery. One is the crushing final will give us a couple of points in recovery. The other we are in the process of - it's not fully approved yet, but we are at the [indiscernible] remuneration, not going to support even final crushing and increase the recovery for those.
Alright. And then with the reset of the Florida plan, we're on site mid last year saw that you have done some re-geek [ph] on the way that you're thinking about the future of that mine. It's also dependent upon the tunnel ultimately going into the main portion of the ore body. What's happening over the next couple of years, can you just describe what we're looking at?
Okay. It's probably linked to what we see in an exploration and we're having some surprises good surprises that has impacted or the future so how to execute the development. When you were at site we show you the Hornitos tunnel. And after that we continued drilling and we come up with an idea that could access the high grade core of that vein from the shifting infrastructure and start development early on and reaching the ore earlier like a year earlier than what we thought from Hornitos. So we gave priority to that development. It's within the mine, but very close to the exit, doesn't impact the core mine. But it's much shorter to get to the high grade revitalization. When that allow us to do exploration and that elevation as well. The other surprise we had is a PBS of favorable as south stope, which is in the same trend. But on other side of the creek if you probably remember those slides and I think it's in the presentation, those corridors go across the property. So exploration late last year also discover mineralization there. And PBS is in the resource now that older 9 to 10 veins we haven't included in the results we are not ready so we need drill them but they will discovered. So there - and that is in the other side of the mine we can connect the infrastructure to the existing infrastructure. So the plan the overall plan, long-term plan remains the same. We are developing the new zones as we are finding them, we'll need those will be developed, we don't have to develop it right now because we have these new zones they are closer to existing infrastructure. And we think we can bring them into production with high grade earlier. So our plan is to keep development, but I was developing PBS and resume the development of Hornitos in 2018.
Okay. And the development CapEx that you've got there this year, I'm guessing would be $10 million plus is that a reasonable ballpark.
Yes, in terms of $16 million more or less flat for the three years and we do have our investment on the plant as you know with the improvements we need to.
Okay. And one last question and I am taking up a bit of time here, you mentioned about the underground work is at Cerro Moro what sort of mixture we would be thinking about as far as tonnage from the open pit versus the underground for the first few years at Cerro Moro?
First year, this year is 70% open pit, next year it goes down to about 60% open pit and then we start going up in the underground to the opposite 70% underground 30% open pit that is in the current plan. As I mentioned in the first question, based on the results of exploration we may have - I think we will have higher proportion of open pit as the new veins are discovered n high-grade will be probably replacing some of the stopes underground and bring in ounces, cheaper ounces sooner.
Alright, thank you very much for that.
Thank you. The following question is from Steven Butler of JMP Securities. Please go ahead.
Thank you, operator. Jason could you tell us what your carrying value is on Gualcamayo at this point?
It's the $150 million that we disclosed in our results, that includes working capital as well.
Includes, okay. That's fine. Butch on your Veronica vein or the Veronica vein at Cerro Moro, what is the approximate drill spacing that you have outlined this vein on? You talked about 1,500 meters of strike, I'd like to know maybe its average width and depth extent and what sort of grades are you realizing?
I'll jump in and answer that. One we initially tested it at 240 meter centers, we are now down to 120 meter centers on the entire vein, we've only taken it down to about 120 meters depth at this point. And we have infield some of the higher grade zones to 60 meter centers at this point. We seem to see - we definitely see two high-grade shoots within the structure and possibly a third that we're still trying to outline.
Okay. And what's the approximate width of the vein?
Average width is over 1.8 meters considerable variability we have some very wide sections that include the part that we're hoping to open pits and average grade at this point is about 7.7 GEO.
Okay, thanks very much. Daniel, do you have a sense of timing of various optimization studies that you're working on at Chapada in terms of telling the market a bit more.
Yes, Steve I think we mentioned that we're going to come in Q2 with a plan for Chapada. So we are going to - in the Q2 report we're going to speak about our expansion plan at the main mill operations and what we're going to do with the Suruca complex the Baru and Sucupira pits.
So next quarter you'll have all these answers.
Thank you. [Operator Instructions]. The following question is from Anita Soni of Credit Suisse. Please go ahead.
Hi, good morning guys. I just wanted to get a better understanding of what prompted your decision to put Gualcamayo for sale as another analyst had mentioned that it seems to produce rather well last year at 150,000 and this year at just 110,000.
Yes, Anita part of it is philosophical, we're trying to maximize and focus on operations where we have more immediate prospect, larger potentially larger prospect. Gualcamayo has a number of years of mine life based on proven and probable reserves and an allocation of resources to reserves. It has a significant number of exploration targets for oxides that can extend that initial mine life it will require effort on exploration for those targets. And it also has deep carbonates, but deep carbonates we see as probably six years out, somewhere in the range of six years out. As we said in prior calls, deep carbonate is already more than 2 million ounces of resources and it's open in every direction so there's a high probability that it will increase in size and scale and it would require a significant capital to put that sulphide deposit into operations and with a new plant. So we are looking at Gualcamayo and saying well if we were to optimize - if we were to look at the portfolio of assets that we have and the quality of assets, which is generating better cash flows, better free cash flows, which has the prospect of generating those we are not looking at only from the point of view number of ounces, which of our assets requires more effort and in concentrating on assets that require more effort you may not be concentrating on assets that can deliver better returns and better results with less effort. The result of all of that is that we concluded that Gualcamayo was probably better suited for sale rather than a continuing development that isn't to say that we're not going to continue to mine it and mine it effectively, that isn't to say that we're not going to continue to optimize that 110,000 ounces in our guidance. Last year we guided 140,000 ounces and we produced 154,000. So we're going to continue with the efforts on production, we're going to continue with the exploration effort and clearly we're going to continue to evaluate the quality of deep carbonates that sulphide discovery. But at this juncture we have so many other opportunities in the company that deliver what we think is more immediate and better value that we should be deploying our time that Gualcamayo falls into a category of lesser priority for us than other assets. And it still has enough optionality that it makes it interesting for a potential sale.
So in terms of sale value I know some - is there any thought or idea to putting, I guess, an optimized plan together for the buyers. I know some of your competitors have done that when they've done asset sales and have gotten pretty good multiples.
Yes, so we've taken that approach and so we've looked at what does it look like on a base case basis, what does it look like on an optimized basis and we're now engaged in a process of what is the optimal price that we can get for that asset. So you're quite correct that's the approach that we're taking. But we also recognized that how much one sells an asset for is, as much the function of what a buyer - who is the type of buyer, what tolerance they have for a particular jurisdiction. That often narrows the scope of the number of buyers that would be available and the type of buyers and that goes to the purchase price. But we're confident that we can deliver a transaction on Gualcamayo, but the equally important point is that doesn't mean that we're not going to continue to look at what are the opportunities in the meantime. There have been several examples as you're aware where a company considers that something should be sold and then you make that discovery. And with that discovery something changes in the parameters and the views. For now we're thinking that within this year and as I answered to Dan's question we're going to be selling Gualcamayo, but we'll continue to evaluate what are its opportunities in the meantime.
Alright. And then last question you didn't give any update, could you give anything on the legal Brio transaction at the stage?
Well they announced this morning a consensual transaction.
Yes, so we think that that's very encouraging and very positive. We provided our support to the original takeover bid concept that Lia [ph] had put forward. We're very pleased that the two boards have agreed to this consensual deal and we're very pleased with the consideration that is being offered. I have to say Anita that we're particularly pleased with a company that accretes. So the company that accretes has critical mass, size, scale, quality of assets what we think is excellent stewardship to the management of those assets. The result of all of which is that we think that our investment will be worth a heck of a lot more than it is today. And as you're also aware in 2016 when Brio was taken public we saw as an opportunity for business combinations to create critical mass particularly in that size of company. Now clearly one of our hopes was that Brio would be the consolidator the share price didn't perform according to our expectations through 2017, but the fact it is not a consolidator doesn't mean that it doesn't make sense to consolidate. And so we think this consolidation of the two companies is excellent and as a collateral benefit we also get to clean up our financial reporting, our operational reporting because we're no longer consolidating the operations in financial performance of Brio Gold.
Okay, thank you very much.
Thank you. The following question is from Josh Wolfson of Desjardins. Please go ahead.
Thank you. Two quick more financial oriented questions, first, in terms of capital spending guidance is the Chapada stockpile movement included within that figure or would that be in addition to it if there is any guidance for this year?
No, it's not in the capital, Josh.
Okay. So, what should we be expecting this year for that?
Well, that'll be an inventory move, will go to our long-term inventories.
Okay. I think so last year we saw on the order for $20 million or is that something we should expect this year again?
Okay. And then for the Gualcamayo book value 150,000 and this like be too granular for the call, but is there any proportion of that or any inclusion of what the deep carbonates could be or is that based on the existing reserves?
No, we can't any at that way.
Okay, alright, thank you very much.
Thank you. There are no further questions register at this time I would like to turn the meeting back over to Mr. Marrone.
So, let me conclude ladies and gentlemen with a couple of pickups on some of the questions that were asked. One of the first questions was about Cerro Moro, we should highlight that we are also in our current plan for production in 2019 and 2020. We are estimating that the amount of processing would be below the design of the plant. So we are roughly at 80%, 82% in 2019, and if we - or that's more to blend out through 2019, 2020, and to see to have a look see on what Veronica and other vein structures look like. If we were to go to full plant capacity than that silver productions would come up, the gold production would come up much more significantly. And we will more guidance on that throughout the course of the year and certainly when we have our mine tour, our first mine tour with investors in early March. The second is on Chapada, and on Chapada what we said the second quarter my hope remains that before our shareholders meeting, which is in early May we will be able to say here is the focus on Chapada, here is this big complex, we have Sucupira and Baru at the pit parameter, how do we do a push back of that pit that allows us to be able to capture some of those higher grades that we reported in our results into through our plant. The second is Suruca as a complex, the oxides we are continuing to advance that for heat bleaching, but the sulphide represented an excellent opportunity for significant production we are not talking about 40,000 to 50,000 ounces per year from the oxide it's a significantly largely number than that potentially a multiple of that. And we are also looking at the plant, we have discussed that we are creating the stockpiles so part of what we are looking at now is how do we increase the plant capacity that allows us to be able to capture some of that into production. Gold production would be expected to stay comparatively flat from the ore coming from the pits, but copper production would increase very significantly. So sometime in the second quarter our hope remains by the time of our shareholder meeting in early May we will able to say here is the focus of this big complex of opportunities and what we are going to be pursuing over the course of the next several years to maximize production for gold, production for copper, but also to significantly increase the cash flows generated from that very robust asset. Ladies and gentlemen with that thank you very much for participating in our call. And we'll look forward to the next call with you.
Thank you. The conference has now ended. Please disconnect your line to this time. We thank you for your participation.