Pan American Silver - Earnings Call - Q4 2019

Transcript

Operator (participant)

Thank you for standing by. This is the conference operator. Welcome to the Pan American Silver fourth quarter and year-end 2019 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 one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star zero. I would now like to turn the conference over to Siren Fisekci. Please go ahead.

Siren Fisekci (VP of Investor Relations and Corporate Communications)

Thank you, Operator, and welcome everyone to Pan American Silver's fourth quarter and year-end of 2019 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.

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. Media and other participants on the call are invited to participate in listen-only mode. 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 fourth quarter and full year 2019. Our results clearly reflect the significant contribution of the mines we acquired with the Tahoe transaction, which closed on February 22nd, 2019. Consolidated gold production rose by 380,000 ounces to a total of 559,000 ounces in 2019. Revenue of $1.35 billion was up 72% over 2018, primarily on higher gold sale volumes and higher precious metal prices. In 2020, we are expecting production increases of 7% for silver and 16% for gold. Considering the strength of our business and financial position, the board has decided to increase the quarterly dividend by 43% to $0.05 per share. Net income in Q4 2019 was $51.7 million or $0.25 per share.

This included investment income of $33.7 million, mostly related to the gain on our 17% interest in New Pacific Metals, offset by a $40.1 million impairment charge related to the Manantial Espejo mine in Argentina. Net income for the full year was $111.2 million or $0.55 per share. Adjusted income in Q4 2019 was $68.9 million or $0.33 per share. Full year adjusted income was $158 million or $0.78 per share. Record quarterly net cash flow from operating activities of $129.5 million was recorded in Q4 2019, reflecting strong operating performance and improvement in precious metal prices during the quarter. Operating cash flow before working capital changes, interest, taxes, and mine care and maintenance was $151 million in Q4. The strong cash flow allowed us to repay $40 million in our line of credit in Q4, bringing the total repaid in 2019 to $60 million.

At year-end, $275 million was drawn on our line of credit. We already repaid another $15 million in January of 2020 and plan to continue deleveraging our balance sheet according to our objective of carrying no debt. 2019 operating cash flow before changes in working capital, mine care and maintenance, and income tax of $432 million was enough to fund our operating requirements, including sustaining capital, income taxes, and dividends. It also covered our growth capital, transaction costs, paid for mine care and maintenance, and increased our year-end 2019 cash and short-term investment by $26 million.

At December 31st, 2019, cash and short-term investments totaled $238.3 million, and working capital was $517.2 million. Turning to operations, production in 2019 was in line with expectations while costs were below our guidance. We produced 6.6 million ounces of silver in Q4 2019, bringing total production in 2019 to 25.9 million ounces.

Consolidated gold production was 173,900 ounces in Q4 and 559,200 ounces for the full year. All-in sustaining costs for the silver segment of our operations were $11.37 in Q4 and $10.46 for the year. Relative to 2018, costs benefited from higher than expected by-product credits and positive net realizable value inventory adjustments, and were negatively impacted by an increase in concentrate treatment charges. All-in sustaining costs for the gold segment of our operations were $901 in Q4 and $948 per ounce for the year. Sustaining capital of $179.1 million came in below our guidance of $203 million-$213 million, largely as a result of timing. The deferred CapEx is included in our guidance for 2020 sustaining capital. In 2020, we are expecting to spend $225 million-$240 million on sustaining capital.

Important projects are heap leach pad and waste rock dump expansions at Dolores, Shahuindo, and La Arena, as well as tailings storage expansions at La Colorada and Timmins. Project capital of $22 million-$27 million is largely directed at the La Colorada's current discovery and production expansion at Bell Creek Mine. We are expecting to produce 27 million ounces-28.5 million ounces of silver and 625,000 ounces-675,000 ounces of gold in 2020. All-in sustaining costs are expected to be in the range of $10.25-$11.75 for the silver segment. The moderate increase in all-in sustaining costs is related to higher treatment charges for concentrates, a lower zinc price assumption, and higher sustaining capital.

All-in sustaining costs for the gold segment are expected to be in the range of $1,090-$1,170 due to higher sustaining capital and more conservative assumptions regarding positive grade reconciliations at La Arena and Shahuindo for the new pit phases. Positive grade reconciliations at the same levels as 2019 would have a positive impact on the 2020 cost estimate. Further information on our 2020 guidance is available in our news release issued on January 15th. 2019 was a transformative year for Pan American. I'm very pleased with what we have achieved in a short time frame and how we are positioned for the future. We completed the highly accretive Tahoe acquisition, adding four new mines to our diversified portfolio, and we are capturing annual G&A synergies of $25 million-$30 million. The Escobal mine offers material upside for investors.

A new government under President Alejandro Giammattei took office in Guatemala on January 14th, 2020. We look forward to the new government advancing the court-mandated ILO 169 consultation process with the indigenous population. Executing the Tahoe transaction was an exceptional event, yet we had another exceptional event with the discovery of the large polymetallic skarn at our La Colorada mine.

In December of 2019, we announced an inferred mineral resource estimate for the skarn of 72.5 million tons, averaging 44 grams per ton of silver, 0.17% copper, 2.02% lead, and 4.4% zinc, truly a world-class deposit. In 2020, Pan American plans to invest $16 million-$18 million on the drilling program, early-stage engineering, and metallurgical testing for the La Colorada skarn. The 44,000-meter drill program is focused on infill and exploration drilling to further define, expand, and add confidence to the inferred resource estimate. Last week, we released the results of 14 additional holes conducted during the fourth quarter of 2019, which were not included in the resource estimate and indicate the potential to increase our initial resource estimate. That wraps up my formal comments, and 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 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 two. We will pause for a moment as callers join the queue. Our first question comes from Chris Terry with Deutsche Bank. Please go ahead.

Chris Terry (Director of Metals & Mining Equity Research)

Hi, Michael, and congrats on a great end to the year. A few questions from me. Just in terms of the La Colorada skarn discovery, you said you'd spend $16 million-$18 million, I think, this year. What are the next data points that we should look for just for project updates with the next addition to resource met testing, project timelines, etc., that we should look out for? Thank you.

Michael Steinmann (President and CEO)

Yeah, sure. Good morning, Chris. First of all, we'll put out every quarter, I think, a result press release like we did last week with drilling a lot of meters, so we don't want to hold that back too long because it will just accumulate. And I think there are and will be continued some very positive results that we'll share with you. So look forward every quarter to that. As you know, we moved with it after the transaction of Tahoe, we moved our reserve and resource update to mid-year, so don't expect any update at the beginning of the year anymore. We started that last year and published our reserves as of the end of June. We will continue to do that.

It aligns our reserve update much better with our budget process that comes just a few months or starts a few months later and gives us the newest and finest reserves that we can use for our budget, so that's a much better timing for us, so again, when we put that resource and reserve update out in June, there will be an update on the first inclusion of our resource of La Colorada, so expect there further updates on metallurgy and first-pass engineering, and that will just then continue with updates during the year. I think this will be a year of heavy drilling, a lot of metallurgical work. We published a few results earlier on and a lot of early-stage engineering to see what kind of size we're going to envision to advance this project.

Chris Terry (Director of Metals & Mining Equity Research)

Okay. Thanks, Michael. And then a couple of others from me. You obviously gave guidance for the full year 2020 in January. Since then, the macro has been pretty volatile and the base metals in particular have been under pressure. Just wondering on the cost guidance and the byproduct credits and different currency moves, just if you could speak to the conservatism or where your costs could come out versus what you guided in January? Thanks.

Michael Steinmann (President and CEO)

Yeah. Look, I mean, the guidance is only a month old and a lot of things move up and down. In that case, you mentioned the base metals that affect our base metal or polymetallic mines on the cost because they're byproduct credits. But there are a lot of other moving parts as well to it, like currency fluctuations, labor costs, goods and parts, etc., etc. So of course, we cannot update our cost guidance for each of the moves. Some go up, some go down, and I don't see any reason to make a change at this point.

Chris Terry (Director of Metals & Mining Equity Research)

Okay. No, that's fine. And then just thinking about some of your country exposure, Argentina in particular, where there's been some changes, just wondered if you could comment broadly on the operating environment and how comfortable you are with the operations there in that country? Thanks.

Michael Steinmann (President and CEO)

Argentina definitely got harder this year. You saw we took a $40 million write-down on Manantial Espejo, COSE, mostly for those reasons. We're looking at additional export taxes. We're looking at additional restrictions in the country right now due to the issues that they're facing right now. We're comfortable to work in Argentina. We've worked in Argentina for a long time, but it definitely got a bit harder right now, and that's what it's reflected in that write-down. As you also know, right now, Manantial Espejo and COSE is a very small part of our NAV. So there's a very minimal exposure right now from Argentina. The other thing, I think that's how I see it, it's just a point in time. I'm sure Argentina will do its best to advance here and bring their economy back on track, and everything will improve again.

Chris Terry (Director of Metals & Mining Equity Research)

Thanks, Michael. Just a last one from me, high level, I guess, after doing the Tahoe acquisition and then not selling some of those gold assets because of the improvements you've been able to do over the course of 2019, when we look forward to 2020 and beyond, you've obviously got more revenue from gold than silver. Is that something you're comfortable with going forward? Do you need to continue to reshuffle the portfolio back towards silver, or are you just going to stick with what will be will be from here? Thanks.

Michael Steinmann (President and CEO)

We are a silver company. It's embedded in our name and in our history. Of course, there is more revenue right now coming from the gold side, not only because of higher gold production, but also because of the gold-silver ratio where it sits right now with gold outperforming silver. You should have a look in our corporate presentation on our website.

There is a slide that compares our revenue with our reserves, and you will clearly see that our reserve is a silver reserve. Mostly, I think it's about half of our reserve is silver. That's obviously where it's going to go here in the future. So while we develop these assets that are very silver-rich, we will go back to a much more kind of what you are used to, silver-gold ratio for the company's production. But meanwhile, where the gold price stands and gold outperforming, I'm very comfortable to have the higher gold production basically generating the cash flow for us to advance our silver projects.

Chris Terry (Director of Metals & Mining Equity Research)

Great. Thanks, Michael. That's all from me. All the best to you.

Michael Steinmann (President and CEO)

Thank you.

Operator (participant)

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

Cosmos Chiu (Executive Director)

Hi. Thanks, Michael and team. And first off, congratulations on a very strong Q4 and a great end to 2019. And certainly, I'm sure investors are happy with the dividend increase. Maybe first off on your 2020 guidance here, Michael, you touched on for the gold segment, you touched on the higher cost for Shahuindo and La Arena for 2020. There's been some conservatism, it sounds like, built into it. But how about Timmins? Timmins had a fairly good 2019 with a new shaft in place. You're still sort of forecasting a higher all-in sustaining cost in year 2020. Is there any kind of upside here as well in terms of potentially coming in below what you're guiding to for cost for 2020 at Timmins?

Steve Busby (COO)

Good morning, Cosmo. This is Steve. I think the big driver to that cost increase projection at Timmins. There's really two drivers. One is we do have a substantial tailings dam expansion in the sustaining capital that we have to complete. That's an important project for us, so that will get done during the year. The other thing is there's an access road. We ship the ore from Timmins West to Bell Creek, and along that highway, there's projected this summer some substantial highway works going on by the province there.

So we're having to redirect trucks, and it's quite a bit of a distance. So it's going to add to that haulage cost from Timmins West during that construction period on the highway. So we factored that in. Now, we're looking at some potential offsets to that. We may find some better economics by investing in some short bypasses and things like that. There may be some upside there, but I wouldn't factor that in right now. I think those cost projections at Timmins are pretty solid overall.

Cosmos Chiu (Executive Director)

For sure. And since I have you here, Steve, maybe if I can talk about the recoveries at Dolores. I know you didn't publish. I don't even want to call it a recovery. It's more like the ratio of what's stacked and what came out. In terms of, but if I were to back calculate what was stacked in Q4, I work out to somewhat of a 51% ratio for silver, 71% for gold at Dolores. Especially for silver, that seems a bit low. And I thought, given what you've done in 2019 for the full year and given the pulp agglomeration plant that's in place, how should we look at it? Is this just a one-off? Is the higher grade stacked in Q4 going to benefit Q1 2020? And what are we targeting in terms of "recovery" here at Dolores?

Steve Busby (COO)

Yeah. Good call there, Cosmo. You're right on. What we did see in Q4, the one thing that we're seeing at Dolores is this heap stack height in this pad three area is getting extremely deep. We're stacking over 100 meters right now in some areas. So we got fresh ore that's stacked upon leached spent ore that's 100 meters in depth, and it's taking a long, long time for solution to percolate through that heap. And Q4 is notoriously the quarter where we get a lot of rainfall and a lot of dilutive effects of the increase in water inventory we take on during that quarter, which was compounded a bit this year because we were in the middle of construction on what we call pad one north.

And so we had exposed liner on a new pad that collected quite a bit of rainwater that came in at a pretty high volume. So we have a lot of inventory we've got to work through. We have, and we talked about this last year, we have kind of reduced our solution application rates to make sure we got effective percolation conditions for leaching through that heap.

So Q4 was below what we were hoping to see, below our expectation, below what we typically had been seeing from the pulp agglomeration plant addition. But we think it is a one-off thing. I think when you look at the full year, you'll see our silver recovery is it is a record silver recovery for the year for that mine. So you are seeing the benefits over the whole year. Even though Q4 was a bit behind, we do think we'll catch up on an early part of this year, 2020.

Cosmos Chiu (Executive Director)

And then I guess on that, Steve, I worked it out to about 62% silver recovery for the year. Is that what you're targeting, or could it be even higher with the pulp agglomeration plant?

Steve Busby (COO)

We do think there's still upside to that. The one thing that the recovery side, the additional recovery, we're expecting close to 20% on the silver. And we were also projecting additional quicker kinetics, faster leach times. We believe today we are seeing that higher overall recovery, but the timing to get there is longer than we expected. And that's reflected because we had to slow down that leach application rate. We weren't getting quite the percolation we thought we would with the agglomerates. So we have slowed that down. That has affected timing. But no, I think as we look into 2020, we do expect to see that come up to the higher 60s as opposed to the lower 60% overall.

Cosmos Chiu (Executive Director)

Okay. And then I did the same calculation for Shahuindo here. I see that the gold recovery was about 67%, about 67% for the year as well. I seem to recall that under Tahoe, that number could be higher, especially with the crushing agglomerator in place. I know you're not crushing agglomerating at this point in time. So I guess my question is, is there upside beyond the 67% that you realized in 2019? And is the crusher and agglomerator back in the cards in 2020?

Steve Busby (COO)

It's looking like you're reading my to-do list on my desk. You're right on.

Cosmos Chiu (Executive Director)

I swear I'm not spying.

Steve Busby (COO)

Yeah, you're right on. We are not, we think there is upside to metallurgical recovery at Shahuindo. We're not yet convinced it requires us to crush and agglomerate to get there. It may. We don't know yet. We do think there are substantial upsides to that. All I would say to caution that a little bit is, remember, this is a run-of-mine heap leach. So we only have one head grade that goes out to that pad, and that's from our ore control. And our ore control is showing substantially higher grades than reserves.

We need to verify that that is indeed the case, that there is a chance. We're hoping that's not the case, but there is a chance maybe the recoveries aren't as high or the recoveries are higher, but the grades aren't as high. So we're kind of working through all those issues you described. Currently, I have to say, from my perspective, I'm optimistic we're going to find ways to improve at Shahuindo.

Cosmos Chiu (Executive Director)

Great. Maybe switching gears a little bit here. Michael, as you mentioned, the new reserve resource update is now going to be mid-year. At this point in time, have you determined what gold and silver price or other commodity prices you might be using, just given how well gold and silver has done year to date or since sort of late last year? And I only ask because I think some of your mines might be a bit more sensitive to changes in commodity price assumptions such as Dolores. So at this point in time, have you figured out what you might be using?

Michael Steinmann (President and CEO)

No, Cosmos. We did not. So if you look at our official reserve statement as of June, that's the prices there that we use. Of course, there was a lot of changes during the last few months. That's a short time. We will look at it and define that a couple of months before we do the reserve update. But in general, as you know, we are also very careful. We like to generate good margins at our mines and just running up the metal price to create more resources is not what I have in mind at all. I never have. But we did not define a price.

Cosmo, I just would like to, as you touched on the happy story of the dividend, I would like to give a quick update here in general on our capital allocation and our plans, which is very straightforward and very simple with three clear steps that we follow here. And I think we have proven here over the last few years that that's working out very well for our shareholders. Number one, a creative, highly accretive projects and acquisitions. That's the best return to our shareholders. I think we have proven that very clearly over the last 12 months with the Tahoe acquisition, what kind of impact accretive transactions can have. Number two, our capital goals is improving our balance sheet. And maybe improving is not the right word because even improving further, because our balance sheet, as you know, is very strong.

We had a very strong free cash flow that allowed us last year to pay back $60 million on our line of credit, $40 million in the fourth quarter alone, and I don't know if you heard it in my call. We actually already paid another $15 million back in January on the line of credit. You know what, and I really like that. I like to have as little debt as possible and the line of credit available to us because it gives us the flexibility to jump in for opportunities if they come along on accretive acquisitions, so that's a circle, right? It's like when it happened with Tahoe, you need to keep your powder dry. We do very few transactions, and when we do them, we need to be ready, though, so I like to have a line of credit available and a very strong balance sheet.

If prices stay where they are, we will continue to pay back our line of credit very quickly. Then the last point is return to our shareholders with dividends, mostly dividends lately. You saw there the increase. I think that's the third increase here in three years, I believe. We're very happy to return dividends to our shareholders. I think we returned about $440 million or $450 million since 2010 between dividends and share buybacks to our shareholder. It's a very simple three-step plan that we follow. We follow that for a few years now, and I don't see any reason to change that.

Cosmos Chiu (Executive Director)

Yeah, for sure, Michael. I think that's great. And on the debt repayment or the payments back to the line of credit, Michael, as you mentioned, you did about $60 million in 2019, $15 million again in January 2020. Do you have any targets in terms of what level you want to pay back in 2020? I know there's dividend, there's capital allocation. I'm just wondering if you've publicly made any statements in terms of how much you want to decrease that debt by in 2020.

Michael Steinmann (President and CEO)

As I said, we will follow this three-step plan on the capital allocation. And the more money is left at the end of the day, the more we will pay back on the line of credit. The idea is to go to as little or zero debt if possible. We can always take the money again on our line of credit and react on an opportunity, but there's no reason in my mind, even if interest rates are low, to service debt if we can pay it back. I'd rather invest that money in further drilling at La Colorada, for example.

Cosmos Chiu (Executive Director)

Yeah, for sure. And for what it's worth, I'm forecasting free cash flow of $200 million for your company in 2020. So there's going to be a lot of cash for you coming in.

Michael Steinmann (President and CEO)

Here we go.

Cosmos Chiu (Executive Director)

Maybe one last question on Argentina. Could you give us a bit more detail? I guess there was a write-down. You talked about the increase in export tax. I wasn't aware that that's been put into law. Has it? And could you maybe give us any other changes that either has been confirmed or we're expecting in Argentina?

Steve Busby (COO)

Yeah, Cosmo, this is Steve. Specifically on the export tax, a law has been passed, but it has not been regulated yet. We expect when it is regulated, it will be retroactive to the first of the year. That's our expectation. Under the law, the export tax effectively does increase because it takes it from a peso base to a revenue-based tax. So net-net, it is an increase in that tax.

Cosmos Chiu (Executive Director)

What kind of magnitude?

Michael Steinmann (President and CEO)

Sorry, you probably also seen there. There's quite a few other changes. There is a double severance payment that was one of the reasons why we decided to go a bit slower with the production and make do with the people that we have there. There are some currency restrictions. It's not that simple anymore just to move money in and out. And so there's a whole bunch of changes, as I said in the former call, that affect our operations in Argentina. But again, when you look at our corporate NAV and the part that is in Argentina, it's very small. It's a few percentage points.

Steve Busby (COO)

Relative to the magnitude on that export tax, Cosmo, when it first came out, it came out as a peso-based tax, and then the peso had eroded. What we're seeing is effectively about a 3% percentage point increase in export revenue tax.

Cosmos Chiu (Executive Director)

Okay. Yeah, because I think when it first came out, as you said, with the depreciating peso, it worked out to, from what I remember, 7% or 7.5% equivalent sort of tax. But now you're saying maybe an additional 3% to it.

Steve Busby (COO)

That's correct. Yeah.

Cosmos Chiu (Executive Director)

Okay. And then, Michael, I agree with you that Argentina is now only a small portion of the NAV at Pan American Silver. But you do have in your guidance about 4 million ounces-4.3 million ounces in silver production included for 2020. Any concerns at this point in time, either it be geopolitical or ground conditions at COSE, Joaquin, in terms of getting to that guidance?

Michael Steinmann (President and CEO)

No, no concerns on that.

Cosmos Chiu (Executive Director)

Okay. Great. Thanks, Michael, Steve, and team, and congrats once again on a very good Q4.

Michael Steinmann (President and CEO)

Thank you, Cosmo.

Operator (participant)

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

Chris Thompson (Head of Research)

Hey, good morning, gents. I want to echo what Cosmo's saying. Congratulations. Just a couple of little questions related to guidance, I guess, looking at some of the gold assets here. First of all, you're guiding for between $42 million and $44 million in sustaining capital for La Arena. My understanding is there's a limited mine life there. I wonder if you could just unpack where that's going.

Steve Busby (COO)

Yeah, good morning, Chris. This is Steve. A big part of that, and I think it's close to $30 million of that, is on pre-stripping. We had what we called Tahoe used to refer to it as a phase VIII. We are kind of changing those phases a little bit. With these positive reserve reconciliations, we think there's opportunities maybe to increase some of the reserves there and maybe look at the pit a little differently. But we are doing some layback there, so there is some substantial pre-stripping in that number.

And then in addition, we do have waste dumps. We have substantial costs on preparing waste dump ground. It's a very boggy area, very wet. We have a lot of drainage efforts that go in and ground preparation work that has to go in before we can start placing waste on waste rock dump on new areas. So those are predominantly the big increases in capital.

Chris Thompson (Head of Research)

Okay, great. Are you guys doing any work on the sulfide opportunity there?

Steve Busby (COO)

We are not, Chris. It's really a copper-gold play. It's really not in our interest. Again, our focus right now is on this La Arena I, if you will, the oxide gold. And we think there are some opportunities there. We're fairly optimistic we might be able to squeeze a little bit more value out of that.

Michael Steinmann (President and CEO)

Yeah. Chris, La Arena II, obviously, very interesting project. But I think I made very clear since the acquisition that a very large copper portfolio is not something that Pan American should and will build. So at one point, of course, that project will be up for sale. But there is time, as you hear from Steve, there is some opportunity on the reserve side, on the oxide side. So we leave the work on the sulfide side for a large copper company to do.

Chris Thompson (Head of Research)

Great. Thanks for that. And just finally, I guess, moving on to the Timmins assets. I mean, you say a lot of your CapEx guidance, a little bit of it anyway, is going into a 20% expansion of the Bell Creek there. How should we be viewing that from a timing perspective to see the results of that?

Steve Busby (COO)

Yeah, it's really interesting. Of that, I think we laid out $5 million for that expansion. And roughly half of that is going into the plant. And it's really just upgrading pumping systems throughout the plant. And so the schedule of completing that work is really dependent on manufacturing and delivery schedules of pumps and the mine equipment. We think that'll trickle in throughout the year so that by the end of the year, we'll be up to that 20% expanded rate.

Chris Thompson (Head of Research)

Right. Okay. And I guess that would be, what is it, the 5,500 ton a day mark?

Steve Busby (COO)

Yeah. We look at a ton per hour, but we're going to go from about 220 tons, just a little above 220 to 250 tons an hour. And we're getting about 92% availability on the mill. So it takes us right about 5,500 tons. It's a good number.

Chris Thompson (Head of Research)

Right.

Steve Busby (COO)

That's a good day.

Chris Thompson (Head of Research)

Great, guys. Thanks a lot. Congrats.

Steve Busby (COO)

Thanks, Chris.

Operator (participant)

Our next question comes from Lawson Winder with Bank of America. Please go ahead.

Lawson Winder (Senior Equity Research Analyst)

Oh, hi. Thank you for taking the call. Maybe if I might just start on La Colorada. And Steve, I think this is probably for you. But I mean, it seems now for two quarters, operating costs per ton are running in the low $90s. And so really, I have two questions on that. I mean, one, is that the level that you're budgeting for 2020 guidance? And then is that a level that you see as being sustainable going forward, at least on a medium-term basis? Thanks.

Steve Busby (COO)

Yeah, Lawson, nice question. We have seen some pretty substantial debottlenecking efforts in the mine at La Colorada that's led to quite a bit higher throughputs than what we had originally designed. I think we attained just over 2,100 tons a day on average for the year of 2019. We're optimistic we can actually improve upon that some more. We're also optimistic that that, coupled with some interesting mechanization efforts we got going on over the next several years, will lead to some better cost efficiencies.

With all that said, we do have some challenges during 2020. We have some substantial ventilation raises that we're going to be installing in the mine, and we need those raises to kind of get some of this mechanization efforts moving. So I don't anticipate big changes through 2020. But I think when we look beyond that, we see some optimism for some additional cost optimizations, if you will, unit cost decreases going forward.

Lawson Winder (Senior Equity Research Analyst)

So for 2020, you would expect it to be in the lower $90s then?

Steve Busby (COO)

Yeah. I'd say we're forecasting a little higher. There are some cost increases that we're absorbing on labor, particularly. We anticipate 5% kind of escalation of cost. So we're probably in the mid-$90s, mid-$95 a ton.

Lawson Winder (Senior Equity Research Analyst)

Okay. Thanks. That's very helpful, Steve. And then just on the dividend, that was a pretty remarkable increase. I think what is two questions. One, when you're setting this dividend, are you basically looking at what your budgeted gold and silver price assumptions are for 2020? That's the first question. And where it's coming from is, I mean, it seems conservative versus historical increases vis-à-vis the current spot price. And then the second question is, I think historically, the cadence of dividend change announcements has typically come in the first quarter with Q4 results. I mean, is that something that you expect to continue going forward, or could that cadence perhaps change? Thanks.

Michael Steinmann (President and CEO)

Look, Lawson, I think it's when I talked about the capital allocation, I think that's really the key when you look at that. So as I mentioned, the returning dividends is number three on our list, very high and very important. But we give preference to capital projects and pay back our debt. I know it's a very nice increase, 43%. What we do is we really look quarter by quarter at this dividend and look at our capital allocation.

And depending on what's going on there, we make a decision. You can imagine that right now, there's a lot of cash flow generation, a lot of free cash flow generation. Some money will also be needed, and capital will be needed to advance the La Colorada skarn deposit. We kind of try to keep a balance here in returning, as I said, very high creative projects to our shareholders and returning dividend at the same time.

Lawson Winder (Senior Equity Research Analyst)

Okay. Thanks, Michael. That's very helpful. And then just moving to one of the other assets, Morococha rather, in Peru. Is there still an expectation that you'll need to move the plant? And if so, when are you expecting that might have to happen? Thanks.

Michael Steinmann (President and CEO)

Maybe on timing, if that should happen, Steve can give you an update there. I think there's still, I would call it, a fluid situation there as we're discussing with our neighbor how they advance the open pit and how that will impact our plant, which is really located very much on the fringe or even a bit outside of the pit. So I think, Steve, timing-wise, I think we made it public last year and this year that we start spending some money on some early-stage engineering. That's what we are working on. I think we have, at the end of this year, a better idea. But I don't have a date yet or anything set if and when such a move should happen.

Steve Busby (COO)

Yeah. Just to add on to Michael's comments, he's exactly right. We are doing engineering. We are actually doing permitting efforts. But in terms of timing, we have not yet defined the timing with our neighbor.

Lawson Winder (Senior Equity Research Analyst)

Okay. That's very helpful. And then maybe just finally on the Escobal ILO 169 process, I'm not sure to what extent you're able to share where that process is. But my question really is, at what point are you guys in that process? And is the process still, as we had understood it a little over a year ago, with the four stages?

Michael Steinmann (President and CEO)

Yes. Look, I'm sure you saw that there is a new administration, as I mentioned in the call, under Alejandro Giammattei. So a lot of changes in Guatemala on the federal and local side. All the new government took office on the 14th, I think it was, of January. So very recent, just a month ago. And so we're really looking forward for them to advancing that process, that ILO 169 consultation process with the indigenous population. We are obviously enhancing still and dedicating training our team there, addressing a lot of issues going from human rights, social concern, indigenous matters, etc., etc. You can imagine there's a lot to do. And of course, we'll support that government-led ILO 169 process as much as we can to find a peaceful dialogue with our neighbors and with the host communities that we're working there. So a lot of changes in Guatemala.

I like what I see. I still don't have a timing. I think the process where it has to go through is still the same. So nothing changed on that, at least not what I would know. But because this is four stages, as we saw last year, we have not been informed by anybody that that would have changed. But again, it's a government-run process, and we are just a participant in it.

Lawson Winder (Senior Equity Research Analyst)

Understood. Thanks very much for your comments.

Operator (participant)

Our next question comes from John Tumazos with John Tumazos Very Independent Research. Please go ahead.

John Tumazos (Owner and CEO)

Thank you. Could you give us a timetable or density of drill holes maybe to get La Colorada Skarn to be Inferred and Indicated maybe two reserve reports out next year? In Tahoe, as they reported, there was almost 20 million ounces of gold and 6 billion pounds of copper and resources across Ontario and the two sulfides in Peru. I know you're very busy with La Colorada Skarn and the existing mine operations in Escobal and Navidad. Is there one or two of those projects that might be a priority from the resource queue at Tahoe if you have time to get to it in the next year or two?

Chris Emerson (VP of Business Development and Geology)

This is Chris Emerson here. Really, to explain the drill pattern program of drilling for that inferred resource, we're probably at around a 70-80 meters spacing at the moment. We'd want to get that down to below 50. And depending on the geostatistics as to the variability within those drill holes and grades. So certainly, with the 44,000 meters this year, we'll probably hopefully be upgrading. Again, it all depends on the results. We'll certainly be looking to maybe 20% or 30% of that, certainly for June this year. Then as that program advances into December this year, upgrading that further. But certainly, we're a little away from getting that all 72 into an M&I, for instance, in 2020. We'd certainly be looking for a couple of years of continued drilling.

And then at that detailed reserve drilling, we'd probably want to be closer to the deposit, i.e., get underground and actually drill it from there. Because at the moment, we're probably drilling 80% from surface with directional drilling, which is obviously slow, costly. So to get it down to that closer spacing, we'd definitely want to sort of get that more efficient.

Michael Steinmann (President and CEO)

John, it's obviously one of our top priority projects here. As you can imagine, this is a world-class discovery, and while Chris is drilling, we are moving quickly ahead here with our metallurgy and engineering in parallel to move the project forward as fast as possible, so stay tuned for updates, as I said, mid-year on the resource, and then as Chris continues to drill to advance that into different categories on the resource stage.

To your second question regarding the copper that Tahoe had in their resource, most of it is located in La Arena II in Peru, and as we are very happy with what we see, and I think there's some upside, and we're very happy with what we see at La Arena in the oxides and the gold production. As I mentioned before, La Arena II, as a big copper porphyry, will not be a project that we will advance. We'll look to divest that project over time. There's really no big hurry on us as we have still several years of production in the oxide ahead of us.

John Tumazos (Owner and CEO)

Concerning the over 10 million ounces of gold resources, much of which Tony Makuch acquired when it was Lake shore up in Ontario, are there any of those that you have time to evaluate in 2020, 2021? I know you're busy with those other irons in the fire.

Michael Steinmann (President and CEO)

Yeah. Yes. We're actually looking at them. We're doing some work on it and some of those projects. I haven't really made the final decision on all of them if they are core or not for us. Some are fairly close to our Timmins operations, and they have a chance to be in trucking distance. And then some are further away, which definitely will be not high on our list of projects. And we'll probably look to divest them.

John Tumazos (Owner and CEO)

Thank you.

Michael Steinmann (President and CEO)

Thank you, John.

Operator (participant)

Our next question comes from Adam Graf with B. Riley FBR. Please go ahead.

Adam Graf (Senior Mining Analyst)

Thank you, guys. There's been a lot of questions. But just I know that you talked a bit about conditions in Argentina becoming more difficult. But I was curious to hear if there's been any update on the progress to be able to move forward on Navidad and if the challenging conditions in Argentina actually would help or hurt that process to reopen up development of Navidad?

Michael Steinmann (President and CEO)

Yeah, Adam. You cannot just compare very simply a kind of a shorter life mine like Manantial Espejo, Joaquin, where we're looking at a three-year, maybe three and a half year life, and then you look at a project like Navidad that needs a few years to go through permitting and building and then many, many years of production, so I see the issues in Argentina as such as the point in time, some issues that the government will work through it, but that short term, so let's look at that short term, it definitely made it more challenging for us, as I said, when you look at really long-term projects like Navidad that will be in production for decades, I don't think so that you can just extrapolate those issues, so that's a different time frame.

Adam Graf (Senior Mining Analyst)

Yeah. Michael, perhaps you could give us an idea of where things stand as far as politics in the province and at the federal level as far as moving things forward to allow for just the approval at Navidad?

Michael Steinmann (President and CEO)

Sure. Sure, I can do that. And like in many other places we work in Latin America, there was a change of government. We had elections. The legislature in the province actually took seat. I'm not completely sure. It was around the 10th of December, I believe, 10 or 12, somewhere around there, led by the governor, Mr. Arcioni. He won a very clear election there. He's a strong governor in the province, I think. I think he has very good ideas how to advance the province and the economics of the province. And I'm looking forward to work with the new incoming government or government that is there now for a month and a half. Nothing changed in my view on the project. Navidad is a very strong, very large silver deposit. It's still probably the largest or one of the largest undeveloped silver deposits in the world.

It's very scalable. So there are shallow open pits. I think there's about eight zones that are mineralized that we can mine. So it's very scalable in terms of size on startup and how much capital you want to spend upfront and how many phases you want to grow the project. We did not make decisions that how we do that will depend on the situation and on the permitting, etc., etc., if the project goes ahead. But at the moment, obviously, there is no way to do the open pit mining because there's the mining law in place that prevents us from doing that. So this is with the government to make that change.

And it's a political process. I can't do that, obviously. I'm just sitting there on the side waiting and discussing, providing information. And then we see how it advances. But as I said, the really important part of Navidad is the scalability. And that makes it, I think, much more adaptable for us once we make a decision on size and scale and capital requirements and timing for possible startups.

Adam Graf (Senior Mining Analyst)

So just so I'm understanding you correctly, no change in the provincial or the federal level as far as new initiatives or to change the law that would allow this project to move forward on the horizon as far as you can tell?

Michael Steinmann (President and CEO)

No, that's not correct. First of all, the federal side does not really matter on this law. This is a provincial law. The resources in Argentina belong to the province. So that's not the federal law. On the provincial side, a lot of changes over the last, what is it, 12 months, I would say. Mr. Arcioni, if you remember, came in as vice governor and was there last year. And so the province actually is working on the zonification law, provided kind of a draft map, I think, that would kind of explain where they would install kind of mining zones and no mining zones.

And so we're talking about possible mining zones in the center of the province called Meseta. And then obviously no mining around the big rivers, glaciers, coastline, etc., etc. So there has been lots of advances there. But at the end of the day, it's a pretty black-and-white decision by the provincial legislature to change that law or not and to allow open pit mining. And once that's done, obviously, we would provide our environmental impact study, which is ready to go, and then start a permitting process.

Adam Graf (Senior Mining Analyst)

So is that draft law expected to be finalized and come up for a vote in the next six months, in the next year, in the next 18 months, or there's no schedule?

Michael Steinmann (President and CEO)

I don't have a timing for that, Adam.

Adam Graf (Senior Mining Analyst)

Great. Thank you very much.

Michael Steinmann (President and CEO)

Thank you.

Operator (participant)

Our next question comes from Trevor Turnbull with Scotiabank. Please go ahead.

Trevor Turnbull (Director of Gold and Silver Global Equity Research)

Hi, Michael. Here at the end of the queue, I ended up getting most of my questions answered, including from Adam just previously. But I guess there was one nuance to the discussion of Navidad I wanted you to touch on. We try and keep an eye on the news coming out of Argentina, look at the local papers and so forth. And towards the end of the year and into January, there was quite a bit of a lot of articles, a lot of protests going on about the environment, specifically in Chubut. And it seemed like this open pit mining law was getting kind of wrapped up in that. There was a lot of other issues at play. But certainly, it was one of the things that was being bundled with other concerns that these environmental people had.

At first, we thought that this increased agitation by environmental concerns meant perhaps that the mining law was coming to a head. Maybe they were getting closer. But it all seems to have died down a bit here in the last couple of weeks. And I wondered, are we reading too much into these protests? Are they unrelated? Or was that a bit of an indication the government was, in your opinion, getting closer to doing something?

Michael Steinmann (President and CEO)

I think they were mostly related to the issues that happened in Mendoza at the end of the year, I would say. Probably see that they actually changed the law in Mendoza. I think, unfortunately, they did not provide in the law zonification. So there was no mining or non-mining zones in the province, which I think the population really didn't like. As you can see, no, Mendoza is a big wine-producing area. So there should be areas, of course, that should be non-mining and others that should mining could go forward. So that caused a lot of issues.

And I think that kind of spilled over to Chubut. Yeah. I don't have really much more information on this, Trevor. I think you're probably reading a bit too much into it where we stand with the government. I mean, as I said, it's a political process. The governor and the legislature, I'm sure, are diligently working on a lot of issues in the province, and that mining law is one of them to provide jobs and to provide income for the province in the future, and where it stands at the end, as I said, it's a decision of the provincial legislature.

Steve Busby (COO)

Okay. I appreciate that, Michael. Thank you.

Operator (participant)

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

Michael Steinmann (President and CEO)

Thank you very much. Great call. It was a great year for Pan American Silver, for sure, transformational year. Looking really forward to update you on our Q1 result, which will be in May. Have a good time until then.

Operator (participant)

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