Pan American Silver Corp Q2 FY2025 Earnings Call

Thank you for standing by. This is the conference operator. Welcome to the Pan American Silver Second Quarter 2025 Results Conference Call. The conference is being recorded. I would now like to turn the conference over to Siren Fisekci, Vice President, 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 second quarter 2025 results. This call includes forward-looking statements and information and references to non-GAAP measures. Please see the cautionary statements in our MD&A, news release and presentation slides for the Q2 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.

Thank you, and good morning, everyone. I'm glad you could join us to discuss Pan American's Q2 2025 results. Today, I'm pleased to report another quarter of record-setting results. Top line revenue of $811.9 million reflects solid operating performance and the benefit of a supportive price environment. Net earnings were a record of $189.6 million or $0.52 per share, largely driven by record mine operating earnings of $273.3 million. Adjusted earnings were $155.4 million or $0.43 per share. Cash flow from operations before noncash working capital changes was also a record of $287.9 million after $68.3 million in cash taxes paid. After noncash working capital changes, operating cash flow totaled $293.4 million. Free cash flow was a record of $233 million, increasing our cash balance to a record high of $1.1 billion at the end of Q2. Our capital allocation framework remains unchanged: maintain our strong balance sheet, sustain and grow the business and return capital to shareholders. Given our strong balance sheet, we are focused on growing the business. And in Q2, we significantly advanced that objective with our proposed acquisition of MAG Silver. The top-tier Juanicipio silver asset is expected to provide an immediate uplift to Pan American silver production and free cash flow generation while meaningfully reducing our consolidated silver segment costs. It also represents further opportunities to grow our silver production through the exploration potential of the asset. MAG shareholders approved the transaction in July, and we are now awaiting the clearance under Mexican antitrust laws. The transaction is expected to close in the second half of 2025. In addition to the acquisition, we invested $73.7 million in sustaining and project capital in Q2. Project capital was invested in the La Colorada mine and the Skarn project and the Huaron, Timmins, and Jacobina mines. At Jacobina, in addition to advancing mine and plant optimization studies, we have invested in improvements to plant availability and equipment reliability. In terms of the La Colorada Skarn project, our discussions around potential partnerships for the development are progressing well, and we expect to share more on our plans for the Skarn in the coming months. We have also delivered on the third priority of our capital allocation approach, returning capital to shareholders. Yesterday, we announced a 20% dividend increase from $0.10 to $0.12 per common share with respect to Q2 2025. We also repurchased just under 0.5 million common shares at an average price of $24.22 per share for a total consideration of $11.1 million in Q2. During the first half of this year, we have returned approximately $103.5 million in dividends and share buybacks to our shareholders. Total available liquidity at the end of Q2 was roughly $1.9 billion, affording us ample flexibility to pursue our organic and inorganic growth opportunities even after accounting for the $500 million of cash that will be paid as part of the consideration for MAG Silver. Turning now to operations. We produced 5.1 million ounces of silver in Q2 within our guidance range for the quarter. Our silver segment achieved all-in sustaining costs of $19.69 per ounce, excluding NRV adjustments, which was at the low end of our guidance range. La Colorada once again led the performance in the silver segment following the improvement to ventilation from the new infrastructure installed in mid-2024. Throughput reached an average of 2,130 tonnes per day in Q2 relative to the 2,000 tonnes per day that we were targeting. As a result, silver production at La Colorada was up nearly 50% and cash costs per silver ounce down by nearly 25% compared with the first half of 2024. We are maintaining our guidance for silver production and costs in 2025. Gold production of 178,700 ounces in Q2 was slightly below our guidance range, while gold segment all-in sustaining costs, excluding NRV adjustments of $1,611 were within guidance. The gold segment was impacted by lower throughput and grades at Timmins, primarily as a result of additional backfill and hanging wall dilution. At El Peñon, production was impacted by mine and development sequencing into lower gold and higher silver grades. These impacts were partially offset by stronger performance at Shahuindo from higher gold grades and positive mine grade reconciliations and at Dolores with the leach cycle delivering more production than originally planned in Q2. Gold production in the first half of 2025 was in line with our guidance, and we are maintaining our outlook for gold production and all-in sustaining costs. However, we now expect gold production to be more heavily weighted to the fourth quarter of 2025 than originally indicated in our 2025 quarterly operating outlook. At Escobal, the Xinka Parliament issued a statement in May 2025 with respect to the ILO 169 consultation process. The Guatemalan Ministry of Energy and Mines or MEM has now delivered a response to that statement describing the proposals to address the concerns the Xinka Parliament had raised. These documents can be reviewed on the MEM website. The MEM has indicated that they will continue to hold working meetings and maintain dialogue with the Xinka Parliament as they work towards completing the ILO 169 consultation, although a date for completing the consultation has not been specified. As we consider the global backdrop for precious metals, we see a very supportive environment for gold and silver prices. Global photovoltaic installations and electronic applications continue to drive industrial demand growth for silver, while mine supply is largely flat. The silver market is in its fifth consecutive year of structural deficit, and this deficit is expected to persist in the coming years, depleting above-ground stocks further, creating a very supportive backdrop for silver prices. We view the MAG Silver acquisition as a high-quality addition to our portfolio to capitalize on this outlook for silver. In summary, Pan American Silver has delivered record financial results in the first half of 2025. Our operating teams are focused on meeting our production targets and maintaining strong control over costs. We are on track to achieve our guidance for 2025. We look forward to continuing to deliver robust free cash flow and returning capital to our shareholders. I will now be happy to take your questions together with other members of our management team.

Our first question is from Ovais Habib with Scotiabank.

Michael and Pan American team, congrats on Q2 beat. A couple of questions from me. In Q2, on Cerro Moro, El Peñon, Timmins, Minera Florida, essentially all experienced either negative grade reconciliation or geotechnical issues. First part of the question is, have these issues been resolved going into Q3? I believe you said Q3 is expected to be your weakest quarter with Q4 being your strongest quarter in terms of the gold production. And part two of the question is, do you think Jacobina can make up for the loss of ounces if it comes to that? Essentially, what I'm trying to ask, Michael, is how confident are you with meeting the gold production guidance?

Ovais, I have Steve here next to me, who will answer your question.

Good morning, Ovais. For the most part, those issues we faced in terms of grade reconciliations at most of those operations and the geotechnical issues, we are addressing aggressively. We do anticipate some of it to linger into Q3. That's why we're kind of pushing the gold guidance heavier into Q4. That's kind of where we raised that note. But we're feeling pretty confident. Generally, what we see when we have a quarter of low reconciliations, we do generally see it come back. Our drill data on average, we're comfortable with the reserve information. It's just the swings of highs and lows quarter-to-quarter, and it kind of hit those operations you mentioned during Q2. Geotechnically, we're having some good success in Timmins at addressing particularly some of the production drill hole squeezing issues we've had. We're drilling larger diameter holes. We're using an additive that's been pretty unique, and it's been pretty helpful in maintaining those holes open. And we've added quite a bit of ground support, even dynamic support along some of the key developments in the high-stress areas. So we're feeling pretty good that we're overcoming those issues there. So yes, that's why we kind of favored pushing some of the gold into Q4, but we remain incredibly confident that we'll come in within guidance on gold production and certainly on silver and cost.

And I mean, most of these operations have kind of achieved at least about 40% to 50% of production year-to-date. So in terms of kind of getting over that hump, it does seem like you guys should be able to hit those numbers. So thanks for that color. Just wanted to see if I can move on to noncore asset sales. Michael, your team has done an excellent job in kind of selling noncore asset sales over the past couple of years. Should we expect more to come going into the second half or even the next 12 months?

Yes. Definitely, we are working on some of the deals. They are mostly smaller things. So don't expect like big, big sales like we've seen over the last 18 months. But there's quite a few smaller things that we are working on, and we'll release those, obviously, when they're done. I would expect that a few will close here from now to the end of the year.

I mean, Michael, maybe in terms of a little bit detail, I mean, are those operating assets? Or are they more exploration assets that you're looking to sell?

No, they're not operating assets. There's a lot of mid to later stage exploration plays that we are finding new homes for, all kind of different jurisdictions and also different constellations. You should expect maybe some straight-out sales, some participation in other companies, et cetera.

The next question is from Fahad Tariq with Jefferies.

On Jacobina, in the quarter, there was a comment in the MD&A about mine sequencing to lower grade gold grade ores. Can you just talk about expectations for the second half of the year on grades?

Yes, Fahad, this is Steve. We're aiming to start mining at Jacobina using reserve grades that are somewhat lower than what we experienced in Q2. However, we do have access to some higher grades for the remainder of the year that we will utilize. The transition to lower grades will be part of the optimization study we are conducting, where we will begin to process more tonnes at these lower grades while trying to maintain or slightly increase gold production. Nevertheless, we are still confident that we will meet our guidance for Jacobina as previously indicated.

Okay. And then on Escobal and the consultation process, can you just give a bit more color about the types of meetings that are happening, I guess, over the coming weeks and months? Is it Pan American being involved in those meetings directly with the Xinka Parliament? Or is it the government meeting with them in Pan American providing information and where needed?

It's important to remember that the consultation is conducted between the government, represented by the Ministry of Mines, and the Xinka, not by Pan American. However, I have Sean here, who is leading our efforts in Guatemala and can provide more details on this.

Yes. What we're seeing now is a series of working meetings that are being planned. So we expect to see the government meet with the Xinka Parliament over the coming weeks. They did have a meeting on the 29th of July. So those meetings are ongoing, and we will be called in to participate in the future. We expect that to happen. And we have ongoing meetings with the MEM and the government at the same time in parallel when they have questions and issues that they want to resolve with us. But I would expect that we would have a few meetings this quarter. And so we'll update that in the Q3 update.

The next question is from Lawson Winder with Bank of America Securities.

Thank you for today's update. Great quarter. I wanted to ask about Skarn, something you mentioned in your prepared remarks, Michael, and then follow up on that. Did you say that you expected an update in a month, or did you mean over several months? That would be much sooner than the previous guidance for the year-end. Also, what are the current monetization options that seem most likely at this point?

Yes, that was likely misunderstood. The several months I mentioned indicates a plural timeframe, not just a singular month. I will provide information very soon. There are some intriguing developments on the Skarn. If you recall, we began showing the first intercepts of very high-grade veins above the Skarn to the east late last year. These intercepts were exceptional, and we published some details in our press release. We have been actively drilling in that area for the last 8 to 10 months, and we are looking at the potential for synergy between the Skarn and those high-grade intercepts. We plan to release further information once we compile all the data, which should happen in the next few months. This will be included in our updated resource and reserve calculations. Besides the infill drilling at the Skarn, we have a lot of insights about the Skarn, but the new information will definitely enhance the project when considering La Colorada as a whole and our plans for moving forward with both the Skarn project and La Colorada, incorporating those high-grade veins to the east. Please stay tuned for updates throughout the year regarding La Colorada and the Skarn. I apologize for not having more details to share at this moment, but it is all part of the updates we have planned for the remainder of the year.

Okay. And then just to be clear, one of those updates could be some sort of monetization or partnership transaction?

Look, these discussions are ongoing. And of course, those additional veins and synergies will play into the partnership negotiations as well. So that will come after. So I can't promise yet when that will come out. But as I said, we're working hard on that. And whenever it's ready, we will share. But the first few steps here will be the reserve update, resource update on it, and then the inclusion of those high-grade veins, and then the next step will be to include that in our negotiations with potential partners.

Okay. Fantastic. And then just since you brought it up the reserve and resource update, could you give us an idea of the timing on when that update would come? And then thinking about gold and silver price assumptions in that update, I mean, would you say you'd have a fairly high level of confidence in replacing reserves this year? And to the extent that the change in the gold and silver price assumptions might be quite material, could we be looking at some impact on the current mine plans?

Yes. If you remember, in our reserve resource update, we don’t apply a one-size-fits-all approach. Depending on the mine life, if it’s shorter, we are currently in a high metal price environment, so to optimize returns, higher prices should be used for those assets. For long-life assets like Jacobina, lower prices would be used. This is how we approach it consistently. Our reserve resource tables include different prices for different assets across a whole page. We will continue with a similar approach this year. While a few assets may see slightly higher prices, we remain very conservative. We're focused on maintaining and capitalizing on the substantial margins afforded by the current metal price environment, which is reflected in the strong cash flow we delivered last quarter. This theme persists. With gold prices about $1,500 higher than last year, we must adjust to ensure we don’t overlook high-value material. It’s definitely an interesting year for defining metal prices for our reserves and resources. As you know, we are among the few companies that perform updates midyear to have new reserves and resources ready for the budgeting season. Expect a press release in the coming weeks, certainly before mid-September.

The next question is from Cosmos Chiu with CIBC.

Maybe going back to the various geotechnical mine sequencing and negative grade reconciliation issues at the various properties, El Peñon, Cerro Moro, Timmins, and Florida. I seem to notice that a number of these operations came from the Yamana portfolio. I would say these are normal issues underground, but would it also be related to the fact that some of these operations were operated by a previous operator, and that's why some of these issues came up.

Yes, this is Steve from Cosmos. I can say there isn’t any specific bias toward the Yamana assets regarding the reconciliation issue. It relates to narrow vein mining. We definitely favor narrow vein mining at El Peñon and Minera Florida. If you consider Cerro Moro, those veins are quite variable, and that's a common characteristic of these types of deposits. We’ve encountered similar challenges at some of the Pan American Silver operations. We're confident this is just a temporary quarterly issue that fluctuates. We’re not worried about our overall reserve estimates; it’s more about refining the timing and locations of these estimates. As we prepare for the 2026 budgeting season, we are considering increasing the drill density in some of these narrow vein areas to help mitigate variability moving into next year. However, I do not perceive any bias solely toward the Yamana operations.

We have seen results like this, as Steve mentioned, which are often due to the characteristics of high-grade narrow vein mining. There is more variability compared to larger deposits, such as massive or porphyry deposits. We observe similar results sometimes at Huaron, San Vicente, and other assets, including the narrower structures at La Colorada in the past. These are typically short-term challenges that we manage. There is nothing unique to the ex-Yamana assets; we have owned them for a considerable time, and you may have noticed that quarter after quarter, these assets have consistently provided strong cash flows within our portfolio.

I do know this. Maybe as a follow-up in terms of these issues here, are they related to like new areas that you're entering at these different assets, maybe new structures that you might not have previously been aware of that could maybe potentially lead to a more sustained impact on mining? Or am I thinking too much into it?

Yes, I think you might be overthinking it a bit. We're working at the outer edges of the veins we've been mining. As we explore these outer reserves and go deeper, we typically encounter more variability and less density of information, which leads to greater variability in our results.

Okay. Maybe my next question will be going back to what I'm actually good at numbers. On that sustaining CapEx here, you've budgeted $270 million to $280 million per year. I seem to see that so far, you've done about $122 million. Certainly not hitting 50% for some of the assets like Jacobina, Shahuindo. So can you maybe talk about that CapEx budget for the year and where you're going to be planning on spending more of that CapEx in Q3 and Q4?

Scott Campbell here from Cosmos. We experienced a few delays in launching our major capital projects at Shahuindo this year, mainly due to weather conditions, permitting issues, and a longer-than-expected awards process. However, we are moving forward at full speed with those projects, and our capital expenditures will align with our forecasts.

Great. And maybe one last question here on the dividend. It's great to see that it's increased. It's great to see the very robust free cash flow in Q2. I want to confirm, based on the mechanics of the dividend, how you calculate the variable component, once you use a part of your cash on the balance sheet to pay for MAG Silver, there's potential for that dividend to decrease again. Is that correct?

Well, there's obviously a dividend policy, as you mentioned, but just keep in mind that we generate a lot of free cash flow, so does MAG, and there will be cash obviously coming to us when we close the transaction. So I think it's too early to say, but I don't think so that we're going to see a big impact on our outlook here.

Okay. And then on the MAG transaction, as you mentioned, it's been approved by MAG Silver's shareholders, and you're still waiting for the antitrust approval. Is that like the last hurdle? And how should we view it?

Yes, that's absolutely the last hurdle. I would expect that once we get that okay from Mexico, which is between all the transactions we did in the past was required and was always the last piece to the transaction. And I would expect to probably close a few days later after we receive that approval.

Okay. And nothing more complicated to this transaction compared to what you've done in the past, correct, Michael?

No, everything is completely moving normal here. You saw a very clear vote of confidence by the MAG shareholders. So I'm really looking forward to adding that operation or piece of operation to our portfolio, which has very strong production there as well, very strong silver at very low cost. That's obviously the reason why we are interested in that acquisition, looking at one of the highest-quality, highest-grade, lowest-cost silver mines on the planet with, in my view, probably one of the biggest exploration upsides as well.

And then maybe a bit premature, but on the MAG Silver transaction, once it closes, have you determined how you're going to account for it, given that it is a 44% minority interest? Is it going to be some kind of equity pickup, equity accounting sort of one-line pickup in your income statement? Have you thought about how you're going to account for it?

Cosmos, this is Ignacio here. So yes, we're still doing the analysis, but a good point of reference would be the way MAG accounted for the Juanicipio JV interest, which was, as you mentioned, an equity pickup. In addition to that, I can also point you to the MAG info circular, there's pro forma financial statements there, and then there are already some assumptions on what the accounting is going to look like. So yes, everything is pointing towards an equity pickup.

This concludes the question-and-answer session. I'd like to turn the conference back over to Michael Steinmann for any closing remarks.

Thanks, operator, and thank you, everyone, for calling in here on a beautiful summer day, at least here in Vancouver. Another great quarter for Pan American, beat across the board on our strong financial results. We're looking forward to the rest of this year, looking forward to add the Juanicipio piece to our portfolio as well later this year. And as I mentioned, we will release the reserve and resource update as of midyear, and that should be quite an active second half or last four months, five months of the year with news flows on various topics for the company. Looking forward to that and looking forward to update you in November on our Q3 results. Until then, enjoy the rest of the summer. Thank you, everyone.

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