Pan American Silver Corp Q3 FY2020 Earnings Call

Thank you all for joining us this morning. Before I turn the call over, I need to advise that certain statements made during this call today may contain forward-looking information, and actual results could differ from the conclusions or projections in that forward-looking information, which include, but are not limited to, statements with respect to the estimation of mineral reserves and resources, the timing and amount of estimated future production, cost of production, capital expenditures, future metal prices and the cost and timing of the development of new projects. For a complete discussion of the risks, uncertainties and factors, which may lead to actual financial results and performance being different from the estimates contained in the forward-looking statements, please refer to Yamana’s press release issued yesterday, announcing third quarter 2020 results as well as the management’s discussion and analysis for the same period and other regulatory filings in Canada and United States. I would like to remind everyone that this conference call is being recorded and will be available for replay today at 12:00 PM Eastern Time. Replay information and the presentation slides accompanying this conference call and webcast are available on Yamana’s website at yamana.com. I will now turn the call over to Mr. Daniel Racine, President and CEO.

Thank you, Melanie. Thank you all for joining us and welcome to our third quarter conference call. With me today is Jason LeBlanc, our CFO and Henry Marsden, our Senior VP of Exploration. Let me start by thanking again, all our employees, contractors, suppliers, and their families for their efforts keeping our operations safe in these difficult times. First, as always, let’s talk about our health, safety, environment, and corporate responsibility. Our total recordable injury frequency rate was 0.4, representing a 31% improvement. Our social license to operate index, which is based on surveys conducted on our host communities, continues to show an increase in trust across all our operations. Evidence indicates that our COVID-19 response and engagement is a significant contributor to the improvement. We have, as I said on the Q2 call, engaged closely with our host communities since the early stages of the pandemic to understand their needs and help them address those needs. We’ve provided various donations along with thousands of masks, gloves, and sanitizers, respirators, and other medical equipment and critical supplies. And we will continue to do everything we can to support our communities during this challenging period. During the quarter, the Jacobina mine was named one of the '10 Best Places to Work' in the programs of Bahia by The Great Place to Work Institute. The Canadian Malartic Mine received two awards. The first, the F.J. O’Connell Trophy for Quebec, from the Quebec Mining Association, recognized the operations for improvement in the operations and health and safety records compared to the industry average. The second was the Sustainable Development and Environment Award from the Val-d’Or Chamber of Commerce. We are proud of these recognitions, which tell us we are doing the right things in critical areas of our business, like health, safety, sustainability, environmental stewardship, and talent management. Turning now to the Q3 highlights. We delivered another strong quarter, both operationally and financially. We produced 201,772 ounces of gold during the quarter, supported by standout quarters from Jacobina, Canadian Malartic, El Peñón, and Minera Florida. Silver production was just above 3 million ounces due to an exceptionally strong performance from El Peñón. GEO production was 250,466 ounces, exceeding plans as a result of strong gold and silver production. Cash costs of $723 per GEO and all-in sustaining costs of $1,096 per GEO were in line with annual guidance. Sustaining capital increased during the quarter as expected after declining in Q2 while Cerro Moro and Canadian Malartic ramp up following temporary suspensions due to COVID-19-related restrictions. We expect Q4 to be our strongest production quarter of the year, and thus cost per ounce will decrease. Net earnings during the quarter were $55.6 million or $0.06 per share. Adjusted net earnings were $92.9 million or $0.10 per share. Cash flows from operating activities were $215 million and $237 million on an adjusted basis. Cash flows were at a multiple high and that includes higher production periods, where we owned operations that have since been sold or discontinued. Cash flows from operating activities before net change in working capital were $199 million or $221.1 million on an adjusted basis. Cash flow before dividends and debt repayment were $156.8 million. As of September 30, the company had cash and cash equivalents of $474.2 million, an increase of $149.4 million from the end of Q2. We have sufficient cash on hand and liquidity through our current balances and incoming cash flow to fully manage the business and pursue growth without having to borrow. This includes, but is not limited to, obligations related to the Jacobina plant expansions, development of the Odyssey underground project at Canadian Malartic, generative exploration, development of the integrated Agua Rica and Alumbrera project, and further balance sheet improvements, all while having excess funds to dedicate to possible other opportunities and dividend increases. Subsequent to the quarter, we have announced that we will be increasing our annual dividend by 50% to $10.50 per share effective in Q4. That is 425% higher than our dividend level just 18 months ago. Jason will talk more about our dividend and dividend policy during his remarks. Subsequent to the quarter, we also increased production guidance. Our GEO forecast for this year is now 915,000 ounces compared to the previous guidance of 890,000 ounces. This includes a 1% increase to our previous gold production forecast and a 6% increase to our previous silver forecast. Looking at our operations, Jacobina had another strong quarter with production just above 44,000 ounces. The higher production resulted from the mill, again, achieving a higher-than-planned steady state throughput of 6,800 tons per day. I’ll provide an update on the mines optimization project in a moment. At El Peñón, gold production was strong during Q3 while silver production greatly exceeded plans due to the processing of higher-grade silver ore. While silver grades are expected to normalize in Q4, we anticipate higher gold grades in the quarter due to increased underground production and lower stockpile reclaim as well as mining from higher grade gold sectors. Canadian Malartic posted strong production of 76,398 ounces of gold due to higher throughput and feed grade. Barnat produced 13,305 ounces of pre-commercial production gold during the quarter, and its successful ramp-up resulted in the Barnat deposit declaring commercial production on September 30. The Cerro Moro mine and processing plant are operating at full capacity as of September 30th, following temporary government restrictions related to COVID-19 and the subsequent ramp-up. The plant has now returned to its optimized 1,000 to 1,150 tons per day, which is expected to be maintained going forward. The transition to underground ore with higher grades is expected to continue in Q4 and drive substantially higher production and lower costs. Minera Florida continued to perform well with results driven by higher feed grades and increased process, largely due to continuing improvements in productivity with contributions from Pataguas and Don Leopoldo zones. Turning to our strategic development and project updates. At our Agua Rica project in Catamarca, Argentina, we continue to advance the integration of Agua Rica with Alumbrera and expect to complete the integration in Q4; after which, the integrated project would be managed as a combined operation. To reiterate our excitement for this project, this is a very unique opportunity we have in front of us. Agua Rica is one of the largest undeveloped copper-gold deposits in the world, and the integration with the existing Alumbrera mine creates a de-risked brownfield project, which reduces capital requirements and minimizes environmental footprints, remaining on track for our feasibility study results in 2021. As I mentioned, Q3 throughput at Jacobina averaged 6,800 tons per day. This was the second straight quarter that the mine achieved this milestone. While it’s well above the target rate of 6,500 tons per day that we set for Phase 1 of the Jacobina project, we identified opportunities to further optimize the results and recoveries achieved in Phase 1 with a modest investment. Work commenced in Q3 for the expansion of the gravity concentration circuit, with the objective of optimizing gold recovery at the higher throughput. Commissioning is scheduled for mid-2021. Considerable technical work, which supports the variability of the Phase 2 expansion, has already been completed. The company intends to advance the project following the completion of the feasibility study in mid-2021. The permitting process is also underway. Like mentioned before, the Phase 2 expansion will increase throughput to 8,500 tons per day and take the annual gold production to 230,000 ounces. At Canadian Malartic, construction of the surface infrastructure, offices, and the ramp portal to the underground project is well underway. With the ramp development into Odyssey and East Malartic scheduled to start in November. The exploration ramp will allow tighter definition drilling on the Odyssey, East Malartic, and East Gouldie from underground drill platforms and eventually be used for mining and haulage of ore from the upper zones. This will allow us to potentially produce from Odyssey South, providing higher-grade mill feed to complement the open pit production. The underground project, as you may have seen from our press release this week, is continuing to advance with excellent drill results reported from East Gouldie. We are very encouraged by the results and excited about the potential for this project. Our exploration team is doing an outstanding job; both at our existing operations and on our generative project, and Henry will talk more about this in a moment. As a complement to the advancement of these internal opportunities, we’ll evaluate the acquisition or investment in prospective exploration opportunities that align with our objectives for capital allocation and financial results, including jurisdiction, quality, geology and operational expertise. Such opportunities would meet minimum requirements to achieve mineral reserves and mineral resource inventories of at least 1.5 million ounces supporting a mine life of at least eight years at a 150,000 ounces per year production rate. Before handing off to Henry, I also want to highlight that on October 13, we began trading on the Main Market of the London Stock Exchange, adding another senior exchange for trading to our existing listing in Toronto and New York, and further expanding our public market profile. We’re excited to be entering this market and look forward to sharing our story in the UK and Europe and building relationships with the investment community there. And with that, I will turn it over to Henry to provide an update on exploration.

Thank you, Daniel. I’ll start with a high-level overview of our generative exploration program. We currently build large land positions in all the countries where we operate, and the generative program targets our most highly prospective areas. This includes both advanced and earlier stage projects wherever we see district scale potential. The key objective of the program is to add a new inferred mineral resource of at least 1.5 million ounces of gold within three years, where it would support the corporate objectives of a potential production platform that can produce 150,000 ounces per year. Given the pipeline we have, the quality projects, and the strong corporate commitment to organic growth, we do expect to be able to meet this objective. As Daniel mentioned, as an extension of the strategy, we also actively evaluate opportunities to acquire advanced stage exploration assets as long as they align with our corporate objectives. Now, I’ll move to a quick update on some of the key projects in the program. At Monument Bay, located in Manitoba, Canada, a drilling program to test the depth extension of high-grade shoots at Twin Lakes is ongoing, with one drill hole completed in the quarter and two further deep holes pending. There’s a 16,000 meter drill program planned for the winter as a first step in developing a high-grade potentially underground resource with this project. At Lavra Velha, which is an advanced exploration project located in Bahia, Brazil, drilling to date in 2020 focused on the Lavra Velha South and Southwest zones located immediately south of the established resource. Results are positive to date and we expect to add to the resource base of offside mineralization by year-end, with exploratory drilling continuing in Q4. The Jacobina Norte project is also located in Bahia state, just a few kilometers north of the Jacobina mine. This project covers 70 kilometers of favorable geology that extends north from the mine site. Given the prolific geological setting and good surface results, we expect this to become a flagship exploration project for the company. During the year, surface work has defined a 4.3 kilometers strike of mineralized rates at Barrocão, one of our high-priority targets. Exploratory drilling on this target was initiated in Q3 and will continue to the end of the year. Further surface exploration is also underway and we expect to generate additional drill targets as we explore the 70-kilometer extent of Yamana’s exploration concessions covering this favorable geological basis. Finally, in the general area of Borborema, located in Brazil’s Pernambuco state, drilling in Q3 extended the core massive sulfide zone that we discovered last year. We’ve extended the zone to the East, and we now see 800 meters of strike defined by drilling and the original surface discovery. Exploration will continue both on the known intercepts on the massive sulfide zone, but we’re also going to be testing other copper-gold soil anomalies in this large project to better define the size and nature of the asset. I now turn to our exploration programs at producing mine sites. As you may have seen, and as Daniel mentioned, we issued an exploration update on Wednesday for Canadian Malartic. Exploration in Q3 focused on infill drilling at East Gouldie, a recently discovered zone that we announced last year that significantly expanded the gold mineral resource space at Canadian Malartic. We completed 38,000 meters of drilling in Q3 at East Gouldie, and the results have confirmed the expected grades and width of the zone. We’re also seeing that the zone remains open both at depth and along strike. The positive results provided confidence to proceed with an exploration round and these results, as well as ongoing drilling to year-end, will be incorporated into a new resource model to form the basis for a PA that we expect to see completed in 2021. The higher-grade East Gouldie zone is expected to significantly improve the economics of the consolidated Canadian Malartic underground project, and these latest results represent a very significant step towards defining the project as a multi-million ounce deposit that would support a future long-life underground mine with a potential multi-hundred thousand ounce per year production platform. Moving to Jacobina, drilling was completed in the quarter at Canavieiras Sul and Canavieiras Central connector zone, and this continued to provide positive results. This further expands the mineral envelope in one of the highest-grade parts of the mine. We are also working on a new zone, João Belo Sul that extends the João Belo mine in the South. We’ve seen very good results from this zone and it clearly has the potential to add inferred resource systems to the mine. At Cerro Moro, in the core mine area, exploration drilling is focused on the main Escondida-Zoe structural corridor. We completed infill drilling and I’ve also been testing new exploration targets based on new interpretations of the plunge of the mineralized envelope. Drilling also continues to test the numerous exploration targets that we have within the property in the near mine area, although most results are still pending due to some slow assay turnaround times in Argentina at this point. In addition, surface work has identified an exciting new target for us, the Selene vein, located in the Northern section of the Cerro Moro land package. We’ve traced the vein on surface for over 11,000 meters, which is significantly larger target than any other targets currently on the project. Surface assays from some sections of the vein have shown values of one gram per ton gold to as high as 15 grams per ton gold from selected grab and chip samples, providing drill-ready targets that we’re expecting to drill in Q4. I’ll move now to El Peñón. We’re seeing excellent exploration results at El Peñón this year. Infill drilling has returned positive results from a number of sectors, especially from Pampa Campamento, El Valle, and the Paloma veins indicating very good potential in these areas for new indicated resources. We’re most excited about the drilling success at Colorada Sur; it’s demonstrating significant potential. We’ve got good drill results, and we expect to add to inferred resources, but much of the strike from the depth extent of the zone has not yet been drill tested and we see excellent potential for the growth of a significant new mineralized zone for the mine. At Minera Florida, infill drilling in the quarter has cut significant results as well. We’re seeing good numbers from a number of veins, including several high-grade new intercepts in Pataguas and Don Leopoldo, as well as positive results from Polvorín and La Flor indicating good potential for new resources in all of these areas. Exploration at La Florida has been able to consistently expand the mineral envelope, both to the East and the West of the core mine, indicating a strong future for this asset. I’ll now turn it over to Jason to discuss the financials.

Thank you, Henry, and good morning, everyone. Turning now to our financial performance, revenue in the quarter was $439.4 million compared to $357.8 million in the same period of 2019, a 23% increase. However, gross margins, excluding DD&A, rose 40% to $272.8 million as costs were pretty much in line with last year. G&A costs in the quarter were essentially flat at $21.4 million. Earnings during the quarter were $0.06 per share compared to $0.21 per share a year earlier. Prior year earnings benefited from a one-time $273.1 million gain from the Chapada sale. So on an adjusted basis, net earnings doubled to $0.10 per share from $0.05 last year. Total CapEx across all categories was about $62 million during Q3, as we bounced back from COVID delays in Q2, although we still had some spending delays in Q3. For Q4, I expect capital spending to be above the levels of Q3. The same will also be true of exploration expenses. But despite the higher capital in Q4, we expect a meaningful increase in production such that unit costs will be the lowest of the year. We’ll see a bigger drop in cash costs versus ASIC, because with ASIC, as I mentioned, we’ll have the higher CapEx. But we expect our ASIC over to 2H to be between $1,020 and $1,060 per GEO that we recently regarded. Coming back to CapEx, one category to point out though is on the expansionary capital side that benefited from the margin associated with pre-commercial ounces from Barnat at Malartic. At Barnat, only declared commercial production on September 30; the margin during the quarter from its pre-commercial production of approximately $13.5 million was treated as a reduction in our expansionary capital for the quarter during Q3. Starting in Q4, sales from Barnat will flow through the income statement instead of being capitalized. Quarterly cash flows continued to rise, with cash flows from operating activities climbing to $215 million in cash flows before net changes in working capital of $199 million that compared to $157.4 million and $152.4 million respectively in the prior year quarter. Looking back to Q2 this year, the cash flow in the quarter has more or less doubled. These cash flows included COVID costs of $8.6 million for the quarter, down from about $19 million in Q2. For Q4, we expect to see a further drop in these costs. To give a clear representation of the cash flow for Q3, if we adjust for these COVID costs and the margin associated with the pre-commercial ounces at Malartic that I mentioned on the prior slide, the normalized cash flows from would have been approximately $237.1 million and before working capital movements would have been approximately $221.1 million. As Daniel noted, cash flow from operating activities hit a multi-year high, including periods with higher production attributable to mines no longer in the portfolio. Free cash flow before dividends and debt repayments rose to $156.8 million in March, the sixth straight quarter of positive free cash flow generation for the company. Combined with cash on hand and the free cash flow that we’re generating, we will see the balance sheet continue to improve while at the same time, having the flexibility to invest in the organic growth opportunities in the portfolio, including the Jacobina phase 2 expansion, the underground Malartic, and the longer-term integrated Agua Rica project, but beyond that, also being able to build excess funds for other opportunities and consider further dividend increases. Said simply, we see an excellent balance and flexibility among our capital allocation priorities. In the shorter term, that strong operating cash flow we’re generating has translated to reductions in net debt. While at the same time, we’ve been increasing our dividend. In particular, on the balance sheet, net debt decreased during the quarter by $148.9 million to $619.1 million, a level that we haven’t seen going all the way back to the start of 2013. This advances our objective of achieving a positive net cash balance sheet, creating further capital allocation flexibility. Cash at quarter-end totaled $474.2 million. Contributing to the ending cash balance during the quarter, we also saw marketable securities, mainly 1.2 million Equinox Gold shares that produced approximately $18 million. For Q4, we expect another solid free cash flow quarter that will lead to growing cash balances. Despite the higher capital spending in Q4 that I mentioned, we’ll also have our best quarter on production as an offset. Our revolving credit facility is fully undrawn as we repaid the outstanding $100 million on our $750 million facility towards the end of October. We drew down $200 million during the first quarter of 2020 as a precaution due to COVID and we will repay the first $100 million in Q2. Subsequent to quarter end, as Daniel mentioned, we also announced the further 50% increase to our annual dividend, bringing it to $0.105 per share, which is 425% higher than just 18 months ago. On a per ounce basis, the dividend rate is about $100 per GEO, which is now the new dividend floor. Consistent with our dividend policy and sustainability objectives, we have sufficient cash reserves to support payment of the dividend at the increased level for three years and our cash reserve fund provides us with the flexibility to pay the dividend at the new floor for an extended period even during the gold prices. While we will continue to reflect our dividend on a per share and a per GEO basis, we will no longer be providing a range for our dividends on a per GEO basis level. Going forward, any increases above the new dividends floor will be based entirely on cash flows and cash generation capacity of the company. As our cash flows and cash balances increase, our dividend will rise correspondingly to the percentage of those cash flows.

Thank you, Jason. In closing, I’ll leave you with a few takeaways. We are now well into our historically strongest quarter and executing exceptionally well in what we believe is the early stages of a secular full cycle for gold. Production in Q4 is planned to be higher than Q3, meaning our all-in sustaining costs and cash costs will be significantly lower as well. Our cash flow and cash balances are rising, hitting multi-year highs in the latest quarter, significantly improving our financial flexibility. As a result, we are well-positioned to invest in growth while continuing to increase shareholder returns as evidenced by the recently announced 50% increase to our dividend. And with that, we’ll be happy to take your questions.

The first question is from Fahad Tariq of Credit Suisse. Please go ahead. Your line is now open.

Hi, good morning. Thanks for taking my questions. First on Cerro Moro, I think it was a positive update that you’re back to, call it, run rate throughput at the end of September. One of your gold competitors also in the same country is having far more difficulty and running well below capacity. Can you talk a little bit about what you’re doing differently at Cerro Moro to maybe mitigate some of the COVID-related impact? And the second part of the question, what’s kind of the run rate company-wide for COVID costs going forward? Thanks.

Well, good morning, Fahad, and good question. So, for Cerro Moro, as you all know, we had quite a long ramp-up because of transport restrictions, but we were able through the quarter to mitigate that. One of the things we have done is improve the runway, the airplane landing at Puerto Deseado. So, our employees coming from outside the province are now flown to Puerto Deseado, making it easier to have them at the site. All our employees are tested before they go to shift change. So, each 14 days, we have a shift change at the Cerro Moro. Over time, we have improved the way we’re doing this. So, everybody needs to have a negative test before going into the mine site. We’re having a lot fewer people at the mine site to be honest, and most of our staff in administration are working from home. We’ve established measures to ensure they can work from home. Only people that need to go to site are going to site. We have increased our number of employees coming from Santa Cruz. Before, around 30% of employees were coming from outside. We moved many of them into the province to avoid transport issues. We have also hired more people locally. So, this is why, as I mentioned before, by the end of September, we will be fully back into production at Cerro Moro. I don’t know for Cerro Negro; it’s the same province, but it's further north. There may have been more difficulty for people. But in our case, the run rate is like I mentioned, between 1,000 and 1,150 tons per day. So, we’re fully back to production.

Yes. And on the cost side, I guess I had mentioned that we’ll see – we thought that the decrease in those COVID costs between Q2 to Q3 would carry on into Q4. Really, Cerro Moro will be the operation that will have some of those lingering costs. It’s from transportation, and as Daniel said, we’ll continue to spend that money. We think it makes sense to improve the certainty of getting people in and out. We’ve physically moved people into the province instead of transporting them back and forth, resulting in some additional costs. So, I think it’s probably a couple of million dollars for the time being. I would say it’s providing support at Cerro Moro for those costs, ensuring our ability to hit those full throughput rates that we’re achieving right now.

Okay, great. So, the $5.7 million of incremental cost that you incurred in Q3 for company-wide, is that like a good run rate going forward as well?

No. We should see a little bit lower than that. Of the $5.7 million, I think just a little under half of that was attributable to Cerro Moro, and I expect Cerro Moro to be the bulk of that prospectively. The next mine is El Peñón, and that’s similar – just transportation there, and most of the other operations we’re seeing these costs really fade away.

Okay. Got it. Okay. And then the last question from me. On slide 11, you mentioned the acquisition of earlier stage development assets, any geographic preference? Anything you can provide on that?

Any of the four countries we are currently working in right now, Fahad. We like Canada, Argentina, Brazil, and Chile. If there’s an opportunity there, we’re going to look at it. Our first priority is our expansion projects, both at Jacobina and Canadian Malartic. Also, our generative exploration program, like we mentioned, we think there’s at least one mine that will happen within the next three years with these exploration projects. But on top of that, if there’s any good opportunities in the four countries, we’re going to evaluate them now.

Thank you. The next question is from Ralph Profiti of Eight Capital. Please go ahead.

Good morning, everyone. Thanks for taking my questions. Two of them please; one on capital allocation and maybe one on Canadian Malartic, Daniel. The first one should – when you lay out the generative exploration strategy, are you looking at this as a dedicated pool of capital that’s going to get put to work? Because we see the cash reserve fund and we see the dividend strategy as sort of these very structured frameworks. I’m just wondering, is your approach to generative exploration along the same lines? And maybe give us an indication of how much capital will be put to this over the next few years?

Yes. Thank you, Ralph. Good morning. It’s a good question. Yes, it is. It is very well aligned. We have $53 million over the next two years. So there was $14 million in 2020. There’s $20 million next year and the rest to the $53 million in 2022. So, it’s very structured. We have these seven projects. We have many projects in the company, but we choose the best seven. And this is where we’re going to focus our attention in the next three years. We think one of these seven projects will generate what we’re looking for, so 1.5 million ounces potential at least and then to be able to produce 150,000 ounces per year. So, that’s really clear, and our objectives are well defined on that generative exploration program. We’ll see after what will happen. Yes, it is a separate budget from the rest of the exploration that doesn’t touch the exploration that we’re doing at our mine site.

Okay. Got it. Let me switch to Canadian Malartic then. Where is the Q4 drilling at East Gouldie? You’re going to be focused on—is this continuing to be infill? And how far is the team away from testing convergence at depth between East Malartic and East Gouldie, and when possibly could we receive results from that testing?

Yes. Thanks, Ralph. Good question. The drilling in Q4 will focus on simply infilling around the envelope that sort of shows up on that longitudinal section. We’re also doing some 75-meter spaced drilling in kind of the core upper part of the deposit. At the end of that, we expect to see a reasonably high confidence inferred resource and a few areas, in which we’ll see a slightly higher confidence level at that 75 meters. We’re quite a long way from testing the convergence, and I don’t see us doing that within the year or probably even in 2021. What we are seeing are some fairly high-grade zones that we can actually project uptick, especially to the east, and we have a positive drill hole out to the East domain—East Gouldie zone, a significant step out of about 200 meters. So, we’ll simply be stepping out and growing that core zone as much as possible, rather than focusing on deeper drilling down to the convergences there.

Got it. Okay. Thanks, Daniel. Thanks, Henry.

Thank you. The next question is from Carey MacRury of Canaccord Genuity. Please go ahead.

Hi, good morning. Just wondering if you could give us a little more granularity on the grades you’re expecting at Cerro Moro and how that will help you out for Q4?

Good morning, Carey. Jason, do you have these numbers?

Yes. I think we’ve seen pretty steady grades at Cerro Moro throughout the year despite COVID. We’re going to be moving back towards reserve grades for Q4. El Peñón may have a marginal uptick on grades as we move on, as we indicated in the MD&A last night. So, I think that’s the way to look at it.

So the Q4 implied production, given the guidance, is a pretty big step-up. Are you expecting pickups at the other assets similarly?

Well, I think you hit on one of them. We’ve got full throughput at Cerro Moro with the grade mentioned. I think also Malartic was working its way through some stockpiles as well. So, we’ll see an uptick in grade there in Q4, and obviously, with the tonnage that has a pretty big impact on the production level. So, those are probably the big two, and otherwise, it’s a steady issue across the operation. But as you pointed out, it’s pretty easy to infer what we expect from Q4 here. It’s a very strong quarter.

Then maybe a question on the Malartic underground. I mean, you mentioned in your press release, getting to 20,000 tons per day. Just wondering if you could sort of walk through how you get there, from 2023 to 2029. Is that the shock coming in in 2025, 2026, or are there multiple declines? Just wondering if you could outline that.

We have to complete, Carey, the PA study that will be completed by the end of this year or early next year, where our partnership team and our partner, Agnico, and us are working together to optimize the actual PA study. We’ll have to make a decision based on the PA and then mostly inferred resources, but as we mentioned, it’s very continuous. As we see right now, production from the open pit is still another seven years to go until 2027. We’re going to see how and when we can bring the underground production from underground as we start to ramp in November. You can assume we’re going to access with the Odyssey South zone way sooner than 2027, probably sometime in 2023. There’s potential that some production could start in 2023 from that zone specifically, but it won’t be a very high production. Our focus right now is mostly to see how we can increase production in the open pit. We have ideas that can extend or increase the resources or reserves in the actual Barnat pit, the link between the Barnat and main Canadian Malartic pit holds potential to mine other ounces. We mentioned potential around other smaller open pits on surface. There’s a lot of work ongoing with our partner, and the two companies are exploring how we can bring the production in that 2027, 2028, 2029 time frame, during the time that the shaft is completed. It all depends on when we start that completion and then go with full underground production.

Great. Thank you.

Thank you. The following question is from Mike Parkin of National Bank. Please go ahead.

Hi, guys. Just some follow-ups on Malartic underground. With respect to permits, is there any need to gain additional permits for the project?

Good morning, Mike. For the underground, we have already the exploration permit. So, there’s no problem to drive the ramp, even to go to a bulk sample. So, we’re going to have to transfer that to an operating permit eventually, but that should not be an issue because the infrastructure on surface won’t change. The tailings are already permitted and the mill, as we have mentioned many times in the past, when the tailings facilities are full, we’re going to put tailings at the bottom of the main Canadian Malartic pit. You can assume that the capacity of both pits when depleted, and when the underground mine comes into production, there will be plenty of spaces. Permitting will be easier or much easier to obtain as we won’t be doing any surface expansion; it’s all underground. So, there’s no doubt, there’s no public hearing resulting from going underground. It’s a lot easier to get permitted.

Sounds good. The other thing with the ability to use the pits as tailing facilities for the underground, does that give you any beneficial impact on closure costs that were allocated to the open pit?

We are driving our ramp right away from the two pits. So, we won’t use the pit for the underground. As I mentioned, we’re planning to put tailings mostly in the main Canadian Malartic pit. So that won’t be really—in relation to any real use of the two pits for accessing underground.

Right. Okay. And then with the ramp, it sounds like you’ve got the focus near term as well as exploration. So, in terms of a significant step-up in the capital, recognizing this is still early days, and we’re still waiting on the PA, but your partner kind of indicated that you’re not likely to have a construction decision made off a reserve. It would be more off a resource when you go ahead to move on this is made. So, are we thinking kind of two or three years out before you would see significant capital getting spent on this project?

Again, you made it clear. We will approve the project on the PA and on inferred resources and there will be some indicated included, but mostly inferred, and we’ll see how the PA responds. We’re not many years from capital investment. We’re starting the ramp. We know what the ramp development over the next two years is going to be—ramp development, and a lot of drilling is happening from underground. If the PA gives us the answer we think it’s going to provide, then we go ahead. We have to do a lot of engineering and ordering of equipment. A lot of engineering has already been completed. We’ve mentioned the size of the shaft, the type of hoist we’re going to use, and the type of tonnage we think we can achieve from the underground. So, I think as soon as that PA is out, both us and our partner are going to decide whether to go ahead right away or wait more time. If we go right away, there’s going to be capital spend next year—at the end of next year. If we wait, then it will be delayed by however long we decide to postpone the project. So far, I think our partner and us are quite excited about the project. The mine is excited. The PA looks really good, and what we have seen so far—it’s not completed, but what we have seen so far is encouraging. We’ll see in the New Year, but I wouldn’t be surprised if it doesn’t take very long before we’re making the decision to go or no-go.

Okay. Sounds good. And switching over to the open pit side of things, we saw a really good throughput in the quarter. Is that a function of Barnat, which has always historically been known to be a softer ore source? Is that what’s helping that hit close to 60,000 tons per day?

Yes. Finally having Barnat into production is helping quite a lot. It’s good; it’s better-grade as you know, but grade is going down at the Canadian Malartic; it’s getting better too. It’s a softer ore for sure. The Barnat is one of the big factors in Q3 was Barnat and as we’re going to move more into Barnat in the coming months and quarters. Yes, it’s going to continue to improve. We had great success in Q2, in tons per day, the same in Q3 despite two shutdowns in Q3. It was remarkable that the mill was able to achieve this tonnage despite the shutdowns. We have one planned in December. But you’re right, Barnat is helping a lot to improve production at the mine right now.

Super. Looking forward to the fourth quarter. And thanks again for taking the questions.

Thank you.

Thank you. Our final question is from Tim Huff of Peel Hunt. Please go ahead.

Yes. Just a follow-up on one of your earlier questions, which is, I know you’re still firmly in production recovery mode as we head into year-end and looking forward to the fourth quarter. Given what you’ve said on Cerro Moro, with respect to staffing levels and potential production efficiencies, as we head into 2021, do you see more scope for cost initiatives in the year, quite simply because we’ve seen that from one or two of the gold producers over here? I didn’t know if your focus is shifting a little more from production recovery to cost initiatives going into the following year.

Good afternoon, Tim. Yes. Cerro Moro—the first objective this quarter in Q2 was to put the mine fully back into production. We achieved that, and we don’t see that being an issue going forward. We have always worked on cost improvement. They have improved this year. They will continue to improve in Q4 as production is going to be significantly higher compared to whatever we achieve in the first three quarters of this year. You’ll see in Q4 a big increase in production, and on the same token, a decrease in costs, cash costs, and all-in sustaining costs at Cerro Moro. We have a lot of fixed costs at our mines, but as soon as you produce more ounces with the same amount of people and there won’t be any more people at the site with higher production, our costs are going to be impacted. But like any of our mines, the other four mines do they have each year projects to decrease costs, being more efficient, and Cerro Moro is doing the same thing also. Thank you.

There are no further questions registered at this time. I’ll turn the meeting back over to Mr. Racine.

Thank you, operator. Thank you everyone for joining us. We look forward to updating you on our fourth quarter and year-end results in February. Please take care and stay safe. Thank you, and goodbye.

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