Pan American Silver Corp.

Good morning, ladies and gentlemen, and welcome to the Pan American Silver Corp First Quarter 2023 Unaudited Results Conference Call and Webcast. At this time, online journalists are in only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call, we require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, May 11, 2023. I would now like to turn the conference over to Saren Fisiksar, VP, Investor Relations. Please go ahead.

Thank you for joining us today for Pan American Silver's Q1 2023 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 2023 unaudited results, all of which are available on our website. I'll now turn the call over to Michael Steinman, Pan American's President and CEO.

Thanks, Siren, and thank you everyone for joining our call today. The first quarter was transformational for Pan American. With the closing of the Yamana acquisition on March 31st, and the resultant increase in scale and quality across our portfolio as outlined in our recently released consolidated 2023 operating guidance. Due to the timing of closing, the addition of Yamana assets is not reflected in our Q1 production and cost numbers, but Yamana's cash and debt have been added to our balance sheet at the end of the quarter. While Q1 excludes the benefits of the Yamana acquisition, Our continued focus on operational excellence helped us to deliver results ahead of expectations despite ongoing inflationary pressures. In Q1, we sold nearly 4.5 million ounces of silver and 133,000 ounces of gold. Silver segments all in sustaining costs were $14.13 per ounce and $1,196 per ounce of gold segments. Silver segment Q1 production costs and our 2023 guidance reflect the restricted mining rates in the high grade zone of the La Corada mine until the new shaft ventilation project is commissioned. Thinking of the 5.5 meter diameter concrete lined ventilation shaft reached a depth of 228 meters by the end of Q1 and is on track to be completed by the end of this year. The shaft will be equipped with ventilation fans connected with the adjacent deep underground east Candelaria workings and commissioned to significantly improve ventilation rates in this high-grade area of the mine around mid-2024. This new ventilation infrastructure will benefit both the long-term development of the SCARN project as well as the current Wayne system operation. Until this new system is operating, we are restricting mining rates in the higher grade, deep eastern portion of the Candelaria deposit, which is reflected in our guidance for 2023. Gold segment production and costs were impacted by leach sequencing at Dolores and La Reina. In addition, production was interrupted for seven days at Dolores, but local contractor terms were revised in preparation for the completion of mining and the transition to a multi-year leach cycle, which we expect will begin in late 2024. Like last year, production at La Arena is back and weighted as the higher rates of waste mining extend into Q3, followed by higher rates of ore mining and production in the last quarter of the year. A Large Net Realizable Value, or NRV, inventory adjustment at Dolores decreased oil and sustaining costs at that operation by $775 per ounce and lowered consolidated gold segment all in sustaining costs by $165 per ounce. As a reminder, NRV inventory adjustments are accounting adjustments to recognize the production costs of heat breach inventory relative to the market value of that inventory at a time of assessment. NRV inventory adjustments are non-cash movements and do not affect cash costs. Revenue in Q1 was $390.3 million, which included finished goods inventory drawdowns of 779,500 ounces of silver and 11,300 ounces of gold. Net earnings in Q1 were $16.5 million, or eight cents per share. This includes $18.9 million in transaction and integration costs related to the Amana transaction and $12.7 million in severance provisions. Adjusted earnings were 21.2 million or 10 cents per share in Q1. Cash flow from operations totaled $51.3 million, which includes $30.7 million in cash taxes. Our annual tax payments are typically the highest in Q1 and Q2. We are in a strong financial position with a cash and short-term investment balance of $513 million and $425 million available under the sustainability linked credit facility. We assumed two senior notes, one for $283 million and another one for $500 million as part of the AMANA acquisition. both with attractive coupon rates, and have $325 million drawn on our credit facility. Our capital allocation priorities for the expected increase in cash flow generation from the expanded portfolio are consistent with our history. Reduce debt, invest in growth, and provide dividends to shareholders. With respect to Q1, we announced a dividend of 10 cents per common share in March. a bit earlier than normal, in order to align with Yamana's timing for dividends. Future dividend declarations will revert back to Pan America's previous schedule. We have been paying dividends consistently since 2010 as an important means of returning capital to shareholders. Moving on to growth projects, earlier this month we released additional trill results for the La Corada's GARN. We completed nearly 14,122 meters of infill and exploration drilling on the SCARN in a quarter. The new drill holes both extend the 902 zone and confirm that there are multiple zones of higher grade within the limestone and SCARN, which align with surrounding porphyry intrusives and epithermal veins. Some of the drill holes return spectacular grades, like 64.3 meters, at 391 grams per tonne silver, 10.8% lead and 8.5% zinc, including 23.25 metres at 914 grams per tonne silver, 25.2% lead and 16.7% zinc. We have now drilled over 20 holes into this area, which remains open to the west and northwest. An infill and expiration program of 28,000 meters from surface and underground rail stations is currently underway. We also progressed other projects for the SCARN, including engineering work associated with the Preliminary Economic Assessment, or PEA. We are planning to provide an updated technical report on the LaGuardia property in the second half of 2023 that will include a PEA of the SCARN deposit describing our view of project development, operating costs, and capital estimates, and overall economics. In 2023, Project Capital will also be invested in completing Yamana's plant upgrades at Jacobina, construction of new dry-stack tailing storage facility at Waron, and installing a paced backfill plant at our Bell Creek mine interments. At Escobar, the ILO 169 consultation progress is progressing well. The consultation meetings held in March and April and the next meeting planned for later this month. The 2023 guidance detailed in our Q1 disclosure is largely the same as the guidance we provided on April 27th. The only change was an increase in project capital for the LaGuardia's current project to reflect updated estimates for completing the PEA and advancing exploration drilling. The guidance provided in our Q1 disclosure now includes a forecast for G&A, care and maintenance, and exploration expense in 2023. We are expecting to produce 21 to 23 million ounces of silver in 2023 and 870,000 to 970,000 ounces of gold. We expect all in sustaining costs of between $14 to $16 per ounce for the silver segment and $1,275 to $1,425 per ounce for the gold segment. Please note, this reflects nine-month ownership of the mines we acquired from Yamana and the full 12 months for Pan American's original mines. You can see estimates for individual mines and quarterly breakdown of consolidated production costs in our Q1 MD&A. We plan on releasing our 2022 sustainability report later in Q2, which will report on the performance on environmental, social, and governance metrics for Pan America's original assets and our goals in these areas. Information on all former Yamana assets following the Yamana acquisition will be included in the 2023 sustainability report that will be published next year. Before I hand the call over for questions, I would like to address our integration efforts for the former Yamana assets. Integration is advancing very well in a timely fashion, and we have started harvesting the $40 to $60 million of annual synergies we announced earlier. We have welcomed a large group of new colleagues that joined Pan American at the end of March, and it is an absolute pleasure working with the new team. And with that, I would like to open the call for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star 4x1 on your telephone keypad. You will hear a three-tone prompt acknowledging your request. Questions will be taken in the order received. Should you wish to cancel your request, please press the star 4x2. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Thank you. And your first question comes from the line of Cosmos Chu from CIBC. Please go ahead.

Thanks, Michael and team, and congrats on a very strong start to 2023. Maybe my first question is on Mexico. Mexican peso has strengthened, and we've heard from others operating in Mexico that it has had an impact on cost. Maybe could you comment on the Mexican peso? I believe right now you're assuming 18.75 to 1. I think now it's closer to 17.5. And then overall, if you can also talk about, we've also heard in Mexico, labor, power, consumables, might actually increase in prices as well. Is that impacting you as well?

On Cosmos' side, Michael, I will start and then hand it over to Ignacio. Just in general, it's a great question, and the impact that we see on our costs in general from foreign exchange rates during the years, it can be very big, positive or less positive impact as we have. Even before, with the original Pan American assets, probably around $600 million of our costs, in local currencies. So it's not only in Mexico, of course, moves on the currencies have a big impact to our costs. Just in general, I would like to A statement there when you probably saw on the cost side, we assumed I think about around 5% inflation for this year. We see probably a bit more push on wages and less so on energy costs. But that's just a general remark. And maybe, Ignacio, you can give us a bit more flavor on Mexico.

Sure. Thank you, Michael. Hi, Cosmos. Hi, Ignacio. Yes, so for sure, the Mexican peso has been one of the strongest performing currencies over the last year. A lot of it has to do with the high interest rates in Mexico relative to other rates. So it's something that we've been monitoring throughout the year. We do have a Mexican peso hedge program that's detailed in our MD&A. There's a table there. So today, approximately, I think, 24% of our Mexican peso costs are being covered through our exposures, being covered through our hedge program. Yes, it has been. It's been tough managing that. However, all mines operating in Mexico are facing the same challenge. So we'll continue to monitor it, and when there's opportunities to lock in some favorable rates, we'll do that.

Of course. That's great to hear. Maybe also in Mexico on April 29th, the Mexican Senate passed the amendment to the federal mining law here. Changes include 50 to 30 years in terms of the concessions and also 5% contribution to social funds in the country. Have you looked into it? I'm getting mixed reviews in terms of is it retroactive, is it not retroactive? And even if it's not retroactive, would it impact, say, something like a La Colorada scar? Maybe if you can comment on that, Michael.

Sure. And of course, we are looking into it, monitoring it very closely. As you know, it's changing right now. There's more and more information coming out every day. So there will be more changes down the road for sure once we have all the details available. At the moment, I understand it really applies to new concessions. As you know, our two operations are on concessions that are established for a long time uh there will be for sure some some impacts but i don't have any final numbers from it but uh like the timing on the new concessions obviously would only apply if we state new concessions uh mid-exploration ground for example so something like a lot colorado scar would not be a new concession it would be it would be part of the you know existing concessions Yeah, La Colorado's corn is right below our current producing mine, the vein, so it's on the same consumption span than the current production at La Colorado.

Perfect. Got it. Maybe switching gears a little bit. Thanks again, MD&A. I'm sure it's a lot of work in the page 28. You actually gave us quarterly projections, and I see that it is back-end weighted. Q4 appears to be the best quarter that you're projecting. Could you maybe talk about that? What are some of the key drivers here in terms of the back end weighted production?

Yeah, good morning, Cosmo. This is Steve. Hi, Steve. The back end, yeah, is driven largely through La Reina is a good example where Michael mentioned, you know, the typical pre-stripping schedule at La Reina opens up most of the ore flow at the end of the year in Q4, a little bit in Q3 as well. We're seeing a similar trend on back-end loading at Jacobina in their mine sequencing. They're sequencing into higher-grade golds as well. And then also at Cerro Moro, Cerro Moro we're going to see higher silver and golds, and El Pinyon higher silver and golds. And those are all just mine sequencing according to their mine plans that they're currently operating in. Those are the main drivers.

Great. Thanks, Steve. And then maybe one last question on the guidance as well. Thanks again for giving us guidance on sustaining costs for silver and gold. Just one confirmation, those guidance numbers, do they include the NRV adjustments? Is it before or after? And then in terms of NRV adjustments, again, Michael, thanks for explaining it to us earlier. Is that going to be even more of a bigger number later on? I believe my understanding is that the biggest changes or the biggest numbers come from heat leachers, and El Pinyon, I believe, that's a heat leacher. Are we going to see an even bigger adjustment, especially for gold, on a gold-foy basis?

Hi, Cosmos. It's Ignacio again.

Hi, Ignacio.

Yeah, so as Michael mentioned in his opening remarks, there was an NRV adjustment, and it was a positive NRGM adjustment. And basically NRV is a calculation on the recoverable amount on our inventories. And one of our largest inventories are the heat bleach pads. And if you notice from the ACE numbers, it's mostly in the gold segment, and that's directly related to Dolores. So one of the biggest drivers in that positive adjustment was not just the quantities or the recovery curve, but most importantly was the prices. So we saw an increase in metal prices from December 31 to March 31, and that was the key driver in that positive adjustment. In terms of going forward, NRVs are excluded from our guidance numbers. They're very difficult to project. And from the new operations, none of them have a heat bleach pad, so we don't expect the new operations to be driving big NRV adjustments going forward. So El Peñon does not have a heat bleach pad.

Oh, it doesn't. Okay. Clearly, I've never covered Yamana. Thanks, Ignacio, for letting me know. But great. Those are all the questions I have. I'll get back in the queue. Thank you, Cosmos.

Thank you. And your next question comes from the line of Craig Hutchinson from PD Securities. Please go ahead.

Hi. Good morning, guys. Good morning. Question on Escobar. You guys have been in the Phase 2 consultation process for about a year now. Can you just give us a high-level view of where those discussions are at and whether you sort of see a potential timeframe to kind of wrap up that phase and move it on to the Supreme Court? Thanks.

Yes, Greg, thanks. It's actually a bit less than a year, but I'll pass it on to Sean McAleer, who is running our activities in Guatemala. He can give us some more details. Sean, please.

Yeah, good morning. There's currently a timeline published On the MEMBA website, you can access that through our website. There's a series of activities that are coming up in the consultation. Right now, it's information sharing, evaluation of information with the consultants, and a series of meetings. I would expect there's, after the meeting we have on May 19th, we'll probably have monthly meetings. And then, at the timeline that's published, shows some field consultation activities taking place in July, August, with a target end date in October this year. So we've seen some delays in the process in the past, and so I'm always cautious about that, and I don't know if we're going to have delays anymore in the future, but that's basically the timeline that the Ministry of Energy and Mines in Guatemala has published.

Does the consultation phase kind of end in some kind of impact-benefit agreement, or is that not necessarily the case?

Yeah, I think that's, you know, the idea, and you'll see that timeline talks about reaching agreements. And so I think the intent is that there'll be some agreements, again, the content and what the exact parameters that would be discussed, that's still open right now. So I can't say specifically what kind of activities or mitigations we would need to do or other commitments we would need to make at this point.

Okay, thanks for that. And then just maybe in terms of capital returns, You guys should be generating some substantial pre-cash flow kind of going forward with the human assets. Is the priority just to sort of pay down the RCF over the next couple of quarters, or do you guys sort of plan to build up cash? Thanks.

Yeah, look, nothing has really changed with our capital allocation priorities. It's really paying back at the moment our line of credit for sure. It's always nice to have that all available. for whatever else we want to do or comes up on our capital side. So that will be focus number one for this year. As I said in my remarks, they're always looking for and working on really high-quality projects. We have quite a few in our pipeline already. And, of course, we'll continue to return capital to our shareholders in form of dividend.

Perfect. Thanks, guys. Thank you.

Thank you. And your next question comes from the line of John Tomatoes from John Tomatoes Ferry Independent Research. Please go ahead.

Congratulations on all the work. I was especially impressed at the new balance sheet that there's no goodwill or intangibles. With $1.1 billion of debt, including the Yamana acquisition, How much is the debt level that you're comfortable with for the new Pan Am? I know historically you've been conservative, liking a strong balance sheet. And how much would you need to reduce the debt to before you would go ahead with any of the major big dollar projects at hand like La Colorado Scarn or the Mara Project or the La Rain Sulfide, et cetera, et cetera.

Yeah, John, look, I mean, I'm very comfortable with that level now. I think if you look at the size of the company, it's a very comfortable level. But I think everybody who knows me for a while knows that I like to have, you know, very conservative balance sheet. So as we alluded in the last question, There will be excess cash that will be used to pay back on our line of credit for sure. There are two bonds that we took over from Yamana that have very attractive interest rates and will run quite long. I think one is maturity in 31 and the other is like 27. We received an investment grade from S&P and Moody's on that, so I'm very comfortable and happy about that as well. Just when you look at new projects, this does not exclude progressing on our projects. I mean, like Guarada's GARM, the advancements there and the work for the PAs in full swing, you know, these projects are not – ready right now to receive huge investments. You saw the investments that we do this year at La Colorado's Garden, for example, for the PEA and for the dwelling to prepare that project to go forward. So the big spend will obviously come down the road. So everything goes parallel. So we'll repay our line of credit as the first line item. while our technical team will continue with their work on, you know, most of the projects you mentioned. I mean, we don't need to work on larena sulfides. We still have oxides that we mine on top of that porphyry that will last probably well into 2026. But all other projects are, you know, ongoing as normal as I said. The big capital spans will be coming later.

Michael, it was notable that the cash balances consolidated from the MERA project are large. When you booked the acquisition March 31, what is the carrying value for the MERA project? It must be at least $400 million if the cash was over $200 million.

Yes, I'll start and hand it over to Ignacio. But you're right. There is just north of $200 million in our cash balances. It's for MARA. It's a sign to MARA that money is consolidated on our balance sheet because we are the majority holder on that project with over 56%. So that's the reason why it shows up on our balance sheet. Ignacio, do you have – can you give us some more details?

Hi John, this is Ignacio here. So I will point you to note nine of our financial statements where we have the breakdown of the property plans and equipment. Now, just to let you know, we did assign values to all the new assets. However, those are preliminary numbers through our purchase price allocation exercise. We have a year to refine those numbers, and as the year goes by, some refinements may come. But currently, if you look at that table, the carrying value assigned to Mara net is around $1.3 billion. And that is around 26% of the total value assigned to the properties. Now, the total acquisition cost for Yamana was around 2.8 billion, but that's the net number of assets and liabilities are assigned in our balance sheet. So there's liabilities offset in the assets.

So, you know, sometimes we say, plan for the worst and let the upside take care of itself, but I'm thinking sort of in the converse way. Just in case lightning struck and Escobar got the green light in six months and La Colorado is getting closer to getting ready, And maybe Glencore really wants to build Mara, given how much enthusiasm they have for all those projects and tech. If you have three projects that are ready to go around the same year or two, and they all look good, how do we manage that wonderful scenario?

Look, I mean, as I said, like the La Colorado SCAR, there's a lot of work going on right now, but we are not ready to build a project there. So that's way out there. So it's not possible that that would happen all in the same year. We will present the PEA later on this year and then, you know, take next steps from there. But as we do all that technical work, And, you know, we'll be able later in the year to share with everyone how those numbers look like. The scenario that everything will come through in one year, in this year, is not possible just because of La Colorado. There's a lot of work going on at MARA as well. As I mentioned, we are over 56% owner. The rest is we plan court as an approved budget there. And as I said, there is some money set aside for some of the work as well on our balance sheet. And just, Ignacio, something to add to this?

Yeah, just one last thing, John, just to clarify. That $1.36 billion that I mentioned, that's the 100% value. We own only 56.25% of it. So that was the value for...

So yeah, so John, even if everything lines out perfectly, there are wonderful projects and they will come in due time and not all together. So that would be a very nice scenario, yes.

So I don't want to minimize the future work ahead for Don Ignacio and you, Michael, but Glencore is the most spectacular partner We have a company in the US called Century Aluminum that had Glencore as a trading partner. And Glencore owns 43% of the public stock now and has been saving the day for Century Aluminum since 1990 and for Polymet Metal since around 2006, where they own 70% of Polymet now and merged it with tech. What sort of creative solutions are there for financing MARA and do you have to do any work at all and can you simply rely on the good graces of Glencore that can finance all their partners?

Look, of course, Glencore is a great partner to have in a new project. We're working together with Glencore in many, many fronts on our trading side. For people who are familiar with my bio, they will see that I worked for Glencore actually before I joined Pan American for quite a long time. It is a great partner to have. But look, we only own these assets now, the former Yamana assets, for about six weeks. So it's Of course, as I said before, asset management and optimization of our portfolio will be a focus going forward here, but we need a little bit more time to work on all that, so we'll have more answers for you as the year progresses.

Excuse my enthusiasm, Michael and Ignacio. Buona serata. Thank you.

Thank you. Next question comes from the line of Adrian Day from Adrian Day Asset Management. Please go ahead.

Yes, good morning. Excuse me. I've got three questions, two of them very quick. I'll ask them all in a row. The first one is, I don't think you mentioned the cash costs. You just gave the all in sustaining. Can you tell us what the cash costs are? I realize there's variability among the mines. The second question is, Again, I realize it's far too soon to have made a thorough review of all the amount of assets, etc. But is it your intention? Should we expect some disposals of properties? Is that an intention or is it still not clear? And then the third one, and I'm sorry to harbor on Escobar, I'm a little unclear on what the current process is. As I understood it, there was a a Supreme Court mandated consultation with the government and the local people. And you were sort of observers, if you like. And I thought that was completed in January or February. So the current process, the current consultation is still government, right? It's not Pan-American. Those are my three questions.

Thanks, Adrian. I have Sean starting with Guatemala. Yeah, so...

The process is there's three principal actors in the process. The government of Guatemala and the Ministry of Energy and Mines leads the process, the consultation process. The Xinka Parliament, who are the representatives for the Xinka people, and then the company, which is our Pan American Silver Guatemala subsidiary. So the meetings generally happen, the formal meetings generally happen about once a month. So as we mentioned, we'll have another meeting on May 19th. And those meetings will go and continue on through the summer. And so we expect the information sharing process to continue and some of the other activities to continue. And as I mentioned before, those activities are outlined on the Ministry of Energy and Mines website, and that link is on our website. You can go look at that outline there.

Thank you, Sean. Ignacio, could you answer the cash cost question, please? Sure.

So our cash costs on the silver segment for the first quarter of 2023 was $12.19, and on the gold segment it was $1,120. So factors affecting the cash costs Q1 2023 versus Q1 2022 were the inflationary pressures that Michael mentioned, as well as the cessation of mining activities at Morrocotra. Those are the main factors.

Okay, and then I will answer your last question on the disposal of assets and plants there. As I said, we are now owning these assets for about six weeks. We started a big process with our team to go through all the assets. Of course, we know the producing assets very well. We started looking at a lot of exploration ground all in every country, a lot of exploration projects. There are some advanced projects we are looking at as well. So there's no, you know, there's absolutely no plan that we keep everything. There will be some disposals. And that's the work we're doing right now. So as I mentioned before, it's a little bit early, but you should expect that there will be some disposals coming over the rest of the year. Okay. Thank you. That's helpful. Thank you. Thanks, Adrian.

Thank you. And your next question comes from the line of Don DeMarco. From National Bank Financial, please go ahead.

Thank you, operator, and good morning, Michael and team. Most of my questions have been answered, but maybe just a question on care and maintenance. I know you're guiding about $100 million for this year, and we see that the Q1 expense is in line with that, but is there any visibility to reduce these care and maintenance costs by way of dispositions or otherwise? I get it that ESCOBAL, you're kind of keeping that ready to restart, but do the other care maintenance projects, does that much money really need to be spent or can it potentially be eliminated altogether? Thank you.

Yeah, Don, thanks for your question. Absolutely, as you said, the big ones on the care maintenance ESCOBAL, and that's for obvious reasons, and we are keeping that operation in great shape. So, you know, when we get the green light, which Matt has shown that there's no timing to it yet, we are in good shape to start. So that's the reason why we spent the money on care and maintenance at Escobar, so very good reasons for that. The other big span is Amara, and it's probably, you know, I wouldn't say the same situation, but it's the money spent to prepare the project to move forward. So there is, you know, one portion of it really as care maintenance, the rest is to prepare it for technical studies and move that forward. So that will obviously change over time and move into more project capital later on, but the capital right now is in our care maintenance budget. I think the other ones are fairly small, Morococha via – You know, looking at opportunities and the other alternatives for motor culture right now. So to find a solution there for that for that care and maintenance.

OK, thank you. That's all for me. Thank you.

Thank you Mr. Michael. There are no further questions at this time.

Thank you operator and thanks everyone for calling in. It was a great quarter, and I'm really excited to look forward for the rest of this year. As from now on, we have all the additional assets from Yamana in our ownership and are producing. So looking forward to talk to everyone to discuss Q2 in August. Have a great start of the summer.

Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you all for participating. You may now disconnect.