Hochschild Mining PLC (OTCPK:HCHDF) Q4 2019 Results Conference Call February 19, 2020 4:30 AM ET
Ignacio Bustamante – CEO
Ramón Barúa – CFO
Conference Call Participants
Dan Major – UBS
James Bell – RBC Capital Markets
Richard Hatch – Berenberg
Tim Huff – Peel Hunt
Kennedy Nyangoni – Barclays
Patrick Jones – JPMorgan
Good morning, everyone. Thank you for joining us today in the presentation of our 2019 full year results. We’re very happy to present a very strong set of 2019 financial results. Ramón is going to be giving you the detail in a few minutes, but let me just emphasize the key highlights here. We continue with a lot of emphasis and strength given to our cost control, and we managed to have our all-in sustaining cash costs for the year below what we had in 2018 and also in the lower side of our range that we guided to the market. And so we’re very proud with the work being done on the cost control side.
Our EBITDA was at $343 million, which represents a 28% increase compared to 2018, also very strong EBITDA. Our EPS increased by 80% compared to 2018, and that represents $0.09 per share. And finally, on the financial front, we have just declared a final dividend of an additional $12 million that, combined with the $10.2 million that we declared for the first half of the year, totals $22.2 million compared to $20 million in 2018 for the full year. So also, we believe that that’s a very positive news as well.
Also, our production was very strong. We beat our guidance by 5%, which is also very positive. And not only that, but we managed to get production records in two of our operations, both in Inmaculada and in San Jose.
Also, and we will see that later on, probably one of the most important piece of news release today is the fact that we managed to have significant discoveries again at Inmaculada with much better grade and increasing significantly also our resource base.
Also, as you may recall, we have been struggling with getting the permits for government delays in the case of Pallancata, and we finally managed to get those permits. We got them at the beginning of January. So now we have all the permits that we need for a full drilling campaign in Pallancata into 2020, which, in fact, has already started.
Also, in addition to this, we continue to see significant optionality, as we’ll show you in our early-stage projects, exploration and our Rare Earths project. And finally, we have substantially improved our debt profile at very attractive interest rates, as Ramón will also show you later on.
Moving to the next slide. Safety continues to be the top priority of the company, and you’re going to see there two charts that show how our safety index, frequency and severity have been evolving pretty much after the IPO. And you may recall that, by the time of the IPO, we were having at around — we were at around 7 frequency ratio, and we committed that we needed to take that amount more to industry — into the best industry levels of around 5 — or between 4 and 5. We managed to do that fairly quickly, but for a few years, we’re pretty much starting the 2 to 3 range. And we realized that the only way to change that was by working on a plan to completely change the safety culture of our people.
And we embarked on a very aggressive and intensive plan about 1.5 years ago, and I’m very happy to report that, that plan is working. You can see we have obtained the best-ever frequency and severity ratios in 2019. It doesn’t mean that the problem has already been corrected, but it means that we’re in the right direction and that the safety-first culture is firmly being embedded within the entire organization. So we’re very proud with the results, and we believe it’s important not only to feel comfortable that we have managed to achieve this, but also to continue evaluating this and understanding what else we can do.
So as a result of that, we just launched another review to our safety culture brand that we’re calling Safety 2.0, which basically builds on the key things that allow us to obtain this important change in the culture of our people and correct the things that we may have omitted and the things that aren’t necessary to continue improving it. So it has come also with new force getting into 2020 to continue targeting being as good as we can in safety.
And environment is the same. We have a commitment to the highest industry environmental standards. But as opposed to safety in which we have metrics that are easily measurable and comparable in — regarding the environment, it’s very hard to find those metrics. So we decided that if there are no metrics, why don’t we create our own metric? And we created what we call our ECO score, which basically is a score that measures many things such as discharge limits, environmental incidents, water consumption, waste generation, recyclable waste, observation from the regulators, et cetera, and push that in a score that goes from 0 to 6. We have been raising our bar every year. It started with 4, then 4.25, then 4.5. And for this year, the target is to exceed 4.75, which is the rate line over here. And this ECO score now is part of the corporate objectives, bonus and many other things for the entire company. So that has also helped to generate the conscious for environmental care within the entire — or throughout the entire company.
That ECO score allowed us also to get a recognition last year. We won the Mines and Money Award 2019 for innovation and sustainability. And our goal is that at least this is allowing us to compare our units, one to each other and how they evolve over time. Our goal is that, over time, more companies will adapt this ECO score and be able to compare not only within our own companies over time, but also with the rest of the market.
But as you can see there, we had — we reached these levels in the years 2017 and 2018. We had a slight decrease getting into 2019, mostly as a result of some environmental incidents that were not material, but still counted as incidence. And that has forced us to take another undertaking in the company, which is to leverage on the success that we had on our Safety Culture Transformation Plan and apply the same Culture Transformation Plan to our environmental culture. So we are in the process of launching a new Environmental Culture Transformation Plan in 2020. We want to give it as much priority as we have given to our safety plan with the goal of continue aiming to reach the highest score of 6 as soon as we can.
So that’s it on the key highlights. And now I would like to hand it over to Ramón, who cover the full year results in more detail.
Thank you, Ignacio. Well, so very excited to present to you this very robust set of financials underpinned, as Ignacio said, by the impressive 28% increase in EBITDA for 2019.
We had revenue of $755.7 million. As you can see here on the table below to the right, that resulted from higher prices. Gold went up 12%. Silver went up 8%. But also, our production went up, in the case of gold, by 4%, and silver did go down by 12%. Of course, we’re not counting with the primary silver mine Arcata in 2019 already.
Costs. We’ll talk about costs later on. But they were better than in — the all-in sustaining cost was already better than in 2018, also underpinned by operational efficiencies and also with the help of not counting with Arcata. As you remember, in 2018, it was experiencing already very high costs. These benefits were partially offset by higher depreciation in the period. As a result, we had a gross profit of $243 million, a margin of — a very healthy margin of 32%.
Administrative expenses were very much in line with last year. Selling expenses did go up, but very directly as a result of the export taxes that we’re paying now in Argentina since September of 2018.
Exploration expenses also went up. We have also a slide in which we will detail and break down this number, but it has to do basically with the pickup of exploration, primarily in Pallancata and in San Jose.
The others line is also very important here to explain because it went up considerably, I would say, primarily as a result of an increase in the provision for mine closure. And there are 2 mines — old mines that are behind this. The first one is Ares. In Ares, as you know, we have a tailings facility. We’re in the process of closing that facility. And as part of the work that we need to do, we need to dewater it. Before dewatering it, we need to treat very well that water, and we have — we’re investing in a plant that will do so. And our plan is that, in the next 2 to 3 years, we will fully dewater that tailings facility, and we can proceed then to fully close it. The cost of loss of that is now fully booked in our mine closure provision.
And then Sipan. Sipan is a mine that was in operation even before the IPO. So it’s a very old mine. We need to treat water in that facility as well. We are — that treatment is taking a little bit longer than anticipated, so that’s a reason for the provision increase. And we’re also investing in improving the plant and the technology that we’re using there so that we can move quicker to a full closure of that facility as well. As a result of these numbers, we obtained an operating income of $112.3 million, again, representing a healthy margin of 15%, better than the 10% that we achieved in 2018.
In terms of taxes, the effective tax rate was 46%. But if you exclude the royalties that are — that we pay in Peru that are booked in this line as well, and you take out also that withholding taxes, the effective tax rate shows a 30%, which is a number that is very consistent with the statutory tax rates that we have both in Peru and in Argentina.
The net profit was $60.1 million. Attributable to Hochschild shareholders was $47.6 million, representing an earnings per share of $0.09.
Going to the next slide. I go directly to the cash flow because I think this chart tells very well the story of what has happened during 2019. First, as you can see, there was very strong cash generation at 3 of our operating assets: Inmaculada generated $165 million; Pallancata, $41 million; and San Jose, $70 million. We had an investment in exploration of $44 million. Also, again, bear with me, we have a slide detailing how that money was invested. And we had administrative costs of $52 million, including LTIP payments corresponding to 2018, around $8 million, that will not be repeated this year in this year’s cash flow. We paid interest for $5 million. We paid dividends of $29 million, around $7 million of which represent, of course, to the dividends that we paid to McEwen Mining, our partner in Argentina.
We paid taxes of $14 million, around $6.8 million were paid in Peru, basically royalties, as we continue to have tax yields for our income tax in Peru, tax shield that has expired in 2019, and we are expecting to be paying income tax in Peru in 2020. And $7.6 million in Argentina, that relate, of course, to income taxes and the responsibility tax in Argentina.
We had $70 million of progressive mine closure and care and maintenance. That number is split around 50-50 between the two. Working capital, very, very stable: the investment in BioLantanidos for $57 million and an increase in our net loans of $44 million. So we closed the year with a very solid $166 million in cash.
Moving to the following slide. We have the performance of the all-in sustaining cost. It came at $11.9 per ounce, so very close to the low end of the guidance at the — the guidance was $11.8 to $12.3. So very solid numbers. And very impressively, it came also below the all-in sustaining cost that we had in 2018.
Inmaculada contributed with higher-than-expected grades, around 9% higher grades, and several cost efficiencies. For example, we improved the cost of cement, peroxide, cyanide.
Pallancata had already a full year of the wider but lower-grade Pablo vein, but we did have several impacts in our cost per tonne. We improved the transportation cost. We had a lower backfill cost. We also had here lower cement costs.
In San Jose, the costs were flat. Again, increases associated to export taxes and envision that was 54% in Argentina last year, but were offset by a devaluation of 59% and higher grades in the operation of around 10% higher than 2018.
With that, our guidance for 2020, as already reported, is $12.1 to $12.5 per ounce of silver equivalent. You can see on the chart on the right that does include an important investment that we’re going to be doing in Inmaculada. We’re increasing our tailings facility there for $22 million. So if we exclude that one-off impact, the guidance would come down to $11.6 to $12, very much in line with what we have been obtaining in the last couple of years.
Moving to the next slide on capital expenditure, not the actual CapEx of around $137 million came also in line with the guidance that we gave you at the beginning of last year of $130 million to $140 million. For next year, for 2020, the guidance is going to be lower at $115 million to $130 million, and that comes despite, as I mentioned, you can see here on the chart, that Inmaculada will be going up from $66 million to $80 million to $85 million, primarily, again, as a result of the increase in the tailings facility. But Pallancata will be coming down as we’re doing less mine developments. That number is likely to be increased again as soon as we discover new resources in Pallancata.
San Jose is also coming down. In 2019, you may recall we had certain equipment replacement and backfield plant investments that are not going to be repeated this year. And also, there are some less meters of mine developments at San Jose.
And on the table on the right, we show you the exploration expenditure for the period. Of course, an important drop in Arcata vis-à-vis 2018, but an increase in Pallancata and San Jose, while Inmaculada remained relatively stable.
In terms of greenfield, we spent $9.4 million exploring Corina. We will have a slide also showing you the results that we have obtained there, very encouraging, I would say. We drilled also in our project called Casma in Peru with not so good results, and we explored also in Chile and in Nevada. The total number came at $44 million of expenditure, $38 million of which we put through the P&L and $6 million were capitalized in the balance sheet.
In terms of guidance for 2020, what we have is $36 million for more brownfield and $8 million for more greenfield, while we are also be — going to be spending around $7 million in delivering the feasibility study for BioLantanidos project.
Finally, on the balance sheet. The balance sheet remains very strong. As mentioned, we have a cash balance of $166 million, net debt of $33 million, representing a ratio of net debt-to-EBITDA of impressively 0.1x. As you know, in December of last year, we completed a debt refinancing. We took $150 million of our short-term lines, and we converted them into a 5-year $200 million facility, originally at — priced at LIBOR plus 1.15%. But I wanted to announce also that last week, we did fix the floating rate. So now the rate that we will be paying, not a swap rate that we will be paying, is 2.5%, 3%, 4%.
Finally, in terms of the dividend, we’re announcing a final dividend of $12 million. That adds to the $10.2 million corresponding to the first half of the year, an increase, as you can see on the table below, from $14 million in 2016 to ’17, $20 million and $22 million, really $0.2 million this year. This payout represents 46% of our pre-exceptional net income and 77% of our post-exceptional net income for the period.
With that, I return the presentation to Ignacio.
Thank you, Ramón. So moving to the next section of the presentation, you can see our long-term track record of production growth and cost control. Our 2019 production was 5% ahead of forecast. We forecasted 37 million ounces, and we ended up pushing 38 million ounces. So a very, very important beat to our guidance. And very importantly, that was obtained also with record output from two of our mines: Inmaculada, San Jose, as I mentioned. So we’re also very proud with that. And our all-in sustaining costs were in line with expectations in all three of our operations.
When you take a look at the chart here, you can see what we have been doing in the past few years. We have grown our production from 20 million ounces to almost 39 million ounces. So that’s pretty much double production. While at the same time, we have pretty much cut our cost in half. So it’s a material increase in production, a material reduction in our all-in sustaining cash costs. And going forward, we want to keep on doing that.
How are we planning on achieving that? With our growth strategy that is based on four pillars: brownfield, greenfield, early-stage projects and strategic alliances, as we have been communicating to the market. The most important part of the strategy continues to be in brownfield with the role of targeting life-of-mine increases, improve the quality of the resources and hopefully, take some of the spare capacity that we have available and put that back into production, particularly in the cases of Arcata and in the case of Ares.
In the case of greenfield, we have been putting a lot of effort also into streamlining our portfolio of projects. Right now, we have a portfolio of greenfield project that looks much more interesting and attractive than we had in the past, streamlined, but projects that are — that have higher chances of giving us interesting results. We continue taking properties that we consider to be attractive for the company, and we are progressing the drill-ready projects that we have and with the goal of drilling somewhere between four and five projects per year. And we’re basically focusing on three jurisdictions, which are Peru, Chile and Nevada, because they have the good mix of good political, economic stability and also with geological potential.
Also, we have our early-stage projects, and we continue looking at those. As you know, we have Crespo, we have Azuca, we have Volcan. We’re taking a closer look at Crespo now, because Crespo is a project that even with lower gold prices was profitable, but the problem was the scale. The scale could be at current ratios of around 3.5 million to 4 million ounces per year, which is not too bad. And we’re managing it in two different areas. First, trying to optimize the engineering work and the other one is exploring certain other areas surrounding Crespo to see if we can come up with additional material that could allow the project to either produce more or increase the life of mine. So we’re enthusiastic about Crespo, and we’re going to continue updating you on any advances that we may make there.
We have Azuca, and I’m going to talk a little bit about Azuca. We also have Volcan there that I’m going to talk a little bit about later on. And obviously advancing our BioLantanidos deposit, and Ramón will talk a little bit about that later in the presentation.
And finally, we have the strategic alliance, which is basically acquisitions sort of joint ventures, and we continue looking at opportunities there as long as we are sure that we get there in an early stage that we have control, that we have significant geological upside and that we can make a good return for our investment.
Resources. You can see there the news that I highlighted this morning. So basically, we have added 46 million ounces at an average grade of 475 grams per tonne. So you can see there a significant increase in resources during 2019. And I’m going to tell you a little bit about where these resources are coming from and what our plans are for 2020 in terms of new exploration areas in Inmaculada. So we’re very happy and proud with these results and expecting to continue delivering even more during 2020.
In San Jose, we added about 10 million ounces of resources, which was not enough to compensate for production, but we do have done a lot of work in terms of potential that I’m going to be very happy to explain in the upcoming slides.
And finally, Pallancata, as you know, because of the delay in permits, we couldn’t drill in Pallancata pretty much during the entire year. So we only added a few resources. But we already have the permits, and we’re already drilling. And I’ll tell you right now in the upcoming slides our view on that.
So let me start first with this slide, and let me just get closer. This is basically 65 kilometers that we have here in the area that comprises Inmaculada, Pallancata and our Selene plant with all the key targets that we have, which are Corina in the north, that I’m going to tell you a little bit about later; Pablo Sur, that we started in the last 10 days or so to drill; in Cochaloma, that we are planning on starting drilling fairly quickly; Palca, we already started last year, and that is now currently stopped because of the rainy season; and obviously targets around Inmaculada. So our aim here is to try to look for veins that could be material importance, veins that could be, what we call, close to $1 billion vein, such as what we had in Inmaculada, what we had in Pallancata, what we had in Selene. That’s what we’re aiming. We’re trying to find similar things in Corina, in Pablo Sur, in Cochaloma and in Palca, look for material things. And we’re going at full speed, as I mentioned, on that plan during the year with all the permits that we’re required to do so.
Getting to Inmaculada and giving you the detail. Inmaculada, as you may recall in 2019 — ’18, we brought like 120 at current silver gold ratios, million ounces of resources, and most of them were coming from this area. This is the Angela vein, and the resources that we brought were coming from this area, let’s say, from the east of the Angela vein. And those were giving us an average grade of around 320 grams per tonne or so. So we could have — continue pursuing this and continue their expansions, but we said, what we want now is we want to focus on areas that have the potential of giving us higher grades.
So we started looking for many different areas, did a lot of potential in-field drilling — or potential drilling, and we came up with area that was showing a very interesting potential for a grade increase, which is this area here. That comprises Pilar, Dora, Salvador, Susana Beatriz, Noelia, et cetera. And this is the area that we put all of the focus this year, and that’s the area where we have been able to find 46 million ounces with 475 grams. And we are already starting to do the infill drilling to convert those into reserves as well as soon as possible. So we’re very excited with these results. And also, this is an area that continues still totally open. We can see that the mineralization improved significantly on the other side of the Falla Lita, the structures are on this side as well, but the best mineralization is on this side. They are still open to the east, and our goal is to continue following those structures as we speak. It’s very close to current infrastructure. It’s very close to where the Angela vein is located, and that allows for very low incorporation costs and also very low-cost operations. And during 2020, we have the goal of continuous exploring this area and also exploring this area here that comprises the Lady structure that is also giving us very positive results as well. So as we speak, we are chasing these structures. And this, with all of coming up with inferred resources very quickly, very good leader in the first half of the year, which is what we can’t currently do with the permits that we have in Inmaculada.
And also, you can see here, this is where the resources are and where we are targeting, but this is like a zoom out. And you can see here three areas that are also highly encouraging: Minascucho, Huarmapata and Shakira. Those three areas are outside of our currently permitted areas, but are showing a lot of geological potential. So we’re in the process of getting the permits, and we expect to have them, I would say, somewhere between May and August of this year. So our goal is that, during 2020, in addition to drilling these areas around the mine that should give us very positive news as well, these areas are looking more encouraging and are going to continue enhancing the footprint that we have for our deposits. So highly encouraged by this, and these are going to be 2020 drilling targets.
And just as a reminder, this area here is this area here, and this is an entire property that we have at 100% Inmaculada. So there’s still a lot of potential to be untapped here. I’m very excited with the results that we have obtained so far, and looking forward also to a successful 2020.
In the case of Pallancata. In Pallancata, you may recall that we were waiting for a few permits, basically on three targets on Palca, Cochaloma and Pablo Sur. Palca, we did obtain those in 2019. But Pablo Sur and Cochaloma, we just obtained them in the first 15 days of January. So what we are doing is with the permit that we just obtained for Pablo Sur, we are trying to test, first, the continuation to the west of the Pablo vein; second, the continuation to the west of the Pallancata vein; and third, there’s a system that we already have in resources, but still fairly minor, which is the Huararani area, but in our — we have the potential to grow and have the potential to connect also with the Pallancata vein. So those are the three key targets that we are testing. We should test these three, I would say, within the next two to three months, finish all the drilling campaign. I would say, by May, we already should have drilling finished and results obtained. So we’re looking forward to that, and that could be the most imminent source of additional production and resources because of the proximity to our current work. So we’ll continue updating the market on these results.
At the same time, we are doing 5 long-hole — long drill holes also in this area, like 1.5 to 2 kilometers long, with the goal of intercepting any other structures that we could find within our current operating area. And this is on the actual area of operations.
To the south of that, we have Cochaloma here. And in Cochaloma, we have two structures or three that we want to test, which are Cochaloma, Esperanza and Pumahuire. And in Palca, that we did started drilling last year and we did come across structures that were already economic, particularly Prometida, Escondida, — sorry Santa Beatriz, Escondida and Prometida. And the goal that we have for 2020 is to continue pushing for Escondida and Prometida and add an additional vein, that is Alexandra vein and continue with the drilling program. Those are the ones that so far looked the most encouraging and continue with the process of trying to turn them into inferred resources during 2020 as well. So also highly encouraged with Palca and Cochaloma, and hopefully, we can make good progress on that as well and continue updating you.
And in addition, another potential source of mineral for the Selene plant is Corina. I think Corina, also, we’re very excited with the results that we have obtained. You can see here the structure or the potential structure. We did our first drilling campaign. We had to stop because of the rainy season, but we obtained very interesting indices, such as 3.5 meters with 9 grams of gold and 32 grams of silver. We obtained 43 meters with 4 grams of gold; 25, including 16 meters, with 6 grams of gold; 3.7 meters with almost 8 grams of gold. So you can see that there are many encouraging results there that we believe they are getting Corina very close to a discovery. So we’re waiting for the final — for the rainy season to be over. And hopefully, in April and May of this year, we can continue the drilling of this area and determine our resource. And this is located very close to the Selene plant, so this could be also a very interesting potential source of mineral as well for Pallancata for the Selene plant.
Then we have San Jose. In the case of San Jose, we have the following targets for the year: We have Aguas Vivas, the areas surrounding our current operations; we have Rosalia; we have Telken; and we have this area that is between our current operations, Newmont’s Cerro Negro.
Let me talk first about our operations. Here in the operations, we continue adding resources. As I showed you, we added about 10 million ounces of very high-grade material in 2019, and we believe that this area can continue giving us more resources of high grade. We are basically chasing Micaela here to the west and the Huevos Verdes area here in the south, and drilling as we speak as well. So that’s a target for the first half of the year, and that target is the one here.
In addition to that, we have already started Titan geophysical work. Titan geophysical work, we have talked about that in the past, but it’s basically a system that allows us to do geophysical work at much deeper depth. And that already has proven to be a successful method in Inmaculada. So we are replicating that Titan in Pallancata, in Selene, in San Jose, in all our operations and in our targets, with the goal of coming up with additional exploration targets. So we are in the process of doing the Titan drilling between our properties and Newmont’s Cerro Negro properties with the role of coming up new targets that we can also test during 2020. And you may recall the permitting in Argentina is significantly simpler and much leaner process than in Peru. So once we come up with the targets, being able to drill them, should be fairly, fairly quickly.
Another target that we have is Telken North. What is Telken North? Telken North is an area that basically assumes that the projection of the veins from Newmont’s Cerro Negro are extending into our property here called Telken North. We just obtained the permit 2 days ago to drill this area, and we’re in the process of preparing the roads and everything to start this drilling campaign. And already, we have indications that there could be — that those successions getting into our own property. So we’re also very excited about Telken, and that’s something that, hopefully, in the next month or so, it really should start as well.
Then if you take a look at these structures from Cerro Negro, we believe that they are going in this direction. And Rosalia is a target that is — the hypothesis there is to test the potential continuation of this structure further north. So Rosalia is going to be another target that we’re going to be testing into 2020.
And finally, we have Aguas Vivas. Aguas Vivas is an interesting target. We already have economic intercepts there, but it’s a target that is looking to be more like a lead and zinc deposit. The content of lead and zinc is much larger than those of precious metals. So unless we are able to prove that there’s something big or bigger there, it really doesn’t make too much sense to continue putting a lot of focus into Aguas Vivas. But we do have some ideas that we’re going to be testing to potentially finding larger bodies underneath areas that we’re currently operating to see if they are there or not. So that’s what we’re going to be testing, testing for the possibility of larger occurrences in Aguas Vivas.
So those are the plans for the current operations. This is a chart that we find interesting because these are our properties in Peru. We have here the area that I just pointed to you, which includes Inmaculada, Pallancata, Selene and Corina in this area to the west. And I said to this, we have Arcata, Ares, Crespo, Azuca and Condor. So in addition to the work that we’re going to be using in our operations and in Corina, we’re also going to be drilling between 2020 and 2021. We’re already reapplying for the permit. Some of them may come 2020, some of them may 2021. For many targets in Selene that we are mentioning here, Pacapausa, Makarena, Gaby Marina, Huachuhuillca, Sayrosa and Condorillo. Some of them, Huachuhuillca, for instance, are going to be drilled in 2020, some of them in 2021, but it’s an area that still is very prospective and very close to the Selene plant.
In addition, you may recall that we have our early-stage Azuca project. And Azuca is a project that already has a lot of ounces, has over 100 million ounces of silver, but still not to the economics that we would like it to have to be economical or to achieve the financial returns that we expect. So there’s a project right next to Azuca, Huacullo, that has the potential of containing higher grades. We expect to have the permit to drill Huacullo sometime in the mid part of this year, and the goal is to drill Huacullo. I think we can find better mineral there that could significantly change the economics of the project and turn the Azuca-Huacullo combination into an attractive project. So we’re waiting also for that to happen during the year.
Crespo, we talked about that. Crespo, it’s looking interesting, has the potential to grow basically from 3 areas. We have only alluded the superficial part of the Crespo deposit. We believe that going deep, it could also grow. Also, over time, this is a deposit that has been eroded, and the erosion has been deposited in what is called colluvial deposits. So we have tested some of those colluvial deposits and are showing the same grade as the ones that we see in Crespo. So that could be an additional source of further resources. And also, there’s another target next to it, Cusco, that we have not completed exploring, and it’s also going to be a target for exploring in the upcoming months. So also a lot of potential in Crespo as well.
Arcata, Ares, we have many targets. In the case of Ares, we’re drilling now. In the case of Arcata, we’re waiting for the permits, but we continue seeing a lot of potential there and considering it as a temporary suspension.
We have Condor, also waiting for the permits, fairly close to Arcata and Ares. This has the potential of being either feed or new — potentially new operation. This is already producing and there are small miners. The mineral is there, but a geological — a fully blown geological that has never been done there. So nobody has any idea of the potential size of this. All we know is that there’s a lot of mineral with very good grades and continues coming and coming. So we now have the control of the project and are in the process of permitting to drill and see if this can be a stand-alone operation. And obviously, the targets that we just talked about in Pallancata and Inmaculada. So still a lot of optionality even outside of our current operations.
Briefly we talked a little bit about that. We want to drill four, five projects per year; three countries, Peru Chile, and Nevada.
Peru. In Peru, permits are taking longer. So we want to complement that with more Chile and Nevada projects. In Peru, we drill Corina. Corina, we believe that the cash indications are being potentially an economic discovery. So we’re very excited with that to the point that it’s not part of the greenfield team now. Now it’s moved to the brownfield team. And there’s a drilling plan for this year, very aggressive to see if we can turn it into our resource. Condor, we just talked, permitting, and we have two other greenfield projects, Cueva Blanca/Alto Ruri, but we’re in the process of negotiating with communities to be able to access the land and start doing geological work there.
In the Americas, we have Snip in Canada that I’m going to talk about in the next slide. And we’re also planning on drilling two other projects. One is Cooke Mountain, Adamera, this is in Washington; and one is Horsethief with Allianza Minerals in Nevada. So those are the places we’re going to be drilling this year. And hopefully, we can come up with one or two more that we can also add to our pipeline.
And finally, we have Volcan. Volcan is a project that has about 10 million ounces of gold that is a potential to be a huge project, but there were still two things that we need to work on. The first one is the metallurgy. We believe that the metallurgy can be optimized, and we are already working with a couple of engineering firms to see if we can optimize the metallurgical recoveries there.
And the other one is the water situation. You know we have the water rights, but what the permit by the government are getting tougher. So we are exploring many different alternatives. One of them is with a company called ENAPAC that is trying to group the companies operating in that area of Chile Maricunga and see if they can put together a project to bring water desalinated and supply to the entire Maricunga area. On that side, there have been a positive — a couple of positive developments. One has been that Kinross has just announced that they’re going to restart operations in La Coipa in that area. And also, Goldfield has announced that they’re going to go ahead with the Salares Norte project that is also located very close to this project. So there’s movement, which is good in general for the area. And obviously, it increases the chances of Volcan getting into a project or more closer to a real project in the short to medium term.
Snip briefly. Snip is a very interesting investment that we made. We invested in shares in the company. But that money was completely earmarked for exploring and doing exploration work only in the Snip property. The company is Skeena Resources, and they have two projects, Eskay Creek and Snip. The project that we believe fits the best with our needs and our skills is Snip. That money was used for exploration in 2019 with very interesting results. The idea here is Snip in the past has produced about 1 million ounces at very high gold grades at around 1 ounce of gold per tonne. And the idea was to test if there were parallel structures to this original body.
So they drilled and they obtained, I would say, at least a couple of very interesting drill holes. One is this one that is 5 meters with 16 grams of gold, very good. And the other one that is 1.5 meters but with 1 kilo of gold. So — and that contains 50 centimeters with almost 3.4 kilos of gold. So there’s a lot of gold in there. And we are very excited with these results. There’s going to be another drilling campaign into ’20 — into 2020 once the cold season is off. And we’re also looking forward to that campaign. And the most important thing here is that we have the option to acquire up to 60% if we like the project and take control of it. So also very, very excited and looking forward to the next campaign. But I would say this project is looking very encouraging as well.
And with this, I’d like to hand over the next three slides to Ramón to talk a little bit about BioLantanidos innovation and valuation and then I will take over again for the conclusions.
Thank you. Thank you, Ignacio. So BioLantanidos, I mean if you were a believer on the electric revolution, you’re certainly going to be interested in BioLantanidos.
Really, the market has been — the market does believe, I think, in the electric revolution. We’ve all seen the Tesla stock going up quite impressively in recent weeks. And most of the market has been focusing, “Okay, so what are the minerals that this revolution will require?” And people have been focusing on those associated to the batteries. There’s a lot of talk around cobalt, lithium, nickel, but not a lot on rare earths, which are crucial in terms of the efficiency of the motors. So basically, the performance that you can get with the same battery using rare earths, especially those who perform as permanent magnets, is really fundamental for this revolution to take place.
In that light, we have been studying the market for 4 years already, and we have discovered this deposit in Chile. Now I was asked this morning about other rare earth deposits in Africa. I was asked about Molycorp in the U.S. and how this deposit compared to those. And I said, “Well, it has nothing to do with those.” Really, the market leader in rare earths in the world is China. And in China, there are six companies that dominate the market. And 5 of them dominate the heavy rare earth industry. And those five industries — companies have ionic clay deposits. And this deposit in Chile is the only ionic clay deposit outside of China that can perform economically. So that’s why this project is so unique and so important to the future and to the electric revolution.
This project is particularly high on the heavy rare earths. Remember that there are four that act as permanent magnets. We have neodymium and praseodymium, the lighter rare earths. They’re important for the magnets. But if you want that magnet to perform under extreme temperature conditions, for example, like in an electric vehicle, you would need to add dysprosium and/or terbium. And this is what — particularly what this deposit has to offer.
The operations are expected to be super simple. The mining is really more sort of a quarrying. It doesn’t require explosives. The mineralization occurs in the first 30 meters. And then the process is also extremely simple. It has three stages. The first one is called the desorption stage, where the clay is going to be washed using ammonium sulfate, which is not a hazardous chemical. It’s a fertilizer actually. And then two stages where the impurities will precipitate. And the final stage where the carbonates of rare earths will precipitate.
So this will require a very low CapEx. And the way in which this deposit works is that you’ll need to — the main cost is associated to bringing the clay into the plant. So as you move further in the deposit, and remember, we have around 87,000 hectares of the best clay deposits in Chile, you will probably need to — it will require for you to build another module. This is fantastic because it would allow us to grow in stages. And we’ll have to put a huge amount of capital upfront to exist or to start producing rare earths. There’s a lot of geological potential. We are testing some of those. The cost of testing this potential is substantially lower than compared to the other exploration that we’re doing at our existing operations because this is sonic drilling. Again, it’s only 30 meters deep. And in this case, it’s very easy to perform them.
We have appointed a separate management team to pursue this opportunity. We have hired a local CEO. We have hired a project manager. We have already a complete geological team in Chile. So the idea, of course, is that we, as Hochschild management, we don’t get distracted with this project or that we devote as little attention as possible while the project still receives very high management attention. As you can — as you do know, we continue to be a gold and silver company. That’s absolutely our primary focus, but we believe that a project like this, where the cost of entry was relatively low to our market capitalization and that offers such explosive and exponential growth should the electrical revolution occur, we believe that is a very attractive investment for the future.
We’re in the process of completing metallurgical optimization. That work is going very, very well. And we are finding opportunities to optimize on the work that was performed before. The permitting process is also moving along. And we’re doing some equipment testing that will be, of course, an important input to complete the feasibility study that we have offered for the first quarter of 2021.
The next slide, I just wanted to give you a couple of examples. I mean there’s a very strong push that we as management are giving the company in terms of innovation. And here are just a couple of examples. The first one, we’ve already been talking about this, is ore sorting. We believe that we can add a lot of value, especially in Inmaculada in the new veins that we’re discovering, namely Millet and Divina and the new ones that Ignacio have mentioned, by applying ore sorting. We have done testing in Germany both — with again, two German companies, Steinert and TOMRA with very, very positive results. We have done pilot testing in Brazil with Steinert. The results are going to be coming in March. But preliminarily, they do support the findings that we obtained in Germany and further complement them. We have hired Ausenco to help us figure how this new technology would fit into the existing flow chart that we have in the Inmaculada facility, so going very well.
We have been also working in-house to improve the sensors and the algorithm that separates the ore from the waste. What I can tell you is that, in general, with very simple technology, we’re being able to separate very easily between the quartz-based mineralization to the andesite that it’s the holding rock. The ore restriction that we were facing was the size, the particle size. There’s a size that is the perfect fit for the sorters. And we were not necessarily obtaining that in our operations because we’re using a lot of explosive to reduce the cost of grinding and milling further down the process. But we have been working with different suppliers. And we have discovered that we can have an ability to manage the size of the particle in the mine in order to fit exactly for the sorters. So we’re very excited about that. And of course, you can imagine this is creating a lot of buzz inside the company around innovation. And now it’s pushing the rest of the team to think about innovation as well.
Another example is the mine digitalization. All of our data from inside the mine was being collected manually. We’re in the process of digitalizing it right now. We hired a company. It’s really a Chilean start-up company. And we did a three-month test on certain equipment. And we found that the productivity could be increased quite substantially by 34% to 42%. So in light of that conclusion, we have decided to fully adapt this technology to our equipment. And we do expect reductions in our fleet size and costs, of course, in Inmaculada.
Finally, we have a slide on valuation. This data has been taken from FactSet as of February 14. You can see there that in every single valuation metric that we have considered and compared us to our peers both in the U.K. and in North America, we appeared certainly undervalued.
So with that, I return to Ignacio for the conclusions.
Thank you, Ramón. And just wrapping up quickly, what we have presented today is a very solid, a strong track record of production and cost control. Inmaculada continues to deliver on our life-of-mine increases, and we’re very excited with that. Also, the exploration program across Hochschild portfolio continues to be very excited now that we have all the permits in Pallancata as well. So that should be also a news flow for the upcoming months as well.
Attractive optionality in greenfield, early-stage projects and M&A strategy as well, as we talked, the innovation program that Ramón just described aimed at delivering operational and project upside as well is keeping us also very motivated. Significant free cash flow generation, furthermore, with the prices that we’re seeing now. And you can see the difference between the first half and the second half with relatively similar production, the impact that these higher prices are having on free cash flow and balance sheet in general. Strong balance sheet that enables the strategy of execution at full speed and opportunity to generate further shareholder returns.
So that pretty much covers entire presentation. And now any questions that you may have for either Ramón and myself, happy to take them.
Q – Dan Major
Dan Major from UBS. Two kind of lines of questioning. Firstly, on the exploration, you kind of briefly mentioned a bit. Can you just reiterate you have absolutely all the permits required across your key 3 assets to execute all the drilling programs you need for 2020?
So let’s go by them one-by-one. In the case of Inmaculada, we have the permits — remember, I mentioned that we needed to — that we’re going to be working in the first half of the year on this area and on this area here, so the veins here and the veins here. For doing that, we have all the permits that we need. The other part is extending a little bit from the current operations area, which is Minascucho, Huarmapata and Shakira. For those, we are in the process of getting the permits and should be done. Some of them, we’re targeting May, July and August. So we’re expecting to have all these three permits for the year, okay?
But for the other ones that should give us the continuation of the other extensions on Lady and hopefully other structures, for those, we have 100% of what we need. These are for the extensions that will require the permits for 2020. That’s one in Inmaculada. On Pallancata, we have all the permits. In the case of Corina, we have certain permits to continue drilling after the rainy season is over. And we are expecting isn’t just an ITS, which is something simple, a processing [indiscernible], to get within three months, the process to complete all the rest. So that’s looking good as well. And in the case of San Jose, the only permit that was required that we didn’t have yet was the Telken North that we already have. So we have all the permits for 2020.
All right. Very clear. A following question on the reserve and resource statement, your — I guess your resource grade was fairly stable or up slightly. The reserve grade came down somewhat in Inmaculada in particular. Can you just give us a little bit of description of what drove the reduction in reserve grade?
Absolutely. And that’s in the schedule here. So you can see here what happened is that — you remember that during 2018, we managed to bring significant amount of resources in the Divina, Millet areas. So that area, we have already subject that to infill drilling. So now they have moved from the category of inferred resources into reserved drilling. And remember that those had a grade of around 320. There have been some grade upgrade as well, which is positive. But when you convert all those, and there was a significant amount, 22 million ounces, converted to reserves, that is what is driving the grade down, those new ones. And with the 320, those are the ones that we have converted. But this year, we’re also working hard on converting the ones with the higher grades. And that’s infill that we’re doing as we speak as well with the goal of by June, having also those new resources with higher grade turn into reserves to improve the average grade of the resource additions.
Very clear. And just final one on the exploration side, given the permitting delays that you experienced this year, are you still on track to achieve your target you laid out, I can’t remember exactly what it was, for 10 years of resources, all of your assets by 2022?
I would say in the case of Inmaculada, we’re pretty much right there now with what we have. And remember, Inmaculada is pretty much 75%, 80% of our free cash flow. So I would say in 75% to 80% of our plan, we are pretty much there already. And obviously, in the case of Pallancata, there have been delays because of the permitting situation. Our expectations of reaching 10 years’ life of mine remain the same. Now we need to drill these Pablo Sur, Palca, Cochaloma areas and wait for the results. That’s something that we cannot control. We have done all the work. We believe that they are very prospective. But we need to do the work before we can comment. But we do have already all the permits that we need to test if that is a possibility.
And in the case of San Jose, we continue to be very excited about the potential and the targets that we just mentioned. So we’re also looking forward to the execution of this plan and wait on that until we give an additional forecast. So our expectation is that by the end of this, we ideally would like to have another Capital Markets Day, we talk about exploration, the results and give you an update on our latest perspectives on that.
It’s James Bell at RBC Capital Markets. Following on from Dan’s question on Inmaculada, if you look at the 250,000 ounce gold equivalent production rate, which we’re forecasting for 2020, how should we think about future years, given that lower reserve grade, offset by the fact that you’ve obviously defined another 0.5 million ounces at a grade significantly above that? Is 250,000 the right number for the next few years? Or should we expect some declines in the short term as you firm up those higher-grade resources coming into the mine plan?
It’s probably still early to say. I think that we can foresee the next at least couple of years with production being very similar, two to three years. As we have talked, the grades coming from the Divina, Millet areas were lower. But in certain areas, we have had upgrades on grade, particularly in Millet. Not necessarily in Divina, but in Millet, we have seen an uplift once we have done the infill of about 15%, which is a good number. The new — the areas that we are bringing have significantly higher grades, much closer to production. We have this ore sorting technology that could also allow us to improve the grade. Those areas are located very close to current operations, so the CapEx should be also very, very low to compensate for the all-in sustaining cash cost.
And also remember that we have the possibility of increasing very, very cheaply and efficiently the plant capacity by 10%, investing around $15 million. And even more increase also very efficiently if we wanted to work ahead of that. So our goal is to try to continue coming up with the resources that would allow us to maintain a production as evenly as possible going forward. But we have those alternatives that we’re managing, improving the current grades, coming up with new resources, ore sorting, the cost, that should be a help and the [indiscernible].
Okay. And then just again on exploration, you talk about targeting these so-called $1 billion veins. And you’ve got some early-stage drilling going into your exciting targets, which looks like we’ll have results by the middle of the year. Do you think from initial drilling you can define that level of excitement? Or when do you sort of start to say, “Actually, this is something real”? Is it going to be a few holes? Is it going to be towards the end of the year? You’re like, “Actually, this is one of — a key vein.” How should we think about that time line on results and the materiality potentially to the business?
I would say in the case of Corina, hopefully by the end of this year, we should know if this could be a $1 billion vein or not, by the end of 2020. In the case of Pablo Sur, for sure this year. And in the case of Palca and Cochaloma, if there’s something very obvious, we might find it this year. If there’s something that is not that obvious, it might take us more than this year, but — and these ones are more complex because are new, are further apart. Remember, Palca has 14 kilometers of superficial anomalies, so — and we just did a first drilling campaign that we had to interrupt because of the rainy season. So there’s still a lot of pending work to do here. So these ones, we should know 2020 or 2021 at the latest.
And in these ones here, let me see where these start. I think they are here. Yes, in these ones that we have for Selene, Pacapausa, Macarena, Gaby Marina, Huachuhuillca, Sayrosa, Condorillo, I think Huachuhuillca so far is the only one that is looking likely to be drilled this year. So that’s another one that we should test this year for a potential $1 billion occurrence. And the rest, we are pushing as hard as we can to try to make them 2020 targets. But we don’t know that yet. And if not, for sure, they’re going to be 2021 targets that we should be able to test as well.
Okay. So we should look out for lots of results with Q2 production on this [indiscernible].
Q2 production is on account with the resources that we have so far, absolutely.
Okay. Just one more quick one, if I may. I mean it doesn’t feel like there’s a lot of value in your share price for BioLantanidos at this point. We’re quite far from a feasibility study, 2021. Do you feel there’s value in educating the market a little bit more about the project and the potential upside you see in terms of the feasibility study beyond the single slide and information you’ve given today?
Yes. Do you want to take it or…
Look, here’s the situation. We bought this deposit from a private equity firm in Chile. And we’re finding during the optimization of the metallurgy that we are obtaining a lot of upside. So we believe that — I mean I believe that once we give you a number, we have to be fully behind that number. And the numbers are moving, fortunately, in our favor. So we are testing the equipment. In terms of equipment testing, I mentioned that the work that they had done before, we believe, it was suboptimal. So we need to adjust those numbers as well. So we really do need that additional time to provide you with numbers that are very, very solid. We know that, and we understand perfectly, that the risk of not giving those numbers before will mean that the market is a little bit confused about the investment and doesn’t have a full grip about it.
So there’s a tradeoff between the two. I can throw you some numbers, but if I don’t stand 100% behind them, it will be — I mean I will be changing them in the very short term, and I don’t think that, that is fair. So we understand the risk that we’re taking. We want to take the opportunity to fully review this very unique process because there’s — again, outside of China, as I mentioned, there’s not a lot of experience or very limited experience on this type of thing. It is not difficult. But the work needs to be done and completed before we can very robustly tell you what the numbers are.
Richard Hatch from Berenberg. First question on the dividend. I appreciate you’ve hiked and you continue to hike it. But the company is generating a lot of free cash flow, and you’re at an extremely low leverage, and you’re yielding 2%. But perhaps against some of the other London peers, sort of 5% is kind of the top, upper end of the dividend yield. So why not increase the dividend more meaningfully? You can afford to do it. If you can extend the life of the mines, you generate strong free cash flow. So what’s the thought process behind that?
No, certainly, no. That — all that has been under consideration. Again, we believe that 2018/’19 was a super impressive year in terms of cash flow generation. 2020 is also looking like that. But as Dan was pointing out, there’s still a lot of work that we need to do to sustain the grade of Inmaculada going forward. So we do have an aggressive exploration plan. And we — I mean — and if results are positive, we have to be ready also to further support it if necessary. Second, we have — still we have some debt at $200 million. We’ve been able to extend that. And although prices today are supportive, we need to make sure that we still maintain a high cash balance in order to have a reasonable net debt that we have the flexibility to execute on our growth plan, we would like to add an ore mine for you.
And remember that we don’t have a lot of flexibility on the equity front with Eduardo at 51%, which is good. It provides also some solidness to shareholders to know that the equity is tight. So in that regard, cash is very important to us and very dear to us. And we don’t want to give you a hike this year that we cannot support in years going forward. So we want to signal to you that we are increasing the dividend, especially in years we are profitable like this one, we would like — we don’t have a policy because we would like to retain the flexibility that should prices drop, that we can adjust that without compromising our credibility. So we do take that dividend seriously. We don’t believe that we are going to be a very — a super high dividend yield company. But we’re going to be there for you and delivering a dividend going forward in scenarios like this.
Thank you, Ramón. And while I’ve got you, just on the digitization — digitalization of the mines, you talked a bit about opportunities to reduce your costs or improve efficiencies. Is it too early to put kind of a rough number on where you kind of think you could get Inmaculada all-in sustaining costs down to if you do improve that efficiency?
Look, with digitalization, I mean the impact is going to be relatively limited. What we have found is that, for example, with these tests that we run, that cost reductions are going to be — initial cost reductions are going to be in the order of $1.5 million to $3 million. So the fleet reduction is probably going to reduce 1 jumbo and 1 scoop. So yes, that’s kind of a continuously improving type of innovation. I think the ore sorting is much more radical. If we’re successful in the ore sorting, which we’re again fine-tuning that could have, I mean, an impact — a huge impact between, I don’t know, depending on the amount of resources that you put through the ore sorting, could have an impact of, I don’t know, $50 million to $100 million. But again, I cannot offer you those numbers yet because I don’t have robust figures to support them. But the impact of that project is much, much higher than mine digitalization. On the other hand, mine digitalization is a reality this year. The other one will take more work to…
At Pallancata, I mean obviously, the production was downgraded this year because of the drilling. Should we expect it to kind of bounce back up to the — 2018 levels sort of in — or 2019 levels in 2021?
It’s going to be highly dependent on what we find and where we find it. If we find something that is important and it’s close to our current operations, the chances are higher. If what we find is not what we’re expecting or if it’s further out from our current operations, it’s going to be more difficult to make it into 2021. So it’s going to depend on what and where. So we’re probably going to have more light on that, I would say, by the second half of the year.
And last one, just on Skeena, I know you talked about skipping the presentation. But in the nature of the accounts, it says that you sold some shares at post year-end. So what’s the deal?
Yes. I mean the reason why we invested in the company was to get the option, okay? And we have the option. Yes. And the other was more, I would say, a financial move. We’re already making money with investment. So we set to capitalize on that investment and sell our shares. But we keep the option to only 60% of that. And that’s what really mattered to us, have that optionality, not necessarily the actual share because it was like 5% or so of the company. It was not material.
Yes. It’s Thomas Streater from Streater Investment Research. You mentioned this morning in the RNS, you’re looking to improve or increase the level of ESG reporting. So I was just wondering, is there — are there any initiatives or frameworks that you’d be looking to join or use?
Yes. I mean we’re evaluating many alternatives right now by the team. But we still wouldn’t like to commit to any one in particular because we’re in the process of evaluating. But the short answer is yes, we believe that, that is very important. We’re fully committed to that, and we hopefully can give you updates later on to see which are the ones that we choose as the first stages. But in general, we have been doing a lot of progress in reporting our ESG over the years. And the idea is to continue moving in that direction.
It’s Tim Huff over at Peel Hunt. Just a couple of questions. I noticed, sticking to the theme of exploration, focus a little bit more on Corina and Selene today, than maybe Arequipa-Cusco cluster that you talked about quite a bit last year. Is it just simply because of the prospectivity of Corina that you think you can deliver this year and maybe Selena going into ’21 that you’ve shifted that focus? I know you’ve still talked about Arequipa-Cusco but a lot less than you did last year.
No. I would say the reason is basically because of the permitting situation. It’s the — the permits in some cases is taking one, two, three, four years. And in the case of Corina, it has taken four years for us to get the permit and we already have that. So we’re moving along with that. In the other cases, it’s the permitting process that we need to follow. But I would say if we had the permits, we will be going at full speed in all of them. It’s just a question of the timing of the permits that is creating this timing.
Which sort of brings me back to the capital allocation process. I mean Rich has already touched on the dividend, mentioned growth a lot less. I mean obviously, you’ve just got 1 acquisition done. And you’ve got you’ve got a lot of cash generation coming in the next year, which brings you towards net cash. Are you still looking at growth just as much as you were last year? Or are you focusing much more on the exploration side of things this year?
No. I would say we continue looking at — with the same strength and level of interest on the acquisitions or the joint venture side. And I will say in addition to that, we’re also looking more carefully at our early-stage projects, such as Crespo, for instance. So going to the question of cash, it’s important for us to have the money. Also, if we’re going to do an acquisition or going to invest in a project or do get into a joint venture or, let’s say, go ahead with Crespo, for instance, depending on our results. But those are the type of things that we’re going to be ready at. But clearly, acquiring or developing or increasing our portfolio of projects continues to be a top priority with the company — for the company in addition to the exploration work.
Okay. And I guess last one, I guess, on external growth is, I mean, when you look at BioLantanidos of about $50 million, are you guys pretty comfortable with that $50 million to $100 million range, where you’re looking at your cash flow coming in, in the coming year, where you want to stay from a balance sheet perspective? Or are you actually looking at things actually larger than that?
In terms of potential acquisitions from gold and silver, you mean, in general?
Or anything really, outside. Because you’ve mentioned outside pressures as well.
Yes. I mean we have, as Ramón mentioned, the limitation that we have by the majority shareholder. I would say, in general, we do believe and we are under an impression that under the right conditions, if we find a deal that is highly value-accretive, we can also try to convince our main shareholder that the dilution could be positive as well. So we’re not closing ourselves to things that we can only do in cash. We’re also opening up possibilities that things that we could do in shares in case that was the case and we’re able to put a case that could convince our main shareholder. So I would say, no, we’re not limited to $100 million, $150 million, we’re limited to things that could be profitable, I would say, even at a higher ticket mark, if it makes sense for the company.
This is Kennedy Nyangoni from Barclays. My question is related to the cash flow bridge, which you highlighted earlier on, showing a $52 million of admin costs. What percentage of these costs will be nonrecurring? And should we expect these costs to come back sometime in the future?
Sure. Thank you, Kenny. Look, really, when you look at our — in the P&L, when you look at our admin expenses, they are relatively stable. We are not budgeting for 2020 anything different. The only — what created a difference in the cash flow was when the LTIP, which is a compensation for management that is associated to the performance of the share, kicks in. Again, we had that benefit in after — at the end of 2018. So that was a payment that occurred during 2019. In 2019, we did not earn that. The share price did not perform as well. So in 2020, that number should return to levels that are close to $45 million, $46 million.
[Indiscernible] we should expect another [indiscernible].
Every year, we review a three-year LTIP. And depending on the performance of the share, you can see the details of that in the annual report. So if the share price performs very well compared to our peers, then the price kicks in. So we should be aligned in that program with shareholders.
It’s Dan from UBS. A couple of follow-ups. Just to be very clear on the dividend and the balance sheet. You’d be happy to move or plan to move to a net cash position this year if you didn’t execute on a transaction, i.e., you’re not going to lift the dividend to the extent that if the current prices remain, is that the base case we should be modeling?
Yes, sure. If we don’t — if we don’t execute on M&A or in growth, yes, we would be moving depending on prices to a net cash position. The dividend is really decided not by us, but by the Board. And every six months, when we have our results, we meet with the Board and we have that discussion.
Very clear. And then second question on Inmaculada, obviously you’ve delivered higher grades in the additional resource that you’ve added. Can you give us any sense or some more color on the mining cost and the vein width? Because my understanding is when you were in Millet and angle of the width is wide, but the grade is lower, if you’re moving into higher grade, does that mean the veins are narrower and the mining cost is higher?
The mining costs are going to depend on the final mix. But they are narrower range, they are veins that are in the 1.5 meters or so. So they’re not as narrow as the ones that we had in Arcata that required us to do full conventional mining. So in this particular case, it’s going to depend more on the infill resource that we find to define the best way to mine. But I will say don’t look to be as expensive as those operating in Arcata but are not going to be like fully mechanized, 4, 5, 6 meters as the ones in Angela.
But I would say the total all-in sustaining cash cost of those ounces, they should be fairly competitive because, first of all, the development cost is going to be low and is an important component of the all-in sustaining cash cost because they are right there. Second, the grade is higher. And the — even if they cannot be highly mechanized, they can still be 1.5 meters, allows you to do many interesting things to achieve a very efficient production rate.
Okay, very clear. So yes, higher grades but similar all-in sustaining cost and economics.
That’s what we are targeting, yes.
Patrick Jones, JPMorgan. Just on the rehabilitation and the closure costs you’ve had at Sipan and Ares, could you just talk about — you obviously said there’s about — with the other net cost, it’s about $26 million or so last year. Should we be expecting that coming back down to that 10 million tonne or so level by, say, 2022, 2023? Just kind of a rough idea on that profile. And then just on Pallancata, if everything goes perfectly right and you get the resource that you see Q1 and Q2, what would you think as a blue-sky scenario for how much you’d end up spending more in the second half of the year?
Take the one on the…
Yes. On Sipan, what I can tell you is that right now, we’re spending around $2 million per year. And with the plant that we are planning on implementing, the idea is to bring that cost down hopefully all the way down to close to $1 million per year until we have a final closure. So it will be a significant improvement. We’ve done the studies. We believe that, that could work. So we’re going to be implementing that this year.
And [indiscernible] — in the past, when we’re developing Pablo, for instance, we still have CapEx at around $20-something million, $25 million, $30 million per year. So if we were to find areas that are interesting and we need to access and develop them, this could be a good indicator. But again, it’s going to be highly dependent on where it’s find and what we find. So it’s hard to say that yet. But I mean probably, we’re going to have by — in six months, a much clear answer on that front. Any additional questions? Anything from the web services?
[Operator Instructions] There are no questions from the telephone at this time.
Okay. Thank you very much. Should you have any further questions, please feel free to contact Charlie directly, we’re here also, so happy to talk. And thank you very much again for your time.