Pan American Silver - Earnings Call - Q1 2018

Transcript

Operator (participant)

Thank you for standing by. This is the conference operator. Welcome to the Pan American Silver First Quarter 2018 Results 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. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Siren Fisekci, Vice President, Investor Relations. Please go ahead.

Siren Fisekci (VP of Investor Relations)

Thank you, operator, and welcome everyone to Pan American Silver's First Quarter 2018 Conference Call. We released our results after yesterday's market close, and a copy of the news release and presentation slides for today's call are available on our website. In a few moments, I will turn the call over to Pan American's President and CEO, Michael Steinmann, who will provide a brief review of our first quarter results. We will then open up the call to questions and answers. Joining us for the Q&A portion are Pan American's Chief Operating Officer, Steve Busby, Chief Financial Officer, Rob Doyle, Senior VP Project Development, George Greer, Senior VP Technical Services and Process Optimization, Martin Wafforn, and VP of Business Development and Geology, Chris Emerson. Before we get started, I'd like to remind everyone that our news release and certain statements and information in this call constitute forward-looking statements and information.

Please review the cautionary statements included in our press release and presentation, as well as the risk factors described in our most recent Form 40-F and Annual Information Form. I will now turn the call over to Michael.

Michael Steinmann (President and CEO)

Thank you, Siren. Welcome everyone joining us today to discuss our results for the first quarter. We generated revenue of $207 million in the quarter, up 4% from Q1 2017, mainly due to higher byproduct prices and lower treatment and refining charges. Cost of sales was down roughly $14 million quarter-over-quarter due to lower production costs and royalty costs, somewhat offset by a $5.2 million increase in depreciation expense. The decrease in production costs was mainly due to $16.5 million variance in NRV inventory adjustments at Manantial Espejo and Dolores. Depreciation was up largely as a result of the increase in production at Dolores and the higher depreciable asset base at Morococha following the impairment reversal in the fourth quarter of 2017. The increase in revenues and lower cost of sales resulted in $55 million of mine operating earnings in Q1, up 68% from the 2017 period.

Net earnings were $48.2 million or $0.31 per share. Even excluding the gain realized on the sale of the Calcatreu project, Q1 net earnings were double those in the same period of last year. Adjusted net earnings in Q1 were $30.7 million or $0.20 per share. In Q1, operating cash flow before changes in working capital of $77 million funded tax payments of $32 million, $11 million used of cash from working capital, sustaining capital, and dividends. We had a modest drawdown of $3 million in our cash balance to fund project capital and repay short-term debt. Tax payments were up $7.5 million quarter-over-quarter, reflecting the increase in taxable income in 2017. As you are aware, most of the tax payments are heavily weighted to the first half of the year. As of March 31st, 2018, our cash and short-term investment balance was $225 million.

Total debt was only $10 million, related entirely to finance lease liabilities. Total available liquidity, including our undrawn $300 million credit facility, was over $500 million. Consolidated silver production in Q1 was 6.1 million ounces, largely flat with Q1 2017. Higher production at most of our mines helped offset the loss of production from Alamo Dorado's closure and lower grades at San Vicente. Gold production was up 23% quarter-over-quarter, while zinc was up 15%. Lead was essentially flat, and copper production was down 7%. Consolidated cash cost per ounce of silver were $1.18, down 81% from Q1 2017. Higher byproduct credits, reflecting higher throughput at our mines combined with higher metal prices for all byproducts, drove the remarkable decrease in cash cost. We also continued to benefit from historically low charges for concentrate treatment and refining, along with low energy costs.

The same factors, along with the positive NRV adjustment of $0.93, resulted in all in sustaining costs of $6.98. That's down 45% from Q1 last year. Turning now to performance at each of our mines. At La Colorada, silver production was 1.65 million ounces, similar to last year, as higher throughput was offset by lower silver grades from mine sequencing necessary to access backfill. Zinc and lead production were up 17% and 7% respectively, contributing to cash costs of $0.67. All in sustaining costs were $1.87. Dolores drove the increase in consolidated gold production, posting record quarterly production of 34,300 ounces. Silver production was up 25% quarter-over-quarter to 1.2 million ounces. These strong results reflect the pulp agglomeration plant achieving several days at designed throughput rates and average daily stacking rates to the leach pad of 21,000 tons.

We're expecting delivery of the filter expansion kits for the pulp agglomeration plant during Q2, with installation continuing into Q3. We've also added a surge tank to the plant circuit to increase the filter feed density and improve throughput. Development of the new underground mine at Dolores is also progressing on schedule, producing nearly 450 tons per day during the quarter. With the strong credit from the gold production, cash costs were -$3.11 at Dolores. All-in sustaining costs were $10.02. Sustaining capital was up about $9 million quarter-over-quarter, primarily due to the timing of payments, higher open pit mine-stripping rates, and greater leach pad expansion works. At our Huaron mine in Peru, silver production was up 4% quarter-over-quarter, while zinc and lead were down 15% and 25% respectively due to mine sequencing.

Higher base metal prices improved concentrate terms, and higher payable silver production offset the lower zinc and lead production, resulting in the low cash costs recorded at this mine of -$1.51 per ounce. Our Morococha mine in Peru produced 13% more silver than the comparable quarter, primarily due to higher throughput grades and recoveries. Higher byproduct prices combined with increases of 47% and 31% for zinc and lead production respectively led to record low cash costs of -$11.36 in Q1. Mine sequencing into lead-zinc-rich zones resulted in a 29% decrease in copper production. All in sustaining costs were -$2.68, which includes $4.9 million of sustaining capital.

At our San Vicente mine in Bolivia, we are transitioning from conventional mining methods into more mechanized methods, which has affected silver head grades and production in Q1, largely due to rescheduling higher grade areas as we adjust to new mining methods. Silver production was 18% lower quarter-over-quarter. As indicated previously, we expect to be stoping at these lower grades during the first half of the year before moving back into the higher grades. Byproduct production was very strong, with increases of 271%, 74%, and 45% for copper, lead, and zinc. The improvement is due to better recoveries for zinc and better smelting and refining contract payabilities for the bulk silver concentrate that contains both lead and copper. Cash costs were $11 per ounce, and all-in sustaining costs were $11.42.

At our Manantial Espejo mine in Argentina, we produced 825,000 ounces of silver at cash costs of $11.92 per ounce, and all in sustaining costs at $11.43. The devaluation of the Argentine peso helped costs, and a five million NRV adjustment further benefited all in sustaining costs. Both Joaquin and COSE are proceeding on schedule and on budget. At Joaquin, we completed the surface earthworks, modular camp, access roads, water supply development, and soil removal and preservation for the waste dump in Q1. At COSE, we developed 347 meters of decline access to the underground for a total of 495 meters developed to the end of Q1. We also completed infrastructure development and put the remainder of the underground mining equipment into service. We are maintaining our guidance for 2018, which calls for 25-26 million ounces of silver at cash costs between $3.60 and $4.60 per ounce.

We expect All-in Sustaining Costs to be between $9.30 and $10.80. While costs are significantly below the guidance in Q1, we will wait and see how the following month progresses before revisiting our guidance on costs. Sustaining capital is estimated to be between $100 million to $105 million in 2018, and project capital at $50 million. That concludes my formal remarks. I now like to open a call for your questions.

Operator (participant)

Thank you. We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. Our first question is from Mark Mihaljevic with RBC Capital Markets. Please go ahead.

Mark Mihaljevic (Research Analyst)

Hey, good morning, everyone, and nice performance on the cost side of things.

Steve Busby (COO)

Thank you.

Mark Mihaljevic (Research Analyst)

I guess my first question relates to La Colorada. Obviously, you guys are still trying to catch up on that development given the mill performed so well last year. I was just wondering if you could give us some additional color on how you see this evolving and how long it'll take you guys to really get back to reserve-grade levels.

Steve Busby (COO)

Yeah, good morning, Mark. This is Steve Busby. Good question. We're working on this backfill, this sand backfill plant. We have a plant on the surface that generates sand from our flotation tailings products, and we send them back underground. When we completed the expansion, what we wanted to add on was a few more raise bores with a drill pipe or with a pipe down the raise bore that would allow us to pump the sand back underground into key locations where we can distribute it. So the biggest issue we're having in developing that backfill plant is completing those raise boreholes. As you know, La Colorada, over its history, bringing raise bores to the surface has been one of our big issues.

We have been challenged by that over the last few months, but we're still confident we'll get that final raise bore into the high-grade area probably during Q2, and it looks pretty good. And as we get into that, that'll give us a lot of fill capabilities into the high-grade zones that right now we don't have a lot of development muck available in those areas for the backfill. So we'll start to see those grades come back in the second half of the year. And that's pretty much on track with what we expected coming into the year.

Mark Mihaljevic (Research Analyst)

Thank you. Perfect. That was very helpful. And then with the pulp agglomeration, obviously, you mentioned that you're expecting to get the expansion or expanded capacity installed into Q3. Is that really the only remaining bottleneck or anything else you need to address? And then just how the performance of the other components has been outside of the filters?

Steve Busby (COO)

Yeah, the pulp agglomeration plant's running extremely well. And even without the expansion kits, as Michael alluded to, we're seeing designed tonnages on an occasional daily basis here and there. We just haven't been able to string them together consistently like we'd like to see. Typical of these big filtration plants that you see around the world, after a few months to a year of operation, the operators really gain a lot of knowledge and confidence and comfort into running these things. And we're seeing it as well. At the end of the day, internally, we even debate at times that we may be at our designed tonnage even before the expansion plates arrive on site. So that's not necessarily the bottleneck. The bottleneck is really just learning how to work with these highly automated machines and getting them to run effectively.

We do think the expansion plates will give us some contingency to ensure we have smooth operations for a longer period. So we do want to install them. But yes, that is really the only bottleneck that we see in the circuit today. The rest of the circuit's running extremely well. The crushing and grinding is running exactly as prescribed. Our recoveries through the pulp agglomeration plant, what we call the immediate recoveries, extraction into silver and gold that can go directly to Merrill-Crowe, has been performing at or better than our design expectations. And of course, as you see, our overall throughput back out to the heap is actually exceeding what we designed at 20,000. We actually achieved 21,000 during the quarter. So everything else looks really, really good. It's just really getting those filter machines up to their potential.

Mark Mihaljevic (Research Analyst)

Okay. I guess two follow-ups to that. So first off, can you just remind me what percentage of gold and silver you get immediately through that crushing and grinding circuit that goes directly to the Merrill-Crowe? And as a follow-up as well, once you get that expanded capacity online in the filters, do you see potential to push past the 5,600 tons a day?

Steve Busby (COO)

I'll address the second one first. No, I think 5,600 tons a day, that's going to be our capacity of that plant. I don't see it going much above that. And then in terms of the recovery, I may have to follow up with you, Mark, but I think generally we're targeting 50% of the gold and 35% of the silver, somewhere in those neighborhoods.

Mark Mihaljevic (Research Analyst)

Okay. Perfect. That's it for me. Thanks for answering my questions.

Operator (participant)

Our next question is from Chris Thompson with PI Financial. Please go ahead.

Chris Thompson (Mining Analyst and Head of Research)

Hey, good morning, guys. Congratulations on a really, really strong quarter. A couple of quick questions. Just moving on, I guess, to Dolores. Can you give me a sense of how much growth CapEx is remaining to be spent here? Where do we stand as far as CapEx for this asset?

Steve Busby (COO)

Yeah. Hi, Chris. This is Steve. During 2018, overall, between La Colorada and Dolores, to complete the growth projects, we had budgeted $13 million or guided $13 million of spending this year. Probably about eight of that is at Dolores. And of that eight, probably about five of that is for the underground and three for the pulp agglomeration plant. That'll be it for growth capital. We don't see any further growth capital at Dolores after this year.

Chris Thompson (Mining Analyst and Head of Research)

That's great. Thanks. Just on the underground there, can you give us a sense on how grade continuity reconciliation is stacking up?

Steve Busby (COO)

Yeah. Right now, it's looking pretty good. After we've got through all of the detailed infill drilling actually, I'm going to turn this over to you, Chris. I'm sorry.

Chris Emerson (VP of Business Development and Geology)

No, absolutely. Hi, Chris.

Chris Thompson (Mining Analyst and Head of Research)

Hi.

Chris Emerson (VP of Business Development and Geology)

We've certainly been doing a fair amount of infill drilling, and certainly in Q1 and this year, we have a certain amount of meters to complete that target. Last year was a big push, over 25,000 meters drilled, and of course, what we're seeing at the moment is the development going into it really is too early to do any sort of reconciliation at the moment in terms of what the reserve model says and what we're getting out from the underground. We really are just initiating development in, and test stopes, etc., so really it's too early to talk about that sort of side of the reconciliation.

Michael Steinmann (President and CEO)

Probably later in the year, Chris, when we have more information and started more production, have more production results, we can answer you that question.

Chris Thompson (Mining Analyst and Head of Research)

Okay, Mike. Thanks. Any comment on costs? I guess a little too early to tell on that as well?

Michael Steinmann (President and CEO)

Yes. Very early in the game. It's advancing very well, as you saw there in the text. Development is going really well. The drilling as well. But to have the final numbers, it's very early.

Chris Thompson (Mining Analyst and Head of Research)

All right. Thanks. Just moving on to San Vicente. Can you give us a sense of what to expect, obviously, for the remainder of this year? Are you still confident on meeting guidance, cost, and production here?

Steve Busby (COO)

Yeah, Chris, this is Steve. We are facing, as you can see in Q1 and as we saw in the last part of 2017, we are facing some significant challenges of mechanizing some of these conventional areas, as we discussed in previous quarters. Those challenges continue. We do have quite a task force of engineers and support personnel that came out of our Peruvian operations engaged at the operation and helping the training and the understanding. It is a big task. I mean, mechanizing these mines is a substantial undertaking, and we're confident we're going to work through these issues. Timing-wise, we do feel the second half of the year is going to be better than what we're seeing in this first half, as Michael alluded to. Whether that's going to get us up to that guidance, there is a possibility.

We think we can do it, but we still got some big issues to overcome to get there.

Chris Thompson (Mining Analyst and Head of Research)

All right, Steve. Thanks. And then the final question, guys, just on some of the base metals, looking, I guess, at Q1 performance relative to your guidance. I think you're tracking slightly higher on the zinc, slightly lower on the copper and in line on the lead. Are we going to continue to see? Do you see this potential for outperformance on that zinc?

Steve Busby (COO)

Yeah, it's a good question, Chris. These polymetallic mines in Peru, we're either mining in, it seems, the last few years, we're either mining in the higher copper zones without much lead and zinc or vice versa, and it's really hard to predict. Some of it's where we're at in the mine sequencing, where we're at in the exploration, and how that may fit in the mine sequencing. For instance, if we start to see some high copper zones in an area close to where we're mining, we'll shift some of the sequencing over there. So from our way of thinking about it, from a value standpoint, we see it performing extremely well. Whether it's going to be higher copper and less lead zinc or vice versa, for us, it doesn't really matter as long as we're getting the value out of it.

Chris Thompson (Mining Analyst and Head of Research)

Yep, that sounds right. Looking forward. Great. Congratulations, guys, on a really good quarter.

Michael Steinmann (President and CEO)

Thank you.

Operator (participant)

Our next question is from John Tumazos with John Tumazos Very Independent Research. Please go ahead, sir.

John Tumazos (Principal)

Thank you very much. With regard to the building almost $250 million cash position, in the past history of the company, five, 10 years ago, there were large acquisitions like Aquiline and Minefinders. How do you expect to deploy the cash looking forward, particularly today when Bitcoin and other things are popular? There are many emerging companies that have difficulty raising equity where there are many attractive small values today.

Michael Steinmann (President and CEO)

Yeah, John, this is Michael. Look, as many times I alluded to this topic that we are really actively looking around, always have been, never stopped, especially in markets like this where there are opportunities out there. As you recall, we made an investment in Bolivia in December in New Pacific. We are constantly looking around for early, later stage, mid-stage exploration projects, more developed projects. We just, in general, have a really close look at the silver market constantly and what projects and mines are out there. So if there are opportunities that provide accretive growth for us that fit in our cost curve, which is very important, as you realize that our costs are very low and we want to maintain that situation, if you find something that fits in there, by all means. So there's constantly looking around.

We are very careful with that, as always in the past, and as I mentioned, we did that investment in Bolivia in December and we'll continue looking around.

John Tumazos (Principal)

Other than building the Navidad mine, if it's permitted and sanctioned, do you have any in-house projects that could use the sum of cash that you're beginning to accumulate?

Michael Steinmann (President and CEO)

If you look at Argentina right now, we see some press reports that the governor of Chubut, and the national government, are supporting the debate in the legislature on mining. And we also understand that the proposed bill that is in front of the legislature right now would potentially allow mining activities in certain areas in accordance to a land use sensitivity map. And Navidad would be located in a mining zone with low sensitivity. So as you know, Pan American, we are looking really forward to an open and transparent debate on mining in Chubut, which hopefully will allow responsible mining, which is controlled by the government for the benefit of all the stakeholders. So if that's happened, for sure, that will be a nice use of our cash. We are constantly looking at internal other opportunities.

I mean, two good examples were the expansions of La Colorada and Dolores in the past. I think we found some really nice accretive growth with those projects. Right now, as Steve alluded to, we are working on the mechanization in Bolivia, so we constantly have the eyes out for improvements and to deploy our cash. But meanwhile, there is nothing wrong on having a strong cash position as a company and be able to react on opportunities that may occur.

John Tumazos (Principal)

Thank you.

Operator (participant)

Our next question is from Sherry Banga with Scotiabank. Please go ahead. Sherry, your line is open, ma'am.

Oh, hi. Thanks for taking the call. Just a few questions from me. So we see the impact of base metal prices and byproduct credits in terms of driving down costs. We're just wondering how unit costs are trending generally. Do you see savings there too?

Steve Busby (COO)

Hello, Sherry. This is Steve Busby. Yeah, our unit costs are tracking pretty much on guidance where we thought it would be. We kind of see them starting to inch up a bit. If you look at our normal cost structure through the years past, you'll always see we're doing collective bargaining and things like that for our labor rates kind of during Q2 into Q3. So we'll see some increases probably as we get through those this year on our operations. We're keeping a close eye on energy prices, and we kind of look at the oil prices as a gauge to where things might be going there. So that's something we're keeping a very close eye on. We've been enjoying some very nice low energy costs over the last couple of years. We think those are going to start inching up a little bit.

But overall, I think that increase on a unit-cost basis that we guided and we expected this year, we're tracking below that during Q1 as our costs kind of show. And I think we'll see it kind of inch up as we move in through the year.

Rob Doyle (CFO)

Sherry, Rob Doyle's here, I might just add one more thing to what Steve said. Certainly in Q2, we've seen quite a bit of devaluation in both the Mexican peso and the Argentine peso, which, of course, would help combat some of that expected escalation in unit prices.

Great. So with respect to Argentina, is there offsetting labor cost pressure as well and across other operations as well?

Steve Busby (COO)

Yes, there are, but as Rob says, the devaluation so far this year has been pretty dramatic, so there will be some clawback, but we'll have to see how the year goes by as to how much.

All right. That's it for me. Thanks.

Operator (participant)

The next question is from Dalton Baretto with Canaccord Genuity. Please go ahead.

Dalton Baretto (Director of Metals and Mining Equity Research)

Good morning, guys, and congrats once again. Can't wait to see what you guys do if you're on core. Just a couple of quick housekeeping questions from me. First of all, in your disclosure, there's a lot of mention around concentrate terms and how that's contributed to the decline in unit costs. My question is very simply, does your Q1 numbers reflect the new benchmarks that were set a couple of weeks ago for zinc and lead? Have you already adjusted for that, or is there another leg down?

Rob Doyle (CFO)

Dalton, hi, Rob here. Our terms are not specifically tied to benchmark, and typically our concentrate contracts are longer term, six to 12 months out. So the Q1 doesn't reflect the recent benchmark announcements at all. It's more a reflection of contracts that we negotiated during the second half of 2017. So those markets continue to be pretty favorable to us. Perhaps they've come back a little bit from their lows, but still historically at very, very favorable levels for producers.

Dalton Baretto (Director of Metals and Mining Equity Research)

Okay. So your concentrate terms are pretty much set. They're not indexed to the benchmark in any way?

Rob Doyle (CFO)

No, they're not.

Dalton Baretto (Director of Metals and Mining Equity Research)

Oh, okay. And then secondly, I was wondering if I could get a little bit more color on what happened at Huaron in terms of the blockade and how that was settled.

Michael Steinmann (President and CEO)

Maybe I start and I hand it over to Steve to give more color. As you know, around all our operations, or most of the operations, there are communities around. In this case, the Huayllay community is a fairly large community. We have, if I recall right, Steve, probably about 15 contracts with the community actively. We have a large amount of people employed and people on contracts to do projects at the mine, and there are constant discussions with these communities and negotiations on new additions, and this one took a while to come to an agreement and lift the roadblock, but I'll hand it over to Steve to give you a bit more color on it.

Steve Busby (COO)

Yeah. Hello, Dalton. As Michael alluded to, I mean, we're a very important employer, obviously, in the local community. And very important, we have some service contracts with various contractors in the community. Over the years, that mine's been there nearly 100 years now. And there's other mines adjacent to ours that also affect the community. Over the years, that community has grown substantially and actually has grown and started to take on projects in the community, working on infrastructure projects around the area. A lot of those infrastructure projects have been shut down over the last couple of years through some of the challenges that the government's going through. And with that, that brings some social stresses into that community. And they are facing some unemployment there, and that's just reflective of the stress we deal with.

Dalton Baretto (Director of Metals and Mining Equity Research)

Okay. I understood, and then maybe last one on Argentina, and it's going through its latest round of pain here with 40% interest rates yet again. Does that change your thinking at all in terms of having a presence and investment in the country?

Michael Steinmann (President and CEO)

Sorry, can you repeat? I didn't get that.

Dalton Baretto (Director of Metals and Mining Equity Research)

Sure. Yeah. I was just saying with Argentina, you talked about the devaluation of the peso and your interest rates are back up at 40% and so on. I'm just wondering how that factors into your thinking in terms of investment in the country and even having a presence in there?

Michael Steinmann (President and CEO)

Look, I mean, we're in Argentina for a long time, and we have seen this kind of challenges in Argentina before. I think this time it's different. The current administration is obviously doing a great job to attract more investment in the country. There are some road bumps, looks like. We've seen one last week, as you alluded to. As Steve said, the devaluation of the currency helped us on the cost. We see some clawbacks afterwards from the unions, obviously, during the year, which is to be expected. But in general, I think Argentina is really moving in the right direction. And we are active there. We are growing COSE and Joaquin, which are advancing on or ahead of schedule. And we are fairly happy there.

So I think with the two changes we've seen on the federal and on the provincial side in Chubut, I think Argentina became a very attractive place for us.

Dalton Baretto (Director of Metals and Mining Equity Research)

Perfect. That's all for me, guys. Thank you.

Michael Steinmann (President and CEO)

Thank you.

Operator (participant)

Once again, if you have a question, please press star then one. Our next question is a follow-up from Chris Thompson with PI Financial. Please go ahead, sir.

Chris Thompson (Mining Analyst and Head of Research)

Hey, guys. Just one more question. The dividend, obviously, great performance in the Q1 here. Any chatter about maybe stepping it up a little?

Michael Steinmann (President and CEO)

As you know, and I mentioned that many times, we love returning money to our shareholders. We just increased the dividend the last quarter, and for sure, we have a look at it in many occasions, but we won't move it every quarter-and-quarter. I mean, we have a little bit of longer-term look, but for sure, we always have looks at it, and if the year continues like that, then we'll for sure have a deeper dive on it.

Chris Thompson (Mining Analyst and Head of Research)

Great. Thanks.

Operator (participant)

The next question is from Corinne Blanchard with Deutsche Bank. Please go ahead.

Chris Terry (Director of Metals and Mining Equity Research)

Hi, guys. It's actually Chris Terry here. Apologies. I missed the very start of the call, but just wondering, I know in the past, Steve's gone through some of the quarterly moves. So just what to look for, sort of 2Q, 3Q versus 4Q. Can you just give us some color there? I think you touched on it on the base metal side, but just on a few of the moves as to how we expect the guidance to play out in the year versus the 1Q numbers.

Steve Busby (COO)

Yeah. Good morning, Chris. This is Steve. Yeah. Just briefly, I think we're tracking pretty much like we indicated at the end of last year that we would see this year, that the first part of the year is going to be a bit light with La Colorada and the backfill plant needs that's coming along. And we'll get that up and running during Q2. So we'll start to see the effects of that during the second half. San Vicente, the mechanization, as we talked about, we're trying to get the operators up to speed on how to mine with these new machines and things like that. That's all taking place during the first half of the year. We'll see that change during the second half. Dolores is still ramping up, I would say, particularly on the underground and also a bit on the pulp agglomeration plant.

I think we're already seeing a pretty good jump on that one. I don't think you'll see much changes going into the next few quarters until late in the year, but it looks pretty good too. The rest of them are pretty steady state, I'd say.

Chris Terry (Director of Metals and Mining Equity Research)

Okay. Thanks, Steve, and so on the road blockade, you're talking about on a couple of questions back, but there's no impact on how you're thinking about 2Q or the guidance for that asset in particular. I guess it was pretty short-lived, so it shouldn't have an impact over the full year?

Michael Steinmann (President and CEO)

Well, yeah, it has been a few days in Q2, obviously impacting it. So we'll see. But for the full year, I don't think so there will be any impact. Maybe we'll see a little dip there in Q2. Have to see how that evolves. But for the full year, yeah, we don't expect any impact.

Chris Terry (Director of Metals and Mining Equity Research)

Okay. Thanks, Michael. That's all from me. Thanks, guys.

Operator (participant)

The next question is from Lucas Pipes with B. Riley FBR. Please go ahead, sir.

Lucas Pipes (Managing Director)

Hey, good morning, everybody. I wanted to follow up a little bit on the M&A question from earlier. And Mike, I wondered specifically if you would be interested in looking at silver assets in North America, so United States and Canada. Thank you.

Michael Steinmann (President and CEO)

Yeah. Look, I think, as I mentioned before, we are working with silver company. That's what we do. We provide exposure to silver price to our shareholders. And silver is geologically much more restricted to certain areas than gold worldwide. And that's where we're working. A large part of the far majority of silver production comes from the Cordillera, somewhere between Chile all the way north to Alaska. And that's where we're active. Obviously, being Mexico number one and Peru number two, kind of silver producers in the world, that's where we are active. Bolivia, Argentina. And for sure, if there are good projects in North America, we're having a look at them as well. I mean, there's no. The restriction is obviously there are places politically that we wouldn't be all that comfortable.

But as long as we are in the Americas, the restrictions are really quality of projects.

Lucas Pipes (Managing Director)

Got it. That's helpful. Thank you.

Operator (participant)

The next question is a follow-up from John Tumazos with John Tumazos Very Independent Research. Please go ahead, sir.

John Tumazos (Principal)

The cash flow was roughly flat in the first quarter with an $11.2 million decrease for inventory adjustments. A year ago, the inventory adjustments increased cash flow. Could you explain which locations have the adjustments and go into a little bit of explanation on the net realizable value issues?

Rob Doyle (CFO)

Sure, John. Rob Doyle here. Yeah. We did see an inventory buildup in Q1, especially in Argentina, actually, at Manantial Espejo. Just the logistics involved in getting the doré product out of Argentina sometimes doesn't line up particularly conveniently with quarterly reporting. So there was a large buildup of ounces of both gold and silver in Argentina, which we fully expect to monetize in the second quarter. So that working capital adjustment that you referred to should, over time, of course, it should flatten out. There was also somewhat of a payable use of cash through reduction of payables in the quarter, particularly around cash taxes that we had accrued during 2017 and then paid in the first quarter of 2018. The NRV adjustments is, again, simply just the mark-to-market of inventory at period-end prices.

In this particular quarter, it went the opposite way from in the comparable quarter. There was a positive NRV swing in Q1 of 2018.

John Tumazos (Principal)

Thank you.

Operator (participant)

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

Michael Steinmann (President and CEO)

Thank you very much, operator. That concludes our call for Q1. I'm looking forward to talk to everybody again with our Q2 press release and conference call in August. Thank you very much.

Operator (participant)

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