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Earnings Transcript for USAS - Q2 Fiscal Year 2019

Operator: Greetings, and welcome to the Americas Silver Corporation Second Quarter Investors Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer Session. [Operator Instructions] As a reminder, this conference is being recorded Monday, August 12, 2019.I would now like to turn the conference over to Darren Blasutti, President and CEO. Please go ahead.
Darren Blasutti: Thanks, Kevin. Thanks for joining us on such short notice, everyone. It's summer time, so our board and audit committee meetings were today. And Mr. Dell, our Chief Operating Officer, is already in Nevada at the Relief Canyon, and I'm off traveling tomorrow firstly tonight first thing. So we have to have a very-very compressed, so I apologize in advance.As we go through the presentation, I will be telling you a slider on for those of you who are not -- who are looking at the conference call slides. Moving to Slide 2, forward looking statements. So obviously, this presentation I'm going to make contain some forward looking information. I always say we do our best to predict the future but it can be very volatile based on metal prices. And mining, obviously, is not always as easy predicted but we base our forward looking information on the opinions and estimates. As of the date, such information is provided and is subject to known and unknown risk, uncertainties and other factors that may cause the actual results, level of activity performance, or achievements of Americas Silver to be certainly different from those expressed or implied by these statements.Moving over to Slide 2 or 3, our conference call overview. I don't think we need to be spend much time over here. But I will be going through each one of these slides.Slide 4. Our call participants with me in the boardroom here in Toronto are Warren Varga, our Chief Financial Officer and Shawn Wilson, our Vice President of Technical Services. And we've got Darren Dell live from Relief Canyon Lovelock, Nevada. As he's out obviously we're very excited about where the mine is going out at Relief Canyon, and he'll give you some color about what he's seeing out there.Over to the next slide, Slide 5. I would say it was an eventful Q2. It was very busy, almost messy, given all the things that were going on at the same time. You have Pershing close, effective April 3rd. obviously, we announced the Sandstorm financing of $42.5 million. We then announced construction of Relief Canyon. And as of today's date, I can happy to tell you that the mine is proceeding on time and on budget. So that's great. We also released our EC120 pre-feasibility study, which produces 2.5 million ounces of silver on its own, which is a obviously materially more than we're producing today just out of the one asset. So that was an exciting moment for the company.And even though we have the Galena challenges in the quarter on our view of doing some more development, our operations are on target through H1 2019 to meet our 2019 production and cost guidance. So despite a poor quarter for Galena, and I'll get through and explain that what's going on there, we still are on target for our guidance. Subsequent to the quarter, we had Eric Sprott make an investment of $10 million. That was necessary as a result of the fact that Premier terminated the San Felipe option sale agreement.And we, as part of the Sandstorm $42.5 million, we're asked to raise $7.5 million. And so technically, we would be outside of that financing agreement once we found out about them terminating the agreement. So we look to Eric who's looking to make an investment anyways. And we basically took the $7.5 million in that we required plus the remainder of payments for the option this year of $2.25 million. So basically the $10 million offset what we were going to basically have raised through the sale.The good news is originally when we did our investments on April 3rd, our stock price was about 2.06, I think at that or 2. 09 Canadian. And if we would have to raise $7.5 million of equity, I would have said we would have raised that at probably 10% to 15% discount to the market. Instead, we were able to raise it with Eric at 60% higher than that 2.06 price. So ultimately, it worked out better for our shareholders. We not only get to keep the San Felipe asset, but we also you know have less solution as the shares that we have to raise. We're done at a much materially higher price and obviously, getting Eric as our individual biggest shareholder is very important.So it was a very busy and eventful quarter. I'll take you through some of the details here on Slide number 6. It's interesting we processed 13% more tons, we processed 15% more silver, we processed -- or produced 15% more silver equivalent ounces. And again our costs were materially. Why is that? Really two things, you have the Galena refocus of development. As you will remember, at end of the first quarter, we had the two major high tonnage stopes go down.And as we got into late April early May, you saw silver prices at $14.30 to $14.60. You also saw lead prices around $0.70 to $0.90. And so from our perspective rather than going out and trying to find stopes that could replace them and basically lose money on those stopes and produce -- and lose cash, we decided to use the time to develop into areas so that we can give ourselves more flexibility in the future. We could only do that because one, we had a financing [Technical Difficulty] come in and we have the cash to be able to do that, but also because we have -- we just didn't think it made sense to produce more ounces that lose money at them. So unfortunately, the way all sustaining costs works, you don't get -- you get the benefit -- you don't get the benefit of the development, you get all the costs in the second quarter of that extra 1,600 feet of development, but you get none of the benefit, which will come later in the year.So again, despite that, we were able to do that. And then we had about 15% lower metal prices, about 14% or so as the basket of commodities that we are producing right now, we're 14% lower in the second quarter this year than we were last year. And again, silver is moved up materially, lead has moved up materially, zinc's a little bit volatile right now. But again, it all points to having better second half. So that's really the reason for the higher cost and the reason for the shift in development over production at Galena, because again, I think we've been very consistent to say, silver and the commodities that we have in the ground are hard to come by, so why would we ever produce them at a loss. So we though the better answer was to do development.Now we expect to get the benefits of that later in the third quarter and the fourth quarter. So that's good news for us. And when those other high tonnage stopes get up and running, it will be even better. So ultimately, you saw higher production across the board, you saw zinc production grade come up but you saw costs go up materially from last year, and that's really the result.If you go over to Slide 7, talk about revenues. Again, if you think about it, you've got -- you're down $2.3 million of revenue and yet, production was up by 15%. So what happened? And the answer is two-fold. Again, metal prices down 14% but also the TCRC's for zinc in the quarter were up $2.7 million over last year. And that's a result of higher industry wide treatment charges. There's less for refiners right now than there were in previous years, as a result of some environmental challenges in China. And so, TCRCs have gone up as there's more zinc concentrate available, but not enough smelters. And so the TCRCs have gone up.We think this is a temporary thing. We don't think it's going to change this year, but it ebbs and flows. Again, we were very, very low last year. We're very high this year. I think that will smooth itself overtime. We're looking at ways to offset those costs, and we'll talk about those in coming quarters. But revenue is really down. If you think about it, we produced more, but metal prices were down 15% and then the $2.7 million. So again, that's driving the revenue line, that's driving the EBITDA.You can see the realized prices on the slide here, 14.87 for silver versus 16.70 last year, $1.23 for zinc versus $1.41 and $0.86 versus $1.10 for lead. So we would have seen a pretty big increase in profit. We would have the same metal prices last year, but didn't have them. The cash balance at the end of the quarter is $6.3 million. This does not include the $25 million Sandstorm gold purchase agreement. We've not drawn that yet, or the subsequent $10 million Eric Sprott investment. So we've got $41 million of capital there against our current liabilities and the build of the new mine.So we have ample money to build the new mine. We're hoping that the operations are going to do better as we said, so that they're not a drain as we get the new mine built for those as we're seeing prices move up. On earnings, let's talk about the $8 million and why it's down. I will refer you to slide I think it's waterfall slide on Page 8. So we had net income of 2018 for Q2 of $1.4 million. In that income, we had $700,000 of an asset disposal, which was a gain -- that was a gain there. We had production increase this quarter going against that. So we made a little bit more as a result of the addition of 15% in production. But then you take that against the $2.5 billion impact of lower prices, the $2.7 million impact of higher TCRCs. So those are the things happening in the business. And then you got non-cash share based compensation. So normally, we do our options and all of our compensation in the first quarter. But given Pershing close on the 3rd of April that compensation was moved to after the close. So those are mostly options issued to management and directors. And that was an impact in that second quarter of this year, that wasn't in the second quarter last year.You also have the -- our portion of the transaction costs for the second quarter of $1.2 million. And you have a derivative on loss on the convertible debenture we did with Sandstorm of $1.6 million, so a lot of noise in there to get to negative $8 million. But if you adjusted our net income, we don't do adjusted net income as it's frowned upon by the SEC and the OSC. But I'll just say verbally, if you adjusted for the impact of the increased production and excluding the impact of these increased treatment charges, we would have been in a net income position. But ultimately, that's not the way accounting works in way it happened in the quarter.So we have a pretty big loss that on the face of it looks big, but it's not really all that much from operations, it's a bunch of impact of many other things going on in the quarter. That has to do with onetime events with respect to Pershing, and some of these derivative things that you'll see flowing through the balance sheet from quarter-to-quarter. Obviously, we want to be operations positive and cash flow and earnings positive in the third or fourth quarter.Clearly where we're going to -- we think we're going to produce more silver in the second half of the year, it's really where lead and zinc prices go that are going to impact where we are in a quarter-to-quarter basis, at least until Relief Canyon first gold in the fourth quarter, and we're going to see a very big an obvious step change in the profitability of the company, is it will be more focused on precious metals and less focused on that. And we'll talk about that. But again, a very messy difficult quarter to understand on the face of it. So we did this waterfall charts. Hopefully that helps everyone understand why the net income was lower. But you really have $5.2 million with metal prices and higher TCRSs, and then a bunch of noise around the transaction and non-cash items that were impacting the quarter.Turn it over to our guidance on Slide 9. You can see that we're a little light on silver and lead. But if you think about it, we only produced for half the quarter at the Galena that's been close to 100,000 ounces of silver and more lead. So again, our view is zinc is doing quite well. And we're well ahead of guidance that's the result of Mexico being on budget and doing really well. And Galena now has to catch-up in the third and fourth quarters. So we expect for our metrics to be on the lower half of silver production, the higher end of zinc, the lower half of lead and in the middle to the higher half of silver equivalent production. So that's going in well and our guidance is in place.Our cash costs are 360 right now for the half year against $4 to $6, and outstanding costs are 10.50 for the year against 10 or 12. We will make the production. The question now is where will metal prices be to help us make those numbers, and that's the big question. But you can see in the bottom our estimates use 14.50 silver, $1.15 zinc and $0.90 lead. So if we get those prices, we're very confident we're going to meet our numbers in a 19 to 1 peso rate. So we've been all over the map. Prices have been very volatile. We're happy to see silver moving and lead has actually improved quite a bit. There's obviously been a lots of noise around the trade war with China, that's impacted not just us but all the silver producers and all the base metal producers in the second quarter. So we're not -- our story is not unique.And again, we're looking at different ways that we can offset those production by putting more silver production on in 2020. We think as we go through this year, it's going to be the same but I'll talk about as we move forward. So the guidance again on track and reaffirm despite half the quarter Galena and not producing, and the volatility going on forward in the market right now. I'm going to turn the call over to Daren Dell, our Chief Operating Officer in Lovelock. And Daren, if you can take us through what you're seeing at Relief Canyon and where that construction update is.
Daren Dell: Sure. As Darren mentioned earlier, we had our Board of Directors meeting earlier today, and I've got that group of people all fired up, because the progress we're making here at the project site. Most of the work has been centered around the leach pad, and getting that prepared for first ore placement. The earth works just about complete. By the end of the week, we should be close to 25% with getting the -- our liner down. Material for that work has been arriving on site, that's not going to slow us down at all.We've been in close contact with our major equipment suppliers. And we don't see any cause for concern and with delivery schedule on those items. We should have that equipment rolling onto site in September as we expected. So that should give us ample time to get it installed, begin stocking in November. And we're right on track for pouring gold before the end of the year.
Darren Blasutti: That's perfect, thank you. And mine -- the net lead core, our mining that contract has been signed as Daren said. They're helping with the leach pad right now. And Daren, when do they go into start to mine, when will that happen?
Daren Dell: They'll have some of their production equipment on site next week. The initial work will be more simply not in the pits, the existing pit, roadwork burn, stuff like that. But we will have our first ore coming out probably towards the end of September. We will be stockpiling that initially. So that it will be ready for feeding into the crusher once that's been assembled and ready for commissioning.
Darren Blasutti: Great, and obviously, the information Daren said to the Board today is that the first gold for again is expected still in the Q4 2019, so we're very excited about that. It's coming rapidly as we're already halfway through August. And so we're excited about it.I'm going to turn you over the Slide 11. And we talk about where is this precious metal growth coming from, this is a slide from our presentation. And you know we are -- last year, we produced 1.4 million ounce of lower. We are going to produce closer to 1.6 million this year. And next year, when you ramp-up with Relief Canyon, and your know we're not going to be at 90,000 ounces because first gold pores at the end of the year. But you're going to expect that as we get through Q1, we'll be at full production kind of in Q2 timing. So we will have a good year next year that we'll really just -- the precious metal growth and then 2021, obviously, full production for the full year. So you see two years of high ramp up on the gold side. As well San Rafael, of course, we've been mining our main zone. And our main zone is around 50 to 55 grams of silver, and we've been -- but very good zinc and lead grades.But the upper zone, which we're developing in to now, has much higher silver grades, probably four or five times those 55 grams. And we've been leaving that in the ground, because we're hopeful of higher silver prices. And so the plan will be to starts at the end of the year getting into that upper zone. It will be slow as we start. But as we get developed in through the first quarter, we're going to start to see a very big ramp up in silver production next year from San Rafael. And so that will be exciting as we get into the upper zone. And the capital to get up there is very minor, I mean we're always worried about working capital differences where you're talking a couple of million dollars to get ramped up. We're probably, what Shawn, 30% done up, 40% getting developed up there already…
Shawn Wilson: So the start of the bottom of the zone, yes.
Darren Blasutti: Right. So we're 30% or 40% already just doing it sparingly as crude become available on the main zone. We're going to start ramping that up in the fourth quarter, third and fourth quarter to get up there and develop. And again, we expect to see first ore hopefully by the end of the year, and a big ramp up kind of starting the second quarter next year on silver. So that impacts the precious metal growth. And then of course if we get a complete change in silver prices, we can always look at the upper zone in EC 120. Again, EC 120 on its own produces 2.5 million ounce of silver. So again, we've got a lot of options at Mexico with respect to where we're going to go with the asset.And what we're going to do right now as zinc prices are higher, or have been high -- lead prices doing relatively well. And we've seen $1.50 move or since the bottom when we stopped production at Galena for a bit. We saw 14.30 silver at the bottom. We're almost at -- we're roughly just over 17. So that's been a good move. We think silver is going to move explosively and much higher, and we're going to be ready for that at the start of 2020. So we're excited about it and again, EC 120. So I think that's all great. You can see the value of Relief Canyon. You can see the value at San Rafael. The question that we get a lot about is, what are we going to do about Galena? It's been an asset, which has close to 54 million ounces of silver and all the categories. We're producing just over -- roughly a million ounces this year. In its past, it's got as many as 2.3 million ounces.Silver has been in a down trend for eight or nine years. So we haven't really spent any money on it. We call it [indiscernible]. We fixed the shafts. We fixed the mill. And we spent very little money on development. So the technical team here is putting a capital development plan together, in which we can reconstruct Galena to be a much better mine. And we think we can do it concurrently with mine operations. We're talking to third parties to fund that expansion of Galena. There's lots of people excited about where they think silver is going to go. So again, we're looking at a material fix for the Galena mine. Obviously, if prices stay at $15 silver and $0.80 lead, it's going to be very difficult for that mine to make money. But as prices increase and the development and exploration goes in, I can tell you we're drilling about 15,000 feet of development of drilling this year, all of it is development none of its really exploration.And we think below and beyond existing resources, we have a heck of a lot more there. And our goal is to double our resources at Galena by putting in a drill program, and developing into some of the lower levels in the mine, fixing some of the shafts. So we've got to plan around it. We're going to fix it. We're going to make it better. It requires some capital. We can either do it pre-Relief Canyon by bringing in investors, or we can do it post-Relief Canyon after the cash flow starts to flow there. So we're looking at those options today.But obviously, on our table as management and board is we know we've got to see better performance out of Galena. We've had a no access ability to get around when something -- when you lose a stope, what are you going to do with it. Again -- so we've bit the bullet in the second quarter, did a lot more development. We think that helps the rest of the year. But as an ongoing asset, we're -- wait and watch the space. We're going to be kind of coming up with some new plans on the Galena mine as we go forward.So that talks about where we're going and how we're going to grow our precious metal revenue by 500% next year and probably 600% as we get into 2021 as we get a full year's production out of Relief in 2021, so very excited about that. It's one of the reasons why people are investing in the story. Across the silver categories, we have 125 million ounces in reserves and M&I resources. And a third majority of that being in M&I and reserves.And so we got a lot of ounces and we're only producing 1.6 million. The view has been keep the silver in the ground until we see a great price for silver, and then bring on that growth. And we're going to be able to bring on that growth at very good capital, and that's the key part of our story. So we're struggling like the rest of the silver guys today. But when silver goes up, we're going to have probably the best internal growth in any silver producer out there from where we are. So along with that and the Relief Canyon, gold pour and the start of the mine, I think we're quite excited about the company's future.I'm just going to go to Slide 12; talking about the summary, active complex quarter, Pershing closing, transaction costs, lower metal prices, higher TCRCs and the Galena development focus caused that we think is a blip in the outlook for the company. We have a solid outlook for H2 2019 review affirmed our guidance. We've obviously got the very exciting first gold pour coming in late Q4 2019. We've got higher silver production coming from just the assets we have today. And then when you look beyond 2020 and beyond, you've got the upper zone, you got full years' of gold production and you got higher silver production generally from the company. And really, again, we'll talk more about the fix at Galena as we move forward.So we're very excited about the company's future. We're working hard. It was a tough quarter. We're not trying to get away from it. We have not only a price impact but a number of things hit the balance sheet. But we are going to do better as the quarter goes forward. So with that Kevin, if you can turn it over to questions. We've got about 15 minutes or so, 15 to 20 minutes to take questions.
Operator: Thank you [Operator instructions] And our first question is from Jake Sekelsky with ROTH Capital Partners. Please go ahead.
Jake Sekelsky: So just looking at Galena, I mean, production was intentionally lower there given where we were with silver prices early in Q2. And you guys focused on development for the longer term viability of the mine. And this is obviously a mine with a lot of leverage to silver prices. So I guess really my question is has the strategy changed at all here with the recent run-up in prices? And if we're not there yet, what would you be looking for to ramp up throughput?
Darren Blasutti: So I mean, obviously, Jake, the first answer is where we are as a company, we're a bigger company with more access to capital. So that's the first thing is, has the outlook for Galena changed. Yes, I mean the outlook for Galena was, let's hang on and hold on to higher metal prices go, because it got lot of optionality. So I think first case is we think or we believe or we know in that order that that at depth our grades get better. And we've been mining most of our tonnage from 49 and 52. And as you know, we've been ramping up and down with equipment that's older and we've been doing all these things that cause issues, because we just didn't have any capital to spend.And so our view is, again, if we did the proper capital enhancements, if we did the proper development, and we did some drilling in front of that, we think this thing is not a 50 million ounce resource, it's a 100 million ounce resource, and we think the grades are higher. So that's what we know and believe about the assets. But we've never had any money to spend to make that a reality. And so this old mine, which was closed in 2005 that was stripped of all its components, no overlap, no development last, shafts in trouble. We bought it in 2011. We never in our wildest dreams thought silver was going to go to $13, and it was at $35. We have fixed the shop. We've got the mills operating. We got 1500 tons of capacity. And we're doing 500 times a day, five days a week.So the answer is until you put invest -- you got to prove to the board and to me, and to the business guys that this mine can make a return on the money that we put into it. And the prices have been so low it's hard to believe that. It's hard to get your hands around it. And I think as silver price has moved and gold price has moved, and we know silver always moves after gold. We think there are investors out there who believe in the upside of silver price. And what we're going to trying to is, from a business perspective where we have doubt, because it's hard to make money where we are today, to guys who are betting on the leverage of silver in the future, can we find a way to tie that process in, because we know we've got more, we know we have got a lot more that can be discovered. And if we can do the proper development work and get newer equipment and use the shaft down to 5,500 and we eliminate a lot of those issues and make the mind much better, much quicker.And so what I passed my guys to do is figure out what that amount is. So I can go out and figure out how to get that money into the company. And again, I don't think its $100 million, but it's not $2 million. So you know they -- and I think the leverage of $54 million ounces is only the beginning of what's in that mine and so why have we stubbornly kept with it, because ultimately we believe in the optionality of the mine. And so I think the decisions we're going to make going forward are going to be more based on optionality. But the question is where is the risk capital coming from? And it's really about that risk capital and bringing somebody in who has the risk appetite to do that is the way that we look at putting the Galena story into a different context.And so, I don't know if that answers your question, can't go into a million specifics. But what you're seeing now, I think a year from now, is going to be very, very different story. And whether silver is at 17 or 20, I think you are going to see a much better Galena in a year. And again, I think that the questions been where does the capital come from to do that, because so far we bought them up. We've bought the company when Scorpio, we built San Rafael and put all the money that into that. Then we bought Pershing, we put all the money now into building Relief Canyon. And so now, you finally got an optimistic silver market where people feel that the silver price has moved and still cheap. And again, I think that's where the opportunity lies here. So if you have any more detailed questions, that's the broadsided answer to that question.
Jake Sekelsky: That's fair and that's very helpful. Shifting gears quickly, obviously, you mentioned revenues negatively impacted by TCRCs during the quarter. Give any other color here? It sound like it's not specific to just you guys. Just trying to get a handle on this going forward and how it's going to impact revenue?
Darren Blasutti: Sure. I'll let Warren to give you the details.
Warren Varga: As it relates to the zinc economy and treatment charges on our zinc con, I don't think it should come as a surprise to anybody who is associated with that industry, or deals with other silver companies who created zinc con, because over the -- the course of the past year, the spot price has risen from $60 per ton or even less, sometimes $25 per ton to at times over $286 per ton on a spot basis. You can see that in with macro or the crude magazines, or industry publications as they come in on a monthly basis, as well as the price of the benchmark has gone from 140 up to 180. So this shouldn't come as a big surprise where we're going to hit with higher TC this year relative to last year, and the entire industry will be going through this.
Darren Blasutti: So Jake, one of the strategies is to figure out can we change our product mix to avoid, to make less zinc con or more lead con, for example, or can we go to the upper zone and will that help. And so, Shawn and Daren and their teams are evaluating how we do this, because we think this is some, I guess, it's not going to be gone in two-three months but it's not going to be here in three years. And so, it's very volatile. We did our reserve guide that we used $220 we've never changed the TC. We've always kind of used the long term view of it, and that's what they were. And again, as a result of a couple of smelters closing down and being retrofitted for environmental challenges, that's created -- in a very small market has created this kind of arbitrage. And so, you've got a lower zinc price and higher TCRCs.It's one of the reasons that we've hedged zinc forward, because again we didn't want to be in a position where we had higher TCRCs and lower zinc prices. And so ultimately, the trade war is creating -- Mr. Trump's trade war is creating many, many challenges for people as well. And so we're hoping that gets resolved at some point. But again, we're looking at our product mix. We're looking at ways to do it. But I don't think the rest of the year is going to change much as you look forward for your modeling.
Jake Sekelsky: Fair enough and one last quick one. I don't want to hop in queue, a high level question on Relief Canyon. With first gold expected in late Q4, as you mentioned do you guys have any concerns related to any impact from whether or anything related to that at all as you cross the finish line?
Darren Blasutti: I will turn that over to our metallurgist, Mr. Dell.
Daren Dell: I would say by the time we're done, so most of the work will be done by early November. I don't think there'll be any issue. It's not until later into the winter that you're start having to deal with snow and even then, we're in a bit of a banana belt here, I think we'll be able to escape the worst of winter.
Operator: [Operator Instructions] Next question is from Barry Allan with Laurentian Bank Securities. Please go ahead.
Barry Allan: Just kind of a bit of a follow up maybe to the question just asked. So how do see your spend rate at Relief Canyon working out over the balance of the year? Are you going to say large part of the spend done by end of November, December?
Darren Blasutti: Yeah, I think the way we look at it is the big -- and again, there's obviously -- once you pour gold, there's working capital. So we looked at it Barry as 28 to 30 as the capital, I don't think that shifted with the majority of that capital being spent by mid-November and then going into kind of a more of a regular kind of monthly spend. And we had anticipated up to $8 million of working capital, which includes no gold recoveries and we certainly didn't do it at $1,500 gold. So again, I think from our perspective, we were a little slow ramping up, because it's a different project. You're not mining the pit regularly right away to strip it. You're actually doing a leach pad and waiting for long lead ion equipment, because the pits basically stripped and already accessible.So we don't get that big spend from the mining operations starting to come. So as Daren said, mid-to-late August and then you start to see kind of that ramping up and that’s the major capital and then again you’re pouring gold in December. So again I think we're in good shape there. So nothing -- but it will be ramped up I'm guessing by kind of mid to end of August as higher monthly capital spend and then stabilizing kind of in November as it goes just to operations.
Operator: And next question is from Bhakti Pavani with Alliance Global Partners. Please go ahead.
Bhakti Pavani: Just wanted to get a little bit more clarity on Galena, I know Jake asked a bunch of questions about the development pipeline. Just wondering from the silver price standpoint, you did mention that the silver is at 17 or at 20. You would see a different kind of development at Galena, starting next year. At this point, just kind of curious with the increase in metal price, how much big of a capital development program are we talking about here, and is there any way to ramp-up at this point?
Darren Blasutti: Yes. So again, I think the way we're thinking about it Bhakti is right now, we're doing only silver-lead. We're doing it only roughly 500 tons a day through the mill. I mean, we're doing roughly 12,000 to 15,000 tons in a month. And when you look at the capacity of the mine, it can do much, much more than that. So the challenges are we need some new equipment, we need to do some work on the Galena hoist, we need to develop. And so those three things and a little bit of exploration work is what we're looking to do kind of raise outside of the asset kind of keep producing where we're producing, but do bring new equipment in then fix the hoist and do that work. And that stuff is probably around $10 million to $15 million. And that is not going to come from us in the sense of funding it. We're looking for somebody to fund that, because they like the upside in silver price.And what that does is that gets us into more developed bigger -- more stopes developed that gives us the better grade stopes and it gets us into an ability where you got better equipment that's operating better. And you get it without having to go up and down big ramps that's really bad on equipment it's using that, lower part of the of the number three shaft. And so all of those things we think -- I mean again when you think about a new mine, if you were trying to add 50 million ounces of silver, what would it cost to develop that mine and how could a lot more than $10 million or $15 million. So what we're trying to do is figure out how to how to manage that, while keeping the mind open. And what we're trying to do quite frankly is by this time next year trying to double the capacity at the mine to make it much more profitable and get a lot more ounces out of it.And if silver price goes to 20 then we can start looking at a lot of these copper stopes that have not been in the plan, and so again it's a little early stages. But I just want people to understand that we understand that Galena is an issue right now. We understand we've done -- it's a mine that we inherited. We did Scorpio. We built our new mine its running as we expected it to. We believe Relief Canyon will be an asset that will run as expected. But in order to get Galena to be the third leg of the company that's producing properly, there needs to be some capital go into it. And we're seeing that silver price movement that's going to help us find that capital, and allow us to drill out more ounces, allow us to develop into more areas and allow us to kind of -- what we're trying to do in a year is double production.
Bhakti Pavani: Just switching gears. I mean, have you thought about hedging your silver production at this point, or do you think still premature?
Darren Blasutti: Again, our view is we don't have silver or gold. We think it's why people buy us at the optionality to tell you about 500% increase in production. And we want that again -- and we want that even when silver was low. I don't think that's the right option. Again, I think we're going to hedge lead and zinc for sure, and copper if we produce it. But I think for silver and gold, we want to non-hedge it. I would -- again, I think in precious metal investors' bias because of the optionality of these prices. And the reason that we've performed reasonably well about in that capital markets is because they're seeing that optionality on the 800,000 ounces of gold and the 100 million ounces of silver we got on the balance sheet. And that we have more than most companies, a lot more companies at our site that leverage, and that's that people are buying us for. So we're never -- I don't think, I don't want to say never say never. But I won't be the CEO when we had silver.
Bhakti Pavani: Just to follow up on lead and zinc. At what price, would you feel comfortable hedging the production?
Darren Blasutti: Well, again, we hedged I think zinc, Warren, at what -- what's the hedge on the floor, about 20 or so?
Warren Varga: Yes…
Darren Blasutti: So we saw that as a price. It's very hard with every tweak causing a 5% move up or down in zinc prices and lead. And so -- I mean, we saw copper come from 2.99 to 2.55. We have seen -- lead has actually performed quite well at one point yesterday it was almost $0.96. So it's all over the map. So again I think $0.95 lead would be a good price for us to hedge, I think and I think we want to see greater than $1.15 zinc at this point. And again, I think all of those mindsets, Bhakti, will change once Relief comes on, because right now, Mexico is a big moneymaker right now. It's a great first half of the year. Relief will change that, because it will make -- it makes a lot of money if the costs are around $800 basic for the life of the mine, at $1,500 that's going to produce a lot of cash. So right now, I think that's our mindset for hedging. Those prices we've locked in a $1.20 for how much, Warren, 30% of production?
Warren Varga: Roughly 50%.
Darren Blasutti: Yes, roughly 50% of production has $1.20. So that kind of gives you where we think about the level for that. And again, we're hoping -- it's funny when you produce the basket of commodities, you go, oh, well I hope in September, the trade war escalates because I don't like gold go up. And then we're like, oh, that will make zinc and lead go down. So we're kind of half hedging for one or the other on it, what announcements going to happen on September 1st, but we remain very bullish for silver and gold, and lead and zinc I think is in a very volatile place. I think we both think if the trade war was over, both lead and zinc could be materially higher than where they are today. So that's our challenge on hedging today.
Bhakti Pavani: Just last one from the housekeeping standpoint, I know you did mentioned that the development expenses for Relief Canyon is going to increase from August through November. Just wanted to get my hand around the math, what is the expected cost we talking about?
Darren Blasutti: I will turn that over to -- the monthly run rate cost.
Warren Varga: So when we're at full operation or during capital, Bhakti?
Bhakti Pavani: No, during the capital, when you are ramping up [Multiple Speakers]?
Warren Varga: It depends on month and when the deliveries are received from long lead items, but you're looking at roughly from $5 million to $10 million, you probably more along the lines that $5 million and $6 million per month as we go forward into and then coming off the end of the year. The next few months will be a little bit more, it's little bit heavier as a result of maybe everything is coming a bit too ahead right now, so over the next few months and maybe a bit higher.
Bhakti Pavani: So from August to November, we're talking about, right, the $5 million $6 million?
Warren Varga: Yes, August will be $5 million or $6 million -- September-October-November will be $5 million or $6 million. Little bit shifting more to the front of that period, and little bit less again in that period.
Darren Blasutti: Yes, because you got all the long lead items hitting in September, or you've got the mining contractor up in September. So again it’s kind of a different -- normally projects are mining first and doing all those other step after where the long leak items are not the pit. So they all -- they kind of all hit in September Bhakti. So September-October-November will be very capital intensive. And as many of you know, we’re having an analyst trip on 8th of September, so you'll be out there and you'll see it so.
Operator: There are no further questions. I'll turn the call back to you.
Darren Blasutti: Great, thanks Kevin. Well, listen everybody thank you very much for sitting through the call on such short notice. We appreciate that. If there’s any questions, please call Andrew, Jack or I, we’re available depending on who you normally talk to. Again, the tough quarter, expect the rest of the year to be better and we’re very excited about the rapidly rising gold price. And we think the silver price will follow. And again, we've been working hard to make sure that we can get more of that silver out and get that gold poured, and that’s our focus for the rest of the year. So with that, appreciate your call and thank you very much.
Operator: That does conclude your conference call for today. We thank you for your participation and you may now disconnect.