Pan American Silver Corp Q3 FY2021 Earnings Call

This conference is being recorded. All participants, please standby. Your conference is ready to begin. 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 includes, but is 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 2021 results, as well as the management's discussion and analysis for the same period and other regulatory filings in Canada and the 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 p.m. 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, operator. Thank you all for joining us and welcome to our Third Quarter 2021 conference call and webcast. Presenting with me today is Jason LeBlanc, our CFO, Yohann Bouchard, our Chief Operating Officer, Gerardo Fernandez, Senior VP Corporate Development, and Henry Marsden, Senior VP Exploration. We'll be available to answer questions during the Q&A portion of the call. I will start as always with a focus on health and safety. Our total recordable injury rate was 0.68 for the first nine months of 2021. The health and safety of our employees always come first and is something we have always tried to improve. Since the beginning of the pandemic, we have taken quick action to limit the impact of COVID-19 on our operations and the communities in which we operate. We put measures in place across the Company to minimize the spread of COVID-19. We are happy to report that we expect over 90% of our employees to be fully vaccinated before the end of the fourth quarter. During the third quarter, we completed a human rights risk assessment at all our sites in line with the voluntary principles on security and human rights. We also approved a responsibility policy covering all aspects of health and safety and sustainable development. This is available to view on our website. Earlier this year, we introduced our climate strategy; in Q3, we performed workshops with each operation to establish roadmaps for each operation that described project cost and schedule. These actions will help ensure that we are aligned with our long-range GHG reduction efforts. Our climate strategy is supported by practical and operationally focused, short, medium, and long-term actions to achieve the targets. Moving onto our third quarter results, Jason will review our quarter in more detail, but I want to spend a moment to recognize the strong performance of our mines: Canadian Malartic, Jacobina, and El Pinon all had standout quarters, and Cerro Moro also produced excellent results. In total, from our five operating mines, we achieved the second highest quarterly gold production ever in Q3 with record-breaking gold production expected in Q4. As previously guided, we mentioned production was weighted at 53% for the second half of the year, with the fourth quarter being the strongest quarter. We performed better than planned in the first half of the year, so don't be surprised if we do the same in the second half. We are in a very strong position to achieve or even exceed our production guidance of 1 million GEO ounces. I will also mention that September was the lowest cost month of the quarter, and we expect this trend to continue in Q4, where we expect to deliver meaningfully lower costs. Before talking about the Odyssey project, let me congratulate our exploration team at the Canadian Malartic General Partnership. They have been awarded Discovery of the Year by the Quebec Mineral Exploration Association for East Goldie. What an important discovery for the underground mine, assuring multi-decades of production. We are very proud of them at Yamana. At Odyssey, development of the underground ramp continues to perform well. The head frame slip form was started in September, and 93 meters was completed on October 19, in 21 days. Structural steel installation is expected to start in November and be completed during Q4. Infill drilling from underground is defining the Odyssey internal zone, which is not currently included in the life of mine plan but has the potential to add underground production within the next five years. Exploration continues to deliver exciting results at Odyssey, and we will continue to provide updates on that. Turning now to Jacobina and our expansion project, which continues to exceed our expectations. The mine has delivered significant progress on the Phase 2 expansion. A new daily throughput of over 8,800 tons per day was achieved in September during a trial test to assess the plant capacity. However, the potential we see for Jacobina extends well beyond Phase 2. As we have mentioned in the past, we will advance work towards our Phase 3 expansion, but the true potential lies even beyond this. Jacobina is located in a mining jurisdiction with huge potential. It shares similar geology to the gold district in West and South Africa that hosts massive gold deposits. We are seeing the potential for the Jacobina belt to become an entire gold mining district, which we own 100%. The Jacobina mine produced over 2 million ounces and has over 8 million more ounces in mineral inventory. This is all within a small portion of our land package, which is over 150 kilometers. In the future, Jacobina could very well be a complex of mines, producing at a scale of over 400,000 ounces and continuing to be one of the lowest cost mines in the Americas. At our Wasamac project, permitting and engineering are continuing to advance. And as you may have seen from our press release during the quarter, exploration is already beginning to deliver some exciting results, especially at the Wildcat target. The Wildcat zone is located 300 meters south of the Wasa Shear, and it shows that step-out drilling has expanded the down deep continuity of the known historic zones that are now included in the current mineral reserve or mineral resources, highlighting the potential for zones with higher-grade to increase richer production and extend mine life. Our planning field and exploration drilling has the potential to generate additional mining mineral reserves that will sustain a 200,000 ounces production level for an extended period and support our strategic mine life of more than 15 years. I also want to take a moment to speak about MARA, another high-quality asset in our portfolio with huge potential. The project is one of the world's lowest capital intensity copper projects, and we are working to advance it. In the quarter, work progressed on the engineering design, drilling at the site, and furthering studies and permitting. We are at a very important moment for this asset, and there are multiple options forward, all of which deliver value for our shareholders. And that value is significant as you can see on this slide; at $4 per pound copper and $1,700 per ounce, MARA has an NPV of over $4 billion, and we own 56.25% of that. We will evaluate all possible avenues to deliver the most value to our controlling interest. The opportunity we have to deliver value from this project that is not currently captured in our share price is truly exciting. And I will now pass the call over to Jason, who can go over our quarterly results in more detail.

Thank you, Daniel, and good morning, everyone. I'll now provide a brief overview of our third quarter results as Daniel mentioned. We recorded net earnings of $27 million or $0.03 per share. And on an adjusted basis, $69.7 million or $0.07 per share, with one adjusting item relating to our early note redemption premium. We also saw strong cash flows in the third quarter with a step change increase quarter-over-quarter, which I'll come back to in more detail in a moment. But this profile of a strong third quarter is what we had expected at the start of the year. If you recall, at the beginning of the year, we guided that production would be weighted 47% for the first half and 53% for the back half of the year, and that the fourth quarter would be our strongest. Our results through nine months reflect an attractive profile, and we expect Q4 production to exceed 270,000 GEO, which positions us to achieve our annual guidance of 1 million GEO production for the year. On costs, recall in the second quarter, we indicated that we were seeing some inflationary pressures from certain consumables with an impact of approximately $20 per ounce above our planning assumptions at the start of the year. This is still our expectation. But with our planned ramp-up in sequential quarterly production, our unit costs have been decreasing since earlier this year. We really started seeing some of that better cost performance later in Q3. In September, we had meaningfully lower costs at several mines, and to give some gauge of that on a consolidated basis, ASIC for September was about 10% lower than our average Q3 costs. We expect that trend to continue into Q4, where along with the increase in production, our ASIC for Q4 should be between 5% and 10% lower than our ASIC for Q3, which will translate to our strongest cash flows for the year. Moving on to results from our mines in a bit more detail. Canadian Malartic followed its exceptional second quarter with another strong quarter in Q3, benefiting from higher grades and recoveries compared to last year. Jacobina also delivered strong performance in Q2 with another solid quarter in Q3. Production in the quarter was close to the record-setting production established in Q2 with mill throughput above plan, and with recovery and grade as expected. The mine is on track to sustain 7,500 tons per day of ore to the mill by the end of the year, which will support our path to the Phase 2 expansion at Jacobina. Cerro Moro also had an exceptional third quarter with GEO production increasing 50% from the second quarter. More mining faces continue to be opened up in the quarter with more mill feed coming from the higher-grade underground ore. This trend will continue in the fourth quarter, which is expected to be the strongest production of the year with stable throughput but at higher grades. With stronger production expected in Q4, Cerro Moro's costs are expected to be lower as well. Shifting over to operations in Chile, El Penon delivered solid results with GEO production increasing 19% quarter-over-quarter. Recall, we had indicated El Pinon was one of the mines that would contribute to our back-end weighted production profile. The higher-grade zones that contributed to that profile came into the mine sequencing during Q3, and we expect this will continue through the remainder of the year with a further increase in silver production for Q4. At Minera Florida, production was just under 22,000 ounces. But we are expecting a strong fourth quarter, both in terms of higher production and lower costs, and the mine is off to a great start so far in October. Regarding our financial performance for the third quarter, we continue to generate robust cash flows, with cash flows from operating activities and cash flows from operating activities before working capital, increasing from the second quarter by 24% and 21% respectively. We also generated great free cash flow during the quarter, which increased 59% to $81.6 million up from Q2. There were some other notable events during the quarter. We further strengthened our financial position by repaying $720 million of existing debt and completing an offering of $500 million in senior notes due 2031, with a net impact of reducing our gross debt by about $220 million. Aside from increasing our average tenor on debt, our interest costs were reduced by approximately $20 million annually, which provides further flexibility for capital allocation. We also repurchased 3.3 million shares during the quarter since we initiated our share repurchase program. We will remain opportunistic with our NCID and continue to use it as a further tool for delivering returns. To wrap up, I want to come back to the strong Q4 we expect with our highest production and lowest cost for the year. By extension, we will see our strongest cash flow and free cash flow generation of the year as well. With that, I will now turn the call back over to Daniel.

Thank you, Jason. And with that, I will turn it back over to the Operator for the question and answer session.

Certainly, thank you. We will now take questions from the telephone lines. Thank you for your patience. The first question is from Fahad Tariq with Credit Suisse. Please go ahead.

Hi. Good morning. Thanks for taking my question. Maybe first, just to clarify, I thought I heard you say 5% to 10% lower ASIC quarter-over-quarter in Q4. Can you just confirm that?

Yeah, you are right, Fahad.

Great. And then my second question. Maybe just extending that, can you talk a little bit about 2022? I know Q4 of this year benefits from the higher production, but what about going into next year? How does the inflation angle play in then?

First I'd say we're obviously going through a planning process right now. We'll deliver a full update on our guidance early next year. Directionally though, there's some inflation impact that will carry over to next year. We're trying to keep a lid on that. We saw most of the inflation come into costs later this year. That's most of the impact that I mentioned, so we expect that to continue over to next year as well. But we will be taking other efforts to try to offset that. But we do think it's here for the shorter term. We don't think this is something that's going to continue on for years in the past. It does look like it's based on some dislocations on the supply side impacting some commodity inputs that are hurting us as well, but we're doing our best to offset it.

Okay. And then just maybe as a quick follow-up, can you talk a bit about some of the measures you're taking to mitigate the inflation? Because it sounds like from your comments that it's actually a bit more muted for Yamana than it is for some of your peers that are talking about 5% to 7% inflation on consumables, or even higher than that, 3% to 4%, maybe 5% labor inflation. It sounds like, if I'm hearing correctly, it sounds like it's a bit more muted for Yamana. So I'm just trying to get a sense of what are the measures you're taking that's allowing you to kind of see less of an impact on inflation?

Good morning, Fahad. You're right, we mentioned in Q2 that we're seeing a maximum effect of $20 per ounce, which is 2% for us. Early in the pandemic, we increased our inventory and have maintained it at a level higher than usual. This proactive purchasing of necessary materials for our mines has helped us remain less impacted than others this year. We continuously review our contracts and evaluate alternative suppliers who can offer the same quality at a better cost, which we take advantage of. We emphasize a culture of operational excellence across all our mines, implementing numerous projects each year aimed at reducing and improving costs because we encounter regular inflation with labor and materials. This culture of cost-saving initiatives comes from all levels of the organization, including miners, engineers, and technical services. Teams share ideas during monthly or quarterly meetings to discuss cost improvement strategies. We established global procurement years ago, allowing us to secure better pricing through global tenders rather than on a mine-by-mine basis. These are some of the strategies we are employing, and we've found success in mitigating costs.

Okay. Great. Thank you. That's it for me.

Thank you. The next question is from Mike Gelman with Bank of America. Please go ahead.

Morning, Dan, Jason, Yohann, Gerardo, and Henry. Just had a couple of questions. Dan, you mentioned earlier that you don't think Cerro Moro has value in your share price. I may have misquoted you. Just wondering, what was your basis for that assumption, and what steps are you taking to enhance the value, maybe a joint venture, sell the asset, or is it more longer days for it?

Okay. I will start, and then Gerardo can complement. But you know this, there are many assets that are carrying no value for MARA after we published a strong pre-feasibility study last year. The numbers we showed on our side are speaking for themselves; that mine has been built. When we integrated Alumbrera and Agua Rica together to form MARA, there's always risk to spend $2.5 to $2.8 billion on a project, or $5 billion; you have to build a mill. This is behind us, the mill is built. We have the permits for the training facilities, all the infrastructure in place at Alumbrera to operate the mill. We have the permit to do this. We have a huge open pit to dispose of waste in the future. We have pipelines to transport the concentrate to the port; so that all exists. What we need to do at MARA is to strip a big open pit and install overland conveyors to the mill, so that's something very simple to do. This is why we say there's a lot of value there. We're working to show you the value; we'll probably share a final feasibility study next year, or in the permitting phase. There's a lot of interest in that project, and our goal at Yamana is to demonstrate the potential of MARA. I don't know if Gerardo wants to add something on this, but we see huge potential with MARA in the future.

Thank you, Daniel. Maybe just to add, from a regional perspective, as Daniel was saying, there are some assets that carry no value. But if you look at the consensus versus similar assets based on the development stage and value, I think you can see that it would be significantly higher value even with lower metal content. It's a really good stage. That's the reason behind that. And it's a high-quality asset with a profile for development. As Tanya was saying, it's a lot lower risk than a comparable asset. In terms of paths to unlock value, our main paths to advance the project include advancing permitting, social engagement, and social license. We have good progress there with a local team and on the technical side with our partners. We are considering all options as we progress the project, and the more we advance it, the more the risk becomes, and the more value it has.

We have a great partner with Glencore on this project, and the three companies are fully aligned. We're working together now for over two years on the project, and I think there's big value creation for the three companies in this project.

Okay, great, thanks for that comprehensive answer. And the second question is on your London listing. There was a lot of fanfare about this last year and earlier this year, but I noticed the volumes are very, very low on London, still very high in Toronto and New York, so I'm just wondering, is Yamana happy that the London listing is a bit cheap compared to what you wanted? Just curious. Thanks.

Thank you for the question, Mike. I think it's a process; it's not a one-day event. It’s a long-term commitment from our part to establish and meet with new potential shareholders. We are traveling and now that restrictions are lifted, we are starting to have face-to-face meetings. We understand that investors in the UK and Europe value relationships and long-term partnerships, so it is a long-term commitment from our part. We will continue to put the effort to go there to meet face-to-face, tell our story, and show our results to investors. We already have a good base of shareholders in Europe and London specifically, and we have been meeting a lot of new potential shareholders, so we are there for the long haul.

Good morning, everyone. Thank you for taking my questions. I wanted to follow up with Jason on the inflation question for 2022. As we review the inventory purchased earlier this year, I understand you may be focused on labor. You've completed all your agreements. I would like to confirm, if we look at 2022, is it reasonable to expect that your inflationary pressures are driven by the need for additional fuel, consumables, and so forth, suggesting that an increase in the order of 3% would be suitable over the $700 per ounce all-in-sustaining cost this year?

Yeah, Tania, I think that's the way you laid it out; that's a reasonable expectation. We will work through lower-cost inventory and purchases more at market than you would have called the cost-plus compared to what we saw this year. But I think the jury is still out for us in terms of inflation impacting our operations this year, plus a little bit more for next year. The final numbers will roll out into next year with our guidance.

I appreciate that. I also wanted to understand, as we look at some upcoming catalysts in the next few months, when we might receive another exploration update or any additional studies before you release your Q4 financials.

I think the next big catalysts update, Tania, is going to be in February. In February, we're going to have our new R&R and the Q4 results. We're going to talk about the Cerro Moro e-page and then the mill expansion. We said we were doing studies on both Canadian Malartic and the Odyssey project; we will provide advanced updates and possibly some exploration results. We have very good results; after we released news earlier this year, you can expect the early part of next year to be active. I think it's going to be quiet in November, December, and January, but February will see a lot of news coming. We'll try to time those announcements a week or two apart, but there's a lot of updates coming early in the next year.

That's good. I wanted to check in on your pricing regarding reserves and resources. Are you planning to maintain the same pricing as you did in 2020? We're noticing some inflationary pressures on costs, so I'm curious if you will keep the pricing steady. Also, how do you view the prospects of replacing your production and reserve base this year or increasing resources, and which mine should I pay attention to?

The pricing won't change. We have $12.50 now for gold, and that has been our consistent price for many more years. So that inflation doesn't impact this. For copper, we are at $3 for silver, and these two numbers have been constant. Regarding production, we can put crawlers, but we see very good results. As you can imagine, Canadian Malartic, when you mine close to 700,000 ounces of your reserves each year, the reserve will go down, but the resources will continue to grow up with the underground. We clearly stated earlier this year that we have more than replaced our ounces mined. We had very good success at El Penon, and at Cerro Moro, we have some very good news this year. Overall, we are very confident that we will do like in the past few years to replace the ounces mined, and we may even add some ounces from some operations. I don't know, Henry, if you want to add something else, but we're very confident.

Daniel covered that really well. We've had these very strong targets for the last few years focusing on replacing depletion. The sites are performing very well. We're fairly confident we'll make that target, and over the last few years, we've seen consistent growth. I think we'll see that again this year. Obviously, at Canadian Malartic, we're going to see some growth in resources there, and perhaps the conversion of some of that inferred to indicated for that February release.

Okay. So what I kind of take from that is you've got a good chance of at least replacing production in your reserves and growing your resources this year?

Precisely, yes.

And just maybe one last one on Cerro Moro. Can I just have a feel for how much additional material you could unlock if you decided to expand the amount?

It’s basically our cut-off tenure that Cerro Moro is very high because it's a very high-grade mine. When you have a high cutoff underground, it's about six grams per tonne in the open pit, and three grams per tonne. That mill was built expandable. We know the front-end of the mill can process above 2,000 tons per day or even 2,110 tons per day right now, which is the max, but we know the front-end can do more. So you will see in this study what our thinking is. Sure, expanding the mill will allow us to increase resources and reserves because we can mine lower grade materials. We have huge potential on the land package there, and as we mentioned earlier, we have huge targets. This is where Henry and the team are focusing at the end of this year and early next year to bring resources that at lower grade that will justify that epleege option. The mill option to upgrade the mill isn't very costly; we just need to add infrastructure like flotation and cyanidation to increase capacity. Unlocking that potential will also allow us to mine zones that we're currently right next to but aren’t extracting due to lower than cutoff grade. We already paid for that infrastructure ramping down and have access points—so it will add to the amount of ounces we can recover. Let us finish the study, and then we'll see what we can bring into the mineral inventory.

That sounds good. Great. Thanks a lot for taking my question.

Thanks, Tanya.

Thank you. Once again, the next question is from Mike Parkin with National Bank. Please go ahead.

Hi, guys. Thanks for taking my question. A follow-up on the inventory comment that you've got excessive inventory now. What's the thought on that going into 2022? Is that something that you are looking to maintain levels at or drop down to more normalized levels?

Good morning, Mike. We're still in the pandemic, so there's no reason for us to reduce our inventory for now, and the plan right now is to continue. Nothing will change in our planning for at least next year and probably for the next three years. Forecasts indicate that we're going to maintain high inventory levels. We paid a price in 2020 to do that, but now we're benefiting from having done that immediately when the pandemic started last year.

Okay. Then, has there been any discussion with the new management now that the merger of equals has been announced in terms of what the vision is on Canadian Malartic? It seems like possibly we might be seeing some expansion in budgets for exploration, and certainly with that asset, that's showing quite a bit of upside, so maybe that's something that you guys would be welcoming?

And the answer is no. Mike, let them close their deal together later this month or later in November. After that, I'm assuming at the management committee level, we're going to have discussions with them. So we'll speak with Tony at the time when the deal is closed. I think at the management committee level, where the mines are managed, Yohann and his counterpart at Agnico will continue to work together the same way we have been. We don't see any changes, and we will be very happy to provide more money to exploration as we generate strong free cash flow. Malartic has been amazing in exploration. I mentioned earlier they won Discovery of the Year; that is always continuing to grow. We'll be happy to speak with Tony when the time comes.

Okay. And then just last question from me. There has been a lot of chatter around labor tightness in Ontario and Quebec. For Quebec operations, are you seeing much in the way of price pressures to attract people to the Wasamac Project and maintain staffing at Canadian Malartic?

I'll start with Wasamac; the answer is no. We were able to attract very good people so far for the Wasamac project. We are building the team there. We are close to regions where people are looking to work in the mining industry. Many are looking for positions closer to home. We've been able to attract good people to Malartic. The underground project is mostly contracted now. I think we're going to switch to our own employees in April next year. We've started to hire people on the staff side already; we have no issues so far. We will see what happens in the future when it comes time to go underground. But the open pit will go down, and employees are already interested in transitioning from open pit mining to underground work. We're going to start training some of our existing manpower at the site. We haven't seen that pressure at either operation but surely will monitor that as we go forward.

Great. Thank you, that's it for me, guys. Thanks very much. Congrats on a good quarter.

Thank you.

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

Thanks, everyone. Good morning. Daniel, my first question is on Jacobina Phase 3 permitting. By your own account, Phase 2 permitting has gone very well. When it comes to Phase 3, do you think it's probably going to go as smoothly? And I'm specifically talking about incremental issues such as tailings and the use of the conveyor; if that's going to produce any more scrutiny or difficulties in getting the permitting for Phase 3?

Thank you, Ralph. Good morning. So we're going to get permits for Phase 3 when we get the permit next year. The tonnage of 10,000 tons per day—that's the permit we're going to get. We need 8,500 tons per day for the second phase, but we have asked for the permits like we were planning Phase 3. So, it will not be a situation where we need another amendment to increase the permit to 10,000.

Understood. Okay. My second question is going back to the earlier comment about incremental Canadian Malartic investment. Now that we have a new and bigger player, is that changing your thinking on the pace of potential dividend increases or the pace at which we get NCIB action just to build up that balance sheet for maybe bigger capital commitments?

No, the balance sheet is pristine, so we can afford to give more dividends, buy back more shares, and continue to invest if needed in Canadian Malartic. We're on a very high-speed path there. I mentioned the head frame; it's ahead of our plan. We're working on the other infrastructures. If we need to spend more, we can. I think we have 12 or 14 drills operating at Malartic right now. Can we go to more drills? Yes, we can. But it's not an issue for us to continue prioritizing. No, we had three before: balance sheet, that's fixed. We're focusing on returning to shareholders and reinvesting in the mines and in the project. But that's not an issue for us to allocate more funds at Malartic or any other mines. We have increased the exploration budget this year because it's going well, and then we've seen successful discoveries. So that should not be a problem for Yamana. Even if our partner is bigger, we have always decided from day one what our plans are at Malartic. I'm assuming it will continue to proceed smoothly; the two companies have been working together for 8 years without any disagreements.

Thank you. There are no further questions registered at this time. I will turn the meeting back over to Mr. Racine.

Well, thank you, Operator, and thank you all for joining us on our third quarter 2021 conference call and webcast. We'll look forward to sharing more of a recap of our full-year performance in February. Please take care and stay safe. Bye for now.

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.