Sierra Metals Inc

TSX:SMT

Earnings Call Transcript

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Sierra Metal Q2 2020 Consolidated Financial Results Conference call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mike McAllister, Vice President of Investor Relations. Please go ahead, sir.

[Michael McAllister, Vice President of Investor Relations]

Thank you, operator, and good morning, everyone. Welcome to Sierra Metals Q2 2020 Results Conference Call. On today's call, we are joined by Luis Marchese, our CEO; Ed Guimaraes, our CFO. Today's call will be followed by a question-and-answer period. And the accompanying presentation for today's call is available for download both through the company -- both through the website -- the webcast and the company's website at sierrametals.com. Yesterday's press release, the financial statements and the management discussion and analysis are posted on the company's website. Before I turn the call over to Luis, I would like to indicate that the earnings call contains forward-looking information that is based on the company's current expectations, estimates and beliefs. This forward-looking information is subject to a number of risks, uncertainties and other factors. Actual results could differ materially from our conclusions, forecasts or projections as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast or projection in the forward-looking information and material factors or assumptions that were applied in drawing a conclusion or making a forecast to our projection as reflected in the forward-looking information is all contained in the company's annual information form, which is available publicly on SEDAR or EDGAR via Form 40-F or on the company's website. Please note that all dollars amounts mentioned on today's call are in U.S. dollars, unless, otherwise, noted. With that, I would now like to turn the call over to Luis Marchese, CEO of Sierra Metals.

[Luis Carlos Marchese Montenegro, President, CEO & Director]

Thanks, Mike. Before I speak about our Q2 highlights and insights, I would like to take a quick moment to update you on the most recent COVID-19 developments in Mexico Group. Turning to Slide 4. At the beginning of June, the Peruvian and Mexican governments allow for the resumption of full mining and mining-related activities, beyond essential activities that have been carried on the previous months. The company first recalled additional employees to Yauricocha and Bolivar mines, also once the process put in place at Cusi to ensure working and community safety, we will recall employees there as well, restarting operations in late July. We are proceeding cautiously and adhering to a strict health protocols to protect our employees and the communities in which we operate as well as to mitigate the potential for further work stoppages. Employees are first tested, quarantined and tested again before joining the active work. Also once at the mine, employees are monitored daily with health checks. While this system has served us well, it's not a perfect solution. We still have had some positive cases materializing the workers and have needed to quarantine and send those employees for medical attention. We also needed to remove any employees identified through contact tracing from the workers, until they are medically cleared to continue. For example, 2 weeks ago, we had 2 persons that leaked through the sanitary fencing system that we have in place. And at the end of the day, we start to remove over 100 employees from the Yauricocha Mine. So this is a sort of situation that we are looking at. I cannot understand the difficult situation due to COVID-19 currently both in Peru and Mexico, and we might continue to be very diligent in our actions. Taking care of the communities where we operate is also very important to us for their safety and with their wellbeing. We have worked with the communities and have donated PPE and medical supplies, including a donation to a local fundraising effort near the Yauricocha Mine for the purchase of 2 oxygen production plants. Oxygen remains in short supply and is critical for those who are here with COVID-19. We will continue strengthening our engagement and support to our workforce, their families and the local communities in our area of influence at all 3 mines as the situation evolves. Then to Q2 2020 highlights. Turning to Slide 5. The company achieved remarkable results, despite the negative implications of the COVID-19 related shutdowns. While consolidated throughput, copper equivalent production and revenue were lower, adjusted EBITDA was positive. And we finished the quarter with $40.7 million in cash. These are strong results given the shutdowns experienced in the second quarter. Our revenue mix by metal continues to migrate with copper taking a leading role followed by silver. Gold has also seen a continued increase as a percentage of the mix, aided by improved production and recovery at Bolivar and supported by higher coal prices. In Q2, we faced lower base metal realized prices, but saw improvement to precious metals realized prices. Precious metals have continued to improve in Q3, and base metals have also been improving, especially in copper over Q2. Turning to Slide 6. When compared to the same period of 2019, costs were down at both Yauricocha and Bolivar, which was attributable to lower operating costs and a prudent management of capital expenditures to protect the balance sheet. We also realized improved head grades and favorable foreign exchange rates. I would like to commend our employees and management, who, despite the challenges faced in the quarter, maintained a high level of productivity, a solid balance sheet and strong cash. While Cusi remained in care and maintenance during Q2, we did have a positive EBITDA of $0.2 million and revenue of $1.7 million from the sale of silver concentrate remaining at the end of Q1 2020. Cusi restarted earlier than anticipated in late July and is on track and performing well on its way to the 1,200 tonnes per day throughput level. Cash costs at Cusi are expected to be lower in the latter half of 2020 as we ramp up production. Overall, we are certainly optimistic that with improved operating efficiencies and potential higher metal prices, we will see a strong third quarter in 2020. Looking ahead in 2020. Turning to Slide 7. We will see a strong growth for the company as operations returned to full capacity. At Yauricocha, we had the flexibility to recover some of the lost production from the second quarter shutdown during the second half of the year. We are also excited to see Bolivar and Cusi ramping up to their targeted capacities of 5,000 and 1,200 tonnes per day, respectively. Furthermore, we will also continue to seek the required permits to increase Yauricocha's throughput to 3,600 tonnes per day level for next year. I am also pleased to announce that as per the ongoing strategy of the company, the Board of Directors has approved a proposal by management for the expenditure to examine further expansions at all 3 mines beyond their current capacity ramp-ups levels. These studies will incorporate the latest 43-101 mineral resource updates, including the significant mineral resource increases of Bolivar reported in December 2019 and March 2020. The company has excellent land packages which remain the source growth potential to support further organic growth at coal mine. The company has issued revised 2020 production guidance. We now anticipate that 2020 copper equivalent production will range between 110 million to 122 million pounds, silver equivalent production will range between 17.4 million and 19.4 million ounces or zinc equivalent production will range between 286.8 million to 318.7 million pounds. The revised guidance assumes no further shutdowns or working stoppages because of the COVID-19 pandemic and it's based solely on what management expects the company's operations can produce this year. In conclusion, on Slide 8, the company has had a solid quarter despite the adversities we faced from the COVID-19 pandemic and we're still able to emerge with a strong balance sheet and cash position. While we certainly continue to operate in a vulnerable environment due to COVID-19, we remain optimistic that further cash flow and liquidity improvements are expected in the second half of the year as a benefit of higher production and metal prices as compared with the first half. We remain committed to the prudent and sustainable growth of the company, and more importantly, improving the per share value of the company, which benefits all shareholders. With that, I will now turn the call back to Mike.

[Michael McAllister, Vice President of Investor Relations]

Thanks, Luis. That ends the presentation portion of the call. With that, we would now like to open the call up to questions from participants. Operator, could you please open up the lines?

[Operator]

[Operator Instructions] Our first question comes from the line of Mark Reichman from NOBLE Capital Markets.

[Mark La France Reichman, Senior Natural Resource Analyst]

Luis, when you look at the COVID-19 situation in Peru and Mexico, how are you thinking about required functions and activities versus what's discretionary?

[Luis Carlos Marchese Montenegro, President, CEO & Director]

Thanks for the question, Mark. I think it's extremely relevant what you've asked. The COVID-19 in bottom reductions is a very worrying situation. In Peru, yesterday, we have the highest number of infected people since the start of the pandemic. And we are having the highest number of dead people and this is all across the country, and it's certainly the case near our operation at Yauricocha. In Mexico, the situation is also quite worrying. Although, where we are operating, it is still at -- and hopefully, will remain at a lower level of infection than the rest of the country. What we're doing is, we are prioritizing nondiscretionary capital expenditure, particularly in the areas of health, safety and environment. And also, we are prioritizing operational CapEx. So as we speak, we are trying to spend more on the required CapEx to maintain operations at the level that we require. In the last quarter provided we could only do the special mining activities, we had to stop some of our development, which we're currently bringing back at the right level so we can have the right amount of ore available for production. In the future, certainly, we expect to have some cash flow to start looking at different CapEx initiatives from nondiscretionary and we're going to look at expansion studies that I've just mentioned among other studies that we have to make to -- for the future of the company as part of the growth strategy.

[Mark La France Reichman, Senior Natural Resource Analyst]

My follow-up is, when you think about the potential to increase production capacity at all 3 mines beyond what is already planned, at this juncture, which ones appear to be the easiest versus the toughest to accomplish? And what are the most critical questions that you hope to study will provide help with.

[Luis Carlos Marchese Montenegro, President, CEO & Director]

Well, thank you, Mark. The advantage of study is to provide answers to this time and relevant variables of the 3 expansions: the right sizing, the right layout, the potential bottlenecks in terms of infrastructure, power, water, roads, the environmental impact [indiscernible] the financial requirements and eventual financial needs. So we're going to look at all of those variables to decide between the options that we have at current to see what the option that is the most value-accretive for the company is the one that we would develop in the future. So that's what the studies are aiming for. And the Board has supported that we do this studies for the 3 mines because we are very optimistic that provided where we are in terms of resources, in terms of cost base and the jurisdictions where we are, that we will be able to bring all this value to the company and to the shareholders.

[Operator]

Our next question comes from the line of Heiko Ihle from HCW.

[Heiko Felix Ihle]

So just went through a couple of past press releases. January 23, you initiated guidance of 135 million copper equivalent pounds. You suspended at May 13, now you're at 110 million to 122 million pounds. I mean all things considered, it's really only a 14.1% decrease at the midpoint. So that's actually really strong. We're sort of halfway through Q3 at this point. Can you just sort of tell us what you're seeing in the quarter? And how much room for error this guidance actually allows?

[Luis Carlos Marchese Montenegro, President, CEO & Director]

Thank you, Heiko. While we were maintaining official mining activities, and we work on the most profitable areas of the mine. That's where we try to stay while also maintaining all the right variables in place. So that's why you see our guidance as compared to 2019, we have -- we are aiming to reach more production in gold, silver and copper. Even though actually in Silver, we stopped Cusi for almost 4 months. So that's why you can see that the drop in production is not that much. And we have to remain there. Well, looking ahead, we are also very carefully planning what we do for the rest of the year. And so far, we're getting there. My only concern, we reiterate this is, COVID. That it can impact us in the development of some areas that we are currently planning. So that's why we are providing this lower guidance for the rest of the year.

[Heiko Felix Ihle]

Okay. And then just building on that, it states in your release that the guidance quote assumes no further shutdowns of work stoppages as a result of the COVID-19 pandemic. Can you just sort of walk us through some factors that may have changed on your internal outlook in the last 14 days? And what has started to concern you more? Maybe also things that start to concern you less in the very recent past.

[Luis Carlos Marchese Montenegro, President, CEO & Director]

Okay. In terms of COVID, if you compare actually our operations with other operations in Peru, we have been able to manage it fairly well. We have not stopped operations at any moment. Our strategy of sanitary fencing, daily controls and we have a crisis Committee that meets fairly often has worked quite well. So that's the -- that's a good part of it, and we certainly are planning to remain that way. But on the other hand, the overall situation in the country in Peru and in Mexico is really concerning. As I said, as we speak, yesterday was the worst day since the beginning of the pandemic. So we cannot state that we won't have any needs or actually dire consequences from this pandemic in the future. We are having, as we speak, also some operational restrictions. Like I said, we had to quarantine over 100 workers that were in Yauricocha, which is pretty much 15% of the workers that we had at the mine at the time from one day to the other because we had to isolate some cases that had appeared, even though we had this sanitary fencing strategy. So these are the situations can happen. We are doing our best to control, but we are part of a community, we're a part of the environment. So it's very difficult to finally say that we're not going to have any sort of issues in the future.

[Heiko Felix Ihle]

Okay. And then just finally, and I know I asked this question on 1 of these calls before, and we were actually at an even lower cash figure than but I mean just thinking out loud, you currently have over $40 million in cash. That's essentially in line with the end of 2019, but it's double the cash you had at the end of '18 and '17. I mean at what point in time do you think that's a little bit too much firepower and you'd be willing to spend that down a little bit or return it to shareholders or do something else with it? And that's it from me.

[Edmundo Gontardo Guimaraes, Chief Financial Officer]

Heiko, I'll take that question on. Yes, that's a very good point. With the cash position that we have and assuming Q3 and Q4 continue as Q3 has started off, we will continue to build cash. We have opportunities to continue with our original 2020 capital -- approved capital expenditure plan, which if you recall, on the original guidance back in January was $52 million. So we've only spent approximately $15 million halfway through the year. So there would be another $38 million available for that. As well as consider further spending for other growth programs and exploration as well. And yes, should there still be excess cash, a portion of that could be returned to the shareholders. But it's important to note that we're still nowhere near out of the woods with COVID. And as Luis just mentioned, yesterday was one of the worst days that Peru has seen in terms of COVID. So it's still very much near.

[Heiko Felix Ihle]

Yes, no, unfortunately, you're right with COVID being nowhere near over.

[Operator]

Our next question comes from the line of Lee Cooperman from Omega Family Office.

[Leon G. Cooperman, President, CEO & Chairman]

I have a few questions. Maybe I can put a math there. The market capitalization of the company is $275 million, which is almost an irrelevancy in today's market as people want larger, more established companies. Present management and predecessor management done a good job. So we really can't criticize the management. It's just that nobody is interested in this. So I'm just curious, whether you guys are willing to undertake a strategic review with the idea of maximizing value to shareholders. And in that regard, we used to publish a slide where you listed out your NAV, I guess that disappeared because you're going through this preliminary economic assessment and waiting for the results. But I'd be curious, if you looked at M&A activity in the mining industry, what is typical multiple EBITDA and NAV on these transactions that are taking place? And what would that portend for us? That would be question number one. Question number 2, you're really almost yourself, opened up the Pandora's Box. You made a reference in your press release looking at returning money to shareholders, what have you got in mind? We announced an intention of doing a buyback earlier this year. I think the stock price is actually unchanged from where it was at the beginning of the year, even though the fundamental performance of the company looks to be better. So that's my second question in terms of the buyback. The third, I looked at the tonnage that you're projecting to produce in 2021 versus 2020, would that -- should one assume that your production in gold and silver is likely to be greater in 2021 than it is in 2020? Those are my questions for now.

[Edmundo Gontardo Guimaraes, Chief Financial Officer]

Thanks, Lee. I'll take that on and then Luis could complement. But in terms of strategic reviews, yes, that's something that is ongoing. We do strategic reviews, management to presenting to the Board. And we do these twice a year, and just recently, we approved studies for hospital expansion scenarios at all 3 of our mines and that can go a long way in terms of...

[Leon G. Cooperman, President, CEO & Chairman]

I was referring to a strategic review as regards, the possible sale of the company to a larger entity. There was $275 million. We just don't attract any interest. Silver and gold are at record high prices, you'd have -- stock price is no different than it was a decade ago. So my question is, whether you have a 50% owner, 59% of the stock is owned management and Alberto. Has the time not come for you guys to step out and see if there's an alternative home for Sierra that would get proper value for us? So I'm not talking about strategic review of your expansions.

[Edmundo Gontardo Guimaraes, Chief Financial Officer]

Okay. Thanks for clarifying, Lee. But I think that question is more, I think, should be posed to Alberto into the [ Arias ] Fund in terms of what their strategic plans are for their interest in the company. And because it is 52%, what they decide, ultimately, whether it's 52% or 100% at that point, they can control what takes place. Luis, I don't know, if you want to add anything in that regard, you're on mute?

[Luis Carlos Marchese Montenegro, President, CEO & Director]

I was just -- maybe for the next question, Leon, on the excess cash flows, but as I mentioned is that we have a CapEx backlog there. We carried $10 million from CapEx backlog from 2019 to 2020 and we certainly have a larger CapEx backlog due to the COVID. We haven't been able to do -- not even, but we believe was nondiscretionary in terms of operational...

[Leon G. Cooperman, President, CEO & Chairman]

That wasn't my question with all honesty. My question -- let's focus on the first question, was, if you look at M&A activity in the mining space in terms of multiples of EBITDA and NAV, what would you think the value is of Sierra in the merger market versus the auction market? The auction market is the market where 1 or 2 shares trade or 100 or 200 shares trade. What is the value of Sierra to a strategic buyer? And will company consider that?

[Luis Carlos Marchese Montenegro, President, CEO & Director]

Leon, I think we are providing guidance in terms of [ cost ] production. We have provided guidance in the past. I think there is a group of analysts that have certainly a view on the value of the company. And they certainly support your view that, that the company have room to grow in terms of per share value. That's what I can comment on that. In terms of the strategy that you mentioned, I think, I just clarify that the company is controlled by 1 party. So quite a bit of that is, well, that decision is in the hands of that controlling party.

[Leon G. Cooperman, President, CEO & Chairman]

What about the question, I assume that if I look at your tonnage, that you're expecting to produce in 2021, would it be fair to reason that you would anticipate that your production of gold and silver in ounces would be higher in 2021 than you forecast in your -- in 2020?

[Luis Carlos Marchese Montenegro, President, CEO & Director]

Absolutely. Absolutely. We are aiming to reach full capacity at the 3 mines at Bolivar and Cusi by the end of the year, and we are aiming to have a permit to go to 3,600 tonnes per day -- so which is 20% more throughput in Yauricocha by the start of the next year. So by the likes of throughput and grade and recoveries, we are certainly aiming to have higher production. And let me add that we are also aiming to have lower costs, lower unit cost.

[Leon G. Cooperman, President, CEO & Chairman]

Yes, that's a good combination. More production, lower cost.

[Luis Carlos Marchese Montenegro, President, CEO & Director]

Absolutely. Absolutely. And that's what we're aiming for, and we are certainly committed to that.

[Leon G. Cooperman, President, CEO & Chairman]

The cash, any ability to make a guess as to how much cash you would generate in the second half of the year? In other words, we currently have $40.7 million in cash and $99.5 million debt. Do you think you'll generate -- how much cash you think you could generate in the second half of the year? Do you have any view of that at this point in time?

[Edmundo Gontardo Guimaraes, Chief Financial Officer]

Because we've suspended guidance on earnings guidance, we're not prepared to make that statement. What we can say that we expect the second half of Q2 to be much stronger than the first half, assuming there's no COVID related work stoppages and if metal prices stay where they are closer to spot as opposed to consensus, yes, we should be in a position to generate cash. But I'm not prepared to...

[Leon G. Cooperman, President, CEO & Chairman]

Commit. Okay. It's understandable. It's understandable. Again, I think we have to pay a little bit more attention to looking at strategic alternatives for the company because I think the stock is disconnected from the fundamental value of the business. And I think it's incumbent upon the Board and Mr. Arias to basically look at this and try to decide the best way to deal with it. But thank you, and good luck. Stay healthy.

[Operator]

[Operator Instructions] Our next question comes from the line of James Young from West Investments.

[James Young, VP & Investment Analyst]

Thank you for the strong performance in the second quarter. A couple of questions. I got several questions for you. Number one is, can you just remind us, are there any upcoming labor contracts that are due for negotiation that we should be aware of, at any, and all of the 3 mines?

[Luis Carlos Marchese Montenegro, President, CEO & Director]

James, thanks for the question. Not in the very near future. The next discussion with the Yauricocha union should be early next year. So -- but we are certainly in constant conversations with them. This COVID-19 situation has certainly disrupted the whole relation with the workforce because we've had to put some of the workforce in suspension. There have been some changes in the shift. So we didn't have to go up so often to the mine and go through this quarantine process. So we are constantly talking to them and agreeing on different things. But the contract as itself, we have to negotiate it by the end of the year or early next year.

[James Young, VP & Investment Analyst]

Okay. Secondly, at Yauricocha, could you just help us understand where exactly do we stand with respect to the permit that will enable you to expand your production from 3,000 tonnes a day to 3,600 tonnes a day? And what specific permits are required? Like how are there -- is it just 1 permit? Or are there multiple permits? Can you just help us understand that process?

[Luis Carlos Marchese Montenegro, President, CEO & Director]

Yes. Thank you, James. What we required to expand the Yauricocha to 3,600 permit is a permit called the ITS. The ITS is a shortened version for the environmental permit, which apply to this sort of 20% expansion price. We have already contacted the government. They have already given us their views on what will be required to get that permit. So we are currently completing the documentation and the studies that have to be sent to the government. So this process should take into early next year together, this environmental instrument approves. Once that environmental instrument is approved, then we go to the Ministry of Energy and Mines for the production permit, which should be right away. So all in all, we are expecting to cover that journey by early next year.

[James Young, VP & Investment Analyst]

Okay. And so has there been any other permits that have been granted to you as part of this whole process? Or is this just ITS you're really waiting for, that's the key one?

[Luis Carlos Marchese Montenegro, President, CEO & Director]

That's the key one. The ITS, yes.

[James Young, VP & Investment Analyst]

Okay. All right. Third, in the MD&A on Page 10, you mentioned that about copper, and that the strong demand you're seeing out of China and supply constraints from like Peru and Chile. Can you help us better understand, I mean, the demand that you're seeing out of China overall and if you can quantify any of these numbers would be helpful. Because, while you've done a very good job on COVID, I would assume, and this is something on the supply side, that there have been other mines and other miners who have not done as well in Peru, Chile or around the world. So can you help us better understand how the demand recovery in China is benefiting the pricing environment for copper and also the supply constraints that we're seeing in the markets?

[Luis Carlos Marchese Montenegro, President, CEO & Director]

Okay. Thank you, James. Well, what we see -- I mean, the demand from China has grown, and we see strong demand coming into the market. On the supply side, certainly, as you mentioned, both Peru and Chile have been hit by the COVID and the production from Peru and Chile have been hit. So the result of that is what we see in the market that the price went the level of 240ish in the peak of the pandemic few weeks ago, and now it's in the 290. We are no experts in copper markets. We are other experts. But certainly, we are optimistic that in the long run, and hopefully in the short run, copper is a key component of our asset, of our strategy, of our assets, and we're going to be very successful on the development of our resources. Bolivar is a great mine. It has a low cost base. As you can see from the first half, and hopefully, you'll see in the second half, we're having great results from that mine, and we are certainly expecting to do so for the future.

[James Young, VP & Investment Analyst]

Okay. And then thinking of Bolivar, you'd mentioned on Page 7 of the MD&A you had a comment of the porphyry system that is [ President ] Bolivar where you're -- where you're drilling 549 meters. Previously, the previous CEO had at one point in time, commented about the porphyry like characteristics. And now you seem to be officially defined this as a porphyry system. So my question is, have you actually found a porphyry at Bolivar? Or what are your plans to develop this porphyry potential at Bolivar?

[Luis Carlos Marchese Montenegro, President, CEO & Director]

Okay. Porphyries have some defining characteristics like certain alterations and certain components in the rocks and some type of rocks and we have found that in Bolivar, and it's there. So we are going to keep our strategy to keep searching for the sweet spot but hopefully we'll be there with the right ratio to have a porphyry mine. So that's where we are at the moment. We have found that there is a porphyry system in the area. And we are going to keep exploring. For that, we're engaging with consultants that are specialized in this sort of mineral systems. Myself, I've worked in porphyries in the past. So we are certainly working -- we're at Bolivar. Actually the same thing applies to Yauricocha, where we are also aiming to work pursuing that opportunity in the future.

[James Young, VP & Investment Analyst]

Okay. So it's just porphyry -- so it sounds like you think it's highly probable that there's actually a porphyry at Bolivar. Has the same party, as I understood, either in prior discussions with management that there was another mining company that signed an NDA at Yauricocha, has the same party been engaged to look at the potential opportunity at Bolivar?

[Luis Carlos Marchese Montenegro, President, CEO & Director]

Well, we cannot discuss the specifics of this party, James. What I can tell you about Yauricocha is that, we have stopped exploring because of the COVID. So as soon as we can get back to fairly normal operations there in terms of COVID, we will start looking at exploring back again there.

[James Young, VP & Investment Analyst]

Okay. The next question really pertains to the production levels at -- as you seem to be quite convinced and you're confident that you're going to be able to achieve Bolivar at 5,000 tonnes a day by the end of the year, in Cusi at 1,200 tonnes a day by the end of the year and continue to operate and recover a lot of the lost production at Yauricocha. So my question really is, as you've been able to reinstate the production at all 3 mines, where -- what -- can you help us get a better sense as to how that ramp in production looks like? So like, how much -- how many tonnes per day were you able to mine at all 3 mines in the month of July, in August where you were halfway through the month already. So where, how is August unfolding?

[Luis Carlos Marchese Montenegro, President, CEO & Director]

Well, July, in Cusi, we have started operating in the 27th of July. So it's not relevant. In Bolivar and Yauricocha, we are ramping up still. We are having, as I mentioned, the sort of disruptions from COVID. So it is a fairly fluid situation, James. So it's difficult for me to say a number. But what I can state is that the teams are doing a great job in bringing as much production as possible at both mines. And I'm certainly proud of the job that they're doing.

[James Young, VP & Investment Analyst]

Okay. Well, I would assume, though, that you're getting some daily production numbers and reports out of all 3 mines. So can you help us understand at least where -- I mean, like Cusi, for example, yes, you started in early July, you had a month into it. So like can you give us a sense as to like what's the highest level of production you've been able to produce at Cusi since it's restarted?

[Luis Carlos Marchese Montenegro, President, CEO & Director]

James, those numbers are not public yet. So I'd rather leave them probably all together. What I can tell you is that, as I said, the teams are doing a great job, really doing a great job. So I hope that -- I'm sure that the numbers are going to be where the shareholders and we all want them to be.

[James Young, VP & Investment Analyst]

While I recognize that you did not publicly put them in the press release, but this is a public call for your earnings call. And so this is an opportunity to share that with the marketplace in a public forum. So if I guess, again, I'll come back to you 1 last time. Can you help us understand like Bolivar, what levels of production are you currently producing? At your Yauricocha? What levels of production are you producing in Cusi? Because this is critically important for the company and for shareholders, too.

[Michael McAllister, Vice President of Investor Relations]

Luis, can I pop in here. Jim, this is not considered public form enough that it meets disclosure requirements for all people. The only way that we disclose the meet -- disclose the requirements for everybody is through a press release. So because -- and right now, we currently have 7 people on the line. And so that's not considered public disclosure in the sense that we can put something on the press release. So we cannot disclose the actual numbers as to what the mines are doing right now. We can tell you that we're very optimistic. Things are going well, but that's all we can say. The production and press release will be out mid-September for Q3. And at that point, I think you'll be happy with the numbers, but that's all we can say.

[James Young, VP & Investment Analyst]

Okay. In the -- and do you think you'll be prepared to provide some better guidance going forward, in the mid-September release is provided to the markets? Or is this just going to be a historical number?

[Edmundo Gontardo Guimaraes, Chief Financial Officer]

Jim, its Ed. So the third quarter numbers will come out in -- it's going to come out around November. And at that point, we should have a much better grasp in terms of where our cash flow, cash position is. Again, there is still possibly a COVID risk, but having 3 quarters of the year in place, we should be in a better position.

[James Young, VP & Investment Analyst]

Okay. If I can move over then to Cusi for a second. Can you help us understand this new system that you talked about, you had a press release of the Northeast - Southwest System. How -- I guess, you put the press release out on June '18. And how much production and how much ore are you expecting to be able to process at the Mal Paso mill?

[Luis Carlos Marchese Montenegro, President, CEO & Director]

From that area, Jim, we could not -- what we found is very encouraging and very positive. The geological interpretation in Cusi was that the "was like hard boundary between an area with ore and with an area with no ore, okay?" So the interpretation of the ore that was found along that ore quarterly was stockwork. It was ore mixed with the rock. I'm being very simple here. If the rock that was cracked at default, okay? The geologists have looked very carefully at what we found once we are mining near the area and their interpretation now has changed, that it's more -- that the ore actually extends to the other side of default. Before we felt that on the other side of default we would have ore. Now we feel that there is ore on the other side. And this stockwork has become a system of base that's going to the ore side. So that's where we are. As we speak, we are drilling into that area and the numbers that we released on that press release some time ago and the numbers that we have found some drills in the area. Now we are working on more drills to quantify what sort of tonnage and grade we are going to have on that area for mining. We are very excited about that area. It's higher grade than we -- than what we have found in the nearby areas. And since it's very close to where we are mining, we are planning to bring this into production in the next 6 to 12 months, part of it. So that's where we are working at the moment. We're very excited. We hope that it helps in terms of grade profile for the future. But we have to do the drills, the numbers and the planning and the mining to make sure that it's there.

[James Young, VP & Investment Analyst]

Okay. So this new system, the Northeast - Southwest System that you're talking about here, is your sense that the grades are higher or lower than what you're seeing at The Santa Rosa de Lima.

[Luis Carlos Marchese Montenegro, President, CEO & Director]

So far, what we found from this, the grade is higher, but we feel -- well, it's 3 of these samples. We have to drill more and make sure what the volume is and what the final tonnage and grades will be for mining. We have to account for dilution, grades, and all of these variables. But from what we found, we are optimistic that they are going to be higher.

[James Young, VP & Investment Analyst]

Okay. And then what about how wide -- what's the width that you're finding in this new system? Because the 1 issue with Cusi over the years, they've been quite narrow, which has made them difficult to be economical. So can you help us understand how are the widths compared to what you're seeing out of The Santa Rosa de Lima?

[Michael McAllister, Vice President of Investor Relations]

Jim, as per the public disclosures, The Santa Rosa de Lima, on average, is about up to 4 meters. And the press release actually stated that the -- the widths go up to 17 meters in this new area. So the -- what we have from the information that we've seen so far is that they're wider. That's about all we can say right now.

[James Young, VP & Investment Analyst]

Okay. And when would you expect to be able to release some more information about the overall tonnage and quantity and other characteristics of the Northeast - Southwest System for the markets?

[Michael McAllister, Vice President of Investor Relations]

Well, the drilling is ongoing right now. As soon as the drilling is complete and we have assays, we'll get that out to the market as soon as possible. We're excited about this. And we want to share it as soon as we have it. So we're not holding back the information here. As soon as we have it, we'll try to get it out to you as soon as possible.

[James Young, VP & Investment Analyst]

Right. I understand that, Mike. But I mean, are you -- are we looking at something like, say, in September? Are we talking about by the end of the fourth quarter of 2020? Or is this a 2021 event?

[Luis Carlos Marchese Montenegro, President, CEO & Director]

As Mike said, Jim, we are drilling at the moment. Hopefully, by the end of the year or early this year, we will have some of the numbers out in the market. But look, we are really into it. So we are expecting to have the numbers as soon as possible and make sure that we bring that ore into the plant and silver out of it.

[James Young, VP & Investment Analyst]

Okay. If we can move back a little bit towards the Bolivar, where can you help us understand the incremental margins where the incremental EBITDA margins, Ed, whereby in the latest quarter, you were producing at 3,500 tonnes a day. As you ramp towards 5,000 tonnes a day, we can -- I would assume that these incremental margins should be fairly robust. So can you just help us better understand what is the incremental EBITDA margin for Bolivar, please?

[Edmundo Gontardo Guimaraes, Chief Financial Officer]

So in Q2, we saw some -- a real increase in our incremental margins, if you will, operating almost at a 53% margin. H1 Bolivar was at around 50%, very strong. We would expect that as we increase our throughput up to the 5,000 tonnes per day, you are going to get the advantage of the lower fixed unit basis, your lower costs per tonne and per pound. So we're highly optimistic, but I'm not prepared to say, to give you a firm number at this point. But very solid margins coming out of Bolivar.

[James Young, VP & Investment Analyst]

Okay. Well, can you help us better understand then with these benefits from the economies of the scale that you're alluding to Ed, what kind of cost per pound would you -- that the cash cost and all-in sustaining costs, as you move from 3,500 tonnes a day to 5,000 tonnes a day, would you expect to see at the Bolivar?

[Edmundo Gontardo Guimaraes, Chief Financial Officer]

Jim, I think what the benefit of Bolivar is that, Bolivar would be, you could say it's in the close -- very close to the bottom quartile in terms of its cash costs, C1 costs. And I'd expect it to maintain that and going forward. But I'm not prepared to give you as cost per pound at this point.

[James Young, VP & Investment Analyst]

What additional information do you need to see? And when would we expect to know what these -- what you're -- the cost trends look like at Bolivar?

[Edmundo Gontardo Guimaraes, Chief Financial Officer]

The cost trends, Jim, are going -- they're going lower. And it's just -- there's a lot of things that go into -- there's grades, there's all sorts of things that impact the amount of development you're doing, the amount of machinery you're doing. So to really put your neck -- throw out on the line, I'm not prepared to do that and say that, yes, I can say that Bolivar is going to be x dollars per pound going forward at a 5,000 tonne throughput and much higher lower depending on the throughput. As we speak, at the end of June, cash costs for Bolivar were around $1.16, which is very good. And there's also the FX component as well, which does make a difference as well and as you have a weakening Mexican peso. And that has gone into the cost profile as well.

[James Young, VP & Investment Analyst]

Okay. Well, I guess the last question here is that it would seem that given your optimistic view towards the ability to deliver on the production increases, excluding any negative impacts from COVID? And the pricing environment that we're seeing here that the upcoming, that the record quarter that you guys produced on an EBITDA basis in June of '18 of about around $29 million, is there any reason why that number should not be exceeded by the fourth quarter of 2020, given that you've had rising volumes and the pricing environment is much better today than it was back in '18?

[Edmundo Gontardo Guimaraes, Chief Financial Officer]

Assuming there's no COVID interruptions, and as Luis mentioned on the call earlier, we expect the stronger second half than first half. There's no question. And it's all a matter of, if spot prices -- if metal prices remain at spot prices, then we should see a nice big bump. Again, just to remind you that we do base our planning efforts on consensus pricing and consensus prices are still very much -- they're way below where we have spot prices right now. So it's really highly dependent on that.

[James Young, VP & Investment Analyst]

Right. Yes, I totally understand the importance of pricing. And -- but again, the question really is, though, if the pricing environment remains where it is today, again, we're halfway through the third quarter. And as to continue down to the fourth quarter like this, is there any reason why we should not be able to exceed the June quarter of '18, it was at $28.9 million?

[Edmundo Gontardo Guimaraes, Chief Financial Officer]

If shouldn't be -- taking COVID out of the equation, Jim, there should be really no reason.

[James Young, VP & Investment Analyst]

Okay. Great. I appreciate your time and all your thoughts here. And most importantly, we wish you all the best and all the safety to all the employees at Sierra Metals.

[Operator]

Our next question comes from the line of Lee Cooperman from Omega Family Office.

[Leon G. Cooperman, President, CEO & Chairman]

I just had to come back in the line because I listened to this exchange between you and Jim. And I want to make an observation and I have a question. The observation is, you guys are working very hard trying to create value. The market doesn't seem to give a damn. You have more press releases per dollar of market cap than any company I've ever been involved in the 55 years I've been in the business. We have 7 people on the line. Nobody gives a dam. Okay, they don't care about us. And I hope Alberto is listening because he should understand that there's a growing sense of frustration of those people like Mr. Young who have been long-term support of the company. Stock is unchanged for a decade. The price of the commodities more recently is way up. Yes, we have the uncertainty of the COVID, which is another factor, but the reality is, that it certainly should give us an opportunity. So I would say, the time has come for us to explore strategic alternatives. And maybe the best thing is to do nothing. If people can't pay us or won't pay us for what you guys have created. My second thing is a question. When earlier this year before COVID hit, you announced intention of pursuing a Dutch auction tender, I guess it was. Given just your assessment of the environment today, the financial position of the company, your production capacity, the price of the commodities you sell, is the stock cheaper today than it was in January? Or you have no opinion on that?

[Edmundo Gontardo Guimaraes, Chief Financial Officer]

I'm not prepared to comment on that.

[Leon G. Cooperman, President, CEO & Chairman]

Well, I'll comment. Everything you said, would suggest that the stock, which is unchanged from January is more attractively priced today than it was in January. You have more production, you have higher prices of the commodity, either you made a mistake in the intention of buying back stock earlier this year, or you basically should really reenter the market. The uncertainty is what creates the opportunity. That's it. I've said enough.

[Michael McAllister, Vice President of Investor Relations]

Lee, just a rebuttal on that. When we announced that share buyback, COVID was not anticipated, and this was supposed to be a much stronger year. We have not seen -- COVID actually impacted operations significantly. Metal prices came off and the other thing is that, we had no debt repayments this year. We're just paying interest on that line. And so now, going into next year, we have to take everything back into consideration, again, and everything has to be looked at. So we do believe that the company is on the strong footing. We do believe there's a lot of upside. We do believe in the metal price. We have to reevaluate because we have to look at how much capital we're going to need to meet the capital expenditure requirement.

[Leon G. Cooperman, President, CEO & Chairman]

Excuse me, I don't want to do interrupt you, but you did reevaluate, you understandably withdrew the intention of doing a buyback. What the question I'm asking and I have an opinion on that question is, now is there -- is the appropriate thing to reassess that decision? The word is that commodity price today is materially higher than it was in January, I believe. Your production outlook, assuming COVID doesn't upset it again, is for materially greater production into 2021 than you had in January of 2020. The price of stock is unchanged, okay? I think at that time, you thought the stock was at a big discount to the value of the business. And I would say that the discount today should probably even be greater. That's just an observation. And I'm just trying to see whether you agree with that or not. But I guess what, time will tell. Time will tell. Even though I'm 77, I'm not in a rush. I'm patient. But I would suggest to Alberto, if he listens to this call, there's a growing sense of frustration amongst those who have been the loyal, most loyal and longest shareholders in the company. That's all.

[Operator]

We have no further questions in queue. I'll turn back to the presenters for closing remarks.

[Michael McAllister, Vice President of Investor Relations]

Thanks, operator. That concludes today's call. On behalf of management team, I'd like to thank all the participants who are joining us today. A replay of the webcast and all the materials can be found on the website, sierrametals.com. If there are any further questions, please feel free to reach out to us any time after today's call. Our contact information can be found in today's presentation or on the company's website. Thank you, operator. Please conclude the call.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.