Pan American Silver Corp. (PAAS) Earnings Call Transcript & Summary

Welcome to the Pan American Silver's 2020 Preliminary Production Results and 2021 Guidance Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Siren Fisekci, Vice President of Investor Relations. Please go ahead.

Thank you, operator, and welcome, everyone, to Pan American Silver's conference call to discuss our guidance for 2021 and preliminary production results for 2020. Media and other participants on the call are invited to participate in listen-only mode. We issued a news release earlier this morning that details our guidance for production, costs and expenditures in 2021 as well as the preliminary 2020 production results. The news release and presentation slides for today's call are available on our website. That 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. Following his remarks, we'll open the call to questions and answers with the rest of the executive team.

Thank you, everyone, for joining us today. I will begin with a brief recap of 2020 production and then discuss our outlook for 2021. In 2020, we produced 17.3 million ounces of silver and 522,000 ounces of gold. Government decrees in response to the COVID-19 pandemic led to the suspension of all our Latin American operations for various durations in 2020. As well, production at Manatial Espejo was suspended from December 21, 2020 to January 7, 2021, following a directive from the government of Santa Cruz in Argentina imposed on mining operations in the province. Comprehensive COVID-19 protocols also reduced production capacities and added COVID-related expenses at all operations. Nevertheless, we generated strong cash flows in 2020, and we paid $275 million on our credit facility, exiting the year with no bank debt, while our cash and short-term investment balance reached approximately $271.1 million at December 31, 2020. We also increased the dividend twice during the year, by 43% in January, and another 40% in November, returning $46.2 million to our shareholders. At La Colorada, production was impacted by an inability to access high-grade ore due to the COVID-19-related delay in completing an underground ventilation raise and the loss of a second surface raise in Q4 2020, which further limited the deployment of personnel and diesel equipment underground. Last week, we successfully completed the 3.1 meter diameter surface to 345-level raise bore, which will replace the critical ventilation raise that failed in Q4 2019 after 10 years of service. This new ventilation raise will now be shotcrete before the fan is installed and commissioned in the next few weeks. In 2021, we will be advancing 3 additional pre-granted raise bore shafts in different areas of the mine. While we complete these projects, we are temporarily moving ventilation fans and tapping other available infrastructure, including existing ramps and shafts to distribute the available fresh air intake to the key production areas of the mine. This ventilation work has been incorporated in our 2021 guidance. La Colorada is currently our largest civil producer with long life reserves. The investment in the new ventilation systems will serve us well for many years to come, not only for our current reserves in production, but also in developing our world-class cone discovery and future mine expansions. We have also revised our COSE and Joaquin mine plant in Argentina to address the scarcity of qualified underground miners in the region due to COVID-related interprovincial travel restrictions and the cost associated remobilizing a larger workforce. Workforce numbers have been reduced under the new mine plans, resulting in lower mining rates and annual output while extending mine life by about 1 year. As you know, the pandemic is still with us, and our outlook for 2021 incorporates our view that while production will bounce back from 2020 levels, operations will continue to be impacted by COVID-19 protocols, which increased costs and restricted throughput levels, especially at our underground mines, where we produce most of our silver. The impact on operations is expected to diminish over the course of 2021 as vaccinations are deployed throughout our operating jurisdictions later in the year. For Q1 2021, we assume operations will experience the full effect of COVID-19 restrictions, similar to Q4 2020. We assume the impact of restrictions on cost and production declines to 75% in the second quarter to 50% in the third quarter and 25% in the fourth quarter of 2021. The first quarter of 2022 is assumed to be the first period that will be free of COVID-19 restrictions, allowing operations to run at full capacity. Of course, these assumptions depend on the global supply of vaccines, how each jurisdiction manages the vaccination programs, the effectiveness of vaccines and any potential virus outbreaks. In 2021, we are guiding silver production of 22.5 million to 24 million ounces and the record gold production of 605,000 to 655,000 ounces. All-in sustaining costs are expected to be in the range of $12.50 to $14 for silver segment and $1,135 to $1,250 for the gold segment. These costs reflect the reclassification of the Dolores operation to the gold segment, given the mining sequencing into higher gold grade ores in 2021. We expect to spend $245 million to $260 million on sustaining capital in 2021. Largely an open pit pre-stripping, leach pads and tailings storage facilities, exploration, site infrastructure and mine equipment overhauls and replacements. Approximately $50 million to $60 million of that spending has been carried forward from 2020 as we had to defer certain projects because of the pandemic. Project capital is expected to be between $55 million to $60 million. The vast majority will be invested in the La Colorada skarn project for the infill drill program, early stage engineering, metallurgical testing and completion of a preliminary economic assessment, or PEA. It also includes investment to advance some longer-term infrastructure for the skarn project. About $5 million of project capital will be spent on the Wetmore exploration project, which is located in 900 meters southwest of the current Bell Creek underground workings. The goal is to expand and upgrade the existing resource to reserve with 15,000 meters of underground drilling from an 825-meter exploration drift developed from the existing Bell Creek mine underground workings. Our 2021 guidance does not include any production for the potential restart of the Escobal mine in Guatemala. As stated previously, we cannot provide a view on timing. We understand that Guatemala's Ministry of Energy and Mines and the Xinka parliament have agreed to begin the preconsultation meetings in April 2021 as part of the court ordered ILO 169 consultation process. In 2021, we expect to spend $20 million to $21 million in care maintenance expenses at Escobal, which is focused on safely completing the actions required by our approved environmental management plan, ensuring the mine is in excellent condition for a possible restart and to support the government-led ILO 169 consultation process. In 2020, we made significant progress deploying the COVID sustainable mining protocols at the site, and we facilitated the launch of a participatory environmental monitoring program in partnership with the School of Engineering of the University of San Carlos in Guatemala City. The budget for care and maintenance at Navidad project is approximately $2 million. Under our guidance assumption for 2021, we expect to generate robust levels of free cash flow with bank debt fully repaid, our capital allocation priorities are to invest in high-quality projects like the La Colorada expansion and other select exploration projects as well as returning cash to our shareholders through dividends. We are very excited about progressing our La Colorada skarn project and providing a PEA by the end of the year. La Colorada is a world-class deposit that will continue to be mined for decades, both from vein expansions and development of the skarn deposit providing long-term exposure to silver. And with that, I would like to open the call for questions.

[Operator Instructions] Our first question comes from Don DeMarco of National Bank Financial.

First, my first question has to do with Dolores. I see you've switched it over to the gold segment, you're seeing increased gold grades. How long do you expect this sequencing to last?

Yes. Don, it's Steven here. I think the best indication of that is to look at the mine plan that's in the 43-101 technical report. It kind of shows that. But we've always talked all along in the development of the Dolores open pit. But the high-grade at the bottom of the pit that we strip so much waste for is very high in gold and relatively low in silver. And that is going to be predominantly most of our ore for the rest of the life at Dolores.

And Don, just to add here, that change, obviously, was necessary because if you had that big of a gold credit to the silver production, it just made the cost metrics for the silver net of byproduct gold look silly. So that's really the reason why we changed. So Dolores was always kind of close to half-half, so it didn't really matter. And we had it, obviously, in our silver segment because it was always be PanAm for a long time. But now producing more value in gold than silver, it was time to change it over just to have the cost metrics in a reasonable place.

Okay. Okay. That makes sense. And certainly, AISC helps that gold group helps the gold segment. But shifting to another name in the gold segment, the costs at Timmins have increased a little bit over a year. Maybe can you speak to some of the reasons for this and your outlook or strategy for this mine?

Yes. Relative to cash costs, there's a modest increase, and it's really reflecting some of our COVID protocols and the way we've costed those through the year, gradually decreasing through the year 2021, while the vaccine kind of rolls out. Relative to today's cost, there is a substantial increase in relative capital spending from previous years. And that's really in light of the large -- we have a very large tailings dam expansion project that starts during 2021 and we had to really expand the size of that tailings facility to be able to accommodate some of the new reserves that we've discovered there and planning for that. We just didn't have a facility that was capable of handling that. So there's a substantial spend of about $18 million of that capital at Timmins for tailings dam expansions, that's really the driver there.

I see. Okay. So maybe it's a sort of a 1-year elevated cost. But in the past, you had talked about maybe selling this. Is that sort of been -- you're now content to keep it within your portfolio?

Yes. Look, Timmins was and is a fabulous mine. And really, what Steve is alluding to is we added much more mine life to the asset, and that's requiring some capital right this year and I think that's not only for Timmins, I mean we -- look, we -- if you look at the other assets that we purchased, I'm sure you remember, we added last summer, about 400,000 ounces of new gold reserves to sell window. Adding such a big new reserve, obviously, requires at the end, a bigger stripping, and that requires more space in our leach pads and waste areas, something similar at La Arena, where we actually added probably full 3 years of production since the purchase but of course, that requires more space for waste and more capital for that. And so that's kind of a bit more capital-intensive year with those kind of one-off addition to a very positive story, of course, because it means actually substantial increase in mine life in all places. But at one, we have to, of course, put the capital in to make that happen. And that's why you see increased risk on these assets for this year just because of the capital, I think if you compare the cash costs, you see that the increase is not all that much.

Okay. And my final question is on the La Colorada skarn. And of course, this is a tremendous opportunity and base metal prices are cooperating here. We're looking forward to the PEA, but the release mentioned plans to develop some ventilation raises. Do you have something in mind with respect to developing this asset at this point?

Well, we already know that this is a world-class discovery. And you mentioned base metal prices. I mean, we're looking at -- remember, it's over 100 million tonnes of resource already still open, basically all around. And we are drilling and expanding that a bit further, but mostly focusing on infill drilling. This will be decades in production. So just looking at a 1-year metal price move doesn't make too much sense. I think we have to look at long term, this will be the longest life asset that we have, in my view, as I said, there will be decades to come. Don't forget that we have already about 10 or 12 years of reserves and resources for the veins, which all continue deeper down as well. And now we added this really long-life, very large skarn ore body. So we are very aggressively developing that ore body, and we start with some access, either from underground, from surface this year, we'll start with building some ventilation that helps us in the mine for the veins and for this skarn because they're very close together. And this is just a start, obviously, of putting capital in that great discovery. As you can imagine, to build over the next year in a substantial increase of production at La Colorada will require more capital at one point. But this year, I think we guided $55 million to $60 million.

Our next question comes from Lawson Winder of Bank of America Securities.

Thanks for doing this call. I think it's a great idea. I just had a few questions on the guidance. First with Huaron, it makes perfect sense, of course, that the underground mines would continue to experience some negative impact from COVID. But par on, on the other hand, has actually exceeded my expectations as opposed to the others, which were a little below. So I guess, my starting question would be, what are you guys expecting in terms of tonnes and grades at that asset for 2021?

Yes. Thanks, Lawson, Steve here. And actually, we're seeing -- there is an impact in our throughput. We do expect to be about an average of 8% less than its maximum capacity, let's call it, in mining and processing rates in our year. What we're seeing in that production is a little bit better grade than what we've seen in the past. And that's largely mine sequencing is what we're seeing there. But overall, I have to say and agree with you that Huaron is performing incredibly well these days. We're very happy with it. But I think what you're seeing and what you're describing is a mine sequencing making up for that difference in shortfalls in tonnages.

Just in general, a few comments on COVID here and the impact that we see. Of course, the impact is much bigger to our underground operations, which produce more silver than our open pit. We don't really see an impact on -- we don't see an impact really in our open pits. I think we are pretty much back where we want to be. Actually, in most places, if we look at the tonnage, it's increased compared to 2020 because of the increased stripping that I just mentioned because of the new reserves that we found. So it's, of course, easier to social distance in the open pit and in the underground, and we expect bigger impact from COVID on the underground operations. In general, this has been, of course, a difficult budget to make these estimates on COVID. And I gave some guidance there. What we assumed, you probably saw there, it's kind of similar impact to Q1 than to Q4 last year. And then back-end loaded decreased production towards the year with less and less impact on COVID, that's what we assume. That's our best guess really on that. That's like you and anyone else. We don't know yet how well or easy this vaccine is going to get distributed and how quick, especially in Latin America, we're going to go back to normal. So that's kind of a -- our take on where it's going to go. But as we learned with this pandemic, it normally goes into a different direction.

Yes. That's well appreciated by me, Michael. I might want to also ask on Dolores. Steve, you made the comment that if you go back and look at the technical report, that might give you a good idea as to sort of gold grades versus silver grades. And I think I was actually modeling something pretty close to the technical report, but I was still a little bit above reserve grade for silver. Whereas it looks to me like you guys might be mining a little bit below reserve grade in 2021. Is that correct?

Yes, that is correct. And part of that, Lawson, is a sequencing of stockpile ahead of the pulp agglomeration plant, you're right. But we are generally sequencing into lower silver than we had in the technical report for that specific year. But you got to remember that we're a little bit out of sequence with that technical report. But there is also a minor effect, I will say, from the stockpiling because we can't mine the deeper part of the open pit during the wet season. It basically floods the bottom of the pit. So we have to build enough high-grade stockpile to be able to run the pulp agglomeration plant through that period. And so there is some higher grade silver that gets tied up in stockpiles during the year of 2021. It does have a bit of an effect there.

Right. Okay. That makes sense. And of course, then, so that would explain partly why the gold grades seemed to be a little higher than I would have expected as well.

Yes.

Okay. Great. And then I'm just sort of backing out and stepping away from the guidance a bit. I just wanted to get your latest thoughts on Navidad and not really from the perspective of what's going on because I think it's become clear that at least the Governor in Chubut is support of the project. And really, it's just now a matter of getting the zonification law proposal through. And I'm not asking you to comment on that, but my question would be, if we assume that zonification law is passed, what are the next steps from there for Pan American?

Well, next step will be to present our environmental impact study and apply for permits. This is of course, just one step. If the law change will happen, like any mining project, this mining project would have to be permitted. And we would have to make a decision -- final decision on exactly the size of the project, et cetera, et cetera. So as you probably recall, I think we talked about that before. Navidad is a very scalable project. It has really 8-kind of shallow open pits next to each other, and you can develop 1 or 2 or 3 or how many as you want, at the same time, depending how much capital you want to put up front or how much you want to grow the asset through cash flow while you are in production. So that's really the decision that has to be made at one point. But at the moment, as you said, we have to see what happens in Chubut. But once -- if the law gets changed, it will just be a normal, I think, sequence what we would see in any mine development anywhere else in the world. I don't know, Steve, if you...

And what would sort of be the time line? Or how much work, I guess, would be involved before you guys could make a decision on what exactly the operation looked like, whether it be 3 or 8 pits or whatever it might be. And then before you finally submit the application for the permits?

Yes. We actually have already defined in our permit applications that we prepared, kind of a sequencing and incremental production ramp-up over about a 5- or 6-year period. So we can kind of go-forward with that permitting right away in our mind, within a couple of months, we have to do a few upgrades on the baseline data, get it up to snuff for the current period and get that submitted. But that permitting, we expect it could take quite a while, maybe up to a year. And during that year, we can kind of reconfigure that ramp up as we see best. Given the current conditions and the current kind of situations, if you will, down in Argentina.

Okay. That's great. And I mean, it sounds to me like, I mean you would be going ahead with the permitting process basically as soon as possible. I mean my question is, you guys are keen to move ahead with this?

Yes. We're keen to get the permitting going. Remember, there is an indigenous consultation period as well that has to take place. And we'll support the government. That will be a government-led permitting effort, and we'll support them with all the information and baseline data and project description information of what's going forward. And as I say, we've got a few weeks that we're going to want to get that up to snuff before we actually make the submission, but then focus on assisting the government though that process however long it may take.

Just to be clear, Navidad is one of the best undeveloped silver deposit in the world. There's no doubt in that. It's a great deposit. It's outcropping or very, very shallow. It's good grade. It's -- so yes, of course, we would move forward with the project, with the permitting, if we will be allowed to do so. But as I said, final decision on how the ramp-up will happen is still pending.

Our next question comes from Trevor Turnbull of Scotiabank.

I just wanted to ask about the range on costs for guidance. You've talked about how many of these operations you feel will be -- continue to be heavily impacted in the first quarter. And then that will gradually -- that impact will lessen as we go through the course of the year. And I was wondering if we kind of look at the cash cost or all-in sustaining cost guidance ranges, if it's safe to kind of assume and we kind of start the year at the high end of that range and then maybe finish up at the low end. I guess I kind of wanted to understand, I -- none of those quarters will, I guess, fall outside of the guidance range. And certainly, we would expect costs to be going down through the year. I'm just wondering if it's fair to kind of use that range as how we step it down?

Yes. Trevor, I don't think that's a bad approach. I mean we do know both in terms of cost, but also in terms of production, it is back-end loaded to production and less cost than the tail end. So I wouldn't be surprised if we'll see kind of the last periods fall even outside the range, below the range on cost. And maybe be a little bit heavier going in. But I think using that as an average, we don't do a quarterly kind of guidance. But clearly, this is back-end loaded on production and higher costs upfront.

And can you just remind me kind of how badly has throughput been impacted by some of the restrictions? Are you off greater than 10% or as much as 20% at some of the operations?

Yes. As Michael mentioned, interestingly, on the open pit mines, the 3 open pit mines we operate, we haven't seen much of an impact. We've been able to -- with the physical distancing, it's much easier in the open pits situation than it is underground. But also, we're able to find temporary employees because passing through our screening to come to work is a pretty arduous process, and we end up with pretty high absenteeism rates. And so we're able to make that up with temporary help in the open pit fairly easily and we've been successful in doing that. We're not able to do that underground with some of the specialized skills that we need underground. It's not so easy. So when I look at Q4 as an example, we're looking on the underground being about 20% short on personnel deployment, and that equates directly to about a 20% on average shortfall of, let's call it, maximum production rates from those underground mines. That's how severe it was impacted during Q4, and that's kind of the logic we take into Q1 of this year.

Okay. Great. And then the only other question I had, maybe for Michael or Rob, I'm not sure. We saw that there was this proposal in Mexico on essentially a 5% mining fee. It was going to be a mining fee-based on revenue. This was, I guess, an early proposal by a congressman that's been put forth. Have you heard anything about that? Or any sense if this has a reasonable chance of moving forward? Or it's just kind of a one-off by a congressman that isn't necessarily destined to go very far.

So I'll start and hand it over to Rob, but I think we know about as much as you have seen, obviously, in the public space. It has been made public, and it was a proposal in my view. That's where it stands. I don't know. Rob, you want to?

Yes, really not much more to add, Trevor. I mean, we just don't have a basis to rate the chances of that going through. It has actually been proposed in the past unsuccessfully. So we'll just have to take a wait-and-see approach.

Yes. It did seem like it came out of kind of a bit out of not necessarily nowhere, but didn't come out with a broad base of support and a lot of fanfare, just seemed like it just kind of got tabled and hopefully, it doesn't proceed too quickly.

[Operator Instructions] This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Steinmann for any closing remarks.

Thank you, everyone, for calling in. I think it will be an exciting year here for the whole world, I hope. I think vaccines will roll out somewhere, in some places, a bit slower, in some places faster, but I think there's light at the end of the tunnel, and I'm really looking forward to this year. I'm looking forward to all the great projects that we have and catalysts that we have here and that we are able to put in some more money at work. I'm very excited with the financial situation the company is in. I'm sure you've seen there, we have no debt and a substantial increase of our cash and short-term investments. So that looks very good for 2021. At the beginning, as I said, COVID will impact more. Less impact, hopefully, in the second half of the year. And looking forward to share with you the details on the Q4 reporting and year-end in just about 1 month, I guess. So thank you very much, and have a good day.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.