Pan American Silver Corp. (PAAS) Q2 2025 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Pan American Silver Second Quarter 2025 Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Siren Fisekci, Vice President, Investor Relations. Please go ahead, Ms. Fisekci.

Thank you for joining us today for Pan American Silver's conference call and webcast to discuss our second quarter 2025 results. This call includes forward-looking statements and information and references to non-GAAP measures. Please see the cautionary statements in our MD&A, news release and presentation slides for the Q2 2025 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.

Thank you, and good morning, everyone. I'm glad you could join us to discuss Pan American's Q2 2025 results. Today, I'm pleased to report another quarter of record-setting results. Top line revenue of $811.9 million reflects solid operating performance and the benefit of supportive price environment. Net earnings were a record of $189.6 million or $0.52 per share, largely driven by record mine operating earnings of $273.3 million. Adjusted earnings were $155.4 million or $0.43 per share. Cash flow from operations before noncash working capital changes was also a record of $287.9 million after $68.3 million in cash taxes paid. After noncash working capital changes, operating cash flow totaled $293.4 million. Free cash flow was a record of $233 million, increasing our cash balance to a record high of $1.1 billion at the end of Q2. Our capital allocation framework remain unchanged, maintain our strong balance sheet, sustain and grow the business and return capital to shareholders. Given our strong balance sheet, we are focused on growing the business. And in Q2, we significantly advanced that objective with our proposed acquisition of MAG Silver. The top-tier Juanicipio silver asset is expected to provide an immediate uplift to Pan American silver production and free cash flow generation while meaningfully reducing our consolidated Silver segment costs. It also represents further opportunities to grow our silver production through the exploration potential of the asset. MAG shareholders approved the transaction in July, and we are now awaiting the clearance under Mexican antitrust laws. The transaction is expected to close in the second half of 2025. In addition to the acquisition, we invested $73.7 million in sustaining and project capital in Q2. Project capital was invested in the La Colorada mine and the Skarn project and the Huaron, Timmins, and Jacobina mines. At Jacobina, in addition to advancing mine and plant optimization studies, we have invested in improvements to plant availability and equipment reliability. In terms of the La Colorada Skarn project, our discussions around potential partnerships for the development are progressing well, and we expect to share more on our plans for the Skarn in the coming months. We have also delivered on the third priority of our capital allocation approach, returning capital to shareholders. Yesterday, we announced a 20% dividend increase from $0.10 to $0.12 per common share with respect to Q2 2025. We also repurchased just under 0.5 million common shares at an average price of $24.22 per share for a total consideration of $11.1 million in Q2. During the first half of this year, we have returned approximately $103.5 million in dividends and share buybacks to our shareholders. Total available liquidity at the end of Q2 was roughly $1.9 billion, affording us ample flexibility to pursue our organic and inorganic growth opportunities even after accounting for the $500 million of cash that will be paid as part of the consideration for MAG Silver. Turning now to operations. We produced 5.1 million ounces of silver in Q2 within our guidance range for the quarter. Our Silver segment achieved all-in sustaining costs of $19.69 per ounce, excluding NRV adjustments, which was at the low end of our guidance range. La Colorada once again led the performance in the Silver segment following the improvement to ventilation from the new infrastructure installed in mid-2024. Throughput reached an average of 2,130 tonnes per day in Q2 relative to the 2,000 tonnes per day that we were targeting. As a result, silver production at La Colorada was up nearly 50% and cash costs per silver ounce down by nearly 25% compared with the first half of 2024. We are maintaining our guidance for silver production and costs in 2025. Gold production of 178,700 ounces in Q2 was slightly below our guidance range, while gold segment all-in sustaining costs, excluding NRV adjustments of $1,611 were within guidance. The gold segment was impacted by lower throughput and grades at Timmins, primarily as a result of additional backfill and hanging wall dilution. At El Peñon, production was impacted by mine and development sequencing into lower gold and higher silver grades. These impacts were partially offset by stronger performance at Shahuindo from higher gold grades and positive mine grade reconciliations and at Dolores with the leach cycle delivering more production than originally planned in Q2. Gold production in the first half of 2025 was in line with our guidance, and we are maintaining our outlook for gold production and all-in sustaining costs. However, we now expect gold production to be more heavily weighted to the fourth quarter of 2025 than originally indicated in our 2025 quarterly operating outlook. At Escobal, the Xinka Parliament issued a statement in May 2025 with respect to the ILO 169 consultation process. The Guatemalan Ministry of Energy and Mines or MEM has now delivered a response to that statement describing the proposals to address the concerns the Xinka Parliament had raised. These documents can be reviewed on the MEM website. The MEM has indicated that they will continue to hold working meetings and maintain dialogue with the Xinka Parliament as they work towards completing the ILO 169 consultation, although a date for completing the consultation has not been specified. As we consider the global backdrop for precious metals, we see very supportive environment for gold and silver prices. Global photovoltaic installations and electronic applications continue to drive industrial demand growth for silver, while mine supply is largely flat. The silver market is in its fifth consecutive year of structural deficit, and this deficit is expected to persist in the coming years, depleting above-ground stocks further, a very supportive backdrop for silver prices. We view the MAG Silver acquisition as a high-quality addition to our portfolio to capitalize on this outlook for silver. In summary, Pan American Silver has delivered record financial results in the first half of 2025. Our operating teams are focused on meeting our production targets and maintaining strong control over costs. We are on track to achieve our guidance for 2025. We look forward to continuing to deliver robust free cash flow and returning capital to our shareholders. I will now be happy to take your questions together with other members of our management team.

[Operator Instructions] Our first question is from Ovais Habib with Scotiabank.

Michael and Pan American team, congrats on Q2 beat. A couple of questions from me. In Q2, on Cerro Moro, El Peñon, Timmins, Minera Florida, essentially all experienced either negative grade reconciliation or geotechnical issues. First part of the question is, have these issues been resolved going into Q3? I believe you said Q3 is expected to be your weakest quarter with Q4 being your strongest quarter in terms of the gold production. And part two of the question is, do you think Jacobina can make up for the loss of ounces if it comes to that? Essentially, what I'm trying to ask, Michael, is how confident are you with meeting the gold production guidance?

Ovais, I have Steve here next to me, who will answer your question.

Good morning, Ovais. For the most part, those issues we faced in terms of grade reconciliations at most of those operations and the geotechnical issues, we are addressing aggressively. We do anticipate some of it to linger into Q3. That's why we're kind of pushing the gold guidance heavier into Q4. That's kind of where we raised that note. But we're feeling pretty confident. Generally, what we see when we have a quarter of low reconciliations, we do generally see it come back. Our drill data on average, we're comfortable with the reserve information. It's just the swings of highs and lows quarter-to-quarter, and it kind of hit those operations you mentioned during Q2. Geotechnically, we're having some good success. in Timmins at addressing particularly some of the production drill hole squeezing issues we've had. We're drilling larger diameter holes. We're using an additive that's been pretty unique and it's been pretty helpful in maintaining those holes open. And we've added quite a bit of ground support, even dynamic support along some of the key developments in the high-stress areas. So we're feeling pretty good that we're overcoming those issues there. So yes, so that's why we kind of favored pushing some of the gold into Q4, but we remain incredibly confident that we'll come in within guidance on gold production and certainly on silver and cost.

And I mean, most of these operations have kind of achieved at least about 40% to 50% of production year-to-date. So in terms of kind of getting over that hump, it does seem like you guys should be able to hit those numbers. So thanks for that color. Just wanted to see if I can move on to noncore asset sales. Michael, your team has done an excellent job in kind of selling noncore asset sales over the past couple of years. Should we expect more to come going into the second half or even the next 12 months?

Yes. Definitely, we are working on some of the deals. They are mostly smaller things. So don't expect like big, big sales like we've seen over the last 18 months. But there's quite a few smaller things that we are working on, and we'll release those, obviously, when they're done. I would expect that a few will close here from now to the end of the year.

I mean, Michael, maybe in terms of a little bit detail, I mean, are those operating assets? Or are they more exploration assets that you're looking to sell?

No, they're not operating assets. There's a lot of like mid to later stage exploration plays that we are finding new homes for all kind of different jurisdictions and also different constellations, you should expect maybe some straight out sales, some participation in other companies, et cetera, et cetera.

The next question is from Fahad Tariq with Jefferies.

On Jacobina, in the quarter, there was a comment in the MD&A about mine sequencing to lower grade gold grade ores. Can you just talk about expectations for the second half of the year on grades?

Yes, Fahad, this is Steve. We're trying to move towards mining at Jacobina at reserve grades, which are actually a little bit lower than what we saw even in Q2. With that said, we have access to some higher grades during the rest of the year that we will be tapping into. So we won't -- that push towards lower grade will come as part of the optimization study we're working on where we'll start to push more tonnes at lower grades and kind of maintain or expand the gold production to a limited degree. But again, we remain confident that we'll deliver to our guidance at Jacobina according to what we showed there.

Okay. And then on Escobal and the consultation process, can you just give a bit more color about the types of meetings that are happening, I guess, over the coming weeks and months. Is it Pan American being involved in those meetings directly with the Xinka Parliament? Or is it the government meeting with them in Pan American providing information and where needed?

Just keep in mind that the consultation is between the government led by the Ministry of Mines and the Xinka, and it's not led by Pan American. So that's -- you have to keep that in mind. But I have Sean here, who is leading our efforts in Guatemala, can give us more details on this.

Yes. What we're seeing now is a series of working meetings that are being planned. So we expect to see the government meet with Xinka Parliament over the coming weeks. They did have a meeting on the 29th of July. So those meetings are ongoing, and we will be called in to participate in the future. We expect that to happen. And we have ongoing meetings with the MEM and the government at the same time in parallel when they have questions and issues that they want to resolve with us. But I would expect that we would have a few meetings this quarter. And so we'll update that in the Q3 update.

The next question is from Lawson Winder with Bank of America Securities.

Thank you for today's update. Nice quarter. I wanted to ask about Skarn, something you said in your prepared remarks, Michael, and then follow up on that. Did you say that you expected an update in the -- in a month like in terms of like a singular month? Or do you mean months? And then -- because that would be a lot sooner than the prior guide for the year-end. And then what are the current permutations of monetization that look most likely at this point?

Yes. No, first, that was probably mesh with English. The several months that was plural, not singular month. I will be very soon, as you mentioned. Look, very, very interesting developments on the Skarn. I don't know if you recall, we started showing maybe late last year, first kind of intercepts on very high-grade veins above the Skarn further to the east. There were exceptional intercepts. We published a few in the press release there. And we kept drilling there very actively over the last like 8 months, 10 months. And we are looking at actually tapping into that as well and look at synergies between the Skarn and those high-grade intercepts. And with cryptic here, that's one of the release we will put out when we have all the data together, which will happen. You should expect that coming in the next few months to discuss those results, and then that will be included in our updated resource and reserve calculation as well. So that's probably the -- beside the infill drill and the Skarn, obviously, we know by now a lot about the Skarn, but that's definitely the most interesting and additional information that will come into the project when you look at La Colorada entirely and how we move forward with the Skarn project and with La Colorada, adding those very, very high-grade veins to the east. So just stay tuned. Sorry, I don't have all the details that I can share right now with you, but it's definitely part of the several updates that we're going to see during the rest of the year on La Colorada and on the Skarn.

Okay. And then just to be clear, one of those updates could be some sort of monetization or partnership transaction?

Look, these discussions are ongoing. And of course, those additional veins and synergies will play into the partnership negotiations as well. So that will come after. So I can't promise yet when that will come out. But as I said, we're working hard on that. And whenever it's ready, we will share. But the first few steps here will be the reserve update, resource update on it and then the inclusion of those high-grade veins and then the next step will be to include that in our negotiations with potential partners.

Okay. Fantastic. And then just since you brought it up the reserve and resource update, could you give us an idea of the timing on when that update would come? And then thinking about gold and silver price assumptions in that update, I mean, would you say you'd have a fairly high level of confidence in replacing reserves this year? And to the extent that the change in the gold and silver price assumptions might be quite material, could we be looking at some impact on the current mine plans?

Yes. Look, I mean, if you recall, when you look at our reserve resource update, we never use just a one price fits all. I'm a strong believer that you have -- depending on the mine life, if you look at a shorter mine life, and obviously, we're sitting on a in a very high metal price environment, in order to optimize your return, you obviously should use higher prices in those assets in very long-life assets like Jacobina, for example, you would use lower prices. We have that done all the time. When you look at our reserve resource tables, there is actually a whole page with different prices that we use for different assets. So that will remain, and we will do -- use a similar approach this year. There will be obviously a few assets where we use slightly higher prices, but I think we are still very, very conservative. I think on the price side to really maintain and take advantage of big margins that we can create with this metal price environment and the result you see obviously in our strong cash flow that we delivered last quarter. So that kind of the same theme continues. But of course, we have probably what $1,500 higher gold price than last year. So you have to adapt a little bit not to leave really high-paying material behind. So it's an interesting year definitely to use and define metal prices for your reserve and resources. As you know, we are one of the few companies to do it midyear because we want to have a new reserve and resource when you go into the budgeting season. But you should expect a press release coming out over the next few weeks, definitely before, I would say, mid-September.

The next question is from Cosmos Chiu with CIBC.

Maybe going back to the various geotechnical mine sequencing and negative grade reconciliation issues at the various properties, El Peñon, Cerro Moro, Timmins and Florida. I seem to notice that a number of these operations came from the Yamana portfolio. I would say these are normal issues underground, but would it also be related to the fact that some of these operations were operated by a previous operator, and that's why some of these issues came up.

Yes. Cosmos, Steve here. No, I would have to say, no, there's no specific bias towards those Yamana assets. in terms of this reconciliation issue. It is a factor of narrow vein mining. I'd say we favor narrow vein mining certainly at El Peñon and Minera Florida. When you look at that Cerro Moro as well, those are pretty variable, highly variable narrow veins, and it's a characteristic of those type of deposits that we face. They are challenges that we've dealt with some of the Pan American silver operations. So again, we're confident this is a quarterly blip, and it comes and goes. We're not concerned about our overall reserve estimates. It's just the timing and spatial locations of these estimates that we have to hone in. We're looking -- as we go into budgeting season for 2026, we are looking at potentially enhancing some of the drill density in some of these narrow vein zones. to try to reduce that variability going into next year. But I don't see any bias towards just Yamana operations there.

We have -- just to add to this, we have seen, obviously, this kind of result, as Steve said, which is often a result of high -- very high- grade narrow vein mining. You have more variability, obviously, than in a larger massive [indiscernible], for example, or porphyry. So you have more variability, and we see the same kind of results sometimes at Huaron or San Vicente or other assets, a matter of fact, obviously, more narrow structures at La Colorada in the past. So these are normally short-term issues, and we deal with them. So nothing specific to being ex Yamana assets. We own the assets now for quite a while. I'm sure you have noticed that over quarter and quarter-on-quarter, all these assets have been our strongest cash flows in our portfolio.

I do know this. Maybe as a follow-up in terms of these issues here, are they related to like new areas that you're entering at these different assets, maybe new structures that you might not have previously been aware of that could maybe potentially lead to a more sustained impact on mining? Or am I thinking too much into it?

Yes. I think a little bit too much. I mean you're on a bit. It's more towards the extremity of the known -- of the veins that we have been mining. As we reach the extremities of those reserves and go deeper on those, we generally are seeing a bit more variability, a little less density of information which also drives a bit more variability in our results.

Okay. Maybe my next question will be going back to what I'm actually good at numbers. On that sustaining CapEx here, you've budgeted $270 million to $280 million per year. I seem to see that so far, you've done about $122 million. Certainly not hitting 50% for some of the assets like Jacobina, Shahuindo. So can you maybe talk about that CapEx budget for the year and where you're going to be planning on spending more of that CapEx in Q3 and Q4?

Cosmos, Scott Campbell here. Yes, we had a few delays starting off our capital -- our major capital projects at Shahuindo this year. Some are weather-related, permitting related and the awards process took a little bit longer to the tender process, but full speed ahead with those. And so we do intend to -- our CapEx will be in line with our forecast.

Great. And maybe one last question here on the dividend. It's great to see that it's increased. It's great to see the very robust free cash flow in Q2. I want to confirm, based on the mechanics of the dividend, how you calculate the variable component, once you use a part of your cash on the balance sheet to pay for MAG Silver, there's potential for that dividend to decrease again. Is that correct?

Well, there's obviously a dividend policy, as you mentioned, but just keep in mind that we generate a lot of free cash flow, so does MAG and there will be cash obviously coming to us when we close the transaction. So I think it's too early to say, but I don't think so that we're going to see a big impact on I look forward here.

Okay. And then on the MAG transaction, as you mentioned, it's been approved by MAG Silver's shareholders, and you're still waiting for the antitrust sort of -- not the permit, but the approval. Is that like the last hurdle? And how should we view it?

Yes, that's absolutely the last hurdle. I would expect that once we get that okay from Mexico, which is between all the transactions we did in the past that was required and was always the last piece to the transaction. And I would expect to probably close a few days later after we receive that approval.

Okay. And nothing more complicated to this transaction compared to what you've done in the past, correct, Michael?

No Everything is completely moving normal here. You saw a very clear vote of confidence by the MAG shareholders. So really looking forward to add that operation or piece of operation to our portfolio, which has very strong production there as well, very strong silver at very low cost. That's obviously the reason why we are interested in very interested in that acquisition, looking at one of the highest quality, highest grade, lowest cost silver mine on the planet with, in my view, probably one of the biggest exploration upside as well.

And then maybe a bit premature, but on the MAG Silver transaction, once it closes, have you determined how you're going to account for it, given that it is a 44% minority interest, is it going to be some kind of equity pickup, equity accounting sort of one line pickup in your income statement? Have you thought about how you're going to account for it?

Cosmos, this is Ignacio here. So yes, we're still doing the analysis, but -- nice talking to you. A good point of reference would be the way MAG accounted for the Juanicipio JV interest, which was, as you mentioned, an equity pickup. In addition to that, I can also point you to the MAG info circ, there's pro forma financial statements there, and then there is already some assumptions on what the accounting is going to look like. So yes, everything is pointing towards an equity pickup.

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

Thanks, operator, and thank you, everyone, for calling in here on a beautiful summer day, at least here in Vancouver. Another great quarter for Pan American, beat across the board on our strong financial results. We're looking forward to the rest of this year, looking forward to add Juanicipio piece to our portfolio as well later this year. And as I mentioned, we will release the reserve and resource update as of midyear, and that should be quite an active second half or last four months, five months of the year with news flows on various topics for the company. Looking forward to that and looking forward to update you in November on our Q3 results. Until then, enjoy the rest of the summer. Thank you, anyone.

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