Pan American Silver Corp. (NASDAQ:PAAS) Q4 2023 Earnings Call Transcript

Pan American Silver Corp. (NASDAQ:PAAS) Q4 2023 Earnings Call Transcript February 22, 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 Fourth Quarter 2023 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] This call is being recorded on Thursday, February 22, 2024. I would now like to turn the conference over to Siren. Thank you. Please go ahead.

Siren Fisekci: Thank you for joining us today for Pan American Silver’s Q4 and full year 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 Q4 2023 audited 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. The past year was a dynamic period of growth and change for Pan American. We added four new mines in two new jurisdictions. We streamlined our portfolio through the sale of non-core assets and we announced the preliminary economic assessment for the La Colorada Skarn. With integration of the assets we acquired from Yamana now complete, we continue our focus on improving margins through safe cost efficient operations, harvesting synergies and further portfolio optimization. In 2023, the nine month contribution of the assets we acquired grew 11% increase in silver production and a 60% increase in gold production over 2022, and resulted in record revenue for both Q4 and for the full year.

Operating cash flow for Q4 was $167.4 million net of $32.4 million in taxes paid and inclusive of $56.1 million of cash from working capital. We recorded the net loss of $0.19 per share in Q4, driven by three non-cash charges. The first relates to the final purchase price allocation for the acquired Yamana assets and American finalized the purchase price allocation or PPA. Asset values for the amount of gold acquisition in Q4 2023 resulting in a $16.5 million improvement to previously reported Q2 2023 and Q3 2023. IFRS Accounting Standard Reporting Rules for business acquisitions required that all accounting impacts to earnings from the finalization of PPA asset values be retrospectively recast to prior quarters. As a result, the additional $16.5 million or $0.05 per share in earnings for the year related to revised depreciation charges for the final PPA asset values must be retroactively applied to Q2 and Q3 rather than applied to Q4 2023 earnings.

There’s no impact on full year 2023 earnings. The second factor impacting Q4 earnings was a $36.2 million impairment charge for the crushing and agglomeration plant of Shahuindo. The plant was constructed prior to Pan America’s purchase of the mine in 2019, and we have never operated it. The third factor was a $13.8 million closure in decommissioning expense, largely due to the revised reclamation estimate that Alamo Dorado in order to withstand high intensity rainfall events through the installation of impermeable barriers for the waste dump and enhanced side drainage system. The closure of the tailing storage facility at Alamo Dorado has been successfully completed. The impact of the impairment and the closure of decommissioning liability was removed from adjusted earnings.

Production in 2023 was pre-released on January 17, 2024, and largely in line with our expectation. Silver was slightly below our guidance range at 20.4 million ounces, while gold was within guidance range at 882,900 ounce. Shortfall in silver production was largely due to the ventilation constraints at La Colorada together with the temporary suspension of operations in October, 2023. They’re looking forward to the completion of the new ventilation system mid-2024 in order to access the higher grade mine zones for the northeast. Excavation of the new 5.5 meter concrete line ventilation shaft was completed, the final depth of 581 meters on schedule in December, 2023, and the remaining key pieces of infrastructure to large exhaust fans to draw the hot humid air out of the mine are expected to be installed by the end of Q2.

The first two quarters of this year will continue to reflect the challenging operational conditions, expect significant improvement in the second half of the year with high throughput and lower costs thereafter. The production shortfall at La Colorada and higher mining costs at both La Colorada and Huaron resulted in cash costs and all in sustaining costs for our silver segment operations coming in above our guidance range for 2023, increase or partially offset by lower cost of several modal from higher than expected gold by product credit and at San Vicente from lower costs and higher silver production. Gold production and gold segment all in sustaining costs were within our guidance range for 2023. Our cash cost for the gold segment came in above the guidance range, largely due to the lower gold production at El Penon.

That is closed in the third quarter of 2023, gold grades mined at El Penon were lower than we had anticipated in certain high grade sections of the mine. We are increasing the drill density at El Penon after drilling fell behind late in 2022 and early 2023, due to a change of a contract to buy Yamana. We expect to provide more information on El Penon with the midyear reserve update. We released our guidance for 2024 on January 17. In 2024, we expect to produce between 21 million and 23 million ounces of silver and between 880,000 and 1 million ounces of gold. All in sustaining costs for the silver segment are expected to be between 16 and 18.50 per ounce and between 14.75 and 15.75 per ounce for the gold segment. At Jacobina, we are expecting processing rates of approximately 8,500 tonnes per day with stable gold recovery rates around 96%.

The new carbon in power tanks were mechanically completed and the new concentrate leach system began operating late 2023. We are undertaking a comprehensive optimization study of Jacobina to evaluate alternative mining methods and enhancements to the processing facility to optimize the long-term throughput and economics of that mine. At El Penon, we are assuming that grades and throughput rates will be similar to what we realized in the second half of 2023 pending the new infill drilling results. We expect to complete mining at Dolores by Q3, 2024 with residual leaching to follow-up for several years thereafter. Silver production is expected to be largely back end loaded from improved ventilation conditions at La Colorada and an expected improvement in grades at Cerro Moro, as we access and bring into production the NATE satellite deposit, which is located 25 kilometers from the plant side.

Costs will reflect that production profile being heavily weighted to the first two quarters and significantly decreasing in the back half of 2024. As shown in the quarterly operating outlook provided with our Q4 disclosure. We also expect to spend between $295 million to $310 million on sustaining capital and another $80 million to $85 million on growth projects, primarily for advancing the La Colorada Skarn, completing the tailing filtration project at Huaron, finishing the paste backfill facility at Bell Creek and completing some plant upgrade projects initiated by Yamana at Jacobina. Sustaining capital is largely to expand tailing stamps and leach pads to extend underground mine ventilation systems and open pit mine based stamps for exploration, to replace an overhaul mobile equipment and for certain operating lease payments.

Turning now to our strategic initiatives. In January, we filed an updated technical report for our La Colorada property, which included the preliminary economic assessment for the La Colorada Skarn project. Our objective is to provide investors with exposure to silver and to Skarn provides that exposure in scale. Annual silver production is estimated to average 17.2 million ounces during the first 10 years. It is also expected to produce 427,000 tonnes of zinc annually during that period. Given the volume of base metals in the deposit, we are assessing interest from base metal producers and other capable parties to explore long-term partnerships to develop this polymetallic project. We’re focused on the large amount of anticipated silver production from this deposit.

Turning to Escobal, a new government took office in Guatemala in January, 2024, and we had our first meeting with the new Ministry of Energy and Mines or MEM on February 7, 2024. The meeting for the ILO 169 consultation was held yesterday on February 21, with the newly appointed Vice Minister of Energy and Mines and Xinka representatives. During which presentation on the observations of the Xinka’s appointed consultants was communicated. We look forward to receiving the reports and working with the man to ensure accurate information is communicated to the Xinka participating in the consultation process. As usual, we are not providing a timeframe for completion of the consultation or a potential restart off the mine. At America’s financial position strengthened over 2023, at year end, our cash and short-term investment reached a record of $440.9 million and we had the full $750 million available under our undrawn revolving sustainability linked credit facility.

Total debt of $801.6 million was mostly related to two senior nodes we acquired through the Yamana acquisition. We expect cash flow generation to improve in 2024, as we realize the contribution of a full year of the four new mines and cost savings through synergies and lower care maintenance costs. However, we expect cash flow to be back and weighted given the production and associate cost profile I previously outlined. As well, we expect approximately half of the estimated $95 million to $100 million of tax payments will be paid in the first quarter of 2024. Yesterday, we announced our intention to begin buying back some of our shares. We have been opportunistic in the past when making acquisition. At the current market dislocation between our equity and asset valuations, we believe that share buyback is a prudent and a creative use of capital and we’ll apply the same opportunistic approach in repurchasing Pan American shares.

We also announced yesterday a cash dividend of $0.10 per common share in line with our policy. In 2023, dividends paid totaled $130.4 million. Before opening up for questions, I would like to welcome Scott Campbell, who’s coming back to joined the company in April. Scott will help oversee the company’s operations and lead the corporate project group reporting to our Chief Operating Officer, Steve Busby. The senior operational expertise will be very valuable as we work to optimize our portfolio and advance our growth projects. On behalf of the entire team at Pan American, I would also like to thank George Greer for his contributions to the company over the past 17 years. George we wish you all the best for your retirement coming up later in this year.

Together with the other members of our management team, we would now be happy to take your question.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Cosmos Chiu from CIBC.

Cosmos Chiu: Maybe my first question is on your quarterly guidance. Thanks, Michael, for providing us with quarterly guidance. As we can see, it improves quarter-over-quarter. My question is, I understand the second half is going to be better than first half, but I do see a big drop or improvement in terms of silver cost in Q4. Just wondering how you’re going to get there. I think it’s a fairly big drop even from Q3 into Q4 in terms of all in sustaining costs for silver.

Michael Steinmann: Yes, there’s a big drop, of course, heavily impacted by La Colorada’s changes to back to bigger production, more ounces after the ventilation circuit is back working. Of course, that was the reason for the high cost last quarter. So that big impact will be reversed and that’s why it’s a bit, but I’ll hand it over to Steve to give us a bit more color on the cost side.

Steve Busby: Yes. Cosmos, I think I would add the other thing to look at is on Cerro Moro. We have a back end loaded gold production in Q4. It’s quite high and that’s a byproduct credit there. So that’s really driving a big part of the Q4 change as well.

Cosmos Chiu: And then, Michael, as you mentioned, there were a number of onetime items in your earnings in Q4, including, Shahuindo, the crushing agglomeration plant, $36.2 million write down. I’m just wondering, was that something that you could have sold? Did no one want it or did you try to sell it?

Michael Steinmann: Again, I will start and then Steve will have more color to this. This plant has been built by Tahoe before we actually purchased the company. We had obviously looked at that other plant during operation. We opted for a solution of blending between coarse and fine grain material as way more economic solution than using the plant. So the plant is now, let me just think, probably 7 years old, 8 years old. We have never used it. And I think where we stand right now and with the blending solutions that we found, we come to the conclusion that it’s — that we will not turn it on looking forward. But Steve, maybe he will give us more details.

Steve Busby: Cosmos, Michael is precisely right. And really the issue was we were trying to decide, we were trying to look at all the alternatives of treating the high clay ores of Shahuindo and looking at the blends, looking at the rock availability. And so we kind of kept that plant in check just in case we didn’t have enough rock that may have been the alternative to go to. Now, we’re more confident with our blending capabilities. We understand the percolation characteristics on the heap. So we’ve made the decision we didn’t need that plant anymore.

Cosmos Chiu: I’m just wondering. I know I used to cover Tahoe as well. I know it was no longer needed. I’m just wondering if it’s something that you can actually just monetize, in terms of the parts that we’re wanting.

Michael Steinmann: If I could add, Cosmos, we do plan to market that equipment. There’s some of it we want to keep for other developments we have internally, but there’s large pieces of crushing and agglomeration equipment that we will try to market over the next year or so.

Cosmos Chiu: And then maybe one last question on Dolores, as you mentioned, mining will likely come to an end soon. This is going to be a residual leach sort of operation. Can you maybe talk about the ongoing, what would you call maintenance costs or closure costs that you will need to spend and then as you enter the closure period, what would you need to do in terms of ensuring the safety of site the structural integrity of the leach pads and making sure that no accidents kind of happen?

Michael Steinmann : I can tell you we’re focused on trying to structure the operation when it’s in this residual leaching as efficiently as we can. We will absolutely maintain all of the monitoring systems. All of the geotechnical monitoring, elaborate monitoring that we have on the heaps and the dumps during the residual leaching. Those aren’t expensive items to instruments to run. The real cost is going to be on just circulating solutions through the heap. And then the big question’s going to be cyanide concentration for the solubility of the silver. The gold’s pretty well solubilize, so it comes out as you rinse. But the silver, you’ve got to keep the cyanide concentrations at a critical level. So that’s really going to be what we monitor, what we operate.

We’ll do it as streamlined as we can. We’ve made some estimates in this guidance, particularly in Q4, where it’s all residual leaching at that time. But until we get there and we actually structure and see how it goes, it may change from that point.

Operator: And your next question comes from the line of John Tumazos from Very Independent Research.

John Tumazos : Michael the La Colorado scarring PEA with $2.8 billion of capital. If you go to 50,000 tonnes a day and $2.6 billion, if you stop at 30,000 times a day is a big future item. The share buyback in potentially in 2024, maybe you have a lot of time to earn money until 3, 4, 5 years from now you’re heavy into the construction in La Colorado Skarn. Should we take this essentially as your expression of confidence that you’re going to complete a JV with a base metal partner and that your share of the capital might be less than half of the PEA number or the subsequent studies are going to reduce that CapEx number and reduce your capital call?