Pan American Silver Corp (PAAS) 2022 Q1 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Pan American Silver First Quarter 2022 Results Conference Call. (Operator Instructions) And the conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Siren Fisekci, Vice President, Investor Relations and Corporate Communications. Please go ahead, Ms. Fisekci.

Thank you for joining us today for Pan American Silver's Q1 2022 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 Q1 2022 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. The start of the first quarter was heavily impacted by the Omicron variant that was spreading quickly around the world. Throughout our operations, we experienced significant reductions in workforce deployments during January and early February. Fortunately, this was largely due to our COVID screening process and the government mandated isolation periods and not because of serious illness.

With the lack of visibility on how Omicron would play out, we delayed issuing our 2022 guidance until late February. By that time, the Omicron surge was subsiding and our workforce deployment levels were rising. I'm pleased to say that we are on track to achieve our production guidance for 2022 back-end weighted to the second half of the year.

This view reflects the large impact Omicron had in Q1. And our expectation that COVID in general will be less impactful on workforce deployment levels going forward, and demand sequencing at La Arena and Dolores and continued operational improvements at La Colorada.

We are also maintaining our cost guidance for 2022. However, we are currently experiencing higher-than-expected overall inflationary pressure, particularly for diesel and certain consumables as well as supply chain-driven cost pressures and shortages. We are carefully monitoring this largely global inflationary pressures and will adjust our cost estimates if necessary.

In Q1, we produced 4.6 million ounces of silver. Silver segment all-in sustaining costs were $13.41 per ounce. Cash costs for the silver segment were $10.23 per ounce. Despite the impact of Omicron and inflationary cost pressures, higher by-product metal prices contributed to the decrease in cost at Huaron and Morococha. As well, higher by-product metal prices and silver grades led to lower costs at La Colorada despite a 13% decline in throughput from Q4 because of Omicron.

Manantial Espejo recorded strong performance in Q1 due to the contribution of high grade ore from COSE and Joaquin. Mining operations are now winding down at COSE as anticipated in our 2022 guidance. Silver production and costs in Q1 were negatively impacted by a decrease in grades at San Vicente from greater dilution due to the expected narrowing of the vein structures at that.

We recorded some production and associated costs from Morococha in Q1 before that operation went on care and maintenance in late February. As disclosed in February when we issued our 2022 guidance, we will be decommissioning the Amistad processing plant to allow for the expansion of a neighboring mine. We completed closure at that plant in Q1, and we are currently investigating alternative opportunities for Morococha, including monetization, joint venture operations or accelerating exploration of prospective areas that could enhance the attractiveness of allocating capital to build a new processing facility.

Moving on to our gold segment operations. We produced 131,000 ounces of gold in Q1. Gold segment all-in sustaining costs were $1,502 per ounce. Cash costs were $1,069 per ounce. Gold segment production and costs were impacted by lower mined grades due to mine sequencing at La Arena as expected and at Dolores. Omicron and inflationary pressures also impacted gold segment costs in Q1.

A large net realizable value, or NRV inventory adjustment at Dolores, increased all-in sustaining costs at that operation by $321 per ounce and increased consolidated gold segment all-in sustaining costs by $94 per ounce. As a reminder, NRV inventory adjustments are accounting adjustments to recognize the production cost of inventory relative to the market value of that inventory at the time of assessment. NRV inventory adjustments do not affect cash costs.

At Dolores, production was impacted by lower mined gold grades due to mine sequencing and the reconciliation shortfall in Phase 9B of the open pit. This appears to be the localized issue as our model has been performing well over the past 3 years, and we are now mining into Phase 10 of the pit.

Shahuindo made a strong contribution to gold production in Q1 due to improved oil blending and drier-than-expected weather which allowed us to increase the tonnes stacked on the heap.

Revenue in Q1 was $439.9 million, which included inventory drawdowns of 531,600 ounces of silver and 17,600 ounces of gold. Net earnings in Q1 were $76.8 million or $0.36 per share. This includes a onetime $44.6 million fair value adjustment for our interest in Maverix. We have changed our accounting treatment for our interest in Maverix based on the determination that we no longer have significant influence on Maverix. Our 17% interest in Maverix is now recorded as long-term financial assets on the balance sheet and will not affect quarterly earnings.

Adjusted earnings were $32 million or $0.15 per share in Q1. Cash flow from operations totaled $68.8 million, which includes $58.3 million in cash taxes and a $15.1 million buildup in working capital, largely from timing of accounts payable and receivable. Our annual tax payments are typically the highest in Q1 and in Q2.

We are in a strong financial position with net cash of $224.8 million. Based on the dividend policy we introduced in February, we announced a dividend of $0.12 per common share with respect to Q1. Our dividend policy provides for a base dividend of $0.10 per common share and the supplemental amount tied to the net cash on our balance sheet. This allows shareholders to participate in improving financial performance while providing liquidity to fund our growth projects.

Moving on to the growth projects. Earlier this week, we released additional drill results for the La Colorada's Skarn. We completed nearly 26,000 meters of infill and exploration drilling on the Skarn in the quarter, the most we have completed in any single quarter. The infill drilling confirmed continuous mineralization over a 400-meter wide area in the Central Eastern part of the deposit, while step-up drilling expanded the mineralization to the East, South and West. We have now completed over 100,000 meters of infill and exploration drilling since the last resource estimate dated August 4, 2020.

We also progressed our project for Skarn advancing the precincting for the concrete line ventilation shaft and starting the commissioning of the refrigeration plant. We have been evaluating bulk mining methods which appear to offer an attractive alternative for mining the deposit. We will be assessing these methods against an updated resource estimate for the Skarn that we intend to provide early in Q3, together with the annual company reserve and resource update.

At Escobal, the inclusive ILO 169 consultation process continues with the pre-consultation meeting held on May 9, and the next meeting planned for June 5.

Before we open up for questions, we released our 2021 sustainability report last week. The report includes our performance on environmental, social and governance metrics and our goals in these areas. Notably, we published a climate change policy statement that sets an attractive to reduce our GHG emissions by at least 30% by 2030 from our 2019 baseline emissions at an aspirational objective of net 0 carbon-dioxide equivalent emissions by 2050.

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

(Operator Instructions) The first question comes from Trevor Turnbull with Scotiabank.

Michael, I just checked the website for the Escobal consultation process, and it looked like the last update was back in February. So I appreciate the additional information you just gave about the meeting in May, and I think you said the next one, either June or July. On the website, it did sound like there was about 12 meetings that needed to take place. And so if we count the ones in May and in the summer, it seems like that would take us to 7. Is that the right way to think about kind of the length of the process that there's going to be roughly 12 meetings?

Trevor. Look, I don't think so that there's a set amount of meetings. I think we are at this similar place than last quarter when I mentioned that we saw this increase of meetings, and you see it now there's a very kind of a richer schedule. Much -- many more meetings than what we've seen last year, obviously, due to COVID, as I explained in earlier calls, got a lengthy delay for the 2 years of COVID that we saw that really didn't allow the Ministry of Mines to call meetings with a lot of people in person for obvious reasons.

So right now, as such, and since January, we see this continuous meetings every month at least, sometimes in between. And I would assume that will continue. But I don't think so, Trevor, that you can just count a certain amount of meetings and say it's done at 12, but definitely encouraged with that schedule that we see now.

And hopefully, COVID will be stays in check in the world for all of us. I guess, all of us, we hope that so far, as I mentioned in the call as well, we see a huge change really compared to the last wave that really hit the world that was we want to call it the first Omicron wave. I think the subsequent waves that we see now from Omicron probably not having that much of an impact. A lot of people are vaccinated.

We have in the company a very high rate of vaccination. And I think for the first time, I can say that we are pretty much back to normal worker levels everywhere. So yes, don't read too much in there. I think it's moving forward as hoped for the beginning of the year, and we'll see where it stands.

Yes. No, I'm glad to hear that it does obviously seem to be moving and maybe picking up pace a bit. And without asking for speculation on timing or outcomes. I do wonder, though, could you provide any sort of sense of how long -- provided you're allowed to recommence operations, what kind of lead time you would need to get recommissioned?

Well, the mine is in care and maintenance. There is work that we can and have to do under the environmental management plan for that care and maintenance program. Of course, we keep the mine, the underground part and the mill in good shape. So that's all ready to go. Of course, we are not doing any stope development or something like that. So that would have to pick up and we will need to replace some of the underground equipment and, of course, hire workforce.

So as you can imagine, there will be a few months, but as I said -- to go back to production. But as I said, the plan to mine everything is in constant care and maintenance programs and everything is in good shape. So that's where -- and you saw that we spent probably about $1.8 million to $2 million a month on that program. So you can imagine there's quite a bit of work going in there.

Yes. And then just my last question is about La Colorada Skarn. You've been drilling and the pending resources coming up later this year. It appears you've done a huge amount of drilling since the previous estimate. It looks like almost 50% more potentially by the time you provide the update. I know some of the work was focused on infill drilling, some of it was step-out into the new areas. And I just wondered how we should expect the resource update to be focused? Is this going to be more about upgrading inferred resources? Or is this going to be more about just adding to the inferred with the step-out holes?

Well, it will do both, right? I mean we have much more information from the infill drilling. But we were still looking with the step-out holes, obviously, for the kind of the fringes or ends of this ore body, and we did not find them yet. So you see there it's still open around many, many directions, pretty amazing if you look at those holes.

And actually, Trevor, if you're familiar, for sure, with this kind of Skarn deposits, it's actually an amazing continuation of the mineralization, right? You normally have lots of skarns that I've seen in my career have been much, much more variable and irregular than this. So, so far, so good. It's growing still growing and really looking forward to that resource update. As we said, we drilled over 100,000 meters since the last one, they're very active. We have constantly 13, 14 rigs drilling on it. So it's quite a production on that drilling. And -- so just expect on both, as I said, a lot of infill drilling, but the step-outs will for sure increase the inferred resource as well.

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

Just maybe, Michael, continuing with some questions on the Skarn. So yes, we certainly look forward to that resource update in Q3. And -- but what would be the next steps beyond that resource update? Of course, there was a PEA that, at one point, been scheduled, maybe for some point last year that was deferred. What do you need to know at this point in order to put that back into the calendar, to put a technical report back in the calendar?

Well, a lot of work is going in on the engineering side right now, and it's really to define the mining method. Remember in like November or late last year, when we talked about it, when we start finding suddenly this very big, wide and high-grade zones are -- extremely high-grade zones that we call it and some of the intercept we published in November, that kind of similar value optimization than our veins. And then obviously, the bigger size that we see that is growing everywhere. So the fact that we can look now at possible bigger bulk minable or mining -- bulk mining methods.

So it's really the engineering on that to define what's going to be the mining method. As you can imagine, that's the main driver on the cost for that mining. And once we have that nailed down, well, that will obviously define the mineable part of that resource. So those are really the next steps.

I think once we have that, we know much more about what exactly will be the daily tonnage for it. And that will obviously dictate the size of the plant we have to drill and the tailings management that we have to look at, equipment size, access, et cetera, et cetera. So that's really kind of the steps forward here. So let's wait for that resource. That's really the first step. We're doing a lot of -- I know that the engineering team is doing a lot of work on the mining method side, of course, parallel to that. And looking forward to those results.

Okay. Yes, as are we. So -- okay, as a second question, if I may, shifting to Dolores. So Dolores cost well above guidance, and you had some discussion on the call about Dolores. Could you here just reiterate the factors that contributed to the cost at Dolores and comment on whether or not they're transient and whether you expect the cost to rebound over the rest of the year?

Don, Steve Busby here. Probably, the biggest driver to that cost in Q1 was the fact that we did end up processing lower grade ores than we anticipated. We did mine into an area of Phase 9 of the pit -- of the open pit that the ore -- we had a high-grade drill hole from exploration, the original exploration on the project that look like you got a little bit overextended in that area. So the ore that we encountered was quite a bit lower grade, and that's really what drove those costs up.

We see that as a very localized issue. It was at the bottom of that pit phase. We're now over into Phase 10. I'd like to reiterate that the model we're using, we haven't really adjusted it for 3 years and has been performing incredibly well. So it was just this one area that happened to come in during Q1. But with those lower grades that drove that cost per ounce up quite a bit.

With that said, I mean, COVID was the other big impact, just lack of people and lack of deployment of our workforce kind of brought productivities down, brought our cost or unit costs up during that period. We didn't really face, I could say, the kind of inflation numbers that we may be seeing today during Q1 as an average. It kind of came on strong as you've seen throughout the world, inflation rates on fuel prices and explosives and supplies and consumables have really kind of heated up over the last couple of months. So I wouldn't really point to inflation factors as Q1 being that big of a driver. It is something we're very keen on, very watching very closely today. But the real drivers at Dolores was at lower grade and the inefficiencies with COVID.

Just to add, Don, to add is that, obviously, quite a sizable NRV adjustment that we've seen there on the cost that Dolores see if you take the NRV, that makes quite a big difference. And different drivers for that. As you know, the NRV adjustments are adjustments to the heap, but it's not impacting our cash costs, of course, but mostly driven by either metal prices or costs. And definitely, we see the inflationary cost pressure that impacted that. And the soon that, that comes up, obviously, the sooner we will probably see there change depending on where metal prices go. But definitely higher energy costs across the world and inflationary pressure that we see everywhere in the world and in our daily lives have an impact to this kind of noncash on readjustments as well.

Okay. Okay. And as a third question, just shifting to an asset of yours that doesn't get a lot of airtime, La Arena II. Could you just give me what your strategic intention is for this asset? Is it a divestment candidate? Are you planning to drill, expand it potentially or issue an updated technical report, maybe even develop at some point?

Yes. I think 2 main reasons why it doesn't get a lot of airtime. The first one is that we have been incredibly successful with the exploration and Chris with his team to expand the life of (inaudible), I'll call it La Arena I or the oxides, the gold production at La Arena. I recall 3 years ago, when we looked at the assets of -- and our resources, we assume that La Arena oxide, the current mine will be mined out in 2021, but we're still successfully drilling there. We'll see what that brings us with our new resource and reserve update midyear, but very positive outcome there. So we added quite a few years by now of additional gold production from the oxides at La Arena I.

And so that's one of the reasons I think why nobody looked at when we did the transaction, I've got quite a few questions on La Arena II, but I don't necessary -- everybody thought that La Arena I has a very short life, which obviously changed quite substantially. That's the one reason. There's definitely more time now and a lot of people looking at it because when Power did their technical study, I believe, they used about $3 to $3.30, somewhere around there to do the study. And as you can imagine, 3 years ago that didn't look all that interesting. Today, that looks very interesting as a large copper gold project.

And just to remind everybody who's not familiar with La Arena II, it's basically the copper gold porphyry that sits below the La Arena I open pit and it would basically mine out the current pit and make a bigger pit below. And it's a copper-gold porphyry, probably about 75% copper, 25% gold revenue. So definitely a type of us that a lot of precious metal companies are looking for. So there is a big change happened in the last few years. And I think it hasn't been on the radar for a while, as I said, due to metal prices and due to the fact that we just keep producing gold at La Arena probably for quite a while longer, obviously, but has definitely starts to get more interest on it and they're steadily getting more interest on my side as well as you can imagine at today's copper prices at the copper price outlook and in fact, as I said, that a lot of process metals company looking for porphyries, copper gold porphyries and we already have one in the portfolio. So very interesting project.

Okay. And we'll keep an eye out for the resource update in Q3 and good luck in the coming quarters.

Thank you, Don.

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

Thanks, operator, and thank you, everyone, for calling in. Looking forward to giving you an update on our Q2 results, which will be, well, August already. So enjoy your spring and early summer and talk in August. Thank you, everybody.

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