Pan American Silver Corp. (PAAS) Q3 2024 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Pan American Silver Third Quarter 2024 Unaudited Results Conference Call and Webcast. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Wednesday, November 6, 2024. I would now like to turn the conference over to Siren Fisekci, VP, Investor Relations. Please go ahead.

Thank you for joining us today for Pan American Silver's Q3 2024 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 Q3 2024 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, Siren, and thank you, everyone, for joining today's call. Pan American delivered strong financial performance in Q3. Revenue was a record $716.1 million, which, due to timing of sales, excluded the sale of finished goods and concentrated inventories with a value of approximately $30 million. Cash flow from operations before working capital changes was a record $235.8 million. Free cash flow also reached a record of $151.5 million. At the end of Q3, cash and short-term investments of $469.9 million had increased by $101.3 million compared to Q2 2024. Net debt decreased to $376.2 million. These record financial results further strengthened the balance sheet. At the end of Q3, we had $1.2 billion of available liquidity to invest in future growth and provide returns to shareholders. Yesterday, we announced a $0.10 per share dividend with respect to Q3. Year-to-date dividend payments totaled $109.1 million. In addition, we also repurchased and canceled shares for $24.3 million under our share buyback plan. Net earnings in Q3 were $57.1 million or $0.16 per share. This includes a one-time tax expense for a settlement with the Mexican tax authorities and an amendment of certain Argentine income tax filings, both of which relate to prior year's tax filings. Q3 tax expense was partially offset by reversal of the inflation-driven tax expense in Argentina that we recorded in the first half of 2024. Adjusted earnings were $115.1 million or $0.32 adjusted earnings per share. Yesterday, we announced that we have received regulatory approval from the Government of Canada for the sale of La Arena in Peru. We expect the transaction to close later in Q4. Proceeds from the sale of $245 million will further strengthen our balance sheet. The agreement also grants Pan American a life of mined gold net smelter return royalty of 1.5% for the La Arena II project and an additional contingent payment of $50 million when commercial production starts from the project. Turning to the operations, we produced 5.5 million ounces of silver in Q3, led by La Colorada, where silver production was up 59% and cash costs down 26% compared with Q2. Since completing the new ventilation infrastructure in mid-July, we have seen substantial improvements in mine operations. Throughput rates have been rising, averaging over 1,800 tons per day in October, and we expect throughput to reach 2,000 tons per day by year-end. Improving performance at f La Colorada will further increase silver production and lower cash costs. We produced 225,000 ounces of gold in Q3. Jacobina’s strong results led to gold operations delivering robust margins with production of 50,400 ounces of gold at an all-in sustaining cost of $1,195 per ounce at that mine. At Cerro Moro, gold production was reduced by delayed development due to severe winter weather in Q2 that reduced access to the site and portals and due to higher than planned dilution in the underground mines. Weather in Q2 also restricted access to the Northeast Zone [ph], which is 30 kilometers from the mill, resulting in delayed development, thereby reducing mining and processing of gold ore from this zone. We are now catching up on production at Cerro Moro by increasing production from the Nati Zone and increasing the development meters at the underground mines, focusing on higher-grade areas. At Minera Florida, surface access to some of the mine portals was affected by heavy rainfall, which delayed the development of higher-gold-grade zones, which is now underway. As planned, we completed mining at Dolores in Q3 and have been processing lower-grade stockpiles since July. Gold segment cash costs were within expectations in Q3. Cash costs for the gold segment in Q3 were $1,195 per ounce and all-in sustaining costs were $1,516 per ounce, excluding NRE adjustments. Silver segment cash costs in Q3 were $15.88 per ounce. All-in sustaining costs were $20.90 per ounce, excluding a net realizable value inventory adjustment that decreased costs by $1.27 per ounce. Costs for silver segment in Q3 were higher than expected, largely due to lower gold by-product credits from Cerro Moro, the catch-up of sustaining capital spending at La Colorada and Huaron, and high royalty costs at San Vicente from higher metal prices. We are on track to achieve our guidance for 2024. As indicated previously, we expect silver production to come in at the low end of the 21 million to 23 million ounce range. We are very pleased with the progress we have made in our capital projects. The new filter plant and filter tailing storage facility at Huaron is on schedule to be in full operation by the end of Q1 2025. At our Bell Creek mine in Timmins, commissioning of the new Pace plant project is underway. At Jacobina, we are investing in upgrading the plant facility infrastructure and in a study to maximize Jacobina's long-term economic and growth potential. We expect to release this optimization study in the first half of 2025. We are excited by the potential of our Jacobina asset. In our most recent mineral resource update as of June 30, 2024, which we released in early September, we more than replaced mine production with new mineral reserves for the eighth year in a row. In addition, exploration added 1.2 million ounces of new gold-inferred mineral resource. This is a long-life mine with excellent exploration potential, and we believe there is opportunity to capture more value from this high-margin operation. Our reserve and resource update also highlighted the potential for La Colorada Skarn project. The estimate for indicated mineral resource increased by 53% to 265 million tons, and grades improved by 10% for silver, 2% for zinc, and 4% for lead. An estimated 309 million ounces of silver are contained in the indicated mineral resource category, in addition to 59 million ounces in inferred mineral resource. There is significant interest in this large, long-life silver and zinc project from potential partners, and we continue to evaluate future agreements. At Escobal, the Guatemalan Ministry of Energy and Mines appointed Mr. Luis Pacheco as Vice Minister Sustainable Development in August. This position responsible for overseeing the ILO 169 consultation process for the mine had been vacant since April 29, 2024. During Q3 2024, Mr. Pacheco visited the mine along with other members of MEM and held working meetings regarding the consultation process. MEM communicated the company that the Xinka Parliament is in the process of conducting meetings in their communities, but no new time line has been published yet for plenary consultation meetings. The Escobal mine remains on care maintenance, and there is no date for a restart of the operation. That completes my brief recap of Q3. I'm pleased with the progress we have made year-to-date particularly at La Colorada and Jacobina and on our capital projects. We are focused on achieving our production targets and managing costs to deliver margin expansion. Current metal prices are improving profitability, and we are expecting a strong finish to the year from a back-end loaded production profile. I would now be happy to open the call for your questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Ovais Habib from Scotiabank. Please go ahead.

Thanks operator. Good morning, Mike and team. Really congrats on a good quarter and congrats on getting La Arena sale deal approved. A couple of questions from me. My first question, staying with La Arena. Michael, with the introduction of the offtake agreement, could we expect any sort of implications on the cash or contingent element of the consideration of the NSR royalty that's already been agreed upon? Any additional color you can provide on this offtake agreement?

No, Ovais. This is just in addition. So there is no changes under consideration at all, neither on the cash nor on the NSR, as we put it in the press release. And we assume to close the transaction later this quarter. And yeah, I think it's a great outcome. It's a good outcome for everyone. And look forward to it, it was a great mine. La Arena is a great producer on the oxides. Obviously, as we made very clear the sulfur part is not really what we are focusing on, on this business. But I'm looking for and I think it's a great outcome for Peru for the mine, for the community and everybody around.

Great. Thanks for clarifying that. And just moving on to 2024 guidance. Again, great to see that you have rigid gold guidance, again, with silver production on the lower end of guidance. Michael, on our numbers, it would seem like consolidated gold production is kind of shaping up to also be at the low end of guidance. Again, we might be a little bit conservative on our assumptions for Q4. But is that the right way to be thinking about this? Or maybe what assets could you expect to drive stronger Q4 finish?

Yeah. This is Steve. Great question. I mean we do have several of our assets, particularly Cerro Moro and actually, and this will play a role depending on closing La Arena. Those two assets, particularly have a strong finish to the year. So those are what we're looking for. We're cautiously optimistic that we'll come closer to midpoint maybe, assuming all those assets carry through towards the end of the year, and we get -- we capture all that.

Obviously, Ovais just to make that clear again what Steve mentioned. Obviously, it depends on closer, the closing of the La Arena deal happens as last quarter -- in the year, yeah, last month of La Arena due to the cycles of -- the lead cycles and the climate and weather that we have around at mine is always the strongest month of the year. So it really depends when closure happens, therefore -- for the other details, I don't have the update yet, so we have to wait for that.

Sounds good. Okay. Thanks for that as well. And just El Penon on silver grades did decrease going into there appear to be about a 12% decline in gold grades. Can we just -- can you comment on how should we be thinking about the gold and for grades in this asset going into Q4.

Yeah. Great question. We're seeing some really interesting exploration opportunities on the silver side at El Penon. Won't so much effect this year, but looking out into the future, we see opportunities to see some interesting silver production increases there going forward. The gold side, as we've mentioned during 2023, this deposit is pretty variable, pretty spotty in terms of the high-grade distribution of gold, and we're in and out of it quite a bit. So we do expect a little bit stronger gold grade going into Q4 than we saw in Q3, but it is uncertain, there are some variables, there in terms of when we're in and when we're out. Overall, the average, we feel good with the reserve average, and we are running a bit of low-grade stockpile right now to overall come in a little bit lower than the reserve grade on gold, but we're comfortable with that reserve grade.

Okay, thanks for that, Steve. And my last question, any sort of updates on how the partnership discussions are progressing at the La Colorada Skarn? Should we be expecting any sort of news by the end of the year?

Look, there are several very large companies that are going or have been going through the data room are already completed a large part of the technical review. There's a lot of interest in a project like that. As you can imagine, a very large, very long life asset. They are hard to find one of very, very few discoveries over the last 5 to 10 years in the world. And so I'm feeling very optimistic, very happy of the group of companies that are looking at this and are interested in this. As you can imagine, this will take a while to do structure a partnership agreement for it. So I something that we can have something ready to make public by the end of the year, but we'll definitely continue to work on this and continue. But as I said, I'm very happy to have this safety now.

Excellent. That’s it for me, guys. Thanks for taking my questions.

Thank you. Your next question comes from the line of Don DeMarco from National Bank. Please go ahead.

Thank you, operator. And good morning, Michael and team. Thanks for taking my question. Congratulations on a great quarter and really good to see the operations back on track with read-through for us on Q4. Now first question on La Colorada. Michael, so the ASIC is significantly lower quarter-over-quarter. What kind of ASIC range might we expect once you're up and running at 2k tonne per day?

Yeah. Don, this is Steve. We're still working on next year's budget, so I can't really forecast yet what the ASIC is going to look like in the 2025 when we're at this kind of 2,000 tonne a day running rate. We're evaluating our cost structure and kind of predicting where the escalation inflation may go next year exchange rates, things like that. So there's quite an intensive process of budgeting going on right now. And I can't really forecast out ahead. Just to make clear again here, exchange rates are a huge impact to our cost structure across the globe. And obviously, with the U.S. elections now behind us, there -- we need a little bit of time, obviously, to see how that falls out, and where exchange rates will fall up for next year.

Okay. Thank you. Yeah, we see the peso weakening recently, so keep an eye on that. Now a couple of questions on Timmins. Can you quantify the potential favorable cost impact from the new [Indiscernible] plant? And then secondly, I see it's been averaging ASIC around $2,000 an ounce this year. Previously, this might flag as a concern, but have higher gold prices reduced concerned and extended the life of this asset.

Yeah. Great question. The simple answer is yes. Higher prices are extending the life of that asset, absolutely. Cut off grade as we can lower that cutoff grade, it definitely has an effect on our life there. I will say the $2,000 race that we're seeing there, a large part of that is as we've extended the life of that asset, we've extended it quite a bit further than where we thought we would be already when we bought Tahoe back in 2018. And one of the things that we're seeing increased cost is on tailings disposal. We're having to build quite a bit larger tailings facilities than we anticipated, and that's driving a significant amount of sustaining capital each year. We're looking at some opportunities there that kind of fold in and couple there's a bit of a double benefit with the pace plant that maybe there are some opportunities we can go to a little bit more of a filtered approach or other approaches on the tailings. The tailings quite useful at both Timmins West and Bell Creek now for the pace backfills. So that allows us more and more. So it does there's an offset with the cost of pace and the cost of cement that we add to the pace, which is an added cost, we get a benefit for less cost on the tailings facility. But the other big benefit, as you mentioned, as we get to mine more tonnes of ore resources for every meter of development. So net-net, we don't see a significant cost decrease, but bringing in the pace we see we see a similar cost with much more reserve recovery than what we saw before.

Okay. That's helpful. And then as a final question, Michael, do you have any comments on the recent M&A in the solar space, of course, referring to Gatos and SilverCrest. You're the dominant player in the sector. Are you comfortable with your level of silver production as a percent of revenue, or are you looking at M&A from a different perspective now that these acquisitions have occurred.

Well, look, we are a completely different sized company, obviously. And when you look at our M&A strategy, we are always looking around, of course. We are always interested in buying high-quality long-life assets that fit into our cost structure. And that those are really some absolutely important parameters that an asset we look at or go after has to fulfill. We're looking at accretive transactions. And I think we have shown that very clearly the Tahoe very clearly with the amount of transaction lately, what we are looking for. And those that's really in our focus. So it's -- of course, it's nice to find silver assets. So as you know, we already have most of the very large silver assets in our portfolio, either in our resource or in our resources there still has -- obviously, some work needs to be done to bring them either back or bring them into production, but we hold the biggest reserve and biggest resource of silver. And as I always say, the current picture of silver and gold production is just a picture in time, which will obviously change. And if you have to discount with a very, very large silver production as well, you can very clearly see where this is going. So we are not -- obviously not interested in looking at smaller assets. As you noticed over the last -- since the transaction with Yamana we divested a lot of the smaller assets, simplified -- and improved the quality and simplified our portfolio. I think you see the result this quarter with very, very strong financials. And that was really the path we wanted to do. So of course, looking -- continue looking around for opportunity. I think we're in an incredibly strong position of an incredibly strong balance sheet, especially after we closed the La Arena transaction. And we are ready. We did the integration very successfully. And I think we are we'll be ready for the next transaction. But as I said, it has to be very, very disciplined in that. So it has to be accretive. It has to be upsized and cost structure that fits into our company.

Okay. Thank you very much for that. That’s all for me. Good luck with Q4.

Thank you.

Thank you. [Operator Instructions] No further questions at this time. I will now hand the call back to Mr. Michael Steinmann for any closing remarks.

Yeah. Thanks, everyone, for calling in, and very busy day for everybody for the whole world, obviously, looking at political events in the U.S. But Q3 has been a great quarter for us, very, very strong cash flow, free cash flow, operational cash flow, production, cost control just across the board, very strong quarter, and I'm really looking forward to Q4, which is historically always our strongest quarter as well. This is a great time to be in precious metals. It's a great time to be in silver and gold. And we are the dominant player in this space, really looking forward to next quarter and looking forward to share in January our annual production looking backwards and looking forward with our forecast for 2025 with our budget numbers. Until then, have a great time. Thank you, everyone.

Thank you. And that concludes our conference today. Thank you for participating. You may all disconnect.