Pan American Silver - Earnings Call - Q4 2018

Transcript

Operator (participant)

Thank you for standing by. This is the conference operator. Welcome to the Pan American Silver fourth quarter and full year 2018 earnings review 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 of Investor Relations. Please go ahead.

Siren Fisekci (VP of Investor Relations)

Thank you, Operator, and welcome everyone to Pan American Silver's fourth quarter and full year 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 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 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 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 fourth quarter and full year 2018. Quickly recapping our Q4 results, we generated $11.9 million of cash from operations, impacted by lower prices for all metals and lower silver, gold, and copper sales. The lower quantities sold reflects an inventory build at San Vicente and La Colorada, which represents approximately $8.4 million of revenue that should be realized in the next quarter. The net loss for the quarter was $63.6 million, or a basic loss per share of $0.42. The adjusted loss was $2 million, or a $0.01 loss per share. The most significant impact on Q4 earnings was the nearly $28 million impairment charge on our Manantial Espejo, COSE, Joaquin assets, which resulted from the new Argentine export tax introduced in late 2018, combined with the decrease in short-term consensus metal prices.

The other significant reductions to earnings included net realizable inventory adjustments, costs related to the Tahoe transaction, tax expense from foreign exchange changes, and an inventory write-off to the credit loss related to a third-party refinery, all of which totaled to $36.3 million. All-in sustaining costs in Q4 were $15.86, including $13.3 million of NRV adjustments. This cost net of NRV adjustments was $13.36 for the quarter and was impacted by the lower silver ounces sold, partially due to the inventory build, as well as lower byproduct credits from lower prices for all metals in Q4. Sustaining capital expenditures of $31.3 million for the quarter reflect the tailings storage expansion and mine deepening project that went on, as well as an increase in spending at La Colorada for equipment rehabilitations and raise boring activities. For the full year 2018, our operations generated a healthy $155 million in cash flow.

Operating cash flow before working capital changes, interest, transaction costs, and taxes of $237 million in 2018 was more than sufficient to fund sustaining capital, taxes, and dividends. Non-sustaining capital cash outflow of $45 million and $11 million repayment of short-term debt resulted in a cash and short-term investment balance at the end of the year of $213 million. Annual 2018 net earnings were $12 million, or 7 cents per share. Adjusted earnings were $59.4 million, or 39 cents per share. We previously reported preliminary operating results, which showed that we met our production guidance for all metals except silver, where we were 200,000 ounces, or 0.8% short of the low end of our guidance range. In 2018, we produced 24.8 million ounces of silver at all-in sustaining costs of $10.73. All-in sustaining costs are in line with original guidance of $9.30-$10.80.

All-in sustaining costs net of NRV adjustments were $9.68, well in line with our revised range of $8.50-$10 provided in Q2 and $0.59 lower than in the year 2017. 2018 sustaining capital was $105.2 million, compared with our forecast of $100-$105 million, reflecting higher pre-stripping and leach pad expansionary activities at Dolores, largely offset with lower capital spending at Huaron on infrastructure upgrades, equipment procurements, exploration, and tailings facility expansion, mostly as a result of timing. Project capital was $41.3 million, compared with the revised forecast provided with our Q3 2018 results of $40 million, and was directed to the COSE and Joaquin mine developments in Argentina, as well as investments at Dolores and La Colorada. Cash costs of $3.35 per ounce in 2018 were the lowest on record since 2006.

We beat the original guidance issued in January 2018 of cash costs between $3.60 and $4.60 and were within the revised range provided with our Q2 results. Silver production in 2018 reflects shortfalls at Dolores and San Vicente. At Dolores, above-average rainfalls during the third quarter hampered our ability to make up open pit pushes following the security-related road closures in June, resulting in a shortfall of tons placed on the heap and excess leach solution dilutions. In addition, slower cement deliveries due to logistical challenges, not related to past security issues, required lower solution applications and reduced leach rates. During Q4, we installed two expansion kits in the pulp agglomeration plant at Dolores, which has resulted in achieving nameplate throughputs on most days.

We plan to install the third and final filter expansion kit during the first half of this year in order to maximize throughput and sustain overall rates at the heap leach pad of 20,000 tons per day. At San Vicente, narrow-vein mechanization efforts required additional operator training, resulting in lower throughput and increased dilution. Operations at La Colorada and Morococha performed better than expected, partially offsetting the impact from Dolores and San Vicente. La Colorada set an annual production record for silver and zinc and record low cash cost of $2.02 per ounce. We provided 2019 production and cost guidance on January 21st, with annual silver production expected to be between 26.5-27.5 million ounces at an all-in sustaining cost of $10.80-$12.30. We expect to produce between 162,500-172,500 ounces of gold.

A later startup of the COSE mine, due to a change in mining method, pushed out some of the silver and gold ounces we were expecting in 2019 into 2020. Project capital is estimated at $30 million in 2019, which will be directed at completing construction of the underground declines at COSE and Joaquin mines to bring production on stream in the third and fourth quarter of this year, as well as development of the underground mine at Dolores to achieve the targeted 1,500 tons per day. Please keep in mind that this guidance does not include any production from the Tahoe assets. We will issue revised guidance in Q2 after we started the integration of these new assets. Yesterday, we also released our year-end 2018 mineral reserve and resource report.

Proven and probable silver mineral reserves at year-end were 280 million ounces and gold mineral reserves were 1.7 million ounces. Successful near-site exploration programs replaced large parts of the silver mine in 2018, especially at our high-return assets, La Colorada, Huaron, and Morococha, where we replaced 132%, 115%, and 220% of the silver mine. Again, the reserves and resources yesterday reported do not include the Tahoe assets. On October 23rd, 2018, we announced the major new discovery at La Colorada with wide zones of polymetallic mineralization below our current production levels. This is a very exciting development and, without doubt, the largest discovery Pan American has ever made. In 2018 we drilled 12,600 meters on this current target. Even at the very early stage of this remarkable discovery, none of the intercepts encountered are included in the year-end 2018 reserves or resources.

I would encourage you to take a look at the news release we issued yesterday for more information on these impressive results. The sections have also been posted on our website under La Colorada. Intersects of up to 308 meters containing 6.5% lead-zinc combined with 46 grams silver and 0.2% copper, or intervals in the 12- to 90-meter range, carrying over 8%-13% lead-zinc combined, are more than outstanding. Silver is more variable in this new ore body, but returning over 100 grams in many samples. In 2019, we are planning 42,000 meters of drilling in this current discovery with the aim of releasing an initial mineral resource estimation later this year. For the company as a whole, the total exploration budget for 2019 is approximately $20 million, and we plan to complete about 122,000 meters of diamond drilling.

This does not include any exploration spending on the Tahoe assets. In closing, I would like to congratulate Matt Andrews and Monica Moretto for receiving the Robert R. Hedley Award for Excellence in Social and Environmental Responsibility from the Association for Mineral Exploration. This is a strong endorsement of the leadership within Pan American for Social and Environmental Responsibility. Pan American is at a pivotal point in its history, and I'm very excited by the many prospects and opportunities that lie ahead of us. Our transaction with Tahoe is expected to close tomorrow. Our focus will be on integrating the new assets and capturing valuable synergies. We are entering 2019 in a strong financial position, enabling us to take a careful, thoughtful approach to executing on our growth opportunities. These growth opportunities are among the best in the sector, with the potential to unlock substantial value for our shareholders.

With that, I would like to open the call for 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 are 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 comes from Chris Thompson of PI Financial.

Hi, good morning, guys. Congratulations on a good year. Transformational. Just, my questions relate very much to Dolores. The first question, what do you mean? Just give us a sense of how the underground ramp-up is going there?

Michael Steinmann (CEO)

Yeah, thanks. I'll pass it on to Steve.

Steve Busby (COO)

Hey,good morning, Chris.

Chris Thompson (Analyst)

Hi there.

Steve Busby (COO)

Yeah, as we kind of alluded to, we took a major disruption on that ramp-up during 2018 to address a couple of items. One was to address the access road security shutdown that we faced for a month. We demobilized all the underground personnel and contractors, and we decided over that month that it was shut down. It was an opportunity for us to kind of change direction. We had been using a primary underground mine development contractor in Mexico, and we decided it was time, ahead of time what we had planned to do, to bring our own people on board. So we decided not to bring back the contractor, bring our own people on, and start training. And that disrupted that whole ramp-up quite significantly. So we're sitting here today. We're feeling pretty good about getting our people trained. We got the crews working.

We still need some additional personnel. We're trying to get on board as we speak, but we're mining at rates of around 500 tons a day. We're starting to push above that now. We're going to be opening up the south zone, so we'll have a central zone and a south zone that we'll be mining towards the middle part of the year. And we're feeling pretty good that we'll be able to ramp up towards the latter part of the year to the 1,500 tons a day.

Chris Thompson (Analyst)

So Steve, we should be basically just, I guess, modeling 500 and then a slow ramp-up to 1,500 in Q4? Yes, I think that would be accurate. Okay, thanks for that. Obviously, you mentioned installation of the final filter kit in H1. Again, what should we be modeling by way of throughput rates to the leach pad in H1 this year?

Steve Busby (COO)

Well, throughput to the leach pad, we're still maintaining the 20,000 tons a day total rate. We're currently seeing right around design tonnage right now, even with just the two expansion kits on the filters, maybe slightly below it. So I would say we're probably going to be in the 5,200-5,600 tons a day range for the first half of the year and probably 5,600 tons a day thereafter, which is a design rate.

Chris Thompson (Analyst)

Great, thanks for that. Steven, then the final question, more exploration more than anything else. Just looking, can you maybe just talk to the exploration upside and potential for reserve growth at Dolores?

Steve Busby (COO)

Sure, sure, Chris. Yeah, I mean, we drilled around 8,000 meters last year. That was really centered on the underground and expanding. You saw a little increase in the inferred resource at Dolores.

The pit into the north is pretty well defined. We, per se, are looking at some on surface and some more regional stuff going into 2019. So at the moment, there's not a huge possibility to increase that reserve base outside of what is in resource at the moment. I think it's fair to say, Chris, that all the upside on the exploration at Dolores is on the underground. As Chris mentioned, it will be difficult to push back the pit further. There's a geographical or topographical, better said, constraint to the pit, so that won't be possible. So all the upside will go probably further south as I can see in the underground. So I guess really you're only going to get a better handle on that when you start ramping up production on the underground and maybe positioning drills underground to drill off opportunity?

Chris Thompson (Analyst)

That's correct.

Yeah, that's Chris.

Steve Busby (COO)

Yeah, I mean, to be fair, we did have some success in 2018. There are two structures there, and we were able to put into resource and reserve some of Alma Maria. So sure, I mean, as we're able to ramp down and further down, we'll get some better accesses and be able to maybe expand that.

Chris Thompson (Analyst)

Okay, guys, thanks. I'll jump back in the queue. Thanks.

Our next question comes from John Tomazos of John Tomazos Independent Research.

John Tumazos (Director)

Thank you very much. We admire your strong balance sheet and net cash position. And if I could ask about three financial alternatives with the strong balance sheet. First, at low silver prices, would you hold back and not sell some of your production? McEwen Mining held back some gold production this past year, for example.

Second, after the transaction closes, some of the Tahoe shareholders might move on. Would you repurchase Pan Am stock, or could you update us as to whether you have a buyback authorization? And thirdly, will you have a buyback authorization for the continuing contingent value right where some people might just sell that like it's a dividend or something?

Michael Steinmann (CEO)

Thank you, John. Interesting questions. I'll go start with the first one, holding back silver production. Obviously, we're continuously selling silver and gold production completely unhedged, as you know. We have some hedges on our base metals. The idea is really to provide to our shareholders full exposure to the silver price, and that's how we achieve. We have, as you saw in the press release, sitting on a very, very large reserve of 280 million ounces.

We will add in another probably 280 million ounces around there, I think, from the Tahoe side. We mentioned that we will do a reserve update mid-year and include all these assets in our reserve base. If you look at our reserve base of far over 500 million ounces of silver and then over 1 billion ounces in the resources as well, there's a lot of silver available to us to mine at different metal prices and at higher metal prices as well. There's really not a need for us to hold back and kind of hoard the silver as we want to be unleashed and provide exposure to silver price at any time in the market. Regarding return to our shareholders, we started paying a dividend in 2010, strong return to our shareholders of over $400 million since then.

There was some kind of share buyback in there in the past. At the moment, we are opting really on returning value to our shareholders through dividend and not share buybacks, and then your last question was, I believe, on the CVR, and look, we will close the transaction tomorrow, and then we'll see how the CVR trades and what happens over the next years, if people are actually willing to sell in that CVR or not, what kind of activity we'll see around there, so we'll just see and wait on that.

John Tumazos (Director)

Thank you.

Michael Steinmann (CEO)

Thank you, John.

Operator (participant)

Our next question comes from Mark Mihaljevic of RBC Capital Markets.

Mark Mihaljevic (Analyst)

Hi, thanks, and good morning, everyone. First question for me, obviously, we've seen some pretty bad weather down in South America, Peru in particular. Have you seen any impact of that on the operations?

Steve Busby (COO)

Hey, good morning, Mark. This is Steve.

We are seeing some disruptions in the transport routes along the Central Highway, but our operations themselves have been reasonably stable. We haven't seen the heavy rainfalls at any of our operations at this time. So we're not worried about the operation, but we are worried about the transport routes. If you remember, I believe it was two years ago, we had to look at alternative routes into Morococha that added about 18 hours to the trip. We may be facing that again this year if this heavy rain persists. But we're not seeing it up at the mine sites themselves at this point.

Mark Mihaljevic (Analyst)

Okay, so probably something we'd expect to see more on, maybe a bit of a higher cost and maybe some lags with sales, but not likely anything on the production side is probably a fair assessment.

Steve Busby (COO)

Yeah, that's correct.

Mark Mihaljevic (Analyst)

Okay.

Were there any issues with the trucking strike there? I think there's been some noise out of Peru on that front. So did that actually have an impact with logistics as well? At this point, no, we have not seen any impacts from the truckers' strike. Okay. Then moving over to La Colorada, again, continues to be the workhorse of this company and nice growth to the reserve. Just the one caveat there being, I guess, the grade did come down a bit, kind of more in line to where you guys have been mining over the past few years. So is this kind of a reset given some reinterpretations there and kind of what you're actually able to deliver, or is it just that you added some or some of the tonnage that came in was just lower grade?

Steve Busby (COO)

Yeah.

Mark, we did kind of rationalize some of the reserves at these higher production rates. We did add a little bit of dilution to our reserve base. But in addition to that, the biggest effect is the new areas that came in are a little bit lower grade as well. But as you can tell, we're very happy with La Colorada with the additional production rates. It is the workhorse of the company, and it's doing a great job. Just to add, Mark, to add a few statements to this, you saw over 100 million ounces of proven and probable reserves. La Colorada is producing over 8 million ounces of production this year. That's the plan. Just with the proven and probable reserves, that's to continue for the next 12 years. We have a strong resource base as well at La Colorada. Of course, we're going deeper down in the asset.

So the resource, the deeper we go down, will have a bit lower silver grades in the veins as well and higher base metal grades. And then obviously, don't forget the really massive discovery there. I think obviously every quarter we will show some results. Chris is drilling a lot of meters this year. I believe it's like 40,000 meters. Yeah, that's 42 and 10,000 from a carryover, so. So 50,000 meters just on this current target, which I'm sure you have seen. They're very impressive results. Of course, there's lower silver grade, but keep in mind that's kind of on the side. So that does not affect our mining of our reserve and resources in the vein. That's just an additional discovery for La Colorada.

Mark Mihaljevic (Analyst)

Yeah, perfect. Definitely exceptional asset, and that current area looks very interesting. So looking forward to that evolving over the next couple of years.

I guess just kind of one follow-up to La Colorada, kind of as you look forward, what kind of throughputs do you think you can actually push out of that now that you've stabilized at the 0.19 million tons per quarter? Is that kind of a steady state, or should we expect you to continue to block and tackle that higher?

Steve Busby (COO)

Great question, Mark. We're extremely pleased with the de-bottlenecking efforts that have taken place there. And obviously, these 2,100 ton a day rates that we're seeing are very pleasing. It's far beyond what we thought we'd achieve, even though that infrastructure we put in place we knew was pretty robust. We got a resourceful group down there, and I'm not going to hold them back. They're doing some things. They're looking at ways to tweak some more out.

But obviously, as they de-bottleneck, they're taking the low-hanging fruit as days go on, so it gets harder and harder. I would not, at this point, project we're going to see increases there. But I am cautiously optimistic that over the long run, we're going to squeeze a little more out of that thing.

Mark Mihaljevic (Analyst)

Perfect. And then just kind of shifting gears a little, wondering if there have been any updates with Shalipayco? I guess you guys have the free carry interest there, and I guess you previously outlined that as potentially non-core. So is that project still advancing? And kind of if there were any updates on the process there?

Steve Busby (COO)

Yes, it's definitely a non-core asset for us. It's a zinc project, a very large zinc project in Peru, which is run by Nexa. And we own a 25% free carry into production on the asset.

I would refer to you to look at the Nexa public statements they made, I think just last week or this week. And also their presentations that I've seen, where Shalipayco is in their development pipeline somewhere in the early 2021, 2022, somewhere around there. But have a look on their presentations, please. It's all there they're talking about. But as I said, this is definitely one of the non-core assets on the Pan American side.

Mark Mihaljevic (Analyst)

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

Steve Busby (COO)

Thank you, Mark.

Operator (participant)

Our next question comes from Lucas Pipes of B. Riley Financial.

Lucas Pipes (Managing Director)

Hey, good morning, everyone.

Michael Steinmann (CEO)

Morning, Lucas.

Lucas Pipes (Managing Director)

I wanted to first ask kind of a question on Escobal as we look forward to the combination of these two companies.

What are some of the milestones that the market should be kind of having on the radar as you look to integrate this asset? Would appreciate your thoughts on that. Thank you. Sure. I'll take that, Lucas. And I think we have to shift a little bit here on the thinking. I know that Tahoe always announced the milestones on the consultation process, which will continue. But as you said, the transaction will close tomorrow. And we are looking forward to advance our plans and especially engage with the communities in the region. So our goal is really to establish the trust through a fair, transparent, and honest, respectful dialogue. So that's really important to get going right now with the regional communities. We do not believe that this is a unilateral solution, and we have always pursued dialogue, consensus, and mutual beneficial relationships with the stakeholders.

We'll continue to do that at Escobal. And this takes time. I think from the beginning on, I was very clear that this will take time. We will take the time necessary to get this right and build long-lasting trust with the communities. So while that's going on, obviously, with the communities, inside the communities, the consultation process is advancing through the Ministry of Mines. But at the moment, that's really how it works. So we will take our time. Stay tuned. I will give updates. That's first close tomorrow, and then start the integration. We'll give updates, obviously, every quarter. So do you have a guesstimate at this point, kind of how quickly Escobal could come back to full capacity?

Michael Steinmann (CEO)

No, Lucas, I don't have.

Obviously, the deal structure that we have here with the CVR reflects exactly that, that the CVR will be paid out once we have the first shipment of concentrate from the site. So that reflects the fact that there is no fixed timing on it. As I said, it is very important here to get this right and take the time necessary to do that right. While you do that, is there a sense of kind of what the capital expenditures and the OpEx at Escobal are while you take your time?

Steve Busby (COO)

Yeah, Lucas, this is Steve. We're going to be spending the next month very closely with our team down in Guatemala as we integrate and prepare budgets and get into details on the strategy. As Michael alluded to, we are focusing the strategy in the communities.

It's going to change kind of the way things have been doing recently. So we need to get on the ground. We need to understand that strategy better, put the budgets together. I don't have a number that I'm willing to share at this time. Our goal is to come out in May with a new kind of care and maintenance budget for that as we launch on that strategy to work with the communities. So at this point, I don't want to give a number yet.

Lucas Pipes (Managing Director)

No, that's appreciated. Maybe one last question on Escobal, and then I'll switch topics quickly. But when I looked at some of the historical data, it appeared to me that Escobal never reached design levels of kind of below $100 per ton for ore. So do you have a sense where operating costs per ton should be shaking out down the road?

Any updated views on that?

Steve Busby (COO)

Yeah, Lucas, I do not. We have not had a chance to really get into that level of budgeting. As Michael says, I mean, we are anticipating a lengthy process here with the communities, and that's kind of where our focus is right now. We do have a crew in the mine doing care and maintenance, quite capable, quite competent group. And we'll get our hands around that, understand better as we bring that up to operations what the cost will be. But we haven't even started that process yet.

Lucas Pipes (Managing Director)

Gotcha. No, that's helpful. Thank you. And then turning it over to Navidad. Any progress on that front? I know that it's been a pretty difficult just kind of regulatory backdrop in Argentina, but would appreciate any updated thoughts on progress there. Thank you.

Michael Steinmann (CEO)

Yeah, sure.

Just to give an update, what happened in the province of Chubut, the elections in Chubut, like in, I believe, nine or 10 other provinces in Argentina, have been advanced, so they will happen earlier. Primaries will be in the first week of April, and then the final election in the first week of June. That's a bit different than on the federal side, well, the election will happen in October this year as well, so we'll go with there's an election process going on right now in the province, obviously, and decide that. I think nothing changed from what I said and stated before. I think everybody is working diligently towards a solution here at Navidad, and we are supporting those efforts, obviously, in the province.

And hope that there will be a solution which will be a law, an amended law that does the zonification and allows some zones of mining and some zones of non-mining in the province to go forward. And I think it's an incredibly good project that would provide a lot of support, a lot of jobs, and a lot of support to the province for many years to go.

Lucas Pipes (Managing Director)

Gotcha. Okay. Well, that's very helpful for now. I may jump back in the queue, but really appreciate all of your detail here. Thank you.

Operator (participant)

Once again, if you have a question, please press *, then 1. Our next question is a follow-up from Chris Thompson of PI Financial.

Chris Thompson (Analyst)

Hey, guys. Just a quick follow-up question. Argentina again. Any comments on cost pressures, inflationary pressures in Argentina right now?

Michael Steinmann (CEO)

I can take the inflationary part and then refer to Steve for the cost. Yeah, it was for Argentina, not an easy year last year. I think we ended up somewhere in the high 40s on the inflation. You saw there was a big devaluation phase that happened. Actually, it was a short but very abrupt time in, I believe, August, July or August. And that was not an easy year. So I think the projections right now are lower inflation rates for the years to come here. I encourage you, obviously, to read the information from the Argentine federal government. But definitely, the year-end was around, I think, higher 40s, somewhere in the 45%-47%, which for sure, the devaluation helped us on the cost. But then there's obviously pressure there to reclaim part of that.

I will pass it on to Steve to give some more details on that.

Steve Busby (COO)

Yeah, Chris, this is Steve. And as Michael says, we've come out of 2018 in really good condition. Our costs have actually been reduced with that significant devaluation that took place. But we are facing the clawbacks, as we suggested. And what we have planned for this year is kind of a 10%, if you will, clawback of costs starting right out of the box in January. We think we're seeing that. And then what we're planning from there on is kind of a balance. I mean, it's a crystal ball. It's a balance between inflation and devaluation to where we're kind of projecting a modest 5% increase in US dollar terms overall, being the offset of the devaluation to the inflation. So that's what we're planning this year.

That's the best we can do right now.

Chris Thompson (Analyst)

All right, guys. Thanks for that.

Operator (participant)

Our next question comes from John Bridges, J.P. Morgan.

John Bridges (Analyst)

Hi, Mike. Steve. I was just wondering, following on from a previous question, the write-downs in Argentina, the extra taxes, the windfall taxes there, were only supposed to be going for a year or two. Have you taken a more conservative stance? Is that what led to the asset value cut?

Rob Doyle (CFO)

John, hi. Morning. It's Rob Doyle here. You are right that the law as currently written is through to the end of 2020. So it is a relatively short-term law, export tax. The reason why it really hits the projects that we have in Argentina is because of the relatively short-term nature of those projects. COSE and Joaquin are significant producers, but really right over this period, 2019, 2020, 2021.

So it really does impact the carrying value of those assets.

John Bridges (Analyst)

Okay. Okay. And then perhaps as a follow-up, I guess you've got enough core now for the metallurgists to play with. So I just wonder, like La Colorada, if you have a better sense as to what the metallurgy is of that skarn material.

Rob Doyle (CFO)

Yeah. We're certainly, as we drilled through nearly 13,000 meters at the end of 2018, we're going into 2019. We will start. We do have a lot of core coming in now, and we will obviously start to review that with the technical services guys, with Martin and Steve. And yeah, certainly, I would expect us through this year, as we build towards that initial resource, to have metallurgical testing completed.

Steve Busby (COO)

Without going into very detailed geological descriptions here, but it looks, to me, at least looking at the core, as a very coarse polymetallic mineralization.

John Bridges (Analyst)

We'll see.

Michael Steinmann (CEO)

I mean, yeah, John, if I can chime in on that as a metallurgist. At La Colorada and the veins, we actually have wonderful sulfide metallurgy. I mean, the flotation is very efficient. The selective flotation of lead and zinc is very efficient there. We're seeing coarse-grained minerals of sphalerite and galena in the veins. From what I've seen of the core of the skarn, it looks every bit as coarse-grained, if not even cleaner and better. I'm really excited to start doing some testing. We haven't started that process yet. Just visually looking at the core, I'm kind of with Michael. It looks really exciting. Yeah. It feels as if you might be able to avoid the bulk concentrate sort of. I think almost without a doubt. It's that clean. Yeah. Yeah.

And there's a bit of copper too, which will be exciting to play with. And we really are seeing chalcopyrite as well. So again, who knows what could happen? Wow. Okay. Cool. I look forward to the update.

John Bridges (Analyst)

Thank you so much.

Michael Steinmann (CEO)

Thank you.

Our next question is a follow-up from Lucas Pipes of B. Riley Financial.

Lucas Pipes (Managing Director)

Yes. Good morning again, and thank you for taking the follow-up question. I wanted to ask what the throughput was at the Dolores Mill and how much came from underground versus open pit. And then if you have a sense for the average grades and recoveries at the Dolores Mill, again, from underground versus open pit. Thank you.

Steve Busby (COO)

Yeah. Thanks, Lucas. Right now, the pulp agglomeration plant, as I alluded to earlier, we're running today right around 5,200-5,300 tons a day up to the design 5,600 tons a day pretty regularly.

Of that, 500 tons a day is coming from the underground, and the rest is coming from the open pit. And then we're going to be ramping that underground up, as we mentioned, through the end of the year, up to the 1,500 tons a day. And that'll push some of that open pit lower grade of the high grade back to the low grade circuit so that we maintain 20,000 tons a day to the heap.

Lucas Pipes (Managing Director)

Got it. Okay. No, that's helpful. And then one last question here. Earlier this month, there was a local news report about the court ruling regarding the Chinalco operations at Morococha. Could you give us an update there and what the impact to Pan American might be of that court ruling?

Michael Steinmann (CEO)

Yeah, Lucas. We don't see that being an effect to us.

That dealt with some residents that remain in the old town of Morococha that has to relocate to allow that open pit to advance. It doesn't affect us. Our operations are outside of that. We're working directly with Chinalco, trying to determine the best timing for us to relocate our mill. Someday, we'll have to relocate that mill. At this point, we do not have a date that we have fixed in stone as to when that's going to happen,

John Bridges (Analyst)

and when you have to relocate the mill, is any financial impact to Pan American of that, or how would that be worked out?

Michael Steinmann (CEO)

Yeah. Chinalco will put up some of the money for that relocation. We had to relocate some of our offices and shop infrastructures back about six, seven, eight years ago, and they put up some money on that.

They will have to put up some money on the mill. We'll have to put up some as well. We'll probably put up the majority, slight majority of that overall, depending on what it's going to cost to do that. We haven't really started the engineering studies on that yet.

John Bridges (Analyst)

Okay. Well, this is very helpful, and I appreciate you taking the follow-up question and providing so much detail. Thank you.

Mark Mihaljevic (Analyst)

Thank you. Thank you, Austin.

Operator (participant)

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

Michael Steinmann (CEO)

Thank you, Operator. As you all heard, the Tahoe transaction will close tomorrow, and I would like to take the opportunity here to welcome all our new stakeholders to Pan American Silver.

I intend to address our new members of the workforce, our new community members, and indigenous groups around the operations, and our new shareholders in the same open and honest manner that we always worked and always will work at Pan-American Silver. I'm looking forward to address everybody for our Q1 call in May. Until then, have a good time, everyone. Thank you.

Operator (participant)

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