Pan American Silver Corp Q1 FY2025 Earnings Call

Thank you for standing by. This is the conference operator. Welcome to the Pan American Silver First Quarter 2025 Results Conference Call. The conference is being recorded. I would now like to turn the conference over to Siren Fisekci, VP, Investor Relations. Please go ahead, Ms. Fisekci.

Thank you for joining us today for Pan American Silver's conference call and webcast to discuss our results for the first quarter of 2025. 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 Q1 2025 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.

Hello, everyone. I'm glad you could join us to discuss our Q1 results. 2025 is off to a strong start with Pan American posting another quarter of solid operating performance, building on the momentum from last year. Mine operating earnings have been increasing over each quarter in 2024, and this trend continued for the first quarter of 2025, reaching a record of $250.8 million in mine operating earnings. The improvements in metal prices have certainly contributed to margin expansions, but I would like to acknowledge the work of our teams in not only maintaining a focus on safe, efficient operations but also carefully managing costs to deliver the margin improvements that resulted in the record mine operating earnings for the quarter. La Colorada is contributing strongly to these results. The improvement in mine ventilation conditions has allowed us to accelerate development rates and increase the number of production areas, which is leading to higher throughput and lower per-unit costs. In Q1, we produced just over 5 million ounces of silver production, slightly above our guidance range for the quarter. On cost, the performance was even better. Lower-than-anticipated production costs across the Silver segment contributed to all-in sustaining costs of $13.94 per ounce, well below our guided range. The low Silver segment all-in sustaining costs also benefited from higher-than-expected byproduct credits from higher gold production at Cerro Moro and higher zinc and lead production across our polymetallic operations, as well as some lower capital expenditures. Gold production in Q1 of 182,200 ounces was in line with our guidance while Gold segment all-in sustaining costs, excluding NRV adjustments of $1,485 per ounce, were better than expected. The main drivers of the strong cost performance in the Gold segment were higher-than-expected gold and silver production from residual leaching at Dolores and higher silver byproduct credits at El Penon. Revenue in Q1 was $773 million, while net earnings in Q1 totaled $169 million or $0.47 per share. Adjusted earnings were $153 million or $0.42 per share. Operating cash flow before noncash working capital changes was $240 million, including $95 million cash taxes. The taxes paid in Q1 represent roughly one-third of the cash tax we expect to pay in 2025. After working capital changes, operating cash flow totaled approximately $175 million. At the end of Q1, our cash and short-term investments increased to a record balance of $923 million, and free cash flow for the quarter was $112.6 million. Keep in mind that this increase in cash over the quarter is net of the $95 million in taxes paid, $81 million invested in our sustaining and growth projects, inclusive of lease and loan payments, and $56 million we returned to shareholders through dividends and the share buyback. The cash generated by our operations fully funded our business needs, provided returns to shareholders, and further improved our balance sheet. Including our undrawn line of credit, we have approximately $1.7 billion of total available liquidity, which gives us plenty of capacity to pursue our growth objectives. Our largest organic growth opportunity, the La Colorada Skarn project, continues to move ahead. Over Q1, we advanced engineering work and continued with exploration and infill drilling. We are also continuing to discuss potential partnerships for the development of the project. We expect those discussions to take several quarters given the size and long-life nature of the project. Our aim is to retain maximum exposure to the silver in this deposit. We're also investing at the La Colorada vein mine operations to explore extensions to the mineral resource in the higher-grade Candelaria zone to the east and southeast of our current operation. At Escobal, Pan American had four working meetings with the Guatemalan government during Q1 2025 as part of the ILO 169 consultation process. Currently, there is no date for the completion of the consultation process or the potential restart of operations at Escobal. The comprehensive mine and plant optimization studies at Jacobina are progressing well, and we expect to include the findings of the first phase in early August 2025. The initial findings will include evaluations of modifying mining and tailings disposal methods to maximize the long-term value for this flagship asset. In closing, 2025 is off to a very strong start. Operating performance is in line or better than expected, and our forecast shows higher production over the balance of 2025 as per the quarterly guidance we provided in February. We are maintaining the guidance we provided in February for consolidated production costs and annual expenditures. That outlook, combined with today's favorable precious metal prices, points to the potential of generating very strong profit margins this year. We generated $112.6 million of free cash flow in Q1 alone, and gold prices are currently trading substantially higher than the average in Q1. This is an incredibly exciting time to be in precious metals and invested in Pan America. I would now be happy to take your questions together with the other members of our management team.

The first question comes from Ovais Habib with Scotiabank. Please go ahead.

Thank you, operator. Good morning, Michael and the Pan American team. Congratulations on a strong start to the year, particularly regarding costs. Michael, I have a couple of questions for you. First, let's discuss the cost side. Costs in both the Silver and Gold segments have significantly exceeded the quarterly guidance. With Q1 performing above expectations, can we anticipate that subsequent quarters will reflect this cost improvement? What should we expect regarding costs as we move into Q2 and beyond?

Good morning, Ovais. I'll have Scott answer the question. But just in general, obviously, great performance on the cost, as you mentioned. We normally don't make adjustments after one quarter, but we're pretty happy with what we're seeing. But I'd like Scott to answer the rest of the question, please.

Yes. Good morning. It's Scott Campbell here. Yes. We're very encouraged by the strong cost performance in both Silver and Gold segment operations. That's in large part a function of our commitment to cost control, the high byproduct mill prices, and, in some cases, favorable exchange rates in the countries where we operate. We're maintaining our cost guidance for the year. And as Michael said, we don't usually make an adjustment after only one quarter, but we're encouraged by our cost performance so far this year, and we think this will continue, provided metal prices and exchange rates maintain their levels. We will see a cost increase on a per ounce basis as we get into the placement and compaction of our operating from our new tailings filtration plant. And sustaining capital spending will also increase at several operations, specifically show window as we get into the dry season and our large capital projects begin.

Thanks for that, Scott. So essentially, I would expect to see a little bit of an uptick in Q2, but as production increases going into the second half, your per ounce cost essentially should come down in the second half. Is that how we should look at it?

I believe that if everything remains consistent, our costs are influenced by several key factors. One is our operations, where we have been performing well. Another significant factor is the prices of byproduct metals, which are currently high. If those prices remain elevated, it will positively affect our costs. Additionally, favorable exchange rates in some countries are beneficial as well. If these uncontrollable factors hold steady and we continue to manage our onsite costs effectively, you are correct.

Perfect. Scott, in terms of the gold and silver sold, it appears to be higher this quarter compared to previous quarters. Can you provide any information on the reasons for that?

This is Ignacio speaking. Yes, the main driver there was, as you remember, we had a very strong Q4 production, and a lot of that production came in late in December. So, we did sell in January that extra production from December. And you'll see in some of our slides, I think it's over 445,000 ounces of Gold inventory that we sold in Q1.

Maybe just timing of shipment, which happens many quarters, sometimes there's an increase of inventory, sometimes a decrease depending on how the production aligns at the end of the month. Obviously, it's a little bit easier to control timing on the doré shipment, a bit harder sometimes with the concentrate that we sell where we have to wait for ships and ports to be ready. So that's just kind of the normal course of business at the end of each quarter. And as I said, sometimes it's a bit more, sometimes less. But as Ignacio said, after a very strong Q4, that's kind of the rest of the selling that went on there in January.

That's great. And just one more question. At Minera Florida, you were talking about costs that were high and you noted absenteeism as one of the causes. Are you able to shed some more light on what's happening there? And how should we position ourselves going into Q2?

Yes. Minera Florida had a rough quarter, certainly. We were affected by mine sequencing, some lower grades than expected, some absenteeism and delays regarding plant equipment delivery and mobile equipment delivery. We expect to claw that loss of production back and get those costs per ounce back in line in Q3 and Q4.

Yes, this is Steve. If I can just add on the absenteeism, January is a big month for holidays in Chile. And this year, it was a particularly hard-hit month in terms of the number of holidays that we had our people out on. That's really what affected us in Q1 at Florida.

Got it. That's great color. Again, congrats on a great quarter. And thanks for taking my questions.

The next question comes from Cosmos Chiu with CIBC. Please go ahead.

Thanks, Michael and team, congrats on a very strong start, very strong Q1. Maybe if I can ask about Bell Creek. I read that there were some technical challenges at Bell Creek in the quarter. And then I actually went back to the commentary in Q1 2024. And there were some challenging ground conditions at that time as well. So, is this a continuing issue? Could you give us a bit more insight in terms of what's happening? I know it's not your largest asset, but I'm just wondering if you can provide us more color?

Yes. I'll start, and maybe Martin can add in a little bit as well, Cosmo. But yes, that central zone of Bell Creek, which is where our high-grade and a little bit bigger stopes are for the Bell Creek mine, it's been challenging. We've been seeing some seismicity there, and we have to manage that carefully as we mine, and we've put in some dynamic support as we enter into that area. It's just a more challenging area than we expected. We thought we were putting in some programs that we did see some benefits last year. Last year, what we were seeing was a lot of hole squeezing, where we're reporting hole squeezing on our drill holes. We have gotten some additives and things we're doing there that have helped a lot, but we're still facing some ground movements, ground seismicity in the area that we have to manage very carefully, and it has slowed us down more than we expected in Q1.

No, that's a great answer, Steve. As we get deeper in the mine, certainly, seismicity is there. It's sort of with us all the time. The guys do a fantastic job of managing that. And dealing with it, we've had to increase our support in some areas. But it's with us, and it does cause us at times to change our production plans during the quarter when you see that with the grade going up and down a bit as we have to change out some things in our plan. But we're sort of used to it now, and we've got systems in place to deal with that as it happens, and it's part of our mining process there.

Maybe switching gears to Escobal. Michael, as you mentioned, there were four working meetings with the Guatemalan government in the quarter. Is that what you had expected? Are you happy with that progress? I know you can't give us any timing at this point in time. But I'm just curious if you are happy with what happened in Q1?

Yes, this is Sean. We had meetings during the quarter. Things have been moving very slowly, and it's always been hard to predict the rhythm of the meetings, but they were productive, with a lot of discussion about the main concerns in the process, which focused on water, environmental health issues, and blasting vibrations from the mine. We anticipate more working meetings in the coming weeks and months and will provide an update during the next call.

Great. I have some questions. First, I know that when you discuss sustaining costs, you mention the NRV adjustment. Just to confirm, this should become less significant as Dolores phases out. At what point will you stop discussing the NRV adjustment?

Cosmos, it's Ignacio here. Yes. No, I think you've got that right. Obviously, if you look at our previous results, a lot of the NRV adjustments that we had were due to Dolores. Now that Dolores is in full leach mode, that will become less of an issue. So, we should see those numbers are superior. We do have other mines that have large heap leaches and large inventories in heap leaches, and so we could see NRV adjustments potentially in the future. But yes, now that Dolores is winding down and in leach, those numbers should taper as well.

Great. To follow up on my friend Ovais' question, I'm interested in your guidance. I know you've maintained full-year guidance, but you had previously indicated in Q2 a range of $19.50 to $21.25 an ounce. In Q3, you've projected $14.25 to $16.25 an ounce for sustaining costs. Are those still reasonable targets for us to consider when modeling for Q2 and Q3?

Cosmos, Steve here. Yes, we feel that guidance is still in line with our quarterly guidance. So, I think that's a good gauge. As we mentioned, there are some sustaining capital projects that start picking up steam and things like that. We've got some of the tailings compaction work that's on developments picking up steam. So, those are good guidelines as we look forward, and as production comes up and the costs come down, we think that quarterly guidance is still in line.

Yes. And maybe if I can just...

Just to reiterate here, of course, that all depends on where metal prices and exchange rates stand, right? I mean, because those cost guidance have been calculated with the metal prices that we used at the time in our guidance. So you have to look at that. And of course, when we have higher byproduct metal prices and more favorable exchange rates, that will be and has right now a positive impact on our cost. So when you look at the guidance, just have a look at the metal prices and the exchange rates that we used for that guidance as well.

Of course. We'll definitely adjust for those different input factors here. And then, Michael, since I have you here, maybe if I can slip in one more question. In the MD&A, you don't talk much about Navidad. I know there's still a lot of questions about the province that you referenced, but from our industry sources, it does seem like Argentina is becoming a better place to do business. Any comments that you can make on Navidad?

Yes. Look, I mean, we are a long time working in Argentina, many decades, and of course, we have operations in Santa Cruz and have had operations in Santa Cruz for a long time. So, things are changing in Argentina on many fronts. But I think it's still too early to talk about Navidad. Obviously, we will see hopeful continued positive changes here over the years under the new administration. We see the positive impact already on Cerro Moro, and hopefully that will continue. We are very happy to have kind of some long-term pipeline projects with us that are there. And there's very little cost to hold on this project and one of the largest silver resources on the planet. So, I will just monitor and watch Argentina over the next, I would say, 12 to 24 months.

Congrats once again on a strong Q1, and we look forward to that continuing for the rest of 2025.

The next question comes from Don DeMarco with National Bank. Please go ahead.

Good morning, Michael and team. You had a great quarter, certainly on costs. On costs, and I'll start off with that. In response to a previous question, you mentioned a few drivers that commitment to cost control, favorable FX rates, strong byproduct credits. Do you have a sense of the approximate benefit of each of these categories on the aggregate outperformance in Q1?

That's quite complicated to answer, Don, because the exchange rate involves many factors depending on where we purchase various services, products, and equipment, and which countries they originate from. I don't have a specific figure on that. The byproduct credit is relatively easier to assess. If you consider the metal prices we used for our cost calculation at the start of the year and then compare them with the current higher metal prices, you'll see the difference. However, the exchange rates and our cost control measures at the site are all closely aligned. Therefore, it's quite challenging to provide you with exact numbers indicating how much each factor contributes.

Okay. Okay. Well, that's helpful nonetheless. But then maybe shifting to my next question, it's on capital allocation. Your balance sheet is continuing to improve. You got cash over $900 million. You mentioned $1.7 billion in liquidity. So, what are your priorities on capital allocation? Considering the different range of ops, you've got debt repayment, do you see opportunities to increase the NCIB or dividends or maybe see a better ROI by deploying cash into pending Scarn development?

Most of what you mentioned isn't urgent for us in terms of debt repayment. We have two bonds with very favorable interest rates. The $500 million bond is around 2.65%, and the remaining $280 million is approximately 4.6%. With these favorable terms, there's no rush to pay them off. The larger $500 million bond matures in 2031, meaning we’ll enjoy a 2.5% interest until then. We believe we can generate better returns for shareholders using that money rather than paying off the debt. Regarding shareholder returns, we remain focused on that. We have a policy that allows for a special or additional dividend on top of our base dividend of $0.10 per share quarterly, which is contingent on our net cash. We're close to the threshold of $100 million net cash to activate this, and I expect we’ll cross it soon. This could increase our dividends to as high as $0.18 based on our net cash. As we mentioned earlier, we bought back shares in January and will continue this throughout the year. We’ve renewed our NCIB and are always on the lookout for opportunities to repurchase stock. We had a strong return to shareholders of $56 million in Q1. Additionally, investing in our business provides the best returns, from successful exploration results to developing key projects like the skarn, which is a significant long-term asset for us. These initiatives will yield the best returns for our shareholders. In Q1, not only could we cover our sustaining capital, but we also invested in special projects and exploration close to our sites, totaling around $100 million. The skarn is one example of the successful results from those efforts. We have sufficient funds to return to shareholders, alongside a solid cash balance which is valuable for seizing market opportunities.

Certainly. Okay. And then you mentioned the skarn and with that, the negotiations, you're looking to maintain maximum silver. Are you happy with the level of silver in your portfolio right now relative to gold? And can you share your thoughts on the different levers that you have to increase silver, with skarn being one, Escobal, etc. With Cosmos' question, you touched on Navidad, maybe there's potential M&A. So how do you feel about that level right now where it is?

No, I think our silver-gold ratio within Pan America fluctuates based on the composition of our assets. Looking back about 15 years, we had a significant zinc production when Morococha was part of our portfolio, and during that time, silver accounted for around 50% to 55% of our revenue. Currently, silver contributes less due to various factors. We acquired some notable silver production in Argentina and Chile, along with strong gold production, and right now, gold prices are performing well compared to silver prices, which affects the revenue percentages of our metals. While this is a snapshot in time, I want to highlight that we have the largest silver reserves and resources in the world in our portfolio, including major projects like Skarn, which averages about 17 million ounces of silver per year, and Escobal, which could produce 20 to 22 million ounces annually. Although we have one of the largest silver resources globally, it's not fully developed yet but holds great potential. There are many opportunities, including the potential for M&A, which could help us adjust our internal silver-gold ratio. Right now, though, we are generating strong cash flow from our high-performing gold assets.

This concludes the question-and-answer session. I would like to turn the conference back over to Michael Steinmann for any closing remarks. Please go ahead.

Yes. Thanks, everyone, for calling in today. Great results, a great quarter, a great start of the year. We're looking forward to Q2 and beyond. Just one item I would like to mention is that at the end of this month, we will release our 2024 sustainability report. Our ESG performance is core to our business, and I really look forward to updating you on our progress in that area with our report that's out there annually. You can look at probably the last 12 years of report on our website and get a very good idea of what we are doing on these really important projects that we do on the ESG side. Thanks, everyone, for calling in, and I'm looking forward to talking to you in August for Q2. Thank you, everyone.

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