Hochschild Mining plc (HOC) Earnings Call Transcript & Summary

Good day, and welcome to the Hochschild Mining 2020 Interim Results Webcast and Conference Call. At this time, I would like to turn the conference over to CEO, Ignacio Bustamante. Please go ahead.

Thank you very much, Anita. Good afternoon, everyone, and thank you for joining us in our H1 results presentation. My name is Ignacio Bustamante, CEO. And I also have in the line, our CFO, Ramon Barua; and our head of Investor Relations, Charlie Gordon. So moving into the presentation. If we go please to Page #3 with the key highlights. We would like to highlight the following points. First of all, highlight the swift company-wide response to the COVID-19 situation in which we have prioritized our employee health above business continuity with much stricter protocols than those that have been required by the regulation. The results for the first year, the key highlights are revenue of $232 million and EBITDA of $81 million, a very strong cash balance of $162 million by the end of H1, and Ramon will get into the detail of the figures later on. Also full brownfield program to be completed by end of 2020, so that's good because even with 3 or 4 months of the stoppage, we're going to manage to complete the brownfield program that we had initially anticipated for the full year, so that's very positive news. And finally, our full year guidance is going to be released once Inmaculada reaches full production. As you may know, Inmaculada restarted operations in July 28 and is expected to be at 100% by the end of August. So once it's up and running, we're going to be discussing again year -- full year guidance in the market. If we move to the next slide, Page #4. We talk about our COVID-19 response. So as I mentioned, we have prioritized employee's health over business continuity. We have put in place very intensive communication campaigns since we started tracking the first cases in the country. We have implemented very strict health protocols at all our mines. We have put in place a very comprehensive double testing program with both quick and molecular testing carried out for every person that goes into our operations. We have put in place very strict social distancing rules in all our operations as well. We have full medical teams in place with additional equipment acquired for purposes of this COVID-19 pandemic. We have also provided additional community support, both in health and education as well as a very material donations provided to those communities that are close to our operations. And finally, we have IT-based systems developed to monitor progress of all the cases among workforce, and that should also help us to facilitate logistics for all our shift changes in a COVID secure manner. So in summary, very robust response. We're getting the results that we are expecting, and we believe we have a good handle of the situation prioritizing the health of our people above anything else. Moving to the next slide, Slide #5. Talking a little bit about our ESG performance, you can see there in the chart on the left, our injury frequency rate. We have continued our safety culture plan, and that has allowed us to continue to do our performance. You can see that in the first half of 2020, we have achieved our best frequency rate so far, slightly below 1. Still, we know we need to continue being a priority, and we need to continue improving it. And we have launched a new version of our safety culture plan, which is Safety 2.0 with the goal of reinforcing our key actions and principles. Right below the frequency rate chart, you're going to see the chart of our ECO score. You know that our frequency vaccines is easy to monitor. However, there are no worldwide used factors or scores to monitor environmental performance. So we have created our own score, which takes into account discharge limits, environmental incidents, water consumption, waste generation, recycling, among other things. And you can see how we have been progressing and exceeding the goals that we have set for the company. So far, in the first half of the year, we have the best score ever, with 5.75 out of 6. And this also is a top priority for the company. We have also launched a program to reinforce our environmental culture, and we expect to continue seeing improvements as we move along in time. So those are the key highlights. And now I would like to pass over the presentation to Ramon to discuss the interim results.

Thank you, Ignacio. If we move please to Slide #7 of the presentation where we present our P&L results. I can say, of course, that the half of the year is notably affected by the stoppages related to COVID. However, even after the company has taken such strong measures to defend the health of our workers and employees, as Ignacio mentioned, and having also -- have had the commitment as a company to make sure that all workers and employees continue receiving their full salaries and benefits, I would consider that they're receiving -- that the cash position has shown is really impressive. Of course, it helped recently with the higher gold and silver prices. We saw an average realized price of gold of $1,701 per ounce. In the case of silver, it was $16.2. You can see that at the bottom right of the slide. Of course, a much higher realized prices than what we had in H1 of 2018. However, that was not enough to prevent a significant drop in revenue. Revenue decreased by 35%. However, the gross profit for the half of $85.1 million represented a gross margin of 37% higher than the 29%. Very important to mention here that the fixed costs that were incurred during the stoppages, so during the period where we did not have any production, have been transferred or reallocated from the cost of sales line to the other expenses line, which you see here in this chart, as shown as others net before the operating income. So we'll be incurring around $24 million of these fixed cost expenses that are not being considered in the gross profit calculation. And it will not -- and they will also not be considered in the calculation of the all-in sustaining cost that we will review later on. The administrative expenses was also lower, $20.2 million compared to $23 million last year. That has already to do with some cash conservation policies that we have also implemented during these difficult times. Selling expenses were lower, very much in line with the lower volumes produced and sold during the half. Exploration was also lower, but I would say that we have very high expectations of recovering most of the activity that was lost during the first half -- during the second half of the year. So we're very optimistic that, that number will likely increase in the second half of the period. When we come to these other income or expenses in line, where I mentioned we have booked the fixed costs associated with the stoppages, resulting in an operating income of $18.1 million and an adjusted EBITDA of $80.6 million. Nothing really too material in the finance income or finance expense front. From an FX perspective, you know that we -- that there was significant devaluation, both in Peru and Argentina. In Peru, the sol devaluated approximately 7%, while in Argentina, the peso devaluated 18%. That has had an impact in our costs, but also affects us on some on certain monetary assets, you see the impact on the monetary assets here in the FX loss. And then our tax bases are also denominated in local currency, so a devaluation does reduce those tax bases and that impact in booking in our tax line. You can see that we had a profit before taxes of $13.1 million, and the tax was $17.4 million. So that implies a rate of very close to 137%. When we separate those numbers, we are seeing, of course, paying a statutory or were affected more than paying using a statutory rate of income tax, both in Peru and Argentina that are very close to 30%. And this tax rate results much higher, first, as I mentioned, because of the effect of the devaluation in our tax basis; but also second, we book our royalties and special mining tax. We pay that in Peru. Those taxes are calculated not on the profit before -- not on the basis of profit before taxes, but rather on the operating income line, and those amounts are booked also in the tax line. So especially when we have a relatively small profit before taxes that we had for the period, again, as a result of the lower volumes associated to the stoppages, those other elements, the impact of the valuation and the royalty do play a relatively large percent effect in the calculation of our effective tax rate. The net profit for the period was negative 4.3%. And important to mention also that the other -- or the second important impact that the COVID has had is we've had to incur in several response initiatives that were booked as exceptional items. The number is $6.6 million, and they are primarily related to 3 things. The first one is the bonuses that we had to pay to employees that stayed in the operations during the stoppages to make sure that the minimum equipment was still running at all facilities. And also, notably, the costs associated with the lodging that we have incurred for quarantining people before going up to the operations. And the double testing that Ignacio mentioned, both as a serological and molecular tests that we have performed to really all of our workforce. Everybody that has gone up to the operations has received the quarantine and the double testing. We do expect that those costs continue in the second half of the year, although we're already seeing big opportunities of improvement and of savings going forward as the lab and the testing becomes more efficient and the timing for quarantine is being reduced as a result of this quickness in obtaining the results. Moving to the following slide, Slide #8, in the presentation. Here, we have a reconciliation of our cash position. On the far left of the slide, you can see that we finished last year with $166 million in cash. And at the far right of the slide, you see that in June 2020, we've had $162 million of cash. So as I was saying at the beginning of the presentation, the pre -- I mean I would say solid performance despite the significant stoppages that we've had. As you can see, the 3 operations Inmaculada, Pallancata and San Jose, all of them, generated very positive results. And you can see there also towards the middle right on the slide, the stoppage cost that I mentioned. I mentioned $24 million affecting the P&L, but in cash terms, it's only $22 million. Then you have the COVID-response initiatives. You have a detailed breakdown of the 3 main items that I described, personnel and third-party services includes both the testing and the lodging. We did incur also, of course, in some donations associated to improving conditions in -- mostly in Peru and Argentina. There was a negative income -- a negative impact, sorry, in working capital. There's nothing structural associated with that or -- in the stoppages. We're in very close contact with our contractors, suppliers, clients, et cetera. They are all in very good shape, in good financial shape and operational shape, so we anticipate that as soon as we go back to full production in all of our operations, we should get back to normal in our working capital. So we believe that this is only a temporary measure. The net loans increase that you see at the end of the slide of $20 million were taken in Argentina, precisely to fund and finance this working capital restrictions. We do believe that this is going to continue to ramp up during the year. And with the prices that we're seeing, we feel comfortable that we can repay those $20 million before the year-end. Again, as a result of all these impacts, we finished the half with $162 million of cash. Going to the following slide, where we discuss our all-in sustaining costs. All operations were, as I mentioned, positively affected by the currency devaluation. And certain postponements of CapEx initiatives that are included in the calculation of the all-in sustaining costs. However, the cost did go up as a result of mainly of the stoppages, from $11 per silver equivalent ounce to $11.9 per ounce. In the case of Inmaculada, the lower production was also partially offset by lower exploration expenses. In Pallancata, we did mine a lower rate than they were expected. They were part of the mine plan. We expect to recover those rates as Inmaculada ramps up. And in San Jose, apart from the lower grades that were also anticipated, we had a little bit of -- a little bit that we had a higher local inflation in the country. So you can see there the all-in sustaining cost for Inmaculada denominated in gold equivalent is $777. In the case of Pallancata was $14 of silver equivalent ounces -- per ounce. And in the case of San Jose, it was $15.6. Going to the following slide on capital expenditures and exploration. First, let me walk you through that. To the left side of the slide, we have around $67 million of CapEx in H1 of 2019 compared to only $38 million during this year. This reduction has occurred in all fronts, really there were deferrals in the mine developments leading to [ upgrading ]. And in the case of Inmaculada, you know that we're working on an expansion of the tailings dam, which also was not executed as planned during the half. In the case of exploration, now on the chart on the right, as I mentioned, while I was walking through the P&L, the figure expense was lower than anticipated and lower than what we incurred in H1 of 2019. San Jose, notably, we were able to do some significant work there compared to what we accomplished in all the operations. Ignacio will talk later on about our expectations for the second half, but we are very enthusiastic because I think we have, I don't know if it's a record or no, but we have quite a significant amount of machines and drilling equipment ready to go in all of our operations and many of our projects. So the total amount for exploration, including downstream and greenfield was $12.7 million. All of that amount was expensed through the P&L and nothing was to particularized. Going to the following and last slide of the financial presentation, just to give you a summary of our balance sheet. As I mentioned, the cash position is very strong at $162 million. We are in close contact with all of our relationship in banks. We are in a very good position. We have plenty also of additional credit lines approved. So we feel very comfortable that the liquidity of the company is very, very strong. The operations are ramping up as we speak that we are prepared to -- we have been very successful in handling the COVID situation both in Peru and Argentina, and we are very well prepared should further difficulties arise. The debt now increased, those $20 million mentioned in Argentina. But as you can see, our expectation, as I mentioned earlier, is to retain those short-term facilities within the year. You can see here also the amortization profile of the other significant financing facility that we have, $200 million, which has a -- originally had a 2-year grace period, so amortizations will not start until 2022. With that, thank you very much. If you have any questions, we'll take them at the end. And I pass the presentation back to Ignacio Bustamante. Thank you.

Thank you very much, Ramón. So if we move to Page #13 of the presentation, title operational update. So as you know, both Peru and Argentina have been impacted by COVID-19. However, all our operations are currently in production. And the key restrictions that we're seeing, I would say, in the case of Peru, are the positive cases that we're seeing that, fortunately, they seem to be getting better. And in the case of Argentina, it's basically the mobilization between regions that continues being restricted. But again, all operations are currently in production. Inmaculada, we started operations on July 28 and expected to reach full production before the end of this month, which is also very positive news. Pallancata is currently full production. And San Jose is currently operating at somewhere between 60% to 70%. The restriction, as I said, is basically on the transportation of people, and we're expecting that before the end of the year, we're going to be approaching 100% of capacity. Our guidance is going to be issued once Inmaculada reaches a steady state operation. And hopefully, that will happen within the upcoming days. And it's something that we want to make very clear is that we are prioritizing the health of our employees over business continuity. So the top priority is that they have both our employees and also the surrounding communities. Moving to the next slide, Slide 14. We continue maintaining the same growth strategy with brownfield as #1 pillar, followed by greenfield, early-stage projects and strategic alliances. In brownfield, the focus is on continued increasing our life of mine, improve the quality of the resources and try to maximize the spare capacity we have available, both at current operations as well as our current maintenance projects. In the case of greenfield, we have significantly streamlined our portfolio. We have continued taking properties that we deem attractive for the company and progressing the deal-ready projects that we have with a focus on, at this point in time, Peru, Chile, Mexico and North America. On our early stage projects, we continue optimizing those early stage projects. We continue doing further drilling to continue evaluating those and put them into value as well as advancing our Biolantanidos deposit. And we'll give you a little bit more color on that later on. And on our strategic alliances, the focus continues to be on acquiring something that is early stage that has significant geological upside that we can obtain control, and that provides a very important financial return to our shareholders. So that continues to be the strategy. If we move to next slide, Slide 15, that gives you an idea of most of the brownfield campaigns that we have programmed for the second half of the year. You can see on the left chart that shows the location of our key operations Inmaculada, Pallancata as well as all the projects that we have surrounding those operations, such as Palca, Cochaloma, Pablo Sur close to Pallancata and Corina close to Selene. And on the right, we have included a very nice chart that shows the actual physical looks and distances between Inmaculada, Pallancata, Selene and Corina. So all in all, we have 65 kilometers of mineralized structures that really presents a very good perspective for drilling in this area in the upcoming years. If we move to the next slide, Slide 16, we talk about Inmaculada. And you can see there, some are going from the southwest to the northeast, the Angela vein. And you're going to see in circles, in ovals, in different colors of green and red, the target that we have for this year. So the first part is to focus on continue generating more inferred resources in the Juliana and Shakira vein, which are -- you going to see in a some type of a green color there highlighting Shakira and Juliana. Then the next part is to focus on the potential program, and that focus is going to be also -- it's around in the Shakira, Juliana veins as well as in the other 2 areas highlighted to the north and to the west called Minascucho and Huarmapata that are looking highly encouraging. And we're going to be doing also, if you take a look at the chart in the middle to the east, some highlights on Divina Millet areas, which are the areas where we're doing and we're concentrating most of our infill work for the year, infill program. So all in all, for the full year, we're expecting to drill for a resource about 40,000 meters in Inmaculada and to convert those resources into reserves, an additional 100,000 meters. So all in all, as you will see, a very, very active year for drilling in Inmaculada as well as in all our other operations. Moving to the next slide, Slide 17, we are doing a zoom out of this property, and you're going to see there somewhere in the center called Inmaculada with a lot of colors and activity there. You're going to see how, to the north and to the west, we have Huarmapata and Minascucho that we just presented in the previous slide. And you're going to see all the other targets that we have within our property that are looking highly encouraging, and we are continuing to look outside of our core Inmaculada area to explore and develop all these other areas that are highly prospective as well. Moving to the next slide, Slide 18, we switch to Pallancata. In Pallancata, we also have a very intense drilling program for the year. We have a surface drilling program to evaluate the Pablo Sur area with a potential extension of the Pallancata vein with the Huararani Structures and Paola and Luisa West veins. We are also doing underground long drill holes at Erika, Royropata, Luisa and San Cayetano. San Cayetano, there you're going to see also picture there in the chart in the map to the right. And finally, doing surface drilling at Farallon at the north part of the deposit. So in the case of Pallancata, in total, we're going to be doing for the full year, 40,000 meters for potential resource drilling. Moving to the next slide, we have also the other 2 targets that we're putting a lot of focus on for Pallancata of this year, which are Palca and Cochaloma. As you may recall, in Palca, we drilled, in 2019, and we found 3 areas that we're looking very currently with our Santa Beatriz, Escondida and Prometida. So the focus for this year in Palca is to continue exploring those areas, those structures and also to start the drilling in Cochaloma, which hopefully is something that we can start also within the next few weeks. Moving to the next slide, Slide #20, we move to Corina. Corina, you saw it in the map, is located very close to Selene plant. And we also started drilling Corina last year. We did 14 drill holes. And you can see some of the results that we obtained, 3.5 meters with about 9 grams of gold, 15.7 meters with 4.5 grams of gold, 16 meters with 6 grams of gold. So Selene is looking highly, highly interesting, highly prospective. We are waiting for the permits to do a new drilling campaign this year. We are expecting to start that in the Q4 of this year and a continuous part in this area with a goal of, hopefully, becoming an additional alternative resource for our Selene plant, complementary to the resources from Pallancata. Moving to the next slide, Slide 21, we have San Jose. In San Jose, we also have a very active plan. We have a total amount of meters program for the year of 62,000 meters for both potential and resource drilling. You see in the right, you're going to see 2 structures there that are called Emilia and Julia, which is the main focus of our current exploration efforts, close to our current operations. But in addition to those efforts, we also completed the Titan geophysics program, the same as we did in Inmaculada, and which we have done in Pallancata and in Arcata in Peru as well. And we have new potential targets that we're going to start drilling shortly as well. We're going to focus on the 3 or 4 most prioritary ones, ones that are looking the most encouraging. So hopefully, that's something that we can complete in addition to the plan that we have before the year-end. We're also going to continue exploring Telken area that, as you may recall, this is the area that is right next to Cerro Negro, with a potential continuation of structures from Cerro Negro getting into our property. So we're going to be exploring that as well. We have another target to the northwest called Rosalia that is ready to be drilled in September. And additionally, we're going to be doing further drilling in Aguas Vivas during the second half of the year, so also a very active second half for San Jose. Moving to the next slide, Slide 22, we -- in addition to what we have just talked, we have a very attractive portfolio of opportunities, both in Peru and in the Americas in general. In Peru, in addition to the strong potential that we see in our former mines and near-term projects, we have a list of targets that are outside of our current operations. The most notable one is Arcata. In Arcata, we are highly excited with that because we're planning on receiving those permits in 2021. However, we ended up receiving them in 2020, so it's ready to start. We're going to be drilling 17,000 meters this year in Arcata with all of [indiscernible] in Q4, the famous Q4 and Q3, the quarters 4 and 3, that has the prospectivity of containing a material amount of resources that could allow us to think about restructuring Arcata. So we're very excited with this plan and ready to begin during the month of September. Same with Ares. Ares, we have also a drilling plan for 4,000 meters between now and the end of the year. Condor is actually that is located fairly close to Arcata that is looking also very attractive. It's a small mine operated by a third party. We have partnered with them to do the drilling together. And if we like it, we can acquire 100% of the project. And drilling is set to begin within the next few days as well. Crespo is another advanced project that we have. We are also counting on receiving this permit in 2021. However, we have managed to accelerate those permits to 2020 and between now and the end of the year, we're going to be drilling about 8,000 meters. So we're also looking very, very interesting. Corina, we just talked about that. So we're going to be drilling that. And we have also further programs for 2021 with Azuca, Selene and some additional exploration areas. It's around in [ Crespo ] as well. So enough to keep us busy in 2020 and 2021. We also have Volcan that you're aware of, 9 million ounces in a very attractive area in Maricunga in Chile. And we are basically working on improving efficiencies, both from a metallurgy and a water sourcing. And finally, in the Americas, we have also very interesting news on the Snip project in Canada, which I'll talk about in the next slide. And we are planning on drilling 4 projects outside of Peru for this year. Cooke Mountain, Horsethief, Illipa in the U.S., Las Cuarenta in Mexico. And we have also identified new projects that we are in the process of progressing with the goal of also drilling 4 to 5 projects, greenfield projects during 2021. Moving to the next slide, Slide 23, we get into Snip. Snip is a project that was acquired by Skeena Resources from Barrick in July 2017. Hochschild has an option to acquire 60% if we like what we see. It's an area that has historically produced interesting amounts of gold at very good grades. They just announced a maiden resource of about 650,000 ounces with very attractive grades of between 13 to 14 grams of gold, so looking very encouraging. And there's a drilling program in place that should start soon, so within the next few days or weeks with the goal of continued increasing these reserves. So we're very excited with that. And again, we have the option to control this project. And with additional information that we're going to be getting in the upcoming months, we should be ready to make a decision. Moving to the next slide, Slide 24. We have our BioLantanidos rare project. Biolantanidos is an ionic clay rare earth deposit in Chile that we acquired last year for a total of $60 million. As you may recall, it's an iron absorption clay, which are currently the lowest cost sources of rare earths in the world. It's highly concentrated on the most demanded rare earths, which are terbium, dysprosium, praseodymium and neodymium. It's a fairly simple and low-cost operation, easy to strike with relatively low cost, no need to use explosives. It has an environmental-friendly process with no tailings dam required since the material is returned to their natural -- to their original environment. A low CapEx modular processing facility that allows us for staged growth. And we have also managed to put in place a fantastic management team that is already pretty much fully assembled and working very diligently to advancing this project. For 2020, the goals that we have are to complete the metallurgical optimization, to continue advancing our environmental permitting, finish equipment testing. We have also identified very interesting brownfield targets in properties that we control as well, so we expect to significantly increase the project resources going forward. And we're in the process of revising the feasibility study with the goal, as we have announced in the past, of finishing the feasibility study in Q1 2021. And finally, moving to the final slide of the presentation. As conclusions, we have finished the first half of the year in a very strong financial position, enabling a very resilient response to the current pandemic resulting from COVID. Inmaculada, it's expected to be back to full production by the end of August. And after which our Inmaculada fully operational, we're going to be restating the guidance for the full year 2020. We have a very exciting and intensive H2 2020 exploration program. I don't recall having had a second half as busy as this one with so many permitted targets in place. So we're really very encouraged and motivated with this drilling campaign. In addition to the exploration in our Brazil plant, we have very attractive optionality in greenfield in our early-stage projects and also about our M&A strategy. We have in place a growing culture of innovation and relentless strategic execution that we are very proud of. Significant free cash flow generation potential for H2 with pretty much ramping up, and we're getting close to full production with these outstanding prices that we're seeing. And the opportunity to generate substantial shareholder return for all our shareholders. So with that, the presentation is finished, and I would like to open up to any questions that you may have.

[Operator Instructions] We take our first question from Daniel Major from UBS.

Your first question, I guess, it's a month-or-so since the production update, and you still seem confident on the delivery of the exploration despite what appears to be still quite a challenging backdrop. From a coronavirus perspective in Peru. Can you give us, I guess, a few more insights on the kind of restrictions around the exploration? And if you deliver on all of your targets, are you still confident that you will deliver year-on-year increase in resources and potentially reserves this year? That's the first question.

Yes. Thank you, Dan. So the program is a very aggressive plan. The good thing about this plan, Dan, is that it was originally focused on being completed between, let's say, roughly April because of the rainy season lasting between January and April and finishing in October. So now we are starting a little bit later a couple of months later, but we're going to go all the way to December. So with that additional time and some reshuffling that we have done, for instance, we have optimized materially the amount of infill work that we needed to do in Inmaculada, and that has allowed us to free up some machines and people to focus also on this additional brownfield plan and in the new areas in which we have received additional permits, such as Arcata and Crespo. So with that reshuffling and with the additional 2 months that we have between October and December, we expect that we're going to be in a position to complete the plan. We have already secured pretty much all the machines and people that we need. The people that we are pending to do the drill work is, so far, people that are -- have not been materially affected by COVID. So we are in a position to do the work pretty much at the intensity that we are expecting. So we are highly enthusiastic with that. Obviously, the goal is to continue finding more resource sales as much as we can, both potential inferred and also to the infill in Inmaculada, we have, as I mentioned, a very aggressive plan, 100,000 meters only for infill in Inmaculada, so our goal is to find as much as we can. And hopefully, the results come with the plan. And we can continue updating on the progress made in the coming quarters.

Okay. Great. And just a quick follow-up. I mean, are you expecting to put out any additional changes or updates to reserves and resources? Or will we basically wait till the end of the year?

No. We're going to be waiting for a resource update until the end of the year, as we do always. However, as we continue getting the results from our brownfield plan, we're going to be updating the market on the results that we get.

Okay. Cool. And then second question, you've obviously got an additional permit to restart drilling at Arcata. Can you tell us whether the higher gold and silver price environment has changed your view on what would be the main determinant to restart Arcata, i.e., price or drilling and exploration success? And when we look to the calculation of reserves and resources, et cetera, are you looking to change your gold or silver price assumptions off the back of the improved spot pricing when it comes to review at the end of the year?

Sure. Let me start with the second, Dan. I think we have done, which is, I would say, a fairly conservative adjustment. We have moved -- I think, the prices were using are $17 for silver and $1,700 for gold, so still very conservative prices. It's a little bit of revision upwards compared to what we used last year. But it's still significantly below the current spot prices and the current projections as well. So that's on the second question. On Arcata, what I can tell is our goal in Arcata is to put it back into operation once we have a good amount of resources that could allow us to operate 4, 5 years at least. So with significant potential further on and to do it with a material that passes the spot price test. So we are looking for assets that can be in the first quarter or at least in the first half of the cash cost curve and resilient to a price movement. So with that, our goal is to do this program. We do believe that by completing this program in Arcata by year-end, we're going to be in a position to know probably not necessarily with a full resource but at least with a lot of potential indications whether we have something material there or not and be making a more informed decision by the end of the year with information that we have obtained from the drilling plan. So this is a very critical program. As I mentioned, that was a scheduled originally for 2021, but we -- I mean we already have the permit, so why wait? And we're going to get that done as soon as possible. So hopefully, that we are successful. Hopefully, we'll obtain what we want. And hopefully, we can think about putting back into operational capital.

Okay. So just to be clear on that, you need to hit the exploration success to restart. You won't just do it in response to the higher price.

Yes. Because what we know is that when we kept in Arcata were the resources that were marginal. Now those resources at current prices are looking much better, of course. But still, we need to restart the operation. We need to assemble the operating team. We will need to dewater certain areas of the mine to do some reportion growth on the areas that were inundated with water. So there's been a lot of work to be done. And we don't believe it's necessarily worth doing that with the current information that we have for the ounces that were left in the past. But we do believe that, that makes a lot of sense, if we are able to find material resources in these quarters 3 and 4. And that's where we would like to wait until we complete the exploration plan by year-end.

And now we'll take our next question from James Bell from RBC Capital Markets.

Yes. Just firstly on Inmaculada and San Jose, I wondered if you could talk maybe a little bit more detail about the challenges you're seeing from an operational ramp up perspective, given these seem to be taking a bit longer than expected? Is it the physical movement of people to site? Or is it actually in the mining and processing that social distancing and other changes are actually causing the production side to take longer than expected?

Sure. As I mentioned, James, there are 2 mainly 2 different circumstances in Inmaculada and San Jose. In the case of Inmaculada, the challenge has been to find the amount of people that we need that were testing negative under both quick and molecular testing. As you know, the COVID situation in Peru has hit the overall country significantly. So we have had issues into finding the right amount of people that we needed to restart, in a balanced manner, our operation. So we started, and we were able to reach half of capacity very quickly. And the main challenge was to find the second half required to complete full production. So based on the people that we have already tested and we have already secured, we already have the amount of people to ramp it up to the full 3,850 by the end of the month. It's people that is already there and is in the process of following protocols and ready to get into products. So that's why we feel confident that we should be getting close to full production very quickly. And the positive news on that is that everything moves. It's like a peak and then start getting better, so we started seeing a material increase in cases testing positive on serologic and molecular testing. And the good thing is that in the past few tests that we have performed in the past few days, we are starting to see a significantly lower amount of people testing positive. So hopefully, that trend continues. And our people have either recovered or we find more people that have not been -- that are testing negative that we can continue incorporating and allowing us to continue production on a sustained manner. But I would say the situation looks significantly better now than what it looked a month ago when we started the ramp-up. In the case of Argentina, the situation is better because the amount of people infected in general in the country is less than in Peru. However, the traveling between regions is restricted because there are certain areas of the country that are performing worse than others. So there's a lot of confident restrictions between regions not allowing other regions to come to those respective areas. So we have to work with most of the people coming from the Santa Cruz region, which is where our operation is having trouble finding people from elsewhere. And that's what is preventing us from moving north of 70% of production capacity. So once those restrictions start getting lifted, our expectation is that we're going to start ramping up and reach full capacity as soon as that happens.

Okay. That seems fairly clear. And maybe just as an extension to Dan's question on the silver price change. I mean good to get some idea of where you're moving reserve prices to. Does that make any major difference to your current reserve base that those changes in prices? Is there any additions that sort of come into being economic that you would -- you think you can help or will help the mine life story? Or is it the case that we're still kind of broadly seeing the declines that we're forecasting based on depletion?

Capital increase in prices in general in our operations, James, our resources are not too sensitive to price changes because it's not that we have like a scaling or scaling performance of grades between the main structure in the world. So we typically have the structure. And once the structure finishes, then we have the world that has no grade. So when we increase the gold and silver prices, it's not that there's material that wasn't economical that now becomes economical. That doesn't necessarily happen. Those are certain isolated areas that we can look in more interesting or attractive with better prices. But in general, our resource base and reserve base is not too sensitive to price changes.

Okay. That's very clear. And then just 1 more quick one. I realize the dividend is not that sizable potentially in terms of -- in relation to some of your global peers. But I just wondered what your thinking is, given that the final dividend has been -- was canceled, obviously, no interim payout just now. Do you expect to make good on the final? Or should we be thinking about just payments for 2020 from here?

Yes. So regarding dividend, we have not even had that discussion at the management or Board level because we believe that before talking about dividends, we should make sure that Inmaculada is up and running at full capacity on a sustained manner and watch what happens. We're going to be discussing dividends again. So it's still a bit early to talk about dividends, but rest assured that once we have Inmaculada running, hopefully in the upcoming days, that's something that is going to be discussed. And we're going to be guiding the market in terms of what to expect on dividends.

And we'll take our next question [Operator Instructions] Ian Rossouw from Barclays.

Just a couple of follow-ups on the exploration. Just how should we think about the spending? Ramón, you were saying, obviously, you should see that figure pick up quite a bit in the second half. Should we use what you've given at the beginning of the year? Is that a good guide? Or is there a potential that you actually might spend more than that given you brought Arcata and Crespo into this year's drilling? That's the first question. And then maybe just as a follow-on, likewise, on CapEx. I mean how should CapEx sort of gradually increase as production increases? Or should you also see a step change in the CapEx spending as operations now are starting to ramp up?

Sure. Let me talk about the first one on exploration, Ian, and then Ramón can talk about the other part. But in exploration, if I were able to drill all the targets that we have in place and including in Arcata and at Crespo, there's probably going to be some increase in the case of profit spending but not too material, probably, let's say, $3 million, $4 million more. And you need now to take into account that we have also been able to reshuffle some part of our older brownfield expenses. So it shouldn't be anything that is too material by incorporating Arcata and Crespo.

But it's similar to what you said then in the beginning of the year.

Sorry, say again?

So you're saying it might be a little bit more, but I guess, using the number you gave us at the beginning of the year, I think, around $44 million. Is that a good estimate still then?

Yes. Yes, that's a good estimate. And if something is going to be a number, that is going to be not too much above that by another, let's say, $3 million, $4 million or so.

And also -- sorry. I'm just going to answer the second question for me and around CapEx. In terms of CapEx, I think the overall number -- I mean we haven't have come up with the official guidance yet, but I can give you some sort of color. In the case of Inmaculada, there will be some mine developments that were postponed from the first part of the year that we will not be able to fully catch up in the second half of the year. Having said that, part of those savings are likely to be compensated. Only part of those should be compensated by a more intense infill drilling in the new veins discovered in Inmaculada. In the case of Pallancata, we do anticipate that we will further develop the mine towards new areas in Huararani and Marco, so there will be new developments that we do believe that can be accomplished in the second half of the year. So the number of -- in terms of CapEx in Pallancata, we don't expect to be significantly lower than what we had anticipated for the full year. And in the case of San Jose, there are certainly some postponements, but we will not be able to catch up for the full year. So I think that the number -- the new CapEx guidance is going to be lower for the full year than we had originally anticipated, but I don't think it's going to be proportional to a drop in production. So it's going to be lower but not significantly lower.

We have no further questions at this time.

Thank you very much, everyone, for participating in the call. And should you have additional questions, please feel free to contact Charlie Gordon directly in our London office. Thank you, and have a great rest of the day.

This concludes today's call. Thank you for your participation. You may now disconnect.