Pan American Silver Corp. (NASDAQ:PAAS) Q3 2023 Earnings Call Transcript

Pan American Silver Corp. (NASDAQ:PAAS) Q3 2023 Earnings Call Transcript November 8, 2023

Operator: Good morning, ladies and gentlemen, and welcome to the Pan American Silver Third Quarter 2023 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. [Operator Instructions] This call is being recorded on Wednesday November 8, 2023. I would now like to turn the conference over to Siren Fisekci, Vice President of Investor Relations. Please go ahead.

Siren Fisekci: Thank you for joining us today for Pan American Silver’s Q3 2023 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 Q3 2023 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: Thanks, Siren, and thank you, everyone for joining our call today. Let me begin with an update on our progress integrating the assets we acquired through the Yamana transaction that closed on March 31st. I’m happy to report that we have integrated the four new operations into Pan American’s organization and advanced on streamlining the new company with the sale of non-core assets. We have also reorganized the Yamana Latin American regional offices in line with focusing support to the mine operations and continuing to enhance corporate oversight, leadership, systems policies and procedures by taking advantages of substantial synergies and business improvement opportunities. Working with the new teams, we are evaluating many optimizations and mine life extension opportunities.

We look forward to sharing more with you on that in the coming quarters as we advance detailed studies and near mine exploration programs and update the life of mine plans. We committed to rationalizing our portfolio following this transformative transaction and we have made significant progress on that objective earlier than I think most would have expected and with additional opportunities yet to come. In Q3, we completed the sale of our interest in the MARA project in Argentina and the Morococha mine in Peru. And on Monday, we completed the sale of our interest in Agua de la Falda project in Chile. In Q2, we divested certain non-controlling equity investments, which are largely inherited from Yamana. We increased our equity interest in New Pacific in Q3 to 11.6% of New Pacific’s outstanding common shares, helping to further advance interesting Bolivian silver projects by leveraging our long-standing operating success we have enjoyed at San Vicente over the past 24 years.

We also committed to paying down certain higher interest debt incurred for the Yamana transaction. We repaid the amounts drawn on the sustainability-linked credit facility and as at September 30th have the full $750 million available on our credit facility in addition to working capital of $832 million, which includes cash and short-term investments of $386 million. Total debt of $809 million is largely related to two senior notes, Pan American assumed to the Yamana transaction as well as lead and construction loans. These notes have attractive terms, $500 million with a coupon of 2.63% maturing in 2031, and $283 million with a coupon of 4.625% maturing in 2027. Pan American has mainly about strong balance sheet, which gives us the flexibility to manage business cycles and capitalize on growth opportunities.

The steps we have taken to divest non-core assets and repaid debt will also significantly reduce cost going forward. We expect to save approximately $90 million in cash annually primarily from the elimination of care maintenance, project development and reclamation costs associated with MARA and Morococha. In addition to interest expenses from having repaid the $280 million that was drawn on the credit facility at the end of June 30, 2023. We expect further savings from the Yaman acquisition and the former synergies which we continue to estimate will be about $40 million to $60 million annually. Finally, it is important to remember that we retain future upside on both the MARA and the Agua de la Falda projects to the precious and base metal royalties we retained with the strong counterparties in those projects.

With that let’s move on to our results for the third quarter. Acquisition of the four Yamana operating mines has provided a significant increase in production with reduced unit operating costs and enhanced diversification. We produced 5.7 million ounces of silver and 244,200 ounces of gold in Q3. All-in sustaining costs for the silver segment were $18.19 per ounce and $1,451 per ounce for the gold segment. While operating performance at most of our mines was in line with expectations two operations faced unique challenges, which weighted on Q3 results. In the silver segment La Colorada continued to be impacted by ventilation constraints. These constraints resulted in reduced throughput, limited access to higher grade zones of the mine and required intensive ground support innovations in areas where high heat and humidity have rendered older ground support methods ineffective.

We do not expect an improvement in La Colorada’s performance until the new ventilation infrastructure is completed around mid-2024 and were able to increase development of mining rates in the deep east part of the mine thereafter. We are making good progress on that work. The excavation of the concrete line shaft reached a depth of 522 meters by the end of Q3 2023 and is expected to be fully excavated to a depth of 593 meters by year-end. The expect installation of two large exhaust fans on the surface of the shaft will be completed by mid-2024. Commissioning of this large primary ventilation system will deliver the refrigerated fresh air we currently produce directly to the heat source in the deep eastern area work faces and immediately exhaust vertically to the 40 concrete line shaft.

This will avoid sending hot air back through the mine where it is damaging our ground support systems. In the gold segment mined gold grades were lower than we were expecting El Penon. Based on recent reconciliation data we have initiated a review of our mining sequence in certain sections of the mine to achieve a more stable gold production. Over the next several months, we will be adapting to the mine development schedule for El Penon that to provide more flexibility when encountering unexpected great shortfalls in this highly variable deposit. The delineation drilling strategy has been reviewed to reduce the grade variation of risk we are currently encountering. El Penon remains one of our core assets with excellent exploration potential and excess mill capacity, supporting that mine as being an important contributor to the company’s future cash flow.

Given year-to-date production and our outlook for the next two months, we are reaffirming our annual 2023 guidance ranges for silver and gold production with the expectation that production for both will come in at the low end of the ranges. We expect the gold segment cash costs and all-in sustaining costs to be within our guidance ranges from 2023. We expect silver segment cash costs and all-in sustaining costs to be marginally above our guidance range largely due to ventilation constraints at La Colorada I mentioned earlier, and the two weeks expansion of operations at that mine in early October to address security concerns as previously disclosed. We are maintaining our 2023 guidance for base metal production and sustaining and project capital expenditures as well.

We reported a net loss of $22.7 million in Q3 or a basic loss per share of $0.06. Adjusted earnings were $3.1 million or $0.01 per share. Operating cash flow was $114.6 million, net of $35.8 million taxes paid. Including the cash dividend of $0.10 per common share we declared yesterday, we will have paid $130.5 million in total dividends this year. Turning to the La Colorada Skarn project, we are on track to release the preliminary economic study by year-end. The study will be based on using a sublevel caving mining method, which we believe offer superior economic benefits given the size and geometry of the large silver bearing polymetallic deposit. We will carefully consider potential alternatives for the optimum funding structure for the current project once the preliminary economic studies released and all of the development details risks and opportunities can be thoroughly discussed and debated.

The ILO 169 consultation process for the Escobal mine in Guatemala continued to progress in Q3, Pan American has now hosted three visits to the mine for shrink and digital representatives and their advisers and several other meetings have been held. This included working meetings with Xinka representatives and Guatemala’s Ministry of Energy and Mines or MEM for short. I know many of you check MEM’s website for the Escobal consultation, which does provide very transparent reporting on the process. I noted that MEM had intended to complete the consultation by the end of October. Although, the schedule was not met all the participants continue to engage in a peaceful, comprehensive transparent and good faith consultation process. The next consultation meeting is scheduled for November 10th and as usual we are not providing a time frame for completion of the consultation or potential restart of the mine.

Other consultation process moves ahead, we are also continuing with our care maintenance activities for Escobal. I would like to congratulate the Pan American team in Guatemala for receiving first place in the environment category from Guatemala’s chamber of the industry for their work on reformation and conservation project. The project involves an innovative approach to reproduction of oak trees within the Escobal mine area with the primary objective of revitalizing forest regions in the mine property and transforming them into protected valuable habitats for flora and fauna. If you’d like to learn more about this, we have the video posted on Pan American’s LinkedIn page where we regularly post updates on some of our company’s initiatives and events.

In closing, we are pleased with our progress on integration of Yamana assets, which is delivering Pan American with significant production growth and reduced unit costs. We are currently preparing our plans for 2024 focusing on safe, reliable, cost-efficient operations and the development of additional value-enhancing future growth opportunities. We will continue to evaluate ways to streamline our overall portfolio with the aim of remaining the world’s premier silver mining company. Together with the other members of our management team, we would now be happy to take your questions.

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Q&A Session

Operator: Thank you. Ladies and gentlemen, we will now conduct the Question-and-Answer Session. [Operator Instructions] Your first question comes from the line of Cosmos Chiu. Your line is now open.

Cosmos Chiu: Thanks, Michael and team.

Michael Steinmann: Hi. Good morning.

Cosmos Chiu: Hi. Good morning. Maybe if I can start off with El Penon, first. And I guess you know what I’m going to ask in terms of the shortfall in grade. Am I reading it correctly? I guess in Q3 your head grade was 98 gram per tonne and 2.7 gram per tonne for gold. If I look at the proven and probable, it’s closer to 213 grams per tonne or probable 148 grams per tonne. So the grade in the quarter was about half for gold and silver compared to your reserve grade. Is that correct? And maybe if you can elaborate on kind of what happened?

Steve Busby: Yes, Cosmos. Steve, here.

Cosmos Chiu: Hi, Steve.

Steve Busby: How is it going? Yes, basically, if I can talk first about in Q3, we had anticipated mining in we’ve been developing for most of the year according to a mine plan that was developed previously in 2022. And we were planning to develop into these high-grade structures that would be mined in the second half of this year. Three of those structures, and keep in mind, El Penon is spatially quite vast. We’re mining several faces across vast areas about 12 kilometers by 5 kilometers. So it’s spread out quite a bit. So there’s a lot of development that goes into these areas all over the different mine. And there were three of these areas that were particularly high-grade gold, not so much silver that we go into. So when you look at the reserves that average is correct, but the distribution depends — the sequencing can affect that grade quite a bit.

Now, when we mined into these areas, what we discovered is that looking back now and evaluating what happened there, three of those areas that were particularly high grade had very limited drilling information on it. It was specially drilled quite a bit wider than the normal reserves that we’d like to see. So, we’re reconfiguring our drill programs to target these higher grade areas in the future. It was really a Q3 impact. It’s going to carry us over into Q4, because they were scheduled to be mined this quarter. So we’re going to be looking at those areas, drilling more and kind of increasing the density of drilling if you will, particularly in the higher grade zones of the reserves. We’re just finding it’s not to the level that gives us the risk tolerance that we want to see.

So that’s going to work into our plans for next year. And depending on how that increased drilling goes, that will kind of adjust those higher-grade zones that we’re seeing. I think we’re going to see positive and negative surprises as we do that just the variability of the ore deposit. But according to your question on was the silver grade really half of that? The answer is yes, and that’s sequencing. We do have higher grade silver zones. But the average grade is about 158 grams silver on the reserves when you put the P&P together. So we were 98. That’s just sequencing. Yes.

Michael Steinmann: Just to add Cosmos as Steve explained with an undercapitalized exploration project here at Yamana was running with not enough drill density, as we would do it. And in order to fix that we increased now drilling on site to about 10,000 meters a month. We actually will spend quite a bit more. I mean I was like paring back greenfield drilling went far, far away and focusing really on further drilling on site. So we’ll further increase that drilling to kind of catch up with what should have been done in the past and then now we’re very confident here that I mean houses at the mine a couple of weeks ago and we’ve seen some very interesting intercepts there. So that drilling, as I said back now at 10,000 or meters a month and we’ll increase further here in the coming months.

Steve Busby: And Cosmos, if I can kind of add a little bit more detail too, as we mind into those high-grade zones and we didn’t see the ores that we expected. At El Peñon, there’s quite a bit of feed that goes to the plant that’s low grade. So when we’re not producing off the mine, we supplement rather from the low-grade stockpiles, which are quite a bit lower silver grade and that’s what drives that.

Cosmos Chiu: Sure. And if I could follow-up on that question. In terms of Q4, I don’t know how much you can share with us but you’ve maintained your guidance for the year but how much of these higher-grade stopes have you factored into your Q4 number? And how much of hitting those Q4 numbers is dependent on getting some of these high grades up. I’m just trying to figure out how much conservatism you’ve factored in in light of what – in light of the great portfolio that you realized in Q4?

Steve Busby: Yes. So we’re moving into Q4, Cosmo anticipating we’re not going to see that high grade that we had anticipated in the original mine plan. So where we say we’re going to still make the gold guidance on the low end, it’s really looking at our other operations to kind of make up some of that difference.

Cosmos Chiu: Of course. Okay. Great. Maybe if I can switch gears a little bit going to Escobal and Guatemala. Thanks, Michael for the update. On top of the conversation I think we’re all where there was a presidential election earlier on this year. There could be a – or there will be a presidential transition early next year. However, there seems to be a bit of noise in terms of the Supreme Court and validity of the runoff in terms of election. How much should we monitor that situation? How much of that situation could potentially impact the time of Escobal?

Michael Steinmann: Of course I hand you over to Sean McAleer here, who is running Guatemala for us in countries. So please Sean.

Sean McAleer: Yeah. I think …

Cosmos Chiu: Hi Sean.

Sean McAleer: Yeah. Good morning. It’s hard to speculate what the outcome will be with some of that noise that you mentioned. The President of Guatemala has publicly stated his commitment to smooth transition at the Ministry of Energy and Mines, the transition team from the newly elected party has met on several occasions with the MEM. And so they are moving forward to have a smooth transition in January as well, we’ve met with members of the incoming team a few times. And it’s hard to say what’s going to be the timing. And if there’s going to be any delays. Certainly, if there’s a transition in the process isn’t completed by the end of the year, we would expect that would take some time to continue that on. But they are committed as well to the ILO 169 consultation process. And so we’re looking forward to a government transition in January. And we’ll continue working with the government as needed.