Pan American Silver Corp (PAAS) 2021 Q4 法說會逐字稿

This is the conference operator. Welcome to the Pan American Silver Full Year and Fourth Quarter 2021 Results Conference Call and Webcast. (Operator Instructions) I would now like to turn the conference over to Siren Fisekci, VP, Investor Relations. Please go ahead, Ms. Fisekci.

Thank you for joining us today for Pan American Silver's fourth quarter and full year 2021 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 Q4 and full year 2021 audited 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, Siren. I will provide a brief recap of our 2021 results and then move on to our guidance for 2022. Revenue in 2021 totaled $1.6 billion. In addition to relatively strong metal prices, production recovered from 2020 levels, when all, but our Timmins operations in Canada faced temporary government-mandated suspensions related to COVID-19. The market improvement in production late in Q4 2021, led to an increase in finished product inventories by approximately $22 million, which were not booked in revenue for the quarter. But we did not face any government-mandated suspensions in 2021, the COVID pandemic continued to impact production, costs and progress on projects, primarily from adherence throughout the year to our intensive COVID protocols, which included testing, contact tracing, isolation, physical distancing, and sanitary protocols.

We produced 19.2 million ounces of silver in 2021, in line with our November 2021 revised guidance and 1.9 million ounces or 11% greater than the previous year. The increase was largely due to temporary government-mandated suspensions incurred at our Latin American operations, that had used 2020 production, partially offset by reduced silver grades at Dolores, as expected due to mine sequencing.

At La Colorada, we improved ventilation to the high-grade deep Eastern area of the mine in mid-2021, which allowed access to higher grade ores during the second half of the year, and increase in production to 1.6 million ounces in Q4. We produced 579,300 ounces of gold in 2021, in line with our November 2021 revised guidance and 57,000 ounces or 11% greater than our 2020 production, when we faced the temporary mine suspensions.

2021 gold production reflects substantially higher gold grades at Dolores, as expected from mine sequencing. That increase was partially offset by encountering a greater-than-expected quantity of clay-rich ore in such a window, which increased blending requirement and slow leaching efficiencies. As well, geotechnical challenges at Bell Creek reduced throughput. At the end of 2021, we had built approximately 46,900 ounces of gold heap inventory.

Silver segment all-in sustaining costs were $13.57 per ounce in Q4 and $15.62 for the full year of 2021, slightly below our November 2021 revised guidance. Q4 2021 all-in sustaining costs were 18% lower than cost for the first 9 months of the year, reflecting improvements at all operations. Gold segment all-in sustaining costs were $1,461 per ounce in Q4 and $1,214 for the full year, in line with our original 2021 guidance. Net realizable value inventory adjustments at Dolores increased gold segment all-in sustaining costs by $21.7 million in Q4 and $8.7 million during the year.

In 2021, operations generated $392.1 million of cash flow, including about $71 million use of cash for working capital changes. We paid $72 million of dividend, reflecting a 55% increase in aggregated dividends over 2020, and ended the year with cash and cash equivalent of $283.6 million and short-term investments of $51.7 million. Net earnings were $98.6 million in 2021 or $0.46 per share, inclusive of a non-cash market-to-market loss on short-term investments of $59.7 million, primarily for our interest in New Pacific and an income tax expense of $146.4 million. The high effective tax rate primarily reflects a significant number of expenses in the year, with no corresponding tax benefit, largely the Escobal care and maintenance expenditures and the investment losses related to New Pacific.

Adjusted earnings in 2021 were $161.8 million or $0.77 per share. Yesterday, we also issued our production and cost guidance for 2022. The guidance reflects the challenges we experienced during January and February 2022, with the rapid spread of the omicron COVID variant, in and around our operations, which is thankfully quickly subsiding now. The impact of the pandemic on operations has been difficult to predict over the last 2 years, and there have been knock-on effects, largely on cost inflation, high absenteeism, supply constraints and shipping disruptions. We are very pleased to report that over 90% of our workforce is now fully vaccinated.

We estimate silver production of 19 million to 20.5 million ounces in 2022, including the impact of placing the Morococha operation in care and maintenance. We reached an agreement with Aluminum Corporation of China or Chinalco, to decommission our processing plant early this year. As previously disclosed, we have an agreement which Chinalco, that the core Morococha facilities, including the processing plant, will need to be moved to enable the expansion of their copper mine.

We have been in discussions with Chinalco for several years on the timing of that move, and have been working on initial engineering plans for a new plant, as disclosed in our private capital budgets. However, currently we do not believe the economics support the construction of a new processing plant. We are initiating an evaluation of several alternative opportunities from Morococha, and working to ensure a fair transition for the workforce. Morococha contributed just under $2.2 million ounces of silver production in 2021, the least from all our silver segment operations.

Our outlook for 2022 silver production assumed the 1.7 million to 1.9 million ounces or 33% to 37% increase in silver production at La Colorada, which will be offset by moving Morococha to care and maintenance. The increase at La Colorada is due to the ventilation improvements and further work to the ventilation system is planned over the next few years, as we continue to mine deeper into the Eastern extension of the mine. This includes commissioning of a refrigeration plant around the middle of this year, and completing the concrete-lined ventilation shaft in 2023, that will be equipped with large, more efficient ventilation fans in 2024.

In addition, we will be making investments to accelerate mine development rates and improving ground control systems that will support progressing the transition of the Candelaria area of the mine, to a more mechanized and efficient mining method, using long-hole stoping techniques over the next couple of years.

Our outlook for 2022 gold production is between 550,000 ounces to 605,000 ounces, similar to our 2021 production. We are anticipating another strong year of gold production at Dolores. We also expect improved leaching efficiencies, leading to a higher ratio of ounces produced to stacked at both Dolores and Shahuindo, given more favorable pad construction sequencing and improved ore blending.

Relative to 2021, we forecast lower production at La Arena Manantial Espejo largely from lower grades due to mine sequencing. At Timmins, we are expecting a modest increase in production from mining and wider zone at the Bell Creek deposits. Ground controls has become a bottleneck to production at Bell Creek, over the last couple of years. So, we will begin construction of the paste fill plant in 2022 to improve backfill quality, and availability to more effective ground support systems. We believe this will increase mineral resource recovery rates in the future.

Despite the inflationary pressures we have been experiencing recently and the move of Morococha to care and maintenance, our all-in sustaining costs for the silver segment in 2022 are expected to be relatively flat compared to last year. Our forecast range is $14.50 and $16.00 per ounce, reflecting the benefit of increased production at La Colorada and Huaron.

Gold segment all-in sustaining costs in 2022 are forecast to range between $1,240 and $1,365 per ounce, which is an increase relative to last year. In addition, to cost inflation, gold segment costs are impacted by sharper increase in community and environmental spending and higher waste mining rates at Shahuindo, as well as additional ground support and backfill costs at Timmins.

We expect sustaining capital expenditures to be consistent with 2021, in the range of $200 million to $210 million. We plan to invest $68 million to $81 million in project capital at La Colorada, for further drilling of the Skarn deposit, engineering work to determine optimal project designed for developing the Skarn, and site infrastructure upgrades that we expect will benefit both the long-term development of the Skarn and the current vein system operation. These upgrades include, starting development of the ramp in mid-2022, which would eventually access the Skarn. Beginning construction of the concrete lined ventilation shaft, and completing the commissioning of the refrigeration plant by the middle of the year. 2022 project capital also includes exploration for the Wetmore and Whitney projects at Timmins, and the construction of the paste backfill plant at Bell Creek that I mentioned earlier.

Total capital spending including sustaining and project capital is estimated at $280 million to $305 million for 2022. We expect to spend between $42 million to $46 million on exploration in 2022, roughly a third is for Brownfield exploration, aimed at reserve replacement and is included in the sustaining capital guidance. $22 million to $24 million included in project capital guidance for drilling at the La Colorada Skarn and adjacent veins, and for exploration at the Wetmore and Whitney projects at Timmins. The remaining roughly $8.4 million is directed at Greenfield exploration.

Our priorities for 2022 are to continue managing the COVID pandemic to protect the health and safety of our workforce and communities, to improve mine efficiencies, as we return to full workforce deployment, and to advance the La Colorada Skarn and Timmins projects. Our aim is to provide an update for the La Colorada Skarn with our annual mineral reserve and resource release midyear, depending on progress of the drilling programs.

The pre-consultation meetings for the court-mandated ILO 169 consultation process for the Escobal mine in Guatemala, have resumed, following delays due to COVID-19. 3 pre-consultation meetings were held in 2021, and additional meetings were held in January and February 2022. The Guatemalan Ministry of Energy and Mines is leading consultation process with the Xinca people, and Pan American is a participant. Pan American looks forward to continuing its participation in a transparent, respectful and inclusive process during 2022.

We are in a strong financial position with operations generating healthy levels of free cash flow and net cash position of $238 million. Based on that strong position, we have introduced a new dividend policy. The base dividend remains at $0.10 per common share paid quarterly. In the future that base dividend will be supplemented with a variable quarterly dividend linked to the net cash on the balance sheet for the previous quarter. If net cash is between 100 and $200 million, we would pay an additional $0.01 per common share, between 200 and $300 million, an additional $0.02 per common share, between 300 and $400 million, an additional $0.06, and then net cash is over $400 million, an additional $0.08 per share.

In line with our new dividend policy, yesterday we announced a 20% increase to the dividend amounting to $0.12 per share to be paid in March 2022. This new dividend policy provides us with the liquidity, to fund our growth projects, while allowing our shareholders to participate in the upside of precious metal prices through higher cash returns, in addition to capital appreciation.

And with that, I'd like to open the call for questions.

(Operator Instructions) The first question is from Cosmos Chiu from CIBC.

Maybe my first question is on La Colorada. Michael, as you mentioned in your remarks in 2022, you're looking for a fairly sizable increase year-over-year in terms of silver production. Could maybe talk a bit more about the throughput, and also the grade that you are expecting in 2022 for that increase? In the past, you had talked about potentially getting to 2,000 tonnes per day in terms of throughput by mid-2022. Is that still the target? And then in Q4, I believe, your head grade was the higher than reserve grade, is that also something and that we can expect for 2022?

And as I recall, with the renewed access to our higher grade areas with the change in -- and improvements in the ventilation system we did last year, that's obviously the result of that. But as we get access back to really high-grade zones, I wouldn't be too stuck just on the throughput, because as you know, the grade plays a really very big role in La Colorada, we have this very high-grade zones. So when it look at the total ounce produced, it's really that play between the throughput and the grades. You see that our forecast is somewhere between what 6.8 and 7.1 million ounces. So a big increase compared to the production we had that year before. But let me pass on to Steve, and he can give us a bit more details on that.

Just to highlight on -- what Michael was saying, I mean we are not -- we got some flexibility in terms of tonnes and grades, as we look at the 2022 plan, and as we are implementing this long haul mining advancements and accelerating some of the developments to improve that long haul mining, it may lead to some more tonne efficiencies, which allows us to kind of blend in from some lower grade areas. But as Michael says, we do have these high-grade areas accessible. So we kind of manage the production, according to the efficiencies we get through the long haul mining. So I hate to focus too much on throughput versus grade. We do have flexibility to move there. And generally what we see, we have a lot of fixed costs at La Colorada. So we kind of think about it in the ounces. We feel very confident in our ounce projection for the year in production. How we get there, whether it's grade or tons, is a little bit up in the air.

Great. And maybe as a follow-up, as you mentioned, part of it -- a large part of is grade. It sounds like a higher-grade area to Candelaria East. But as you mentioned in the MD&A, you're seeing a bit more heat and humidity, as you go lower and more east, is that as anticipated? And I guess my question is, do you need the sort of refrigeration plant in place, before we can get to the Candelaria East area?

Yes, great question. That is one of the reasons we accelerated that refrigeration plant. We know as we move into the Skarn, our thermal isograms, the thermal gradients as we go deep (technical difficulty) see how it gets hotter and hotter. We did expect more heat in Candelaria East as we developed that. I'd say we probably saw a little bit more than we even expected. We are bringing out refrigeration plant on early, that will help us manage that in that area, and allow us even greater access in future years. So we are somewhat constrained in how much we can pull out of there, and that will start to relax, as we get more refrigeration into that area.

Okay, great. And maybe a clarification on the La Colorada. Again, in the MD&A, I read that we have the concrete-lined ventilation shaft that's expected by mid-2023. And then in the Skarn section, you also talk about putting some ventilation infrastructure in place for the Skarn. Is that same shaft, is that the same ventilation shaft that we're talking about, or is it 2 different ones?

The ones that we talk about initially for the Skarn, there'll be 2 primary ones that are different, they're bigger, they're larger than this one we're building. This one potentially will provide a service to that Skarn development. It won't be the primary, it will be more of a secondary ventilation shaft, and maybe even equipped to do some material movement, things like that. And as we also announced, we are going to advance on ramp developments toward the Skarn this year. We'll be (inaudible) in the ramps and starting ramps this year. And that also will provide additional ventilation into those areas. So there is primary and secondary ventilations, this one that we're starting now that we hope to enhance what we're currently mining on the veins, will probably serve to be more of a secondary shaft in the future. It won't be the primary ones.

Maybe switching gears a little bit. At Dolores, there were some inventory buildup last year, but it sounds like with the construction of the Phase 1 south leach pad, it sounds like that's worked itself out. Am I correct? Have you started stocking at the Phase 1 south leach pad yet?

Yes, we did. We started stacking there in late November and started leaching there in early December, and that's where we saw pretty good kick in production from reducing inventories during December. As we moved into January, we do see that continuing, now with the pad 1 south, we don't have near the heights of ore that we're leaching on. So it gives us quick return on what's being leached. At the same time, we continue to recover ounces from the inventory builds over on pad 3, part 5, which is quite deep ore.

Just in general, Cosmos, on the inventory, as you know our year was back end loaded, not dissimilar to what's going to happen this year, when you look at the production. As we increased production in the fourth quarter and especially towards December there, you probably saw that we had about 13,300 ounces in finished goods that did not get sold, just because of the year ended obviously, and we won't be able to sell that Christmas and the end of December. So that's about, probably about $22 million of revenue that has not been recognized in the quarter, but has been produced as finished goods.

Great. And then maybe just one last question to wrap everything up. In terms of your 2022 overall guidance, can you maybe touch on how much inflation have you factored in on a unit cost basis? And then in terms of COVID 19 costs, Michael, as you mentioned in your prepared remarks, there's testing cost, there is additional sort of PPE cost, how much of that has been factored into your 2022 guidance?

I'll just make a statement before Steve comes on. Of course, we experienced exactly the same than all of us and all of you out there in the world. Supply chain interruptions, delays in delivery, et cetera, and that always -- cost is obviously one of the reason we see worldwide, an increased inflation besides the wage pressure that we see on top of that, because of -- mostly because of shortage of labor. So it's something very similar that we see in Latin America. We know that Latin America has been impacted by COVID, much harder than many other places in the world, but the pressures that we see, are very similar than what we see across the world. And maybe Steve, if you can give some more details?

Yes, sure. Just a little bit more color on that, but our inflation rates, as we look into next year or into this year 2022, it's quite variable depending on what we're looking at. Particularly, energy is a focus of ours, as you can imagine what is happening today. We are also focused on wages and logistics cost, transport costs, supply costs coming in. We saw reasonably sharp inflation figures for those areas. When we roll it all up on a consolidated basis, as I say, it's why it varies quite a bit across each material commodity, consumable we use. When we roll it all up or somewhere, I would say roughly 5% to 10% is the kind of numbers we assumed for 2022, which is quite a bit more than we've done in previous years, where we're down around 3% to 5%.

As you can imagine, big pressure on energy cost. We still have some diesel fuel hedged for this year and the details are in the MD&A. That went all the way back, when we put those diesel hedges in place at the very beginning of COVID as you recall, and when oil prices dropped there. So that has been a great program for us, but of course it's running out at the end of this year, and we all know where oil stands today, so there is more pressure on energy costs for sure.

Just one more word, when you look at inflationary pressures or headwinds or tailwinds on our cost, doesn't forget foreign exchange rates, that are really important to us, mostly Canadian dollars, Mexican peso and Peruvian sol, they have quite a big impact to us as well. I believe it's somewhere in the $500 million range, our annual costs that are paid in local currencies. So that -- depending where the exchange rate goes, that's a headwind or a tailwind for us.

(Operator Instructions) The next question is from Don DeMarco from National Bank Financial.

Couple of questions. First of all, Michael, you had mentioned that the production is going to be back-end loaded, which I had sort of expected maybe, given the delays to the guidance and we would expect that Q1 would be the biggest impact. Can you confirm if that's the case then, so we would expect Q1 to be the lightest quarter of the year? And would we expect maybe some of that lightness to be more focused on the underground mines, where the COVID impacts are believed to be the greatest?

Yes, I think you're right on there -- on this. Of course, we see in January, February or especially in January, exactly the same. I know you experienced -- and the world with omicron, it's just a very big and quick wave, looks like, and that's coming off now, but that was the reason why we delayed the guidance there in January, because that was the midst of the wave we see relaxing of in every country now, where we are active. And I think, again, you see exactly the same in the U.S., in Europe and in Canada. So very similar picture that we see there.

Like last year, yes, it's impacting underground operations, always a bit harder than the open pit for obvious reasons, when you do distancing and the amount of people we have available, the amount of contractors that we have available to help us, with the open pit operations versus the underground operations. But as I said and as I've said in the call, there we see very quick improvement from that. Hopefully last wave, but who knows.

Okay. Well, we'll look for that. And as a second question, just shifting to Escobal, so it's encouraging to hear that this ILO 169 pre-consultation process has resumed, you had 3 meetings last year, but can you give us some kind of a sense of what -- we're still in this pre-consultation stage which implies that it's in an early stage, pre. Will we be heading to a consultation stage at some point, or what could we expect over 2022, if there's no interruptions to the meetings?

Yes. First of all, I mean, COVID, for sure, had caused the delay in the whole process over the last 2 years, like in every country. So I'm very happy that all those meetings resume. The process is -- was first -- was reviewed. So there are 4 stages to it, then it goes to pre-consultation in second stage, consultation in the third stage and then the court review in the fourth stage. So that's -- and it's detailed -- and explained in great detail on our website, if you want to read more about that. So yes, we are in the pre-consultation phase right now. As I said, I don't have timing when we move from one stage to the other. Of course, when that happens, we'll advise the market. But at the moment, as I said, we already had 2 meetings in January -- sorry, one meeting in January, and one in February. So very happy that we are back at the regular meeting schedule.

Okay. Well, we'll just keep an eye out for updates and as it progresses. Good luck on Q1, and the rest of 2022.

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

Thank you very much, operator, and thanks for everyone calling in. Looking forward to give you an update on Q1 at -- when is that, in May 2022. Have a good day. Thank you, everyone.

We've got one more.

Sorry. There's -- operator, I think there's another question in the queue.

Sure thing. We have a question from Craig Hutchison from TD Securities.

Just a question on Morococha. I know you guys plan for doing care and maintenance, but when should we assume that happens? Is it a Q1 event or a Q2 event in terms of modeling kind of production, and does your CapEx guidance include anything for that at this point?

Craig, Steve here. We started winding operations down. It is a process we go through, winding down and running through stockpiles and things like that. We started that process actually in December. So we have started that, and specific dates of when it actually comes down, it's a little bit of a moving target and we are working with the employees and the unions and the ministries in Peru to manage that as carefully as we can. So in our guidance, we have put -- we have included a little bit of production during January, which kind of offsets some of the effects of the omicron. So our guidance kind of reflects what we think we will see for the full year, in its contribution. We have not included the cost of care and maintenance in our sustaining capital. We kind of provided guidance outside of sustaining capital for care and maintenance, which includes Escobal, Navidad, and we put about $12 million to $13 million in for Morococha this year.

Okay. And maybe, can you just talk about the process you guys might run here, in terms of some of the strategic alternatives you're going to review?

Yes, sure. Look, I mean we did a detailed risk analysis on this asset of course, on economical risk, social risk, political risk in the country, and came to the conclusion that at the moment, this is the best way forward for actions with Morococha to keep the value intact at this point, looking at alternatives and opportunities for -- which is the smallest asset that we have, Morococha produced about 2.1 million ounces of silver in 2021. So of course, there's a lot of analysis going in there, and that's our conclusion, and I think it's the right way forward at this point for Morococha to look at strategic alternatives.

There are no more questions at this time. This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.