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Coeur Mining Inc (CDE) Q4 2018 Earnings Conference Call Transcript

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Coeur Mining Inc  (NYSE: CDE)
Q4 2018 Earnings Conference Call
Feb. 21, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Coeur Mining Fourth Quarter 2018 Financial Results Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Paul DePartout, Director of Investor Relations. Please go ahead.

Paul DePartout -- Director of Investor Relations

Thank you, and good morning. Welcome to Coeur Mining's fourth quarter and full year 2018 earnings conference call. Our results were released after yesterday's market close, and a copy of the press release and slides for today's call are available on our website. I would like to remind everyone that our press release and some of the comments today include forward-looking statements from which actual results may differ. Please review the cautionary statements included in our press release and presentation as well as risk factors described in our 2018 10-K.

Now, I'll turn it over to Mitch.

Mitchell J. Krebs -- President and Chief Executive Officer

Thanks, Paul, and good morning. Thank you everyone for joining. Before we get started, I'd like to introduce two colleagues here with me, first is Tom Whelan, our new CFO who joined us last month. Tom will walk through the financial highlights and provide some detail on working capital and on capital allocation. He will also highlight some modifications to our guidance framework and how we plan to report our results going forward. Also with me here is Terry Smith, who recently took over as Senior Vice President of Operations, after having served as our Vice President of North American Operations for the past five years. Terry will provide some operating detail in a few minutes.

In summary, the fourth quarter reflected strong performance at Palmarejo, Rochester and Kensington, Wharf had a weaker than expected quarter, but has since bounced back strongly so far here in 2019. Meanwhile, the ramp up of the Silvertip mine in British Columbia continues. Progress has been slower than anticipated, but mill availability continues to improve each month and we remain enthusiastic about our newest operation there.

Overall, I was pleased with the progress we made last year in delivering on our strategy of discovering, developing and operating a balanced portfolio of high-quality North American precious metals assets. We continued to upgrading our asset quality last year by successfully exiting Bolivia and starting-up a new higher margin operation in Canada. We added more high quality Nevada Gold and silver assets with our acquisition of Northern Empire in Southern Nevada and with the package of assets located next to Rochester that we bought from Alio Gold. Those projects more than doubled Rochester's land position and provide additional future growth potential, where we can leverage Rochester's existing infrastructure.

Approximately two-thirds of our reserves are now located in the US and 100% of our production and cash flow now come from our platform of five North American operation. It's also worth noting that 59% of our revenue last year came from our US mines, and gold sales represented 69% of our total revenue with silver contributing 31%.

Our investment in exploration, which ranks among our most attractive capitals allocation priorities, successfully replaced production last year and led to a fourth consecutive year of reserve growth. Reserves Measured & Indicated Resources and Inferred Resources all increased last year. In the case of inferred resources, gold and silver ounces increased a 145% and 39% respectively, reflecting our growing pipeline of high-quality future growth opportunities. Similarly, our organic growth investments are beginning to pay-off. The initial HPGR unit is being installed at Rochester, which should start impacting silver recoveries in the second half of the year. This investment represents the first step toward a larger expansion in 2020 and 2021 to establish Rochester as a source of higher margin, long-term production and cash flow, and is expected to generate an attractive return.

At Kensington, we are now generating a return on our investment to access to a high-grade Jualin deposit with the first 10,500 ounces of gold produced during the fourth quarter. Jualin is expected to be a catalyst for what should be a very strong cash flow year at Kensington in 2019. Our investments into Palmarejo beginning four years ago, including the restructuring of the Franco-Nevada gold stream, the acquisition of Paramount Gold, development of two new higher-grade underground mines, sustained levels of near-mine exploration and numerous incremental optimization projects have resulted in substantial reserve growth, average grade nearly double 2014 levels, unit costs that are now over 40% lower and over $130 million in free cash flow generated in just the past two years.

And finally, although, Wharf had a weak fourth quarter, the acquisition continues to be a real winner for us. We paid $99 million for it in 2015, and have generated $136 million of free cash flow to-date. Wharf's reserves at the time of the acquisition were 560,000 ounces, after mining 450,000 ounces since that time, reserves now stand at 882,000 ounces.

Lastly, I want to call your attention to several slides starting on Slide 20, that highlight our best-in-class corporate governance and our proactive ESG programs and priorities. We maintain a one rating by ISS for our governance practices, including our Board's independence, refreshment efforts, diversity, executive and director ownership targets and incentive compensation design. Also, we have included materials summarizing our environmental stewardship related to water, into our support of local communities. In fact in 2018, we partnered with over 220 community organizations to help make a positive impact on people's lives in the communities, where we have a presence. As I've said before, these priorities are a key component of our strategy and central to who we are as a Company.

And with that, Terry will now provide some details on our operations.

Terry Smith -- Senior Vice President of Operations

Thanks, Mitch, and good morning everyone. Before diving into operations, I just want to reiterate Mitch's comments regarding cash flows. Our operations team is focused on generating sustainable high-quality cash flow and prioritizing quality over quantity. We invested in our mines and development assets to support this concept through success-based exploration, high return capital projects, as well as an emerging business improvement culture across the Company.

Looking at the fourth quarter Palmarejo, Rochester and Kensington all had strong finishes to the year. At Palmarejo, fourth quarter mill throughput increased as the team did an excellent job of making up for the 17 operating days that we lost in the third quarter by milling roughly 25% more ore. With increased throughput, Palmarejo delivered approximately $7.5 million in quarterly free cash flow, despite roughly 4,600 ounces of gold and 277,000 ounces of silver being impacted by the RMC bankruptcy.

In 2019, we will continue advancing underground development toward La Nacion, where we expect production will commence during the second half of the year. La Nacion's grades are similar to our reserve grades, but accessing this zone will facilitate higher throughput. Our mine plan anticipates La Nacion adding around 400 tons per day of additional mill feed once ramped up. We also anticipate a new secondary to come online in the third quarter, which is expected to increase recovery rates by about 2% for both gold and silver. This project with an estimated investment of $4.5 million and about a one year payback is a good example of the type of investments we prioritized according to our capital allocation framework.

At Rochester, we continue to see strong performance from both the Stage IV and Stage III leach pads. As a reminder, we commissioned the expansion of the Stage IV leach pad back in mid-2017. This strong performance has helped us deliver approximately $15 million of free cash flow in the quarter and $23 million for the full year. This year, the primary focus will be on upgrades to our crushing facilities, including an initial HPGR unit. These upgrades are expected to increase our crushing capacity, reduce operating costs, as well as improve timing and overall silver recoveries. The project is advancing on schedule with commissioning expected in the second quarter. Currently earthworks have been completed with steel erection under way, and we anticipate improved second half production because of all of these upgrades. We are excited to demonstrate what these improvements will mean for Rochester's long-term business performance.

Touching on Kensington briefly, we saw a great fourth quarter, largely due to high-grade ore from Jualin, where we declared commercial production on December 1st. We mined approximately 23,000 tons of development ore and 3,000 tons of stope ore from Jualin during the fourth quarter. This yielded nearly 10,500 ounces of gold at a grade of 0.4 ounce per ton, which is more than double the grade we mined from the Kensington Main deposits. I'd like to thank our team at Kensington for bringing Jualin online, and we look forward to delivering stronger results in the quarters ahead.

Switching over to Silvertip. As Mitch mentioned, the ramp-up has been slower than we originally anticipated, primarily due to mechanical issues leading to low availability. I'd like to offer some additional color on what we've been dealing with out there. First off, it's important to point out that the Silvertip mill was originally constructed as part of the Dana (inaudible) mine operated by Teck and Yukon in the early 1990s and moved to Silvertip in 2015.

Due to the age of the facility, the mill acts modern instrumentation and supplier support and parts have been proven challenging to find. In addition, several areas the facility were under designed or poorly installed requiring significant rework. We continue to enhance our workforce at Silvertip with a combination of high turnover, lack of training and a challenging mill facility have also been factors. Although our due diligence identified these issues, we were overly optimistic about the amount of time it would take to address them.

However, our strategy to improve mill performance is leading to upticks in availability and throughput, while making the plant simpler to operate. Most importantly, the underground mine is well developed and in good shape, and we think the potential to expand the reserves and resources is quite significant. Over the past year, our geologists have developed a good understanding of deposit and are excited to do some step out drilling this year. We are all looking forward to demonstrating Silvertip's value and developing it into one of our cornerstone assets.

Now, I'll hand it over to Tom, who will hit on a few financial points.

Thomas S. Whelan -- Senior Vice President and Chief Financial Officer

Thanks a lot, Terry, and good morning everybody. Really excited to be here on my first conference call with Coeur, super excited to join the team and also important for all of you to note I am a shareholder of Coeur, I bought some shares right after the announcement, so I'm excited to be -- have enough skin in the game.

Anyway, I'd like to start out with a few comments about our capital allocation strategy. We are continuously investing in our business to drive value. In addition to the two acquisitions Mitch outlined, we invested over $140 million of capital expenditures in 2018, including over $55 million in development capital across our five mines and various projects in North America.

The benefits of these investments includes maintaining and extending our mine lives as demonstrated via fourth year of growth in our overall reserves as we highlighted in yesterday's news release, de-risking our overall production profile at Silvertip on which we look forward to reporting progress throughout 2019, positioning Kensington for positive free cash flow to our investments in underground development, drilling and improved mining equipment. These efforts are expected to lead to higher grades, improved operating efficiencies and help identify several new high-grade exploration targets.

Finally, prioritizing capital to Palmarejo, which continues to prove itself with strong operating cash flow. With excess mill capacity, finding supplemental ore sources that can further improve profitability remains priority. We ended 2018 with approximately $230 million of liquidity, including $115 million of cash and coincidentally $115 million of revolver capacity. Overall, our cash position declined roughly $77 million from 2017, primarily due to lower cash flow from operating activities in 2018 and the investments that I mentioned earlier.

Let me add some color on these numbers. Our ability to generate cash is driven by our metal sales and the associated cost of production. On balance, we sold approximately the same amount of gold and silver ounces as we produced in 2018. With the exception of the material affected by the RMC bankruptcy. Operating cash flow from our five mines was $70 million during 2018 versus $260 million during 2017. Key drivers of the difference include lower top line revenue, primarily due to 15% fewer ounces of gold sold. Secondly, the timing of Mexican income and mining tax payments, which totaled $40 million in 2018, including $17 million associated with 2017 earnings. And finally, overall profit margin per unit sold decreased during 2018, largely due to higher cost at Silvertip, Wharf and to a lesser extent Kensington.

Also, I want to highlight a few items that impacted working capital, particularly in the fourth quarter. We saw unfavorable movements in our inventory, largely different by inventory writedowns at Silvertip, as well as the inventory build filled up at Wharf. The RMC bankruptcy resulted in approximately 6,500 ounces of gold and 400,000 ounces of silver not being sold. The cost associated with these ounces also impacted working capital. Before Mitch wraps up, I want to briefly cover our new reporting framework and high-level guidance figures for 2019. We are modifying how we will report production and cost to better reflect how we manage the business, while our exposure to silver remains important, our portfolio remains a much more balanced set of operating assets.

More importantly, our focus remains on cash flow. Starting in the first quarter, our site level costs will be reported on a co-product basis with the exception of Wharf, which will be done on a by-product basis given the small amount of silver production at that operation. Costs will be allocated based on the relative revenue contribution from each metal. We believe this revised disclosure will improve transparency. Our full 2019 production and cost guidance ranges are highlighted on Slide 19 of our corporate presentation and Page 12 of our earnings release. Given the HPGR project at Rochester and the ramp-up at Silvertip, we expect production to be skewed toward a heavier second half of the year. 45% in the first half, 55% in the second half for those of you eager to tweak your models.

Our CapEx guidance for 2019 ranges from $100 million to $120 million, 15% to 30% below our 2018 expenditures. We believe that this is the appropriate level of investment to continue executing on our overall strategy. We also want to stress our focus on maintaining our balance sheet liquidity and flexibility. We've done a great job improving our leverage profile over the past few years, but we'd like to continue to delever the balance sheet as we deliver overall financial performance.

With that, I'll hand it back to Mitch.

Mitchell J. Krebs -- President and Chief Executive Officer

Thanks, Tom. So just to quickly wrap up, I think the key takeaways from the fourth quarter in 2018 are that Rochester had an all-around solid year last year and exceptionally strong fourth quarter. And this year we're focused on installing that initial HPGR unit and expect to begin seeing the impact of that beginning mid-year.

Rochester finished -- sorry, Palmarejo finished the year strongly and is expected to continue generating strong free cash flow this year despite lower expected gold grades. Silvertip is slowly but steadily ramping up, we're executing a solid plan there designed to address the challenges and we still remain confident in the long-term value of this new and high-grade asset. Weaker than expected results at Wharf in the fourth quarter looked to be behind us with 2019 expected to be more like prior years. And finally, Kensington had that great fourth quarter led by Jualin, which we expect to lead to strong free cash flow here this year.

We are all intently focused on returning to positive free cash flow in 2019 and remain committed to allocating capital according to our framework that summarized on Slide 12. We'll continue to pursue a higher standard and remain focused on executing our strategy from our balanced North American platform of precious metals assets.

So with that, let's go ahead and open it up for questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Joseph Reagor of ROTH Capital Partners. Please go ahead.

Joseph Reagor -- ROTH Capital Partners -- Analyst

Good morning, guys, and thanks for taking my questions.

Mitchell J. Krebs -- President and Chief Executive Officer

Hi, Joe.

Joseph Reagor -- ROTH Capital Partners -- Analyst

Hi. So couple items, I guess, first one right off the bat. The guidance for this year felt a little more, I'll use the word conservative than last year. Is this an indication that with last year where the couple of mines that meet initial expectations that you guys are taking a revised approach to how you guide, as far as the production numbers go, or is there anything else we should read into that?

Mitchell J. Krebs -- President and Chief Executive Officer

I think you got it there, Joe. We're taking what we think is a realistic and prudent approach to setting our guidance achievable, but fairly realistic and might say conservative, but hopefully viable.

Joseph Reagor -- ROTH Capital Partners -- Analyst

Okay. And on the 45%, 55% split, is there anymore color you can give us there, as far as which mines will be the biggest drivers of that? I'm assuming Silvertip is one of them as it ramps up, but, other than that?

Mitchell J. Krebs -- President and Chief Executive Officer

Yeah, Silvertip, for the obvious reasons of the ramp up. And then Rochester with the -- everything going on there with the crusher upgrades going on in the first quarter. We'll see that then hopefully kick-in and lead to a stronger second half at Rochester. We also have that Nacion ramp-up at Palmarejo that will add a little bit more to the second half at Palmarejo than the first half.

Joseph Reagor -- ROTH Capital Partners -- Analyst

Okay. And then one final question, if I could. Tom mentioned balance sheet in trying to delever a little bit. Give any assets producing or the development stage that you consider non-core that could be used as a way to raise capital and repay some of the debt?

Mitchell J. Krebs -- President and Chief Executive Officer

It's a good question. We're always evaluating our portfolio. Everything is for sale at the right price. I think that's the prudent way to be thinking about it as a Management team of a public company. Our five operating assets are all solid contributors in terms of free cash flow and we've got good organic growth at all of those that we're excited about sort of crystallizing overtime. But if somebody wanted to come in and pay us for all that upfront, we'd always be open to anything. But there is -- other than we have some small equity positions that are probably more easily monetized than an operating asset, we've gone through a pretty thorough monetization of non-core assets year over the last two, three, four years. I think we've sold on an individual basis something like eight or 10 different interests and assets.

Joseph Reagor -- ROTH Capital Partners -- Analyst

Okay. Well, thanks for the color.

Mitchell J. Krebs -- President and Chief Executive Officer

Yeah. Thanks, Joe.

Operator

The next question is from Michael Dudas of Vertical Research Partners. Please go ahead.

Michael Dudas -- Vertical Research Partners -- Analyst

Thank, Mitch. Can you hear me OK?

Mitchell J. Krebs -- President and Chief Executive Officer

Yeah, we can hear you, Mike. Hi.

Michael Dudas -- Vertical Research Partners -- Analyst

(Technical Difficulty) question is, first I want to commend you guys on the presentation, your ESG discussion and the added details on the operations of mine, I think it's going to be very helpful going forward, and also the change in how you're reporting report out on your business.

Mitchell J. Krebs -- President and Chief Executive Officer

I appreciate that. Thanks.

Michael Dudas -- Vertical Research Partners -- Analyst

Cash flow -- I think free cash flows on the mines of most investors thinking about the company this year. Can you maybe discuss about timing of how the business is going to run this year? But certain things at the mines relative to offset some of the cost inflation or labor availability that Coeur is working on maybe a couple of examples of what you're doing at some of the operations to squeeze some of the cost out of that business?

Mitchell J. Krebs -- President and Chief Executive Officer

Yeah, I'll give you a couple of examples, which come to my mind (Technical Difficulty) so feel free to chime in. Probably one of the biggest swing factors in 2018 versus 2019 is the Kensington business. If you look at capital expenditures, down about in half on last year, and that's really a reflection of the heavy investment that we've been putting in there to gain access to some of this higher grade material. So even though you see in the cost guidance at Kensington a number that might not sort of sink-up with what expectations might be.

From a cash flow standpoint, Kensington is pretty well setup now to go from what was a negative cash flow year last year to a healthy free cash flow this year, so that's largely a grade story. The other example that comes up is just Wharf, there is -- probably for the first time, certainly in our time of owning Wharf, there was a clear hiccup there in the fourth quarter, and that dragged down Wharf's results for the full year, that is something we don't anticipate having happened again here in 2019. And so that's going to be a real big swing in terms of not only ounces of gold production, but free cash flow as well.

Obviously, Silvertip as that scales-up, will be probably the largest swing between last year and being a consumer of cash and as we continue to ramp-up there, having that flip over, so that's good growth that lies ahead there. Terry, did I leave any, I hit, about all the mine.

Terry Smith -- Senior Vice President of Operations

Yeah, I've mentioned Palmarejo earlier, we're always trying for fall for free cash flow at the operations. So we're ramping-up throughput in the second half of the year at Palmarejo to sell for that and maximize free cash flow. And at Rochester, really the HPGR crusher and upgrades to the ex-pit that we're doing will drop our operating costs, increase recoveries, increase timing of recoveries. So it's like a magical free cash flow project that we're pretty excited about. So that'll give us some really good free cash flow results out of Rochester in the second half of the year.

Mitchell J. Krebs -- President and Chief Executive Officer

Good point. Does that give you some good color, Mike.

Michael Dudas -- Vertical Research Partners -- Analyst

Yeah, it does, Mitch. Thank you. What are you looking for this year out of your work at Sterling and Crown that you guys get better handle on the deposits and the opportunities there? And what should we anticipate and look forward to in positive data from that?

Mitchell J. Krebs -- President and Chief Executive Officer

Yeah, I'll hit on that and Hans is actually calling in from Leno. He'd just been down there at Sterling and Crown earlier this week. So Hans, feel free to chime in. But Mike, the big -- two big things there worth mentioning, we'll spend combined about $5 million this year in exploration, that'll be split roughly in half between the two. Sterling kind of getting the first attention, Crown then in the second half of the year with us focusing initially there at Crown that on the S&A deposit initially.

Both programs, both at Sterling and at Crown are really geared toward resource expansion. The other key point I think to think about there is these need to fit into an overall sequence in the portfolio that work for us, for our cash flow timing, for our organization. And so while Sterling probably could be put into production quickly for probably a modest amount of capital, what we envision there is something that could be larger based on additional time to drill and expand that resource.

For us right now, the initial focus is Rochester, we get Rochester in this next expansion in 2020, 2021 behind this, and we see the free cash flow from that. Then these two new deposits down in Southern Nevada, first probably Sterling, and then later Crown. Then those could become sort of in the development pipeline mix and that would fit well with our company and overall kind of cash flow timing. So that's a little bit on what we expect to be doing there in the near-term and how we think about it sliding into the overall portfolio and sequencing. Hans, Is there anything you'd like to add to that?

Hans Rasmussen -- Senior Vice President, Exploration

Yeah, Hey, Mike. The focus obviously, is resource growth, shallow (Technical Difficulty) we want to lower the strip ratio, it's a good high-grade oxide system there. So we're focused on heap-leachable oxide gold for foreseeable future. We started out with one rig, we basically inherited Northern Empire's path and operation. And moving forward, you'll see us ramp-up slowly as we get the geologic model figured out and the targeting figured out.

So by second quarter, we'll have two rigs and eventually we'll get to 24-hour shifts and things like that. So the data will be rolling it much faster later in the year than it is now. That gives our geologists a chance to get ahead of the rigs (Technical Difficulty). The Crown area I look at as the biggest growth story there, where Sterling will be the initial cash flow generator. So the Crown area has potential to really grow as evidenced by our neighbor Corvus and all their drilling.

Michael Dudas -- Vertical Research Partners -- Analyst

I appreciate those comments. Thank you. My final question would be, Mitch. As you (Technical Difficulty) 2019, that kind of get to -- get the Silvertip up and get company's more normalized level. Is there capital intensity of the business as you look going forward? And then I want to get guidance on '20 and '21, but is it -- do you feel there is a chance to have it more reduced on the development capital side as prices improve, you can really drive that cash flow, as we exit 2019 and beyond?

Mitchell J. Krebs -- President and Chief Executive Officer

Yeah, that's exactly (Technical Difficulty) how we're thinking about it, Mike, is -- we've got the capital that we'll need to go into Rochester to realize the significant impact of this next expansion, where we'll -- new leach pad, expanded crusher, that is the next kind of hump in terms of CapEx that's mostly 2021 capital. But by then, you look at what everything else inside the company, and you've got Silvertip and steady state, you've got Kensington continuing to have this nice balance between the Kensington Main, and then these higher-grade ore sources. You've got Palmarejo continuing to do what it's doing, you got Wharf continuing to be a cash flow machine for us. Then once you get on the backside of that Rochester expansion and you see the cash flow from that thing. There is really a nice attractive looking cash flow profile sitting out there beyond that year.

Michael Dudas -- Vertical Research Partners -- Analyst

Okay, folks. Thank you.

Mitchell J. Krebs -- President and Chief Executive Officer

Thanks.

Operator

(Operator Instructions) The next question is from Mark Reichman of Noble Capital Partners. Please go head.

Mark Reichman -- Noble Capital Partner -- Analyst

Good morning. Given the expected growth in zinc and lead production at Silvertip. The projected cost applicable to sales at least for lead and zinc at the high-end don't seem very competitive, given where current prices are today. And so I was just wondering, when you think about the cost at Silvertip, are there some ways to get those costs down? Or what's it going to take to get at the low-end of your cost guidance? I mean is it, I know you're shooting for the 1,100 tons per day. But then there were also those four key areas that I think you were focusing on to try to get those costs down.

Mitchell J. Krebs -- President and Chief Executive Officer

Yeah, a good question. And something we gave a lot of time and thought here too. I'm going to let Terry start and then Tom chime in on anything that you would like to add, Terry?

Terry Smith -- Senior Vice President of Operations

Yeah. Thanks, Mitch. So at Silvertip really what we're trying to do initially is stabilize the operation and then we can look at optimizing the operation in the later part of the year. And that's when we'll attack operating costs, right now, it's a pretty inefficient operation. We have a mill that requires a lot of labor to operate it. We have an underground mine that still has a lot of manual activities going on. So I could see us reducing the amount of labor, we need to operate that place and that'll result in some operating costs rolling-off. We have a lot of contractors, we're using to support the operation at the moment and some of those costs will roll-off.

So it's still quite early as far as the genesis of Silvertip is concerned and I think once we get into that optimization phase, we'll be well prepared to make Silvertip very competitive in the base metal space.

Thomas S. Whelan -- Senior Vice President and Chief Financial Officer

Yeah, and Mark it's Tom Whelan here. A couple other comments I would talk about is, in the base metal business, you're only halfway home once Terry produces the wet concentrate of lead and zinc for us to sell. And I'm actually pretty excited about once we get to a stable state of finding some ways to reduce our cost even further around finding happy homes for this concentrate. So there is opportunities on the supply chain, on shipping, all of those areas sort of post the mine, where I think there is some opportunities to find further cost savings.

So again, I know that the guidance is conservative here for 2018. But again, we think that's prudent at this stage, but absolutely stabilized and then optimize on all our whiteboards in our office here at -- in Chicago.

Mark Reichman -- Noble Capital Partner -- Analyst

Okay. And then the second question, at the high-end Rochester's 2019 production guidance is pretty much roughly flat with '18. And you've got the HPGR unit that will go into effect, that should benefit the second half of the year. So I was just wondering, when you talked about that 45%, 55% split companywide, how would you address that just for Rochester?

Mitchell J. Krebs -- President and Chief Executive Officer

Good question. The one thing I'll say about Rochester then Terry, I'll turn it over to you is, our guidance, our thought process around Rochester's guidance is -- we're going to have a lot of new information in terms of how does this HPGR unit impact OpEx for example, just how quickly can we expect to see or will we see impacts on the silver recoveries. And so we -- hopefully, that will provide us with some ways of beating our guidance both on the production and on the cost side, as far as the split between first half, second half, Terry, do you have ...

Terry Smith -- Senior Vice President of Operations

Yeah. So production will be stronger in the second half as we've been sort of guiding over the morning here. And obviously as we get this unit in. leading to higher recoveries, that timing is in the second quarter, that will facilitate an improved production profile in Q3 and Q4, from -- were you looking for specifics around capital, like our split in capital?

Mark Reichman -- Noble Capital Partner -- Analyst

Well, no, what I was trying to address is that the high-end of your guidance, it's pretty much flat with '18 production, OK. So I guess what I'm looking at is you've got the benefit of the high pressure grinding roll in the second half. I understand that the second half supposed to be up a little bit. But I mean, should we imply kind of a weak first half, just given the fact that you're getting all that squared away weaker than say what maybe we saw in some of the quarters in '18? And then a really robust second half or I was just trying to kind of get the magnitude in the difference between the first half, second half.

Terry Smith -- Senior Vice President of Operations

Yeah. So just going back a little bit, we shut down one of our two crushing plants last year, so our -- the tons we placed at our leach pad there has gone down. And really won't return back to strong levels until after this upgrade has been completed. So we will go through a low here in the first half of the year in terms of overall production. So we are seeing a pretty strong second half to the year.

Mark Reichman -- Noble Capital Partner -- Analyst

Okay. And then, I think I understand the increases and decreases in capital spending at each mine versus '18 with maybe the exception of Palmarejo. And so, I was just wondering is the increase there due mainly to the underground development at the Nacion deposit?

Mitchell J. Krebs -- President and Chief Executive Officer

Yeah, you've got it there, Mark. I think last year our total capital was right at $30 million, this year guidance is $40 million to $45 million. And I think Nacion is about $10 million associated with that. So, so much of what we have at CapEx -- have in CapEx at Palmarejo is underground development. And I think that's $25 million or so, it's just Independencia and Guadalupe, and then you add in the additional capital required to get Nacion up and going and that gets you right into the guidance range for 2019.

Mark Reichman -- Noble Capital Partner -- Analyst

Great. Thank you very much.

Mitchell J. Krebs -- President and Chief Executive Officer

Yeah, thanks.

Operator

The next question comes from Brian MacArthur of Raymond James. Please go ahead.

Brian MacArthur -- Raymond James -- Analyst

Hi, good morning. I have a few questions, and they mostly focus on Silvertip. So just one of the other comments was made earlier about efficiently placing concentrate going forward, once you get up and running. Are you -- because it's been slower than expected, was that comp stuff committed so that you've had penalties in the fourth quarter and the first quarter by not delivering stuffs into contracts? Or is it sort of still open contracts where they're just like no penalties involved and you just ship it as you get it now?

Thomas S. Whelan -- Senior Vice President and Chief Financial Officer

Yeah. Hi, Brian, it's Tom Whelan. So when we bought Silvertip, we inherited long-term off-take agreements. And we have not been able to deliver into those off-take agreements because they anticipated much higher concentrate grades. So we've been working with the off-taker to find happy homes for this. And I wouldn't say we're incurring penalties per se, we're just having to pay it may be a teeny bit more than benchmark terms, just because of the lower quality of concentrate grades that we've had.

So no penalties, I would -- for purposes of 2019, Terry and the team at Silvertip, again music to my ears is seeing those concentrate grades go up. And so we should be able to -- we may be able to deliver into this contract, we'll wait and see, but certainly, we'll be achieving benchmark terms at versed in 2019.

Brian MacArthur -- Raymond James -- Analyst

Great. Okay, that's very helpful. Just tired, I got to be honest, the accounting for Silvertip in the fourth quarter is a bit hard to follow at the end the day, exactly what's going on there? So, second thing then just as far as other cash flow this year, so technically, when you get to a 1,000 tons, you still have to make the $25 million payment, right for back to the JDS?

Mitchell J. Krebs -- President and Chief Executive Officer

Yeah, tied to the receipt of that permit and that's $25 million, 25% in shares, 75% in cash. And I think that's due 15 days after receipt of that permit.

Brian MacArthur -- Raymond James -- Analyst

So it's not like it has to be sustained, it's just purely a permit thing, it's not even if you can sustain it at a 1,000 tons, right, you pay it at the time you get the permit, there's no like ramp-up or execution time period that you have to hit or anything it's purely a permit related thing.

Mitchell J. Krebs -- President and Chief Executive Officer

Exactly, yeah.

Brian MacArthur -- Raymond James -- Analyst

Okay. Second thing then, you also -- do you still get the -- and I apologize if I mispronounce that the Manquiri note receivable, I think was coming in, in the third quarter of this year, is that still right?

Mitchell J. Krebs -- President and Chief Executive Officer

That's right.

Brian MacArthur -- Raymond James -- Analyst

For the Bolivian transaction.

Mitchell J. Krebs -- President and Chief Executive Officer

That's right, yeah, there are two things still sort of that lie ahead there. One is the repayment of the remaining balance of the note, which I believe is $6 million -- $10 million, I think it $6 million, and then there's an NSR that's attached to the mill there, and that will start kicking-in, I think it's in September, so we're entitled to stream of cash flow out of that I think 2.5% NSR. But the last biggest chunk is that remaining note balance.

Brian MacArthur -- Raymond James -- Analyst

Right. And then I guess the third component of what I would call is, I mean if I read the financials right, I think both these, the receivable and the payout are in the current assets and liabilities, which makes sense for me so that the net cash come out. The final payment though on the Silvertip deal based on reserves, which I think is done at the end of December 31st this year, right? Is that -- the question I have here is really is that on the balance sheet anywhere? It didn't look like it was in current assets and current liabilities, but it may be in these other long-term liabilities, which -- there is no sub-note to.

Mitchell J. Krebs -- President and Chief Executive Officer

Correct. Yeah, you got it Ryan, it's in other long-term liabilities. And when we acquired -- when we made the acquisition, we set up the liability for the full $25 billion because that's our expectation that we'll owe it. And we're just slowly -- so I'm pointing out account here we had to discount it at the time we acquired it, and we're slowly accreting it up to that $25 million at December 31. So actually -- again astute observation it'll move to current -- as part of our Q1 results.

Brian MacArthur -- Raymond James -- Analyst

But then, you may not actually pay the $25 million depending on what happened, right? So then it may go back -- that's the maximum, so you fully accrued for the -- well, best case, worse case I guess whichever way you look at it.

Mitchell J. Krebs -- President and Chief Executive Officer

No, our best estimates again, and could go on about our confidence about the ore body, our best estimate is the full $25 million.

Brian MacArthur -- Raymond James -- Analyst

Great, thank you. That was just helping with the other, I'm just trying to get the other inflows and outflows this year. Thanks very much. That's very helpful.

Mitchell J. Krebs -- President and Chief Executive Officer

Yeah, sure. No problem, Brian. Thanks.

Operator

There are no other questions at this time, this concludes our question-and-answer session. I would like to turn the conference back over to Mitchell Krebs for closing remarks.

Mitchell J. Krebs -- President and Chief Executive Officer

Okay. Well, thanks. We appreciate everyone's time this morning. I know it's a busy day. We look forward to speaking with you again in the spring time to discuss our first quarter results. So thanks again, and have a good day.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 44 minutes

Call participants:

Paul DePartout -- Director of Investor Relations

Mitchell J. Krebs -- President and Chief Executive Officer

Terry Smith -- Senior Vice President of Operations

Thomas S. Whelan -- Senior Vice President and Chief Financial Officer

Joseph Reagor -- ROTH Capital Partners -- Analyst

Michael Dudas -- Vertical Research Partners -- Analyst

Hans Rasmussen -- Senior Vice President, Exploration

Mark Reichman -- Noble Capital Partner -- Analyst

Brian MacArthur -- Raymond James -- Analyst

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