Pan American Silver Corp Q1 FY2022 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 and 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 first quarter 2022 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 everyone for being here today. Welcome to our first quarter 2022 conference call and webcast. Joining me today are Jason LeBlanc, our Senior Vice President of Finance and Chief Financial Officer; Yohann Bouchard, our Senior Vice President and Chief Operating Officer; Gerardo Fernandez, Senior Vice President of Corporate Development and Investor Relations; and Henry Marsden, Senior Vice President of Exploration, who will be available for questions during the Q&A segment of the call. The health and safety of our employees is our top priority, and while we have an excellent safety record, we are continuously working to enhance it. Our Total Recordable Injury Rate was 0.25 in the first quarter. I want to thank all our employees for their dedication to our safety standards. We are actively taking measures to mitigate the spread of COVID-19. We are pleased to share that over 99% of our employees and contractors have received at least one dose of the COVID-19 vaccine, and over 96% have received two doses, with about 76% having received a booster shot. We have also opened a dedicated community relations office for the Wasamac project in Evain, Quebec, to maintain ongoing communication with the community and local stakeholders. During the quarter, we released our Climate Action Report, outlining our climate governance, strategy, and steps toward achieving our science-based target of limiting greenhouse gas emissions to a 1.5-degree Celsius increase. This document is available on our website, and I encourage everyone to take a look at it. Yamana has a history of prioritizing the health and safety of our people, environmental protection, and community engagement, and we remain committed to enhancing our sustainable development strategy. Now, let’s discuss our first quarter highlights. We continued our excellent operational performance, producing just under 211,000 ounces of gold, surpassing our quarterly target. This strong performance was fueled by Cerro Moro and Jacobina, with Jacobina achieving record monthly gold production in March. Silver production of nearly 2.2 million ounces at Cerro Moro also exceeded expectations, thanks to increased mill feed from higher grade zones. Gold production at El Penon is expected to remain stable throughout the year, and mine sequencing is anticipated to improve silver grades over the year, with over 60% of silver production expected in the second half of 2022. GEO production reached nearly 239,000 ounces, in line with our expectations despite a lower gold-to-silver ratio, while all-in sustaining costs performed better than planned. We are keeping our production and cost guidance for 2022 unchanged. I won’t delve into all the numbers on this slide, but I want to highlight the positive production trend we anticipate for the rest of the year. As anticipated, the first quarter is projected to be our lowest production quarter, and we expect to see increases in production and cash flow generation throughout the remainder of the year. Looking at the individual contributors to our performance, Canadian Malartic had a strong first quarter in line with our plans. We are also pushing forward with the development of the underground Odyssey project, which remains on budget and on schedule, with shaft sinking expected to begin in Q4 of this year and first production from Odyssey South anticipated in Q1 2023. We see significant opportunities at Odyssey. Exploration has shown promising results at East Gouldie, extending mineralization, and at the Odyssey South internal zones, which show potential for mineral resources. Our commitment to exploration in the Abitibi region drove our acquisition of Wasamac and the Camflo property from Monarch Gold. The Camflo property, which is not part of the Canadian Malartic Partnership landholding, has produced about 1.6 million ounces historically, and our initial assessment has found porphyry-hosted gold mineralization that could be mined by open pit. Studies are currently underway to fully evaluate its potential. Jacobina had an outstanding quarter, with higher ore tonnes mined reaching a record high in March, leading to record monthly gold production. Underground mine development work continues to access new mining panels, and combined with the increased ore tonnes, this provides additional flexibility through stockpile development, aiding the higher throughput expected from the ongoing phase expansion. We expect this positive trend to continue as the Phase 2 expansion is progressing ahead of schedule, with 8,500 tonnes per day anticipated by mid-2022. Cerro Moro benefited from access to more mining faces, which supported increased mill feed from higher grade underground ore, making up over 70% of the now-stabilized throughput. We are also advancing a scalable expansion study and considering options for alternative power sources, including grid connection and wind power. As planned, El Penon entered high-grade production this quarter and delivered solid gold results. We expect stable gold production throughout the year, but a strong second half is forecasted to account for approximately 60% of silver production due to mine sequencing. A key strategy for increasing value at El Penon is to establish additional mining sectors and enhance mining flexibility. With recent exploration successes like the South Deeps discovery, we aim to leverage excess plant capacity for increased production. Lastly, Minera Florida met production expectations, and we are pleased to have signed a new long-term collective bargaining agreement with our employees. Operational efficiency continues to be a focus at Minera Florida, where we have identified new opportunities to enhance recovery at the processing plant, and we are pursuing a plan debottlenecking study expected to allow for increased throughput in 2025 upon receiving the permit. Before I pass it over to Jason, I want to recap some of the exciting responsible growth plans shared during our recent Investor Day. Although our formal 10-year outlook shows growth to 1.25 million gold equivalent ounces, we have found a way to increase production to 1.5 million gold equivalent ounces through project optimization with only modest long-term capital expenses. This responsible growth aligns with our capital allocation strategy that balances shareholder returns, our balance sheet, and low capital-intensive growth. Our exciting growth potential is partly because we have a greater proportion of generational mines compared to many peers, and a higher relative number for our size. We define generational mines as those providing significant production and cash flow over many decades, offsetting such generational mines in our portfolio, like Canadian Malartic and Jacobina. Over the long term, we clearly envision Canadian Malartic exceeding current baseline production, assuming our exploration and capacity expansion plans are executed successfully. Combined with the phased expansion at Jacobina and other growth opportunities discussed during our recent Investor Day, we see significant growth potential within our existing portfolio. We will provide more insights about our company at our Annual General Meeting later this morning. I will now turn the call over to Jason to discuss our quarterly results in more detail.

Great. Thank you, Daniel, and good morning, everyone. Turning to our first quarter financial performance, our continued operational strength helped revenue reach $441.9 million, up nearly 5% from the same period last year. Gross margin, excluding DD&A, rose 5% to $262.7 million from $249.9 million in the year earlier period. Earnings during the quarter were $57.8 million or $0.06 per share or similar to last year. But on an adjusted basis, earnings were $0.09 per share versus $0.07 per share last year. Cash flows from operating activities before the net change in working capital came in at $197.3 million, up over 7% from last year. We always have a first-quarter working capital outflow based on normal yearly cycles, but it was a little higher this Q1 due to higher stockpiles and an unbudgeted build in materials and supplies inventory in response to geopolitical events. So cash flows from operating activities of $151.7 million during the quarter compared with $160.2 million last year. We also generated free cash flow before dividends and debt repayment of $34.7 million during the quarter. And we ended the quarter with cash and equivalents of $516.4 million, including $218.3 million available for the MARA project. As Daniel already noted, we expect free cash flow to increase quarter-over-quarter with the strongest free cash flow generation anticipated in the second half of the year and, in particular, during the fourth quarter, which is expected to result in cash balances steadily increasing throughout the year. I've noted before that in Q2, we always have our final cash tax installments from the prior year, and that will be true again this year with about 40% of our annual cash taxes occurring during Q2. Many people have been asking how inflation has been impacting our business. When we guided earlier this year, we had incorporated a modest impact from inflation that we are seeing at our operations at that time. Since then, geopolitical events have caused further price increases in many consumables, although the markets are very volatile. During Q1, we didn't really see any significant impact on the business other than for diesel. We included $80 oil in our guidance for the year, and for every $10 move in the oil price, that adds about $5 per GEO to our ASIC cost structure. But with our footprint of primarily underground mines, we have a more modest exposure to the oil price. We'll continue to monitor global events and their impact on potential inflation. Despite recent volatility, we have been successful in managing these risks to start the year and be more productive. Our costs for Q1 came in better than our planning. As detailed during our Investor Day and by Daniel earlier, we have some exciting growth prospects. That said, I want to emphasize that our responsible growth will adhere to a disciplined capital allocation strategy and that the capital requirements are very manageable in any given year. While we pursue the Yamana 1.5 Plan, we expect continued growth in our cash balances of $50 million to $100 million per year during the guidance period. We're targeting $150 per ounce in sustaining capital to maintain the productive capacity of our mines and ensure mining flexibility. Net expansionary capital is not expected to exceed $175 million per year on average during the guidance period through 2024. Further, our 3-year guidance period only contemplates a modest cost of studies and permitting for the Yamana 1.5 Plan. Expansionary capital subsequent to the guidance period to achieve the additional 250,000 GEO per year to reach the Yamana 1.5 Plan is expected to be between $250 million and $300 million and will be supported by our increasing production platform. With this approach, sustaining and expansionary CapEx is not expected to exceed 50% of operating cash flow during the guidance period, based on our 2022 planning. With strong cash flows and a growing cash balance, we also expect to be in a position to increase our sustainable dividends while continuing to target share buybacks with the residual cash after other capital allocation priorities. Our balanced approach to capital allocation has positioned Yamana to invest in its organic growth projects, while at the same time continuing to generate free cash flow, which provides the opportunity to continue enhancing shareholder returns. And with that, I will pass the call back over to Daniel.

Thanks, Jason. And with that, I will turn it back over to the operator for questions.

Our first question comes from Anita Soni with CIBC World Markets.

Sorry, I put myself on mute. I wanted to ask about your capital spending throughout the year. I believe you spent around 21% or 18%, in that range. Can you provide some insight on how you anticipate this will play out over the year? Will there be a noticeable increase in Q2, or do you expect a more consistent spending pattern throughout the year?

Yes. Pretty even by quarter now, Anita, over the balance of the year. So both you look at sustaining or expansionary capital, it'll be pretty flat; take our guidance minus what we spent in Q1, divide by 3, and it should be pretty good.

Yes. Is the reason for the slight underspending due to any inflationary or COVID-related effects? Are there any risks of increased capital in the next year or potential delays in your projects?

No, not really. We typically start the year a bit slow with capital spending, which aligns with the lower production in the quarter. However, we're ready to spend our capital for the flexibility it provides.

Okay. I have one last question regarding capital expenditures. I noticed that a significant difference in capital spending came from Malartic. I'm curious if that was due to increased stripping. Is this the right level of capital spending for the year, or should we expect a higher increase in stripping later on?

So you're talking in sustaining?

Yes, sustaining both. Both sustaining and development capital there.

Yes, I think our share is probably $50 million to $60 million less around sustaining. So again, divided by three, pretty good.

Okay. All right. And then the last question was in terms of the care and maintenance costs at Alumbrera, is that a good number to use for the remaining quarters of the year?

Yes, you can just roll that out. That's good.

Our next question is from Tanya Jakusconek with Scotiabank.

Great. Good morning, everyone, and thank you so much for taking my questions. And first of all, Jason, thank you so much for providing us the sensitivity to the oil price. I just wanted to check, does fuel represent about 8% of your cost structure? I'm just trying to understand what percentage I'm working with that sensitivity, please.

Yes. We look at everything on the ASIC cost structure. I mean, you may be a little bit closer on pure OpEx. But when we look across ASIC, it'd be about half that amount, I'd say. So it's there with our power, those are our two biggest contributors to consumables.

Okay. So then if I was to use this at $5, it would be closer to half, if I was just looking at it on total cash costs, would that be correct way of thinking about it, the sensitivity?

Yes. Order of magnitude might be a little heavy, but...

Okay. I just want to confirm with you and Daniel that most of your labor agreements are settled for 2022 and there aren't any significant ones coming up. Is that accurate?

Tanya, you're absolutely right. As we mentioned last year, we signed all our agreements in 2022, so there are no CBAs to sign in 2022. It will just be normal discussions on inflation in each of the countries where we adjust our salaries, but it is all already planned in our budget.

I wanted to ask about your recent press release regarding increases in steel prices. Are you experiencing inflationary pressures with any other consumables, such as cyanide, or facing any supply chain issues?

Well, on the supply chain, we have not seen any issues. And then like Jason mentioned, we have increased a bit our capital spending in the first quarter because of what's happening in Ukraine. So we didn't take any chances and then we increased our inventory. But on the cost, we have two choices in life: to accept these cost increases, and they are there, and do nothing, or do what our team is good to do is look at opportunities to mitigate these costs. And they've been quite efficient in the past years and then so far this year in 2022. And then everyone in this team is their focus to make sure we have these increases, like all the other companies like us personally, when we go buy anything, we see it. But again, we made the choice to look at ways to mitigate these costs. I'm not saying we will be able to mitigate 100% of them, but we've been quite good so far. And one of the best ways to do it is to see how we can increase production from this year, what we've done last year and the year before. When the divider is higher, it's always helping even if the top line on cost is a bit higher.

I appreciate that. And maybe just on the guidance that you provided and reiterated this morning for 2022. Should we still be thinking the same way as you gave guidance in Q4, which was that every quarter going forward should be evenly distributed on the gold side and then we have more silver in the second half from El Penon? Is that a fair assumption?

Yes. As you know, Jacobina will be in full Phase 2 production starting in the second half of this year. So you will see an increase in gold in Q2 compared to Q1, then Q3 and Q4 will be more stable, but all the other mines are basically almost equal each quarter. So that's the beauty of this year, most of the mines, or all the mines have equal quarters. Just Jacobina is increasing its production. And right, like I mentioned, Cerro Moro will be stable over the year on the silver, but actually, the planning, our plan shows a higher silver production from El Penon in the second half.

Okay. Perfect. And if I can ask one last question just on the inflationary pressures. We talked a little bit on the cost side. As you look at Wasamac, and thank you for mentioning that Canadian Malartic is on budget and on time. Anything you're seeing on capital at Wasamac?

Tanya, thanks for the question. Here, this is Yohann speaking. We are reviewing our cost, but so far, we don't see any impact on our disclosure of $416 million to build that project.

Okay. I appreciate that. And I'll let someone else ask questions.

Our next question is from Fahad Tariq with Credit Suisse.

Thanks for taking my two questions. First, Jason, if I could go back to one of your comments on just the sensitivity. So you mentioned, I believe that the budget was at $80 a barrel and that $10 a barrel move results in $5 per ounce on a GEO-basis higher cost. So if I look at your annual guidance for the year, which is $725 per ounce. And given that we're at, call it, $100 a barrel, is it fair to say like adding $10 an ounce rough math makes sense, assuming these oil prices stay for the rest of the year?

Yes. Well, as I gave you $10, so at a $20 spot, up to spot then the $10 per GEO on an ASIC basis.

Got it. Okay. That's helpful. And then just a second question. Can you mention or going to some specifics on some of these productivity gains? Like what are the biggest ones across the portfolio? Because I mean, frankly speaking, Yamana in a very positive way has been an outlier when it comes to containing inflation.

Yes, I believe this reflects our strong procurement efforts. It requires a significant amount of work to manage tenders consistently, but we are actively pursuing those. We are also testing various competing products, which brings not only costs but also potential productivity savings. During this period, we maintained a significant level of inventory. That was true at the beginning of the year, and by mid-February, we adjusted our strategy to increase inventories for items we identified as more vulnerable from either a supply chain or pricing standpoint. Therefore, we have items with four to six months of inventory on hand, which has mitigated the impact of any price increases since then. Overall, I would describe our procurement and supply chain as mature and effective—it demands considerable effort, but the rewards are evident.

Maybe to add to that. Good question, but maybe I should add to that. We mentioned many times over the past years that we have what we call operational excellence, a team at our company at each of the operation by Yohann and his team. So each mine, they have project each year to try to beat inflation and/or cost increase. And then it's everyone at the mine site. It's not our staff only. It's coming from our employees at working on the field, seeing opportunities for us to improve the way we drill the way we do things. And then we put these teams together, they work and they come up with project savings at the head of the mine. And then the mines are sharing in between themselves, if they find a way to reduce costs or be more efficient, they share between themselves. And we're proud to have this, and this works really, really well. And that helps us to maintain our cost or keep our costs as low as possible.

Our next question is from Mike Parkin from National Bank Financial.

Guys, can you hear me okay?

Yes, Mike.

We are noticing labor tightness in Canada and Australia. Could you provide some insights on how you might be protected or exposed regarding the Canadian Malartic Odyssey development? Are you locked into contract rates that major labor price fluctuations won't affect, or should we be concerned about potential risks?

Canadian Malartic is a preferred employer in the Abitibi, and we are fortunate to have a long mine life in the open pit, with decades of underground operations ahead. It is known as a great employer, offering above-average salaries and benefits, which helps us attract talent. Last year, we had no challenges in hiring staff to begin planning the underground development this month with our employees. So far, we have not encountered any hiring issues. While the labor market is tight, we are managing well and do not foresee any significant problems.

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

Well, thank you, operator, and thank you all for joining us today at our first quarter conference call and webcast. As a reminder, we have our annual meeting of shareholders later this morning, which will begin at 11:00 a.m. We welcome you to join us at the Design Exchange at 234 Bay Street in Toronto, or you can visit our website at yamana.com for the detail to tune in online. We look forward to seeing many of you later today. Please take care and stay safe. Bye for now.

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