Pan American Silver Corp.

Thank you for standing by. This is the conference operator. Welcome to the Pan American Silver second quarter 2022 results conference call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Sarin Feseke, VP, Investor Relations. Please go ahead.

Thank you for joining us today for Pan American Silver's Q2 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 Q2 2022 unaudited results, all of which are available on our website. I'll now turn the call over to Michael Starman, Pan American's President and CEO.

Thank you, Sharon, and welcome everyone to our Q2 call. In Q2, we produced 4.5 million ounces of silver, led by strong performance at La Colorado. Production at La Corada was up more than 50% from Q2 last year to approximately 1.7 million ounces, reflecting the improved ventilation conditions in the mine. In July, the new refrigeration plant began operating, which we expect will further improve working conditions in the mine. Coal production was 128,300 ounces in Q2. Despite lower than expected production at Dolores from Phase 9b, which also reduced consolidated silver production, Q2 gold production was within our expected range for the quarter. Dolores had a marked impact on our Q2 results. This stems from the shortfall in grades from Phase 9b and the resulting production year-to-date being less than expected, which triggered an analysis for impairment. We did that impairment analysis at a time of industry-wide cost inflation. Incorporating higher cost assumptions especially affects the value of the shorter-lived assets such as Dolores. It was a factor in our decision to suspend the underground mining Q2 and the subsequent reclassification of underground reserves to resources, and it resulted in shortening the estimated duration of economic residual leaching to the year 2030. Of course, this is highly dependent on metal prices and costs over the coming years and will be adjusted accordingly. The exploration drilling originally conducted for Phase 9b of the open pit at Dolores had some high-grade intercepts in the area that we expected to mine during the first half of 2022. However, these high grades were not fully realized and we now believe the high-grade intercepts contributed to a localized overestimation of the contained ounces within Phase 9b. Our updated winter resource and production plan for the life of mine adjusts for this overestimation. We recorded a $99.1 million impairment charge for the lorries in Q2, And together with a $62.8 million net realizable value inventory adjustments, primarily at Dolores, drove the net loss of $173.6 million, or 83 cent loss per share, for Q2. Adjusting for these items, among other adjustments, results in an adjusted loss of $6.5 million, or 3 cent loss per share. Cash flow from operations totaled $20.8 million, which includes $42.4 million in cash taxes and a $19.5 million buildup in working capital. Moving on to our guidance for 2022, we are maintaining our production guidance for both silver and gold, but expect to be at the low end of the ranges. The slides on our website that accompany this conference call include a quarterly breakdown of production in 2022, which better clarifies our expectations for the year, which we have always been weighted to the back half of 2022. Cash costs for the silver segment were $12.10 per ounce and $1,132 per ounce for the gold segment in Q2. All operations were negatively impacted by inflationary pressures, particularly from increased diesel prices and certain consumables, including cyanide, explosives, and steel products, such as grinding media, as well as supply chain shortages. Further, we are experiencing cost increases in services and other supplies indirectly due to the inflationary impact of consumables on their input costs, particularly diesel fuel. In addition to these global inflationary pressures, gold segment cash costs were impacted by the lower grades of Dolores and Chavindo and Lorena from mine sequencing. We expect gold segment cash costs to be at the high end of our original guidance range for 2022. Silver segment all-in-sustaining costs were $17.30 per ounce, excluding not-realizable value NRE adjustments Silver segment all-in sustaining costs were $15.90 per ounce. We are maintaining our guidance for 2022 silver segment cash costs and all-in sustaining costs. Gold segment all-in sustaining costs were $2,051 per ounce and $1,540 per ounce, excluding NRV adjustments. We are increasing our guidance for gold segment all-in sustaining costs to between $1,400 and $1,550 per ounce, excluding of un-RV inventory adjustments as a result of increased capital spending and the great shortfall at the lowest. We have increased our estimates for sustaining capital to between $240 million and $250 million due to a change in the financing strategy for certain plants sustaining capital investments at the open pit mines in Peru. Rather than funding these projects through construction loans, as we had originally intended, we will fund them directly through cash flow, which will be offset by a decrease in future expected cash flows and loan obligations. We have decreased our estimates for project capital to between $55 to $60 million, based on expected delays in spending at both at the La Colorado SCAN and Timmins projects. Total capital spending is now expected to be between $295 to $310 million in 2022, up slightly from our original guidance of $280 to $305 million. The decrease in capital for the La Corada SCARM project is due to delaying the design and initiation of the access ramp developments to optimize alignments with the highly efficient bulk mining method designs now being considered. The current major projects at La Clarada are progressing well. In addition to completion of the refrigeration plant, we have set the Galloway structure during the quarter and now installing the hatch frame and hoist for the concrete line ventilation shaft. We will start sinking the shaft before year-end and aim to advance to the 600-meter depth by this time next year. Yesterday, we provided an update for our consolidated reserves and resources as of June 30th, 2022, which demonstrated reserve replacement at our most significant mines. We replaced 108% of the annual silver production at La Clarada and added another 42.8 million ounces to the inferred mineral resources in the veins above this corn. At Guarón, we replaced 165% of the silver mined last year. 81% of gold production was replaced at Chavindo and 46% at La Reina. Timmins replaced 26% of the gold mined and added a further 53,000 ounces to inferred resources at Timmins West. Gold and silver mineral reserves were impacted by the reclassification of reserves to resources at the Dolores Underground mine. We're looking forward to updating the resource estimates for the La Clarada Skan later this quarter. On July 21st, we announced the most recent drill results for the La Clarada Skan, which included the highest grade intercepts to date of 97 meters at 654 grams per ton of silver, 15.35% lead, and 11.38% zinc. These most recent drill results will not be included because they were drilled after the timing cutoff for the new resource estimate. At Escobar, the ILO 169 consultation has now progressed to the consultation phase from pre-consultation, with the next meeting scheduled for August 21st. We look forward to participating in the next phase of the consultation process and to listening to the Xinka people regarding their perceptions about Escobar in an open, inclusive, and respectful process. We are on track to achieve most of the ESG goals we set for 2022. We are hosting our third annual ESG call on September 22nd. when we will provide more information on our progress and areas for improvement. In closing, we remain in a solid financial position with cash and short-term investment of $241.3 million and an undrawn line of credit of $500 million. We declared a dividend of 11 cents per share in line with our dividend policy. And now I would be happy to take your questions.

We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. The first question is from Cosmos Chu from CIBC. Please go ahead.

Hi, thanks, Michael and team. Um, maybe my first question is around Dolores. You know, certainly, with a write down, you've made some changes, as you mentioned, I think mining will likely last another two years. And that sounds like residual leaching until year 2030. Could you maybe wrap it all up for me in terms of what sort of the new mine plan is and how that's changed from your previous assumptions?

Yes, Cosmos. I'll just start general and then pass it over to Steve for some more detail. Actually, the mine plan and the open pit mining did not change the timing the two years. Afterwards, we go into the residual leach and that was longer term there. We cut it at the moment at 2030. As I mentioned in the call, that obviously is going to be an economic uh analysis that happens every year right when you go to whatever 20 28 20 29 30 uh depending on cost and metal prices etc how long that that leech cycle will continue but i pass it on to steve for further details yeah the only thing i would add cosmos is that the original plan we had

After open pit mining ended, we had some stockpiles we were going to run through the plant for, I think it was initially estimated for a couple of years. If you look at our current life mine open pit plan, the tons of ore really hasn't changed much at all. The only thing that's fallen out are the two extra years of stockpile rehandle. And then as Michael says, we've shortened the duration of residual leaching as well.

Okay, great. And then maybe two follow-up questions. Number one, Dolores, after the write-down, what's your current book value for the asset? And number two, you know, as you said, the underground has now been suspended. How easy it is, you know, based on metal prices, maybe hopefully higher metal prices later on, how easy is it to restart it again? And in the meantime, are you keeping the pumps running to make sure, you know, you're dewatering it, keeping it? in good state.

Hi, good morning, Cosmos. This is Ignacio. Hi, Ignacio. The current book value is around $260 million, and that includes both the PP&E and the LeachPad.

And then relative to the underground, yes, we are keeping the dewatering pumps running because that does help in the open pit as well. And we are keeping the ventilation and all the ground control systems in place. So we could go back in, there would be a bit of development work that would have to be done towards the open pit to open up the additional oil reserves that move to resources. But apart from that, everything's in good shape to restart.

Great. Maybe switching gears a little bit onto more positive news. Michael, you know, it certainly sounds like there's positive progress being made at Escobar. You know, to the extent that you can elaborate on going from pre-consultation to consultation, any details that you can give us in terms of what the next stage sort of entails. And then, you know, in negotiations or in consultation with Azinka, Have they made any specific requests, either be financial or social, that you can share with us?

Yeah, definitely a change there, as we described in the press release, that we are now moved, as it's locally defined as phase two, which is the consultation itself. During this phase, the Guatemala's Ministry of Energy and Mines, which leads that process, It's a formal dialogue process, but they stated the aim to identify and clarify baseline conditions, describe potential impacts, and define possible impact mitigation. the Xinka indigenous communities, the Ministry of Mines and Pan American Guatemala, obviously a subsidiary of Pan American Silver are participating in that process. So there's a lot of details on so far what happened in Guatemala on the process and what's to come on the MAM, the government website. So I would refer everybody to that. There's a link, I believe, on our Escobar section on our Pan American website. and you will see links and videos and description of the process and how the meetings that happened went so far.

Great. Thanks, Michael. And maybe one last question. Again, something else here. Provisional pricing. I think I read in your MD&A that there was a $9.3 million negative price adjustment, which is understandable for the quarter just given the decrease in base metal prices. But I'm trying to reconcile that because I saw that the realized prices for the quarter was 4.42 per pound copper, 1.73 per pound zinc, which is not that bad. So I guess my bigger question is, how should we look at it on a go-forward basis? How should we calculate it? And, you know, is there a bigger potential impact for Q3 and then onwards?

Hi, Cosmos. This is Ignacio again. So, yeah, the provisional price adjustments are just a function of the amount of metal that has open QPs, quotational prices, at the end of every quarter. And it does vary depending on the contract that we have. It is a difficult thing to model given that a lot of the times the clients are the ones that have the options on the QPs that they declare. But just to give you some approximate numbers, at the end of Q2, we had about 1.2 million ounces of silver that the prices were still open and around 1,000 ounces of copper approximately. and 3,800 ounces of – sorry, tons of copper and around 3,800 tons of zinc. So that gives you an estimate. But it does vary quarter to quarter. We do monitor it. And obviously, given drops in prices, that's what impacts it.

Great. Thanks again. Those are all the questions I have. Thanks again for answering my questions. Thanks, Cosmos.

The next question is from Trevor Turnbull from Scotiabank. Please go ahead.

Hi, thank you. Hopefully, I'm not going to repeat too much of what Cosmos just asked. But I just wanted to ask one high level question on the Dolores suspension. I know that operating margins were clearly the issue. But can you just discuss kind of what aspect was the tipping point? You know, was it a matter of the scale of the operation, grade profile or labor rates? And what I'm trying to get at, I guess, is Just trying to understand what would need to change going forward that would let you bring it back online.

Hi, Trevor. I assume you're talking the underground mine suspension at Dolores specifically.

Sorry about that, Steve. Yes.

Yeah, okay, fair enough. Yeah, so it's really – it was truly a function of cost and development needs. I think we've talked in previous quarters that the residual – the remaining reserves – that we had on the books to be mined was in and around the open pit mine. So there was some sequencing challenges we had as we were mining the depth of phase eight and phase nine that we're in now that we didn't really want to have any kind of interference between the underground mine and the open pit. So we always kind of backed away from that development. over the last few quarters. And now with these increased costs, as we look at it and what it takes to develop back in there, at these current cost levels, we just didn't feel the margins were worth pursuing that. So if cost structure changes, if metal prices changes, by all means, that would open back up and we could get in there and get the residual part of those reserves that move to resources.

Okay. That's all I had. Appreciate it, Steve. You bet, Trevor. Thanks, Trevor.

The next question is from Lawson Winder from Bank of America Securities. Please go ahead.

Hi, guys. Good morning, and thank you for the updates on everything here. I wanted to ask a really, really sort of like high-level, big-picture question about Dolores and the MindFinders acquisition. As we approach the end of life at Dolores, I mean, I think it's pretty fair to say that it's kind of underperformed expectations since the Mindfinders acquisition back in 2011. What would you chalk that, or how would you explain what everybody kind of got wrong at the point of that acquisition? Because I know both Pan American and analysts were quite excited about that at the time. Yeah, I'd love to hear your thoughts on that.

Well, I think one of the major differences is when, remember the acquisition happened in 2012, but substantially much, much higher metal prices. And while we did a lot of analysis at different metal prices, I believe at that time, silver was probably in around $30. We obviously didn't We didn't account for that, you know, silver price dropping to what was the low in that time between then and now, probably somewhere $12 to $14. So that was probably one big driver of that. Definitely now, of course, much higher cost that we see. But, you know, there's still some time left, but it's a shorter life asset now. obviously we will need to see quite some changes in metal prices or cost as Steve said to like to, for example, restart the underground. I don't know, Steve, if you want to add something.

Yeah, just to add to what Michael said, Lawson. I mean, clearly the margins were squeezed greater than we thought given the metal prices weren't as high as what we used for the acquisition basis back in 2012. And then the cost kind of squeezed on the other side too. So the margins were not as prescribed given most factors. The mine overall, despite this issue of what we're facing today at 9b in the open pit, the mine resource overall has performed, I think, pretty close to expectations all in all. The only other area where we felt we probably underestimated some of the complexities that Dolores was on the leach pad construction and the leach pad construction costs. You know, that topography and the challenges we found in building, you know, reliable leach pads in that area was greater than we thought going in. But apart from that, it was really the margin squeeze based on price and cost.

Yeah, no, that's very helpful, Collar. I appreciate you you know, giving those thoughts. Okay, so we've already talked a lot about Dolores, I wanted to ask just about a few of the other assets. So at LA Arena, are you starting to see any increased levels of sulfide material mixed in with the oxide?

Yeah, hi Les and Steve again. No, we're strictly mining in the oxide zones. We know pretty well based on all our modeling where that boundary is and we're pretty well above that and we're outside of that. Currently, I think we think the economic pit depth limits are going to be above that zone. We're still drilling. We're still going down. We know where that zone is. We know when we get close to it, and we don't really mine any of that sulfide ore. It doesn't really recover on the leach pads anyway.

Just to add something to Lauren, you probably heard in the call, but I mentioned on site in the press release that we again replaced 46% of of the gold ounces mined. It's just astonishing when you think in our purchasing model, we assumed that Lorena will be mined out, the offsets will be mined out, I believe it was mid 2021. With the new reserve update, I think we go well into 2026, with still quite some upside, we are still drilling there, and I think there's probably a good chance for more to come. at least another five years added in landlabs up to now with more upside. So very positive story there.

Yeah, I couldn't agree more there. I mean, that's certainly been a very positive thing. I also wanted to ask about hard-on. So in Q2, you had really, really strong lead production and then a little bit lower silver production.

i just kind of want to get an idea for how you see that split uh moving into the second half so would that be expected to reverse hi hi lawson this is chris um certainly as as the amount of different veins we have from traviesa which is high copper we've got all these different structures with the lead and the silver more predominant, or we've got lead, zinc, silver, copper, et cetera. So really it's a mix of all of those different veins that come in. And certainly we would be performing to budget and forecast. And so I think you can expect potentially us reverting back to that budget.

Yeah, I just would add to what Chris said, Lawson, Steve here is, you know, to be honest, we really drive that plan on NSR And from a corporate mine planning perspective, the sequencing is really related to the development and the opportunities that the team has to develop into different zones. And these zones are quite variable between lead or copper or high zinc. I'd say it's hard for us to predict exactly what's going to happen in the second half, but I think generally we will probably not see the same degree of lead, maybe a little bit more copper is my general gut sense going into the second half, but not materially different.

And I'm just following the same theme here at Varan, looking at the reserves, 165% replacement of Silverathlus. It's a long time with the company. I believe, you know, soon we will be probably soon having two decades of probably mostly reserve replacement and what on. So that just, you know, shows you how large and how prospective that ground is. And, of course, much easier in that sense to replace your reserves in the vein deposit than in an open pit where you're bound to a pit shell.

Yeah, that's helpful. I guess you're more asking about the lead. Obviously, you have silver production guidance for each mine, but on a mine-by-mine level, there is no base metal production guidance. So that color is very helpful. Thank you. That's it for me.

Thanks, Alison.

The next question is from John Tomasos of John Tomasos. Please go ahead.

Thank you. I'm trying to imagine what consultation might mean in Guatemala. And I recall years ago going to the Marlin gold mine, where the local people spoke a language called ma'am. And another time going to the nickel mine in the east where the local people spoke to Chi. What language Are the consultations held in? Are the chinka people able to understand how a mine and a profit-seeking business operates? Would you say that 100% of the consultation involves things that Pan Am can control and manage, or does the consultation... Stray, where a large fraction of it is contemporary social issues of the country, or the last 500 years where the Chinca people might not have been represented by the government, or 1700s, the Catholic Church paid bounties on Inca scalps, things like that.

Thanks, John. I'll pass on to Sean McAleer. He's here. He's participating as the country minister in Guatemala in the consultations. Please, Sean.

Yeah, good morning, John. The meetings right now are held in Spanish. There is a Xinka language, but the meetings are held in Spanish right now. And so all the transcripts, the discussions, all the presentations are done in Spanish. So that's what we expect going forward. And, you know, there may be issues with Xinka language that arise and those will be dealt with at the time. We expect that we're going to be providing information as a company, the Ministries of Health, Culture, Environment, and Energy and Mines will be presenting information about the project as well as the company in the next few months. I think at that time we'll hear specifics about the concerns and the men will have to address what the government's going to do and will probably be asking the company for what other mitigations might be possible. So we expect that to be developing in the meetings coming up in the next few months.

Does the dialogue relate specifically to the Escobol project or to broader social and political issues possibly outside your control?

So up to this point, the meetings have really been about the process itself. And, again, I expect that we'll get into those kind of details that you're asking about over the coming months. That's, you know, things that will be discussed as the information is presented, the concerns are raised, and then issues are resolved. So I expect to, you know, we'll have more information about that towards the end of the year and probably next quarter update.

Thank you. Sorry for the detailed nature of the questions. I just don't know what consultation means in Guatemala.

Thanks for your question.

Once again, if you have a question, please press star then 1. The next question is from Don DeMarco from National Bank Financial. Please go ahead.

Well, thank you, operator, and good morning, Michael and Steve. Good morning, Don. Good morning. So Q2 also saw elevated costs at other mines, and focusing on Lorraine and Menasha SBAO, did you perform impairment testing on these assets? And if so, how did they fare, and what's the asset? They're also somewhat short-lived, and so is the outlook unchanged despite the elevated costs we saw in Q2?

Yeah, I could start and then I'll turn it over to Ignacio. Basically, no, the outlook at those mines hasn't changed. The results for Q2 were pretty much in line with what we expected. Even though there were some higher costs, we think they were in range to where it really didn't lead to any kind of trigger to do any kind of impairment analysis for those assets. Ignacio, I don't know if you want to add.

Yeah, not much more to add, Steve. Yeah, there were no impairment indicators different from Dolores. So, therefore, we didn't do any sort of testing.

Okay. Thanks for that. And with the end of Dolores in view and other mines that are short-lived, does the company have a strategy for replacing assets? or perhaps a targeted level of production in gold and silver segments to maintain?

Sure, Don. As you know, we are always very active on the business development side. There's different ways to do that. One is exploration, as I mentioned before. There was a lot of strong replacement of our reserves in many of our flagship assets. And we did that over many, many years or decades here in the past. So that's obviously one way to expand, like the example I gave at La Reina. I can give that example for several mines here. The other one is, you know, bigger exploration success. And I would really like to add there the SCARN discovery. I think when you looked at the last results we published and, you know, this is becoming a really, really big discovery. We will publish the new resource update at the SCARN, I would say probably within a month time or so. So that will be, you know, a very interesting data point. But, you know, as you can imagine, the old resource we have that is currently on our books already 100 million tons. And I would expect that number to grow. So that's, you know, the other way to replace our reserves by adding a completely new project like that's gone. And then the third way is obviously acquisitions. which we always have to look out there to see what there is, either an earlier stage project or later stage. you know, as I always say that we are very picky on that because we want to, you know, we're looking for acquisitions that are accretive. And I think, you know, we've shown that with the acquisition of Tau three years back and, you know, the positive impact that can have. So it's really those three pillars, you know, not different than for any other mining company. I would say we're in a very strong financial position. So, yeah. doing acquisitions and consolidate our space is obviously something that lies well in our means. But as I said, we have shown over years and years and years our exploration success, and I think that really got topped with this current discovery at La Colorado.

Okay. Okay, fair enough. That gives some good color. Shifting over to La Colorado, perform well. And I see that some of the access to high-grade zones resumed thanks to the ventilation. Do you expect that to continue? And would we expect to see further incremental gains, both in terms of throughput or grade in the coming quarters?

yeah don steve here certainly on the throughput side this this ventilation is really really helping us a lot and the refrigeration plant is also helping a lot so it is allowing us to catch up if you will on ground control and development into the areas that were originally scheduled to mine a couple years back so we do anticipate seeing throughput come up but we do think grades will kind of maintain in and around the reserve grade at the deposit. We're really targeting to mine this. We see this as a very long-term asset, and we'd like to mine it, you know, consistently at reserve grades as we go forward.

Okay. Well, thanks for that, Stephen. Just to segue into the SCARN then, you know, we're all excited to see the resources. Is there any reason why it was just pushed forward a little bit?

Well, we always announced in Q3, I mean, it was kind of, you know, is it ready? There's a lot of work right now going on, as you can imagine, as it is so large, and a lot of decisions on the mining method. So, you know, we're talking about a few weeks here, not a major change, and well within Q3 that we will publish those new resources.

In terms of the resource, in terms of the mining and mining method, I mean, we are making great progress here. in evaluating this bulk mining method that we talked about a couple of quarters ago. And it does look quite exciting to us, but it is a complex method. This is a deep mine. So it is taking a lot of time to build this mine plan. And we're looking at a couple of unique options that kind of leading edge technologies for cave mining in these days and applying it here. So we want to make sure we look at that right and correctly. We've got a lot of really high-talented consultants who have developed these things around the world. So we need some time to work through that and be comfortable before we start coming out with mining plans, mining costs, things of that nature.

Okay, great. Well, we'll look forward to that, and good luck in the back half of the year. Thank you very much.

Thanks, Don.

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

Thanks, operator, and thank you, everyone, for joining us on this call. We'll talk again in November to share our Q3 results. Have a good rest of the summer. Thank you very much.

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