Pan American Silver - Q2 2024

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to the Pan American Silver second 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. 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.

Siren Fisekci (Chief Sustainability Officer)

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.

Michael Steinmann (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, devaluations of the Brazilian real and the Mexican peso, which reduced foreign-denominated 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 a $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 5.36-5.78 million ounces for the quarter, as continued ventilation constraints at La Colorada affected silver grades and throughput.

I'm very pleased to report that the new ventilation infrastructure was completed at the end of June, and commissioning and startup of the new fans started on July 11, 2024, as scheduled, and ventilation conditions in the deeper eastern areas of the mine have improved significantly. We are currently accelerating mine preparationand development rates, which should steadily increase access to the higher-grade deep 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 for the group of ventilation shaft that was completed last December.

I'd like to congratulate the team on the successful completion of this large, complex project. Silver 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 low ratio of ounces recovered to ounces stacked during the quarter. We now expect to extend ore stacking activities and increase heap irrigation rates throughout Q3, given some stockpile processing and the start of the rainy season. At Cerro Moro, heavy precipitation in southern 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 should reduce the impact and heavy rainfall events in the future. We produced 220.4 thousand ounces of gold in Q2, slightly below our expected range of 221 to 252 thousand 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 $180.12 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-heap inventories once all 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 at Timmins 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, aimed to stabilizing throughput at 8,400 tons per day, and recoveries at 96%. We're also progressing the optimization study to optimize the long-term economic and growth potential on Jacobina. At Escobal, we met with several Guatemalan government institutions to support the LO169 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 standing.

Given the successful commissioning of the substantial La Colorada ventilation system upgrade in July, we are maintaining our operating outlook for production, cash costs, with 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. With improvements 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.

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Cosmos Chiu with CIBC. Your line is now open.

Cosmos Chiu (Executive Director (Institutional Equity Research - Metals & Mining)

Hi. 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. Sounds like it's going pretty well. Could you maybe elaborate, is it functioning as expected? How has that, you know, sort of helped airflow? And ultimately, I guess what I'm trying to get to is, in terms of getting to 2,000 tons per day, you said you're gonna get to it by year-end, along with higher grades. Is it gonna be more a straight line sort of increase from now until then, or is there gonna be some kind of step change? And is that gonna be part of the fact that, as you mentioned, overall, Q4 is gonna be stronger than Q3?

Michael Steinmann (President and CEO)

Yes, thanks, Cosmos. Yeah, the shaft completion and the installation and startup of the fans was right on time, as we indicated for the, you know, since beginning of the year, that it will happen mid-year. It happened mid-year, and it looks very exciting, what we see on the result side, on the impact to the mine of that shaft, which, as you know, was a multi-year project, really, to kind of bring us back on track here with the production in La Colorada. But Steve, maybe give some more detail.

Steven L Busby (COO)

Sure, and 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, on July eleventh, we increased overall flow rates into the mine by about 200,000-300,000 cubic meter feet per second of airflow, or feet per minute, sorry. And immediately, we saw temperatures drop in the Candelaria East zone by three degrees wet bulb Celsius.

Cosmos Chiu (Executive Director (Institutional Equity Research - Metals & Mining)

Hmm.

Steven L Busby (COO)

So substantial improvement, which led immediately, we saw a pump in, in tonnage of 25% over what we've been seeing up until that point through the year. We were about 1,400 tons a day going in, for the year before we started that fan. We're now up at around, a little over 1,700 tons 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 up 10% from where we were prior to when that fan started up. So within the two and a half, three weeks of running the fan, we've seen incredible boost of production and development rates. That'll continue to ramp up. You know, I think for purposes of quarterly reporting, it'll be a bit of a straight, you know, line ramp up.

Obviously, day to day, there's fluctuations that take place. But we're feeling good that we're starting from a good base, and we'll ramp up through the rest of the year.

Cosmos Chiu (Executive Director (Institutional Equity Research - Metals & Mining)

Yeah, 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 costs, non-sustaining costs, was also lower, or better than your quarterly guidance. So how were you able to achieve that lower cost despite lower production? And 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, you know, better cost once again in Q3 and Q4?

Martin Wafforn (CFO)

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 through the year, really based on that ramp up of the production. So that's, of course, still there, still there for us. So, Steve, do you want to add something?

Steven L Busby (COO)

Yeah. Yeah, just to add, Cosmos, I think in the first half of the year, some of the lower costs we've seen has been related to the timing of our inventory of by-product credit sales relative to what we're producing. We sold a bit more by-product than what we produced during that period. So that will offset as we look to the second half of the year. As Michael says, we do anticipate reduced, you know, 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 by-product credits, and that's where we're saying that we feel we'll come in line with what we guided for our cash and AISC costs for the year.

One last point, Cosmos, as I always mention, on the cost side, currency fluctuations have a big impact on our cost. We saw a devaluation in the quarter, especially on the Mexican peso and the Brazilian real, and that had a, you know, positive impact on our cost and will continue to do so if that continues down the road. Just on the flip side of that, obviously, when you have devaluation of the currency, we see kind of an increase of our non-cash tax expense due to those currency fluctuations. So you see that in our earnings numbers, but that's a non-cash tax expense there.

And I, you know, really like to see the positive impact to our cost that we have now. And it's very, very exciting combination of lower cost and higher metal prices, which obviously must reflect... A reflection of that, obviously, was the record cash flow.

Cosmos Chiu (Executive Director (Institutional Equity Research - Metals & Mining)

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

Martin Wafforn (CFO)

Yeah, we had actually quite a large number of meetings with government officials during the quarter. I think, you know, after a bit of a slow start up, I think, of the new government, they have most of the people in place. There's still a few people missing to be put there, but I think, yeah, the meeting schedule between us and government officials has definitely improved, and looking forward to continue and go back into the, you know, the full consultation meetings that we need to have to advance this.

Cosmos Chiu (Executive Director (Institutional Equity Research - Metals & Mining)

Great. That's great to hear. Thanks again, Michael, Steve, and Siren and team, and those are all the questions I have.

Martin Wafforn (CFO)

Thanks, Cosmos.

Operator (participant)

Your next question comes from Don DeMarco with National Bank Financial. Your line is now open.

Don DeMarco (Executive Director/Analyst)

Thank you, operator, and Michael and team. Maybe first question, just continuing on with Escobal. So, you know, I've been looking at the price of the contingent value rights, and they've eased a little bit over the recent months. Do you think this is a fair indicator of the likelihood of a restart or just the tenor of activities at Escobal related to the consultation process?

Martin Wafforn (CFO)

I would be careful when you look at the price of the contingent value rights. As you know, there is 330 million CVRs out there, so a large number. And when you look at the trading numbers, this is a very limited trading on those CVRs. So, you know, they obviously follow Pan American share price, of course. And then, I think, you know, the fact that the new government needed a bit longer to set everything up here could have had an impact to that, but I would not read too much into it as a status. It is a very, very limited trading of those CVRs.

Don DeMarco (Executive Director/Analyst)

... Okay. And then just, I mean, it's encouraging to hear that there's a number of meetings that have been held. But is there any, you know, visibility for next meetings or the filling of that vacancy? This is just kind of maybe repeating some of the questions that were asked by the last caller, but just wondering what we might anticipate in the coming months on this process.

Martin Wafforn (CFO)

Look, I mean, we anticipate that that role will obviously be filled by the government in time, and, and we will pick up, I think, with that, the kind of the style of meetings we had before. As I said, at the moment, all I can say is that there, you know, there has been, an impressive number of meetings with government officials between the company and us. And, and, you know, it, it was really like a, a quite a slow start of the year with the new government, which kind of has to be expected. Obviously, a new government, as you can imagine, a lot of new officials in place that need to brought up to speed, that, you know, have other issues to, to deal with in the country than, than just Escobal, as you can imagine.

And you know, now they're in place, most of them, probably five, six months now. So I think I think we see kind of a normalized, normalizing meeting schedule here in the future.

Don DeMarco (Executive Director/Analyst)

Okay. Okay, we'll look forward to that. And so next question, like the quarter, we see a true portfolio effect here. You got lower costs offsetting higher costs at different operations. The cornerstone mines look strong, Jacobina in particular. Now, you've got this optimization work that's underway. The mine's running seemingly great at 8,400 tons per day. Is the optimization still looking at maybe trying to increase that throughput? Or what are some of the areas of focus that we can look forward to whenever that report will be released?

Martin Wafforn (CFO)

Yeah, we're very excited about Jacobina, and as I see, very, very strong cash flow for us, very strong production, you know, very, very long mine life. So, yes, we're still working on the optimization. I think there is-- there's much more to do at Jacobina, but maybe, Steve, you want to give that? I know you're not ready yet with the study to release anything, but, maybe a few little points.

Steven L Busby (COO)

Sure. Thanks for the question, Don. Yeah, the optimization work is proceeding at full bore. We are seeing benefits to changing some of the mining methods, particularly at depth, as we've talked in the past, that would allow us to capture more of the resource recovery, reserve recovery with the same development. That could lead to the higher throughput. You kinda said it well. We're really happy running 8,400 tons a day. We got a throttle there. Everything's coming in line. We're making a few upgrades to circuits in the process plant, a few upgrades in some of the systems in the mine.

We're very happy with where it's running there, and we want to make sure that the optimization study is done in a way that will achieve the same kind of stable, steady state run at a higher throughput, with understanding all aspects of that. So there's still a lot of work to do. We're still talking, you know, sometime in the first half of next year to come out with the results. We do, I would say, tend to think it's going to show us higher throughput, but I don't really want to give any numbers on it right now.

Don DeMarco (Executive Director/Analyst)

Okay, thanks for that, Steve. Well, in the meantime, it's looking great. So, last question, looking to the Mexican administration, Claudia has been in the seat now for a few months. Have you had a chance to meet with the new administration, and are there any concerns or issues that might potentially develop into concerns in the quarters ahead with this change?

Martin Wafforn (CFO)

Yeah, the new administration has been elected, you're right, but they did not take office yet.

Cosmos Chiu (Executive Director (Institutional Equity Research - Metals & Mining)

September first.

Martin Wafforn (CFO)

September first, well, the change happened. So, it's a bit early to answer your question. Look, I think we will continue to happily work with the government of Mexico. Mexico has always been a good place for us to work. We have very strong operations in Mexico.

Cosmos Chiu (Executive Director (Institutional Equity Research - Metals & Mining)

October first.

Martin Wafforn (CFO)

Oh, sorry, sorry, October first. Sorry.

Don DeMarco (Executive Director/Analyst)

Okay.

Martin Wafforn (CFO)

Will be the change of government. So as I said, a bit early, but I, you know, I don't foresee any big changes how we work with the government in Mexico. But governments, as you know, change, change in every country. We're working over time, and we are dealing with very long reserve lives in some of our assets, especially when you look at the La Colorada mine. You know, there will be many, many administrations passing while we produce for decades and decades on that asset in the future. So, I'm very happy to work in Mexico. I don't, I don't see any, any issue at this point.

Don DeMarco (Executive Director/Analyst)

Okay, Michael. Thanks so much for that, and good luck with Q3.

Martin Wafforn (CFO)

Thank you. Operator? Hello? Hello, operator.

Steven L Busby (COO)

Nicholas, if you can hear us, you're in the queue to ask a question.

Nicholas Kasidhi (Managing Partner)

Thanks, Michael, for taking my question here. I just had a question on Cerro Moro, if I could. I understand the grades have been a little bit variable here for the previous two quarters, and that's been due to some regulatory impacts, but I was hoping if you guys could provide some color on what the next quarter or two might look like there with respect to grades and throughput. Thank you.

Martin Wafforn (CFO)

... Yeah, and it’s really hinging on the Naty Zone that we are mining that is how far away from us? 25 km away from Cerro Moro. High grade, high grade satellite. And we couldn’t really access that site all the time during Q2 because of the really, really strong rains and snowfalls during winter. We are obviously getting now into, you know, springtime soon, and access has been reestablished. So that’s why we’ve, you know, maintaining obviously our outlook for the production there. But Steve, you want to give some details?

Steven L Busby (COO)

Yeah, sure, Nicholas. And you know, we were pushing pretty hard to get Naty online towards the end of last year. We talked about it. It was kind of the next grade zone, if you will. We were gonna open up after mining out the higher grade portions of the Zoe deposit. It was very important to us. So we pushed out there and got that up and running quite well early in Q1, and it was starting to deliver pretty well. You know, I have to admit, yeah, we had some pretty good rains there, you know, higher than normal, but we also—our road wasn't really built to the kind of standards we would have liked to obtain. So the combination of the two definitely limited, restricted our ability to access the pit.

We didn't really have dewatering systems in place to the degree that we should have, to dewater the pit when in these kind of rainstorms. So we've been, as we regained access, and now we are mining back in Naty at the rates we like to mine, we're upgrading those roads, we're upgrading those dewatering systems so that we can face these storms in the future. And we're also looking at plans now to accelerate production in Naty to kinda claw back what we missed in Q2 there. We feel pretty good that we got a good plan in place to be able to do that, but that's going to load up Q4 more, so you won't see as much coming out in Q3. So when you look at the distribution at Cerro Moro, it's gonna be stronger in Q4 than Q3.

Nicholas Kasidhi (Managing Partner)

Got it. Okay, that's helpful. Thanks, Steve. Just if I could sneak in one more. We're almost halfway through the quarter here, and I understand that the Labrana two transaction is still expected to close sometime this quarter. I was just wondering if you guys could provide any updates or color on when you see that happening, and if there's any anything with respect to approvals that you're still waiting for. Thank you.

Martin Wafforn (CFO)

Yeah, Nicholas, that's right. And at the moment, we're still waiting for some regulatory approvals. And then, you know, at the moment, it's still planned for Q3.

Nicholas Kasidhi (Managing Partner)

Great. Thanks, Michael.

Martin Wafforn (CFO)

Thank you.

Operator (participant)

There are no further questions at this time. I will now turn the call over to Michael for closing remarks.

Michael Steinmann (President and CEO)

Thank you, operator, and thanks, everyone, for joining the call today. Very exciting, very exciting times coming here for Pan American. You got a glimpse here when you look at the record, record revenues, record cash flow, free cash flow, cost below guidance. Obviously, a, 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 are nearly back on development meter, on track where we want to be at about, 2,000 meters a month, I believe.

So that you know will lead to a ramp up at La Colorada, as I explained, that will lead to lower cost at La Colorada, and you know very, very exciting combination. While we still obviously work on our exciting Skarn deposit, no doubt that this is one of the largest worldwide largest discovery of silver and base metals over the last decade. And we'll continue work on that, and of course they'll 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.

Operator (participant)

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