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

Okay. We are going to kick off the Pan American Silver session. Pan American Silver is a world-leading silver producer, providing enhanced exposure to silver with a diversified portfolio of assets, large reserves and growing production. And today, we're joined by President and CEO, Michael Steinmann.

Thanks, and good afternoon, everyone. Always a pleasure to be here. Normally, it's the nice warm day out there. It's colder here than Vancouver looks like, but I'm sure the sun will come back. Great to give you an update on Pan American Silver. A lot has changed over the last year, of course. And let me just step in there and show you on the plan. Of course, I will use forward-looking statements in my presentation. And we can spend some time here on the map at the moment, 10 producing asset all across the Americas, that's really our -- there's 2 reasons for that. One of it is the main one. That's where the silver is. I know there are some silver assets, other places in the world. But the big silver projects are all in the Cordillera, and that's where we are. We have a few assets further to the east. Jacobina and Timmins are there and they're obviously producing no silver, they're producing only gold. So they came to us through different transactions. But with Mexico being the biggest silver producer, Peru right now, I think, #3 in the world. Of course, our activity is focused really on the silver side, active in 8 different countries. And the second reason why we are there is because that's the places we know. I think it's incredibly important that you're very aware where you're working. I'm working all my career in Latin America, I lived and worked there for about 37 years. And I think it's incredibly important when you look at places that have a bit of higher political risk than others that you really know where you are and where you're working. So very comfortable with all the jurisdictions I present here. And A few interesting changes, as Matt said, we acquired MAG Silver last year. I will call that just in time. Metal price started running literally after we closed the deal in September. And you can imagine that, that transaction, which was a great transaction actually at $22 to $24 silver. That's what we used for the analysis. I think when we agreed on the transaction, silver was somewhere in the low 30s. Of course, it's a great transaction at $85 silver. And you've seen there some numbers in our full year numbers in the circle. I will show a few on the quarter where you see the really big impact of Juanicipio on that slide. But it's not only what you see there, but it's really what's coming after, right? I mean we all look at growth and we already have it there, and we have it internal. And I'm sure Matt and I will have a bit of time to talk about La Colorada Skarn later on, which is one of our biggest development project that will add a lot of silver for a very long time to our production profile. La Colorada Skarn going to be one of this really, really hard to find 40-, 50-year mine life project and very, very hard to find, especially on the silver side. I won't go into details. It's quite small to see on Juanicipio, but you just see the green dot there, making very clear Juanicipio is at the moment, one of the best or the best silver producing asset globally on the planet, especially when you look at the cost. And it actually brought the cost down corporate-wide for us quite a bit, and I have a slide showing you that. Great year in 2025, provided all the data that we promised we will do and actually had even lower costs than what we guided, especially on the silver side. So a great combination. And I'm just thinking, I think that's a better slide to show you, and I love that slide. And you see here the last, what is it, 8 or 9 quarters coming back. And you see on your left side silver, on your right side gold, and the bars show the average metal price achieved for the quarter and the green bar shows the average cost, all-in sustaining cost, either for the silver segment or the gold segment. And you see this huge margin increase. Let's first talk a little bit about the gold. It's a bit easy to explain. You see quite flat costs over really a long time. Of course, they're increasing. Of course, we're seeing some cost inflation on our side, 5%, 6%, 7%, depending on what good or service you're looking at, but remarkably flat when you compare actually the strong increase in the gold price and that really big margin increase. And when you look at the silver side, it's even more so there. Of course, last quarter, with the big run on silver finally, we were all waiting for, and it was really timid for a long time. And that silver normally does, it pops and it goes and a really high -- well, not that high actually, $58 silver price was the average for the quarter. Right now, we're sitting at about $85, $87 and the way higher average for Q1, so buckle up for Q1 when the result comes out. But you see our costs actually declining on the silver side. And that's the last 2 quarters. The biggest decline, the biggest reason for that is really the addition of the Juanicipio mine to our portfolio. So great addition. When you have a combination of an increase of even this year, again, 14% production on the silver side at the highest silver prices and at lower prices than the years before. Very, very happy to see that, of course. And something that the market has been very critical in the past where we saw other runs and doing this for a long time, where we saw other runs in metal prices. And suddenly, the costs would just cross over and the whole run was over. And this time, it's very, very different, and I'm really happy to show this big margin expansion. I think with that, I'll just leave a few numbers there, and I'm sure it will be more interesting to go through some questions, but a very strong Q4. As you can imagine, we generated over $550 million (sic) [ $553 ] of free cash flow just in 1 quarter. And again, keep in mind that gold is about $900 to $1,000 higher and the silver price over $25, probably higher in average than what we saw in Q4. So we're looking forward to the Q1 numbers. And with that, I'm happy to answer your questions.

Okay. So also with your results early this year, you put out your guidance and production is a bit weighted to back half of the year last year. Can you just talk through some of the key drivers of the ramp-up in production over the course of 2026? And what are the biggest risks to achieving guidance this year?

Yes, right. And look, it happens every year. If you look, Q4 was by far our strongest quarter. It's really mostly related to the weather in South America with our open pits, depending on the rainy season. There's not much we can do. There is a seasonality to our production profile. We have more and more underground operation, of course, and the addition of Juanicipio with a big underground production as well. So it's not that prominent anymore. When you look -- but we, for that reason, actually put the quarterly guidance in our MD&A, just to avoid that people just divide the production by 4. You're going to -- you're going to outguide really your -- as an analyst, where you think we're going to be for the first 2 months, and then we will outperform on the second 2 months of the year always. So not much we can do, having less open pits in the future, more underground, which I think the mining industry will mostly go, but that will be 10, 20 years from now, and then the seasonality obviously won't be an issue anymore.

And how are you feeling on the cost front? We've seen a little bit of cost creep in the sector. How much of that is structural versus temporary? And in particular, I know in the Pan American profile, there's some more development tonnes in the mine plans. So how do you think about the cost progression?

Well, one part of the cost is what we all see, right? There is clear inflation out there. And that's -- with a big push really on inflation on food costs -- and you can imagine if that happens, we're going to see a big push on our wages. So that's really what we see flowing through right now. So we assume probably about an average of 8% increase or so in our wage costs. That will depend a little bit. If it's open pit, our labor costs are probably around 30%, 32%. In an underground mine, it's probably more like 40% to 42%, 43%. So the 8% will translate in anything like 3% to 4%, 4.5% cost increase across a certain operation. Definitely, that's what we're going to see. I think we can't avoid that. As I said, if you go out and do your grocery, you notice that -- the whole world noticed that, and it's very prominent in Latin America. On top of that, we see increase in diesel fuel costs. The more we are underground, this is all electrified most of it. So -- and we are working the [ Andes ], so most of it is hydro, so that's very low-cost power. But of course, we see translated into explosive cost increase from the diesel cost increase. So that's another kind of a driver for higher cost. But we also see lower costs like cyanide costs are lower, grinding media is lower for steel balls, et cetera. So it's kind of a bit of give and take. But just one thing of cost, and there's 2 big drivers that are out of our hands really on the cost. One is by-product metal prices. So silver does not occur on its own. So you find it together with gold or you find it with copper, lead and zinc. And we never show equivalent ounces. I can't sell an equivalent ounce of silver. So we use those by-products to reduce our cost as a by-product credit. And obviously, the higher those prices are, the lower our cost for the silver and vice versa. So it's kind of out of our control. And the last important one are exchange rates. A good one on the exchange rate, obviously, with the weaker dollar, we're going to have higher local currencies, which will push our cost up, but a weaker dollar means higher gold and silver prices, which is what we see right now. And I'd rather show a little bit higher cost and a big margin to the gold and silver price than the other way around.

And on the CapEx front, I mean, maybe we can take it from the angle of the organic growth opportunities in the company. You did increase the project CapEx spend this year. So maybe you can take us through just some of the near-term initiatives there.

Sure. And when you look at the total capital number, the number is actually remarkably similar to last year, just with the addition of Juanicipio. Of course, we had another great mine, and there's some sustaining capital there. But the other increase that we showed is all in project capital. The biggest one will be La Colorada Skarn. Amazing change really over the years on that project and maybe I go a little bit into detail on that. La Colorada is our biggest silver producer, makes about just a bit north of 6 million ounces a year, narrow structures, veins, 2 to 3 meters wide, high up. And we explored deeper down and in 2018, actually hit the first discovery hole, which hit about 370-meter wide ore body. It's a Skarn ore body mineralization below the main mine. We drilled probably about 450,000 meters since then, have a resource of about 450 million tonnes, depending on the metal price and obviously, depending on the mining method that can grow all the way to about 600 million or 700 million tonnes. So it's one of the biggest base metal and biggest zinc discovery on the planet right now with a very big silver credit to it. That's why it's so large. The initial idea was to mine that with a caving method and go very big, 50,000 tonnes, if you recall. And put the PA out there a number of years ago. It was a big capital number, close to $3 billion. And we always try to find a way to actually mine the high-grade part of it first and then go to the big cave. We couldn't find for a long time enough high grade, but then the last 2.5 years have been very successful in discovering new structures higher up, some wider replacement ore bodies as well with grades up to multi kilo of silver and now have -- really have a chance to integrate the current mine plan and the Skarn together for a Phase 1 high-grade version of the Skarn. So just keep in mind, this is going to be quite a while that we mine in Phase 1. I would guess anywhere between 15 to 20 years at least that will be Phase 1. It really depends a bit on the metal prices and how long you want to push out that big zinc ore body later on that no doubt has to be a block cave at one point. So Phase 1, great project, a lot of silver coming out. It's going to be somewhere in the 10,000 to 15,000 tonne production profile per day. So you can imagine it's going to increase substantially the silver production from La Colorada, but it's also going to be way less than the original $3 billion capital. So great start for that project. Stay tuned. We will put out an updated PA in Q2 this year. So it's only maybe a couple of months away to show you the results of that study, and that will be our biggest -- at the moment, biggest silver mine and biggest brownfield addition that we have. Again, great timing with the silver price, and we're looking forward to show the results and share them with everybody.

And that Phase 1, is it a selective mining approach? Or could it be more bulk mining?

It's going to be very productive, but it's going to be a long-haul open stoping at the moment. So it's nothing new for us. It's our normal kind of bread and butter mining method that we apply. And then it will go, as I said, no doubt in maybe 25, 20 years. I don't know when that will happen into a Phase 2, which will be a cave. When that change happen really depends as much on the silver price as it does on the zinc price at that point, right? If zinc will run earlier, maybe somebody wants to go to that block cave later. If happens what I will -- what I think will happen that silver will outperform substantially over the coming decades here, then I think you can just stay in a selective method for way, way longer. The resource really varies so much between the mining methods that you use, as I said, maybe from 400 million to 420 million tonnes to more than 700 million tonnes depending how selective you go. And -- so I think it will just -- it will be an economic decision at that point when we're going to go to big cave, but that decision is pushed out quite a few decades here.

It sounds like a really interesting project. So I look forward to learning more about it. But what are you telling people about the capital intensity of it?

Well, so it's deep down, right, to Skarn. Right now, we are mining all the way down to about 650 levels, so that's 650 meters below surface. The Skarn starts at about 750. So we're going to start an internal ramp to reach the top of the Skarn. We'll start in a couple of months, on work on that. The Skarn goes all the way down to about 2,100 levels. So that's a long, long way to the bottom. You can imagine if you want to build a block cave, if you have to develop everything down, that's why it will cost about $3 billion or more to do that. At the moment, we're going to access it with 2 shafts. They're going to be a ventilation shaft, big -- big shafts and an extraction shaft and this is an internal ramp to bring the equipment down there. I don't have the final number, but it will be somewhere around maybe half than what the original idea was. There's still quite a big number in the sense we need to build those shafts and the ramps you have to do that anyway for any of the mining method you apply. So that will be in place, but way, way less than the original $3 billion, yes.

The other big catalyst that people are always aware of on Pan American is Escobal. So maybe we could get an update just on what steps remain in the ILO 169 process.

Yes. It has been a very slow process. But when I look at -- right now, we are done with all the information exchange. We discussed all the details. We have all the reports and all the technical information. And it's really down now to look how we would do this. This is a consultation with an indigenous group. It's between the government and the indigenous group, not between us. We are obviously party to it. And for me, these high metal prices I think, hopefully, we'll unlock this because when you look at the potential return to both the indigenous population and the government through any kind of participation that we still need to identify at this kind of price is obviously staggering because you look at, at least 22 million ounce a year producer at very low cost. When it was in production last time in 2018 or '17, the cost was about $8 all-in cost. Of course, when you look forward to now, that would probably increase somewhere in, I don't know, maybe $13 -- $12, $13, very productive, big mine with a 45-meter wide main structure. So it would make a really big change, not only for our production profile, but a very big change for Guatemala and its population. And that really got kind of put on the map, I think, for a lot of people with the high metal prices that we're seeing right now. So I really hope that the possibility to have a participation in this project to bring it to a place where we could move forward with it.

So do you kind of take that meeting by meeting? Or what are the milestones that we could see on it?

Yes. No, this is really meeting by meeting. So I don't know when that will happen. And I always said I can't give really a guidance. This is the big upside for Pan American. Keep in mind, when we purchased Tower Resources, we really didn't pay for the asset. What happened was, it was always shut down, and I couldn't ask the PanAM shareholders to pay for a shutdown asset. We issued a CDR, a contingent value right for that asset. And if it comes back into production and is derisked, we will exchange those for PanAM shares. We would issue about 15 million PanAM shares. So it would be about less than a 4%, I call it dilution. It's not really a dilution of PanAM shares to increase our production by about 22 million ounces a year. So a great place to be where you don't have a financial downside, but you have a really gigantic production upside.

Absolutely. Maybe one on capital allocation. You finished 2025 with $1.3 billion in cash, over $1.3 billion. How are you balancing incremental asset investment needs versus shareholder returns?

Yes. Look, I mean, number one always -- and always has been for us, you have to spend the money on the exploration, right? You have to replace your reserves, very important to spend your money on your sustaining capital. Of course, you can see even with all the project capital, we're not even making a dent in the current cash flow generation. So there's no debt to repay. We have about $800 million in debt and long-term bonds. The biggest one, $500 million is only due in 2031. The interest rate is 2.6% on that. So no hurry to pay that back neither, which leaves us with the only bucket left, which is obviously return to shareholders. And we just increased our dividend for the third time in 3 quarters, consecutive quarters. Last week, we increased it by 29%. I think each quarter before we increased the dividend by about 15% or 16%. And very happy to make the returns to shareholders. I think -- just leaving it where it is, it would return about $350 million to shareholders in dividend. We have a share buyback program in place and buyback shares as well. As we heard before, there's obviously different tax realities in different places in the world for our shareholders. So some prefer share buybacks, some preferred dividend. I like to do both, and there's obviously enough cash available to do that. A very similar situation in the mining space that normally, we never had that luxury, but we would talk about quite relatively small dividends. Some people did some share buyback and then we saw the cycle go away again and nobody would do anything. And for me, it has been always very important to continue paying a dividend. We pay uninterrupted dividend since 2010. That's very important to us. I see it as part of our cost structure really. That has to be possible to deliver something to our shareholders in the downturn as well. It's easy to do it now, but in the downturn as well, very important. But for sure, the share buyback is an important tool as well. So you will see the combination of the two. And if metal prices stay where they are or keep climbing, we will accelerate that return as well.

And then just one on your asset portfolio. I think there might be some interesting opportunities. You've got a diverse group of assets. Do you think there's still optimization potential in the portfolio? How are you feeling about the current mix?

Definitely. I mean, look at Jacobina in Brazil. It's 100% gold producer, but it's a great mine to have. And -- right now, we have a mine plan until, I think, 2053. We still add every year 3 to 4 years of additional production. And we really look at now with different eyes of this asset. When we bought it, it was 8,000 tonne a day underground operation. I think we are close to 9,000 permanent. I think there's a way for us to go to 10,000 tonnes a day. But I think there's a way to go way higher than that as well. But that will need to -- we will need to make some investment there in the plant, make it more efficient, get a different extraction method. This is actually not an asset that goes deeper, but it's actually a very long asset. So you have another problem, right? So you don't have to take deep ramps, but you have to have a very efficient way to bring the ore to your mill. So we're looking at conveying methods. At the moment, everything is done by trucks. And then we look at a dry stack tail and a backfill option there. So a lot of engineering going on right now. So this will take a number of years to get there. But I think there are so many years of resources ahead for us at Jacobina that really want to see what's the maximum we can bring that asset at the moment. It's a low-cost 200-plus thousand ounce a year gold producer, and that's a great place to be, but I think we can do quite a bit better at Jacobina over time.

I also saw a mention on your conference call on Timmins satellites. Are there any other things in the portfolio that people may not be aware of that are interesting?

Timmins is an interesting one because it looked when we bought it, it was kind of made a little bit of money, but not a lot. Obviously, gold was at $1,100 when we bought it. You can imagine that now it's a very attractive asset. And over the years with the exploration, we found quite a few very interesting satellites that we -- one, we're going to develop now and the other ones we're going to drill out in detail, and I think that's going to add substantial value to Timmins. And really looking forward where we can bring that asset as well. It has been kind of there, chugging along and people didn't really pay a lot of attention to it, but I think there's way more upside to that, that anybody thinks right now.

And we are out of time. But thank you very much, Michael. That was great.

Thank you very much.