Q2 2022 Pan American Silver Corp Earnings Call
Thank you for standing by. This is the conference operator. Welcome to the Pan American Silver 2nd Quarter 2022 Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Sarin Faseki, VP Investor Relations. Please go ahead.
Thank you for joining us today for Pan American Silver's Q2 2022 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 2022 unaudited results, all of which are available on our website. I'll now turn the call over to Michael Steinman, Pan American's President and CEO .
Thank you, Siren. Welcome, everyone, to our Q2 call.
In Q2 we produced 4.5 million ounces of silver led by strong performance at La Corrada. Production at La Corrada was up more than 50% from Q2 last year to approximately 1.7 million ounces.
reflecting the improved ventilation conditions in the mine. In July , the new refrigeration plant began operating, which we expect will further improve working conditions in the mine.
Gold production was 128,300 ounces in Q2. Despite lower than expected production at Dolores from Phase IXB, which also reduced consolidated silver production, Q2 gold production was within our expected range for the quarter.
Dolores had a marked impact on our Q2 results. This stems from the shortfall in grades from Phase IXB and the resulting production year to date being less than expected, which triggered an analysis for impairment.
We did that impairment analysis at a time of industry-wide cost inflation, incorporating higher cost assumptions especially affects the value of the shorter-lived assets such as the loaners.
It was a factor in our decision to suspend the underground mining Q2 and the subsequent reclassification of underground reserves to resources and it resulted in shortening the estimated duration of economic procedural leaching to the year 2030.
Of course, this is highly dependent on metal prices and costs over the coming years and will be adjusted accordingly.
The exploration drilling originally conducted for phase 9B of the open pit at Dolores had some high-grade intercepts in the area that we expected to mine during the first half of 2022. However, these high grades were not fully realized and we now believe the high-grade intercepts contributed to a localized overestimation of the contained ounces within phase 9B.
Our updated winter resource and production plan for the life of mine adjusts for this overestimation..
We recorded a $99.1 million impairment charge for the Lotus in Q2 and together with a $62.8 million net realizable value inventory adjustments primarily at the Lotus drove the net loss of $173.6 million or 83 cent loss per share for Q2.
Adjusting for these items among other adjustments results in an adjusted loss of $6.5 million So $0.03 loss per share.
Cash flow from operations total $20.8 million, which includes $42.4 million in cash taxes and the $19.5 million build-up in working capital.
Moving on to our guidance for 2022, we are maintaining our production guidance for both silver and gold, but expect to be at the low end of the ranges.
The slides on our website that accompany this conference call include a quarterly breakdown of production in 2022, which better clarifies our expectations for the year.
which we have always been weighted to the back half of 2022.
Cash costs for the silver segment were $12.10 per ounce and $1,132 per ounce for the gold segment. Thank you too.
All operations were negatively impacted by inflationary pressures, particularly from increased diesel prices and certain consumables, including cyanide, explosives and steel products such as grinding media, as well as supply chain shortages.
Further, we are experiencing cost increases in services and other supplies indirectly due to the inflationary impact of consumables on their input costs, particularly diesel fuel.
In addition to these global inflationary pressures, gold segment cash costs were impacted by the lower grades at Dolores and a Chavindo and Lorena from mine sequencing.
We expect Gold Segment Cash Cost to be at the high end of our original guidance range for 2022.
Silver segment all in sustaining costs were $17.30 per ounce excluding net realizable value and RE adjustment. Silver segment all in sustaining costs were $15.90 per ounce.
We are maintaining our guidance for 2022 Silver Segment Cash Costs and All-In Sustaining Costs.
Both segment all-in sustaining costs were $2,051 per ounce and $1,540 per ounce excluding error related adjustments.
We are increasing our guidance for gold segment all-insustaining costs to between $1,400 and $1,550 per ounce, excluding of un-RE inventory adjustments as a result of increased capital spending and a great shortfall at the loss.
We have increased our estimates for sustaining capital to between $240 million and $250 million due to a change in the financing strategy for certain plans sustaining capital investments at the open pit mines in Peru. Rather than funding these projects through construction loans as we had originally intended, we will fund them directly through cash flow which will be offset by a decrease in future expected cash flows and loan obligations.
We have decreased our estimates for project capital to between $55 to $60 million based on expected delays in spending at both the La Corrada's Con and Timmins projects.
Total capital spending is now expected to be between $295 to $310 million in 2022, up slightly from our original guidance of $280 to $305 million.
The decrease in capital for the La Corrada's current project is due to delaying the design and initiation of the access ramp developments to optimize alignments with the highly efficient bulk mining methods designs now being considered.
The current major projects at La Clarada are progressing well. In addition to completion of the refrigeration plant, we have set the Galloway structure during the quarter and now installing the head frame and hoist for the concrete line ventilation shaft.
We will start sinking the shaft before year end and aim to advance to the 600 meter depth by this time next year.
Yesterday we provided an update for our consolidated reserves and resources as of June 30, 2022, which demonstrated reserve replacement at our most significant mines.
We replaced 108% of the annual silver production at La Clarada and added another 42.8 million ounces to the inferred mineral resources in the veins above the scone.
At Waron we replaced 165% of the silver mine last year.
81% of coal production was replaced at Cawindo and 46% at La Reina.
Timmins replaced 26% of the gold mine and added a further 53,000 ounces to inferred resources at Timmins West.
Golden Silver Mineral Reserves were impacted by the reclassification of reserves to resources at the Dolores Underground Mine.
We are looking forward to updating the resource estimates for the La Clararas con later this quarter.
On July 21st we announced the most recent road results for the La Corraladas car, which included the highest grade intercepts to date of 97 meters at 654 grams per ton of silver, 15.35% lead and 11.38% zinc.
These most recent drill results will not be included because they were drilled after the timing cut off for the new resource estimate.
At Esquibalt, the ILO 169 consultation has now progressed to the consultation phase from pre-consultation with the next meeting scheduled for August 21st.
We look forward to participating in the next phase of the consultation process and to listening to the SINCA people regarding their perceptions about Escobar in an open, inclusive and respectful process.
We are on track to achieve most of the ESG goals we set for 2022.
We are hosting our third annual ESG call on September 22nd, when we will provide more information on our progress and areas for improvement.
In closing, we remain in a solid financial position with cash and short-term investment of $241.3 million and an undrawn line of credit of $500 million.
We declare the dividend of 11 cents per share in line with our dividend policy.
And now I would be happy to take your questions.
We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment of callers trying to queue.
The first question is from Cosmos 2 from CIBC. Please go ahead.
Hi, thanks Michael and team.
Maybe my first question is around Dolores. You know, certainly with a write down, you've made some changes. As you mentioned, I think mining will likely last another two years. And that sounds like residual leaching until year 2030. Could you maybe wrap it all up for me in terms of what sort of the new mine plan is and how that's changed from your previous assumptions?
Yes, Cosmos, I'll just start general and pass it over to Steve for some more detail. Thanks, Michael. Actually, the mine plan and the open pit mining did not change the timing for two years. Afterwards, we go into the residual leach and that was longer term there. We cut it at the moment at 2030. As I mentioned in the call, that obviously is going to be an economic analysis that happens every year, right, when you go to...
whatever 2028, 2029, 30 depending on cost and metal prices, etc. How long that leach cycle will continue, but I pass it on to Steve for further details. Yeah, the only thing I would add, Cosmos, is that the original plan we had after open-pit mining ended, we had some stockpiles we were going to run through the plant for, I think it was initially estimated for a couple of years. If you look at our current life of mine open-pit plan, the tons of ore really hasn't changed.
has now been suspended. How easy it is, you know, based on metal prices, maybe hopefully higher metal prices later on, how easy is it to restart it again? And in the meantime, are you keeping the pumps running to make sure, you know, you're dewatering it, keeping it in a good state?
Hi, good morning, this is Ignacio. The firm book value is around $260 million. And that includes both the PP&E and the LeachPad.
And then relative to the underground, yes, we are keeping the dewatering pumps running because that does help in the open pit as well. And we are keeping the ventilation and all the ground control systems in place. So we could go back in, there would be a bit of development work that would have to be done towards the open pit to open up the additional ore reserves that move to resources. But apart from that, everything's in good shape to restart.
Great. Maybe switching gears a little bit onto more positive news. Michael, it certainly sounds like there's positive progress being made at Esquibalt. To the extent that you can elaborate on going from pre-consultation to consultation, any details that you can give us in terms of what the next stage sort of entails. And then in negotiations or in consultation with Zinca, have they made any specific requests either before or after the meeting?
formal dialogue process with...
they stated the aim to identify and clarify baseline conditions.
describe potential impacts and define possible impact mitigation.
the Cinco indigenous communities, the Ministry of Mines and Pan American Guatemala, obviously a subsidiary of Pan American Silver are participating in that process. So there's a lot of details on so far what happened in Guatemala and the process and what's to come on the MEM, the government website. So I would refer everybody to that. There's a link I believe on our Escobar section on our Pan American website.
there and you will see links and videos and description of the process and how the meetings that happened went so far.
Great, thanks Michael and maybe one last question again something else here. Provisional pricing, I think I read in your MDNA that there was a 9.3 million dollar negative price adjustment which is understandable for the quarter just given the decrease in base metal prices but I'm trying to reconcile that because I saw that the realized prices for the quarter was 4.42 per pound copper 1.73 per pound zinc which is...
Not that bad. So I guess my bigger question is, how should we look at it on a go-forward basis? How should we calculate it? And is there a bigger potential impact for Q3 and then onwards?
Hi, Kosmos. This is Ignacio again. So yes, the provisional price adjustments are just a function of the amount of metal that has open QPs, quotation prices, at the end of every quarter. And it does vary depending on the contract that we have. It is a difficult thing to model given that a lot of the times the clients are the ones that have the options on the QPs that they declare.
But just to give you some approximate numbers, at the end of Q2, we had about 1.2 million ounces of silver that didn't, that the prices were still open. And around 1.2 million eight you're thinking behind 100 million
thousand ounces of copper approximately and 3,800 ounces of copper and around 3,800 tons of zinc. So that gives you an estimate but it does vary quarter to quarter. We do monitor it and obviously given drops in prices that's what impacts it.
Great, thanks again. Those are all the questions I have. Thanks again for answering my questions.
The next question is from Trevor Turnbull from Scotiabank. Please go ahead.
Hi, thank you. Hopefully I'm not going to repeat too much of what Cosmos just asked, but I just wanted to ask one high-level question on the Dolores suspension. I know that operating margins were clearly the issue, but can you just discuss kind of what aspect was the tipping point? You know, was it a matter of the scale of the operation, grade profile, or labor rates? And what I'm trying to get at, I guess, is
Just trying to understand what would need to change going forward that would let you bring it back online.
Hi Trevor, I assume you're talking the underground mine suspension that Dolores specifically... Sorry about that Steve, yes. Yeah, yeah, okay fair enough. Yeah so it's really it was truly a function of cost and development needs. I think we've talked in previous quarters that the residual, the remaining reserves that we had on the books to be mined was in and around the open pit mine.
So there was some sequencing challenges we had as we were mining the depth of phase eight and phase nine that we're in now that we didn't really want to have any kind of interference between the underground mine and the open pit. So we always kind of backed away from that development over the last few quarters. And now with these increased costs, as we look at it and what it takes to develop back in there, at these current cost levels, we just didn't feel the margins were worth pursuing out.
So if cost structure changes, if metal prices changes, by all means that would open back up and we can get in there and get the residual part of those reserves that move to resources.
Okay, that's all I had. Appreciate it, Steve. You bet, Trevor. Thanks, Trevor. Let's find your poll number and show you what you found this week.
The next question is from Lawson Winder from Bank of America Securities. Please go ahead.
Hi, guys, good morning and thank you for the updates on everything here. I wanted to ask a really, really sort of like high level, big picture question about Dolores and the Mindfinders acquisition. As we approach the end of life at Dolores, I think it's pretty fair to say that it's kind of underperformed expectations since the Mindfinders acquisition back in...
2011.
What would you chalk that?
Or how would you explain what everybody kind of got wrong at the point of that acquisition? Because I know both Pan American and analysts were quite excited about that at the time. Yeah, I'd love to hear your thoughts on that.
Well, I think one of the major differences is when, remember the acquisition happened in 2012.
but substantially much, much higher metal prices. And while we did a lot of analysis at different metal prices at the leaf at that time, so it was probably in around $30.
We obviously didn't account for that, you know, the silver price dropping to what was the low in that time.
between then and now probably so much wealth to $14. So that was probably one big driver of that. Definitely now of course much higher cost that we see but there's still some time left but it's a shorter life as of now and obviously we will need to see quite some changes in metal prices or cost as Steve said to like to for example restart the underground. I don't know Steve if you wanna add something? Just to add to what Michael said Lawson I mean clearly.
the margins were squeezed greater than we thought, given the metal prices weren't as high as what we used for the acquisition basis back in 2012. And then the cost kind of squeezed on the other side, too. So the margins were not as prescribed, given most factors. But mine overall, despite this issue of what we're facing today at 9B in the open pit, the mine resource overall is performed, I think, pretty close to expectations, all in all.
The only other area where we felt we probably underestimated some of the complexities at Dolores was on the leach pad construction and the leach pad construction costs. You know, that topography and the challenges we found in building, you know, reliable leach pads in that area was greater than we thought going in. But apart from that, it was really the margin squeeze based on price and cost.
That's very helpful, Color. I appreciate you giving those thoughts. We've already talked a lot about Dolores. I wanted to ask just about a few of the other assets. At La Arena, are you starting to see any increased levels of sulfide material mixed in with the oxide?
Yeah, hi, Lawson, Steve again. No, we're strictly mining in the oxide zones. We know pretty well, based on all our modeling, where that boundary is, and we're pretty well above that and we're outside of that. Currently, I think we think the economic pit depth limits are going to be above that zone. We're still drilling, we're still going down, we know where that zone is.
We know when we get close to it and we don't really mine any of that sulfide or it doesn't really recover on the leach pads anyway. Just to add something to Lorraine, you probably heard in the call that I mentioned in the press release that we again replaced 46% of the gold ounce as mine. Just astonishing when you think in our purchasing model, we assumed that we were going to have
that Lorena will be mined out. The upsets will be mined out. I believe it was mid 2021. With the new reserve update, I think we go well into 2026, with still quite some upside. We're still drilling there. And I think there's probably a good chance for more to come. So, you know, at least another five years added in mine lives up to now with more upside. So very positive story there.
I couldn't agree more there. That's certainly been a very positive story for you guys, the whole La Arena thing. I also wanted to ask about Haran. In Q2, you had really, really strong lead production and then a little bit lower silver production. I just wanted to get an idea for how you see that split moving into the second half. Would that be expected to reverse?
Hi Lawson, this is Chris. Certainly as the amount of different veins we have from Travieso, which is high copper, we've got all these different structures with the lead and the silver more predominant, or we've got lead, zinc, silver, copper, et cetera. So really it's a mix of all of those different veins that come in. And certainly we would be performing to budget and forecast.
into different zones. And these zones are quite variable between lead or copper or high zinc. So I'd say it's hard for us to predict exactly what's going to happen in the second half, but I think generally we will probably not see the same degree of lead, maybe a little bit more copper as my general gut sense going into the second half, but not materially different. And I'm just following the same theme here at the end of the presentation.
Varon looking at the reserves, 165% replacement of Silver Anfos. Varon is a long time with the company. I believe soon we will be probably soon having two decades of probably most of reserve replacement at Varon. So that just shows you how large and how prospective that ground is and of course much easier in that sense to replace your reserves in the vein deposit than in an open pit where you're bound to a pit.
Thank you.
I'm trying to imagine what consultation might mean in Guatemala and I recall years ago going to the Marlin gold mine
where the local people spoke a language called Ma'am.
And another time going to the nickel mine in the east where the local people spoke
time going to the nickel mine in the east where the local people spoke K'chi.
What language?
Are the consultations held in?
Are the Chinca people
able to understand
How a mine and a profit-seeking business operates.
Would you say that 100% of the consultation involves
things that Pan Am can control and manage or does the consultation
Stray, where a large fraction of it is contemporary.
social issues of the country.
or the last 500 years where the Chinca people might not have been represented by the government or
1700s the Catholic Church paid bounties on Inca scalps, things like that.
Thanks, John . I'll pass on to Sean MacKler is here. He's participating as the country manager in Guatemala in the consultations. Please, Sean. Yeah, good morning, John . The meetings right now are held in Spanish. And there is a shink of language, but the meetings are held in Spanish right now. And so all the transcripts, the discussions, all the presentations are done in Spanish. So that's what we expect going forward. And there may be issues with shink of language that arise in those.
We expect that to be developing in the meetings coming up in the next few months.
Does the dialogue relate specifically to the Escobar project?
or to broader social and political issues, possibly outside your control.
Well, up to this point, the meetings have really been about the process itself. And again, I expect that we'll get into those kind of details that you're asking about over the coming months. That's things that we discussed as the information is presented, the concerns are raised and then issues are resolved. So I expect to have more information about that towards the end of the year and probably next quarter update.
Thank you. Sorry for the detailed nature of the questions. I just don't know what consultation means in Guatemala.
Thanks for your question.
Once again, if you have a question, please press star, then 1.
The next question is from Don DeMarco from National Bank Financial. Please go ahead.
Well, thank you, operator, and good morning, Michael and Steve.
Good morning. Q2 also saw elevated costs at other mines. Focusing on the rain and menasha SBAO.
Did you perform impairment testing on these assets? And if so, how did they fare and what's the asset? They're also somewhat short-lived. So is the outlook unchanged despite the elevated cost we saw in Q2?
Yeah, I could start and then I'll turn it over to Ignacio. Basically, no, the outlook at those mines hasn't changed. The results for Q2 were pretty much in line with what we expected. Even though there were some higher costs, we think they were in range to where it really didn't lead to any kind of trigger to do any kind of impairment analysis for those assets.
Ignacio, I don't know if you want to add. Yeah, not much more to add, Steve. Yeah, there were no impairment indicators different from Dolores. So therefore, we didn't do any sort of testing.
With the end of Dolores in view, does the company have a strategy for replacing assets or perhaps a targeted level of production in gold and silver segments to maintain?
Sure, Don, as you know, we are always very active on the business development side. There's different ways to do that. One is exploration, as I mentioned before. There was a lot of strong replacement of our reserves in many of our flagship assets. We did that over many, many years or decades here in the past. That's obviously one way to expand, like the example I gave at La Rena.
resource update at this current, I would say probably within a month time or so. So that will be a very interesting data point, but as you can imagine, the old resource we have that is currently on our books is already 100 million tons, and I would expect that number to grow. So that's the other way to replace our...
reserves by adding a completely new project like that's gone. And then the third way is obviously acquisitions, which we always have to look out there to see what there is, either an earlier stage project or later stage. As I always stated, we are very picky on that because we're looking for acquisitions that are accretive. And I think we've shown that with the acquisition of TAO three years back.
innovation success and I think that really got topped with the scan discovery at La Covarrada.
Okay, fair enough. That gives some good colour. Shifting over to La Colorado, perform well. And I see that some of the access to high-grade zones resumed thanks to the ventilation. Do you expect that to continue and would we expect to see further incremental gains both in terms of throughput or grade in the coming quarters? Yeah, Don, Steve here. Certainly on the throughput side, this ventilation is really, really helping us a lot.
And the refrigeration plant is also helping a lot. So it is allowing us to catch up, if you will, on ground control and development into the areas that were originally scheduled to mine a couple years back. So we do anticipate seeing throughput come up, but we do think grades will kind of maintain in and around the reserve grade of the deposit. We're really targeting to mine this. We see this as a very long-term asset.
We'd like to mine it consistently at reserve grades as we go forward.
Okay well thanks for that Steven. Just to segue into the SCARN then, you know we're all excited to see the resources. Is there any reason why it was just pushed forward a little bit?
Well, we always announced in Q3, I mean, it was kind of, you know, is it ready? There's a lot of work right now going on, as you can imagine, as it is so large and a lot of decisions on the mining method. So you know, we're talking about a few weeks here, not a major change, and well within Q3 that we will publish those new resources. In terms of the resource, in terms of the mining and mining method, I mean, we are making great progress.
in evaluating this bulk mining method that we talked about a couple quarters ago. And it does look quite exciting to us, but it is a complex method. This is a deep mine, so it is taking a lot of time to build this mine plan. We're looking at a couple unique options, kind of leading edge technologies for cave mining in these days.
and applying it here. So we want to make sure we look at that right and correctly. We've got a lot of really high-talented consultants who have developed these things around the world. So we need some time to work through that and be comfortable before we start coming out with, you know, mining plans, mining costs, and things of that nature.
Okay, great. We'll look forward to that and good luck in the back half of the year.
Thank you very much. Thanks, Don. Thank you.
This concludes the question and answer session. I would like to turn the conference back over to Michael Steinman for any closing remarks.
Thanks, operator, and thank you everyone for joining us on this call. We'll talk again in November to share our Q3 results. Have a good rest of the summer. Thank you very much.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
And.