Pan American Silver - Q1 2024

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to the Pan American Silver first quarter 2024 unaudited results conference call and webcast. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. Also note that this call is being recorded on Thursday, May 9th, 2024. I would like to turn the conference over to Siren Fisekci, VP, Investor Relations. Please go ahead.

Siren Fisekci (VP of Investor Relations)

Thank you for joining us today for Pan American Silver's Q1 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 Q1 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.

Michael Steinmann (President and CEO)

Thanks, Siren, and thank you everyone for joining us today. Our Q1 operating results were in line or better than expected. Silver and gold production were within our guided ranges, and I am particularly pleased with our strong performance on controlling costs. Cash costs and all-in sustaining costs, excluding net realizable value inventory adjustments for both Silver and Gold segments, were lower than expected. Operations generated $133.2 million of cash flow before working capital changes in Q1. This includes $41.1 million in cash taxes paid, with Q1 typically being the quarter with the highest cash tax payments. We recorded a $30.8 million net loss, or $0.08 loss per share in Q1, which includes a $34.4 million tax expense, of which $15.2 million is related to an inflation adjustment in Argentina.

$14.4 million of net realizable value inventory expense, and a $10.8 million non-cash investment loss, largely due to the decrease of the New Pacific Metals Corp. share price. Adjusted earnings were $4.7 million, or $0.01 per share. We exited Q1 in a strong financial position. Cash and investments totaled $331.4 million, and we have the full $750 million available under our undrawn credit facility. Total available liquidity is $1.1 billion. This strong financial position allowed us to return $58 million of capital to shareholders in Q1, $36.5 million in total cash dividends paid, and $21.5 million in share buybacks.

Following the approval of our share buyback program on March 4, 2024, we repurchased approximately 1.7 million shares at an average price of $14.16 per share for cancellation. Inclusive of [audio distortion]. An optimistic approach to future share buybacks. We maintained the dividend, announcing yesterday a cash dividend of $0.10 per common shares. In addition to maintaining a robust shareholder returns framework, we're investing in our operations for safe and efficient improvements in performance. Operations performed largely in line with expectations, although Dolores was weaker than expected due to lower grades and heavy rains that required us to reduce irrigation rates, resulting in a lower ratio of ounces recovered to ounces stacked. NRV adjustments at Dolores also increased all-in sustaining costs by $838 per oz.

Excluding NRV adjustments, Dolores all-in sustaining costs were $1,529 per oz. At La Colorada, the new ventilation infrastructure is on track for completion in mid-2024. We expect this will lead to significant improvement in the ventilation conditions in the mine, which will allow us the accelerated development rates by opening more areas for production. This is expected to lead to higher mining rates, returning to approximately 2,000 tons per day by the end of the year from the roughly 1,300 tons -1,400 tons per day rate currently. We're also advancing the La Colorada Skarn project. On April 7th, 2024, we announced additional drill results from our ongoing exploration program at the skarn.

These drill results returned some of the highest grade intercepts to date, including a stunning 22.5 meters at 1,435 grams per ton silver, 31.9% lead, and 20.5% zinc. We will provide an updated mineral resource estimate for the skarn in August, together with our mid-year corporate mineral reserve and resource report. We continue to engage in discussions with parties who have expressed an interest in a potential partnership in the skarn. Ideally, we'd like to structure a partnership that would enable us to retain exposure to the silver with an estimated annual production of 17.2 million oz in the first 10 years, and the partner would retain exposure to the zinc. We're also excited by the potential at Jacobina. The study is underway to evaluate alternative mining methods and upgrades to the processing facilities.

The aim is to identify opportunities to optimize the long-term economics of the mine. At the Escobal mine in Guatemala, the ILO 169 consultation process has experienced delays since the new government took office in January 2024. During meetings held in Q1 2024, between Pan American, the Ministry of Energy and Mines, or MEM, and other institutions, the government confirmed its commitment to completing the Escobal ILO 169 consultation process. That has not provided an update on the timeline. On April 29th, 2024, the MEM released the Vice Minister of Sustainable Development, who was responsible for overseeing and coordinating the Escobal ILO 169 consultation process. The MEM has not yet designated a replacement for this post.

On May 1st, 2024, we announced that we have agreed to sell the La Arena gold mine, as well as the La Arena II project in Peru, to a subsidiary of Zijin Mining Group. Under the terms of the agreement, at closing, Zijin will pay $245 million in cash and will grant Pan American a life-of-mine gold net smelter return royalty of 1.5% for the La Arena II project. Additionally, upon commencement of commercial production from the La Arena II project, the agreement provides for an additional payment from Zijin of $50 million in cash. We expect the La Arena transaction to close in Q3, pending satisfaction of the customary conditions and regulatory approvals.

The divestment is aligned with our commitment after the amount of transaction to divest properties that are not aligned with our long-term strategy, while strengthening our financial position to invest in high-quality growth opportunities, reduce debt, and to return capital to our shareholders. With the expected close of the La Arena transaction, we will have generated $837 million in cash from asset sales following the acquisition of Yamana. In addition, we will have retained four high-quality royalties with industry-leading partners, as well as contingent payments of $50 million. Last but not least, the divestments also expect to reduce our annual care and maintenance costs by over $70 million. In closing, Pan American delivered strong performance in Q1, and we are on track to achieve our operating outlook for the year.

We expect free cash flow to increase through 2024, particularly in the second half of the year, based on our view of higher production and lower costs weighted towards the second half of 2024 and supportive metal prices. We look forward to providing our customary mid-year update on our mineral reserves and resources in August. With that, I would like to open the call for questions.

Operator (participant)

Thank you. Ladies and gentlemen, if you would like to ask a question at this time, please press star followed by one on your touch-tone phone. You will then hear a three-tone prompt acknowledging your request. And if you would like to withdraw from the question queue, simply press star followed by two. And also, if using a speakerphone, we ask that you please lift the handset before pressing any keys. Please go ahead and press star one now if you have a question. And your first question will be from Ovais Habib at Scotiabank. Please go ahead.

Ovais Habib (Precious Metals Analyst)

Thank you, operator. Good morning, Michael and Pan American team. Really congrats to a strong start to the year. Just a couple of questions for me. Just starting off, you just had a great start to the quarter, as costs both in Silver and Gold segments outperformed the quarterly guidance that was provided. At the Silver segment, particularly total cash costs and AISC, is down 34% and 40%, respectively. That's quarter-over-quarter. Could you please give us or help us understand what are the drivers here? Are you seeing these declining cost pressures across the board? Maybe some color there, Michael.

Michael Steinmann (President and CEO)

Yeah, Ovais, I will start with that and then hand it over to Steve to give a bit more color directly from the operations. It's like always on our cost, when you look at it, right? These are cost net of by-product credit. So one part is obviously our production cost, which the team did a great job on cost control here. The second part that are the big impacts are base metal prices on the Silver side and in the Gold segment, sometimes there's a bit Silver in it as well as a by-product credit. So when metal prices go up, of course, that's a tailwind for us as well on the cost side. And then the last one, as I often mention, is our currencies, right?

We have a lot of expenses in local currencies, and it always depends where this currency is traded. So in Mexico right now, very strong currency, of course, that's a headwind to our cost. In other places, like, for example, Canadian dollar, quite weak dollar right now. Of course, that helps us on the cost side as we report in U.S. dollars. Even though we are based in Canada, that's a foreign currency for us. But maybe, Steve, you have some more details.

Steven Busby (COO)

Yeah, I don't have a lot to add, Ovais. I mean, the currencies did play a key role, particularly down in Argentina. We didn't quite see the effective U.S. inflation quite—I mean, it was still but heavy, but it wasn't quite to the degree we anticipated in our planning. Likewise, in Chile, was pretty good on the FX side. I would say our consumables, we're generally seeing a little bit better usage, lower usage of our consumables than what we had planned. We're still evaluating that, so we don't wanna change the year, the full-year guidance or the future quarter guidance. We think those are still valid guidance going forward, but we are looking at it. We did see some reductions in usages in Q1, and we're just not sure if that's ore type-related yet or not.

Ovais Habib (Precious Metals Analyst)

So you're not changing guidance, but there could be some possible upside in terms of you know cost improvements?

Steven Busby (COO)

Yeah, if you don't hold me to that, yeah.

Michael Steinmann (President and CEO)

If everything, as we mentioned, stays the same, then I think that's fair to say yes, obvious.

Ovais Habib (Precious Metals Analyst)

Okay, sounds good. And just in terms of selling of the non-core assets, I mean, Michael, you and your team have done a fantastic job over the last couple of months in terms of selling these assets. You know, is there more to come? Any color that you can provide on some other assets that might be also non-core that you're looking to sell down the road?

Michael Steinmann (President and CEO)

Yeah, I really wanna congratulate the team here, and that's amazing, right, to do four transactions in one year after the big Yamana transaction. And really, you know, selling some of those assets that are just really not core to us, and I would say selling them for a good, good price, and not only good price, but for cash, and mostly cash and some royalties. So when you look at the quality of the royalties that we retained on each of them with very high quality mining, big, large mining companies, that's a very valuable royalty portfolio that we have in our ownership now again. So I'm very happy about that. That will allow us to participate, obviously, in future increased metal prices, when that happens and those projects get developed.

We still have a lot of ground, a lot of exploration ground, a lot of some advanced exploration projects, I would say, that don't really fit that came in from Yamana, some we had before. I think in Argentina, we returned the COSE project. So there is a lot of smaller things, but not big dollar numbers, but it's, you know, it all takes time for management and cleaning that up and streamlining that portfolio, just as everybody very more focused and, you know, helps a lot for the future. So we'll continue to go with the smaller assets from now on and still streamline that portfolio.

But at the moment, like large scales, like we've seen last year, you know, the MARAs and the La Arenas of the world, those were really the big ones that we wanted to divest.

Ovais Habib (Precious Metals Analyst)

Okay, thanks for that color, Michael. And, I've got some questions on Escobal, but maybe I'm gonna come back into the queue, and let some other people ask some questions as well. Thank you.

Michael Steinmann (President and CEO)

Okay, thank you.

Operator (participant)

Once again, ladies and gentlemen, please press star one if you have any questions. Your next question will be from Don DeMarco at National Bank Financial. Please go ahead.

Don DeMarco (Precious Metals Equity Research Analyst)

Thank you, operator, and good morning, Michael and team. I think I'll just pick up where Ovais left off.

Michael Steinmann (President and CEO)

Morning.

Don DeMarco (Precious Metals Equity Research Analyst)

I'll ask some questions on Escobal. So I see the ILO process has experienced some delays. You know, I guess we take it as encouraging that MEM confirmed commitment to complete the process. But three questions here: Did they provide a timeline to complete? And is a replacement for that vacant post required to get the process back on track? And is the next meeting scheduled at this point?

Michael Steinmann (President and CEO)

Yeah. Yeah, Don, and I'll start, and I'll hand it over afterwards to Sean McAleer, who is running our affairs in Guatemala. Sorry, I just lost my track. What's the first question?

Don DeMarco (Precious Metals Equity Research Analyst)

Yeah, the timeline.

Michael Steinmann (President and CEO)

The timeline, yeah, sorry.

Don DeMarco (Precious Metals Equity Research Analyst)

Yeah.

Michael Steinmann (President and CEO)

No, as we said, look, that transaction, the transition, sorry, of the new government took really longer, I think longer than expected. You're right, it's encouraging, obviously, that the government is committed to complete the ILO 169, but I also would like to remind everyone that's a court-ordered process that we all have to go through. So, you know, that's just part of ILO 169, that has ordered that it has to be finished. I, there's no choice, really, I think. And, there's just no timeline to it. So the process is very prescribed, and the government is working on it with the former government, with good strides forward last year.

Definitely a slowdown with the change of the government here. And as you said, this vacant post that in the past, that was really the—another person that was running for the Ministry of Energy and Mines, that process. Just to remind everyone, this is a process between Ministry of Energy and Mines and the indigenous Xinca group, and we are just a party to it. So we have no control over timelines here. So the post was very important in the past. I can't speak for MEM to see if in the future when they're reassign a new person, if that will be the person in charge of the process or if they want to use another person for the process. And I think with that, hand it over to Sean.

Sean, you are way closer to it.

Sean McAleer (SVP of Strategic Initiatives)

Yeah. So not a lot to add, Michael. You know, we're obviously waiting for the new appointment there, and that'll be key for us. And we're in regular contact with the government and with MEM specifically to get updates, but there's no updated timeline. The published timeline on the MEM website was tentatively for March 31st, and that's come and gone. But you know, we're hoping to hear some news in the next few weeks and months as things develop. But unfortunately, we don't have anything to provide as an update, and no future meeting dates.

Don DeMarco (Precious Metals Equity Research Analyst)

Oh, okay. Thanks for that latter point then. What, what about some of the key issues that had been raised over the, the previous sessions? I think there might have been some discussion on water, maybe noise, maybe others. What, what's the status of those, the dialogue on those items at this point?

Sean McAleer (SVP of Strategic Initiatives)

Yeah, and that was the meeting on February 21st. There hasn't been any follow-up, and any working meetings around those concerns. But they're consistent with what we'd heard during the visits and during the interactions that we had last year. So, not a lot of new developments there. But again, the dialogue and the process is, you know, awaiting the MEM to take charge and set the next meeting dates and the timeline.

Don DeMarco (Precious Metals Equity Research Analyst)

Okay. And are those issues or others, are they viewed as resolvable? Like, do you see a path toward parties agreeing on whatever topics the discussions might be underway at the last meeting?

Sean McAleer (SVP of Strategic Initiatives)

Yeah, it's hard to say. I mean, for us, I mean, we're just continuing the dialogue. And when we sit at the table and discuss in more detail the issues, you know, I feel confident that we've got the mitigations or other things we could do to alleviate the concerns. But I think that's just part of the process, and so we'll wait and see how that develops.

Don DeMarco (Precious Metals Equity Research Analyst)

Okay, great. And maybe just one other question. Michael, you mentioned your growing royalty portfolio, but perhaps you could share with us what are your intentions with this portfolio? Do you see it as a long-term hold, or would you potentially divest it to fund development in your pipeline?

Michael Steinmann (President and CEO)

Well, if you recall, last time we created a sizable royalty portfolio that you know when I was in charge in business development before I was CEO. We generated most of those royalties. We spun those out into Maverix at that point, and you know we got a really handsome return on those royalties through the sale of Maverix to Triple Flag at the end.

Don DeMarco (Precious Metals Equity Research Analyst)

Mm-hmm.

Michael Steinmann (President and CEO)

I think there has a lot changed since then. You know, when we started that, I think it was 2015, there were not many royalty companies. I think there's a large group of very strong royalty companies now available in the world, and I'm pretty sure if we ever decide to sell these royalties, we will find very competitive bids from different companies. So there's no need to basically start our own royalty company again. That's my point. I think if we decide to divest those royalties, we should you know, for sure have enough offers from very sizable royalty companies here. So you know, it's a big amount of potential cash sitting there for us.

But, at the moment, I think we are not in no hurry to divest those right away.

Don DeMarco (Precious Metals Equity Research Analyst)

Okay. Okay, good to hear. That's all for me, and good luck with the rest of Q2. Thank you.

Michael Steinmann (President and CEO)

Thank you, Don.

Operator (participant)

Next question will be from Gary Chiu at CIBC World Markets. Please go ahead.

Cosmos Chiu (Executive Director of Institutional Equity Research for Precious Metals)

Hi, it's Cosmos here, but maybe I should call myself Gary. Maybe I would have been more successful in life. Still me. Maybe my first question is on the La Colorada. Michael and Steve, as you mentioned, it's almost complete by mid-2024. We're almost there. So could you maybe remind us in terms of what still needs to get done? And then, Michael, as you mentioned, once the ventilation's completed, throughput's gonna go up since you're gonna open up more mining areas. But is grade also to go up as well? And if that's the case, would it happen pretty much right away when the ventilation shaft is commissioned, or is there gonna be a lag of, like, a month or two?

Steven Busby (COO)

Yeah. Thanks, Cosmos. Steve here, or Gary, if you prefer.

Cosmos Chiu (Executive Director of Institutional Equity Research for Precious Metals)

Thank you. Thank you, John.

Steven Busby (COO)

Just to give you an update of where we're at, we are currently putting the ducting on for the fans. We've got the main ducting, the top of the shaft that does a 90-degree elbow, and we're starting to put the horizontal sections in. We got the bases poured. We're starting to put the mechanical equipment for the fans, the base fans in. These are quite large fans. Each, there's two of them. They're 2,000 hp each. So our intention is to have the first one operational by the start of Q3, and we're on track for that. It looks really good. There was a lot of effort, a lot of logistical expediting going on, particularly around some of the electrical components, the VFDs and things like that. So that's coming our way. It looks good.

That's all coming together well. In the meantime, we're laying out our plans for when we get that ventilation going. We do know we've got rehabilitation works to do in the area of Candelaria East and the Deeps. We got to get back in there and rehabilitate some of the ground control systems that were there that were eroded or damaged through the years of this hot, humid air going through those areas. So we're starting to see some of that already because we do have a bit of flow going through the shaft now. So it is getting us into that area. We can see it. There is a lot of rehabilitation work that has to be done. There is a lot of development work that we have to start advancing.

So as that air comes on, we'll start advancing the development, and you'll slowly see the tonnages creep up. Our goal is to get back to the 2,000+ tons a day by year-end. So it'll be a slow, gradual increase from our kind of 1,300 tons-1,400 tons a day that we currently have. In reality, we don't, we're not forecasting an increase in grade as that happens, where, you know, Q1 was a pretty decent grade, I'd say, a 300+ g per ton. We might see a little bit of tweak upwards on that as we start that development work, but we do want to balance that. Again, what we do—what we'd like to do is mine La Colorada at its reserve grade. So that's really our objective.

We're not going to go in and try to high-grade it. We want to get the tonnage up, and we want to run at reserve grades in a steady-state condition for, for as long as we can. So that's kind of, you know, we stand behind our, our quarterly guidance of ramping that up. That's a big driver into our increased production in the latter half of the year. Things are, things are, you know, we have our challenges. We got rehabilitation challenges, we got the development advance challenges, but we're getting the air there, and things are looking good. So we're feeling good about the project, and we're on schedule to get that fan running and start this effort to start ramping the tonnage up.

Cosmos Chiu (Executive Director of Institutional Equity Research for Precious Metals)

That sounds great, Steve. Maybe switching gears a little bit, at El Peñon, I noticed that, grades also improved in Q1, quarter-over-quarter, by a little bit. Gold went up 3.24 last quarter to 3.38, kind of same degree for silver. I know there's some—there's been some issues in the past in terms of grades at El Peñon. Are we trending in the right direction? I understand that, you know, you're drilling it, you're still waiting on some of the drilling results, but could you maybe, you know, comment on El Peñon as well?

Christopher Emerson (VP of Business Development and Geology)

Yeah. Hi, Cosmos, AKA Gary. This is Chris. Yeah, no, but we've really hit the ground running this year. Last year, we had—we did have an issue with the drilling, getting a new drill contractor. It took a while to ramp up, but certainly hit Q1 running, and we certainly see a lot of that drilling now coming into the information for the mid-year reserve and resources update for El Peñon. I would certainly like to believe that we would be keeping these grades, and we've, you know, there's—as you drill through these blocks, you get some good results out of it, but generally, we're seeing that reserve grade panning out in the drilling.

You know, there's, like I said, there's going to be ebbs and flows as to how this turns out in that mid-year update, and we're looking forward to updating everyone in August.

Cosmos Chiu (Executive Director of Institutional Equity Research for Precious Metals)

Great, thanks. Maybe one last question on the Huarón. As you mentioned, the dry stack tailings project is, you know, well underway and should be completed in 2024. Could you remind us in terms of the benefits of this dry stack tailings project? Is it, you know, extension of mine life? You know, is there gonna be more sort of capacity in terms of tailings? What are some of the key benefits here?

Steven Busby (COO)

Yeah, Cosmos, Steve here. Yeah, our our conventional tailings we're currently using, will reach its ultimate capacity in, in, kind of mid—in Q1 of 2025 is the current schedule. So this is the next stage of tailings for the current reserves and life-of-mine that we see at Huarón, is moving away from conventional tails, gives us an ability to open up new areas for tailings depositions that are easier to manage, that don't require quite the, quite the extensive, dam development and embankment development. So it allows us to open up more area that we need for the life-of-mine reserves and, and resources that we intend to mine at Huarón. So it's really just a shift from methodologies to something more robust and, more, capacity as we look into the future.

Cosmos Chiu (Executive Director of Institutional Equity Research for Precious Metals)

Great. Thanks, Michael, Steve, Chris, and Siren. Those are all the questions I have. Congrats on a very strong Q1.

Michael Steinmann (President and CEO)

Thanks, Cosmos.

Operator (participant)

Thank you. Once again, ladies and gentlemen, if you do have any questions at this time, please press star one on your touch-tone phone. At this time, we have no questions registered. Please proceed.

Michael Steinmann (President and CEO)

Yes, thanks, operator, and thanks, everyone, on the call today. That was a, you know, a great quarter. I think we delivered across the board. We delivered on production, on cost, on further divestment of non-core assets, as we indicated last year, and I think that advanced at a very high speed with very good results. And we returned, increased our returns to shareholders. As you saw there, it was a combination of share buybacks and dividends. Strong balance sheet, and there's a lot of really big positives and looking forward to this year, in combination with what we see now at the moment, way higher metal prices than what we experienced as an average in Q1. So really looking forward to update everybody in August again.

But just to remind everyone, we have hosting Investor Day on June 18th. So please, if you want to participate and call in there, let us know. Reach out to [email protected], please, and we'll make sure that you can participate and call in to that Investor Day. And if that, if we don't speak then, then looking forward to talk in August when we discuss our Q2 results. Thank you, everyone. Have a good weekend.

Operator (participant)

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending, and at this time, we do ask that you please disconnect your lines.