Pan American Silver - Earnings Call - Q2 2018

Transcript

Operator (participant)

Good day and welcome to the Pan American Silver Second Quarter 2018 Results Conference Call and Webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one, on a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Siren Fisekci, VP of Investor Relations. Please go ahead, Ms. Fisekci.

Siren Fisekci (VP of Investor Relations)

Thank you, Operator, and welcome everyone to Pan American Silver Second 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 second quarter results. We will then open 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, 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 news 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 (CEO)

Thank you, Siren. Welcome everyone joining us today to discuss our results for the second quarter. We generated revenue of $216.5 million, up 8% from Q2 2017, mainly due to higher byproduct prices and lower treatment and refining charges. Higher revenues and lower production costs increased mine operating margins by about 22% compared to Q2 2017. We recorded $55 million in mine operating earnings, which included the impact of higher royalties and higher depreciation and amortization expense. Net earnings for the period were $36.7 million, or $0.24 per share, similar to adjusted net earnings of $35.4 million, or $0.23 per share. Operating cash flow in Q2 was roughly $67 million, which factored in $7.8 million source of cash from working capital changes and $18 million in tax payments.

Tax payments are heavily weighted to the first half of the year, and we expect payments to be lower in Q3 and Q4. Operating cash flow before working capital changes, interest, and taxes was more than sufficient to fund sustaining and project capital expenditures, taxes, and dividends, resulting in a $25 million increase of our treasury at the end of Q2 2018. As of June 30, 2018, our cash and short-term investment balance was $250 million. Total debt was less than $10 million, related entirely to finance lease liabilities. Total available liquidity, including our undrawn $300 million credit facility, was $550 million. Consolidated operating results were strong in Q2, with silver production as planned and costs lower than forecasted. Silver production was 6.3 million ounces, reflecting higher production at San Vicente and La Colorada, offset by lower production at Huaron.

Production at Huaron was impacted by an approximate three-week suspension of operations during the quarter. As we previously reported, members of the Huayllay community erected temporary road blockades, demanding compensation for alleged impacts to land and additional service contracts for the mine. With the help of the Social Affairs General Office of the Peruvian Ministry of Energy, we were able to negotiate a mutually agreeable solution to allow the mine operations to restart on May 11. Gold production was 53,400 ounces, up 42% from Q2 last year, and reflects record quarterly production at Dolores due to high throughput from the expansion, improved grades, and faster recovery from the pulp agglomeration plant. For base metals, zinc production was up 8%, lead production slightly lower, and copper production down 44% compared with Q2 2017.

The decrease in copper production was primarily because of anticipated lower grades at Morococha and the lower production at Huaron. Consolidated cash costs for Q2 2018 were $0.92, down 84% from Q2 2017, as a result of higher byproduct credits due to increased gold and zinc production and higher metal prices for all byproducts. As well, direct selling costs decreased primarily because of improved contract terms for concentrate treatment and refining. All-in sustaining costs were $6.45. Turning now to performance of each of our mines. At La Colorada, production and costs continue to benefit from the mine expansion completed in 2017. In Q2, we produced 1.9 million ounces of silver at cash costs of $1.93, and all-in sustaining costs of $3.46. Post-Q2, we have started commissioning the backfill plant that will provide the ability to increase production rates from our high-grade stope.

At Dolores, we produced 1.1 million ounces of silver at a cash cost of negative $9.80, and all-in sustaining costs of $1.18. Driving those low costs was record-breaking quarterly gold production of 39,800 ounces, thanks to the benefits from the new pulp agglomeration plant. We are planning to install expansion kits to our pressure filters in the pulp agglomeration plant later this year, which will assist in the continued ramp-up of throughput in the plant. As previously announced, we suspended transport of personnel and materials to Dolores in late May due to security incidents on the access roads to the mine. Production of silver and gold continued at normal rates throughout this period due to the availability of large ore stockpiles. However, we did curtail work on the heap leach expansion project, as well as open-pit and underground mine activities.

The Chihuahua State and Federal Law Enforcement Agencies rapidly addressed the security situation, allowing us to resume use of the access roads in early June. Open-pit mining returned to normal levels by late June. As customary, leach pad expansion work will resume after the rainy season. We also took advantage of the disruption to accelerate the demobilization of one of the primary underground mine contractors in favor of hiring and training our own workforce, which had originally been planned to occur later in the production ramp-up phase of the operation. Consequently, we anticipate reinitiating underground mine production early next month. The planned underground production of 1,500 tons per day should be achieved in early 2019. The timing is not critical to our long-term production forecast, as we have sufficient high-grade feed from the open pit for the agglomeration plant. Moving on to Huaron.

As mentioned, production was impacted by an approximate 18-day suspension of the operations, which has since been resolved. In Q2, we produced 742,000 ounces of silver at cash costs of $1.95 per ounce. All-in sustaining costs were $8.11. More good news from Huaron. We have initiated development of a new, deeper production level that will access the continuation of the vein structures 80 meters below the deepest current mine level. We are now installing the infrastructure necessary to support mining on that level for many years ahead. At Morococha, we produced 652,000 ounces of silver at cash costs of negative $6.41 per ounce in Q2. All-in sustaining costs were negative $0.19. We continue to see mine sequencing into lead-zinc-rich zones, with less copper production for the remainder of the year.

Our San Vicente mine posted strong production growth in silver, copper, lead, and zinc in Q2 as a result of higher grade from improved ore control performance and mine sequencing to access higher-grade stopes, as compared with the recent past quarters. We produced 976,000 ounces of silver, 27% more than Q2 2017, at cash costs of $9.36 per ounce, and all-in sustaining costs of $13.15. This performance demonstrates that we are now beginning to see the benefit of the move to more mechanized mining methods at San Vicente, similar to what we have achieved in Peru. At Manantial Espejo, we produced 962,000 ounces of silver at cash costs of $6.62 per ounce, and all-in sustaining costs of $7.08. The devaluation of the Argentine peso and better-than-expected gold production, largely from higher-than-expected grades in our underground ores, drove costs to these low levels.

We are anticipating some offsetting increases during the second half of the year. However, we do anticipate overall costs to be lower than originally planned at Manantial Espejo for 2018. The COSE and Joaquin projects in Argentina are progressing on budget. Completion of Joaquin project has potentially been delayed by a few weeks due to a short stretch of difficult ground conditions encountered during the decline development. The COSE project remains on schedule. We have revised the annual forecast for 2018 cash costs, all-in sustaining costs and copper production based on results achieved for the first half of the year, including current lower base metal prices for the second half. Annual 2018 cash costs have been lowered to the range of $2.80-$3.80 per ounce, and annual 2018 AISC costs have been lowered to the range of $8.50-$10 per ounce.

Due to lower copper grades at Morococha, we reduced our copper guidance for 2018 to a range of 9,000-10,400 tons. We are maintaining all our other estimates for production and capital expenditures. In summary, our Q2 results demonstrate strong cash flow generation, record low cash costs, and silver and gold production on track for 2018. And with that, I would like to open a call for questions.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. The first question comes from Chris Terry with Deutsche Bank. Please go ahead.

Cosmos Chiu (Managing Director and Director of Precious Metals Equity Research)

Hi, Michael and team. There's a couple of questions for me. The first one's just on the cost guidance. How do we think about the medium term on the cost? What are the cost guidance that you've just guided down to? It seems to be a trend in the last few years where you've continually been able to beat those. Obviously, a portion of it's the byproducts. But can you just step through the other components within the costs at the moment? Maybe talk about cost inflation and cost any deflation you're seeing so we can think about what a 2019 cost might look like. Thanks.

Michael Steinmann (CEO)

Good morning, Chris, Michael. Sure. As you mentioned, we've seen cost reductions here over the last few years. You know why that happened. A large part of it is productivity increase that we've seen, obviously, with the larger production and our Mexican expansion, Dolores and La Colorada, and the mechanization in Peru that helped us there. But as you also mentioned, the byproducts that are an important part of our cost as well. So right now, we see in the market quite a bit of weaker market for base metals and gold prices. So we kind of factored that in for the second half of this year, obviously, looking at kind of actual lower prices. Time will tell where prices will go, and that will have some impact on our costs.

But I think if you look at the mechanization and improved productivity, these cost reductions, the lion's share of that, we already included in our lower cost over the last few years. I may pass it on to Steve to give you some ideas on cost inflation or possible inflation for next year, although just keep in mind we are not giving guidance out yet for 2019 in detail on the cost. They did not change those costs, and we remain with our three-year forecast that we did at the beginning of the year.

Steven Busby (COO)

Yeah. Chris, this is Steve. Relative to our base cost inflations and things, I would say overall, with the exception of Argentina and Manantial Espejo, our costs have been the escalation of costs have been pretty modest, down in the 2%-3%-4% range. We are seeing that relatively across the board. Q2, we did have a couple of unusual events with the shutdown at Huaron, actually, without that production. So when you factor in that cost and the restart-up, there's probably some cost impacts there on a unit basis that we won't see going forward. At Dolores, kind of a little bit of the opposite effect because we basically shut down the open-pit mine for a while and the underground mine, so our costs actually came down as we ran some of that stockpile out. Argentina, of course, had the big devaluation on the peso.

We do anticipate there's still high inflation, local inflation down there. So there will be some clawback as we go back towards the end of this year. But that gives you a fairly good feel of our base cost.

Okay. Thanks. Thanks, Steven. Michael. The other one's from me. So just thinking about 3Q versus 4Q, obviously expecting slightly stronger production in the second half. Can you maybe just talk through a couple of the operations and where there's moving parts on what we should expect on the production or anything significant on 3Q versus 4Q? Thanks.

Yeah. Chris, this is Steve again. The big things that we'll see different moving into the second half is really we don't anticipate that slowdown we had at Huaron during the second quarter and the second half. We also feel second quarter is more characteristic of what we'll see at San Vicente moving through the rest of the year. So when you factor those in, you'll see some improvement. There will be a bit of an offset at Manantial Espejo, but it's not really material relative to everything else. Manantial will go to more normal rate that we had predicted for the year in the second half.

Michael Steinmann (CEO)

Yeah. Okay. And just to weigh in here, Chris, I'm sure you noticed that there was quite some improvement at San Vicente as we start working our way through with the mechanization there. And as Steve mentioned, that will obviously, we hope, continue for the rest of the year and have a bigger impact. If you go back to Q1, San Vicente was a bit weaker there and really strengthened substantially in Q2.

Okay. Thanks, Michael. Just a last one from me. The dividend, what are you thinking there in terms of just keeping the cash balance versus M&A versus paying a dividend? How are you trying to get the balance right between your capital allocation?

Really nothing changed to what I said in the quarters before, I think. As the board, we have a look every quarter at the dividend. We normally try to make the changes at the beginning of the year, if you look back historically, unless something really would change dramatically in the market up or down. It's nice to have a strong cash balance at this point in the market. There's weaker silver price, weaker metal prices. I think there's more opportunity out there in the M&A space. And I'd like to keep some powder dry for that, for sure. But as I always mentioned, we're always happy to return some money to our shareholders. I'm happy that the board decided again this year or this quarter to pay the dividend.

Okay. Thanks, guys. And well done on a good quarter. Thanks.

Thank you, Chris.

Operator (participant)

The next question comes from Cosmos Chiu with CIBC. Please go ahead.

Cosmos Chiu (Managing Director and Director of Precious Metals Equity Research)

Thanks, Michael, Steve, and team. Maybe a few questions from here. Maybe first off on Dolores. As you mentioned, you've worked through some of those stockpiles, those high-grade stockpiles. How much more of those high-grade stockpiles do you still have? And have you started? I think you mentioned that you've started open-pit mining once again. Where are you in terms of? Are you at 100% yet, or are you trying to get to 100% sometime in Q3?

Steven Busby (COO)

Hi, Cosmo. Yeah, this is Steve.

Cosmos Chiu (Managing Director and Director of Precious Metals Equity Research)

Hi, Steve.

Steven Busby (COO)

I'll start with the mining. Relative to the mining, yes, we are up at full speed in the open-pit mine, 100%. We got back up and running at 100% pretty quickly once we sent everybody back to work. So really, there was about a three-week period. We had planned on mining roughly 45 million total tons of waste and ore this year from the open-pit at Dolores. We plan to accelerate a little bit through the second half, and we think we will make that tonnage this year. So everything's back to normal there. We don't anticipate. Relative to the high-grade stockpile, there's probably about 200,000 tons of rough numbers ahead of the pulp agglomeration plant right now.

But with that said, we do have quite a bit of high-grade exposed in the bottom of the pit that we lose access to that during the wet season, during the rainy season that we're currently experiencing. But as we come out of that, we'll get back into that. So there's ample high-grade at the bottom of the pit. It's just scheduling it in and scheduling around the weather that we deal with.

Cosmos Chiu (Managing Director and Director of Precious Metals Equity Research)

Okay. And I guess the grade was actually fairly good in Q2. At Dolores, 1.03 grams per ton, and your recovery has improved as well. Looking at gold, you're averaging 72.3%. I guess my question is, once you get back to the underground, once you start mining underground again, could we see a further improvement in the grade? And on that, in terms of recovery, was there improvement in recovery due to pulp agglomeration, or was it due to the improvement in grade?

Steven Busby (COO)

Yeah. Good questions, Cosmo. Relative to the underground production, because we're going to self-mining, we've kind of accelerated that schedule, as Michael mentioned, to self-mining. We don't anticipate a material supplement of production from the underground during the remainder of the year that will really start coming on more importantly into 2019. Again, as Michael mentioned too, we have plenty of that high-grade I mentioned in the pit that we can access. So we don't anticipate that being any kind of impact to our production. The higher recoveries we saw, there is a benefit with the pulp agglomeration plant because we get that quick return, particularly with gold because it leaches so quickly. We can get 45%-50% of the gold in just eight hours ahead of the filters in the pulp agglomeration plant. So that's really given us that boost. We anticipate that to continue.

We don't really think the grade's having much. We see more of an impact, whether it's sulfide ores versus oxide ores. That's really what impacts the gold recovery just by a few percentage points, so we're not talking anything major, but that's really what we look at for recovery.

Cosmos Chiu (Managing Director and Director of Precious Metals Equity Research)

Yeah. And then looking at your cost guidance here, certainly one of the assets that has had a very good cost profile in the first half is Dolores, much lower than what you had anticipated when we first kicked off 2018. How much of that lower cost would you say is due to higher byproduct gold? How much of that lower cost would you say is due to the fact that you weren't mining much in Q2? And how much of that would you say is actual decrease in the unit cost per ton?

Steven Busby (COO)

Yeah. I think the vast majority, the biggest impact for sure, is the gold price. We did get a little bit more gold out than we had forecast it. So the combination of higher quantity and higher price is really what drove those costs down. Our cost per ton are tracking reasonably close to what we were forecasting. As I mentioned, we did have three weeks without open-pit mining where we were mining off stockpiles. So there was basically three weeks of costs, no open-pit mining or underground mining costs. So it's a fairly substantial impact during Q2. Yeah.

Cosmos Chiu (Managing Director and Director of Precious Metals Equity Research)

Okay. Maybe switching gears a little bit. Manantial Espejo, that was the other one where the all-in sustaining cost guidance for 2018 has decreased quite substantially. How much of that is due to the deflation of the Argentine peso?

Steven Busby (COO)

Yeah. Another good question. The big surprise for us at Manantial Espejo was really on the grades. The head grades feeding the plant were substantially higher than we anticipated, and that was a positive reserve reconciliation in the areas we were mining, particularly in the Maria East underground. We definitely had some surprises there for better grades, and that's what really drove those costs, drove the productions up, and drove our unit costs down with that gold production. With that said, that depreciation was very substantial, and the majority of our costs are peso-related there, so it did have a fairly substantial effect as well, so the two together, obviously, is what really drove those costs quite favorably. We don't forecast in that reconciliation moving into the second half. We're moving more into the conceptual ore body.

We haven't really been mining there underground yet, so we don't know how that reserve model is going to behave. So we haven't factored in any kind of positive reconciliations moving forward. And we are anticipating a bit of a clawback on that depreciation in the second half.

Cosmos Chiu (Managing Director and Director of Precious Metals Equity Research)

Great. Thanks, Steve and Michael. That's all I have. Thanks.

Michael Steinmann (CEO)

Thanks, Cosmo.

Operator (participant)

The next question comes from Mark Mihaljevic with RBC Capital Markets. Please go ahead.

Mark Mihaljevic (Research Analyst)

Hi. Thanks, and good morning, everyone.

Michael Steinmann (CEO)

Morning.

Mark Mihaljevic (Research Analyst)

A little bit easier with a nice clean beat from you guys. So just a couple of quick ones for me. First off, obviously, you did tweak the copper guidance for 2018. I'm just wondering how much of that was a management decision to scale back and mine some of the lower copper-grade areas given the pullback in prices we've seen and whether that'll impact the 2019-20 outlooks or how we should be thinking about that?

Steven Busby (COO)

Yeah. Hi, Mark. Steve here. Yeah. I wish I could say we could dial it in on price that well, but that's not the reality. The reality is it's really mine sequencing according to accessibility. And as we develop our headings in these are old mines, so we're deep underground. We're deep in developing infrastructure in faraway places. So it's really just sequencing into ore that's in front of us and available to us according to our developments.

Mark Mihaljevic (Research Analyst)

Okay, and then I guess with the Dolores security issues, there had been some talk about putting in a more permanent security presence with the state or federal police. And I was just wondering if there had been a decision on that and if there was a sense of potential cost if this was being implemented?

Michael Steinmann (CEO)

Sure, Mark. So as you noticed, and we put that in our press release as well, that the state of Chihuahua and federal government reacted very quickly there to that issue and mobilized escorts for our vehicles along the access road after quite short. I think there was only about a week after the shutdown. So that's why we could restart the transportation that quickly. And we are really pleased with the support that we receive really from law enforcement at this time. On the cost side, for sure, there is more activity, much more activity there. We're talking about public roads here, obviously. I would like to clarify that there was never a security issue in our employee camp or on our side. And so the government is taking care of that. We are liaising with the authorities right now.

For sure, there will be some costs for food and lodging related for the additional security up there. I would not anticipate a major big impact to our costs from that at this time.

Mark Mihaljevic (Research Analyst)

Okay. Thanks. And then just one final one. With the pullback in silver prices, a lot of times we ask companies about stress testing their balance sheets. But given your cash position and free cash flow generation, just wondering if you're starting to see any more opportunities on the M&A front and whether some management teams are a little more willing to discuss with you guys now?

Michael Steinmann (CEO)

As you know, and as I mentioned many times, we are pretty picky on the M&A side. I think we are really looking for high-quality assets. As you can imagine, we are looking for assets that fit in our kind of current cost structure. And they have to be accretive and low cost. There's no point of just growing our production if it's not accretive and keep making money or being even better what we have right now. But having said that, there's definitely, I think, at this market, the kind of depressed metal price market, there is more opportunity out there. We really don't just slow down or speed up looking around based on metal prices because, as you know, that takes normally quite some time to identify the high-quality projects and kind of weed the bad ones out there, and so that's an ongoing process.

And then, of course, when the prices are a bit lower, often management teams are a bit more willing to enter discussions with us. But for sure, we are in a great situation here with our strong balance sheet to react if opportunities come up.

Mark Mihaljevic (Research Analyst)

Okay. That's it for me. Thanks, guys.

Operator (participant)

The next question comes from Chris Thompson with PI Financial. Please go ahead.

Kris Thompson (Senior Research Analyst)

Hey, good morning, guys. A great quarter. Congratulations. Just listened to BNN there and getting some good comments on that channel. Just a couple of quick questions. We'll start off with La Colorada. Obviously, the grade is tracking higher. Tons are tracking higher. Can you give us a sense, a bit of visibility on what to expect in the second half of this year there?

Steven Busby (COO)

Yeah. Hi, Chris. Good afternoon or good morning. I don't know where you're at these days.

Kris Thompson (Senior Research Analyst)

Thank you.

Steven Busby (COO)

Yeah. No, I think with the increased throughputs that we're seeing above our targets, we are kind of distributing our mine plan a little bit differently and starting to bring in. Not, we don't want to run that higher tonnage than we had planned just strictly on high grade. So we are kind of going to dilute the grade a little bit. I generally believe Q2 is probably a good reflection of kind of a steady state run rate at La Colorada right now in terms of tons, grades, cost.

Kris Thompson (Senior Research Analyst)

Okay. That's good. All right. Just moving on to Dolores. I know Cosmos was talking about the recoveries and the grades there, especially the nice gold grades. I'm going to sort of ask a pointed question. One gram on the gold side, is that sustainable in the second half of this year?

Steven Busby (COO)

That is a pretty pointed question. I would say we're probably going to come in somewhat less than that. I don't think it's going to. I think plus or minus 10%-15% of that.

Kris Thompson (Senior Research Analyst)

Okay. Great. You guys are doing a great job on that asset. Just Manantial, very, very quickly, nice grade bump. I know you did comment about that earlier versus the Q1 there. Sustainable at these levels?

Steven Busby (COO)

No. As I mentioned, Chris, that came as a surprise to us with a very positive reserve reconciliation in one area of the mine. We are mining out of that area. We're moving into a new area, the deeper part of Concepción, which we really haven't been mining yet. So we don't know how that one's going to behave. So we haven't forecasted that going forward.

Kris Thompson (Senior Research Analyst)

All right. Thanks, Steven. And then finally, just sending this in to here. Any chance of seeing 400 gram per ton silver grades out of this asset?

Steven Busby (COO)

The straightforward answer is that that would be a stretch. I think the grades we're seeing during Q2 are kind of what we expect going forward. And what's driving that a lot is that the big lateral we see nice grades throughout San Vicente, but we don't have that big 15-meter-wide lateral vein that we mine anymore. They're still very nice veins, but when you're comparing back to what we used to have, it is quite a bit of a different picture there. So it'd be a stretch to see us go to 400.

Kris Thompson (Senior Research Analyst)

Great, guys. Thanks, Steve. Thank you very much. Congratulations.

Steven Busby (COO)

Thanks.

Operator (participant)

The next question comes from Lucas Pipes with B. Riley FBR. Please go ahead.

Lucas Pipes (Managing Director)

Hey, good morning, everybody.

Good job on the quarter. I wanted to follow up a little bit more on the cost side as well. And if I recall correctly, three months ago or so, when you reported Q1 results, there were a number of questions about cost inflation in Argentina given the currency situation and such. And I think at the time you said it just takes a little longer for those sort of inflationary pressures to roll through. And I wondered here at this point, three months later, what are you seeing, not just in Argentina but across your operations in terms of higher labor rates and such? Thank you.

Michael Steinmann (CEO)

Yeah. I'll just start and pass it on to Steve. But obviously, we've seen further devaluation of the peso since we talked there last time in Argentina. So that helped us on the cost side to a certain level. As you mentioned, we talked about that some of that lower cost will be clawed back. We still anticipate that that will happen later on in the year. At the moment, it's kind of a steady state, and we see the positive impact to Manantial Espejo. I'll pass on to Steve. I mean, you might already comment on the other operations as well.

Steven Busby (COO)

Yeah. Look, it's just Steve. I don't have much more to say. I mean, apart from Argentina, I would say our escalations are pretty modest. They're in the 2%-4% range. No real surprises there.

Lucas Pipes (Managing Director)

Got it. Then switching topics, Navidad, I don't think it's come up much on the call or at all. What's the most recent status? Any development there? Can you update us in terms of what you're seeing on the ground? I would appreciate your thoughts.

Michael Steinmann (CEO)

Sure, Lucas. I can give you a quick update here. And I'm sure if you follow the press in Chubut, you I'm sure have noticed that the debate regarding the mining in the province has gained really much more momentum there. We've seen a lot of recent press reports indicating that the governor of Chubut and, of course, the national government are supporting really the debate in the legislature regarding mining activity in the province. So I think we'll see continuing that. And we also understand that there is a proposed bill there that would deal with mining in the province in certain areas. I think there's some coordination with some land use sensitivity in the province. And we also understand that Navidad will be located in the mining zone with low sensitivity.

So as I said before, we're really looking forward to this open and transparent debate here on mining in Chubut. And obviously, we are hopeful that responsible mining will happen in Chubut here. I think with the appropriate government controls, that could be a very good thing for all the stakeholders involved.

Lucas Pipes (Managing Director)

Got it. All right. Well, we'll continue to follow that, and I appreciate your update. Thank you.

Michael Steinmann (CEO)

Thank you.

Operator (participant)

The next question comes from Ryan Thompson with BMO. Please go ahead.

Ryan Thompson (Equity Research Analyst)

Yeah. Hi, Michael and team. I just had a quick question on Morococha. I know back at the Analyst Day that there was some talk about potentially having to relocate the mill at some point. Just wondering if you could provide any sort of update on that?

Michael Steinmann (CEO)

Yes. We talked about that. And I mean, if you look in our public filing, there's some information about that too. This is kind of a fluid situation, obviously, depending on how the mining advances with our neighbor there, Toromocho. We don't have really a fixed date right now. We're obviously discussing with our neighbor. There's enough time for us to do the engineering and make a decision when that happens. But right now, I don't know, Steve, do you want to add something?

Steven Busby (COO)

No. I think that we are looking at some engineering. But the big thing is we are in discussions and trying to work with their schedules and determine when we may have to move. We don't know when that is right now.

Ryan Thompson (Equity Research Analyst)

Okay. I think that's all I had. All of my other questions have been asked. But thanks for the update and congrats on the good quarter.

Michael Steinmann (CEO)

Thanks, Ryan.

Operator (participant)

Next question comes from John Bridges with J.P. Morgan. Please go ahead.

John Bridges (Analyst)

Hi, Michael, everybody. A modeling/accounting question. Steve, you mentioned with respect to Dolores that you pulled from the stockpile for three weeks and weren't mining either in the pit or underground. I would have thought that and that brought your cost down. But I would have thought that you would have already attributed cost to that stockpile. And so it shouldn't have had a significant effect on your reported costs for the quarter. How does that work out?

Robert Doyle (CFO)

Hi, John. Rob Doyle. Yeah. You are correct that we do inventory costs, and then as the inventory or the stockpile is processed, then those costs then flow through to our production. So that is correct. There is sometimes a timing difference, of course, and typically, the cost basis on our inventory may be lower than our current costs. So there is typically a bit of a benefit to processing inventory versus incurring the current costs of operations.

John Bridges (Analyst)

So is that a last-in-first-out situation where the stockpile ounces you pulled out were old ounces at low cost? Is that why it happened?

Robert Doyle (CFO)

It's actually a weighted methodology that we use on the stockpile at Dolores.

Steven Busby (COO)

Yeah. It's first-in-averaged out. So the other thing that happens there, John, is because of the large heap and the large inventory on the heap, there's a huge dilution effect that takes place there. So it gets pretty complicated when you get into the details. But generally, what Rob said is correct.

John Bridges (Analyst)

Yeah. Just as long as you don't lose the ounces in the heap like some miners do. Anyway, another example.

Steven Busby (COO)

Yeah. Good point.

John Bridges (Analyst)

Well done. Thanks, guys.

Operator (participant)

Once again, if you have a question, please press star, then one. Our next question comes from Lawson Winder with Bank of America Merrill Lynch. Please go ahead.

Lawson Winder (Analyst)

Oh, hello, everybody. Thanks for taking the question. I didn't hear you mention on the stockpiles, how large was the low-grade stockpile? And then I also did not hear you mention the grades of the existing stockpiles, either the low grade or the high grade.

Steven Busby (COO)

Yeah. Hi, Lawson. Steve here. Yeah. We don't really show the grades on the stockpiles in many of our reporting. We have massive amounts of low-grade, millions of tons scattered on that site that we stockpiled during the open-pit mining. The high grade, we did have, obviously, quite a large stockpile ahead of the pulp agglomeration plant as we're commissioning that plant. The grade of that high grade, I would say, is close to the grades that we've seen going through the plant during Q2. They're very good grades. And they were intentionally put there to give us some buffer capacity for that pulp agglomeration plant.

Lawson Winder (Analyst)

Okay. Great. And then just finally, I might have missed it, but I don't think I saw any mention of 2019 and 2020 production. So just with what happened at Dolores, could there be any change, whether it be higher or lower, in terms of that production guidance? I mean, I don't think you've obviously not changed that guidance. But I mean, where would it if we were to sort of risk-weight this, would it be potentially higher or potentially lower?

Steven Busby (COO)

Yeah, Lawson. We're just starting our budget process for next year. We'll be starting that next month and working through the mine plan. So we didn't provide any change to the forecast for the two-year outlooks. We will bring a new guidance out in January. Right now, I can't say that this would have much of a material impact to what we're going to see in 2019. But we need to work through the mine plans. And there's lots of factors that go through all that. So we're not willing to change anything at this stage.

Lawson Winder (Analyst)

Okay. That's it for me. And yeah, great job on a fabulous quarter, guys.

Michael Steinmann (CEO)

Thank you.

Operator (participant)

This concludes our question and answer session. I'd like to turn the conference back over to Michael Steinmann for any closing remarks.

Michael Steinmann (CEO)

Thank you, Operator. And thank you, everyone, for joining us for the call today. Looking forward to talk to everybody in November, it will be already, for our Q3. Until then, enjoy the rest of the summer. Thank you very much. Bye.

Operator (participant)

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your line.