Q3 2020 Pan American Silver Corp Earnings Call

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Thank you for standing by this is the conference operator, welcome to the Pan American Silver third quarter 2020 results conference all [noise].

As a reminder, all participants are in listen only mode and the conference is being recorded.

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I would now like to turn the conference over to see Ren Miszewski, Vice President Investor Relations. Please go ahead mr. possess ski.

Thank you operator, and welcome everyone to Pan American Silver's third quarter 2020 conference call media and other participants on the call are invited to participate in listen only mode.

We released our results after yesterday's market close and a copy of the news release Mdna and presentation slides for today's call are available on our website that.

Not material in today's call contains certain statements and information that constitute forward looking statements and information. Please review the cautionary statements included in our news release and presentation as well as the risk factors described in our most recent form 40 F and annual information form.

I will now turn the call over to Pan American's, President and CEO, Michael Steinmann, who will provide a brief overview of our results. We will then open the call the questions and answers.

Thank you everyone for joining us today to discuss our third quarter results.

The earnings in Q3 were $65.3 million or 31 cents per share, reflecting the revenue in the period of approximately $300 million.

Revenue was impacted by lower quantities of metal sold partially offset by stronger realized prices for gold and silver.

In Q3, we produced 4.1 million ounces of silver and Honda 16.9 thousand ounces of gold.

As expected, we experienced the $79.6 million increase in inventories during Q3 of which approximately $25 million well is in the form of story I'm finished inventories.

Revenue associated with these store inventories were not recorded in Q3 due to timing of shipments and will be reflected in revenue in the normal course.

Additionally increases in inventories largely resulted from the replenishment of the heap Leach operations at Dolores Shelving Dawn Lottery Arena.

As we indicated previously inventories were drawn down during the mine suspensions earlier in the year equivalent to about 30000 ounces of gold and half a million ounces of silver which have been replenished during Q3.

Additionally, silver production was impacted by covered related delays of the ventilation verb at la Colorada. The first of two ventilation raises I'd Lakota is complete and commissioning is now in progress, which will enable us to regain access to the high grade areas of the mine.

Earnings benefited from lower costs in Q3, silver segment cash costs were $7.14 and all in sustaining costs for six dollar and one cents per silver ounce sold.

Net realizable value inventory adjustments reduced all in sustaining costs by $5 or 96 cents per ounce, mainly from increased precious metal prices for the heap Leach pad inventory at the Dolores mine.

Gold segment cash costs were $793 and all in sustaining costs for $1057 per gold ounce sold.

The $65.3 million net earnings included $27.1 million of mind care and maintenance costs and $13.1 million of investment income primarily related to the fair value adjustment for our interest in new Pacific models.

Adjusted earnings of $72.1 million or 34 cents per share excludes $20.5 million of care and maintenance costs associated primarily to the COVID-19 related suspensions of out on a motoko trial during Q3.

Cash generated from operations was $114.9 million, which was more than sufficient to fund sustaining capital dividends, Texas and to make repayments on our line of credit.

In line with our capital allocation priorities, we continue to reduce bank that.

During Q3, we repaid $110 million on our credit facility and an additional $30 million in October as of today, we have on the $60 million drawn on the credit facility and aim to have it fully repaid by the end of this year.

Cash and short term investments at September Thirtyth was $231.6 million.

Our other priorities for free cash flow are investing in high return projects and return cash through dividends yesterday. The board approved a 40% increase to the quarterly dividend to seven cents per common share. This is the second dividend increase in 2020 supported by the.

The strong cash flow of our operations have generated.

Operations in Q3 reflect the impact of COVID-19. However, the situation has improved significantly from earlier in the year, but most of our operations versus branded for periods of time.

During Q3, all of our minds with the exception of our own and moral culture, we're operating at reduced capacities.

To accommodate COVID-19 related protocols.

But automotive quarter were brought back into operation by the end of Q3.

The operations in Argentina were particularly impacted by COVID-19, and harsh winter weather, but we were able to complete final development of the coffee project and began processing high grade ore from closely together with lower from the walk in mine at our Manantial Espejo plant.

We have an intensive COVID-19 screening process measures in place to protect the health and safety of our workforce during this pandemic.

In addition, wonderful individuals are not permitted to return to work at this time that means we are operating with a reduced workforce and operations are running below full capacities.

At La Colorada, we experienced delays on upgrading ventilation circuits in the high grade deep Candelaria East area of the mine in Q3, we completed the underground ventilation raise from the 345 to 528 level and the underground booster fan to be installed early next week.

That should enable us to increase production from this high grade area of the mine.

The larger ventilation raise from surface to address ventilation needs in the long term is expected to be completed and fully functioning it made 2021.

Because of the delays in completing this ventilation work and associated restrictions to the higher grade ores at la Colorada and reduced underground mining rates in our Argentina operations, we've reduced our full year consolidated silver production estimate to a range of 18 to 19 million ounces with production being.

Pushed forward.

We are maintaining our forecast for gold production of 525 to 575000 ounces in 2020.

We are expecting increased gold production in Q4 as replenishment of inventory. So now our heaps was complete in Q3.

We do expect similar gold production from our tenants operation in Q4, as we continue to address geotechnical conditions at the Bell Creek mine, where we have discovered a wide assortment of new resources, the chastened to reserves.

This will require modifications to the mining method and ground support standards to adapt for this wider or extensions.

We are also maintaining our forecast for operating costs silver segment cash costs are expected to be between $6.20 to $7.70 per ounce and all in sustaining cost between $10.50 to $12.50 per ounce gold.

Gold segment cash costs are expected to be between 800 to $860 per ounce and all in sustaining costs between 1050 to $1125 per ounce.

We have reduced our forecast for animal capital expenditures by approximately $15 million to revised forecast estimates $175 million to $180 million of sustaining capital and $20 million to $21 million of project capital in 2020.

These reductions reflect the deferrals of certain capital investments.

Turning now to an update on our growth catalysts.

We are currently exploring with three surface drill rigs at our local allowed us Garen discovery and expects to complete about 33000 meters for the year roughly 75% of the originally 44000 meters. We have budgeted for 2020 before the COVID-19 disruptions.

Meanwhile, we are continuing to advance the project baseline engineering and metallurgical studies.

Our Escobal mine remains in care and maintenance pending the Aiello won six nine consultation process, which is led by Guatemala Ministry of energy and mines.

The government has been contending with their call. It 19 pandemic and we have not been informed of a start date for the consultation.

As we entered the final month of 2020 operations have stabilized with inventories replenished that our heap Leach mines and the first of two ventilation raises at la Colorada nearing completion.

Our financial position has further strengthened with a substantial reduction in debt.

This sets Pan American up well for the reminder of 2020 and going into 2021 and.

And with that I would like to open the call for questions.

Thank you.

We will now begin the question answer session to join the question Q You May Press Star then one on your telephone keypad, you'll hear a tone acknowledging your request. If you are using a speakerphone. Please pick up your handset before pressing any Keith.

To withdraw your question. Please press Star then too.

Our first question is from Cosmos Chiu with RBC. Please go ahead.

Hi, Thanks, Michael and team and thanks for taking my questions here, maybe first off on the.

La Colorada good to see that the first ventilation raise shaft is almost complete could you maybe remind us you know the the higher grade zones that kinda, Larry East like what kind of grade are we talking about and once you get back into that higher grade zone. You know clearly you did about 300.

Your gram per tonne silver side could you get back to where your AD sales last year. If I remember correctly, you did about 370 gram per tonne an hour.

While our Colorado, what kind of grade are we talking about.

Yes, Hi Cosmos.

Steve I.

Hi, Steve Yeah, Yeah, first off I'd like to clarify that they raised for itself. The physical raise bore is complete it is short cruises is completely supportive. We're just now finishing up the installation of the fan on the lower level and in fact, the startup of fan a couple of days ago Theyre just commissioning that fans. So we're.

Literally moments from getting getting some substantial increase in their flow to that area.

You you probably recall as many of us have walked down through that lower candle area East sulfide ore zone, we always go down and on the drill three always paint the grades on the side of the wall and you recall back in our two or do you see these multi key low intercept across.

Across the faces of those those areas. So all this is truly we internally we call it our jewel box, but this is truly a remarkable.

Remarkable grades I mean, literally 123, sometimes even higher kilos with a significant lead and zinc in it. So it is it is a very important zone for us for averaging out the overall gray.

So relative to last year's graded in all the 370 type.

We also have to keep in mind that as we look at our reserves.

The new reserves in June I think when you look at the sulfides or that are a bit lower I don't think we will see those kind of great. We're seeing in our planning going forward a little more tons the little lower grade, maybe 343 50 type of grades and that's what we expect to get back into as we open up that area.

That's scheduled to complete again will shot Crete that once we're done we'll see how the ground looks in shock creeped out and get the ventilation system, all connected and running and sealed and that'll go occurred the first part of next year. So that's on track we don't anticipate any further delays there.

All of the crews are going through our covid protocols as they enter the sites and we don't everything's going great on that one, but I think just to follow up their kosmos on the question on my last part of your question. If if that's right that race is really I want a man part of having a long term.

Ventilation circuit until this one is finished as he nobody you stay in turn the race plus the Ram and so it doesn't really it's not critical for next year. If the the main races. In you know a little bit earlier or later, but it's obviously going to be important if you look at the long term large development that block let out.

Including the scorn.

Of course, Uhm, maybe switching gears, a little bit then and since we're on the topic of Iraq.

You know.

Cause I don't want to say competency, but rock conditions here Uhm Bell Creek, you mentioned that.

You know you might need some additional ground support looking at some alternative methods as you go deeper into the mine Uhm could you remind me you know what kind of throughput you now where you're targeting what kind of throughput at Bell Creek are you getting too right now and you know whether it seems like bigger stopes down down at depth.

Working you get too.

And where would you like to be at.

Yeah, I mean, that's the good news of this is that the lower areas Adult Creek, and we're down about 1100, and 20 meters beneath the surface. So over a kilometer down and we're seeing your body's kind of open up a little bit and widened out we're seeing some areas you know potentially.

Potentially like 20 meters plus with some some of the stopes, which is substantially greater than anything we saw up in the upper areas.

As we open that ground up and again, we're we're pretty deep in the deposit we are seeing some stress there that were you hadn't seen a higher than the deposit and given the higher with we do need the modifier ground support systems, maybe modify our mining system to go more transfers my.

Entries into these things and we actually were looking very closely at the sub level situations because of the ground stress has increased the critical areas occur if a sub levels. When you reach so some level sales. So we're kind of looking at all of that evaluating kind of what the best approach is given the.

Dinges in the in the deposit itself relative to the ground and the stresses were seen as.

As we drill long holes, we're seeing some shifting squeezing of the holes, it's causing delays of some of the long haul production in that area and it's a it's a good grade area good thick white zone.

But keep in mind I mean Bell Creek is about 40% of our total capacity.

The Timmins area. The other 60% comes from Timmins, West and quite a bit of that 40% of the production rate comes from above.

Above this 11 20 zone, so, it's probably representing something I would guess around 20% of the total throughput.

So.

Next year, we'll have our forecast.

That will factor all this stuff in but.

We're feeling pretty good about it I mean overall I truly good news, we're seeing more reserves there we've seen it expand adept so we see the ability to get more out of Bell Creek, maybe take some of the pressure off of tendons in west and some of that gap 144 zone. So next year will have good forecast that shows that and it's.

Just getting through this hump of changing the mining method in ground support system at this point, it's not a big impact, but it is a little bit of an impact from where we thought we'd be.

Mhm pusher and maybe one last question maybe for you Michael certainly great to see that you've increase your dividend.

You know, but in terms of dividend yield.

If I compare you today to you know the previous dividend you paid we're not to the same level yet.

You know clearly you've talked about sustainability of the dividend.

Is there a target you were trying to get up to and and how does that kind of fit into your you know and sort of capital allocation strategy. Thanks.

Thanks, Michael Yeah sure customers, Okay, I think I've been very clear during the last two years in our capital allocation strategy and number one must always to pay back down with that.

Invest in very high accretive high quality project and returned dividend to shareholders. So there's a kind of the tree buckets were looking now as as you've seen in Q3, B papac substantial amount of our doctor in our line of credit as of today, we are down to $60 million, we expect if everything space.

Same to pay that back.

By the end of by the end of the year. So that's kind of fulfilled von bucket that we had there in our capital allocation.

Just because we as you know, we like and I like very much to have a strong balance sheet strongest possible as it gives us a lot of flexibility you know keeps getting keeping our line of credit untapped gives gives us a lot of flexibility.

Whatever comes later later in the next coming year, including the development of luck, let us calm.

Which brings me to the next buckets, which is high quality high creative project.

And we will see for next year on more money spent that local it out obviously is working.

Working now on the infield drilling and started to do much much more work on <unk> engineering.

Work to do decide what are we going to go with that with that deposit.

And it was time to increase our dividend for our shareholders because we had a very strong.

Year on the financial side of course impacted by call. It like like everybody in this world.

But very very strong financial results and.

No. This is the second to increase this year I think the increase in February of us somewhere around 43 or 47%.

Now another 40% increase.

If everything stays the same it will continue with the same.

Capital allocation strategy.

Ward will look quarter by quarter at our free cash flow and make decisions.

We're too we're too.

Put the money at work.

Next year.

There won't be anything to pay in the line of credit so that the two big buckets will be accretive project and return to shareholders.

Oh of course, thanks, Michael Stevens or and thanks again.

Thanks.

Once again, if you have a question. Please press Star then one.

The next question is from Mack how generic with I B C capital market. Please go ahead.

Hi, Thanks, and good morning, guys.

<unk>.

Hey, it's causes covered a few of these but circling back on luck, Colorado just wanted to.

<unk> kind of <unk>, what type of timeline should we expect for you to really get back into those higher grades.

Do you have all that development in place and it's just a matter of.

Really just putting the tools back in in in getting people back in there or should we expect a bit of a longer ramp up that you need to do some more development.

Yeah, Mark Steger.

There is development to do their we do have a better development to catch up but it will see fairly.

Market increase as soon as we get back in there and start mining and then it will ramp up there, but I think we're talking within you know the.

Quarter or two it's going to ramp up fairly quickly because it is a small area. It is very high grade area doesn't require a significant amount of development, but we do have something to do there. So Q4 will be an improvement Q1 into.

Into Q2 will be back to normal.

Okay, perfect and then.

Just kind of a little more color if you can provide on.

Exactly the causes of the delays was it.

Limitations in terms of getting people in was a challenge is getting some of the skilled labor that you needed.

Or was it something with it or did you also have some ground condition issues. Obviously, it's always a concern at la Colorado to make sure.

Everything holds together right so kind of a little more color on really the root causes of the delay beyond just call. It Covid inbox germ sure Mark in first first I'd like to say from the ground condition standpoint, no issues. There, we actually had pulled through the rays.

Towards towards the very early part of this quarter and it held up through the whole time, the real impact was just not getting enough.

Workforce deployed to do the work passing through the protocols.

Passing are screaming to get to the site.

Those were our biggest hangups now we did we did also have a little bit of hang ups on delivery of some of the materials, we need it where you needed some cable to run down to the lower level to to power up the fan there was some delays in the shipment of that cable as well, but again as I mentioned, we did get the cable and we did start the.

Fan a couple of days ago. So everything's on track. So the biggest holdup was just mobilization of people and and now we're on a pretty good schedule. We're watching it very closely but for these projects, we're getting pretty good mobilization need shift at this point.

Okay perfect. Yeah, that's really helpful and I guess, just kind of sticking with some of the covid impacts kind of are you confident in the protocols you have in place now that you'll be able to avoid the challenges you've now got in Q3 in Peru do you think you may.

<unk> enough changes I mean, obviously nothing is going to be perfect and everyone still dealing with it but do you think are kind of have you made any changes to the protocols and kind of how confident are kind of what type of impact do you expect to see from them.

Yeah. That's that's a great question, Mark I'll say first and foremost our protocols, we're very confident that we're able to screen and as where you look at it break the chain of transmission we can stop.

Confidently stop having any kind of a major outbreaks that our site. We're very confident that the uncertainty comes in how many of our workforce actually pass through the screen and that depends on the outbreaks in the region in and around her mind sites, we monitor that very closely but if there is a.

There's an epidemic outbreak occurring in and around our Mindsight, we'll see a significant drop off of individuals who don't pass our screen systems, and we won't be able to deploy to the site in those cases, where there's contagion occurring we have very low predictability of how many people.

Arrived for every shift that's where our uncertainty lines I will say today, what we generally see in South America is we're kind of over the hump of the curve in the region drawn their minds and we're seeing the case loads for the most part starting to back off a little bit. So we're optimistic as we look forward to that.

We're over the worst part of that curve and things will get better, but that's where the uncertainty lies for US is really just workforce mobilization, it's not of uncertainty about a concern of an outbreak at the site.

That'd be perfect. That's very helpful. And then I guess a question are going out. So we don't have too much about but done it men and tll can you give us a little color on how you're thinking about that going forward.

<unk>.

Now with three mining areas and.

Obviously pretty different grades between the different deposits can you can you give us a sense of where we should expect that to shake out for the next 12 to 24 months.

I can yeah, I can address first I'd like to say.

Great Wise, we're very very pleased with what we're seeing that the.

Both the Cauchy Joaquin uneven them in MTL underground mining faces.

Cozy in Q3, we were seeing silver grades.

Over 1200 grams and golds in the 2023 Grand per ton range very nice grades are keen we're seeing and silvers.

About 550 grams, so definitely seen the grades we want the issue there like we talked about in Peru is how much of the workforce can we get deployed and here specifically, we're looking at underground miners and as we've talked in the past or underground miners largely comes from the northern part of the country.

And where the epidemic in the country the pandemic of the country.

There's a lot of restrictions on people passing between provinces and they have to go through some extent some quarantining.

And travel restrictions that really impact our logistics of getting people in and out to the side. So our biggest bottleneck today's workforce deployment as I say and <unk> by far as are most severely impacted by this because of the complications of the logistics of getting.

People in.

Again, I think generally.

Although Argentina is seen as significant numbers of outbreaks today generally we feel optimistic that things will improve as they move into the summer months ahead.

But that is our most challenging area.

We're kind of suspecting we'll see.

The kind of production rates 50, 60, 70% underground production rates will keep the mill running at full capacity, because we supplement with low grade stockpiles from the old open pit operations. So we really want to upgrade the tons coming out of the underground to get the grades up.

And that's really our limitations based on that work force deployment and it does seem like it'll be hindered for.

The next couple of quarters anyway.

Okay. Thanks, that's it for me.

I will just add to that that has been factored into our revised forecast and did contribute to one of the reasons, we reduced fulfillment.

Once again, if you have a question. Please press alright, then one.

Our next question is from Dalton Dorado Canaccord Genuity. Please go ahead.

Thanks, Good morning guidance.

A couple of questions for me on Guatemala, Michael can you tell us.

What your team's doing on the ground there around ask them all in terms of helping communities now.

With the COVID-19 situation.

Sure and you know it's.

Obviously, one part of the same protocols that we apply across.

Across the globe.

<unk> like many other countries have been hit talked about it.

There's a few things for example, they have.

Proofed Environmental management plan, which is part of our care and maintenance and of course, a complete that plan that has been.

It's proved it's part of our Cat-o'-mountain into this part of.

What we have to do.

And that's ongoing b.

We have also existing community commitments.

That we are fulfilling their.

And in addition to that via obviously got a lot of requests for.

For some house and.

Support on the cover tied from from communities around the mind that we are attending that's not on the in Guatemala, but that's.

That's tough course worldwide as you can imagine.

New cell during a press release mud we are doing in many places around our operations on.

So that's that's the same everywhere and that's not not not different in Guatemala, So people come to us.

Thus requests we reviewed them and at tandem accordingly.

Okay, and given what you've been doing down there have you noticed.

A change in the way your teams being.

Seem to receive by the community.

Compared to pre pandemic.

The priest depend dynamic.

And compared to reception pre pandemic.

Have you noticed a difference in the way.

Company, you teams being viewed by the community.

I don't think so I mean.

I think the change was.

More from since we obviously took over.

After the transaction has closed the pandemic of course has been very very big impact to everyone in Guatemala and everywhere in the world.

And.

And as I sat the most important part of us to to react to requests and obviously comply with all the rules and restrictions that countries bring up.

Two two.

Quarantine.

Transportation and infrastructure some on.

Mobilization et cetera. So that's what we that's what we are falling following of course, so I think.

Right now everybody is still very focused on the pandemic because he can see Latin America has been hit very hard including.

<unk>.

We see Steve set many countries coming off on that on that first wave.

Not sure yet, but that means Elvis Lam now the pandemic specialist receive apes coming back then in the winter time here in North America and Europe.

So not sure if the same is going to happen in Latin America, or if there's going to be.

Vaccines available before that time.

Time will tell but I think at the moment and a lot of people are ready.

Preoccupied and busy with the pandemic worried about economic impact that to their lives.

Not only in Latin America, but across the globe.

Okay and on that note, there's a number of countries in Latin America like proved for example that are looking at doing this Iowa 169 process.

Mia process.

Virtually as opposed to in person for obvious reasons is that something guatemalans, even contemplating I mean, it's not just completely on the back burner for now.

Oh I Love Unsex nine is run by the government is actually run by the Ministry of minds of Guatemala, not by Pan-american, So I can't.

<unk> exactly how it's gonna happen that's not that's not our decision will be will obviously attend and provide information and adequate and request that.

So I don't really have an answer for you.

I know that.

People still have meetings like like like you know you have meetings property and we and then somewhere in person somewhere virtual.

So it really depends on how each government wants to deal with the pandemic and with Iowa 169 consultation, particularly.

Okay and then the last one Argentina, just given the current situation the fiscal situation of the country and then.

As you said.

The economic impact of COVID-19, any movement and should be.

Right.

Yeah. So what we've seen in Argentina, I think which is really debate is focus and it's probably a stiff alluded to the hardest impacted the country right now that we see caseload is still growing and there's a lot of restrictions between interprovincial movement.

So <unk>.

The moment each province is really kind of clothes. There is some ways to move people Steve.

It makes it complicated for us to move more complicated for us to move people from North 2000, vice versa because of restrictions in quarantine and the same applies.

Two books so.

I think.

At least to my knowledge that there is a lot of restrictions there.

Legislator is not saving right now I don't know when they when they start doing that again, but of course like Argentina entire land as I set the entire region has been impacted economically very strongly behind us by discipline Dominic.

Great. Thank you that's all for me guidance.

Thank you.

This concludes the question and answer session I will now turn the call back over to Michael Simon for any closing remarks.

Yes. Thank you operator, and thank you everyone for calling into this.

Q3 update.

Looking forward to give you an update for the full year in February until then.

They safe and all the best Thank you.

This concludes today's conference call you may disconnect. Your lines. Thank you for participating in half of present day.

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Uh-huh.