Pan American Silver Corp Q2 FY2024 Earnings Call

Good morning, ladies and gentlemen and welcome to the Pan American Silver Second Quarter 2024 Unaudited Results Conference Call and Webcast. This call is being recorded on Thursday, August 8, 2024. I would now like to turn the conference over to Siren Fisekci, VP, Investor Relations. Please go ahead.

Thank you for joining us today for Pan American Silver's Q2 2024 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 2024 unaudited results, all of which are available on our website. I'll now turn the call over to Michael Steinmann, Pan American's President and CEO.

Thanks, Siren. And thank you, everyone, for joining the call. Our operations generated record cash flow before changes in working capital of $203.3 million in Q2. This resulted in $102.1 million free cash flow in Q2. Balance sheet strength further improved with cash balances rising to $337.2 million at June 30, an increase of $36.1 million from the previous quarter. This strong financial performance was impacted by an unusual income tax expense, driven primarily by foreign currency exchange rate fluctuations in the quarter, namely evaluations of the Brazilian Real and the Mexican Peso, which reduced foreign-dominated deductible tax attributes, as well as inflation adjustments on monetary liabilities in Argentina. Reported net loss in Q2 of $21.4 million or $0.06 per share was significantly impacted by the $93.1 million in income tax expense and $26.7 million net realizable value inventory expense. Adjusted earnings were $40 million or $0.11 per share. The impact of the inflation-driven Argentine income tax, which was not adjusted, reduced adjusted earnings by $0.03 per share. Turning to operations. Silver production of 4.57 million ounces in Q2 was below our expected range of 5.36 million to 5.78 million ounces for the quarter as continued ventilation constraints at La Colorada affected silver grades and throughputs. I'm very pleased to report that the new ventilation infrastructure was completed at the end of June and commissioning and start-up of the new plant started on July 11, 2024. As scheduled, ventilation conditions in the deeper Eastern areas of the mine have improved significantly. We are currently accelerating mine rehabilitation and development rates, which should steadily increase access to the higher grade Eastern Candelaria production areas. As a result, we are expecting to achieve higher throughput and grades in the second half of 2024 as planned. The slides that accompany this call available on our website include a brief video that shows the operations of the new ventilation fans that were installed at the surface of the shaft, the fully concrete lined 5.5 meter diameter by 580 meters deep water loop of the ventilation shaft that was completed last December. I'd like to congratulate the team on the successful completion of this large complex project. Total production was also impacted by weather-related disruptions at Dolores and Cerro Moro. At Dolores, open pit geotechnical challenges hampered ore tons mined and unusually prolonged dry conditions limited water availability, which impacted the leaching cycle. This resulted in lower grades and a low ratio of ounces recovered to ounces stacked during the quarter. We now expect to extend ore stacking activities and increase heat irrigation rates throughout Q3, given some stockpile processing at the start of the rainy season. At Cerro Moro, heavy precipitation in South Argentina restricted access to the satellite Naty zone impacting throughput and grades. We have regained access to Naty and expect to make up the Q2 shortfall in production during the remainder of the year. At Minera Florida, unusual heavy rains restricted access to the site and resulted in a 10-day suspension of ore processing during the quarter. We have now upgraded the road access to both Cerro Moro and Minera Florida, which reduced the impact of heavy rainfall events in the future. We produced 220.4 thousand ounces of gold in Q2, slightly below our expected range of 221,000 to 252,000 ounces. Continued strong performance at Jacobina and higher gold grades and recoveries at El Peñon helped offset the weather-related impacts at Cerro Moro, Dolores, and Minera Florida. Costs in Q2 came in better than expected with all-in sustaining costs, excluding NRV adjustments for both the silver and gold segment below our guidance ranges for the quarter. Silver segment all-in sustaining costs were $18.12 per ounce excluding an NRV adjustment that increased costs by $0.95 per ounce. Gold segment all-in sustaining costs were $1,465 per ounce, excluding NRV adjustments that increased costs by $119 per ounce. In total, $26.7 million of NRV adjustments were included in Q2 production costs. The NRV adjustments are primarily related to projections of higher future unit costs at Dolores to extract the in-heat inventories once ore stacking activities have been completed. We are on track with our major projects for the year. The new dry stack tailings storage facility at Huaron is on schedule to be completed in the second half of 2024 and will be commissioned thereafter. The construction of the paste plant project attainment is on schedule to be completed in Q3 2024. This will enhance ore extraction and improve mine stability at the Bell Creek mine. At Jacobina, we continue to advance plant upgrades and stabilize throughput at 8,400 tonnes per day and recoveries at 96%. We're also progressing the optimization study to optimize the long-term economic and growth potential in Jacobina. At Escobal, we met with several Guatemalan government institutions to support ILO 169 consultation process over Q2 and into Q3. During this period, we also hosted compliance visits by the Ministry of Energy and Mines and Ministry of Environment under the care and maintenance program for Escobal. The appointment of the Vice Minister of Sustainable Development, who will assume responsibility for overseeing the consultation process remains pending. Given the successful commissioning of the substantial La Colorada ventilation system upgrade in July, we are maintaining our operating outlook for production, cash costs, the all-in sustaining costs, and capital expenditures in 2024. While we anticipate silver and gold production to fall within our original guidance range, we expect production for both to be more heavily weighted to the fourth quarter of 2024 than originally indicated in our quarterly operating outlook and for annual silver production to be towards the low end of the annual guidance range. This improvement in our balance sheet over Q2, net debt declined to $472.3 million. We maintain our base cash dividend at $0.10 per common share. We look forward to increasing levels of free cash flow from back half weighted production in 2024. Together with the other members of our management team, we will now be happy to take your questions.

Your first question comes from Cosmos Chiu with CIBC. Your line is now open.

Thanks Michael and team. Maybe my first question is on La Colorada. Michael, you kind of touched on it. La Colorada, the ventilation shaft is now in place. It sounds like it's going pretty well. Could you maybe elaborate? Is it functioning as expected? How has that sort of helped airflow? And ultimately, I guess what I'm trying to get to is, in terms of getting to 2,000 tonnes per day, you said you're going to get to it by year-end along with higher grades. Is it going to be more a straight line sort of increase from now until then? Or is there going to be some kind of step change and is that going to be part of the fact that, as you mentioned, overall, Q4 is going to be stronger than Q3?

Yes. Thanks, Cosmos. Yes, the shaft completion and the installation and startup of the fan was right on time, as we indicated since the beginning of the year, it would happen midyear, and it did happen midyear. It looks very exciting what we see on the results side on the impact to the mine of that shaft, which, as you know, was a multiyear project really to kind of bring us back on track here with the production at La Colorada, but Steve, maybe give some more detail.

Sure. Good morning, Cosmos. Thanks for the question. I have to say we're incredibly happy with the results of this new shaft. Immediately, when we turned the fans on July 11, we increased overall flow rates into the mine by about 200,000 to 300,000 cubic feet per minute, sorry, and immediately, we saw temperatures drop in the Candelaria East Zone by 3 degrees Celsius. So a substantial improvement, which led immediately to a pump in tonnage of 25% over what we've been seeing up until that point through the year. We were about 1,400 tonnes a day going in for the year before we started that fan. We're now up at around a little over 1,700 tonnes a day. So between now and the end of the year, the other thing I wanted to mention is that we also bumped our development by 10% from where we were prior to when that fan started up. So within the 2.5, 3-weeks of running the fan, we've seen an incredible boost in production and development rates. That will continue to ramp up. I think for purposes of quarterly reporting, it will be a bit of a straight line ramp-up. Obviously, day-to-day, there are fluctuations that take place, but we're feeling good that we're starting from a good pace, and we'll ramp up through the rest of the year.

Yes, that's great to hear. And then maybe on the quarterly guidance as well. Michael, as you mentioned, Q2 due to weather-related issues. Silver production was lower than your quarterly guidance. However, I do see that your cost, all-in sustaining costs was also lower or better than your quarterly guidance. So how would you achieve that lower cost despite lower production? And then ultimately, what’s your ability to sustain those lower costs on a go-forward basis? Can we see that once again in terms of that better cost in Q3 and Q4?

Well, don't forget that, especially at La Colorada and other places with increased production later in the year and La Colorada is the best example of that, we obviously have a fixed cost there, and having a larger denominator will bring the cost per ounce right down. That's really the reason why we forecast those lower costs at La Colorada going into the year, really based on that ramp-up of the production. So that's, of course, still there for us.

Yes. Just to add, Cosmos, I think in the first half of the year, some of the lower costs we've seen have been related to the timing of our inventory of byproduct credit sales relative to what we're producing. We sold a bit more byproduct than what we produced during that period. So that will offset as we look to the second half of the year. As Michael said, we do anticipate reduced unit cost per ton substantially at La Colorada. We are seeing some improvements that we've made at Cerro Moro and Jacobina, they're coming in at pretty good cost per ton. So we've kind of projected that out with the actual byproduct credits. And that's where we’re seeing we feel we'll come in line with what we guided for our cash and East Coast costs for the year.

One last point, Cosmos. As I also mentioned, on the cost side, currency fluctuations have a big impact on our costs. We saw a devaluation in the quarter, especially in the Mexican Peso and the Brazilian Real. And that had a positive impact on our costs and will continue to do so if that continues down the road. Just on the flip side of that, obviously, when you have a devaluation of the currency, we see kind of an increase in our noncash tax expense due to those currency fluctuations. So you see that in our earnings numbers, but as I said, that's a non-cash tax expense there, and I really like to see the positive impact to our cost that we have now. And it's a very, very exciting combination of lower costs and higher metal prices, which obviously must reflect - the reflection of that, obviously, was the record cash flow.

I agree. And maybe one last question on Escobal. It seems like from your MD&A meetings are still continuing into Q3, despite the fact that the appointment of the Vice Minister of Sustainable Development is still pending. Am I reading that correctly? And was there any more updates in terms of Guatemala and Escobal?

Yes, we have actually got a large number of meetings with government officials during the quarter. And I think after a bit of slow startup, I think of the new government, they have most of the people in place, there are still a few people missing to be put there. But I think the other meetings scheduled between us and the government officials have definitely improved and we're looking forward to continue and go back into the full consultation meetings that we need to have to advance this. Thank you, operator. And thanks, everyone, for joining the call today. Very exciting times are coming here for Pan American. We got a glimpse here when you look at the record revenues, record cash flow, free cash flow, costs below guidance. Obviously, a very nice combination here when you go into a high metal price environment. At the same time, we finalized the ventilation system at La Colorada after quite a few years of very, very hard work to get there. So, as Steve explained, we already see an increase in not only production number but also development meters. We're nearly back on track where we want to be at about 2,000 meters a month, I believe. So, that will lead to a ramp-up at La Colorada, as I explained, that will lead to lower costs at La Colorada. And a very exciting combination. While we still obviously work on our exciting Skarn deposit, no doubt this is one of the largest worldwide, largest discovery of submarine-based metals over the last decade. We'll continue working on that and, of course, still have the optionality on Escobal. So, lots of exciting projects ahead of us and right out there to harvest the fruits of high metal prices with a combination of lower costs. So, looking forward to report on Q3 later this year. Until then, have a good time. Thanks, everyone.

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