Pan American Silver Corp Q2 FY2023 Earnings Call

Good morning. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to Pan American Silver’s Second Quarter 2023 Conference Call. Siren, you may begin your conference.

Thank you for joining us today for Pan American Silver’s Q2 2023 conference call. This call includes forward-looking statements and information and makes reference to non-GAAP measures. Please see the cautionary statements in our MD&A, news release, and presentation slides for our Q2 2023 unaudited results, all of which are available on our website. I will now turn the call over to Michael Steinmann, Pan American’s President and CEO.

Thanks, Siren, and thank you, everyone for joining our call today. The second quarter is the first period we are reporting results inclusive of the assets acquired through the Yamana transaction, which closed on March 31st. The results clearly deliver on the benefits we expected through the strategic acquisition, enhancing both the scale and quality of our portfolio. With the contribution of the new assets, production in Q2 was up 102% for gold and 55% for silver relative to Q1. Consolidated Q2 silver production of 6 million ounces was at the high-end of our 2023 quarterly guidance, and consolidated record gold production of 248,200 ounces also approached the upper end of the range. Silver and gold segment all-in sustaining costs per ounce of $15.70 and $1,342 respectively are within our full-year cost guidance. With a strong performance year-to-date, we have reaffirmed our original 2023 operating guidance provided in our Q1 2023 MD&A. Our production is back-end weighted, particularly for gold, in the fourth quarter. The strong production and sales volumes resulted in Q2 revenue of $639.9 million. Net loss in Q2 was $47.4 million or $0.13 per share, reflecting non-cash accounting impacts. Notably, a $33.3 million impairment charge net of tax related to the sale of our 92.3% interest in Morococha for cash consideration of $25 million as per our news release from July 31. The net loss also includes $26.1 million net of tax for fair value adjustments on finished goods inventories that were expensed during the quarter. As these inventory adjustments are related to the Yamana transaction and more one-time in nature, we have adjusted them from the earnings. The adjusted earnings were $14.7 million or $0.04 per share. Cash flow from operations totaled $117 million net of $50.5 million in taxes paid. Our annual tax payments are typically the highest in Q1 and Q2. We repaid $55.4 million of debt in Q2, exiting the quarter in a strong financial position with $470 million available under the Sustainability-Linked Credit Facility and cash and short-term investments of $409.2 million. This includes the $192.9 million of cash that is restricted to the MARA project. Our financial position improves further with the divestment of non-core assets we announced on July 31, 2023. The sale of our interest in the MARA project in Argentina, the Morococha mine in Peru, and the Agua de la Falda project in Chile, together with the divestment of non-core equity investments, is expected to yield total cash proceeds of $593 million. The sale of the equity investments has already been completed, and we expect the other three asset sales to be completed in the third quarter of 2023. In addition to the cash proceeds, Pan American will retain future upside to the retention of copper and gold royalties with strong counterparties. The divestment of the MARA project and Morococha mine will also allow meaningful reductions in our annual project development, reclamation, and care maintenance costs for 2023 and going forward. As per our capital allocation objectives, we intend to fully repay the $280 million drawn on our credit facility as of June 30, 2023. The remainder of the proceeds will increase our cash balance, further strengthening our balance sheet, and position us to advance our growth projects, including the La Colorada Skarn project, as well as paying dividends to the shareholders. We announced yesterday a $0.10 per share dividend with respect to Q2, equivalent to $36.4 million in aggregate dividends. Optimizing our portfolio was an important and stated objective following the Yamana transaction, and I'm pleased with our progress to date. Turning to the La Colorada Skarn project, work continues on the preliminary economic assessment of the PEA, which we aim to release as part of an updated La Colorada property technical report later this year. The PEA will include our review of project development operating and capital cost estimates for the Skarn. At the La Colorada mine, the concrete line ventilation shaft advanced to a depth of about 420 meters at the end of July and is expected to reach shaft bottom by the end of this year. Once the two exhaust fans are installed, we expect to see significant improvement in ventilation in the high-grade East Candelaria area of the mine. Until this new system is operating, we are restricting development and mining rates in the higher grade, deep eastern portion of the Candelaria deposit. The new ventilation infrastructure, which includes a refrigeration unit that was commissioned in 2022, will also provide benefits to the development of the Skarn project. At the Escobal mine in Guatemala, three meetings were held in the second quarter under the ILO 169 consultation process being led by the Guatemalan government. We also took part in a working meeting in late June with the participation of the Xinka Parliament, their advisors, and Guatemala government institutions. During the meeting, we presented details on the dry-stack tailings facility, management of water, and vibration from blasting activities when the mine was in operation. Following the meeting, we responded to requests for additional information and continue to work with MEM, the Ministry of Energy and Mines in the process. Now that all parties have delivered their institutional presentations, the MEM considers that the information transfer process for phase 2 of the consultation is complete. The MEM has established several dates for working meetings with the parties involved in the consultation. We continue to participate in the ILO consultation process in good faith while respecting the Constitutional Court order. Escobal continues under care maintenance, and at this time, no date has been set for a potential restart of operations. Our second quarter results showed the successful transformation of Pan American into a major precious metal producer with more diversified operations across the Americas and a strong focus on silver. The integration of the Yamana assets is progressing well, and we are on track to capture the $40 million to $60 million of annual synergies we had identified through the transaction. We are committed to maintaining operational efficiencies and delivering on our targets, and I look forward to updating you next quarter as we continue to evolve into the new Pan American Silver. Before we move on to questions, a few housekeeping items: We are currently working on the updated reserve and resource report inclusive of our Yamana acquisition properties, which should be released in the next few weeks. I would also like to note that we have revised the date for our ESG call. The call will now be on October 19, 2023, at 8:00 AM Pacific Time, 11:00 AM Eastern Time. We will provide further details closer to that date. Together with the other members of our management team, we will now be happy to take your questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. The first question comes from Lawson Winder at Bank of America Securities. Please go ahead.

Okay. Thank you very much, operator, and hello, Michael and team. Thank you for the update today. I would like to start off just by asking about your capital return. You touched on briefly in your prepared remarks, but I just wanted to ask that again and hopefully get a little more color from you. With the dividend I would expect, and with a much larger asset base that you have now with the Yamana assets, that there is that ability to pay a higher dividend. I'd like to hear your thoughts on that. Secondly, with the share price trading now well below where you issued shares for the Yamana acquisition, does it make sense for Pan American to be repurchasing its shares? Thanks very much.

Yes. Thanks, Lawson. I think our capital allocation did not change. What we did in the last few years in maintaining a very strong balance sheet has proven effective. We announced last week the sale of a few non-core assets for about $593 million cash and some high-quality royalties as well. We expect that closing will happen in Q3. This money is not in our bank account yet, but it will come. That's where your question hints regarding capital allocation. We maintain a strong balance sheet with low debt levels. We took on two bonds from Yamana, which have very attractive interest rates, and they are long-term bonds, so that's manageable. We took some money on our line of credit, which, as you can imagine with the current interest rate situation, is more expensive debt and will be paid back once we receive cash from those transactions. The remaining funds will further improve our balance sheet and result in returns to our shareholders. We declared a $0.10 dividend, which might be the last quarter of our dividend payment under the old policy. The previous policy was based on net cash, which worked very well when Pan American had no debt. We are currently working on a new policy, and we believe the right time to install that will be at the end of the year when we have all that cash from non-core asset sales. The Board has not made a final decision on this yet. However, it will follow a model similar to our old policy, and there will be an openness to dividends, share buybacks, etc. But do not forget that we also have some high-quality projects, which are core to our business. As I mentioned earlier, La Colorada Skarn is a focus area, and we plan to release the PEA later this year.

Okay. Thank you for those thoughts. If I could also follow up on the asset sales. It would make sense that La Arena 2 would also be a non-core asset potentially to be divested. Is that a fair assumption? Secondly, how do you think about that given that there are still a couple more years or several more years of really strong gold production left at that asset?

Yes. I think we've only held these assets for three or four months. We have come through and identified a strong group of non-core assets. We're also working on others, so this is by no means finished. We have many assets in our portfolio, some from Pan American and some from Yamana. We will continue optimizing our portfolio. I have stated before that copper is not a focus for us. We prioritize silver and gold production. I envision a structure similar to what we did with MARA; get cash for an asset and maintain a strong royalty to keep exposure to future copper prices. You're right that La Arena still has a few years of gold production from the oxides. I’m not worried about that. There will be various ways to structure a deal—keeping the gold, continuing mining, and transitioning the asset afterward to a new buyer who can handle the sulfides below. I believe we can resolve those details through negotiations.

Okay, great. And then hopefully just one final question that should be fairly straightforward just on the silver unit cost guide for Q4. By the way, thank you for providing the quarterly guidance. I see that unit costs step down in Q3 versus Q2; however, they're expected to step back up even with higher production in Q4. Is this related to a decline in some of the byproduct credits in Q4 versus Q3?

Yes. Hi, Lawson, Steve here. No, it's more reflective of our sustaining capital timing. We see a heavy quarter in Q4 for sustaining capital spend, which is particularly weather-related in some of our assets. Q4 is usually the peak time for our construction on leach pads, waste dumps, and similar projects.

Yes, as Steve indicated, it is indeed weather-related in many places when transitioning from the wet to the dry season. Regarding quarterly guidance, Lawson, in case others missed it, it is in our MD&A. Looking back at our Q1 MD&A, our costs in Q2 were actually below our guidance for that quarter.

Okay. Thank you all very much. Appreciate that.

Thank you, Lawson.

Thank you. The next question comes from Craig Hutchison of TD Securities. Please go ahead.

Hi, good morning.

Good morning.

I had a question on the MARA project, which you plan to retain. Is that something you hold long term, or would you be looking to monetize that post the deal closing? Have you received any expressions of interest on that NSR since you announced it last week?

At the moment, we are focused on selling some of these non-core assets. Whenever possible, we try to keep access to future upsides through royalties, which has worked very well for us in the past. I would like to remind everyone of the Maverix transaction we did with our former portfolio of royalties in 2015, which yielded considerable returns. These royalties we're discussing now are very strong. In the case of MARA, we are talking about a life of mine copper royalty, probably one of the largest copper deposits in the world set to be developed. I don’t want to conclude on what we will do with these royalties just yet. There is a lot of demand for royalties, and people are indeed asking about our plans, but for now, we are concentrating on optimizing our portfolio and collecting those royalties. We will decide later how to create the most value for our shareholders.

Okay, great. Maybe one last question just on the tax. You mentioned cash taxes are higher in Q1 and Q2. Can we expect them to drop off fairly substantially here into Q3? Can you provide some context on why it was so high? Was it for catch-up payments from 2022?

Hi, Craig, this is Ignacio speaking. In general, yes, as you know, we pay installments throughout the year. However, there is usually a catch-up that we do, typically between March and April. In this case, there was a large catch-up in April from some taxes, specifically in Chile. But yes, that's just a normal cadence of our tax payments—installments followed by catch-up payments typically in Q1 or Q2.

Yes, you're correct. Our largest tax payments are usually in the first two quarters of the year.

That's correct.

Great. Thanks guys.

Thank you.

Thank you. The next question comes from Don DeMarco from National Bank Financial. Please go ahead.

Thank you, operator. Good morning, Michael and team. My first question regards the asset disposition in late July. Does this change your care maintenance guidance for 2023? I believe it was about $100 million for the year, and maybe $50 million has been spent in H1.

Yes. Good point. It's not just the cash that comes in and the royalties; a lot of care maintenance costs will also go away with those transactions. The biggest impacts on the care maintenance costs really come from Morococha and, of course, MARA. It depends on when the transaction closes, but once it does, yes, we will see those costs disappear. We will make adjustments to care and maintenance capital at the end of the year depending on the closure date, but it will definitely improve future years significantly.

Okay. Thank you. Looking at the reported loss line, I see that AISC costs are somewhat variable against the guidance ranges. For cornerstone assets like Shahuindo and El Penon, the AISC appears above the guidance ranges, while Jacobina is near the bottom. What are the factors driving these fluctuations, and can we expect a reversion to the midpoint of the guidance range in H2?

Yes. Thanks, Don, Steve here. Regarding Jacobina, they are experiencing great success with some cost control programs. We have seen good costs; even the cost per ton has looked very favorable there. We are monitoring the exchange rate of the real, which has a strong effect as well. In Q2, Jacobina performed quite well, and we're optimistic moving forward. On the other hand, El Penon is undergoing some rescheduling in the mine plan, which has impacted costs. We have achieved good silver production from El Penon but experienced disappointing gold output in Q2, hence the adjustment. We expect a strong second half of the year, especially in Q4 at El Penon. We are increasing the development rates and activities there, driving some of the cost differentials.

Regarding Shahuindo, the focus is on blending coarse ore with fine clayey ores. We've decided to lower some cutoff grades to improve ore quality for blending, which has also influenced costs.

Yes. Additionally, a significant cost driver is sustaining capital, which varies due to seasonality depending on the weather patterns in different countries when certain work can be conducted. Byproduct timings and prices also greatly affect our costs, as all costs are net of byproducts. Currency fluctuations further impact costs, positive or negative, based on local payments and the strength of local currencies. Keep these factors in mind when evaluating our all-in sustaining costs.

Okay. We'll keep modeling the guidance ranges for the time being. Finally, regarding the ILO 169 process, it seems like a promising quarter with good progress and dialogue. I'm looking at your website, and it mentions that the Supreme Court verification follows phase 2 consultation. Can you give us an idea of when phase 2 might conclude and the expected events through phase 3?

Many activities were conducted in the quarter, and ongoing outreach efforts are crucial. The government of Guatemala's Ministry of Mines shows a timeline for roughly October to November for phase 2 completion. I can't guarantee that timeline, but it's what the government seems to want to achieve. Following this, we will enter the final verification phase with the court. I encourage everyone to track the government website for ongoing updates on this process.

Okay. I can see the link on your website. Thank you very much. That's all for me. Good luck with Q3.

Thank you.

Thank you. There are no further questions at this time. Mr. Steinmann, I turn the call back over to you.

Yes. Thank you, operator, and thanks, everybody for calling in today. It was a busy quarter with a new, larger, and stronger Pan American due to the addition of the former Yamana assets, strong production, and significant progress on divestments of non-core assets in the quarter. I am very happy to see these advancements. Integration is going well, and we are on track to harvest the synergies between $40 million to $60 million, as planned. I'm looking forward to reporting to you next quarter in November. Until then, enjoy the rest of the summer. Thank you very much.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.