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

Yes. Perfect. Thanks, Cos, and welcome, everybody. Pleasure to be here and give you a quick intro here. I think most of you obviously know the company. A lot of impressive changes to the company over the last few years. Obviously, first on the M&A side, which I would call very timely M&A activity over the last few years, which obviously allow us now to take advantage of these high metal prices. And you see there our assets that we have on projects. That's the Q2 numbers there, $1.3 billion of revenue from those assets. They will go for a long time, many of those. We have a lot of big builds ahead of us, very exciting projects. I'm sure Cosmos will talk about that. We just updated our reserve, 511 million ounces of silver reserve, the biggest reserve in the world, and it will continue to grow. It does not include yet the incredible discoveries that we made at La Colorada. And I'll sure have time to talk a bit later about that skarn development on La Colorada, which actually now will become our biggest silver mine, even being ahead of Juanicipio, the project, 44% project we purchased from MAG Silver last year. And La Colorada, once it's dusted and done, will produce over 19 million ounces of silver in a long, long period. The first phase of that expansion or new project of the skarn will run for 37 years, and that's only about half of the current resources that we discovered at that deposit. So really an amazing discovery. I thought I'd just show a few slides here, and I'm sure everybody is interested in cost. And I show you here the cost, how they evolved over the years. So you see quarter-by-quarter there, the gray bars are our silver mines. Remember, we always show silver and gold separate, we don't use equivalencies. I can't sell an equivalent ounce of silver. There's no market for that. So these are pure silver ounces and pure gold ounces. The price we achieved, the average price for a given quarter. And in blue, you see the all-in sustaining costs and they're net of byproduct credit. So you will obviously see that on the silver side, there's a lot of up and downs, and that's really driven by those byproducts. Silver does not occur on its own. It always comes with byproducts, any kind of gold and base metals, you can imagine that we have there. And of course, like Q1, very, very low cost because of the very high metal prices that we all enjoy in Q1. So that will normalize again. I think our cost will be somewhere in the $17 to $18 range, I guess, for the year. When you look at the gold side, it's a clear picture because gold has normally less byproducts. And you see there a slight increase in cost over the last 2 years and really driven by the worldwide inflation we see right now. Of course, big driver is the oil price right now. And you always should keep in mind that although Pan American is an underground operator, we only have really one large open pit. And there's a lot is electrified and oil is only 5% of our diesel fuel is only 5% of our production cost, higher oil price is obviously rolling through everything. I mean higher oil price will impact every and any cost we see. So the total increase is way more than just an increase on that 5%. And we all see that when we go out and do our shopping or do our businesses, and that's what you see. But overall, still very, very well controlled cost increases here. This is not looking like 2010, if you remember that big cost inflation we had in the mining space. This is well measured obviously, because there's a lot of goods and services available now in the mining space, and that's the reason why we all enjoy these huge margins. What do we do with these margins? Well, we set an incredible strong balance sheet, about $1.8 billion in cash. We have about $3.5 billion of liquidity available to us. And we still generate obviously a lot of free cash flow, and we decided this year to return 35% to 40% of that free cash flow when we announced that was equivalent to about $1 billion to shareholders that will still leave us well sufficient money to build the big expansion at La Colorada and expansions at other projects. So you see that historically, we paid dividends since 2010, but share buybacks have been few and far apart there. And now there's actually enough cash available to really make a difference to our share count and we decided to fix our dividend at $305 million as a fixed number per year. And when we buy back shares, your dividend will increase every quarter a little bit because there's less shares outstanding and then put about the other around $700 million into share buybacks, and we're well on track with that program to go through this for the year. So great return to shareholders from all those big cash flows. And then there's a lot of upside, and I'm sure, Cosmos, we can talk about a few of them. Obviously, La Colorada being the biggest one [indiscernible], our biggest cash flow right now with very exciting long-term projects. Timmins, also very, very exciting what we see there, what's coming. And of course, one is Juanicipio we purchased at 44% last year, which is doing exceedingly well. And I think with that overview, I come over, [ Carsten ], we can go to some Q&A.

Great. Thanks, Michael. You touched on a number of very good points here. But let's take a step back and talk about the first half. As you mentioned, the first half, strong production performance. But if I look at your portfolio, which operations were you pleased with in terms of first half performance and which assets can we expect improvement into Q3 and Q4?

Yes. I mean, look, I'm pretty much on track. So I'm pleased with the whole progress for the first 6 months. It's just our production is not evenly distributed through the yea,r, right? Our production is always back-end loaded. The biggest reason is really difference between dry seasons and rainy seasons with some of our -- Shahuindo mine in Peru. So that's Q4 is always our biggest production quarter that will be no difference this year. So when you look at that, that obviously has impacts to cost, but cost will be lower in Q4 because we produce more ounces, et cetera. So when you look quarter-on-quarter, there's quite a bit of difference. And actually, we tried to help you as an analyst and how the shareholders and so kind of ideas how these quarters look like so that people don't just divide them because they are so different during the year. But look, I'm really happy how the first 6 months evolved here. Cost side looked really good. Silver side right on track. A bit harder sometimes on the gold side, we've got a bit harder hit on some of the mines with the weather. And starting in Chile, I mean, you all saw the impact of some of the copper producers, obviously, same to us, that El Nino event will now move up further north and we'll get closer to Shahuindo in Peru normally hits Peru right in November or December. So we'll see what the impact will be for that, but so far so good.

Great. That's great to hear. And then Michael, ahead of the Mining Forum Americas early in September, you actually released your updated reserves and mineral resources as of June 30, 2026. According to substantial silver and gold reserves in terms of inventory, 511 million ounces of silver, 6.3 million ounces of gold. Can you remind us some of the key highlights such as the discovery of the 4 new Veins in La Colorada.

Yes, sure. And look, more than replacement again, of all the silver production. I mean, this is now going on for nearly 20 years. It's not every year exactly a full replacement, but most, I think when you look at the 20 year, we replaced probably around 85% of what we produce. And our replacement cost is $1.11. If you divide like what it costs us to find those ounces. Of course, there's no way that I can purchase an ounce of silver for $1.11 never has been probably in the past either. Brownfield exploration success is the best value driver you can have. And obviously, the biggest one and the most exciting one is La Colorada. I joined Pan American in 2004, La Colorada was a very small mine and a very small reserve. And when you go fast forward, still a big reserve on the structures on the Veins that we're mining right now. But La Colorada is producing right now 6 million ounces, but the big discovery of the skarn, which is right below the Veins. At the moment, we have about 450 million tonnes. By the way, that's not in the reserve. It's in the resource at the moment. We just showed an updated PEA, increasing the production at La Colorada from currently about 2,200 tonnes to 15,000 tonnes a day and La Colorada will be producing somewhere between 19 million and 20 million ounces of silver for a very long time. I mentioned that before, the first phase of that expansion will run for 37 years. There's a lot of more upside. We keep finding more Veins. We keep finding more skarn ore bodies. Of course, this is going to go way beyond my lifetime. And I'm really excited about that discovery. And again, we didn't have to buy this discovery. We have far enough cash to build this with cash on hand. So definitely, when you replace your reserve or make discoveries like that the value generation is unmatched.

And that segues well into my next question on La Colorada Skarn and you forgot to mention that it is going to have a mine life of at least 30 years. So it's not going to be beyond your lifetime, Mike, you'll be fine. But based on the PEA, maybe could you maybe touch on some of the priorities for the remainder of the year? Maybe in terms of developing the 588 level access to the skarn or anything else that you want to...

And obviously, for sure, beyond my lifetime as CEO, if you look at -- with the development pipeline and everything, we're looking about 41 years here, for Phase 1. I'm sure somebody will over time build this even bigger, make another -- I have no doubt there is so much optionality on that. But that's what we locked in, in the PEA. It's about a $2 billion capital spend over the next 4.5 to 5 years, easy to do with our cash generation. We probably -- if everything stays the same, we not even need to tap into our cash holding on the balance sheet to do this. We actually -- the Board approved the first part of that, which is about a 12-kilometer underground development starting at the bottom of our current mine, it's a big ramp, 6 by 6.5-meter ramp for that big production. It will go all the way down to the bottom of the -- or close to the bottom of the skarn and it go over to the East where it will connect with 2 big shafts that we're going to approve later this year and then start building next year, there about 8-meter diameter conventional sunk, fully concrete lined shaft. One is for ventilation and one will be for production. Those are the longest lead items for this development. That's why we wanted to start right away. The new tailings impoundment and the bigger plant can be built later on, obviously, be ready for production somewhere in 2031. So incredible project, depending on what metal price, of course, you use, but IRR somewhere between 17% and 25%. As we all know, this long lead and very long-dated projects are kind of tough to get a big IRR. So having that kind of number and return on a project like that is pretty amazing. NPV somewhere between $3 billion and $5.5 billion or $6 billion on this project here. And as I said, capital around $2 billion, so well in our means to build, but definitely the biggest project that we ever built. So really exciting project. And as I said, really excited to see. We'll release more exploration results later this year, but we have about 18 drill rigs still going at La Colorada and new discoveries just keep coming in.