Pan American Silver Corp. Q3 FY2024 earnings call

• Financial performance: Q3 revenue reached a record $716.1 million (excluding approximately $30 million in finished goods and concentrated inventories sales), cash flow from operations before working capital changes was a record $235.8 million, free cash flow was a record $151.5 million. Cash and short-term investments at the end of Q3 were $469.9 million, an increase of $101.3 million from Q2 2024. Net debt decreased to $376.2 million. Net earnings in Q3 were $57.1 million or $0.16 per share, and adjusted earnings were $115.1 million or $0.32 adjusted earnings per share. A $0.10 per share dividend for Q3 was announced, with year-to-date dividend payments totaling $109.1 million, and $24.3 million of shares were repurchased and canceled under the share buyback plan.
• Operational highlights: La Colorada saw silver production up 59% and cash costs down 26% compared to Q2, with improved mine operations after new ventilation infrastructure was completed in mid-July, and throughput expected to reach 2,000 tons per day by year-end. Jacobina's gold operations had robust margins with production of 50,400 ounces at an all-in sustaining cost of $1,195 per ounce. Cerro Moro's gold production was reduced due to winter weather and higher dilution in Q2, but production is being caught up by increasing production from the Nati Zone and developing higher-grade areas. Minera Florida's mine portal development was delayed by heavy rainfall but is now underway. Mining at Dolores was completed in Q3, and lower-grade stockpiles are being processed. Regulatory approval for the sale of La Arena in Peru by the Government of Canada was received, expected to close in Q4 2024 with proceeds of $245 million strengthening the balance sheet, and La Arena II project has a 1.5% gold net smelter return royalty and a $50 million or contingent payment upon commercial production. Resource update showed La Colorada Skarn project indicated mineral resources increased, with potential partner interest. Escobal mine remains in care maintenance with no restart date.

In Q3 2024, Pan American Silver's silver segment produced 5.5 million ounces of silver. The gold segment produced 225,000 ounces of gold. The silver segment had cash costs of $15.88 per ounce and all-in sustaining costs of $20.90 per ounce (excluding net realizable value inventory adjustment). The gold segment had cash costs of $1,195 per ounce and all-in sustaining costs of $1,516 per ounce (excluding NRE adjustment). Silver production contributed significantly to revenue, with gold production also making a notable contribution.

For 2024, silver production is expected to be at the low end of the 21 million to 23 million ounce range. The sale of La Arena in Peru is expected to close in Q4 2024. Budgeting for 2025 is underway, considering factors like exchange rates and cost structure, with an intensive process of determining costs and impacts of various elements.

Cerro Moro was affected by winter weather and higher dilution in Q2, impacting gold production. Minera Florida faced delays in mine portal development due to heavy rainfall. Escobal mine has no restart date. Exchange rate fluctuations have a significant impact on the company's cost structure. Partnership discussions for the La Colorada Skarn project will take time to structure a partnership agreement.

Q: Staying with La Arena. 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?

A: 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.

Q: On 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?

A: 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.

Q: 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.

A: 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.

Q: 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?

A: 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.

Q: On La Colorada. 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?

A: 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.

Q: 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.

A: 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.

Q: 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.

A: 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.