Pan American Silver Q2 2023 Earnings Call Transcript

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August 10, 2023

Key Takeaways

  • Integration of Yamana assets boosted Q2 production by 102% for gold and 55% for silver year-over-year, delivering consolidated silver output of 6 Moz and record gold of 248.2 koz within guidance.
  • Q2 revenue reached $639.9 M, but the company reported a net loss of $47.4 M ($0.13/share) due to $33.3 M impairment and $26.1 M purchase accounting charges, with adjusted earnings of $14.7 M ($0.04/share).
  • Non-core disposals (Mara, Morococha, Agua de la Falda and equity stakes) will generate ~$593 M cash plus high-quality royalties, reduce care and maintenance costs, fully repay drawn debt, fund growth projects and support shareholder returns.
  • A dividend of $0.10/share was declared for Q2 and management plans to introduce a new capital allocation policy by year-end that may include dividends and share buybacks while funding projects like La Colorada Skarn.
  • Escobal mine remains under care and maintenance amid the ILO-169 consultation process in Guatemala, with no timeline for a potential restart of operations.
AI Generated. May Contain Errors.
Earnings Conference Call
Pan American Silver Q2 2023
00:00 / 00:00

There are 8 speakers on the call.

Operator

Morning. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to Pan America Silver's 2nd Quarter 2023 Conference Call. Saren, you may begin your conference.

Speaker 1

Thank you for joining us today for Pan American Silver's Q2 2023 Conference Call. This call includes forward looking statements and information and makes reference to non GAAP measures. Q2, 2023 unaudited results, call, all of which are available on our website. I'll now turn the call over to Michael Steinmann, Pan American's President and CEO.

Speaker 2

Thanks, Sharon, and thank you, everyone, for joining our call today. The Q2 is the 1st period we are reporting results inclusive of the assets acquired through the Yamana transaction, which closed on March 31. The results clearly deliver on the benefits We had expected through the strategic acquisition enhancing both the scale and quality of our portfolio. With the contribution of the new assets, production in Q2 was up 102% for gold and 55% for silver Q1. Consolidated Q2 silver production of 6,000,000 ounces was at the high end of our 2023 quarterly guidance consolidated record gold production of 248,200 ounces also approached the upper end of the range.

Speaker 2

Silver and Gold segment all in sustaining costs per ounce of $15.70 13.42 respectively are within our full year cost guidance. With the strong performance year to date, We have reaffirmed our original 2023 operating guidance provided in our Q1 2023 MD and A. As indicated with our guidance, our production is back and weighted, particularly for gold in the 4th quarter. Please see the quarterly operating outlook provided in the Q1 MD and A or the slides that accompany this call for the detail. Strong production and sales volumes resulted in Q2 revenue of $639,900,000 net loss in Q2 was $47,400,000 or $0.13 per share.

Speaker 2

This reflects noncash accounting impacts, Notably, a $33,300,000 impairment charge, net of tax, related to the sale of over 92.3 percent interest in Morococha for cash consideration of $25,000,000 as per our news release from July 31. The net loss also includes $26,100,000 net of tax As these inventory adjustments are related to the Yamana transaction and more one time in nature from purchase price accounting, We have adjusted them from the earnings. The adjusted earnings were $14,700,000 or $0.04 per share. Cash flow from operations totaled $117,000,000 net of $50,500,000 in taxes paid. Our annual tax payments are typically the highest in Q1 and Q2.

Speaker 2

We repaid $55,400,000 of debt in Q2 and exited the quarter in a strong financial position with $470,000,000 available under the Sustainability Link credit facility and cash and short term investment of $409,200,000 This includes the $192,900,000 of cash that is restricted to the Mara project. Financial position improves further with the divestment of non core assets we announced on July 31, 2023. The sale of our interest in the Mara project in Argentina, the Morococha mine in Peru and the Agua de la Falda project in Chile, together with the divestment of non core equity investments is expected to yield total cash proceeds In addition to the cash proceeds, Pan American will retain future upside through the retention of copper and gold royalties with strong counterparties. The divestment of the Mara project and Morococha mine will also allow meaningful reductions in our annual project development, reclamation and care and maintenance costs for 2023 and going forward. As per our capital allocation objectives, We intend to fully repay the $280,000,000 drawn on our credit facility as of June 30, 23.

Speaker 2

The remainder of the proceeds will increase our cash balance, further strengthening our balance sheet and position us to advance our growth projects, including the La Coloradas current project as well as paying dividends to the shareholders. We announced yesterday a $0.10 per share dividend with respect to Q2, equivalent to $36,400,000 in aggregate dividends. Optimizing our portfolio was an important and stated objective following the Yamana transaction, and I'm pleased with our progress to date. Turning to the La Colorada's current project. Work continues on the preliminary economic assessment or PEA, which we aim to release as part of an updated La Colorada Property Technical Report later this year.

Speaker 2

The PEA will include our review of project development, operating and capital cost estimates for this corn. At the La Colorada mine, the concrete line ventilation shaft advanced to a depth of about 4 20 meters at the end of July and is expected to reach shaft bottom by the end of this year. Once the 2 exhaust fans are installed, I mean, next year, we expect to see significant improvement in ventilation in the high grade East Candelaria area of the mine. Until this new system is operating, we are restricting development and mining rates in the higher grade deep eastern portion of the Candelaria deposit. Structure, which includes a refrigeration unit that was commissioned in 2022, will also provide benefits to the development of the Skarn project.

Speaker 2

At the Escobal Mining Guatemala, three meetings were held in the Q2 under the ILO 169 consultation process being led by the Guatemalan innovation process being led by the Guatemalan government. We also took part in a working meeting in late June with participation of the Chinca Parliament, their advisers and Guatemala Government Institutions. During the meeting, we presentation. We will now begin the presentation of the dry stack tailings facility, management of water and vibration from blasting activities when the mine was in operations. Following the meeting, we responded to requests for additional information and continue to work with MEM, the Ministry of Energy and Mines, in the process.

Speaker 2

Now that all parties have delivered their institutional presentations, the MAM considers that the information transfer process Phase 2 of the consultation is complete. The MAM has established several dates for working meetings with the parties involved in the consultation. We continue to participate in the ILO consultation process in good faith and respecting the constitutional court order. Escobar continues under the care and maintenance and at this time no data has been set for a potential restart of the operations. Please see the Ministry of Energy and Mines website for further information, activities and the time line for the Escobar ILO-one hundred and sixty nine process.

Speaker 2

A link is provided on our website on the Escobar page. Our second quarter results So the successful transformation of Pan American into a major precious metal producer with more diversified operations across the Americas and a strong focus on silver. The integration of the Imana assets is progressing well, and we are on track to capture the $40,000,000 to $60,000,000 of annual synergies we had identified through the transaction. We are committed Seeballs into the new Pan American Silver. Before we move on to questions, a few housekeeping items.

Speaker 2

We are currently working on an updated reserve and resource report inclusive of our Yamana acquisition properties, call, which will be released in the next few weeks. I would also like to note that we have revised the date for our ESG call. Call. The call will now be on October 19, 2023 at 8 am Pacific Time, 11 am Eastern Time. We'll provide further details closer to that date.

Speaker 2

Together with the other members of our management team, We will now be happy to take your questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. First question comes from Lawson Winder at Bank of America Securities. Please go ahead.

Speaker 3

Okay. Thank you very much, operator, and hello, Michael and team. Thank you for the update today. I would like to start off Just by asking about your capital return, which you touched on briefly in your prepared remarks, but I just wanted to kind of ask that again and hopefully get a little more color from you. And that is, one with the dividend, I would expect and with a much larger asset base that you have now with the Yamana assets, that there is that ability to pay a higher dividend And I'd like to hear your thoughts on that.

Speaker 3

And then secondly, with the share price trading now well below where you issued shares for the Yamana acquisition, I mean, does it make sense for Pan American to be repurchasing its shares. Thanks very much.

Speaker 2

Yes. Thanks, Lawson. Look, I think our capital allocation did not change what we did the last few years in the sense that, first of all, we maintain a very strong balance sheet. I think we proven already in the Q1 here that we are on track doing so. We announced last week the sale of a few non core assets for about $593,000,000 cash and some high quality royalties as well.

Speaker 2

We just announced that Lawson, so that closing will happen for most of them, I would guess, in Q3. So That money is obviously not in our bank account yet, but it will come. And of course, that's where your question, I guess, Hint on to on the capital allocation. So strong balance sheet, low debt levels. You know that we 2 bonds from Yamana.

Speaker 2

They're very attractive interest rates on those bonds. They're long term bonds, so that's fine. We took some money on our line of credit, which as you can imagine, I mean, the current interest rate situation It's a more expensive debt and will be paid back when we receive the cash from that those transactions. And the rest, of course, will improve even further our balance sheet and there will be returns to our shareholders. So that brings you to your question.

Speaker 2

We declared $0.10 of a dividend that's kind of like probably The last quarter of our dividend payment under the old policy that got kind of a bit distorted because our dividend policy was based on net cash. We put that in place for a long time. Pan American did not have any debt. So that's how it worked really well. So we're working on a new policy right now.

Speaker 2

We believe that the right time to install that will be at the end of the year when we have all that cash in from those non core asset sales. And we and the Board did not make a final decision yet how that will look like, But it will be something easy to follow like our old policy. And I I think the door will be open there to anything like dividends, share buybacks, etcetera. But don't forget that we also have some high quality projects. And that's really the core of our business to build out high quality projects and do that cash on our balance sheet.

Speaker 2

So La Colorada's current, of course, will be a focus on that. And as I mentioned in the call Just before the PA should be out on summer late in this year.

Speaker 3

Okay. Thank you for those thoughts. If I could also follow-up on the asset sales, it would make a lot of sense that La Arena 2 would also be a non core asset potentially to be divested. I mean, is that a fair assumption? And And then secondly, how do you think about that given that there's still a couple more years or maybe several more years of really strong gold production left at that asset?

Speaker 2

Yes. I mean, look, we I think we're only holding these assets for about 3 or 4 months. We have been able to Come through follow through here and come out with a very strong group of non core assets. I also we are working on others. So This is not done by any means.

Speaker 2

We have a lot of assets in our portfolio, Some from Pan America and some from Yamana's side. So we'll continue looking at that and optimize our portfolio. And I think I made statements before that copper for us is not obviously not a focus. We're focusing on our silver production and our gold production. And I would envision with copper project something similar than we did with Mara where we would cash flow and asset and a very strong royalty copper royalty to keep our hands on the upside of the future copper price.

Speaker 2

So kind of the similar structure than we did with Mara. You're right That La Arena still has a few years of gold production from the oxides on the top. I'm not worried about that. There will be many different ways To structure a deal on something like that where you keep the gold, keep mining and hand over the asset later on or a new buyer who wants to look at the sulfides below, finishes the mining of the oxides and pays us for the gold. So I mean, not worried about that.

Speaker 2

I think that's just the detail that we can solve in a deal negotiation.

Speaker 3

Okay, great. And then hopefully just one final question that should be fairly straightforward. Just on the silver unit cost guide for Q4, and by the way, thank you for providing the quarterly guidance. So unit cost stepped down in Q3 versus Q2 on higher production and then there's still even higher production in Q4, but the cost stepped back up. Is that just Are you expecting a decline in some of the byproduct credits in Q4 versus Q3?

Speaker 4

Yes. Hi, Lawson. Steve here. No, it's more reflective of our sustaining capital timing. We see a heavy quarter in Q4 for sustaining capital spend.

Speaker 4

And that's really weather related, particularly in some of our assets. Q4 is kind of the peak time for our construction on Leach pad, waste dumps, things like that. Yes. Really weather related

Speaker 2

in many places when we go from the wet into the dry season. Just something to the quarterly guidance, Lawson, in case people didn't see that it's in our MD and A. And When you look at the quarterly in the Q1 yes, sorry, in the Q1 MD and A, and if you look at our guidance there per quarter, we actually Our costs were actually below our guidance, right in the guidance for the annual one. But when you look quarter by quarter, we did very well in You too.

Speaker 3

Okay. Thank you all very much. Appreciate that.

Speaker 2

Thank you, Lawson.

Operator

Thank you. The next question comes from Craig Hutchison of TD Securities. Please go ahead.

Speaker 5

Hi, good morning.

Speaker 2

I had

Speaker 5

a question on the Mara, you plan to retain and I think you could kind of touch on it. Is that something you hold longer term or would you be looking to monetize that post the deals close? And I guess have you Got any expressions of interest on that NSR since you announced it last week?

Speaker 2

Look, I mean, at the moment, it's really selling focusing to sell some of these non core assets. And as I said, Whenever we can try to keep access to future upside through royalties, I think. I know it has worked for us really, really well in the past. I would like to remind everybody of The Mavericks transaction we did with our former portfolio of royalties we had in 2015 where we started Mavericks Metals and went very strong and long planned shareholder until the company got sold Earlier this year, I think it's up. Yes, lots going on, on the transaction side.

Speaker 2

So So that worked out really, really well for us. I think we got in about $152,000,000 cash from quite a smaller portfolio. This royalty we're talking now are very strong royalties. You can imagine, I mean, we're talking especially in the case of Mara about Life of Mine copper royalty, probably one of the larger copper deposits in the world that is to be developed. I don't want to make a decision right now what we do with these royalties.

Speaker 2

You can imagine there's a lot of demand for royalties. Portfolio and collecting those royalties. We'll decide later on how we create most value for our shareholders out of that portfolio.

Speaker 5

Okay, great. And one last question. Just on the tax, you mentioned taxes, cash taxes are higher in Q1 and Q2. Can we expect them to drop off fairly substantially here into Q3? And Can you just provide some context of why it was so high?

Speaker 5

Is this for catch up payments from 2022?

Speaker 6

Yes. Hi, Craig. This is Ignacio speaking. So in general, yes, as you know, we pay installments throughout the year. However, there's always a catch up that we do, Usually, typically between March April.

Speaker 6

And in this case, there was a large catch up in April from certain taxes. Specifically, I think it was in Chile. But yes, that's just a normal cadence of our tax payments, installments and then a catch up and sometimes in March Naples would be either lines in Q1 or Q2.

Speaker 2

But yes, you're right. It's normally our biggest, largest tax payments are in the 1st two quarters of the year. That's correct.

Speaker 5

Great. Thanks, guys.

Speaker 2

Thank you.

Operator

Thank you. The next question comes from Don DeMarco from National Bank Financial. Please go ahead.

Speaker 7

Thank you, operator. Good morning, everyone team. First question, so looking at the asset disposition late July, does this change your care maintenance guidance for 2023. I think it was about $100,000,000 for the year and maybe $50,000,000 has been spent in H1.

Speaker 2

Look, a very good point. I mean, it's not only the cash that comes in and the royalties, but A lot of care and maintenance costs that will go away with those transactions. The biggest ones for the care and maintenance costs with Imorocha and of course, Mara. It really depends when the transaction closes. But as soon as they close, yes, that will go away.

Speaker 2

Now depending which month, we may going to adjust a little bit the care and maintenance capital down at the end of the year, but it really depends on that date. But definitely, for future years, that will be a big improvement.

Speaker 7

Okay. Thank you. And what we see with the reporting last night is that the cost, the AISC is a little bit variable versus the guidance ranges. And just looking at some of the cornerstone assets, like we see Schwendo and El Penon that are above the ranges on AISC. Jacobina positively near the bottom of the guidance range.

Speaker 7

So what are some of the factors that are driving the swings at these three mines? And would we expect the reversion to sort of midpoints guidance range in H2.

Speaker 4

Yes. Thanks, Don. Steve here. Maybe I'll start with Jacobina. Jacobina is having very, very good success on some of their cost control programs and we have enjoyed some pretty good costs, Even cost per ton, unit cost per ton have been looking very good there.

Speaker 4

We're a little bit we're monitoring very closely the exchange rate of the reais That has an effect there that's pretty strong. But we did come out pretty good in Q2 and we're optimistic I think looking forward at Jacobina. El Penon, there's quite a bit going on there in terms of rescheduling some of the mine plan. We've enjoyed some really good silver production coming out of El Penon, a little bit disappointing gold production during Q2. So we're kind of readjusting that plan.

Speaker 4

We always anticipated a strong second half of the year, particularly strong Q4 at El Pinon, But we have kicked up development rates a bit and some of the activities there have kicked up a bit. So that's driving some of the cost differentials from what we had before. And I think Cerro Moro, I think that was the other one you were talking about.

Speaker 7

Or No, it was Schwindo.

Speaker 4

Schwindo, yes. At Schwindo, I would say, Right now, it's really we're focused on this blending of coarse ore with the fine clay ores. And what that happened what we've decided to do is drop some of the cutoff grade, if you will, of some of the ores To give us better blending rock for the higher grade clay ores, and the effect of that kind of drives a bit of the cost as well. And that's Kind of the noise we're seeing there. Yes.

Speaker 2

But maybe just that in general, really the general cost driver, a big cost driver When you look at, of course, sustaining Capital 1 and that varies, as we said before, from month to month. There's a seasonality to that which depends on the weather pattern or on the dry and wet season of different countries we are working in, When we can do certain work and when not. So that's just a given and especially in Peru that dry season starts in the Northern Hemisphere winter. Byproduct, very important byproduct timing of sales of that and prices of byproduct as All our costs are met by products. Those have a big impact on our cost.

Speaker 2

And then the last one that Steve alluded to is currencies, right? If you're depending on how much of local currency payments we have in a certain country and how strong that local currency is, that has a big impact on our cost, positive or negative, depending where it goes. So Those are kind of given impacts and of course, we have to follow our capital schedule. And as I said, by So just keep in mind when you look at all in sustaining costs that those are big factors as well that play into it.

Speaker 7

Okay. We'll keep modeling the guidance ranges for the time being. And final question, just going over to the ILO 169 process, it sounds like an encouraging quarter. I mean, Sounds like good progress. They're asking questions and there seems to be some dialogue there.

Speaker 7

I'm looking at your website here that you had mentioned. And after Phase 2 consultation, there's the Supreme Court verification. So could you give us an idea of when that Phase 2 might conclude and then what the expected events would be through Phase 3.

Speaker 2

Yes, I mean, you're right. Lots of activities in the quarter and ongoing. The website from the Ministry of Mines, I think, shows something like October end of October November for The conclusion of that phase, look, I don't know if that's really the exact timing, but I think that's What at the moment is on their website and that's what the government is probably trying to achieve. And then it will go into the last place with the court verification. So I don't have any dates for you exactly.

Speaker 2

I just encourage everyone to follow website from the government of Guatemala from the Ministry of Mines and there will be periodic updates As we're going on and see how that evolves.

Speaker 7

Okay. I can see the link on your website. Okay. Thank you very much. That's all for me.

Speaker 7

Good luck with Q3.

Operator

There are no further questions at this time. Mr. Steinman, I turn the call back over to you.

Speaker 2

Thank you, operator, and thanks, everybody, for calling in today. Busy quarter with a new larger and stronger Pan American With the addition of the former Yamana assets, strong production and No, big advance already on divestments of noncore assets in the quarter. So as you can imagine, it was a very busy quarter. I'm Very happy to see the advances. And on top of that, as I mentioned, integration is going really well.

Speaker 2

We are very happy with our local teams and Everything advancing well and harvesting of synergies is right on plan between our $40,000,000 to $60,000,000 So quarter to you in November. Until then, enjoy the rest of the summer. Thank you very much.

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