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Pan American Silver (NASDAQ:PAAS)
Q2 2020 Earnings Call
Aug 06, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Thank you for standing by. This is the conference operator. Welcome to the Pan American Silver second-quarter results 2020 conference call. [Operator instructions] And the conference is being recorded.

[Operator instructions] I would now like to turn the conference over to Siren Fisekci, VP, investor relations. Please go ahead.

Siren Fisekci -- Vice President of Investor Relations

Thank you, operator, and welcome, everyone, to Pan American Silver's second-quarter 2020 conference call. [Operator instructions] We released our results after yesterday's market close, and a copy of the news release, MD&A and presentation slides for today's call are available on our website. The material on today's call contains certain statements and information that constitute forward-looking statements and information. Please review the cautionary statements included in our news release and presentation, as well as the risk factors described in our most recent Form 40-F and annual information form.

I will now turn the call over to 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.

Michael Steinmann -- President and Chief Executive Officer

Thank you, everyone, for joining us today to discuss our second-quarter results. The global COVID-19 pandemic had a significant impact on our operations over the second quarter. Despite strong government measures introduced in many of the countries where we operate to control the spread of the virus, infection rates are climbing, and healthcare systems are struggling to cope. Our operations in Mexico, Peru, Argentina and Bolivia were also expanded for various durations during Q2 in order to comply with mandatory national quarantines imposed in response to COVID-19 pandemic.

Silver and base metal production were most impacted as limited gold production continued from the heap leach operations at Shahuindo, La Arena and Dolores and from the Timmins operation, which continued to produce gold at about 90% of capacity since the pandemic was declared. By June 1, all our operations were back in production, except for Huaron and Morococha in Peru. Now those mines we started in June, they were returned to care and maintenance on July 20 following several workers testing positive for the COVID-19 virus. A reduced workforce is conducting care and maintenance activities at those mines until it is determined that normal operations can safely resume.

Across all our operations, we have introduced comprehensive protocols to safeguard health and safety of our workforce and communities. The slides accompanying this call and posted on our website provide a channel description of those protocols. We have limited the remobilization of the workforce in order to allow time to adopt and refine these protocols. Our mines are currently operating at lower capacities with reduced staffing levels to accommodate the COVID-19-related protocols, particularly physical distancing in the workplace camps, cafeterias and transport system.

Revenue in Q2 of $249 million reflects the impact on sales volumes from the mine expansions, partially offset by higher realized precious metal prices. Mine operating earnings of $48.4 million were similar to last year's Q2, as lower cost of sales largely offset lower revenues, both on account of COVID-19 suspensions in Q2. As well, production costs in Q2 2020 benefited from devaluation of local currencies and lower energy costs. Net income in Q2 was $19.4 million or $0.10 per share, which includes $52.2 million in care and maintenance costs and $47.5 million in investment income.

Investment income largely reflects the realized gains on the partial sales of our interests in Maverix Metals and New Pacific Metals and the mark-to-market fair value adjustment and our remaining interest in New Pacific. We continue using the equity method to account for our remaining interest in Maverix, and thus, the mark-to-market adjustment for Maverix is not included in our net income. Adjusted earnings in Q2 were $58.4 million or $0.28 per share. Investment income is included in adjusted earnings of $46.5 million of COVID-related care and maintenance costs were removed.

Cash flow from operations in Q2 totaled $62.8 million. Working capital changes in the quarter provided roughly $31 million source of cash, which is mostly due to the release of inventories from the continued leaching at our three heap leach operations. We are now replenishing these inventories, and, as such, expect the drawdown in Q2 to be reflected in a larger use of cash working capital adjustment in Q3. Excluding working capital changes, Q2 cash flow was more than sufficient to cover sustaining capex, taxes and dividends and the net $60 million repayment on our credit facility.

At the end of the quarter, our cash and short-term investment balance increased by about $22 million to $262 million. We made a further repayment of $40 million in our credit facility in August reducing the amount currently drawn to just $160 million. During Q2, we sold 10.35 million shares of Maverix and 10 million shares of New Pacific. We also exercised 8.25 million Maverix warrants, which added to our share position.

We now hold an approximately 19.9% undiluted interest in Maverix and an approximately 9.96% undiluted interest in New Pacific. The other notable divestment we made in the quarter was the sale of the Juby and Knight exploration properties in Ontario that we had acquired as part of the Tahoe transaction. We sold those properties for $10 million, had retained a 1% NSR royalty. These transactions largely accounted for the $81.1 million in cash proceeds we realized from divestitures in the quarter.

The partial sales of our interests in Maverix and New Pacific do not change our review of those companies. It was simply a timely opportunity for us to further strengthen our balance sheet. We retain exposure to further growth at Maverix, while we remain committed to the future of New Pacific's exciting Silver Sand discovery. Juby is an early exploration stage property, which was not a fit with our portfolio.

We will continue to look for opportunities to divest of other early stage, smaller exploration assets within our portfolio as our exploration efforts are focused mainly on reserve replacement at existing mines and large-scale projects. While normal operations were significantly disrupted in Q2, we were able to progress some of our key sustaining capital projects. This includes work on underground ventilation system at our La Colorada operation in Mexico. We expect to complete work on the ventilation raise from 345 to 528 level and install an underground booster fan in the third quarter of 2020.

When completed, the mine will be able to increase production from the high-grade sulfide veins in the eastern part of the mine, in line with our previous raise before facing the ventilation restriction in Q1 2020. We're also advancing well on the long-term surface to 345 level ventilation raise, which we expect to complete by year-end. In Argentina, we resumed underground work at COSE and Joaquin in early May and expect to begin processing ores from those assets at our Manantial Espejo processing plant during Q3. We also progressed one of our key catalysts for growing future shareholder value.

Exploration drilling at our La Colorada's current discovery has enabled us to increase the estimate for the inferred mineral resource to 100.4 million tonnes containing 141 million ounces of silver. Please see our news release issued on August 4 and our website for further details. We are continuing with drilling and environmental and metallurgical studies to advance development of this exciting deposit. We're also investigating alternatives to access the ore body.

Options are to decline from the bottom of the existing shaft, decline from surface or develop a new shaft. I'm looking forward to discussing these alternatives in more detail in the coming quarters. Regarding another catalyst in our portfolio, the Escobal operation in Guatemala, we continue to await progress on the government's ILO 169 consultation process. Obviously, the process has been disrupted, given the current COVID restrictions and curfews.

Guatemala has been severely impacted by COVID-19. Like many other countries in Latin America, Guatemala is working hard to balance the health risks and the economic impact. Our team continues to work closely with our employees and local communities to coordinate numerous requests for support. Escobal remains in care and maintenance, and we currently have no time line for the consultation process or the reopening of the mine.

Yesterday, we also provided the annual corporate reserve and resource update for the last 12 months of exploration and production. As you may remember, we moved our reserve update from year-end to midyear in order to work with the latest reserve estimate in developing our annual budgets, a process that will begin in September. Over the past year, we replaced 76% of the silver and 107% of the gold mined, adding 22.1 million ounces of silver and 719,000 ounces of gold to proven and probable mineral reserves. The detail is provided in our August 5 news release.

With the release of our Q2 results yesterday, we also provided a revised guidance for 2020. We withdrew the guidance previously provided for 2020 because we were unable to determine the impact from the government-mandated suspensions at that time. While the situation regarding the COVID-19 pandemic is still very fluid and uncertain, we feel we are in a better position to provide guidance with most of our operations now having resumed. In 2020, we are expecting total silver production of 19 million to 22 million ounces and gold production of 525,000 to 575,000 ounces.

All-in sustaining costs for the silver segment are expected to be between $10.50 to $12.50 per ounce. For the gold segment, all-in sustaining costs are expected between $1,050 and $1,125. Capital expenditures are estimated to total between $210 million to $215 million, including $25 million to $26 million of project capital. Again, there remains significant uncertainty in the second half of the year due to the potential impact of COVID-19 on production and costs.

The past few months have been the most challenging in Pan American's 26-year history due to the global COVID-19 pandemic. I'm very proud how our team has been managing this crisis, which gives me the confidence that our business is resilient and can navigate these extraordinary challenges. The unprecedented economic impact of the pandemic has forced governments to unleash monetary measures, the scale of which we have never seen before. Gold and silver have responded; with prices rising significantly over the course of the year.

This should generate margin expansion and improved financial performance over the remainder of 2020. And with that, I would like to open for questions.

Questions & Answers:


Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] The first question comes from Chris Terry of Deutsche Bank. Please go ahead.

Chris Terry -- Deutsche Bank -- Analyst

Hi, Michael. Hope you're doing well. A few questions from me. Just wanted to start on the balance sheet.

You're, obviously, in a really strong position after that quarter, particularly with the asset sales. So just wondered if you could talk through how you plan to allocate some of the capital maybe in the context of dividends? Thank you.

Michael Steinmann -- President and Chief Executive Officer

Well, good morning, Chris. Look, really, nothing has changed in our capital allocation plan here. As I always said, No. 1 is always our balance sheet.

It's very dear and important to us. So we will keep aggressively paying back debt. I'm sure you've seen that we, obviously, paid back the $80 million that we took from our line of credit at the very beginning of the pandemic as a precautionary matter. We did not need their money.

We also paid back an additional $60 million during the quarter on the line of credit. And actually, we're able to pay already another $40 million on our line of credit after the quarter here, just last week or early this week. So our draw on the line of credit is down, right now, as of today, $260 million. And we will continue to focus on that over the next months and quarters, for sure.

No. 2, always important to us are high-quality, accretive projects. We have a few in our portfolio. I'm sure you saw the incredible resource update on our discovery at La Colorada with over 100 million tonnes now in our skarn polymetallic discovery there.

So high-quality projects that will require capital. That's where we assign the second bucket from our free cash and capital available to us. And then, No. 3, as you mentioned, is dividend.

And if you look at it, we increased the dividend actually just at the beginning of the year. We actually did that probably the last three years at the beginning of the year, and we'll definitely look at that again. We're very happy to return money to shareholders. We're paying dividends since 2010.

We have been returning to shareholders, I think, since time over $470 million, and we'll definitely continue to do so.

Chris Terry -- Deutsche Bank -- Analyst

Thanks, Michael. And then, just in terms of the operations that are on care and maintenance, Huaron and Morococha, can you just give an update maybe on thoughts around what has to change to get those back online? Just wondering. I know it's uncertain, but anything you can provide on those?

Michael Steinmann -- President and Chief Executive Officer

Yeah. It's definitely uncertain right now. I mean, we see -- like in many, many, many countries in the world, we've seen an increase of cases in Peru, especially in Central Peru, as well around the operations. There may be additional restrictions as well from the government in the future.

We don't know. So it's really uncertain, but we just defined it as when we deemed that it's safe for us to restart, we will, for sure, restart the operations then as quick as we can.

Chris Terry -- Deutsche Bank -- Analyst

OK, thank you. And then, I see the strong results coming through on the skarn deposit for La Colorada. Maybe if you can just give a time line of the upcoming events or what you're doing now and drilling when the next update will be when you might get a reserve. Just the time line of events for that project.

Thank you.

Michael Steinmann -- President and Chief Executive Officer

Sure. Yeah, very strong results there. Look, in my view, this is, obviously, a world-class deposit. It's very large.

It can grow all around. It's open in most of the directions. I think we will focus on infill rolling from now on. I mean, we can -- if not, we can spend a long time and make this much, much bigger.

But at the end of the day, I think we have to focus on increasing geological confidence here and pass tonnes into mass and indicated. And then do the technical studies that we need to do on that deposit to move it into our reserves, as you indicated. So time line, still a bit early to say, Chris. For sure, I will have a bit more information on that the next quarter and the one after.

We are discussing actually internally right now how to best access the top part of the skarn. We are looking at ramping down from existing underground levels or ramping down from the surface with a large ramp to get access the third alternative. And there's maybe a combination of those three as well, will be a large shaft from surface. So as you can imagine, there's a lot of technical studies needed for that.

But you should plan on that that you're going to see updates really on infill drilling from now on and increasing confidence on the geology, so we can move forward with the technical work.

Chris Terry -- Deutsche Bank -- Analyst

Thank you. And then, just a smaller one. On the second quarter, there was a difference between sales and production. Just thinking about the guidance you've provided for the rest of the year.

Maybe you could just comment on expectations for sales versus production. Should we assume they're pretty close to each other in 3Q and 4Q?

Rob Doyle -- Chief Financial Officer

Hi, Chris, good morning, Rob Doyle here. Yes, you're right. We did have some benefit in Q2 of drawing down inventory and selling previously produced production. And in Q3, we expect to rebuild that inventory, but it should even out over the quarters.

And we're expecting the second-half sales to be virtually in line with production, perhaps a small lag just to build up the inventories as we ramp up the -- particularly at the heap leach operations.

Chris Terry -- Deutsche Bank -- Analyst

Thanks, Rob, appreciate it. Hope you're well. And just one final question from me. I know, Michael, you normally have some good insights on the silver market.

Just wondering whether you wanted to comment at all on what you're seeing. Obviously, there's been supply disruptions, investment demand improving, etc. I just wondered if you wanted to comment at all on some of the things you're seeing in the silver market.

Michael Steinmann -- President and Chief Executive Officer

For sure. Large disruption on the production side in Mexico, across the line, obviously, not only from Pan Am, but that's just due to COVID. Same in Peru and other countries. So there will be disruption.

I don't have an estimate yet. I haven't seen a number here how much disruption on the mine production for the year, but I would expect that it's quite big. And as you recall, the last year or two years, it's actually -- was already declining without COVID the mine production. At the same time, kind of unlimited money supply as every country is really struggling here to kick-start their economy again, which is, obviously, one of the main reasons why we see the strong reaction in gold and silver prices.

We have not seen really a big increase in an offtake of silver for -- on the industrial side. So I'm a bit torn there to see what's going to happen. Normally, we see a bit slower increases there when metal prices are high for obvious reasons. And the higher metal prices are pushed by the investment demand.

But I could also imagine here with a really strong desire to kick-start economies that it wouldn't have that of a big impact, the metal price to the industrial offtake this time. But time will tell. I don't have a crystal ball for that one either.

Chris Terry -- Deutsche Bank -- Analyst

OK, thanks. Thanks, Rob. I appreciate all the answers.

Rob Doyle -- Chief Financial Officer

Thanks, Chris.

Operator

Thank you. The next question is from Cosmos Chiu of CIBC. Please go ahead.

Cosmos Chiu -- CIBC World Markets -- Analyst

Hi, thanks, Michael and team. And first off, congratulations on a very solid Q2, all things considered. Maybe my first question is on your reserves update, very robust update, replacing silver, increasing gold. I see that you've used an assumption of $18 an ounce silver, $1,300 an ounce gold, clearly lower than where we are today in terms of spot.

So I guess, my question is in two parts, Michael. Maybe first off, how did you arrive at these gold and silver price assumptions? What did you consider? And then, No. 2, what's your sensitivity in terms of these reserve ounces to potentially higher gold and silver prices, especially for a lower grade mine like Dolores?

Michael Steinmann -- President and Chief Executive Officer

Yeah. How did we get to these prices? Well, don't forget that this is the reserve at end of June 2020. So we, obviously, have to define prices quite a bit in advance. Metal prices, don't forget, have been substantially lower at that time already.

That was a big increase just over the last couple of months. So that's one reason why the big difference. But the main reason for it is, really, you have to be very careful when you see these big runs in metal prices, which can provide some really, really attractive returns to shareholders. You have to be very careful not to run up the metal price and add in a lot of lower-grade reserves.

So what we are focused on is to really add real reserves, not just marginal additional ounces, to increase our reserve book, which provides a solid margin and even a bigger margin, obviously, today with the higher metal prices. Sorry, what was the other question?

Cosmos Chiu -- CIBC World Markets -- Analyst

Yeah, in terms of like potential sensitivity, additional ounces, yeah.

Michael Steinmann -- President and Chief Executive Officer

Yeah, well, the sensitivity, as you pointed out, of course, in a place like La Colorada, we have very high grades. There is not a lot of sensitivity. I think if you run at the nearly any metal price, the reserves look probably pretty similar. Of course, there's a different story at Dolores when you look at material inside the pit that suddenly wouldn't be waste anymore.

And definitely, when we go through the budgets and my plans, we will very carefully look at that material and make decisions then where to place that material. So we are, obviously, not just blindly move everything to the waste dump if it makes money at $1,400 once we go to the mine plan in a mine like Dolores, especially as we're sitting on very high gold prices here and could create potentially a big margin from that material. So you're absolutely right. Much bigger sensitivity on lower grade assets.

You will also see we provided an entire table of metal prices used in the back of our reserve update. I'm a firm believer that it's not just one number fits all. Each mine is a little bit different. They're not huge differences, but they're all a bit different, and that just makes sense, right? We have mines which order mine life, there can be much more aggressive with the metal prices because you have lost risk down there.

We probably are pretty bullish on gold and silver prices over the next few years. We have mines with very, very long metal prices where we have been probably a bit more conservative when we chose the metal price. So if you look at the table in the back of our reserves, you will see what prices we use. But if I'm not mistaken, I think it's all somewhere around $1,300 to $1,350, maybe sometimes $1,400 that we use.

Cosmos Chiu -- CIBC World Markets -- Analyst

For sure. And maybe a bit more. Good to see that, at La Arena, you were able to replace production in your latest reserve update. Clearly, La Colorada oxides in terms of reserves, that's likely finite, but is it too optimistic for me to believe that year after year, you can actually replace production? And then, on that where are you finding more ounces to put into reserves?

Michael Steinmann -- President and Chief Executive Officer

Yeah. Look, I couldn't be more happy about the reserve replacement that the geology team provided on La Arena, Shahuindo and Timmins. I think we really have to mention those three assets. Of course, we know that there's a very long life at Shahuindo, but adding over 400,000 ounces of reserves.

And of course, we mined probably around 200 contained. But adding actually two years of production, it's amazing just in the short time that we own the asset. And there is definitely -- and I think, Cosmos, we've talked about that in the past, a lot of exploration upside around that asset, long life and the long time to explore and drill. So I'm not worried about that at all.

But a lot of people have been quite worried about the reserves at La Arena and Timmins a couple of years ago. And every year, we replace basically reserves pushing production another year, another year, another year. At one point, that will come to an end, for sure, but, at the moment, we have very positive exploration results. And of course, there, when you look at the metal prices, and as I said, at shorter life mines, we will be more inclined to use a little bit higher prices to look at.

I think there's still a lot to do there. So a lot of upside that I still see as well.

Cosmos Chiu -- CIBC World Markets -- Analyst

And then, maybe two quick questions on your guidance here. Good to see that you've reinstated guidance, at least in line with my expectations. I guess, first off, Michael, as you talked about the Peruvian underground mines, they are -- it's a fluid situation. They're currently on care and maintenance.

But in terms of your 19 million to 22 million ounces in terms of silver production, what have you kind of factored in, in terms of potential restart date at those Peruvian underground mines? And then, on that, are these two mines and the potential start-up, the biggest sort of variable and you hitting your target for 2020?

Michael Steinmann -- President and Chief Executive Officer

Well, just in general, there's, obviously, a lot of uncertainty here with we're giving a guidance in the time of COVID, and I'm sure everybody appreciates that. We did actually not just include certain restart dates, but more like look the kind of factors or estimates, corporatewide, how the production could look like. And I'll have Steve if he can give you some more details.

Steve Busby -- Chief Operating Officer

Yes, good morning, Cosmos. Good afternoon.

Cosmos Chiu -- CIBC World Markets -- Analyst

Hi, Steve.

Steve Busby -- Chief Operating Officer

Yeah. Cosmos, yeah, I would say that when we look at restarting the operations that were on at Morococha, the issue to us is more at what rates do we restart and at what rates do we ramp up over the rest of the year, is probably going to drive that more so than the exact date of when we restart. So we've got some flexibility built into this guidance, this re guidance that we've issued to allow for that. So we don't have a specific target date that we've put into that.

It's more just a sense of restart rates. We're going to start slowly. We know that. We're going to ramp in slowly because they are fairly large workforces.

These are labor-intensive mines. So we have large workforces, and we just have to ease our way into it. We can't just jump right on it. So to me, the big drivers to our silver production are, obviously, La Colorada.

And getting that ventilation raise done this quarter is going to be opening up some good opportunities for us there. Also at Dolores, I would say, depending on the rains that are just starting now, how intense they are will allow us deepen the pit or not. That can drive more silver production or not. I think those are the big drivers as to what we have control and what we'll see for the full year of silver production in the company.

Cosmos Chiu -- CIBC World Markets -- Analyst

And then, Steve, on Dolores, as you mentioned, I believe in the MD&A, underground restarted in July. The pulp agglomeration plant restarted in mid-June. How is that going so far? Is that going to help you in terms of getting that production in the second half as well?

Steve Busby -- Chief Operating Officer

Yeah, absolutely. The pulp agglomeration plant came up really well. Actually, so did the underground. It is up and running now.

And both are running well. It's just monitoring the workforce, monitoring the pandemic and the virus around where we operate and making our shift changes as smoothly as we can each time we bring new crews in. Those are really the risky periods for us. So that's what we're managing, and, right now, the operations are running pretty smoothly.

Cosmos Chiu -- CIBC World Markets -- Analyst

And then, the last part of my question here is, in terms of guidance, I see that sustaining capex guidance is now $185 million to $189 million. Previously, it was $225 million to $240 million. How should we look at that difference? Is it going to be something that will likely be caught up later on? Does that mean that difference will likely potentially reappear in year 2021, so it's more deferral? How should we look at it?

Steve Busby -- Chief Operating Officer

Yeah, absolutely, Cosmos. It's most definitely a deferral, particularly on leach pad constructions. So we'll have to do those in 2021.

Cosmos Chiu -- CIBC World Markets -- Analyst

OK, perfect. Thanks a lot. Those all the questions I have. Thanks once again.

Steve Busby -- Chief Operating Officer

Thank you.

Michael Steinmann -- President and Chief Executive Officer

Thanks, Cosmos.

Operator

Thank you. The next question comes from Lawson Winder of Bank of America. Please go ahead.

Lawson Winder -- Bank of America Merrill Lynch -- Analyst

Hey, operator, thank you. And thank you everyone for taking the call. I would like to follow up on some of the reserve questions as well. And I'd also make the comment that I'm very glad to hear you say that your goal is to add real reserves as opposed to chase the price higher.

I think that's definitely what investors are looking for. And obviously, I was very impressed to see that you guys added a lot of reserves and did so with only very minor increases in the prices or no increases at all in the case of some of your gold assets. So I just wanted to better understand where some of those increases were coming from. One, on La Arena in the past, basically, what's happened is, materially, you thought with sulfide just turned out to be oxide, is that what's happening here? And then, what's the outlook for that to continue to happen? Thanks.

Chris Emerson -- Vice President, Business Development and Geology

Yeah, sure. Chris Emerson here. The geology teams across the company did an exceptional job this year under very difficult circumstances with -- so starting a whole reserve resource process through sort of February, March, April. And then, obviously, the pandemic coming in, I mean, it took a huge effort from all our teams across the company and some really, really successful results without hiking up the prices or anything and keeping it very, very real.

La Arena, as Mike alluded to, just around to the previous question, was infill drilling from that La Arena pit, which put in the infill structures, which were higher grade structures. We focused on those. And there was some upside that we gained from the bottom of the pit into the west. So that was a nice increase there through La Arena at around 160,000 ounces coming in, easily replacing production.

Shahuindo, we saw infill drilling at the back end of last year and into Q1 this year. That, obviously, got suspended through the pandemic, but that gave us some really nice results outside of what was that long-term life of mine pit. So we added inferred resources into reserves, increasing the tonnes there. And we've had a good positive reconciliation across Shahuindo.

So all in all, really nice to add over 400,000 ounces of reserves in gold at Shahuindo. And Timmins, I think, as Mike again said, they constantly, every -- year on year, are close to replacing the production, which really comes from, mainly from Bell Creek where we've replaced over 100% of production. And that is the deepening of those structures. And as we get them into inferred and convert inferred into reserves, there's still room to increase.

So from the gold assets, the gold segment, that is where the real drive came from. On the silver, certainly, La Colorada, we're on. And Manantial also gave us some good answers back into reserves, which was really pleasing.

Michael Steinmann -- President and Chief Executive Officer

Just to add here. To be clear, La Colorada, not only on the skarn side, which is, obviously, in the resource, but I'm sure you've seen it in the press release, actually had 10 million ounces of silver just from the producing part of La Colorada from the vein. So very strong result there as well.

Lawson Winder -- Bank of America Merrill Lynch -- Analyst

Yeah. I'm actually glad you guys brought up La Colorado, very impressive increase in the silver, though the base metals went down, gold slightly, but it was more of the lead and zinc that declined. Is that just geology driving that? Or is there economics getting involved here as well?

Michael Steinmann -- President and Chief Executive Officer

Well, I could -- well, Chris, you can take it.

Chris Emerson -- Vice President, Business Development and Geology

No, certainly, Lawson, I mean, La Colorada, over the past couple of years, we've, obviously, been moving more to mechanized. That is increasing across the board. A decision from that technical side was taken to slightly increase the width, the minimum mining width from 2.4 to 2.6. That did add in some tonnes, some slightly lower grade material.

Therefore, you did see a slight decrease in those grades.

Lawson Winder -- Bank of America Merrill Lynch -- Analyst

And on the base of metals -- sorry. In my understanding, so the base metal grade went down. So some fell out of reserves. I was asking more about how the -- just how the base metals weren't replaced as well.

Obviously, the silver was more than enough --

Michael Steinmann -- President and Chief Executive Officer

It just depends how much we add in on the oxide side and on the sulfide side. Obviously, for the base metals, it depends in which area we are in the mine. As you can imagine, it's a very large mine now, and there's summations of the base metals. So in any given year, I would expect to add in more zinc and, later on, probably more copper.

That just makes sense what the geology shows to us.

Lawson Winder -- Bank of America Merrill Lynch -- Analyst

Got you. Yeah, so geology, OK, that's what I had suspected. No, Michael, just I wanted to ask you on cost inflation. Obviously, every year, there is some cost inflation.

But I'm curious, are you seeing any early hints of cost inflation beyond what you've seen over the past several years, whether it be on labor or inputs?

Michael Steinmann -- President and Chief Executive Officer

Well, we definitely see some slightly higher costs because there's a COVID cost attached to it. And that will stay, obviously, as long as we deal with this pandemic. Just much more efforts on work there and a bit less productivity. So you see an increase there.

It's not dramatic. I think there are very strong tailwinds, obviously, that we deal with, of course, No. 1, metal prices that help us a lot on the by-product. And then, even on the base metal side, slow but steady increases there as well, that will help us in the future.

We see also two other very important things, I have seen in the past and still do, is lower currencies. So we see advantages there on the exchange rates and definitely lower energy costs across the board. So I may be pass it on to Steve for his comments, but I don't think that we see dramatic increases yet.

Steve Busby -- Chief Operating Officer

No, the only thing I would add, Lawson, is that our normal collective bargaining with the unions would be pretty far progressed on many of those this time of year normally. A lot of those have been disrupted because of the pandemic situation. So we don't have a good sense yet to how those are going to fall out relative to our forecast in that. Right now, we don't sense that they're going to be way out of line, but I don't really have any progress on actual negotiations to really make any statements in that respect.

Michael Steinmann -- President and Chief Executive Officer

Yeah. But definitely, control of cost will be one our main focus, always has been and will remain to be going in the future.

Lawson Winder -- Bank of America Merrill Lynch -- Analyst

Yeah, if COVID costs are your only concern right now, I think that's a good situation. On the ventilation installation at La Colorado, will that have any impact on throughput over the coming quarters? Or is that -- or are the vents being installed out of the way from current production?

Steve Busby -- Chief Operating Officer

Yeah, I'm going to let Martin Wafforn, he's on the line, our Senior VP of Tech Services, address that. Martin, do you want to take that?

Martin Wafforn -- Senior Vice President, Tech Services

Yeah, sure. Thanks, Steve. Lawson, no, the ventilation is more impacting our access to some of the higher grade areas in the eastern part of the mine right now. So, so far, we've been able to get the production from other parts of the mine, but you see we are at slightly lower grades.

I think one of the things that we're seeing perhaps with production is some of the COVID-19 protocols are -- they're constrained, for sure, on production. So they may impact things, but, so far, we've been able to get around the ventilation by producing from other parts of the mine.

Lawson Winder -- Bank of America Merrill Lynch -- Analyst

OK, that's great. Now, I wouldn't mind asking about Guatemala. It sounds like your social license efforts have continued. You're helping the communities through COVID.

How would you describe the progress you guys have made to date on sort of improving the situation around social license? Just putting aside entirely the ILO 169 progress.

Michael Steinmann -- President and Chief Executive Officer

Look, obviously, a lot of work that went in there. Big change of our team, having a big, local -- very strong local team there. Of course, the pandemic's changed everything short term, not only in Guatemala, but anywhere on the planet. And Guatemala has been really severely impacted by that.

And the government is working to minimize this, for sure. But like any other countries, they are really working hard on balancing the health risk and the economic impact after pandemic. We do a lot of work there. Our team really works closely together with our employees and the communities to cotinine actually a huge amount of requests for support and help.

That's, by the way, not only in Guatemala, but really across many jurisdictions where we are. So we are very, very active there. A lot of work has been done, but, sorry, I still don't have the timing for the ILO 169 process, especially as we have to wait to advance a bit further through this pandemic.

Lawson Winder -- Bank of America Merrill Lynch -- Analyst

OK, thanks. And then, maybe, Michael, just some -- an additional question on the capital allocation priority that you provided and have continued -- consistently provide for some time. So in the past, I mean, yes, dividends have been No. 3 on their own.

But in the past, you've also used buyback as a way to supplement dividends. And of course, debt is your main goal right now, but, at current prices, it won't be long before your debt is gone. And just how do you think about a buyback vis-à-vis your current dividend going forward?

Michael Steinmann -- President and Chief Executive Officer

Sure. And we have -- of course, and I have met with a lot of investors discussions on buyback versus dividends all the time. It's a pretty good discussion actually to have, not only in high metal price, but in low metal prices when we actually discuss how we return money to shareholders. There's, obviously, different views depending much on tax regimes in different countries as well on preference of shareholders.

For me, personally, I absolutely believe that the past return are high-quality projects and being able to finance them from cash flow on hand and free cash flow like an expansion or a skarn development at La Colorada is an amazing opportunity. So I'll focus on that. And I think that will provide a much better return to shareholders than buying back a lot of the shares. Just as a general statement, that's my personal view that a lot of companies start share buybacks, obviously, when they have the biggest cash flow.

That means normally when there is the highest metal price. That means when they are looking at the highest share price as well. So if you do share buybacks, normally, I think it's better to shore up your balance sheet and maybe do that a bit later on.

Lawson Winder -- Bank of America Merrill Lynch -- Analyst

That makes a lot of sense. And just one final question for me on the capital allocation. The La Colorado skarn seems like the obvious next sort of larger project with which to use that cap -- around which to use that capital. I'm curious.

Are there any other potential projects that might be in the pipeline that we're not seeing right now? Like any potential expansions with the existing assets or something along those lines?

Michael Steinmann -- President and Chief Executive Officer

Obviously, nothing in the size of La Colorado. This is just, obviously, overwhelming everything as it's such a large deposit and will be the largest amount required for that development in capital. I'm sure Steve and Mark, and they always come up with some really clever ideas, how to squeeze a little bit more left and right, but that won't be material numbers really on the capital allocation for those assets just to keep optimizing them. But of course, there is still Navidad there in Argentina, which is probably about a similar statement there than in Guatemala that -- with COVID.

There's kind of a holding pattern right now on that. And that's, obviously, a bit further out there, but that could be another large project that would require capital. Of course, Guatemala is already built. So capital requirements there will be quite modest.

Lawson Winder -- Bank of America Merrill Lynch -- Analyst

Thanks very much, guys. Enjoy the rest of your summer.

Michael Steinmann -- President and Chief Executive Officer

Thanks a lot.

Operator

Thank you. The next question comes from Chris Thompson of PI Financial. Please go ahead.

Chris Thompson -- PI Financial Corp. -- Analyst

Hi, good morning guys. Thanks for answering my questions. Hi, Michael, it must be a little frustrating not to have a fully ramped up silver side of the business looking at silver this morning at $28. Just a lot of my questions have been answered, but just a little bit more detail, I guess, on how we're -- how you're doing at Dolores by way of the underground and the pulp agglomeration.

Just remind us, what are the goals by way of ramp-up and maybe sort of the timing for that on both components?

Steve Busby -- Chief Operating Officer

Yeah, good morning, Chris, Steve here. Regarding the pulp agglomeration plant, I mean, we kind of targeted about 5,500 tonne a day throughput this year before the COVID pandemic. In the restart, I've got to say we kept everything in really good shape during care and maintenance, and we're basically restarted above 5,000 tonnes a day. My only caution, the uncertainties of these shift changes, that's what we monitor.

And we've extended shifts. We're very careful of how we do the shift changes, but that's where we're seeing our biggest risk. So the uncertainty is whether or not each shift change we'll have enough personnel to run at total capacity rates during each shift change. Right now, today, we are.

In underground mining, we just got the first shifts in there during this month -- this last month, July. It's ramping up well. We're probably just near the 1,000 tonne a day mark. We were hoping to ramp up by the end of the year to 1,500 tonnes a day.

We did kind of knock that back with COVID. And we're kind of in that 1,000 tonnes a day range for the rest of the year.

Chris Thompson -- PI Financial Corp. -- Analyst

Great. Thanks for that, Steve. And then, just finally, I guess, switching gears to the Timmins asset, the Bell Creek expansion, maybe a little bit of color on -- I know that you were planning on expanding, I think, the facility, what, 20%. Is that right? I mean, where do we sit with that right now?

Steve Busby -- Chief Operating Officer

Yeah, the expansion project we define was more like about 10% to 12%. And it was a modest $5 million investment -- $5.5 million investment that we scheduled for the year to do that. COVID has disrupted that to a degree. We were hoping to have that done by the end of Q2.

We did advance. We're about 90% complete, and a lot of it's just upgrading pumps and pipelines and things like that through the plant and a couple pieces of equipment bought for the mine. So that's 90% complete at quarter end. It looks really good.

With that said, we are restricted on personnel at Timmins in terms of how many people we can bring on and maintain the physical distancing restraints that we have. So unfortunately, we don't see that ramped up. That 12% target, we don't see that happening for a while yet. So technically and mechanically, we'll be there probably during this quarter.

But from a personnel staffing standpoint, we'll probably be later to get to that point.

Chris Thompson -- PI Financial Corp. -- Analyst

Great. Thanks again, Steve, and congratulations, guys, on a tough quarter.

Michael Steinmann -- President and Chief Executive Officer

Thanks, Chris.

Steve Busby -- Chief Operating Officer

Thanks, Chris.

Operator

Thank you. The next question comes from John Tumazos of John Tumazos Very Independent Research. Please go ahead.

John Tumazos -- Very Independent Research -- Analyst

Thank you very much for your service to the company on the tough times.

Michael Steinmann -- President and Chief Executive Officer

Thank you.

John Tumazos -- Very Independent Research -- Analyst

Thank you very much for your service to the company under tough times. In terms of your business planning, we would expect your future reserves to reflect three-year average metals prices per SEC guidelines. But will you plan any of your mines perhaps more conservatively at even lower metals prices? Or how might you be changing mine plans as the metals prices rise? We have all the same tough trouble figuring out metals prices as you do.

Steve Busby -- Chief Operating Officer

Yeah, John, that's a very good question. This is Steve here. As we look at our mine plans, I mean, we do try to discipline ourselves strictly to our long-term reserve price outlooks, and we try to run the operation at that. There's times when metal prices fall below reserves,where we shore up and increase our cutoff grades a bit.

There's times like now where metal prices have run way out ahead of us, and it requires a lot of discipline to maintain kind of where we're at. With that said, it also provides us opportunities. If there's some kind of squeeze point in the mine plan, some kind of constraint that we're facing, it gives us some flexibility to kind of get over some of the humps. So we do take advantage of that where we can, but it does require, as any miner would tell you with these high metal prices, it does require some discipline to maintain your outlook because the overall objective is what is the average metal price over the life of the asset.

That's really what we're focused on. And you've got to kind of look beyond these short-term swings. And that's the way we look at it when we build our mine plans.

John Tumazos -- Very Independent Research -- Analyst

So would you change your gold or silver price long-term assumptions at all for the gains in 2019 and '20?

Steve Busby -- Chief Operating Officer

I mean, we just came out with the reserves at the end of June. We did not, I mean, we upped it a little bit, but not -- it was very modest. And obviously, it's taken off after that. I would say -- it's hard to say, John, until next year in where we're at.

We don't need to set that price until next June, so.

Michael Steinmann -- President and Chief Executive Officer

I think the important part is also when you look at your mine plan that you don't sterilize if you don't sterilize material that you can't access later on. And this runs in metal price continue substantially in the future here, then you always have access to that material later on. But as Steve said, this metal price run here has been pretty recent over the last two months actually post what we actually decided on prices.

John Tumazos -- Very Independent Research -- Analyst

If I can ask another. Is it fair to view the one-year extension to La Arena oxides and two-year extension in the life of Shahuindo oxides as giving you another year and another two years more time strategically to evaluate divestiture JV or optimization of the sulfides at each location?

Michael Steinmann -- President and Chief Executive Officer

Well, we're not talking about the sulfides yet at Shahuindo. I think we are -- this is coming down in the future, but it's absolutely fair, your view there, to say that that gives us even another year to think what we're going to do at, what you referred to, it's called La Arena, too, the sulfide, the big copper-gold deposit sitting below and on the side of the current La Arena mine. Absolutely, that gives us even another year there and gives us a lot of time to think and work on what we want to do in the future with that asset.

John Tumazos -- Very Independent Research -- Analyst

If I can ask one more finally is Juby's 4 million-ounce divestiture the only gold resource divestiture you're contemplating? Or might there be more sorted out from the exploration assets in the next year or two?

Michael Steinmann -- President and Chief Executive Officer

No, look, there's a large amount of projects, early stage projects, smaller projects that we have in our portfolio, some for a long time. As you can imagine, there is much more interest in exploration assets than there has been for a long time. So absolutely, we will try to optimize our portfolio here in the future. And you should expect that there will be more to come.

John Tumazos -- Very Independent Research -- Analyst

Thank you, and congratulations on everything.

Michael Steinmann -- President and Chief Executive Officer

Thank you, John.

Operator

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

Michael Steinmann -- President and Chief Executive Officer

Thank you, everyone, for calling in today. Looking forward to give you an update on Q3. That's, wow, November already. So enjoy the rest of the summer, and, most importantly, stay healthy and safe.

Thank you.

Operator

[Operator signoff]

Duration: 57 minutes

Call participants:

Siren Fisekci -- Vice President of Investor Relations

Michael Steinmann -- President and Chief Executive Officer

Chris Terry -- Deutsche Bank -- Analyst

Rob Doyle -- Chief Financial Officer

Cosmos Chiu -- CIBC World Markets -- Analyst

Steve Busby -- Chief Operating Officer

Lawson Winder -- Bank of America Merrill Lynch -- Analyst

Chris Emerson -- Vice President, Business Development and Geology

Martin Wafforn -- Senior Vice President, Tech Services

Chris Thompson -- PI Financial Corp. -- Analyst

John Tumazos -- Very Independent Research -- Analyst

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