Pan American Silver Corp Q4 FY2022 Earnings Call

Thank you for joining us today to discuss Pan American Silver's Q4 2022 results. This call includes forward-looking statements and information and makes reference to non-GAAP measures. Please see the cautionary statements in our MD&A for the period ended December 31, 2022, and news release and the presentation slides for our call today, all of which are available on our website. I'll now turn the call over to Michael Steinmann, Pan American's President and CEO.

Thank you for joining our call today. I'm looking forward to discussing with you the major event of 2022, which is our transaction to acquire the Latin American assets of Yamana Gold. Shareholders of both Pan American and Yamana overwhelmingly approved the transaction in January, and we expect it to close sometime this quarter. But first, let's recap Pan American's 2022 results. Pan American produced 18.5 million ounces of silver and 552,500 ounces of gold in 2022. Silver production came in at the top end of the revised range we issued in November, while gold production was in line with our original operating outlook. Gold production in the fourth quarter was the second highest on record, driven by back-end loaded production from Shahuindo and La Arena, as we had expected and communicated. Both silver and gold production were impacted by reserve grade shortfalls in Phase 9b of the open pit at the Dolores mine, while silver production was further impacted by mine sequencing into lower silver grade stopes at La Colorada in the second half of 2022. Ventilation conditions in the La Colorada underground mine improved in the second half of 2022 following the installation of two booster fans and the commissioning of a refrigeration plant. We expect to complete sinking of the new concrete line shaft late this year and equip the shaft with ventilation fans during 2024, which will further improve access to the higher-grade zones of the La Colorada vein deposit. Operating costs came in above our original guidance range, as we indicated they would, largely reflecting the global inflationary environment. Total capital expenditures were in line with our original operating outlook. We made significant progress on our major capital projects to advance the La Colorada Skarn. In 2022, we completed 32,000 meters of exploration drilling, discovering a high-grade zone of mineralization that we announced mid-year and about 46,000 meters of infill drilling, enabling us to update the mineral resource estimate for the Skarn in September. We also advanced construction of the new concrete line ventilation shaft, reaching a depth of 88 meters by the end of the year. We have included a couple of photos in the slides that accompany this call. We completed and put into service the refrigeration plant. This new infrastructure will benefit the existing La Colorada mine as well as future development of the Skarn. At our Escobal mine in Guatemala, progress was made on the ILO-169 consultation. In 2022, the pre-consultation phase was completed, and the Ministry of Energy and Mines and representatives delivered a progress report to the Guatemalan Supreme Court of Justice. As you know, we cannot provide a timeline for completion of the consultation or potential restart of the mine. Revenue in 2022 totaled $1.5 billion. During Q4, we had a buildup in silver and gold finished good inventories valued at about $45 million to $50 million, which reduced the amount that could be booked to revenue due to timing of shipment at the end of December. Cash flow and earnings in Q4 and for the full year were distorted by expenses related to the Yamana transaction. In Q4, we expensed $157.3 million for transaction costs primarily for the $150 million we advanced to Yamana toward the termination fee paid to Goldfields Ltd. We are expecting to record additional expenses related to the transaction in Q1 2023. The other significant factor affecting earnings in 2023 was the impairment and NRV inventory charges related to the reserve rate shortfall of the Dolores Phase 9b open pit, which we reported in Q2. On an adjusted basis, earnings were $17.9 million or $0.09 per share in 2022. We exited 2022 with cash and short-term investment balances of $142 million and total available liquidity of $482 million. We drew down our revolving credit facility by $160 million to fund the costs related to the Yamana transaction. We maintained a dividend of $0.10 per share for Q4. Pan American liquidated its remaining equity interest in Maverix Metals, Inc. in January 2023, in connection with the acquisition of Maverix Metals by Triple Flag Precious Metals Corp, realizing net proceeds of $105.3 million. Previously, in May 2020, we had sold a portion of our equity holdings in Maverix for $45.4 million. Therefore, in total, we have crystallized $150.7 million value for the 19 royalties, precious metal streams, and payment agreements that had been sold from our portfolio to Maverix Metals. We are in a solid financial position entering 2023 and expect our financial performance to further improve over the coming year as we integrate the Latin American assets we will acquire through our transaction with Yamana. The Yamana transaction will strengthen our competitive advantage in Latin America where we have nearly 30 years of operating experience, with an expanded and more diversified portfolio, plus a suite of highly promising development projects and exploration properties. We see opportunities for growth and operational and administrative synergies. We are planning to provide our operating outlook for 2023 following the completion of the transaction, which is expected to occur later in the first quarter of 2023. The outlook will include the Latin American assets acquired through the transaction as well as consolidated forecasts for annual general and administrative, exploration, and project development costs. It will also reflect the Manantial Espejo operation in Argentina being placed on current maintenance after reaching the end of its mine life at the end of 2022. The transaction with Yamana is truly transformative and builds on Pan American's core operating strength. The new Pan American needs to be a stronger, larger, and more diversified company better able to internally fund and advance our growth projects. I'm proud of what our team has accomplished in 2022, positioning the company and our stakeholders for a very promising future. I would now be happy to take your questions.

With respect to the upcoming guidance, will it be retroactive to January 1? That's my first question. And then, the second question is with respect to the segments. Can we expect, say, if Cerro Moro falls into the silver segment and the remaining assets to report to the gold segment? Or will all the assets report to the gold segment?

Yes. Thanks for the question, Craig. Yes, our guidance for Pan American's original assets, the guidance will be for the full year. And then the assets that come to us through the Yamana transaction will, of course, be adjusted to the closing date. So that’s what we are planning and we are not completely sure with the closing date yet. That’s kind of a moving target yet. So that’s what we have in mind. And I think the separation between gold and silver segment operations, it’s probably very close to what you had mentioned.

Do you anticipate any cyclicality with your existing assets similar to the previous year, specifically with La Arena, regarding whether you expect recoveries to be weighted more towards the beginning or the end? Any clarity on this would be appreciated.

Yes, Craig, this is Steve. It will be weighted towards the back end. This is typical at La Arena with our stripping schedule, but we did carry over some of the waiting from 2022 into 2023. So we're expecting it to be more balanced than in previous years, but it will still trend towards the back end to some extent.

And just to add that, Craig, something on the guidance. Of course, there will be quite some different numbers when you look at the costs because Yamana is showing it in gold equivalents, while as you mentioned, we separate it out in gold and the silver segment’s net of byproduct credit. So there’s not going to be a complete apples-to-apples to compare from one company to the other.

We’re here on February 23, where the first quarter is over half done. Can you give us a little guidance on the March quarter? Will the silver output be above or below 4 million ounces?

John, it's Michael. We don't have all the data yet, but I think we're off to a reasonable start this year. Once we finalize the transaction and have a closing date, we can adjust our guidance for the Yamana assets and provide full guidance. We'll also report first quarter results in May, as usual. I expect that shortly after we close, we will issue a press release with our full year guidance for the combined company. Additionally, you should anticipate upcoming information regarding the drilling and exploration results from La Colorada Skarn, which is ongoing. Typically, we release results about three to four times a year, and more information will likely be available before our Q1 results in May.

Michael, as you know, when you pay a premium to acquire a company and then another premium for the break fee, you have to improve the performance of the other company to justify the higher valuation, or else later down the road, there can be impairment charges if you don't earn the return. In Agnico's case, they have a big savings because they won't have to build a mill for Wasamac. In the operation of the Latin American mines, other than G&A and purchasing, are there any obvious improvements or ways you're going to run the mines better than Yamana would have?

Yes, John, this is a highly beneficial transaction. If you account for the amount Agnico is paying for their assets in Canada, what we are left with are the South American assets. The price we paid for these assets is around 0.7 times the net asset value. After including all closing costs and some of the break fees, it likely averages between 0.8 and 0.85. This acquisition is notably different from acquiring an entire company, as it involves two segments divided between North America and South America. We seized the chance to acquire these assets at an advantageous price. Yamana managed those assets well, but there are changes coming, especially concerning general and administrative expenses, which are significant. We will see shifts in G&A both in North America and South America due to overlap in our offices. We are pleased that Yamana's operational teams will join us; they did an excellent job. Furthermore, our expansion in Latin America will enhance our purchasing and negotiating power for major purchases such as cyanide, steel balls, and explosives, resulting in synergies not yet factored into our estimated synergy figures of approximately $40 million to $60 million annually. This estimate primarily relates to G&A, with a slight portion for exploration, although we anticipate additional operational synergies, which we will better assess once we close the deal and begin working with the assets. Starting with the $40 million to $60 million is promising, and we expect to see total savings of $400 million to $600 million over the first decade.

So Mike, could you explain the accretion a little more? It would seem like in this share swap, the biggest driver of the accretion is that Pan Am's mines have very little gross margin, and the Yamana mines have a bigger gross margin. And I apologize, I don't read street NAV estimates. Sometimes, people use very low discount rates or assumptions that are foreign to me. But could you explain that accretion in a little more detail?

When assessing the accretion dilution analysis for an acquisition, it's important to consider various factors. In this instance, it is already enhancing net asset value, contributing positively to cash flow, boosting production, and lowering cash costs, which is crucial. From the outset, we indicated that this would lead to a mix of higher and lower-cost production, with some mines having significantly longer lifespans. Additionally, regarding reserves, we currently hold one of the largest silver reserves in the world, estimated at about 110 million ounces. However, the most notable increase in reserves, particularly in terms of accretion, comes from gold, which adds a significant quantity to our total reserves. These are the key points related to the accretion dilution analysis.

If I could ask one more. What do you think is a good guess for when La Colorada Skarn enters production?

That's a very good question and we spend a lot of effort on this. As you know, this, no doubt, has been our biggest discovery ever. And it's a great deposit. It keeps growing. And as I said and alluded to, we will put down more exploration results during the year as we go. I'm sure you noticed when we put out the last resource update, that this is kind of a moving target as the exploration has been so successful, not only with infill drilling but with step-out drilling, plus added that really high-grade zone that we reported in September last year. But the engineering has to adapt constantly to decide on the mining method that we go forward with it. I think we are still on track with the PA probably late this year. As I said, we will have more information as we go during the year out there. It's going to be a very sizable deposit, as you can imagine. With all the categories, we probably have around 0.25 billion tons of resources, which I have no doubt will grow with the current exploration program. So it will take a number of years to put that into production. And it really depends on what mining method we ultimately choose and how we deal with the high-grade zone, whether we deal with that separately or if it's part of our overall production profile. So that's all very indicative of whether we will be a few years faster or if we just build a really big operation and it takes a few years more to do so. But I don’t have that number yet, John.

So it might be 2027, or it might be a range of 2027 to 2029, if it's a bigger, more complicated construction.

I don’t have the final year yet, but it will definitely be a ramp-up. We have discussed previously that we are aiming for substantial production, potentially between 15,000 to 20,000 tons a day or more. Starting up the mine won’t happen from scratch in just a few months; it will involve a lengthy ramp-up to reach that tonnage, similar to any large underground operation globally.

This is Sean McAleer. We've got the consultation process ongoing right now. And the process has obviously taken some time due to COVID and changing government after the acquisition. It’s hard to put a date on when the consultation will be concluded. And obviously, that is a prerequisite before we can set any kind of parameters around when we would enter production. The Escobal startup, when and if it does occur later on in the year or in 2024, it's going to take months to get back up again. So we can't give a date really for a startup Escobal right now.

Thank you for joining us today. I anticipate there will be numerous questions once we finalize our transaction and can discuss the new Pan American in more detail. This will be a significant transformational opportunity for us, and I am excited about the journey we will have throughout 2023. I look forward to sharing more details in upcoming press releases and during our Q1 update in May 2023. Wishing everyone a wonderful spring. Thank you.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.