Pan American Silver Corp.

Good morning, my name is Joanna and I will be your conference operator today. At this time, I would like to welcome everyone to Pan America Silver's second quarter 2023 conference call. Siren, you may begin your conference.

Thank you for joining us today for Pan American Silver's Q2 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 Q2 2023 unaudited results, all of which are available on our website. I'll now turn the call over to Michael Steinman, Pan American President and CEO.

Thanks, Siren, and thank you everyone for joining our call today. The second quarter is the first period we are reporting results inclusive of the assets acquired through the Yamana transaction. which closed on March 31st. The results clearly deliver on the benefits we had expected through the strategic acquisition, enhancing both the scale and quality of our portfolio. With the contribution of the new assets, production in Q2 was up 102% for gold and 55% for silver relative to Q1. Consolidated Q2 silver production of 6 million ounces was at the high end of our 2023 quarterly guidance and consolidated record gold production of 248,200 ounces also approached the upper end of the range. Silver and gold segment all in sustaining costs per ounce of $15.70 and $1,342 respectively are within our full year cost guidance. With a strong performance year to date, we have reaffirmed our original 2023 operating guidance provided in our Q1 2023 MD&A. As indicated with that guidance, our production is back and weighted, particularly for gold in the fourth quarter. Please see the quarterly operating outlook provided in the Q1 MD&A for the slides that accompany this call for the detail. The strong production and sales volumes resulted in Q2 revenue of $639.9 million. Net loss in Q2 was $47.4 million, or 13 cents per share. This reflects non-cash accounting impacts, notably the $33.3 million impairment charge, net of tax, related to the sale of our 92.3% interest in Morococha for cash consideration of $25 million, as per our news release from July 31st. The net loss also includes $26.1 million net of tax for fair value adjustments on finished goods inventories that were expensed during the quarter. As these inventory adjustments are related to the Yamana transaction and more one time in nature from purchase price accounting, we have adjusted them from the earnings. The adjusted earnings were $14.7 million or 4 cents per share. Cash flow from operations totaled $117 million, net of $50.5 million in taxes paid. Our annual tax payments are typically the highest in Q1 and Q2. We repaid $55.4 million of debt in Q2 and exited the quarter in a strong financial position with $470 million available under the Sustainability Link credit facility and cash and short-term investment of $409.2 million. This includes the $192.9 million of cash that is restricted to the MARA project. Our financial position improves further with the divestment of non-core assets we announced on July 31st, 2023. The sale of our interest in the MARA project in Argentina, the Morococha mine in Peru, and the Agua de la Falda project in Chile, together with the divestment of non-core equity investments, is expected to yield total cash proceeds of $593 million. The sale of the equity investments have already been completed, and we expect the other three asset sales to be completed in the third quarter of 2023. In addition to the cash proceeds, Pan American will retain future upside through the retention of copper and gold royalties with strong counterparties. The divestment of the MARA project and Morococha mine will also allow meaningful reductions in our annual project development, reclamation and care maintenance costs for 2023 and going forward. As for our capital allocation objectives, we intend to fully repay the $280 million drawn on our credit facility as of June 30th, 2023. A reminder of the proceeds will increase our cash balance further strengthening our balance sheet, and position us to advance our growth projects, including the LaGuardia's current project, as well as paying dividends to the shareholders. We announced yesterday a 10 cent per share dividend with respect to Q2, equivalent to $36.4 million in aggregate dividends. Optimizing our portfolio was an important and stated objective following the Emana transaction, and I'm pleased with our progress to date. Turning to the LaGuardia SCARN project, work continues on the Preliminary Economic Assessment, or PEA, which we aim to release as part of an updated LaGuardia property technical report later this year. The PEA will include our view of project development, operating and capital cost estimates for the SCARN. At the La Colorado mine, the concrete line ventilation shaft advanced to a depth of about 420 meters at the end of July, and is expected to reach shaft bottom by the end of this year. Once the two exhaust fans are installed next year, we expect to see significant improvement in ventilation in the high-grade east candelaria area of the mine. Until this new system is operating, we are restricting development and mining rates in the higher grade deep eastern portion of the Candelaria deposit, as reflected in our year-to-date results and our guidance for 2023. The new ventilation infrastructure, which includes a refrigeration unit that was commissioned in 2022, will also provide benefits to the development of the SCARN project. At the Escobar Mining Guatemala, three meetings were held in the second quarter under the ILO 169 consultation process being led by the Guatemalan government. We also took part in a working meeting in late June with participation of the Xinka Parliament, their advisors, and Guatemala government institutions. During the meeting, we presented details on the dry-stack tailings facility management of water and vibration from blasting activities when the mine was in operation. Following the meeting, we responded to requests for additional information and continued to work with MEM, the Ministry of Energy and Mines, in the process. Now that all parties have delivered their institutional presentations, the MEM considers that the information transfer process for phase two of the consultation is complete. The MAM has established several dates for working meetings with the parties involved in the consultation. We continue to participate in the ILO consultation process in good faith and respecting the constitutional court order. Escobar continues under the care maintenance and at this time no date has been set for a potential restart of the operations. Please see the Ministry of Energy and Mines website for further information, activities, and the timeline for the Escobar ILO 169 process. A link is provided on our website on the Escobar page. Our second quarter results show the successful transformation of Pan American into a major precious metal producer with more diversified operations across the Americas and a strong focus on silver. The integration of the IMAN assets is progressing well, and we are on track to capture the $40 to $60 million of annual synergies we had identified through the transaction. We are committed to maintaining operational efficiencies and delivering on our targets, and I look forward to updating you next quarter as we continue to evolve into the new Pan American Silver. Before we move on to questions, a few housekeeping items. We are currently working on an updated reserve and resource report, inclusive of our Yamana acquisition properties, which should be released in the next few weeks. I would also like to note that we have revised the date for our ESG call. The call will now be on October 19, 2023, at 8 a.m. Pacific Time, 11 a.m. Eastern Time. We will provide further details closer to that date. Together with the other members of our management team, we will now be happy to take your questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. If you are using a speakerphone, please lift the handset before pressing any keys. First question comes from Lawson Winder at Bank of America Securities. Please go ahead.

Okay, thank you very much, Operator, and hello, Michael and team. Thank you for the update today. I would like to start off just by asking about your capital return, which you touched on briefly in your prepared remarks, but I just wanted to kind of ask that again and hopefully get a little more color from you, and that is, you know, one with the dividend, I would expect, and with a much larger asset base that you have now with the Humana assets, that there is that ability to pay a higher dividend. And I'd like to hear your thoughts on that. And then secondly, with the share price trading now well below where you issued shares for the Humana acquisition, I mean, does it make sense for Pan American to be repurchasing its shares? Thanks very much.

Yeah, thanks, Lawson. Look, I think our capital allocation did not change of what we did the last few years in the sense that, well, first of all, we maintain a very strong balance sheet. I think we've proven already in the first quarter here that we are on track doing so. We announced last week the sale of of a few non-core assets for about $593 million cash and some high-quality royalties as well. We just announced that blossom, so that closing will happen for most of them, I would guess, in Q3. So that money is obviously not in our bank account yet, but it will come. And, of course, that's where your question, I guess, hints onto on the capital allocation. So, strong balance sheet, low debt levels. You know that we took on two bonds from Yamana. They're very attractive interest rates on those bonds. They're long-term bonds, so that's fine. uh we took some money on our line of credit of credit which as you can imagine with the current interest rate situation is a more expensive debt and will be paid back when we receive the cash from that those transactions uh and then the rest of course will improve even further our balance sheet and there will be returns to our shareholders so that brings you to your question We declared 10 cents of a dividend. That's kind of like probably the last quarter of our dividend payment under the old policy. That got kind of a bit distorted because our dividend policy was based on net cash. We put that in place for a long time. Pan American did not have any debt, so that's how it worked really well. So we're working on a new policy right now. We believe that the right time to install that will be at the end of the year when we have all that cash in from those non-core asset sales. We and the board did not make a final decision yet how that will look like, but it will be something easy to follow, like our old policy. i think the door will be open there to anything like dividends and share buybacks etc but don't forget that we also have some high quality projects and that's really uh you know the core of our business to build out high quality projects and do that with cash in our balance sheet. So La Corada's current, of course, will be a focus on that. And as I mentioned in the call just before, the PA should be out somewhere late in this year.

Okay. Thank you for those thoughts. If I could also follow up on the asset sales, it would make a lot of sense that La Arena II would also be a non-core asset potentially to be divested? I mean, is that a fair assumption? And then secondly, how do you think about that, given that there's still a couple more years or maybe several more years of really strong gold production left at that asset?

Yes, I mean, look, I think with only holding these assets for what, three or four months, we have been able to come through, follow through here and come out with a very strong group of non-core assets. I also, we are working on others, so this is not done by any means. We have a lot of assets in in our portfolio, some from Pan American, some from Yamana side. So we'll continue looking at that and optimize our portfolio. And I think I made statements before that, you know, copper for us is not obviously not another focus. We're focusing on our silver production and our gold production. and i would envision with copper project something similar than we did with mara where we would get cash for an asset and a very strong royalty copper royalty to keep our hands on the upside of the future uh copper price so kind of the similar structure than we did than we did with mara you're right that la reina still has a few years of gold production from the oxides on the top uh you know i'm not worried about that there will be many different ways to to structure a deal on something like that, where you keep the gold, keep mining and hand over the asset later on, or a new buyer who wants to look at the sulphides below, finishes the mining of the oxides and pays us for the gold. So I'm really not worried about that. I think that's just a detail that we can solve in a deal negotiation.

Okay, great. And then hopefully just one final question that should be fairly straightforward, just on the silver unit cost guide for Q4. And by the way, thank you for providing the quarterly guidance. So unit costs step down in Q3 versus Q2 on higher production, and then there's still even higher production in Q4, but the costs step back up. Is that just, are you expecting a decline in some of the byproduct credits in Q4 versus Q3?

Yeah, hi, Lawson. Steve here. No, it's more reflective of our sustaining capital timing. We see a heavy quarter in Q4 for sustaining capital spend. And that's really weather-related, particularly in some of our assets. Q4 is kind of the peak time for our construction on leach pad, waste dumps, things like that.

Yeah, really weather-related in many places when we go from the wet into the dry season. Just something to the quarterly guidance laws in case people didn't see that it's in our MD&A. When you look at the quarterly, in the Q1 MD&A, if you look at our guidance there per quarter, our costs were actually below our guidance, right in the guidance for the annual one. But when you look quarter by quarter, we did really well in Q2.

Okay, thank you all very much. Appreciate that. Thank you, Lawson.

Thank you. The next question comes from Craig Hutchison of TD Securities. Please go ahead.

Hi. Hi, good morning. Good morning. I had a question on the MARA relative you plan to retain, and I think you kind of touched on it. Is that something you hold longer term, or would you be looking to monetize that You know, post the deals closed, and I guess, have you got any expressions of interest on that NSR since you announced it last week?

Look, I mean, at the moment, it's really selling, focusing to sell some of these non-core assets. And that's just that we, whenever we can, try to keep access to future upside through royalties. I think, you know, it has worked for us. really, really well in the past. I would like to remind everybody of the Mavericks transaction we did with our former portfolio of royalties we had in 2015, where we started Mavericks Metals and, you know, were a strong and long-time shareholder until the company got sold earlier this year, I think. Lots going on on the transaction side. So that worked out really, really well for us. I think we got in about $152 million cash from quite a smaller portfolio. These royalties we're talking now are very strong royalties, you can imagine. I mean, we're talking, especially in the case of MARA, about a life of mine, copper royalty, probably one of the larger. copper deposits in the world that is to be developed. I don't want to make a decision right now what we do with these royalties. You can imagine there's a lot of demand for royalties. And of course, people are asking what we're doing with them. But at the moment, we're just focusing on optimizing the portfolio and collecting those royalties. We'll decide later on how we create most value for our shareholders out of that portfolio.

Okay, great. One last question. Just on the tax, you mentioned taxes, cash taxes are higher in Q1 and Q2. Can we expect them to drop off fairly substantially here into Q3? And can you just provide some context of why it was so high? Is this for catch-up payments from 2022? Yeah.

Hi, Craig. This is Ignacio speaking. So in general, yes, as you know, we pay installments throughout the year. However, there's always a catch-up that we do, usually typically between March and April. And in this case, there was a large catch-up in April from certain taxes. Specifically, I think it was in Chile. But yeah, that's just a normal cadence of our tax payments, you know, installments and then a catch-up and sometimes in March and April. So it either lands in Q1 or Q2.

But yeah, you're right. It's normally our biggest, largest tax payments are in the first two quarters of the year. That's right.

Great. Thanks, guys.

Thank you.

Thank you. The next question comes from Don DeMarco from National Bank Financial. Please go ahead.

Thank you, operator. Good morning, Eklantine. First question. So looking at the asset disposition late July, does this change your care maintenance guidance for 2023? I think it was about 100 million for the year, and maybe 50 million has been spent in each one.

Yeah, look, a really good point. I mean, it's not only the cash that comes in and the royalties, but a lot of care and maintenance costs that will go away with those transactions. You know, the biggest ones for the care and maintenance costs really Morococha and, of course, Mara. It really depends when the transaction closes. But as soon as they close, yes, that will go away. You know, depending which month, we may adjust a little bit the care maintenance capital down at the end of the year. But it really depends on that date. But definitely for future years, that will be a big improvement.

Okay. Thank you. And what we see with the reporting last night is that the cost, the AISC, is a little bit variable versus the guidance ranges. And just looking at some of the cornerstone assets, like we see Schwendo and El Pinyon that are above the ranges on AISC, Jacobina positively near the bottom of the guidance range. So what are some of the factors that are driving the swings at these three mines? And would we expect a reversion to sort of midpoints of the guidance range in H2?

yeah thanks don steve here um maybe i'll start with jacobina jacobina is having very very good success on uh some of their cost control programs and um and we have enjoyed some pretty good costs even cost per ton unit cost per ton have been looking very good there we're a little bit we're monitoring very closely the exchange rate of the re-ice That has an effect there that's pretty strong, but we did come out pretty good in Q2, and we're optimistic, I think, looking forward at Jacobina. El Pinyon, there's quite a bit going on there in terms of... Rescheduling some of the mine plan. You know, we've enjoyed some really good silver production coming out of El Pinon, a little bit disappointing gold production during Q2. So we're kind of readjusting that plan. We always anticipated a strong second half of the year, particularly strong Q4 at El Pinon. But we have kicked up development rates a bit, and some of the activities there have kicked up a bit. So that's driving some of the cost differentials from what we had before. And I think Sarah Morrow, I think that was the other one you were talking about.

Or no, it was Schwindel.

Oh, Schwindel, Schwindel, yeah. At Schwindel, I would say... Right now, it's really, we're focused on this blending of coarse ore with the fine clay ores. And what that happened, what we've decided to do is drop some of the cutoff grade, if you will, of some of the ores to give us better blending rock for the higher grade clay ores. And the effect of that kind of drives a bit of the cost as well. And that's kind of the noise we're seeing there.

Yeah. But maybe just that in general, really, the general cost driver big cost driver when you look at of course sustaining capital one and that you know varies as we said before from month to month that's a seasonality to that which depends on the on the weather pattern or on the the dry and wet season of different countries we are working in uh when we can do certain work and when not so that's just that's just a a given and and especially in peru that that dry season starts in the northern hemisphere winter by byproduct very important byproduct timing of sales of that and prices of byproduct as all our costs are met of byproducts Those have a big impact on our cost. And then the last one that Steve alluded to is currencies, right? Depending how much of local currency payments we have in a certain country and how strong that local currency is, that has a big impact on our cost, positive or negative, depending where it goes. So those are, you know, kind of given impacts and, of course, and we have to follow our capital schedule and uh byproducts and currencies are out of our control uh so just keep in mind when you look at all in sustaining costs that those are um you know big big factors as well that play into it okay okay we'll keep uh modeling the guidance ranges for time being and um but final question just going over to the ilo 169 process

Um, it sounds like an encouraging quarter meeting sounds like good progress. They're, they're asking questions and, you know, there seems to be some dialogue there. Um. I'm looking at your website here that you had mentioned and after phase 2 consultation, there's the Supreme Court verification. So, could you give us an idea of when that phase 2 might conclude and then what the expected events would be through phase 3? Uh.

Yes, I mean, you're right, lots of activities in the quarter and ongoing. The website from the Ministry of Mines, I think, shows something like October, end of October or November for the conclusion of that phase. I don't know if that's really the exact timing, but I think that's what at the moment is on their website and that's what the government is probably trying to achieve. And then it will go into the last phase with the code verification. So I don't have really a date for you exactly. I just encourage everyone to follow that website from the government of Guatemala, from the Ministry of Mines. And, you know, there will be periodic updates as we're going on and see how that evolves.

Okay. I can see the link on your website. Okay. Thank you very much. That's all for me. Good luck with Q3.

Thank you. Ladies and gentlemen, as a reminder, should you have any questions, please press star 1. There are no further questions at this time. Mr. Steinman, I turn the call back over to you.

Thank you, operator, and thanks, everybody, for calling in today. a busy quarter with a new larger and stronger Pan American with the addition of the former Yamana assets, strong production and No, big advance already on divestments of non-core assets in the quarter. So as you can imagine, it was a very busy quarter. I'm very happy to see the advances. And on top of that, as I mentioned, integration is going really well. We're very happy with our local teams. and everything advancing well, and harvesting of synergies is right on plan between our $40 to $60 million. So we'll continue that drive down and our path. We're looking forward to report the next quarter to you in November. Until then, enjoy the rest of the summit. Thank you very much.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.