Pan American Silver Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 8, 2024

There are 7 speakers on the call.

Operator

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. This call is being recorded on Thursday, August 8, 2024. I would now like to turn the conference over to Saran Fasecki, VP, Investor Relations.

Operator

Please go ahead.

Speaker 1

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 and 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.

Speaker 2

Thanks, Sharon, and thank you, everyone, for joining the call. Our operations generated record cash flow before changes in working capital of $203,300,000 in Q2. This resulted in $102,100,000 free cash flow in Q2. Balance sheet strength further improved with cash balances rising to $337,200,000 at June 30, an increase of $36,100,000 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 evaluations of the Brazilian real and the Mexican peso, which reduced foreign dominated deductible tax attributes as well as inflation adjustments on monetary liabilities in Argentina.

Speaker 2

Reported net loss in Q2 of $21,400,000 or $0.06 per share was significantly impacted by the $93,100,000 in income tax expense and a $26,700,000 net realizable value inventory expense. Adjusted earnings were $40,000,000 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 4,570,000 ounces in Q2 must below our expected range of 5.36 to 5,780,000 ounces for the quarter as continued ventilation constraint 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 start up of the new fans started on July 11, 2024 as scheduled and ventilation conditions in a deeper eastern areas of the mine have improved significantly.

Speaker 2

We are currently accelerating mine representation and development rates, which has steadily increased 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, a fully concrete lined 5.5 meter diameter by 580 meter deep Guadalupe 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.

Speaker 2

At Dolores open pit, geotechnical challenges hampered ore tons mined and unusually prolonged dry conditions, limited water availability, which impacted the aging 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 Natte zone impacting throughput and grades. We have regained access to Natty and expect to make up the Q2 shortfall in production during the remainder of the year.

Speaker 2

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 of heavy rainfall events in the future. We produced 220,400 ounces of gold in Q2, slightly below our expected range of 221,000 ounces to 252,000 ounces. Continued strong performance at Jacobina and higher goal grades and recoveries at El Penon helped offset the weather related impact at Cerro Moro, Dolores and Minera Florida. Cost in Q2 came in better than expected with all in sustaining costs excluding NRE adjustments for both the silver and gold segment below our guidance ranges for the quarter.

Speaker 2

Silver segment all in sustaining costs were $18,012 per ounce excluding an NRE adjustment that increased costs by $0.95 per ounce. Gold segment all in sustaining costs were $14.65 per ounce excluding NR readjustments that increased costs by $119 per ounce. In total $26,700,000 of NRE adjustments were included in Q2 production costs. The NRE adjustments are primarily related to projections of higher future unit cost at Dolores to extract the in heap inventories once our stacking activities have been completed. They're on track with our major projects for the year.

Speaker 2

The new dry stack sailing storage facility at Varon is on schedule to be completed in the second half of 2024 and will be commissioned thereafter. The construction of the paved plant project at Timmins is on schedule to be completed in Q3, 2024. This will enhance ore extraction and improve mine stability at the Belkrete mine. At Jacobina, we continue to advance plant upgrades aimed to stabilizing throughput at 8,400 tons per day and recoveries at 96%. They're also progressing the optimization study to optimize the long term economic and growth potential of Jacobina.

Speaker 2

At Escobar, we met with several Guatemalan government institutions to support the LO 169 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 Escobar. 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 LaGuardia ventilation system upgrade in July, we are maintaining our operating outlook for production, cash costs, 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 Q4 of 2024 than originally indicated in our quarterly operating outlook and for annual sales production to be towards the low end of the annual guidance range.

Speaker 2

With improvement in our balance sheet over Q2, net debt declined to $472,300,000 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. To that end with the other members of our management team, we will now be happy to take your questions.

Speaker 3

Thank

Operator

Your first question comes from Cosmos Chiu with CIBC. Your line is now open.

Speaker 4

Hi, thanks, Michael and team. Maybe my first question is on La Colorada. Michael, you kind of touched on it. La Colorada's ventilation shaft is now in place. It sounds like it's going pretty well.

Speaker 4

Could you maybe elaborate, is it functioning as expected? How has that sort of helped airflow? And ultimately, I guess what I'm trying to get to is, in terms of getting to 2,000 tonnes per day, you said you're going to get to it by year end along with higher grades. Is it going to be more a straight line sort of increase from now until then? Or is there going to be some kind of step change?

Speaker 4

And is that going to be part of the fact that, as you mentioned, overall, Q4 is going to be stronger than Q3?

Speaker 2

Yes. Thanks, Cosmos. Yes, the shaft completion and the installation and start up of the fans was right on time as we indicated for since beginning of the year, it will happen mid year, it happened mid year. It looks very exciting what we see on the results side on the impact to the mine off the chart, which as you know was a multiyear project ready to kind of bring us back on track here with better production in La Colorada. But Steve, maybe give some more detail.

Speaker 2

Sure.

Speaker 3

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 turn the fans on July 11, we increased overall flow rates into the mine by about 200000, 300000 cubic feet per second of airflow or feet per minute, sorry. And immediately, we saw temperatures drop in the Candelaria East zone by 3 degree wet fall Celsius.

Speaker 3

So a substantial improvement, which led immediately, we saw a bump in tonnage of 25% over what we've been seeing up until that point through the year. We were about 1400 tons a day going in for the year before we started that fan. We're now up and around a little over 1700 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 2.5, 3 weeks of running the fan, we've seen incredible boost of production and development rates that will continue to ramp up.

Speaker 3

I think for purposes of quarterly reporting, it will be a bit of a straight 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 pace and we'll ramp up through the rest of the year.

Speaker 4

Yes, 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 cost, non sustaining cost was also lower or better than your quarterly guidance. So how we would achieve that lower cost despite lower production?

Speaker 4

And ultimately, what's the your ability to sustain those lower costs on a go forward basis? Can we see that once again in terms of that better cost once again in Q3 and Q4?

Speaker 2

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

Speaker 3

Yes. 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 byproduct credit sales relative to what we're producing. We sold a bit more byproduct 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 unit cost per ton substantially at La Colorada.

Speaker 3

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 byproduct credits and that's where we're saying that we feel will come in line with what we guided for our cash and ASCO's cost for the year.

Speaker 2

One last point, Cosmos. As I always mentioned on the cost side, currency fluctuations have a big impact on our cost. We saw the devaluation in the quarter, especially on the Mexican peso and the Brazilian real. And that had a positive impact on our cost and we'll 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.

Speaker 2

So you see that in our earnings numbers, But that's a non cash tax expense there. And I 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 the reflection of that obviously must record cash flow.

Speaker 4

I agree. And maybe one last question on Eskobel. It seems like from your MD and A, 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 Escobar?

Speaker 2

Yes. We had actually quite a large number of meetings with government officials during the quarter. And I think after a bit of slow start up, I think of the new government, they have most of the other meeting scheduled between us and government officials has definitely improved and looking forward to continue and go back into the full consultation meetings that we need to have to advance this.

Speaker 4

Great. That's great to hear. And thanks again, Michael, Steve and Soren and team. And those are the questions I have.

Speaker 2

Thanks, Carlos.

Operator

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

Speaker 5

Thank you, operator, and Michael and team. Maybe first question just continuing on with Escobar. So 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 Escobar related to the consultation process?

Speaker 2

I will be careful when you look at the price of the contingent value, right? As you know, there is about 3 30,000,000 CVRs out there, so a large number. And when you look at the trading numbers, this is a very limited trading on those CBRs. So they obviously follow Pan American share price, of course. And then I think the fact that the new government needed a bit longer to set everything up here could have had an impact to that, but I will not read too much into it as I said, as it is a very, very limited trading of those CVRs.

Speaker 5

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 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?

Speaker 2

Look, I mean, we anticipate that, that role will obviously be filled by the government in time 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 has been what I think, press number of meetings with government officials between the company and us. And that's it was really like quite a slow start of the year with the new government, which kind of has to be expected, obviously, new government, as you can imagine, a lot of new officials in place that need to brought up to speed that have other issues to deal with in the country than just Escobar as you can imagine. And now they are in place most of time probably 5, 6 months now. So I think we see kind of a meeting schedule here in the future.

Speaker 5

Okay. We look forward to that. And so next question, the quarter we see a true portfolio effect here. You got lower costs offsetting higher costs at different operations. The Cornerstone mines look strong, Jacobin in particular.

Speaker 5

And now you've got this optimization work that's underway. The mine's running seemingly great at 8,400 tonnes per day. Are you still 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?

Speaker 2

Yes, we're very excited about Jacobina and as I see very, very strong cash flow for us, very strong production, very, very long line life. So yes, we're still working on the optimization. I think there is much more to do at Jacobina, but maybe Steve, you want just add. I know you're not ready yet with the study or anything, but maybe a few little points. Sure.

Speaker 3

Thanks for the question, Dom. Yes, the optimization work is proceeding at full quarter. We are seeing benefits to changing of 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 kind of said it well. We're really happy running 8,400 tons a day.

Speaker 3

We got a throttle there. Everything is 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.

Speaker 3

We're still talking 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.

Speaker 5

Okay. Thanks for that, Steve. And 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?

Speaker 5

And are there any concerns or issues that might potentially develop concerns in the quarters ahead with this change?

Speaker 2

Yes. The new administration has been elected, you're right, but they are not they did not take office yet. September 1, well, the change happened. So it's a bit early to answer your questions. Okay.

Speaker 2

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. October 1st. Sorry, sorry, October 1st, sorry.

Speaker 2

Okay. This will be the change of government. So as I said, a bit early, but I don't see foresee any big changes how we work with the government in Mexico. But governments, as you know, change in every country. We are 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's car.

Speaker 2

There will be many, many administrations passing while we produce for decades decades on that asset in the future. So I'm very happy to work in Mexico. I don't see any issue at this point.

Speaker 5

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

Speaker 2

Thank you.

Speaker 6

Thanks, Michael, for taking my question here. I just had a question on Cerro Moro, if I could. I understand that grades have been a little bit variable here for the previous two quarters and that's been due to some regulated impacts. But I was hoping you guys could provide some color on what the next quarter or 2 might look better with respect to grades and throughput? Thank you.

Speaker 2

Yes. And it's very interesting on the Nati zone that we are mining that is 25. 25 kilometers away from Cerro Moro, 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 springtime soon and access has been reestablished. So that's why I've been maintaining obviously our outlook for the production there.

Speaker 2

Steve, you want to give some details?

Speaker 3

Yes, sure, Nicholas. And we were pushing pretty hard to get Nadia online towards the end of last year. We talked about it. It was kind of the next grade zone, if you will, where we're going to open up after mining out the higher grade portions of the soy deposit. It was very important to us.

Speaker 3

So we pushed out there and got that up and running quite well early in Q1, and it was starting to deliver pretty well. I have to admit, yes, we had some pretty good range there, 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 2 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 in these kind of rainstorms. So we've been as we regained access and now we are mining back in Nadia at the rates we like to mine, We're upgrading those roads.

Speaker 3

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 Nadi to kind of claw back what we missed in Q2 there. We feel pretty good that we've 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 going to be stronger in Q4 than Q3.

Speaker 6

Got it. Okay. That's helpful. Thanks, Steve. Just if I could sneak in one more.

Speaker 6

We're almost halfway through the quarters here. And I understand that the Atlanta 2 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 anything with respect to approvals that you're still waiting for?

Speaker 2

Yes, thank you. That's right. And at the moment, we're still waiting for some regulatory approvals. And at the moment, it's still planned for Q3.

Speaker 6

Great. Thanks, Michael.

Speaker 2

Thank you.

Operator

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

Speaker 2

Thank you, operator, and thanks, everyone, for joining the call today. Very exciting times coming here for Pan America. You got a glimpse here when you look at the record revenues, record cash flow, free cash flow, cost below guidance, obviously 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.

Speaker 2

We are nearly back on development meters on track where we want to be at about 2,000 meters a month, I believe. So that will lead to a ramp up at La Colorada, as I explained, that will lead to lower costs at La Colorada and a 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 working that and of course, they'll have the optionality on Escobar. So lots of exciting projects set out of us and right out there to harvest the fruits of high level price amid a combination of lower cost.

Speaker 2

So looking forward to report on Q3 later this year. Until then, have a good time. Thanks, everyone.

Operator

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

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Earnings Conference Call
Pan American Silver Q2 2024
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