Pan American Silver Corp. (NASDAQ:PAAS) Q2 2023 Earnings Call Transcript

Pan American Silver Corp. (NASDAQ:PAAS) Q2 2023 Earnings Call Transcript August 10, 2023

Operator: Good morning. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to Pan American Silver’s Second Quarter 2023 Conference Call. Siren, you may begin your conference.

Siren Fisekci: 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. Please see the cautionary statements in our MD&A, news release, and presentation slides for our Q2 2023 unaudited results. All of which are available on our website. I will 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. The second quarter is the first period we are reporting results inclusive of the assets acquired through the Yamana transaction, which closed on March 31st. 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 relative to Q1. Consolidated Q2 silver production of 6 million ounces was at the high-end of our 2023 quarterly guidance and consolidated record gold production of 248,200 ounces also approach the upper end of the range. Silver and Gold segment all-in sustaining costs per ounce of $15.70 and $1,342 respectively are within our full-year cost guidance.

With a strong performance year-to-date, we have reaffirmed our original 2023 operating guidance provided in our Q1 2023 MD&A. As indicated with that guidance, our production is back-end weighted particularly for gold in the fourth quarter. Please see the quarterly operating outlook provided in the Q1 MD&A for the slides that accompany this call for the detail. The strong production and sales volumes resulted in Q2 revenue of $639.9 million. Net loss in Q2 was $47.4 million or $0.13 per share. This reflects non-cash accounting impacts. Notably, a $33.3 million impairment charge net of tax related to the sale of our 92.3% interest in Morococha for cash consideration of $25 million as per our news release from July 31. The net loss also includes $26.1 million net of tax for fair value adjustments on finished goods inventories that were expensed during the quarter.

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 $14.7 million or $0.04 per share. Cash flow from operations totaled $117 million net of $50.5 million in taxes paid. Our annual tax payments are typically the highest in Q1 and Q2. We repaid $55.4 million of debt in Q2 and exited the quarter in a strong financial position with $470 million available under the Sustainability-Linked Credit Facility and cash and short-term investment of $409.2 million. This includes the $192.9 million of cash that is restricted to the MARA project. Our 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 of $593 million. The sale of the equity investments have already been completed and we expect the other three assets sales to be completed in the third quarter of 2023. In addition to the cash proceeds, Pan American will retain future upside to 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 maintenance costs for 2023 and going forward. As per our capital allocation objectives, we intend to fully repay the $280 million drawn on our credit facility as of June 30, 2023.

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 Colorada Skarn project as well as paying dividends to the shareholders. We announced yesterday a $0.10 per share dividend with respect to Q2, equivalent to $36.4 million 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 Skarn project. Work continues on the preliminary economic assessment of PEA, which we aim to release as part of an updated La Colorada property technical report later this year. The PEA will include our review of project development operating and capital cost estimates for the Skarn.

At the La Colorada mine, the concrete line ventilation shaft advance to a depth of about 420 meters at the end of July and is expected to reach shaft bottom by the end of this year. Once the two 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. As reflected in our year-to-date results and our guidance for 2023. The new ventilation infrastructure, which includes a refrigeration unit that was commissioned in 2022, will also provide benefits to the development of the Skarn project. At the Escobal mine in Guatemala, three meetings were held in the second quarter under the ILO 169 consultation process being led by the Guatemalan government.

We also took part in a working meeting in late June with participation of the Xinka Parliament, their advisors, and Guatemala government institutions. During the meeting, we presented details on 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 request for additional information and continue to work with MEM, the Ministry of Energy and Mines in the process. Now that all parties have delivered their institutional presentations, the MEM considers that the information transfer process for phase 2 of the consultation is complete. The MEM 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 the respecting the constitutional court order. Escobal continues under the care maintenance and at this time, no date 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 timeline for the Escobal ILO 169 process. A link is provided on our website on the Escobal page. Our second quarter results showed 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 Yamana assets is progressing well, and we are on track to capture the $40 million to $60 million of annual synergies we had identified through the transaction.

We are committed to maintaining operational efficiencies and delivering on our targets, and I look forward to updating you next quarter as we continue to evolve into the new Pan American Silver. Before we move on to questions, a few housekeeping items. We are currently working on the updated reserve and resource report inclusive of our Yamana acquisition properties, which should be released in the next few weeks. I would also like to note that we have revised the date for our ESG call. The call will now be on October 19, 2023 at 8:00 AM Pacific Time, 11:00 AM Eastern Time. We will provide further details closer to that date. Together with the other members of our management team, we will now be happy to take your questions.

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Q&A Session

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

Lawson Winder: 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. 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. 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.

Michael Steinmann: Yes. Thanks, Lawson. Look, I think our capital allocation did not change. What we did in the last few years in the sense that, well, first of all, we maintained a very strong balance sheet. I think we proven already in the first quarter here that we are on track doing so. We announced last week the sale of a few non-core assets for about $593 million cash and some high quality royalties as well. We just announced that Lawson, so that closing will happen for most of them, I will 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 hints on to on the capital allocation. So strong balance sheet, low debt levels, you know that we took on two bonds from Yamana, they’re very attractive interest rates on those bonds.

They are long-term bonds, so that’s fine. We took some money on our line of credit, which as you can imagine with the current interest rate situation is more expensive debt and will be paid back when we receive the cash from those transactions. And then 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. 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.

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 think the door will be open there to anything like dividends, share buybacks, et cetera. 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 with cash in our balance sheet. So La Colorada Skarn, of course, will be a focus on that. And as I mentioned in the call just before, the PEA should be out somewhere late in this year.

Lawson Winder: 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 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?

Michael Steinmann: Yes. I mean, look, I think we’d only holding these assets for three or four months, we have been able to come through, follow through here and come out with a very strong group of non-core assets. Also we are working on others, so this is not done by any means. We have a lot of assets in our portfolio some from Pan American, some from Yamana 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 another focus. We are 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 get cash for an asset and a very strong royalty – copper royalty to keep our hands on the upside of the future copper price.

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 like 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 oxide and pays us for the gold. So I’m really not worried about that. I think that’s just the detail that we can solve in a deal negotiation.