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Pan American Silver (NYSE: PAAS)
Q3 2023 Earnings Call
Nov 08, 2023, 11:00 a.m. ET
Prepared Remarks Questions and Answers Call Participants
Operator
Good morning, ladies and gentlemen, and welcome to the Pan American Silver third quarter 2023 and audited results conference call and webcast. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator instructions] This call is being recorded on Wednesday, November 8, 2023.
I would now like to turn the conference over to Siren Fisekci, vice president of investor relations. Please go ahead.
Siren Fisekci — Vice President, Investor Relations
Thank you for joining us today for Pan American Silver’s Q3 2023 conference call. This call includes forward-looking statements and information and makes reference to non-GAAP measures. Please see the cautionary statements in our MD&A, news release, and presentation slides for our Q3 2023 unaudited results, all of which are available on our website. I’ll now turn the call over to Michael Steinmann, Pan American’s president and CEO.
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Michael Steinmann — President and Chief Executive Officer
Thanks, Siren, and thank you, everyone, for joining our call today. Let me begin with an update on our progress integrating the assets we acquired to the amount of transaction that closed on March 31st. I’m happy to report that we have integrated the four new operations into Pan American’s organization and advanced on streamlining the new company with the sale of noncore assets. We have also reorganized the Yamana Latin American regional offices, in line with focusing support to the mine operations and continuing to enhance corporate oversight, leadership, systems, policies, and procedures by taking advantage of substantial synergies and business improvement opportunities.
Working with the new teams, we are evaluating many optimizations and mine life extension opportunities. We look forward to sharing more with you on that in the coming quarters as we advance detailed studies and near mine exploration programs and update the life of mine plans. We committed to rationalizing our portfolio following this transformative transaction, and we have made significant progress on that objective, earlier than, I think, most would have expected and with additional opportunities yet to come. In Q3, we completed the sale of our interest in the MARA project in Argentina and Morococha mine in Peru.
And on Monday, we completed the sale of our interest in the Agua de la Falda project in Chile. In Q2, we divested certain noncontrolling equity investments which are largely inherited from Yamana. We increased our equity interest in New Pacific in Q3 to 11.6% of New Pacific’s outstanding common shares, helping to further advance interesting Bolivian silver projects by leveraging our long-standing operating success we have enjoyed at San Vicente over the past 24 years. We also committed to paying down certain higher interest debt incurred for the Yamana transaction.
We repaid the amounts drawn on the sustainability linked credit facility and, as at September 30th, have the full $750 million available on our credit facility, in addition to working capital of $832 million, which includes cash and short term investments of $386 million. Total debt of 809 million is largely related to two senior notes Pan American assumed to the Yamana transaction, as well as lease and construction loans. These notes have attractive terms, $500 million with a coupon of 2.63% maturing in 2031 and $283 million with a coupon on 4.625% maturing in 2027. Pan American has an agreeable strong balance sheet which gives us the flexibility to manage business cycles and capitalize on growth opportunities.
The steps we have taken to divest noncore assets and repay debt will also significantly reduce costs going forward. We expect to save approximately $90 million in cash annually, primarily from the elimination of care maintenance, project development, and reclamation costs associated with MARA and Morococha, in addition to interest expenses from having repaid the $280 million that was drawn on the credit facility at the end of June 30th, 2023. We expect further savings from the Yamana acquisition in the form of synergies, which we continue to estimate will be about $40 million to $60 million annually. Finally, it is important to remember that we retain future upside on both the MARA and the Agua de la Falda projects to the precious and base metal royalties we retained with the strong counterparties in those projects.
With that, let’s move on to our results for the third quarter. Acquisition of the four Yamana operating mines has provided a significant increase in production with reduced unit operating costs and enhanced diversification. We produced 5.7 million ounces of silver and 244,200 ounces of gold in Q3. All-in sustaining costs for the silver segment were $18.19 per ounce and $1,451 per ounce for the gold segment.
While operating performance at most of our mines was in line with the expectations, two operations faced unique challenges which weighted on Q3 results. In the silver segment, La Colorada continued to be impacted by ventilation constraints. These constraints resulted in reduced throughput, limited access to higher grade zones of the mine, and required intensive ground support renovations in areas where high heat and humidity have rendered older ground support methods ineffective. We do not expect an improvement in La Colorada’s performance until the new ventilation infrastructure is completed around mid-2024, and we are able to increase development and mining rates in the deep east part of the mine thereafter.
We are making good progress on that work. The excavation of the concrete line shaft reached a depth of 522 meters by the end of Q3 2023 and is expected to be fully excavated to a depth of 593 meters by year-end. We expect the installation of two large exhaust fans on the surface of the shaft will be completed by mid 2024. Commissioning of this large primary ventilation system will deliver the refrigerated fresh air we currently produce directly to the heat source in the deep eastern area of workplaces and immediately exhaust vertically to the fully concrete line shaft.
This will avoid sending hot air back through the mine where it is damaging our ground support systems. In the gold segment, mined gold grades were lower than we were expecting at El Penon. Based on recent reconciliation data, we have initiated a review of our mining sequence in certain sections of the mine to achieve a more stable gold production. Over the next several months, we will be adapting to the mine development schedule for El Penon to provide more flexibility when encountering unexpected grade shortfalls in this highly variable deposit.
The delineation drilling strategy has been reviewed to reduce the grade variation risk we are currently encountering. El Penon remains one of our core assets with excellent exploration potential and excess mill capacity. Supporting that mine has been an important contributor to the company’s future cash flow. Given year-to-date production and our outlook for the next two month, we are reaffirming our annual 2023 guidance ranges for silver and gold production with the expectation that production for both will come in at the low end of the ranges.
We expect the gold segment cash costs and all-in sustaining costs to be within our guidance ranges from 2023. We expect silver segment cash costs and all-in sustaining costs to be marginally above our guidance range, largely due to ventilation constraints at La Colorada that I mentioned earlier and the two-week suspension of operations at that mine in early October to address security concerns as previously disclosed. We are maintaining our 2023 guidance for base metal production and sustaining our project capital expenditures as well. We reported a net loss of $22.7 million in Q3 or a basic loss per share of $0.06.
Adjusted earnings were $3.1 million or $0.01 per share. Operating cash flow was $114.6 million, net of $35.8 million taxes paid. Including the cash dividend of $0.10 per common share we declared yesterday, we will have paid $130.5 million in total dividends this year. Turning to the La Colorada Skarn project, we are on track to release the preliminary economic study by year-end.
The study will be based on using a sub-level caving mining method, which we believe offer superior economic benefits, given the size and geometry of the large silver-bearing polymetallic deposit. We will carefully consider potential alternatives for the optimum funding structure for this current project once the preliminary economic study is released. And all of the development details, risks and opportunities, can be thoroughly discussed and debated. The ILO 169 consultation process for the Escobal mine in Guatemala continued to progress in Q3.
Pan American has now hosted three visits to the mine for Xinka indigenous representatives and their advisors, and several other meetings have been held. This included working meetings with Xinka representatives and Guatemala’s Ministry of Energy and Mines, or MEM for short. I know many of you check MEM’s website for the Escobal consultation, which does provide very transparent reporting on the process. I noted that the MEM had intended to complete the consultation by the end of October.
Although the schedule was not met, all the participants continue to engage in a peaceful, comprehensive, transparent, and good-faith consultation process. The next consultation meeting is scheduled for November 10th. And as usual, we are not providing a time frame for completion of the consultation or potential restart of the mine. While the consultation process moves ahead, we are also continuing with our care maintenance activities for Escobal.
I would like to congratulate the Pan American team in Guatemala for receiving first place in the environment category from Guatemala’s Chamber of Industry for their work on reforestation and conservation project. The project involves an innovative approach to reproduction of oak trees within the Escobal mine area, with the primary objective of revitalizing forest regions in the mine property and transforming them into protected valuable habitats for flora and fauna. If you like to learn more about this, we have the video posted on Pan American’s LinkedIn page where we regularly post updates on some of our company’s initiatives and events. In closing, we are pleased with our progress on the integration of the Yamana assets, which is delivering Pan American with significant production growth and reduced unit costs.
We are currently preparing our plans for 2024, focusing on safe, reliable, cost efficient operations, and the development of additional value-enhancing future growth opportunities. We will continue to evaluate ways to streamline our overall portfolio with the aim of remaining the world’s premier silver mining company. Together with the other members of our management team, we would now be happy to take your questions.
Operator
Your first question comes from the line of Cosmos Chiu. Your line is now open.
Cosmos Chiu — CIBC World Markets — Analyst
Thanks, Michael and team. Maybe if I can —
Michael Steinmann — President and Chief Executive Officer
Good morning.
Cosmos Chiu — CIBC World Markets — Analyst
Hey, good morning. Maybe if I can start off with El Penon first. And I guess you know what I’m going to ask in terms of the shortfall in grade. Am I reading it correctly? I guess, you know, in Q3, your head grade was 98 gram per ton and 2.7 gram per ton for gold.
If I look at the proven and probable, it’s closer to 213 gram per ton or probably 148 gram per ton. So, the grade in the quarter was about half for gold and silver compared to your reserve grade. Is that correct? And maybe if you can elaborate on kind of what happened.
Steve Busby — Chief Operating Officer
Yeah, Cosmos, Steve here.
Cosmos Chiu — CIBC World Markets — Analyst
Hi, Steve.
Steve Busby — Chief Operating Officer
How’s it going? Yeah, basically if I can talk first about — in Q3, we had anticipated mining in — we’d been developing for most of the year according to a mine plan that was developed previously in 2022. And we were planning to develop into these high-grade structures that would be mined in the second half of this year. Three of those structures — and keep in mind, El Penon is spatially quite vast. We’re mining several phases across vast areas, about 12 kilometers by five kilometers.
So, it spread out quite a bit. So, there’s a lot of development that goes into these areas all over the different mine. And there were three of these areas that were particularly high-grade gold, not so much silver, that we go into. So, when you look at the reserves, that average is correct.
But the distribution depends — the sequencing can affect that grade quite a bit. Now, when we mined into these areas, what we discovered is that looking back now and evaluating what happened there, three of those areas that were particularly high grade had very limited drilling information on it. It was spatially drilled quite a bit wider than the normal reserves that we’d like to see. So, we’re reconfiguring our drill programs to target these higher-grade areas in the future.
It was really a Q3 impact. It’s going to carry us over into Q4 because they were scheduled to be mined this quarter. So, we’re going to be looking at those areas drilling more and kind of increasing the density of drilling, if you will, particularly in the higher-grade zones of the reserves. We’re just finding it’s not to the level that that gives us the risk tolerance that we want to see.
So, that’s going to work into our plans for next year. And depending on how that increased drilling goes, that’ll kind of adjust those higher-grade zones that we’re seeing. I think we’re going to see positive and negative surprises as we do that, just a variability of ore deposit. But according to your question on was the silver grade really half of that, the answer is yes.
And that’s sequencing. We do have higher-grade silver zones, but the average grade is about 158 grams silver on the reserves, when you put the P&P together, so, you know, we’re 98. That’s just sequencing. Yes.
Michael Steinmann — President and Chief Executive Officer
Just to add, Cosmos, as Steve explained, you know, with an undercapitalized exploration project here that Yamana was running with, you know, not enough drill density as we would do it. And in order to fix, that we increase now drilling on site, about 10,000 meters a month. We actually will spend quite a bit more. I mean, I was like powering back, you know, greenfield drilling like far, far away and focusing really on further drilling on-site.
So, we’ll further increase that drilling to kind of catch up with what should have been done in the past. And, you know, we’re very confident here that — I mean, I was just at the mine a couple of weeks ago, and, you know, I’ve seen some really interesting intercepts there. So, that drilling, as I said, back now at 10,000 or more meters a month and will increase further here in the coming month.
Steve Busby — Chief Operating Officer
And, Cosmos, if I can kind of add a little bit more detail, too. As we mined into those high-grade zones and we didn’t see the ores that we expected, at El Penon, there’s quite a bit of feed that goes to the plant that’s low grade. So, when we’re not producing off the mine, we supplement rather from the low-grade stockpiles, which are quite a bit lower silver grade. And that’s what drives that.
Cosmos Chiu — CIBC World Markets — Analyst
Sure. And if I could follow-up on that question. In terms of Q4, I don’t know how much you can share with us but, you know, you’ve maintained your guidance for the year but how much of these higher-grade stopes have you factored into your Q4 number? And how much of, you know, hitting those Q4 numbers is dependent on getting some of these high grades up. I’m just trying to figure out how much conservatism you’ve factored in, in light of what — in light of the great shortfall that you realized in Q4?
Steve Busby — Chief Operating Officer
Yeah. So, we’re moving into Q4, Cosmos, anticipating we’re not going to see that high grade that we had anticipated in the original mine plan. So, where we say we’re going to still make the gold guidance on the low end, it’s really looking at our other operations to kind of make up some of that difference.
Cosmos Chiu — CIBC World Markets — Analyst
Of course. OK. Great. Maybe if I can switch gears a little bit, you know, going to Escobal and Guatemala.
Thanks, Michael for the update. On top of the conversation, I think we’re all where there was a presidential election earlier on this year. There could be a — or there will be a presidential transition early next year. However, there seems to be a bit of noise in terms of the Supreme Court and validity of the runoff in terms of election.
How much, you know, should we monitor that situation? How much of that situation could potentially impact the time of Escobal?
Michael Steinmann — President and Chief Executive Officer
Yeah, Cosmos, I hand you over to Sean McAleer here, who is running Guatemala for us in-country. So, please Sean.
Sean McAleer — Senior Vice President and Managing Director, Guatemala
Yeah. I think —
Cosmos Chiu — CIBC World Markets — Analyst
Hi, Sean.
Sean McAleer — Senior Vice President and Managing Director, Guatemala
Yeah. Good morning. It’s hard to speculate what the outcome will be with some of that noise that you mentioned. The president of Guatemala has publicly stated his commitment to smooth transition at the Ministry of Energy and Mines, the transition team from the newly elected party has met on several occasions with the MEM.
And so, they are moving forward to have a smooth transition in January. As well, we’ve met with members of the incoming team a few times. And, you know, it’s hard to say what’s going to be the timing and if there’s going to be any delays. Certainly, if there’s a transition in the process that isn’t completed by the end of the year, we would expect that would take some time to continue that on.
But they are committed as well to the ILO 169 consultation process. And so, we’re looking forward to a government transition in January, and we’ll continue working with the government as needed.
Cosmos Chiu — CIBC World Markets — Analyst
Great. Thanks, Michael, Sean, and Steve and Siren. Those are all the questions I have. Thanks again.
Michael Steinmann — President and Chief Executive Officer
Thanks, Cosmos.
Operator
Your next question comes from the line of Ovais Habib from Scotiabank. Your line is open.
Ovais Habib — Scotiabank — Analyst
Hi, Michael and Pan American team.
Michael Steinmann — President and Chief Executive Officer
Good morning.
Ovais Habib — Scotiabank — Analyst
Some of my — hi. Some of my questions have already been answered, and thanks for the color on El Penon. But I did have two more questions. Just number one, post the amount of transactions, obviously, one of the priorities was to sell noncore assets.
It was really great to see the sale of MARA as well. Are you expecting to continue to monetize noncore assets? And are we expecting any sort of release or any sort of update on asset sales by the end of this year?
Michael Steinmann — President and Chief Executive Officer
As you know, this is — you know, selling assets is a very dynamic process in doing deals. So, I can’t give you exact timing, but we’re definitely working — as I mentioned in preamble to this call that we are working on further optimization of our portfolio. So, that’s continuing. There is quite a few more assets from — that we have in our portfolio that really impact our operations or our production profile right now.
And we got some inbounds and interest, so we definitely will continue that process. I’m really very pleased what the team has been able to achieve in the really short like — you know, I think we announced in summer, after only three months. If you look at the big numbers, that really allowed us to repay for the full year, or the last, what is it now, 10 months, just about below — just a quick number, $398 million in debt. We, also, for the full year paid about $130.5 million in dividend, including the dividend payment that just has been announced yesterday.
So, huge change, obviously, to our already strong balance sheet before which was really supported by these asset sales. And just let me mention again that, I put it here in the press release, we’re looking at about a $90 million annual saving in care maintenance costs, project development costs from MARA and Morococha, and then plus, as you saw, we repaid our line of credit fully. So, there is savings — substantial savings on interest payment there as well. So, these three things together amount to about $90 million.
Now, you have to add on top of this synergies. We talked in the past, we always guided somewhere around $40 million to $60 million synergies. I think we are pretty confident here that we’re going to be at the upper end of that range on the synergy side. I think there’s still a bit more to do on the optimization we’re working on and some further synergies that are coming in.
And we have to wait for the really end of the year when we have all the final tally and numbers and early — I guess, early next year, we’ll have the final number there on the synergies. So, big changes from those disposition of assets, and that theme will continue. Do we have something ready to share with you this year still or early next year? As I said, look, that’s a very dynamic process. I can’t really pin the theme down on one month or more or less, but we’ll for sure try the best here to advance that theme and continue that theme that we started this year on the disposition.
Ovais Habib — Scotiabank — Analyst
Thanks for the color on that, Michael. And just in regards to the committee, you know, obviously, you mentioned 40 million to 60 million. Have you already started seeing those synergies kind of going into Q3? Or I’m guessing, we are expecting more kind of going into Q4 and more into 2024.
Michael Steinmann — President and Chief Executive Officer
Yeah. Some is in Q3, but very little. On the synergy side, for sure, not on the current maintenance cost, as you remember the closing of those deals happened really especially MARA and Morococha, which are the bigger — biggest ones on the care maintenance close like later in, I think, like just a week before the end Q3. So, no advantage, really, in Q3 on that.
But from Q4 on, we will see the full effect of those savings. And then, of course, that will go into the next year 2024 together, as I said, with some additional synergies that we will be able to harvest there as well.
Ovais Habib — Scotiabank — Analyst
OK. Sounds good. And just switching gears a little bit, last question from me, we saw that you had increased your stake in New Pacific this quarter. How do we think about Pan American’s position on the silver side project and on Bolivia as well?
Michael Steinmann — President and Chief Executive Officer
Yeah. Look, we are in Bolivia since 1997. A long time with San Vicente, it has been a very successful place for us. And also, this quarter, San Vicente did very, very well.
So, that’s to continue, and it’s a place that we are very happy doing business. Now, you look at New Pacific, and there are big discoveries there. There are exploration discoveries. It’s still earlier stage, but they are all up the size that are absolutely, you know, would be of interest for Pan American, if they come through, you know, as a mine.
And with our experience in Bolivia and, as I said, combined with that large size on the silver side, of course, that’s of interest for us. And that’s really the reason why we continue — we have been in New Pacific from the beginning on. You know, we liked the project very early stage, and we did some of the first financing to help bring in that exploration and drilling forward. And when New Pacific look for financing, we were happy to increase slightly our stake and continue to advance and help to advance those projects in Bolivia.
Ovais Habib — Scotiabank — Analyst
Perfect. And that’s it for me in terms of questions. So, thanks for taking my questions, Michael.
Michael Steinmann — President and Chief Executive Officer
Thanks, Ovais.
Operator
Your next question comes from the line of Carey MacRury from Canaccord Genuity. Your line is now open.
Carey MacRury — Canaccord Genuity — Analyst
Hi. Good morning, guys. Just a question on Cerro Moro. There was a big jump in the on-site direct operating cost this quarter versus last quarter.
Just wondering if you can give any color on what drove that increase.
Steve Busby — Chief Operating Officer
Yeah. So, I think it’s — hi, Carey this is Steve. Overall, I think the cost at Cerro Moro, it’s reflecting the development we have to do to get to some of these really high-grade variable ore deposits. So, our development rates increased, the mining widths have kind of decreased according to schedule.
So, it was pretty much on plan relative to what we anticipated for overall spending there. And then, I think, financially, we have some impacts on — with respect to the cost.
Ignacio Couturier — Chief Financial Officer
Yes. Hi, this is Ignacio. In addition to what Steve just mentioned, it’s worth mentioning that there was a buildup of inventory at the end of Q2. The production in Cerro Moro was backloaded into Q2 the last couple of weeks of June.
And that inventory flushed out during Q3. So, that was another factor contributing to the higher costs for Cerro Moro, Q3 relative to Q2.
Michael Steinmann — President and Chief Executive Officer
But just in general, I think we talked quite often about what our cost drivers on our side. So, there’s a big difference between our silver segment mines and the gold segment mines because the silver segment mines, in many cases, come with base metals. So, as these are by-product credits, our base metal prices have a big impact to our costs both ways, if they go up or down, it can be a headwind or tailwind for us. And another big impact is exchange rate.
So, depending on any given country, that impact, you know, can be quite big because we have a lot of spending in local currency. So, we always have to keep that in mind. Of course, we look at it and not always at the per ounce base, but per ton base, which is, you know, more like a neutral way for us to track the cost. So, there we see, obviously, that variability which is often driven, as I said, up and down by other factors as well.
Carey MacRury — Canaccord Genuity — Analyst
Maybe just a follow-up to that maybe for Ignacio —
Ignacio Couturier — Chief Financial Officer
Sure.
Carey MacRury — Canaccord Genuity — Analyst
Yeah, last quarter there was a $32 million of fair value adjustments relating to the Yamana transaction like — I’m just wondering are there still fair value adjustments flowing through these numbers this quarter? Or have those pretty much more stock now?
Ignacio Couturier — Chief Financial Officer
Yeah. Those were minor PPA adjustments. Just keep in mind that, you know, our initial purchase price allocation, that’s just preliminary. We have a year to finalize those numbers.
We didn’t see any more changes in Q3. So, I’d say stay tuned. As I said, we have a year to finalize those numbers. But I think all those small changes are mostly flushed out in Q2.
And, yeah, as I said, we have a year, and we’ll see how those numbers end up when we finalize our analysis on the purchase price.
Carey MacRury — Canaccord Genuity — Analyst
OK, great. That’s it for me. Thanks, guys.
Michael Steinmann — President and Chief Executive Officer
Thank you.
Operator
Your next question comes from the line of Don DeMarco from National Bank Financial. Your line is now open.
Don DeMarco — National Bank Financial — Analyst
Thank you, operator. And good morning, Michael and team. We’ll start off with Escobal. You know, we’re seeing some a lot of activity in terms of the meetings here a number of visits, but I think to the mine and other engagements with the Ministry of Mines and so on.
Appreciate these details, but can you share what is discussed at these mines? I mean, why would there is a need to go to the mine three times? Are they impressed by the mine? Or what’s the nature of their visit and what are they looking at when they go?
Michael Steinmann — President and Chief Executive Officer
Obviously, I mean this is a very open process, as we always described, and our doors are open to a lot of visitors. And we had those visits by the Xinka representatives as well. So, where I see it is very positive. And yes a lot of activity around the consultation and mine visits during this quarter.
Maybe, Sean, do you want to give some more color to that?
Sean McAleer — Senior Vice President and Managing Director, Guatemala
Excuse me. Yeah. The first visits we had in August, you know, that was over 40 members of Xinka Parliament came to the mine site. You know, it was the first time a lot of them had — well, first time — all of them have been to the mine site.
So, just a general site tour and overview of what the mining activity is, what the operation is, visit to the underground mine, to the processing plant, and the tailings facility. So, obviously, you know, you can imagine a day-long tour and then lots of questions around those tours. And then, there were two other visits where we talked about water and then another visit which focused on our filtered tailings facility and questions around the design of that facility and some of the aspects of that facility. So — and, you know, during the meetings, we’re going into some detailed discussions about water quality water quantity.
And so, it’s always pretty dynamic meetings and lots of learning and Q&A. So, that’s been pretty productive and really good dialogue over the last quarter.
Michael Steinmann — President and Chief Executive Officer
Thanks, Sean. As I said, look, a very positive and open dialogue here, which is, of course, the way that the consultation has been out so far, and we obviously support that way.
Don DeMarco — National Bank Financial — Analyst
OK. Thank you for that, Michael. And so, looking ahead at this consultation the process we have adjudged will a quarter judge that will weigh on the process and determine if it was carried out, you know, to true ILO 169 standards. But what happens beyond that? I mean, at that point, the consultation would largely be concluded.
Is it — will you then be negotiating or having continuing your discussions with the Xinka or other members? What happens beyond that decision?
Michael Steinmann — President and Chief Executive Officer
I think, you know, the process is outlined in our slides as well, on our website. Once the consultation is finalized, the report will be handed over about the consultation to the Supreme Court in Guatemala. And the Supreme Court will then determine, you know, if everything has been followed in the process. And I would assume, in that court ruling, that’s afterwards — after that decision, MEM can decide to reinstate our mining license.
Sean, is that —
Sean McAleer — Senior Vice President and Managing Director, Guatemala
Yeah. That’s pretty accurate. I think — yeah, and I think we’ll get some more color around that over the coming months and coming weeks in the future meetings, so —
Michael Steinmann — President and Chief Executive Officer
Yeah.
Don DeMarco — National Bank Financial — Analyst
OK. Fair enough. And because the court can say the process follow the ILO 169 product, but that doesn’t necessarily mean that the model gets restarted. But anyway, we’ll look for color in the coming months.
But we’re encouraged by this activity that took place this quarter.
Michael Steinmann — President and Chief Executive Officer
Yeah, definitely.
Don DeMarco — National Bank Financial — Analyst
So, La Colorada, you know, [Inaudible] the ventilation is going to be completed by mid- next year. So, what should we be modeling for AISC in the next two or three quarters, you know, the $25 to $30 range, or is that kind of in the pipeline?
Steve Busby — Chief Operating Officer
Yeah, hi, Don. Steve here.
Don DeMarco — National Bank Financial — Analyst
Hi, Steve.
Steve Busby — Chief Operating Officer
I’d say we’re going to be trending toward the upper $20. We are seeing some improvements. There has been some work done in reducing dilution. We’re seeing better grades.
It’s really a tonnage play right now. We’re trying to get air, pumped into some areas so we can get some higher throughput. And I think we’re going to see some, you know, marginal improvements in that. But until that new shaft comes on, I don’t think we’ll see a major change there
Don DeMarco — National Bank Financial — Analyst
OK. Thanks, Steve, for that on La Colorada. And then, final question, just companywide cost, directionally heading into the Q4 last quarter of the year, are you expecting an improvement versus Q3?
Steve Busby — Chief Operating Officer
Yeah. From an operations standpoint, when we look at all the operations, I’d say we’re seeing pluses and minuses, and they seem to be balancing out. So, I think Q3 is probably a reasonable projection for the operations side.
Michael Steinmann — President and Chief Executive Officer
Yeah. I mean, really, a lot depends on when we see a higher oil price again, it’s coming up again a bit. Always a big impact to our operations, not only the cost obviously of diesel, but translating in, you know, higher cost across the board. There is definitely, you know, some more pressure on some inflation, but then there’s some other costs that also coming off — so — but that just speaks up probably pluses and minuses here for next quarter.
Don DeMarco — National Bank Financial — Analyst
OK. Thank you again. Good luck for the rest of the year. That’s all for me.
Michael Steinmann — President and Chief Executive Officer
Thank you.
Operator
Your next question comes from the line of Craig Hutchison from TD Securities. Your line is now open.
Craig Hutchison — TD Securities — Analyst
Hi, guys. Good morning. Thanks for taking my question. Just on La Colorada as a follow-up question, on the throughput, should we assume the throughputs that we saw in Q3 are representative of the throughput we can expect until sort of mid next year in term of ventilation is all up and running?
Steve Busby — Chief Operating Officer
Yeah, Thanks, Craig. Steve here. The simple answer is, yes I think that’s correct. I mean we are focused on advancing development rates, which will generate a bit more ore.
We brought additional contractor on. We are getting a little bit — some of the areas with a little bit more air. So, I think you’ll see some marginal improvement in overall tonnage. But yeah, once again, until that shaft comes on, we won’t see a material change in throughput.
Michael Steinmann — President and Chief Executive Officer
But just the way that I think Steve talked about there, we expect to finalize the escalation of the shaft like later in December.
Steve Busby — Chief Operating Officer
We’re on track to finishing the excavation by year-end, and then we’ll be installing the big ducting systems and the big fans that are 2,000 horsepower fans each that we’ll be putting on the surface and commissioning by midyear next year.
Michael Steinmann — President and Chief Executive Officer
Right. So, all on time, and as we indicated already like I think a couple of quarters ago.
Steve Busby — Chief Operating Officer
And on budget as well.
Craig Hutchison — TD Securities — Analyst
OK. And maybe just a question, with the Cerro Moro or maybe the Yamana assets in general. The lack of drilling density that impacted the grades — expected grades for El Penon, is that a concern at some of the other operations like Cerro Moro? Or do you have more confidence in terms of the drilling work that’s been done today and the grade profile there?
Chris Emerson — Vice President, Business Development and Geology
Yeah. HI, Craig, it’s Chris here. Certainly when we look at El Penon, and we look at the spacing of the 60 by 60 and going down at 30 by 30 meters for that initial gridding and drilling. When we look at Cerro Moro, certainly see a higher ratio of drilling.
And certainly, the ore shoes have behaved more consistently even though very within the major structure of [Inaudible] so, no, we certainly don’t have that feeling in Cerro Moro. And really, as Mike mentioned, you know, the increase in El Penon drilling up to 10,000 meters on a monthly basis, we’re certainly trying to catch up with some losses at the beginning the year due to a change in contractors, which was, you know, completed in January this year before we got on to site. So, certainly, we see that we’re going to be catching up there.
Steve Busby — Chief Operating Officer
And if I can add, Craig, I will say reinforce that Jacobina absolutely no concern. We’re seeing really good order zones there and good continuity. And even Florida to that matter, we’re seeing — we need to get drilling out a hedge just to get some more tons into the reserve category. But that one is looking really good too to just share what Chris was talking about.
Chris Emerson — Vice President, Business Development and Geology
And just to mention, I mean, El Penon, we see some nice upside in the exploration, sort of more blue skies up. So, certainly, something we’ll be concentrating on in 2024.
Craig Hutchison — TD Securities — Analyst
OK. Great to hear. And maybe one last question for me. Just La Arena, the sustaining capex is tracking well below guidance.
I think some of that has to do with the lack of development of the leach pad construction, some dump work preparation. But is that something that’s going to impact production next year or something you guys need to catch up on?
Steve Busby — Chief Operating Officer
Yeah. Hi, Craig, it’s Steve again. The main driver there is this pre-strip capital and it’s the way we account for pre-stripping of the open pit. And what’s happened is a big chunk of that got shifted to operating costs this quarter, and probably we’ll see that in Q4 as well.
So, I think [Inaudible] we’re solid. It’s just where we distribute that pre-strip whether it’s capital or expenses. There are some dollars, as you alluded to, being pushed out into 2024 for Pad V expansion. And it’s — we’re working through that.
Right now, we seem to be on schedule to where it won’t disrupt production, but we’re definitely — it’s one of our key focus areas.
Craig Hutchison — TD Securities — Analyst
OK. Thanks, guys.
Michael Steinmann — President and Chief Executive Officer
Thank you.
Operator
Our next question comes from the line of John Tumazos from Very Independent Research. Your line is now open.
John Tumazos — John Tumazos Very Independent Research — Analyst
Thank you very much for taking my question. Concerning new projects in general and the Colorada Skarn in particular, do you have a minimum hurdle rate threshold rate of return? Or do you rely on some qualitative and things like exploration potential size, synergies with the next mine next door, etc? Tell us how the board approval eventually of the La Colorada Skarn project will go in the context of your approval process.
Michael Steinmann — President and Chief Executive Officer
Sure. And just there’s no board approval at this point. We’re obviously on a kind of a late-stage exploration phase here with La Colorada Skarn, and as I said, will come out with our study at the end of the year. That will give us much more information and to the shareholders how big — well, we already know it.
So, it’s a very large discovery and how we think mining could look like over a very long time. When you look at the hurdle rates you mentioned, a few things that play into this. There’s a lot of factors that of course play into this. Long-term metal prices have a very, very big impact to that calculation.
So, you — especially in a project like the Skarn that goes over a very, very long time, you know, there’s obviously some impact — a big, big impact on the capital number upfront and the big impact on the metal price you are using your model for later on. So, there’s a lot of things that play in there. But, of course, it’s — at the end, it’s all about the quality of the asset. It’s about mine life.
It’s about the exploration potential. We already know at La Colorada Skarn that, you know, we keep drilling and we just keep finding more and more. So, we know this asset is still growing. We, for the current study, obviously, have a cutoff.
I think it was like December 22. We drilled a lot of meters since then actually, it’s Chris just told me it’s 50,000 meter additional drilling. So, that deposit is still to grow. This is just a point in time that we’re looking at it.
But as I said, and as you mentioned, a lot of factors to play into calculating an IRR for a project and a lot of decisions to what we like to see depending on country jurisdiction, size, location to other mines as you mentioned, synergies with other operations, etc., etc. So, there’s a lot of factors in there and, a lot of time, will be discussed in our study.
John Tumazos — John Tumazos Very Independent Research — Analyst
So, for example, is 5% or 10% a minimum hurdle rate of return?
Michael Steinmann — President and Chief Executive Officer
Five would be a very, very low number, of course. That’s not something we are looking ready for. But, as I said, look, it really depends, but the metal prices are already used. And that’s probably one of the most critical and also difficult decision when you look at a very, very long mine life — way easier obviously to kind of come up with the metal price.
If we look at a normal precious metal kind of projects that normally run like, let’s call them, 10 to 12 or 15 years. Very different when you look at long lives like the Skarn. And not only that, but you’re dealing with not only silver on this side, but also lead and zinc, and, of course, concentrate contracts that play a lot of — into this as well. Just one side note here, which is really nice, obviously, La Colorada polymetallic, a lot of zinc in there, a lot of silver as well.
Just as a side note, La Colorada is producing a really, really clean zinc and lead concentrate already now from the veins. And the metallurgical testing we do shows that the Skarn will produce the same. So, that’s very attractive concentrates in this term. So, again, a lot that plays in there, but, you know, we would expect quite favorable concentrate terms for that kind of quality.
John Tumazos — John Tumazos Very Independent Research — Analyst
So, Michael, someone might be listening and reading between the lines in a way maybe you don’t want to. Should someone infer from your explanation that the project requires higher lead and zinc prices than current prices, but because it’s a many decade project, you’re going to — you might wait for lead and zinc to recovers to $2 and go ahead, assuming that lead and zinc recovers to $2.
Michael Steinmann — President and Chief Executive Officer
No, my point, John, is that the beauty of long-life assets like everywhere in the world is that you don’t have to kind of try to time for a sink price or lab price or precious metal price cycle. We all know that this is very difficult to do because you have construction time upfront, and none of us knows where the prices go exactly. But that’s exactly the beauty. When you look at this very, very long mine lives that are going to catch, you know, a few — quite a few of those cycles anyway.
And that’s the beauty — that’s the reason why, you know, mining companies, especially large mining companies look for very large, large, long-life assets because it takes that risk out of the equation.
John Tumazos — John Tumazos Very Independent Research — Analyst
Michael, one last one. I’m sorry to be so interested this morning. Some investors are impatient, and their clients have quarterly performance pressures on stuff like that. And they don’t understand that it takes a long time, you know, four or five years, just to get to the PEA point here.
And sometimes, in the stock market, they love Bre-X that publishes 150 million ounces of gold that don’t exist, and they disrespect meticulous engineers that take five years to plan the project. Do you think that it would be appropriate to buy back a little bit of your stock since some of these short-term investors might give up — it’s like a stale project, it’s like a junior stock that’s going nowhere stale.
Michael Steinmann — President and Chief Executive Officer
Let me first answer on the timing. You know, this has been incredibly fast. If you think it’s like what five years since the first drill hole in this Skarn, you know, resourcing up to 9.25 billion tonnes of resource still to grow as I said. If this will be pure greenfield discovery, you know, we were talking probably about 15 or more years to bring a project to that place.
The reason why it went so fast is, obviously, it sits below, you know, La Colorada, one of our silver mines. So, that, of course, helps with infrastructure and drilling way faster and get that work done. So, the team has done an excellent job to advance the project that quickly to an economic study here. So, that’s pretty impressive and would not be possible if it wouldn’t be on-site discovery, which, and I’d say, is, you know, very unusual to make that large of a discovery.
Talking about share buyback that you mentioned, look, as I said, this year the board opted to return capital to shareholders in form of dividends. It’s over $130 million. We’re still working and finalizing the new dividend policy. We will probably put that in place at the beginning of the year, which is the normal and logic place for us to do that.
And, you know, it will be at the boards discretion, how we return further capital to shareholders. We’re paying dividend uninterrupted since 2010. Of course, we disposed of quite a few assets, which are a very positive effect as I mentioned on our balance sheet. And, you know, our shareholders participated with that, with the dividend payment.
So, we’ll see next year what the board’s decision will be in what form and shape that return to shareholders will happen. As I said this year, very strong dividend payments. And for sure, dividend will always be one part of it and will continue to do so.
John Tumazos — John Tumazos Very Independent Research — Analyst
Thank you.
Michael Steinmann — President and Chief Executive Officer
Thank you, John.
Operator
[Operator instructions] Your next question comes from the line of Lawson Winder from Bank of America Securities. Your line is now open.
Lawson Winder — Bank of America Merrill Lynch — Analyst
Yeah. Thank you, operator, for fitting me in. Good morning, Michael, Steve, and Sean. Hopefully, I can keep my questions pretty snappy.
I wanted to ask about Jacobina. So, you guys provided the IRR update back in late August and the reserve grade that Jacobina for gold the M&I and inferred grades — M&I [Technical Difficulty] I wanted to ask a question [Technical Difficulty] example of some of the drill spacing issues that you experienced at El Penon and what are some of the potential other factors? Thank you.
Martin Wafforn — Senior Vice President, Technical Services and Process Optimization
Yeah. Hi, Lawson, it’s Martin Wafforn here. Pretty much the change that you saw in the reserve grade at Jacobina was related to looking at the metal prices and the cutoff grade, the operating costs going forward. We have a slightly different approach than the way that the Yamana was doing it.
They were using a lower gold price than we use. We bumped up the gold price, but we were also looking at the cutoff grade and how that works. And we were able to use a lower cutoff grade for our reserve estimation. It’s based on our sort of methodology, and that’s — that brought in quite a lot of ounces and took the overall grade down.
And my belief was it’s being mined anyway, and so that’s what happened there, that’s what it seems.
Steve Busby — Chief Operating Officer
Lawson, if I could add from an operating point of view, I think, from my perspective, the operation is much more comfortable with a lower-grade cutoff. At higher-grade cutoff, there was a lot of piecemealing, if you will, on the deposits. And it wasn’t — it opens up the mining. It opens up some opportunities for us to lower that cutoff to where we can look at more bulk mining, even above what they’re doing now, that could drive costs lower again, yeah.
So, that’s really where we’re trying to drive to is looking for efficiencies. And it may come at a little bit less grade, but it’s — that’s what we’re trying to — that’s what this whole optimization study that we’re talking about is for Jacobina is where is that best sweet spot and can we mine more volume at a lower cost per ton and withstand a bit lower grades. That’s going to be many months of study, you know, but we’re pretty optimistic walking into this. And I think that’s kind of the taste.
What you’re describing is kind of the taste of where we see we’d like to take optimization, if you will, at Jacobina.
Chris Emerson — Vice President, Business Development and Geology
And just drilling at Jacobina, I mean it’s by far our most productive mine in terms of drill meters per ounces added, and it’s definitely [Inaudible]
Lawson Winder — Bank of America Merrill Lynch — Analyst
Now, what would the implication of [Technical Difficulty] then for potential production growth? Like with all those —
Steve Busby — Chief Operating Officer
Great question. I get that a lot. Yeah, Lawson, Steve here. I don’t want to speculate on what that’s going to be.
You know, I just look at the ounces in reserves, the tonnes-grades I look at the ounces in resource tonnes-grades, and it makes me excited. There are some opportunities here, but I don’t want to speculate how big that could happen. It’s going to take us months to get through this, so —
Lawson Winder — Bank of America Merrill Lynch — Analyst
Well, I can definitely hear the excitement in your voice. That’s great. Just wanted to [Technical Difficulty] on that. But just, you know, maybe you could just share with us what the base case is for throughput? And then, as a follow-up question to that, with respect to financing, construction, I think you’ve mentioned that as potential consumers of funding going forward and have even sort of suggested some cautiousness with respect to potentially more aggressive capital return.
What are the prospects from a partner to help alleviate some of that — some of those funding demands?
Michael Steinmann — President and Chief Executive Officer
I can start. And, sorry, you’re cutting in and out there but I think I got the question on the Skarn, so let me know if you need any more details there. But look, we need to finish the study, of course, and it will be out and, then we have a lot of numbers and details to discuss how this is going forward. We are very, very open to, you know, any way to look at this project later on.
I think there is a lot of way to optimize return for our shareholders that can be in different form and shape and can go from finding a partner, or focusing on the silver, to many other ways how to do that. And I really don’t want to fix that yet because there will be a lot of a lot of details that need to go into that decision. But I think a large deposit like the Skarn opens up huge opportunity for us to optimize that return to our shareholders. So, I think you should not just think in the normal case just building the mine and mining it out over the next whatever, 30, 40 years, and doing it all ourselves.
That could be one outcome for sure, but there can be many different outcomes to optimize that return. So, it’s a little bit early, Lawson. Once we have the study out there, I’m sure there would be a lot of activity going on, on how we can optimize that and a lot of ideas. So, we already have a lot of ideas how to do that.
And I will start sharing those ideas, of course, with everyone, I think, once we come out with the study and early into next year.
Steve Busby — Chief Operating Officer
And if I can add, Lawson, this is Steve, relative to throughput on the Skarn, that is one of the most debated subjects we have here internally right now. And we are going to have to pick a base case, as I understand it to present a base case. But I think we’re going to open that debate even beyond ourselves and show some alternatives because it’s very interesting to look at throughput on this project. It’s such a massive project.
There are so many opportunities Michael alluded to. And the more people we get, the more ideas we get, the better right now. So, we’re going to open that up a bit when you see the study coming up. Yeah.
Lawson Winder — Bank of America Merrill Lynch — Analyst
Great. I apologies for the sound quality on my end, but I think you guys captured the nature of my question very well with your response. Thank you very much.
Michael Steinmann — President and Chief Executive Officer
Thank you.
Operator
There are no further questions at this time. I will now hand over the call back to Michael. Please continue.
Michael Steinmann — President and Chief Executive Officer
Thank you, everyone, for calling in today. Like — so we will provide early 2024 our outlook for the new year. I know it was later this year because of the transaction. But normally, we do that in January, and we’ll do that in January 2024, when we’ll share all those details with you.
And until then, have a great end of the year, and talk to you in January. Thank you very much.
Operator
Ladies and gentlemen, this concludes today’s conference call. [Operator signoff]
Duration: 0 minutes
Siren Fisekci — Vice President, Investor Relations
Michael Steinmann — President and Chief Executive Officer
Cosmos Chiu — CIBC World Markets — Analyst
Steve Busby — Chief Operating Officer
Sean McAleer — Senior Vice President and Managing Director, Guatemala
Ovais Habib — Scotiabank — Analyst
Carey MacRury — Canaccord Genuity — Analyst
Ignacio Couturier — Chief Financial Officer
Don DeMarco — National Bank Financial — Analyst
Craig Hutchison — TD Securities — Analyst
Chris Emerson — Vice President, Business Development and Geology
John Tumazos — John Tumazos Very Independent Research — Analyst
Lawson Winder — Bank of America Merrill Lynch — Analyst
Martin Wafforn — Senior Vice President, Technical Services and Process Optimization
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