Pan American Silver Corp. (NASDAQ:PAAS) Q1 2024 Earnings Call Transcript

Pan American Silver Corp. (NASDAQ:PAAS) Q1 2024 Earnings Call Transcript May 9, 2024

Pan American Silver Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen, and welcome to the Pan American Silver’s First Quarter 2024 Unaudited Results Conference Call and Webcast. At this time, all lines in a listen-only mode. Following the presentation, we’ll conduct a question-and-answer session. [Operator Instructions] Also note that this call is being recorded on Thursday, May 9, 2024. And I would like to turn the conference over to Siren Fisekci, VP Investor Relations. Please go ahead.

Siren Fisekci: Thank you for joining us today for Pan American Silver’s Q1 2024 conference call. This call includes forward-looking statements and information and makes reference to non-GAAP measures. Please see the cautionary statements in our MD&A, news release and presentation slides for our Q1, 2024 unaudited results, all of which are available on our website. I’ll now turn the call over to Michael Steinmann, Pan American’s President and CEO.

Michael Steinmann: Thanks, Siren and thank you, everyone for joining us today. Our Q1 operating results were in line, or better than expected. Silver and gold production were within our guided ranges. And I am particularly pleased with our strong performance on controlling costs. Cash costs and all-in sustaining costs, excluding net realizable value inventory adjustments for both Silver and Gold segments were lower than quarterly guidance. Operations generated $133.2 million of cash flow before working capital changes in Q1. This includes $41.1 million in cash taxes paid, with Q1 typically being the quarter with the highest cash tax payments. We recorded a $30.8 million net loss or $0.08 loss per share in Q1, which includes a $34.4 million tax expense of which $15.2 million is related to an inflation adjustment in Argentina, $14.4 million of net realizable value inventory expense and a $10.8 million non-cash investment loss largely due to the decrease of the New Pacific Metals Corp share price.

Adjusted earnings were $4.7 million or $0.01 per share. We exited Q1 in a strong financial position. Cash and investments totaled $331.4 million, and we have the full $750 million available under our undrawn credit facility. Total available liquidity is $1.1 billion. This strong financial position allowed us to return $58 million of capital to shareholders in Q1, $36.5 million in total cash dividends paid, and $21.5 million in share buybacks. Following the approval of our share buyback program on March 4, 2024, we repurchased approximately 1.7 million shares at an average price of $14.16 per share for cancellation, inclusive of shares that settled in April. We intend to continue to take an opportunistic approach to future share buybacks. We maintained a dividend announcing yesterday, a cash dividend of $0.10 per common share.

In addition to maintaining a robust shareholder returns framework, we are investing in our operations for safe and efficient improvements in performance. Operations performed largely in line with expectations. Although Dolores was weaker than expected, due to lower grades and heavy rains that required us, to reduce irrigation rates, resulting in a lower ratio of ounces recovered to ounces stacked. NRV adjustments at Dolores also increased all-in sustaining costs by $838 per ounce. Excluding NRV adjustments, Dolores all-in sustaining costs were $1,529 per ounce. At La Colorada, the new ventilation infrastructure is on track for completion in mid-2024. We expect this will lead to significant improvement in the ventilation conditions in the mine, which will allow us to accelerate the development rates by opening more areas for production.

This is expected to lead to higher mining rates, returning to approximately 2,000 tonnes per day by the end of the year, from the roughly 1,300 to 1,400 tonnes per day rate currently. We are also advancing the La Colorada Skarn project. On April 7, 2024, we announced additional drill results from our ongoing exploration program at the Skarn. These drill results returned some of the highest grade intercepts to-date, including a stunning 22.5 meters at 1,435 grams per tonne silver, 31.9% lead, and 20.5% zinc. We will provide an updated mineral resource estimate for the Skarn in August, together with our mid-year corporate mineral reserve, and resource report. We continue to engage in discussions with parties who have expressed an interest in a potential partnership in the Skarn.

Ideally, we’d like to structure a partnership that would enable us to retain exposure to the silver with an estimated annual production of 17.2 million ounces in the first 10 years, and the partner would retain exposure to the zinc. We are also excited by the potential at Jacobina. A study is underway to evaluate alternative mining methods and upgrades to the processing facilities. The aim is to identify opportunities to optimize the long-term economics of the mine. At the Escobal Mine in Guatemala, the ILO 169 consultation process has experienced delays, since the new government took office in January 2024. During meetings held in Q1, 2024 between Pan American, the Ministry of Energy and Mines, or MEM, and other institutions, the government confirmed its commitment, to completing the Escobal ILO 169 consultation process, but has not provided an update on the timeline.

On April 29, 2024, the MEM released the Vice Minister of Sustainable Development, who was responsible for overseeing and coordinating the Escobal ILO 169 consultation process. The MEM has not yet designated a replacement for this post. On May 1, 2024, we announced that we have agreed to sell the La Arena gold mine, as well as the La Arena 2 project in Peru, to subsidiaries of the Zijin Mining Group. Under the terms of the agreement, at closing, Zijin will pay $245 million in cash and will grant Pan American a life of mine gold, net smelterreturn royalty of 1.5% for the La Arena 2 project. Additionally, upon commencement of commercial production from the La Arena 2 project, the agreement provides for an additional payment from Zijin of $50 million in cash.

We expect the La Arena transaction to close in Q3, pending satisfaction of the customary conditions and regulatory approvals. The divestment is aligned with our commitment after the Yamana transaction to divest properties that are not aligned with our long-term strategy. While strengthening our financial position to invest in high-quality growth opportunities, to reduce debt, and to return capital to our shareholders. If you expect a close after the La Arena transaction, we will have generated $837 million in cash from asset sales following the acquisition of Yamana. In addition, we will have retained four high-quality royalties with industry-leading partners, as well as contingent payments of $50 million. Last but not least, the divestment also expects to reduce our annual care and maintenance costs by over $70 million.

In closing, Pan American delivered strong performance in Q1, and we are on track to achieve our operating outlook for the year. We expect free cash flow to increase through 2024, particularly in the second half of the year, based on our view of higher production and lower costs weighted towards the second half of 2024, and supportive metal prices. We look forward to providing our customary mid-year update on our mineral reserves and resources in August. And with that, I would like to open the call for questions.

See also 15 States with the Most Alcohol Related Deaths in the US and 15 Highest Paying Countries for English Teachers.

Q&A Session

Operator: Thank you. [Operator Instructions] And your first question will be from Ovais Habib at Scotiabank. Please go ahead.

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

Michael Steinmann: Yes, I will start with that and then hand it over to Steve, to give a bit more color directly from the operations. It’s like always in our cost when you look at it, right? These are cost net of byproduct credit. So one part is obviously our production cost, which the team did a great job on cost control here. The second part that are the big impacts are base metal prices on the silver side and in the Gold segment, sometimes there’s a bit silver in it as well as a byproduct credit. So when metal prices go up, of course, that’s a tailwind for us as well on the cost side. And then the last one, as I often mention, is our currencies, right? We have a lot of expenses in local currencies, and it always depends where this currency is trade.

So in Mexico right now, very strong currency. Of course, that’s a headwind to our cost. In other places, like for example Canadian dollar, quite weak dollar right now. Of course, that helps us on the cost side as we report in U.S. dollars, even though we are based in Canada, that’s a foreign currency for us. But maybe Steve, you have some more details?

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

Ovais Habib: So you’re not changing guidance, but there could be some possible upside in terms of cost improvements?

Michael Steinmann: You don’t hold me to that, yes.

Steve Busby: Everything, as we mentioned, stays the same, then I think that’s fair to say yes, Ovais.

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

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

We still have a lot of ground, a lot of exploration ground, a lot of some advanced exploration projects, I would say, that don’t really fit that came in from Yamana, some we had before. I think in Argentina, we returned the [COSI] project. So there’s a lot of smaller things that not big dollar numbers, but it’s, you know, it all takes time for management and cleaning that up, and streamlining that portfolio, just as everybody way more focused and helps a lot for the future. So, we’ll continue to go with the smaller assets from now on and still streamline that portfolio. But at the moment, like large, large scales, like we’ve seen last year the MARA’s and the Lorena’s of the world, those were really the big ones that we wanted to diverse.

Ovais Habib: Okay. Thanks for that color, Michael. And I’ve got some questions on Escobal, but maybe I’m going to come back into the queue, and let some other people ask some questions as well. Thank you.

Michael Steinmann: Okay. Thank you.

Operator: [Operator Instructions] And your next question will be from Don DeMarco at National Bank Financial. Please go ahead.

Don DeMarco: Thank you, operator. And good morning, Michael and team. I think I’ll just pick up where Ovais left off. I’ll ask some questions on Escobal. So I see the ILO process is experiencing delays. I guess we take it as encouraging that MEM confirmed commitment to complete the process. But three questions here. Did they provide a time line to complete? And is a replacement for that vacant post required to get the process back on track? And is the next meeting scheduled at this point?

Michael Steinmann: Yes. Yes. Don, I’ll start and hand it over afterwards to Sean McAleer, who is running our affairs in Guatemala. Sorry, I just lost my track of the first question.

Don DeMarco: Yes the time line….