Q1 2023 Pan American Silver Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to the Pan American Silver Corp, first quarter 2023, unaudited results conference call and webcast.
At this time all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session.
Any time during this call may acquire immediate assistance.
Zero for the operator on this call is being recorded on Thursday May 11, 2023, I would now like to turn the conference over to Sharon <unk> Tsai VP Investor Relations. Please go ahead.
Thank you for joining us today for Pan American Silver. Its Q1 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 Q1 2023 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 .
Thanks Darren.
Thank you everyone for joining our call today.
First quarter was transformational for Pan American.
The closing of the Yamana acquisition on March 31.
And the resultant increase in scale and quality across our portfolio as our client and our recently released consolidated 2023 operating guidance due to the timing of closing. The addition of the Yamana assets is not reflected that in our Q1 production and cost numbers, but the amount is.
Cash and that has been added to our balance sheet at the end of the quarter.
Our Q1 excludes the benefits of the amount of acquisition. Our continued focus on operational excellence helped us to deliver results ahead of expectations.
<unk> ongoing inflationary pressures.
Q1, we sold nearly four 5 million ounces of silver and 133000 ounces of gold.
Silver segment, all in sustaining costs were $14 13 per ounce and $1196 per ounce of coal segment.
Silver segment Q1 production costs, and our 2023 guidance reflect the restricted mining rates in the high grade zone. After lock what are the mine until the new shaft translation project is commissioned.
Thinking after $5 five meter diameter concrete client ventilation shaft.
We reached a debt of 228 meters by the end of Q1 and is on track to be completed by the end of this year.
The shaft will be equipped with ventilation fans connected with your adjacent deep underground east Candelaria workings and commissioned to significantly improve ventilation rates in this high grade area of the mine around made to 2020 for this new ventilation infrastructure will benefit both.
The long term development after Con project.
Well as the current vein system operation.
Until this new system is operating we're restricting mining rates into higher grade deep eastern portion of the candelabra deposit which is reflected in our guidance for 2023.
Old segment production costs were impacted by Leach sequencing at Dolores and La Arena.
In addition production was interrupted for seven days at Dolores by local contracted terms were revised in preparation for the completion of mining and to transition to a multi year Leach cycle, which we expect will begin in late 2024.
Like last year production at La Arena is backend weighted as the higher rates of waste mining extend into Q3.
Follow up by higher rates for mining and production in the last quarter after a year.
A large net realizable value or an RV inventory adjustment at Dolores decreased all in sustaining cost at that operation by $775 per ounce and lowered consolidated gold segment, all in sustaining costs by $165 per ounce.
A reminder, anniversary inventory adjustments are accounting adjustments to recognize the production costs of heap leach inventory relative to the market value of that inventory at a time of assessment.
And inventory adjustments are noncash movements and do not affect cash costs.
Revenue in Q1 was $393 million.
Which included finished goods inventory drawdowns of 779500 ounces of silver and 11300 ounces of gold.
Net earnings in Q1 versus $16 5 million.
<unk> per share.
This includes $18 9 million in transaction and integration costs related to the Yamana transaction.
And $12 7 million in severance provisions.
Adjusted earnings were $21 2 million or <unk> 10 per share in Q1.
Cash flow from operations totaled $51 $3 million, which includes $37 million in cash taxes.
Our annual tax payments are typically the highest in Q1 and Q2.
We are in a strong financial position with cash and short term investment balance of $513 million and $425 million available under the sustainability linked credit facility.
We assumed two senior notes one for $283 million and another one for $500 million as part of the amount of acquisition, both with attractive coupon rates.
And have $325 million drawn on our credit facility.
Our capital allocation priorities for the expected increase in cash flow generation from the expanded portfolio are consistent with our history.
Reduce debt invest in growth and provide dividends to shareholders.
With respect to Q1, we announced a dividend of <unk> <unk> per common share in March a bit earlier than normal in order to align with yamana is timing for dividends.
Two dividend declarations will revert back to Panama because previous castle.
We have been paying dividends consistently since 2010 as an important means of returning capital to shareholders moves.
Moving on to growth projects earlier. This month, we released additional trial results for <unk> com.
We completed nearly 14122 meters of infill and exploration drilling on discounting in the quarter.
So new drill holes, both expand to 902 zone and confirm that there are multiple signs of higher grade within the limestone into con, which align with ceramic porphyry intrusive and happy terminal veins.
Some of the drill holes returned spectacular grades like $64 three meters at 391 grams per ton silver.
<unk>, 8% led at eight 5% zinc include.
Including 23 to five meters at 914 grams per tonne silver 25, 2% Lat and 16, 7% zinc.
We have now drilled over 20 holes into this area, which remains open to the west and northwest and.
An infill and exploration program of 28000 meters from surface and underground drill stations is currently underway.
Also progressed other projects for this car.
Including engineering work associated with the preliminary economic assessment our PPA.
We are planning to provide an updated technical report on the <unk> property in the second half of 2023.
It will include the PAA of discount deposit describing our view of project development operating costs and capital estimates and overall economics in.
In 2023 project capital will also be invested in completing yamanaka plant upgrades at jacobina.
Construction of new dry stack tailings storage facility at what Ron and installing a paste backfill plant at our Bell Creek mine impairments.
Cobalt the Ilo 169 consultation progresses progressing well the consultation meetings held in March and April after next meeting planned for later this month.
The 2023 guidance detailed in our Q1 disclosure is largely the same as the guidance we provided on April 27th.
The change was an increase in project capital for the local artist Con project to reflect updated estimates for completing the PVA and advancing exploration drilling.
The guidance provided in our Q1 disclosure now includes a forecast for <unk> care and maintenance and exploration expense in 2023.
We are expecting to produce 21 to 23 million ounces of silver and 2023.
And 870000 to 970000 ounces of gold.
We expect all in sustaining costs of between 14% to $16 per ounce for the silver segment and 1275 to $1425 per ounce vertical segments.
Please note. This reflects nine months ownership of the mines, we acquired from Yamana and the full 12 months for Pan American's original mines.
As you can see estimates for individual mines and quarterly breakdown of consolidated production costs in our Q1 MD&A.
We plan on releasing our 2022, a sustainability report later in Q2.
We'll report on the performance in environmental social and governance metrics for Pan American original assets.
And our goals in this areas.
Information on all former Yamana assets. Following the amount acquisition will be included in the 2023 sustainability report that will be published next year.
Before I hand, the call over for questions I would like to address our integration efforts for the former Yamana assets integration is advancing very well.
In a timely fashion and we have started harvesting the $40 million to $60 million of annual synergies, we announced earlier.
We have welcomed a large group of new colleagues that giant Pan American at the end of March and it is an absolute pleasure working with the new team and with that I would like to open the call for questions.
Thank you ladies and gentlemen, we will now begin the question and answer session.
Should you have a question. Please press star followed by one on your telephone keypad, you will hear from acknowledging your request questions will be taken in the order received should you wish to cancel your request. Please press. The star followed later too if youre using a speakerphone. Please keep the handset before pressing any Keith.
Please please first question.
Okay.
Thank you and your first question comes from the line of Cosmos <unk> from CIBC. Please go ahead.
Thanks, Michael and team and congrats on a very strong start to 2023.
Maybe my first question is on Mexico.
Mexican peso has strengthened and we've heard from others.
Operating in Mexico that it has had an impact on cost.
Maybe could you comment on the Mexican peso I believe right now you're assuming $18 75 to one and I think now its closer to $17 five and then overall if you can also talk about we've also heard in Mexico Labor power consumables My box really increased in <unk>.
Prices as well is that impacting you as well.
Okay.
Cosmos, it's Michael I will start and then hand it over to Ignacio.
Just in general.
Great question on the impact that we see in our costs and John Rowe from <unk>.
From ex foreign exchange rates during the years.
It can.
Can be very big positive for our less positive impact.
As we have you know even before with the original Pan American assets, probably around $600 million of power costs in local currency. So it is not on the Mexico of course move from the currencies have a big impact.
Through our cost just in general I would like to make.
A statement there when you probably saw on the cost side, we assume that think about around 5% inflation.
For this year, we see probably a bit more bullish on wages less less so.
On the energy costs, but that's just a general remark, maybe Ignacio you can give us a bit more flavor on Mexico sure. Thank you, Michael Hi, Cosmos, Hi, Ignacio yes.
Yes, so for sure the Mexican peso has been one of the strongest performing currencies over the last year.
A lot of it has to do with the high interest rates in Mexico relative to other to other rates. So it's something that we've been monitoring throughout the year. We do have a Mexican peso hedge program. That's detailed in our MD&A. There was a table there. So today approximately I think 24% of our Mexican peso cost or are being <unk>.
Covered through our exposures being covered through our hedge program.
Yes, it has been.
It's been tough managing that however.
All off all mines operating in Mexico are facing the same.
The same challenge so we will continue to monitor it and when theres opportunities to lock in some favorable rates will do that.
Of course, that's great to hear.
Maybe also on Mexico.
April 29.
Mexican Senate passed.
Gentlemen, jimmi federal mining molecule.
Changes include 15 to 30 years in terms of.
The concessions and also 5% contribution to social funds in the country.
Have you looked into it I'm getting mixed reviews in terms of is it retroactive is it not retroactive and even if it's not retroactive would it impact say something like a la Colorado scarred.
Maybe if you can comment on that Michael.
And of course, we are looking into it and monitoring it very closely as you know thus changing right now there is more and more information coming out every day. So there will be more changes down the road for sure. Once we have all the details are available.
At the moment I understand it really applies to the new concessions.
As you know our two operations are on concessions that are established for a long time, there will be for sure. Some some impacts but I don't have any final numbers from it but.
The timing on the new concessions, obviously would only apply for Ya stake new concessions with exploration ground for example.
So something like that like Hello, I described would not be a new concession we would be.
Being part of it.
Existing concession.
Yes, Luckily Congress right below our current producing mine domain. So it's on the same consumption than.
The current production at local level.
Maybe switching gears, a little bit thanks, again, and DNA I'm sure. It's a lot of work in the page 28, you actually gave us quarterly projections.
And I see that it is backend weighted Q4 appears to be.
The best quarter that youre projecting could.
Could you maybe talk about that what are some of the key drivers here in terms of.
The backend weighted production.
Yes, good morning, Cosmo, Steve Hi, Steve in the back the back end is driven largely.
Through La Arena is a good example, where Michael mentioned tip.
Typical pre stripping schedule at La Arena opens up most of the order flow at the end of the year in Q4.
In Q3 as well.
We're seeing a similar trend on backend loading at jacobina and their mine sequencing there.
Quentin into higher grade golds as well and then also at Cerro Moro Cerro Moro, we're going to see higher silver and gold and <unk> and higher silver and gold and those are all just mine sequencing and according to their their mine plans that they're currently offer and those are the main drivers.
Great. Thanks, Steve and then maybe one last question on the guidance as well.
Thanks, again for giving us guidance.
Training costs for silver and gold.
One confirmation those guidance numbers didn't include <unk>.
Our adjustments as it before after and then in terms of NR via adjustments again, Michael Thanks for explaining it to us earlier.
Is that going to be even more.
You've been a bigger number later on because I believe my understanding is that the biggest changes are the biggest numbers come from heap leaches and helping you on I believe that's it.
Are we going to see even bigger adjustment, especially.
Goal.
Go forward basis.
Hi, Cosmos, it's Ignacio again.
Ignacio so as Michael mentioned in his opening remarks, there was a large there was an NR via adjustment and it was a positive <unk> adjustments and basically NR b is a calculation on the recoverable amount on our inventory is in one of our largest inventories are they are the heap leach pads and if you noticed.
The.
From the eighth numbers, it's mostly in the gold segment and Thats directly related to the Dolores. So one of the biggest drivers in that that positive adjustment was not just the quantity is ore recovery, but most importantly, it was the prices. So we saw an increase in metal prices.
From December 31 to March 31 to March 31, and that was the key driver of that positive adjustment in terms of going forward.
<unk> are excluded from our guidance numbers theyre very difficult to project.
And from the new operations, none of them have a heap leach pad. So we don't expect.
The new operations to be driving big MRV adjustments going forward. So helping you on does not have a heap leach pad. It doesn't okay, clearly net recovery Amanda.
Thanks, Ignacio for letting me know, but.
Great those are all the questions and I'll get back into queue.
Thank you Cosmos.
Thank you and your next question comes from the line of Craig Hutchison from TD Securities. Please go ahead.
Hi, good morning, guys.
Good morning, a question on Escobar you guys had been in the phase II consultation process for about a year now can you just give us a high level overview of where those discussions are at and whether you see a.
Potential timeframe to kind of wrap up that studies and move it onto the Supreme Court.
Alright.
That's correct.
It's actually less than a bit less than a year, but.
Has it done to some macro here I've always running our activities in Guatemala, He can give us some more detail someplace, yes. Good morning.
Currently our timeline published on the <unk> website, you can access that through our website.
There is a series of activities that are coming up and the computation.
Right now it's information sharing evaluation of information with the consultants and a series of meetings I would expect there is after the meeting we have on May 19th we will probably have monthly meetings and then at the timeline. That's published shows some field consultation activities taking place in July August with a target.
And date.
In October this year, so we've seen some delays in the process in the past and so.
It's cautious about that.
I don't know if we're going to have delays anymore in the future but.
That's basically the timeline that.
The Ministry of energy mines in Guatemala is published.
Does the does the consultation phase confirmed in some kind of impact benefit agreements.
Or is that not necessarily the case, yes, I think thats the idea and you'll see that timeline talks about reaching agreements and so I think.
The intent is that there'll be some agreements again, the content and what the exact parameters that will be discussed.
Still open right now so I can't say, specifically what kind of.
Activities are mitigation, we would need to do other commitments, we would need to make at this point.
Okay. Thanks for that and then just maybe in terms of capital returns you guys should be generating some substantial free cash flow kind of going forward with the humana assets.
Is the priority just to sort of paydown the Rcs over the next couple of quarters or so.
Got it sort of a plan to build up cash.
Yes look nothing has really changed with our capital allocation priorities.
It's really a buyback at the moment our line of credit for sure.
It's always nice to have that all available.
Or whatever else, we want to we want to do or it comes off on our capital side. So that will be focused number one for this year as I said in my remarks, they're always looking for and working on really high quality projects. We have quite a few in our pipeline already and and of course, we will continue to return.
Coupled with our shareholders in form of dividend.
Alright, thanks, guys.
Thank you.
Thank you and your next question comes out it comes from the line of John Tumazos from John Tumazos very independent research. Please go ahead.
Yeah.
Congratulations on all the work.
Specially impressed.
A new balance sheet that there is no goodwill or intangibles.
With $1 1 billion of debt.
Debt.
Including the Yamana acquisition.
How much is the debt level.
So you're comfortable with for the new Pan Am I know historically you've been.
Service.
A strong balance sheet.
And how much would you need to reduce the debt too.
Before you would go ahead with.
Any of the major.
Big dollar projects at hand.
Colorado scarring or.
The marrow project.
Hello.
All side et cetera et cetera.
Yes, John look I mean, I'm very comfortable with that.
That level now.
If you look at the size of the company, it's a very comfortable level.
But I think everybody who knows me for a while and noticed that I like to have a very conservative balance sheet. So.
As we alluded in the last question.
There will be excess cash that will be used to pay back on our line of credit for sure.
There are two bonds that we that we took over from from Yamana debt.
Very attractive interest rates and well run.
Quite long I think one is mature it in 31 that the other is slide five.
<unk> plenty of seven.
We received an investment grade from S&P and Moody's on that so I'm very very comfortable happy about that as well.
Just when you look at new projects this does not exclude.
Progressing on our approach.
Like what how that's gone the advancements thereon and to work on.
For the PPA is in full swing.
These projects are not ready right now to do receive huge investments you saw the investments that we do this year at La Colorado Scone for example.
The PPA unfold, it's willing to prepare that project to go forward. So the big spend will obviously come down the road so everything goes parallels.
Repay our line of credit as the first line item, while our technical team will continue with our work on AR.
Most of the protects you mentioned I mean, we don't need to work on a lot of in sulfides, we still have our oxide that we mine.
On top of that porphyry that will last probably well into 2026.
But all other projects are ongoing.
Normalized capital sponsor will be coming later.
Michael It was notable that.
Cash balances consolidated from the marrow project are large.
Okay.
When you.
The acquisition in March 31, what is the carrying value.
For the mirror project must be at least $400 million to cash was over $200 million.
Yes, so I'll start and hand, it over to Ignacio, but youre right. There is.
Just north of $200 million right now our cash balances as for Mara is assigned tomorrow.
That money.
This is consolidated on our balance sheet, because we are the majority holder.
That project with over 56%. So that's the reason why it shows up on our on our balance sheet.
So do you have kind of give us some more detail hi, John This is ignacio here. So I will point you to note nine of our financial statements, where we have the breakdown of the property plant and equipment now just to let you know we did assigned values to all the new assets. However, those are preliminary numbers through our purchase price allocation exercise.
We have a year to refine those numbers as the year goes by some refinements may come.
But currently if you look at that table.
The carrying value assigned tomorrow net is around $1 3 billion.
That is.
That is around that 26% of the total value assigned to the to the.
So that the properties now that the total acquisition cost.
Our four.
For the for Yamana was around $2 8 billion, but thats. The net number of assets and liabilities are assigned in our balance sheet. So theres liabilities offsetting the assets.
So sometimes we say.
Our plan for the worst and lead to upside to take care of itself.
I'm thinking sort of in the converse way.
Just in case lightning struck.
And <unk> got the Green light in six months.
And La Colorado.
It is getting closer to getting ready.
And maybe glencore really wants to build meera, given how much enthusiasm they have for all of those projects in check.
If you have three projects that are ready to go around the same a year or two.
And they all look good.
How do we manage that wonderful scenario.
[laughter] look I mean.
As I said like the La Colorado scar and Theres a lot of work going on right now, but we're not ready to build.
Chuck there so that's way out there so it's not possible that that would happen all in the same year, we will present. The PPA later this year and then.
And we'll take next steps from there but.
As we do that all of that technical work.
There'll be able later in the year to share with everyone. How those numbers look like.
Scenario that everything will come through in one year and this year.
Is not is not possible just because of la Colorado Theres, a lot of work going on that tomorrow as well.
As I mentioned, we are over 56%, though and the rest the rest as we plan caused us an approved budget there and as I sat there is some money set aside for some of the work as well.
On our balance sheet so.
Ignacio has something to add to this just one one last thing John just to clarify that 1.3 dollars 6 billion that I mentioned that for 100, that's the 100% value. We all know only 56.
Two 5% so that was the positive value for.
For our Mara so, yes, so Jon even if everything lines up perfectly.
They are a wonderful project.
And that will come in due time into our pipeline and other all together.
So that will be a very nice scenario, yes.
So I don't want to minimize the future work for Don Ignacio and you know Michael but.
<unk> is the most spectacular partner.
We have a company in the U S called century aluminum.
That had glencore is a trading partner Glencore owns 43% as a public stock now and it's been taking has been saving the day for century aluminum since 1990.
And for polymer metal since around 2006.
Where they own 70% of polymer now in <unk>.
<unk> was tech.
What sort of creative solutions are there.
For financing Meera.
Do you have to do any work at all and can you just simply rely on the.
Good graces of Glencore that can finance all of their partners.
Yeah look we are of course Glencore is a great partner to have in and then project to be working together with Glencore in many many fronts on.
Our trading side for people, who are familiar with my bio that we will see that I worked for Glencore actually before I joined Pan American for quite a long time.
It is a great partner to have but look we only owned those assets now that the formal yamana assets for about six weeks.
Of course, we as I said before of asset management and the optimization of our portfolio will be a focus going forward here, but we need a little bit more time to work on all of that so we will have more answers for you as the year progresses.
Skus my enthusiasm.
Yeah.
Uh huh.
Thank you.
Thank you Andrew.
Next question comes from the line of AT&T from Adrian Day asset management. Please go ahead.
Yes, good morning, excuse me I've got three questions two of them very quick.
I'll ask them all in a row. The first one is I don't think you mentioned the cash costs. You just gave the all in sustaining can you tell us what the cash costs I realize there's variability among the mines. The second question is.
And I realize it's far too soon to have made a father were part of a review of all the amount of assets et cetera, but is it your intention should we expect some disposals of properties is that's an intention or is it still not clear and then the third one and I'm sorry to harp on Escobar.
I'm a little unclear on what the current process is if I understood that there was a Supreme court mandated consultation with the government and the local people and you were sort of observe as if you like and I thought that was completed in January or February so the current process.
As the current consultation is still government right, it's not Pan American.
This is my three questions.
Thanks, Adrienne I'll have Sean starting with Guatemala, Yeah. So the process is theres three principal actors in the process the government of Guatemala, and the Ministry of energy mines leads the process. The consultation process. The Sheikh of Parliament, who are the representatives for that she could people and then the company which is.
Our Pan American silver.
<unk> subsidiary so the.
Meetings generally happened the formal meetings generally happen about once a month. So as we mentioned we will have another meeting on may 19th.
And.
Those meetings.
We'll go.
Continue on through the summer and so we expect.
The information sharing process to continue and some of the other activities to continue and as I mentioned for those.
Activities are outlined on the Ministry of Energy My website and that link is on our website. You can go look at that that.
That outlined there.
Sean So could you answer the cash cost function. Please sure. So our cash cost on the silver segment for the first quarter of 2023 was 12 19 and on the <unk> on the gold segment. There was 1120, so factors affecting the cash cost.
Q1, 2023 versus Q1 2022, whereas the inflationary pressures that Michael mentioned as well as the cessation of mining activities at more contract those are the main factors.
Okay, and then I will answer your last question on the disposal of assets on plants there.
We are now.
Owning these assets for about six weeks, we started a big process with our team to go through all of the assets.
Of course, we know the producing assets very well.
Started looking at a lot of exploration ground.
All in every country a lot of exploration projects. There are some advanced projects, we are looking at as well.
So there is no that's absolutely no plan that we keep everything there will be some disposals.
And that's the work we're doing right now so as I mentioned before it's a little bit early but.
You should expect that there will some disposals coming over.
The rest of the year okay.
Thank you.
Thank you.
Thanks Adrian.
Thank you and your next question comes from the line of Don Demarco from National Bank Financial. Please go ahead.
Thank you operator, and good morning, Michael and team.
Most of my questions have been answered, but maybe just a question on the care and maintenance.
I know you're guiding about 100 million for this year and we see that the Q1 expenses in line with that.
But is there any visibility to to reduce.
It's these care and maintenance costs by way of dispositions or otherwise.
I get it that basketball youre kind of keeping that ready to restart.
Did the other care and maintenance projects does that much money and you really need to be spent or can it potentially be eliminated altogether.
Thank you.
Yes, Don Thanks for your question, absolutely as I said, the big the big ones on the kind of a maintenance Escobar, thus far for obvious reasons, we cannot and.
And we are keeping that operation.
And in great shape. So so.
When when when we got the Green light, which it sounds that there is no timing to it yet.
We are in good shape to start so that's the reason why we spend the money on care and maintenance.
At cobalt, so very good reasons for that.
Other big spend is a moron, it's probably a you know I wouldn't say the same situation, but it's the money spent to prepare to approach us to move forward.
So there is.
Unfortunately.
Care and maintenance to Russ this to prepare it for four technical studies and move that forward. So that will obviously change over time and moving to more project capital later on but the capital right now is under our current maintenance budget.
The other ones are fairly small.
Good job.
Looking at opportunities.
And the other alternatives for motor culture right now so.
The solution for that for that care and maintenance.
Okay. Thank you that's all for me.
Thank you.
Thank you Mr. Michael There are no further questions at this time. Please proceed.
Thank you operator, and thanks, everyone for calling in Oh, It was a great quarter and I'm really excited to look forward for the rest of this year as from now on we have all the additional assets from Yamana and our ownership and are producing so looking forward to talk to everyone.
Discuss Q2 in August have a great startup this summer.
Thank you Sir.
Ladies and gentlemen that does conclude our conference for today. Thank you all for participating you may now disconnect.