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

Good morning, afternoon, evening, and welcome to the Pan American Silver 2023 Production and Cost Guidance Conference Call. [Operator Instructions] I would now like to turn the conference over to Siren Fisekci, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Thank you, operator, and welcome, everyone, to Pan American Silver's call to discuss our guidance for 2023. 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 certain expenditures in 2023. 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 Michael Steinmann, Pan American's President and CEO. Following his remarks, we'll open the call to questions and answers with the rest of the executive team.

Thank you, and thanks, everyone, for joining us today. We are pleased to provide our 2023 guidance for the new Pan American following the completion of our acquisition of Yamana Gold on March 31. The acquisition brings into our portfolio of 4 producing mines, the Jacobina mining complex in Brazil, the El Peñon and Minera Horda mines in Chile and the Cerro Moro mine in Argentina. It also adds several new exploration and development projects. It is important to note that the production and cost guidance we provided today for the acquired mines reflects only the 9-month period, we are owning these assets in 2023, specifically from March 31 to December 31, 2023. Cadence for the original Pan American mines is for the full 12 months of 2023. Guidance for the original Pan American mines also reflects the completion of mining activities at Manantial Espejo at the end of 2022, as previously disclosed. It is also important to note that Pan American reports production and unit operating costs using different accounting and reporting practices than Yamana had -- we report mine performance under either a silver segment or gold segment, with the sales from the byproduct metals as a credit to the unit costs per ounce to produce the primary metal of either solar or gold. TeMana reported production and unit costs on a gold equivalent ounce basis or [ Kio ]. This means that production and costs provided in our guidance are not directly comparable to guidance or outlooks previously provided by Yamana. Other accounting adjustments to be aware of, are that we expand more underground mine development costs that were previously capitalized by Yamana, and we allocate a greater amount to operating expenses or sustaining capital than to grow type project capital. This results in lower project capital and higher sustaining capital, thereby increasing all-in sustaining costs. Please see the news release we issued today for more detailed descriptions of these accounting and reporting differences. Moving on to our consolidated guidance for 2023. We're expecting total silver production of 21 million to 23 million ounces and gold production of 870,000 to 970,000 ounces. Silver segment cash costs are expected to be between $10 to $12 and all-in sustaining costs between $14 and $16 per ounce. Gold segment cash costs are expected to be between $975,000 and $1,100 and all-in sustaining costs between 1,275 and $1,425 per ounce. The mine-by-mine breakdown is provided in the news release issued earlier today and in the slides that accompany this call, where you will also find the forecast for consolidated base metal production. We intend to provide guidance for generative exploration, care and maintenance activities and general and administrative costs with our Q1 earnings release on May 10. We are expecting sustaining capital expenditures to total $305 million to $320 million and project capital of $75 million to $85 million in 2023. Following an expansion project previously initiated at Jacobina by Yamana, we will be investing an estimated $26 million to $29 million in the last 9 months of 2023 to stabilize the process plant performance and sustain a gold recovery of about 96%. And Jacobina is an asset that has tremendous exploration and production potential. We are signing a 60,000 meter exploration program for 2023 to begin to harvest part of that potential. For the other operations acquired to the Oman acquisitions, all capital expenditures are being classified as sustaining capital for the remainder of 2023. At La Colorada, we are investing $16 million to $18 million of project capital, largely directed at completing the 5.5-meter diameter concrete line ventilation shaft by the end of this year. The shaft will be equipped with ventilation fans connected with the adjacent deep underground East Candelaria workings and commissioned to significantly improve ventilation rates around mid-2024. This new ventilation infrastructure will benefit both the long-term development of the scar project as well as the current vein system operation. Until this new system is operating, we are restricting mining rates in the higher-grade [indiscernible] portion of the Candelaria deposit at the La Colorada due to additional ground control issues impacting ventilation rates, which is reflected in our production and cost estimates for 2023. At La Colorada, we are also investing project capital in the continued exploration and infill drilling for the skarn project and advancing the engineering work. Our aim is to release preliminary economic assessment during the second half of this year. remaining project capital will be invested at Huaron for a tailings pressure filtration plant and the dry stack tailings storage facility to replace the conventional tailings storage facility currently in operation. And [indiscernible] for the construction of a paste fill plant at Bell Creek to improve backfill quality and availability for better ground support systems and to increase resource recovery and throughput. The 2023 guidance issued today reflects the accretive nature of Mana transaction with a significant increase in production and lower costs. We see tremendous opportunity in the expanded portfolio of assets, and I'm very pleased with the integration of our teams. Within our first month of ownership, we are on track to realize the $40 million to $60 million in annual synergies and are confident that we will achieve further synergies by managing the combined portfolio efficiently. We continue to have a strong financial position, with cash and short-term investments as of March 31, 2023, of approximately $513 million and $425 million available under our $750 million revolving sustainability-linked credit facility. Pan American is in a strong position with a diversified portfolio of high-quality assets in the Americas, a solid balance sheet and the financial capacity to pursue growth opportunities. On April 18, we became listed on the New York Stock Exchange, providing investors with exposure to highly liquid, well-capitalized company that is a leading producer of silver and gold in the Americas. With that, I would like to open the call for questions.

Our first question comes from Cosmos Chiu with CIBC.

Maybe my first question is on La Colorada. I see that in your 2023 guidance, it is -- production is flat year-over-year. You kind of answered my question in the MD&A in your opening remarks as well, Michael. But I seem to remember that at one point in time, I think there was a rehab of another event raise that could have given you access to some of the higher grade earlier. And that's why I think my 2023 expectations was slightly higher than what came out today for La Colorada. Has that changed? I know now we're going to wait until this other concrete line event way to be completed, I guess, in 2024 before you can ask just a higher date. Has that changed? Could you give me an update?

Yes. Cosmos, Steve here. We have run into -- so we were trying to develop an internal raise over the last year, we called it raise bore 3 from the 345 level to the 528. If you remember, the shaft that we had to replace that brought us the air we needed was the [indiscernible], which brought us from the surface to the 345. We had a raise bore, we called Raise bore 1 from there to the 528. So we're routing the second one. We've been working on that through the year. It was part of a long-term plan. And with that second raise, it would give us good access to that Candelaria deep zone. Unfortunately, during the first quarter, that raise have failed, and it's actually impacted by Raise bore 1 to some degree as well. So there was a bit of a change there, and it's required us to readjust our long-term plan. it does put more emphasis on getting this concrete line shaft down when that shops in, it will substantially enhance the refrigerated flow rates in that area where the high grade is. So that's why we've decided to readjust the long-term plan, stay out of the area to a large degree during -- and mine at the lower reserve grades until that shaft is completed.

Of course. Understood. Maybe switching gears a little bit again on the 2023 guidance. On a more positive note, for sure. Cerro Moro was higher than what I had expected for both gold and silver. Actually, I've never covered your [indiscernible]. So still better than what I have modeled. So maybe 2 questions. Number one, on the former Yamana assets. What was the process in terms of how you got comfortable with the numbers that you put out today in terms of guidance for those Yamana assets? Was it through site tours? Was it through other stuff as well? And then the second part of my question, anything specific that you can add in terms of Cerro Moro...

Sure. Cosmos, it's Michael, and I will start here with the question and then pass it on to Steve. Definitely, this is not just a few side tours. We're obviously fully integrating these assets into our portfolio with the were strong technical teams on site that Yamana brought to the new Pan American and of course, our technical team that is constantly traveling and being in contact and working together with the on-site teams to get comfortable around this asset. So we started that quite early. You can imagine that did not just happen in the last 3 weeks or 3 now weeks that we own the assets. So a lot of work going in there to wrap our hands around -- still a lot of work to do. I think the biggest change for us was really on the accounting side, and we explained that large, I think, in the call and in the press release where we show as Pan American silver mines and gold mines in our portfolio and do not use equivalences like Yamana, Dita, that's the biggest change. And the other big change really, we as much less capital to approach our capital. That has to be really future growth for us to end up in the project. And that change means that a bit more of capital in general would move into our sustaining or our sustaining capital side and will be reflected in our ACE cost. So those are the biggest changes. And I'll maybe pass it on to Steve here to give a bit more flavor on the site visits and how we work and integrate these assets.

Yes. Thank you, Michael. And thanks for the question, Cosmos. We spent a significant amount of time, as Michael said, integrating these teams between Pan American and the Yamana Group. And I'll have to -- just right out of the blocks, I'll say, we are incredibly impressed with the teams that are on these sites of the amounts assets that were in place, and we've taken over the company. And that team at Cerro Moro, we have spent some time with them with all our technical groups, our geologists, our mine engineers, planners, HR people throughout the organization. And it's a solid team. They're really performing well. They've kind of gone through a long hard commissioning period on that mine. And I think they've really got that mine dialed in well. We're pretty optimistic with what we see there. On top of that, they have had some pretty decent exploration success over the last year. And one of the deposits is [indiscernible] I believe it is. It's been seeing some really good high grades, and that's what's driving that higher production this year. But I think across all 4 assets, we're really excited with this team. These teams they're solid, they're competent. They're engaged, they're enthusiastic and the -- the integration is going incredibly well.

Perfect. That's great. And maybe one last question, switching gears a little bit. On top of your guidance press release today, you also put out another press release, the consent solicitation for the 2027 and the 2031 senior notes that came from Yamana -- my understanding is that the ratings agencies have now rated these bonds, debt investment grade under Pan American Silver as well. So a very good news, congratulations. But on that, can you walk me through the significance of this consent earlier today? Is it more like a normal sort of procedure? I try to reading the press release, to be honest, I got a [indiscernible].

Cosmos is Ignacio here. also it's actually quite straightforward. At the time of close, Pan American did -- there was a supplemental indenture included in the bonds, whereby Pan American guarantees the bonds. So really, the purpose of the supplemental indenture is just to align the reporting requirements with that guarantee. So currently, the reporting requirement is for Yamana Gold Inc. financial statements and annual reports to be filed with the bondholders. So the purpose of this consent solicitation is to transfer that to Pan American. And as I said, it just aligns with the guarantee. So going forward, if this consensus is accepted by the bondholders, the bondholder will be receiving an American Silver quarterly and annual financial statements. That's the main purpose.

Our next question comes from Craig Hutchison with TD Securities.

My question in regards to the gold segment. In the past, there's been some variability among some of the operations like Shahuindo, La Arena, et cetera. Given that Q1 is essentially behind you guys, can you just give some rough guidance in terms of how you see the kind of the year shaping up, whether we should think about production from these assets as being front-end weighted or back-end weighted?

Yes. Craig, Steve Busby here. Relative to the 3 gold segment assets that we had prior to the acquisition, Shahuindo is running pretty well steady state right now. We're pretty pleased with that. We see that production being flat through the year. La Arena, as usual, is back-end loaded. We always seen every year after year. We go through a pre-stripping phase during the first half of the year into Q3, and then Q4 is really the harvesting time where we're down in the bottom of the pit, and we get a lot of high-grade ore at that time. So it is definitely back-end loaded. Dolores is reasonably flat through the year as well. We do intend, I think we referenced it in the press release that we will come out with kind of a quarterly guidance as part of our MD&A in a couple of weeks when we come out with the earnings release. So that will help give you some more visibility to that.

Okay. And just with respect to the synergies that you guys quoted in the press release, I think it's $40 million to $60 million. Outside of sort of corporate synergies, can you talk to some of the synergies you're already seeing in terms of the savings at the operations level.

Sure, Craig, yes, one of the big one, of course, is on the head office costs that we made changes, that's for sure a big one. Another substantial one we see on the exploration side. We really focus on our brownfield exploration like we always say a Pan American replacing reserves, finding new reserves close or at least within trucking distance to our existing operations. So that's always our main focus, and it's less so focused on very generative greenfield projects. So there's another piece of the synergies. And lastly, and that's not, I think, not really included yet in the synergies because we cannot really quantify it right now, and we need a bit more than a month of ownership is we are active in the region and active in several of the countries, we already -- we purchased more assets here. So there will be synergies on the office there synergies and probably on purchasing and other services that we can harvest over time. But that's a bit harder to put your thing around to, and that's at the moment, not included in the EUR 40 million to EUR 60 million.

Our next question comes from Don DeMarco with National Bank Financial.

Michael and Steve, just continuing with the question from a previous call around La Colorada. So the ventilation upgrades will progress this year and into mid next year. And you mentioned that during this time, the reserves -- the grades will be below reserve grade. My question is, will the upgrades also impact throughput?

Steve here. No, we're able to go elsewhere. We're able to re-sequence the mine. So throughput will remain as planned. It's just going to be at a lower grade than the reserve...

Okay. Because remember, last year, we saw the throughput sort of ramping up. So post completion of these upgrades in mid-2024, would we expect them to see the mine running above reserve? And can you just remind us what that sort of throughput level or target is?

Yes. Relative to throughput, we're kind of targeting around 2,000, 2,100 tonnes per day is kind of our smooth run rate at La Colorada. -- reserve-wise, once this shaft is in place, we will -- at that time, we'll have a new reserve as well. So we'll see what the grades look like. But no, we expect to run at that point -- at that reserve grade going forward, obviously offset the low rate that we're pushing now. So we'll see what those new grades are at the time, but the expectation is we'd be at reserve grade from that point forward.

Okay. Now looking at Huaron, one of your lowest cost silver operations in the guidance this year, production remains buying close to 4 million ounces silver. Now I see that there's going to be some spending on CapEx for dry stack tailings. It seems like a worthwhile investment. How many extra years capacity does this represent?

Well, it's a very important project to us because we're basically replacing the conventional tailings disposal with the dry stack. The tailings -- the conventional sales will reach capacity in 2025. So this really will replace it. The facility we're designing for the first phase of that dry stack gives us about 6 years of capacity. -- but it's obviously quite expandable from there. So certainly, our current designs take us through the current reserves, but we believe there's plenty of capacity in the dry stack scenario to continue that beyond because we do expect this mine to continue beyond the reserve on.

Okay. And final question. So the company's previously messaged intend to divest some of the assets to focus on a more concentrated portfolio. Is this still the intention? And can you provide an update on what some of the priority targets might be?

Well, look, Don, it's always our job to optimize our portfolio. It's a very large portfolio of producing assets, developing assets. And as I mentioned, a lot of exploration assets as well. With spending, as you can imagine, a lot of time right now with our teams evaluate all this all these opportunities, future opportunities as many of them and then make a decision later on how we go ahead with the optimization. It's a little bit early after [indiscernible] as I said, 3.5 weeks of ownership.

Okay. Fair enough. That's all for me. Congratulations, look forward to the financials in a few weeks.

Thank you, Don.

Our next question comes from Eric Winmill with Deutsche Bank.

It's Scotiabank, in fact. But yes, great to see the guidance out today. I guess just sort of following on Dan's question. I know it's still early days in terms of integration. But if you look out a couple of years, the noncore assets, do you have a sort of preference as to where the cash would be allocated? Is it more organic opportunities or capital returns, debt, things like that?

Look, nothing has really changed how we see our capital allocation priorities. You probably saw at the end of the press release, our balance sheet is very strong. We are sitting right now about $513 million cash and short-term investment. We have about $325 million on our line of credit. Our first order of business is always to sit on low debt. I mean I'm fine with the bonds, they're very long term, very low interest debt, but the line of credit will be, for sure, be our focus to pay that back. And as you know, we're paying dividends since 2010. Nothing has changed on that. We'll continue to pay dividend. We declared the dividend for Q1 here a bit earlier. As you recall a few weeks ago, that was really to kind of put in sync for Yamana and Pan America now all Pan-American shareholders put them in sync on the dividend payment because there was about a 2-month difference there. And then we'll continue just with our normal dividend schedule from Augustana we'll probably tweak a little bit our policy to take care of that of the new bonds that we have of those long-term debt. But our focus will always be on returning some capital to our shareholders. And lastly, of course, the biggest return we can provide for our shareholders our high-quality growth project things like La Colorada, [indiscernible], et cetera, there will be enough cash flow available to take care of all these buckets, but that's still our focus like it was before.

Yes. Fantastic. I appreciate the extra color there. And maybe just lastly, too, on Escobal, any updates there. We're still looking for some sort of a market update probably later this year? Is that the plan?

Well, look, I mean the meetings are ongoing. I think we gave an update last time. There will be a more fulsome update for sure, with our quarterly reporting and MD&A as well. As you know, the ILO 169 is continuing the process. I think the next meeting, if I'm right here, somewhere in May, mid of May. And that all continues kind of -- I think, as planned, as we said, it's run by the Ministry of Mines. And I can't give you a timing when this is finalized.

Our next question comes from Adrian Day with Global Strategy Management.

I just had one question, actually. My other one has already been answered. I don't know if you've had -- I didn't really follow you, [indiscernible]. So I don't know how much greenfields exploration they have. And if it's focused in particular countries. And I don't know if you've had the opportunity to sort of review their exploration projects and how you would say they stack up against the existing Pan American greenfield projects?

Adrian, look, we are in the cost of that work right now. So give us a few more months, please, to review of them. There are many projects. There's a huge amount of factors of land across Latin America that our exploration team is looking after. And for sure, there are some interesting projects there. But as you know, we also have some interesting ones in our portfolio. So we need a little bit more time to make that decision. But during the year, we will, for sure, keep the market informed what our decisions are regarding those assets.

This concludes the question-and-answer session. I would like to turn the conference back over to Michael Stein for any closing remarks.

Yes. Thank you everyone for calling in today and looking forward to give you an update on our Q1 results, which will be in about 2 weeks. Speak then. Have a good weekend. Thanks, everyone...

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.