Tahoe Resources' (TAHO) CEO Kevin McArthur on Q1 2016 Resulthttps://seekingalpha.com/article/3972913-tahoe-resources-taho-ceo-kevin-mcarthur-q1-2016-results-earnings-call-transcript?app=1&auth_param=pr64p:1bivs20:48845e17d1cdc7c629213bb441f146e6&uprof=45&dr=1 Tahoe Resources' (TAHO) CEO Kevin McArthur on Q1 2016 Results - Earnings Call Transcript Tahoe Resources, Inc. (NYSE:
TAHO)
Q1 2016 Earnings Conference Call
May 04, 2016 11:00 AM ET
Executives Mark Utting - Vice President-Investor Relations
Kevin McArthur - Chief Executive Officer and Executive Chair
Ron Clayton - President and Chief Operating Officer
Mark Sadler - Vice President and Chief Financial Officer
Tony Makuch - EVP and President of Canadian Operations
Edie Hofmeister - Vice President of Corporate Affairs
Charlie Muerhoff - Vice President of Technical Services
Analysts Geordie Mark - Haywood Securities
Tony Lesiak - Canaccord Genuity
Andrew Kaip - BMO
Mike Jalonen - Bank of America Merrill Lynch
Steve Parsons - National Bank Financial
Operator Thank you for standing by. This is the conference operator. Welcome to the Tahoe Resources Q1 2016 Financial Results Conference Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions].
I would now like to turn the conference over to Mark Utting, Vice President, Investor Relations of Tahoe Resources. Please go ahead.
Mark Utting Thanks very much operator. And welcome everybody to Tahoe Resources’ first quarter conference call. Management participating in the call today include Kevin McArthur, CEO and Executive Chair; Ron Clayton, President and COO; Mark Sadler, Vice President and Chief Financial Officer; Tony Makuch, Executive Vice President and President of Canadian Operations for Tahoe; and Edie Hofmeister, Vice President of Corporate Affairs. I will add there is, also a number of other members of the executive team with us today as well.
During the call, we would be discussing forward-looking information that involves unique risks concerning the business, operations and financial performance and condition of Tahoe. Use of the words forward-looking statements include, but are not limited to statements with respect to future metal prices, the estimation of mineral resources, the timing and amount of estimated future production, cost of production, capital expenditures and the cost and timing and development in new deposits.
Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause the actual results to be materially, be different from those expressed or implied in such forward-looking statements. Accordingly, you should not place undue reliance on forward-looking statements.
Our forward-looking statement, cautionary notes and technical disclosures are on SEDAR, as well as on our website. They are also included in our MD&A which along with the Q1 financial statements and press release are also available on the website and on SEDAR. And incidentally the web address for the company is
www.tahoeresources.com. Please feel free to reach out to us with any additional questions following the all. And there is no webcast or slide deck for today’s call.
I’d now like to turn the call over to CEO, and Executive Chair, Kevin McArthur.
Kevin McArthur Okay thanks, Mark and thanks everyone for attending this call. I have a few prepared remarks and then we’ll turn it over to Mark and then Ron to provide the details.
The first quarter of 2016 was one of the most important in our company’s history. Our financial results were very strong and production levels were in-line with our expectations. Our unit costs were much better than our target ranges for the year.
And we generated operating cash flow of $69 million or $0.30 per share and achieved net earnings of about $38 million or $0.17 per share. And we also continued to return capital to shareholders and closed $14 million through our monthly dividend.
Apart from our strong results, the importance of the first quarter has a lot to do with two key developments that will support our future growth and success. First; during the quarter we continued to make excellent progress at Shahuindo mine is Peru. In fact, I’m pleased to report that we have achieved commercial production for Phase 1 on schedule effective May 1, 2016.
Our development team at Shahuindo has done an excellent job and we expect to make continued progress as we work towards increasing our gold production to improve to approximately 300,000 ounces per year over the next couple of years.
As you all know, during the first quarter we announced an agreement to merge with Lake Shore Gold Corp. that transaction was completed on April 1. The acquisition of Lake Shore is a major development for our company. Through the deal we have gained about 170,000 to 180,000 ounces of low-cost annual gold production in one of the world’s great gold mining camps Timmins, Ontario.
And we’ve also gained a pipeline of projects and exploration projects that will support significant growth in both production and mine life between now and 2020.
With the addition of Lake Shore Gold and the advancement of Shahuindo, we are on track to increase our gold production from 174,000 ounces last year to over 550,000 ounces by 2020. That will involve increasing production by 40% to more than 250,000 ounces in Canada and to about 300,000 ounces in Peru.
Yesterday, we took the first step towards growing production in Canada. Our board approved a new project to re-commission and deepen the historic shaft at the Bell Creek mine in Timmins. I’ll have Ron get into the details on that. However, it is a project that will double-production at Bell Creek mine and will add significant mine life. It should also lead to lower unit cost which will support increased cash flows.
Our board also approved plans to increase the exploration program in Timmins this year with total exploration drilling now expected to exceed 200,000 meters. We have lots of attractive targets in Timmins and we’re not going to be shy about moving projects forward.
Looking ahead, Tahoe today is a company with one of the strongest balance sheets in the industry. It is operating at one of the world’s largest and lowest cost silver mines and that has a growing business in low-cost gold production with operations both in Peru and Canada.
And to talk more about our strong financial position and performance, I’ll now turn over to our Chief Financial Officer, Mark Sadler.
Mark Sadler Thanks Kevin, and good morning. As Kevin mentioned, Tahoe was a company with a strong balance sheet and the numbers that I’m going to review are as of March 31, 2016 and does not include the impact of Lake Shore Gold.
At March 31, 2016, cash and equivalents saw $90.8 million and working capital was $83.8 million. Total debt at quarter-end was $35 million and we have $12.8 million in lease obligations. Our net cash division at quarter-end is $42 million.
The outstanding term debt of $35 million is related to the loan acquired as part of the Rio Alto transaction just over a year ago. On April 8, this year, we completed the restructuring of this debt, replacing it with an additional $35 million credit facility. And the facility currently bears interest at LIBOR plus 2.25% and matures on April 9, 2018.
We also have our $150 million revolving credit facility. We have not drawn on this facility and that continues to provide us with significant additional liquidity.
Kevin discussed the low-cost production and growth potential we have, we’ve now added through the Lake Shore acquisition. We’ve also added considerable cash for our balance sheet on a pro forma basis including Lake Shore, cash and equivalents at April 1, 2016, so, $161 million while net cash was $97 million.
In the net cash calculation, Lake Shore convertible debentures were considered as equity. As it was announced on April 1, we’re in the process of redeeming the debentures with the conversion to be completed by May 16.
Turning to our Q1 results, revenue in the first quarter of 2016 totaled $132 million, an increase of 55% over the $85 million recognized in the first quarter of 2015. The addition of our approving gold operation through the acquisition of Rio Alto last April accounts for that increase in revenue.
Sales during the first quarter of 2016 consisted of 4.6 million ounces of silver, 50,598 ounces of gold, 2,386 tons of lead and 3,336 tons of zinc. The company realized prices of $15.92 per ounce of silver sold in concentrate, $1,166 per ounce of gold sold in dore, $1,590 per ton of lead and $1,875 per ton of zinc.
Our unit cost continued to be very good. Total cash cost net of byproducts averaged $4.51 per ounce of silver and $638 per ounce of gold. These averages compared favorably to our target ranges of $7.50 to $8.50 per ounce of silver and $675 to $725 per ounce of gold.
In addition to strong operating performance, the low silver cash cost also reflected royalty expenses of $900,000 during the quarter. Our Guatemala operation does not incur voluntary royalties when the silver price on finalized sales drops below $16 per ounce as we experienced during this year.
All-in sustaining cost for the quarter net of byproduct credits averaged $6.15 per ounce of silver, and $825 per ounce of gold. Both results were well below our target of $10 to $11 per ounce of silver and $950 to $1,000 per ounce of gold.
Mine operating earnings for the quarter totaled $54.6 million, a 21% increase from the $45 million recognized in the first quarter of last year.
As Kevin mentioned, we recorded cash flow from operating activities before changes in working capital was $69 million or $0.30 per share. Net earnings for the quarter were just under $38 million or $0.17 per share and adjusted net earnings were similar totaling $35.5 million or $0.16 per share.
As our numbers illustrate, we’ve entered the second quarter with strong financial position and with results that position us well against our key targets for 2016.
And with that, I’ll now turn the call over to President and Chief Operating Officer Ron Clayton.
Ron Clayton Thanks Mark, and I’d like to offer my welcome to those of you who have been able to join the call today. I’ll start with Escobal production results and results from our operations.
Escobal averaged little over 4,260 tons a day throughput rate at 524 gm per ton silver grade, mine produced 5.7 million ounces of silver, 3,298 ounces of gold, little over 2,700 tons of lead and little over 4,200 tons of zinc, all in concentrates.
Silver recovered in concentrates was 87.1% which is up a little bit and better than our target. So the guys are doing a nice job there of improving the recoveries.
Concentrate sales in the first quarter were 4.6 million ounces of silver, which generated $78 million in revenues at mine operating costs of about $46.5 million, which gave us a little over - almost $32 million in mine operating earnings.
Underground ramp and sub-level development continued on schedule during the quarter with little over 1,800 almost 1,900 meters of development being completed. Mining during the quarter was concentrated in Central zone but we actually started mining our first stopes in the East zone. We’ve had development rock out of there earlier in the year and late last year, stope mining actually started in April, so that’s another great milestone at Escobal.
The new paste backfill plant was commissioned in the first quarter and it’s fully operational. Installation of paste delivery lines in the East zone was completed, and we actually began testing those and things are operating just fine, that’s why we are able to start production in April for the stopes.
In terms of exploration, development of an underground access to establish some drill platforms and test targets in the Central and East zones was completed during the first quarter. And we began drilling actually in April, drilling deep below the junction between the Central and the East zones.
Moving on to the operations in Peru, La Arena had another very strong quarter. The team achieved the milestone of working over 3 million man hours without a loss time accident in the first quarter. The total, of 3.6 million tons of ores were placed on the pad at an average grade of 0.48 grams per ton. And we mined about the same amount of tonnes at a strip ratio of waste tonnes - at a strip ratio of 2.3 tonnes of waste per ore tonne mined. There are 46,576 gold ounces produced in dore and 46,143 sold during the first quarter.
Q1 2016 gold sales generated $54 million in revenues and mine operating costs just over $31 million resulting in $23 million of mine operating earnings.
Sustaining capital projects, in the first quarter of 2016 included planned extensions of the leach pads in the waste dump, at the end of the quarter, those projects remained on schedule to meet the 2016 production targets.
Exploration activity improved during Q1 including step-out drilling at the Shahuindo project, modeling of the La Arena sulfide project, remaining activities continued for planned drilling slated from second quarter of 2016 in both project areas.
In addition, surface explorations carried out on high priority regional targets surrounding La Arena and Shahuindo resource areas and we began drilling at our Eleazar [ph].
As you have heard an important milestone where our team improved occurred on May 1, with the phase 1 10,000 ton per day run-a-mine heap leach at Shahuindo achieving commercial production. We produced 7,590 ounces of gold at Shahuindo in the first quarter, which were pre-commercial production ounces.
In total 790,000 tons were placed on pad during the quarter and an average grade of 0.97 grams per ton. And the strip ratio was 0.92 tons of waste rock per tonne, were milled. Plans are underway for an expansion of the Shahuindo mine, the 36,000 tonnes per day by 2018. Current activities include continued exploration design to expand known mineralization areas, metallurgical optimization, planned engineering, design and permitting.
Bulk heap leach tests and geologic mapping conducted in 2016 have resulted in the conclusion that the deposit contains a higher percentage of siltstone than we originally estimated and that dump leaching of blended siltstone and sandstone ores will not achieve our acceptable metallurgical or geotechnical results for long-term operations.
Design, procurement, and construction of the crushing and agglomeration plant have begun and are expected to be completed in two phases between now and the end of second quarter of 2018. The first phase will have a capacity of 12,000 tonnes per day, and should be completed and operational in the first quarter of 2017. The additional 24,000 tonnes per day capacity scheduled to be installed between now and second quarter of 2018.
The estimated cost to complete the expansion of 36,000 tonnes per day remains in the range of $140 million to $160 million including the expansion capital spent during the first quarter of this year.
Compared to the feasibility study filed for Shahuindo in January of 2016, crushing and agglomeration are expected to begin one year earlier which will increase operating costs and recoveries in 2017. Minimal impact to the project economics is anticipated relative to the feasibility study.
On the political side, the first round of the presidential elections, were completed in Peru in April. Keiko Fujimori and Pedro Pablo Kuczynski, referred to as PPK were the two successful candidates. It’s our understanding that polling has the candidates in a relatively close race for the June final election, both candidates are pro-business and we don’t anticipate any issues with either one of them.
Turning to Canada, I’ll reiterate what Kevin said earlier that we’re very excited about to have completed the acquisition of our Lake Shore division. It’s a major development for our company, one that will lead to significant growth down the road.
Lake Shore’s operating and financial results are being consolidated in Tahoe effective April 1, 2016. We’ve not waited long to get going on some of the Lake Shore’s attractive growth projects. Yesterday our board approved the project that deepened the existing historic shaft at Bell Creek. It’s almost 1,100 meters below the surface. The project will involve about $80 million of capital invested over the next two and half year period, and will lead the doubling of production at Bell Creek from 40,000 ounces currently to about 80,000 ounces annually.
The shaft, will also nearly double the mine life to 10 years from the current five-year plan. Finally, it will allow us to establish drill-platforms at depth which will support continued growth in both reserves and resources. There remains a lot of exploration potential at Bell Creek. And I should add that we have plans for additional phases of development that could see the shaft go even deeper.
Speaking of exploration drilling, Bell Creek is one of several attractive targets within the Lake Shore portfolio. We plan to aggressive with exploration drilling in Timmins. In fact yesterday, our board approved the plan to increase the number of exploration meters to be drilled this year.
Lake Shore had plans to drill about 125,000 meters, we are now targeting well over 200,000 meters of surface and underground exploration drilling. And that is an addition to the ongoing mine production drilling that is done at the Timmins West in Bell Creek.
In addition to Bell Creek, the key targets for the increased meters are the 144 trend and the Whitney and Gold River projects. And we completed the Lake Shore gold acquisition and at the beginning of April, we announced two key objectives for our new Canadian operations which we are targeting by 2020. The first is to increase production to over 250,000 ounces from the current 170,000 ounces to 180,000 ounces production range.
To increase reserves and resources by 2 million to 4 million ounces over the next two to four years is our second objective. These initiatives we have announced today are initial steps down the road to achieve both of these objectives. You can be certain that there will be more to come.
With that operator, I think we’re ready to take questions.
Question-and-Answer Session Operator [Operator Instructions]. Our first question today comes from Geordie Mark of Haywood Securities. Please go ahead.
Geordie Mark Yes, good morning. At Escobal, [technical difficulty] it will come down remaining three quarters? In terms of Shahuindo, just looking at [technical difficulty] about 67%, are you looking for that to ramp up throughout the year as you get more time on the pad? And what do you expect for grade to hold, is it holding around here or what’s your projection?
Kevin McArthur Okay, on the first one, the grade at Escobal will come down a little bit. I think our average grade in the plant here is about 480 grams and I don’t see any reason that we won’t, that’s where we will be. So you can see that you can expect the throughput will probably go up a little bit as the grade comes down over the course of the rest of the year.
From the recovery standpoint at Shahuindo that 67% number that we put in there is what we’re expecting now for ultimate recovery from run of mine leach material. And that’s based on recovery curves that we’re getting from actual results now. So, I don’t expect that recovery to increase during this first year. Once we get the crushing and agglomeration equipment in and begin running a 100% through crushing and agglomeration, we expect that number to go up above 80%.
At some point, we probably take a real hard look at reprocessing the material that, were run-a-mine leaching right now. But that’s down a down the road development.
Geordie Mark Great. And you expect rates to stay around 0.98 or?
Kevin McArthur Yes, and I think that’s good for the rest of the year.
Geordie Mark And maybe one quick follow-up on Canadian ops, in the forecast for expected headwind for the rest of the year?
Ron Clayton Our average grades for the year should be somewhere between 4 grams and 4.2 grams per tonne.
Geordie Mark Thank you very much. Cheers.
Kevin McArthur Thanks Geordie.
Operator The next question comes from Tony Lesiak of Canaccord Genuity. Please go ahead.
Tony Lesiak Hi, good morning. Couple of questions for Ron on Shahuindo. Do you see any material changes to the unit cost structure, recoveries that was envisioned in the feasibility study based on the new network?
Ron Clayton Only in these first two years Tony. And what it basically boils down to, is the material that we’re putting on the pad in 2016 is going to be peak at 67% recovery. In 2017 we’ll have, we should be able to jump that up to between 80% and 83%. But you’re also compared to the feasibility study going to see cost for crushing and agglomeration in 2017 that weren’t in the feasibility study. So, you’re going to kind of offset the cost with increased ounces produced. 2018 and beyond should be very similar to what we have in the feasibility study.
Tony Lesiak Okay. Can you see, basically see there is a bit of a wash then in terms of economics?
Ron Clayton I’m hoping that we get a little bit of positive out of 2017 that more than covers for the lost recovery in 2016. But I don’t know that I’d model it that way.
Tony Lesiak Okay. And then just looking at your balance sheet, I mean, obviously you’re in a very strong position. So I was somewhat surprised to see a pair-back the exploration, spend in Peru and Guatemala. I mean, you’ve got a lot of upside there. I mean, can you comment on that?
Ron Clayton Actually Tony, we haven’t heard back any spending anywhere. We just in our guidance, we had enough. We put up new guidance in what I think last quarter, but we knew we were entering into this with Lake Shore. So we had some gap in there to cover this. We’re not pairing back anywhere.
Tony Lesiak Okay. I’m not sure if Brian’s on the call. But is there, can you maybe provide some details on what the program could look like in Peru and Guatemala this year?
Brian Brodsky Yes, in Guatemala, like Ron mentioned, we’re doing the deep drilling at Escobal and the [indiscernible]. And that’s currently underway that should go for the remainder of the year. We’re looking to get some new concessions and we’re talking with the government, but that’s some of the regional work. And that possibly could happen later in the year but we do have a little bit of social work to do there.
In Peru, we’re actively drilling right now at Shahuindo. We expect our second drill there we’re drilling certain extensions to the pit north of Shahuindo. And we’re looking to drill some other targets like Lake Shore and others later in the year.
And at Eleazar which is a satellite to La Arena, we’re currently drilling. So, we’re pretty active there.
Kevin McArthur And Tony, I’d maybe even take one further step and say that if we have success in any of these areas, we’d likely start out in the discussion of putting more money in that area.
Tony Lesiak Okay, great to hear. Thanks.
Operator The next question comes from Andrew Kaip of BMO. Please go ahead.
Andrew Kaip Hi, good morning gentlemen and congratulations on good quarter. Just following up on some of the questions, first on Escobal. Can you give us a sense of how the grade profile is going to play out over the next couple of years, I mean, you are materially above reserve grade and I’m just, I’m looking for a little bit more visibility say beyond 2016 where you think the grade is going to gravitate to?
Kevin McArthur Andrew, I would just take you right back to the feasibility study that we put out which is, I mean, it’s got a similar grade profile of the two PAs that we put out before that. So, I mean, we’re going to make 20 million ounces a year out there for another, what five years, maybe six, seven and then it starts to drop off. But that profile that we put in the feasibility study is the profile that we seek.
Andrew Kaip Okay, all right.
Kevin McArthur I might add Andrew that the reconciliation of what we expect versus what we are mining has been positive, so, no surprises there.
Andrew Kaip Can you give us a sense of what kind of positive reconciliation you’re looking at, is it 5%?
Kevin McArthur Charlie.
Charlie Muerhoff Yes, Andrew, this Charlie Muerhoff. On both tonnes and grades, we just did a full reconciliation production to date, life of mine. And it’s like we’re plus 2% on the ounces and minus 2% on the tonnes. I mean, we’re in that range, that’s how close it is.
Andrew Kaip Okay. So, it’s reconciling quite well then?
Kevin McArthur It’s doing what it’s supposed to, yes, exactly.
Andrew Kaip Okay, great. And then, on La Arena, when can we expect to see an exploration update with some indication of what you’re finding at Eleazar?
Kevin McArthur Well, I wouldn’t expect anything soon, as the program that’s going to be going to the remainder of this year, and possibly in the next year and it’s one drill going slow. So permitting is what it is in Peru. So, it might take some time to get through our first 10 drill sites and then we have to start permitting the next stage.
Andrew Kaip All right, so it’s just…
Kevin McArthur Later in the year.
Andrew Kaip Okay. So, it’s really just an initial test and feel if the anomaly is there?
Kevin McArthur That’s correct.
Charlie Muerhoff And there are number of issues involved here also Andrew. I mean, if we make a significant discovery, of course we have a duty to report that. We also have to bear in mind that there are lot of surface rights issues that we’re going we’ll be dealing with over the future. So, you just may see us go quiet for a while also.
Andrew Kaip Okay. And then, presumably over next sort of this afternoon and tomorrow, you’ll give us some more of an indication on Bell Creek and the expansion and you’re indicating that production rates will double. But I guess what I’m trying to better understand is sort of the economic decision that the board made and if there are any additional details that you can provide on where costs will go at Bell Creek and what we should be expecting from the timing of ramping up of production rates?
Kevin McArthur Yes, as you know, at Bell Creek and any of the underground mines in the Abitibi, it’s very hard to justify economically a decision to go deeper because a lot of the resources that we are referring to are in the inferred category and drill holes at depth that continue the mineralization but we can’t into put into reserve category or resource category. So, we’re bound by 43101 issues.
But I can tell you that we’re targeting plus 15% rates of return. And I’ll just let it stand at that. There will be little more detail on the analyst session later this afternoon.
Andrew Kaip Okay, thanks very much Kevin.
Kevin McArthur Thanks.
Operator The next question comes from Mike Jalonen of Bank of America Merrill Lynch. Please go ahead.
Mike Jalonen Hi Kevin, and everyone. Kevin, just a question on your favorite topic, just wondering with two gold acquisitions now behind you, congrats to both, what’s your view on M&A going forward and would it, be gold or silver? Are you agnostic, to me it appears to be far more targets in gold versus silver? Thanks.
Kevin McArthur Yes, Mike, thanks. Well, first of all, we were very transparent two years ago that the next phase of the company was going to be M&A. And we wanted to generate some geographic and multiple mine diversity. And I think by and large that work is done. We’re now in a roll of delivering on what we have now acquired and are discovering.
And so this is now using our balance sheet to develop growth in the company. That’s not to say that we don’t look. I mean, as you know in this business, we have to kiss a lot of frogs before princess appears. And we will continue to do that work but it’s much less of our focus now. This is now integration and delivery. And I think we’ve timed that right with the cycle of the market.
We are yes, agnostic on the gold silver ratio. We love to find another silver mine, I hope we discover one right next door at Escobal because we have expandability at Escobal to grow production.
Any of our focus will be in the Americas because we like that North-South strategy. I think I’ve answered about all, of that Mike, thank you.
Mike Jalonen Okay, thank you.
Kevin McArthur You bet.
Operator The next question comes from Steve Parsons of National Bank Financial. Please go ahead.
Steve Parsons Yes, good morning gentlemen. Couple of questions, just first on Escobal again. Maybe Ron, could you, you talked a bit about the developments in East zone, the developments there being significant milestone for the mine. Could you talk a bit about this and maybe what you are hoping to get out of East zone in terms of some mine flexibility in grades?
Ron Clayton Well, the biggest thing I think is it gives us some additional flexibility. And also we’ve got three mining firms up and running. That’s one. It’s about 40% of the total resource. So we’re about in the timeframe where we need to get that part of the ore body developed towards the life of mine production.
The paste bill - getting paste bill out there was always a little bit of a question mark from the standpoint of would we have to put booster pumps and things like that out there and I think we’ve gotten a cross that bridge now. We’re reasonably sure that that’s a down the road kind of issue which is what we originally intended but wanted to test.
So, the other thing about the East zone is it has some pluses and minuses to it and that from a mining standpoint, the ground stability is much better particularly up in the elevations that we’ll be working for the next, three, four, five years. It stands up more vertical. So the mining costs are going to be a little bit lower. But the flipside of that coin is, is it’s a little bit harder. So we’re going to be doing a little bit more regrinding in the middle, so the cost is going to up little bit narrower. For the grades, pretty much on track with what we’re seeing now.
Steve Parsons And when you break into the East zone or get more stopes in the East zone, do you sort of expect the same quarterly grade fluctuations as you see, seen last year?
Ron Clayton Yes, we do because that’s just the nature of the ore body. And I wouldn’t say that the East zone is anymore or any less variable than the rest of the ore body.
Steve Parsons Okay, okay. And over to Bell Creek, again, what just - maybe what sort of level of engineering have you completed on the shaft deepening. Was this sort of an internal study PA, pre-fees, what sort of degree of confidence do you have in the estimates or degree of accuracy in the estimates?
Tony Makuch Hi, Tony Makuch here. We actually spent the last year doing a lot of engineering. I mean, we did outside - services outside shaft sinking the company. And we did a lot of mechanical engineering. But the level of engineering with those stopes, probably it did to as 15% level of the engineering completed. We’ve done some further work capture, we’ve actually got some tenders that we’ve done on the work.
Ron Clayton So, it’s pretty high quality and got internal and external numbers in it that we’re pretty confident now.
Steve Parsons Perfect, okay.
Kevin McArthur Let me add, our approximately $80 million CapEx includes 25% contingency.
Steve Parsons Good to know, okay, thanks gentlemen. Cheers.
Kevin McArthur Thanks Steve.
Operator There are no more questions at this time. I’ll now hand the call back over to Kevin McArthur for closing comments.
Kevin McArthur Thanks operator. And thank you everyone for the questions and we look forward to seeing analysts in our meeting this afternoon.
I just wanted to close with a couple of key messages. First of all, our operations are performing very well. With silver production on track to total around 20 million ounces for the year and gold production targeted at 370,000 to 430,000 ounces in 2016. Our cash costs and all-in sustaining costs are averaging well below our target ranges. But we don’t feel comfortable re-guiding it this time.
We have one of the strongest balance sheets amongst our peers, one, that allows us to both, invest or grow and to reward our shareholders through an industry-leading dividend. So we’re very proud of that.
And with the achievement of commercial production at Shahuindo and with the merger with Lake Shore Gold, we’re now positioned for strong growth and performance well under the future, so some exciting future indeed. Thanks everyone for attending this call. And operator we can now disconnect.
Operator Thank you. This concludes today’s conference call. You may now disconnect your lines. Thank you for participating. And have a pleasant day.