Pan American Silver Corp.

This call has been recorded on Thursday, August 8, 2024. I would now like to turn the conference over to Saran Fasecki, VP Investor Relations. Please go ahead.

Thank you for joining us today for Pan American Silver's Q2 2024 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 2024 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, Erin, and thank you, everyone, for joining the call. Our operations generated record cash flow before changes in working capital of $203.3 million in Q2. This resulted in $102.1 million free cash flow in Q2. Balance sheet strength further improved with cash balances rising to $337.2 million at June 30th, an increase of $36.1 million from the previous quarter. This strong financial performance was impacted by an unusual income tax expense. driven primarily by foreign currency exchange rate fluctuations in the quarter, namely evaluations of the Brazilian real and the Mexican peso, which reduced foreign-dominated deductible tax attributes, as well as inflation adjustments on monetary liabilities in Argentina. Reported net loss in Q2 of $21.4 million, or $0.06 per share, was significantly impacted by the $93.1 million in income tax expense and the $26.7 million net realizable value inventory expense. Adjusted earnings were $40 million, or $0.11 per share. The impact of the inflation-driven Argentine income tax, which was not adjusted, reduced adjusted earnings by $0.03 per share. Turning to operations, silver production of 4.57 million ounces in Q2 must be lower our expected range of 5.36 to 5.78 million ounces for the quarter, as continued ventilation constraints at Laco Varada affect the silver grades and throughput. I'm very pleased to report that the new ventilation infrastructure was completed at the end of June, and commissioning and startup of the new fans started on July 11, 2024. As scheduled, and ventilation conditions in the deeper eastern areas of the mine have improved significantly. We are currently accelerating mine rehabilitation and development rates, which has steadily increased access to the higher grade deep eastern Candelaria production areas. As a result, we are expecting to achieve higher throughput and grades in the second half of 2024 as planned. The slides that accompany this call, available on our website, include a brief video that shows the operations of the new ventilation fans that were installed at the surface of the shaft. The fully concrete lined 5.5-meter diameter by 580-meter deep water group of ventilation shafts that was completed last December. I'd like to congratulate the team on the successful completion of this large, complex project. Silver production was also impacted by weather-related disruptions at Dolores and Salamoro. At Dolores, open pits, geotechnical challenges hampered ore tons mined and unusually prolonged fire conditions limited water availability, which impacted the leaching cycle. This resulted in lower grade and low ratio of ounces recovered to ounces stacked during the quarter. We now expect to extend ore stacking activities and increase heat irrigation rates throughout Q3, even some stockpile processing at the start of the rainy season. At Cerro Moro, heavy precipitation in southern Argentina restricted access to the satellite NADI zone, impacting throughput and grade. We have regained access to NAATI and expect to make up the Q2 shortfall in production during the remainder of the year. At Minera, Florida, unusual heavy rains restricted access to the site and resulted in a 10-day suspension of ore processing during the quarter. We have now upgraded the road access to both Cerro Moro and Minera, Florida, which should reduce the impact of heavy rainfall events in the future. We produced 220.4 thousand ounces of gold in Q2, slightly below our expected range of 221 to 252 thousand ounces. Continued strong performance at Jacobina and higher gold grades and recoveries at El Peñon helped offset the weather-related impacts at Cerro Moro, Tolores, and Minera, Florida. Costs in Q2 came in better than expected, with all-in sustaining costs excluding NRV adjustments for both the silver and gold segment below our guidance ranges for the quarter. Silver segment oil and sustaining costs were $18.12 per ounce, excluding an NRV adjustment that increased costs by $0.95 per ounce. Gold segment oil and sustaining costs were $1,465 per ounce, excluding NRV adjustments that increased costs by $119 per ounce. In total, $26.7 million of NRV adjustments were included in Q2 production costs. The NRV adjustments are primarily related to projections of higher future unit costs at Dolores to extract the in-heat inventories once all stacking activities have been completed. They're on track with our major projects for the year. The new dry stack tailing storage facility at Guarón is on schedule to be completed in the second half of 2024 and will be commissioned thereafter. The construction of the paste plant project at Timmins is on schedule to be completed in Q3 2024. This will enhance ore extraction and improve mine stability at the Bell Creek mine. At Chacobina, we continue to advance plant upgrades into stabilizing throughput at 8,400 tons per day and recoveries at 96%. They're also progressing the optimization study to optimize the long-term economic and growth potential of Chacobina. At Escobar, we met with several Guatemalan government institutions to support the LL169 consultation process over Q2 and into Q3. During this period, we also hosted compliance visits by the Ministry of Energy and Mines and Ministry of Environment under the Care and Maintenance Program for Escobar. The appointment of the Vice Minister of Sustainable Development, who will assume responsibility for overseeing the consultation process, remains pending. Given the successful commissioning of the substantial Lackawatta Ventilation System upgrade in July, we are maintaining our operating outlook for production cash costs, the audit sustaining costs, and capital expenditures in 2024. While we anticipate silver and gold production to fall within our original guidance range, we expect production for both to be more heavily weighted to the fourth quarter of 2024 than originally indicated in our quarterly operating outlook, and for annual silver production to be towards the low end of the annual guidance range. With improvements in our balance sheet, WQ2, net debt declined to $472.3 million. We maintain our base cash dividend at 10 cents per common share. We look forward to increasing levels of free cash flow from back half weighted production in 2024. Together with the other members of our management team, we would 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 star followed by the one on your touchtone phone. You will hear a three tone prompt acknowledging your request and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from Cosmos Chu with CIBC. Your line is now open.

Hi, thanks, Michael and team. Maybe my first question is on La Colorado. Michael, you kind of touched on it. La Colorado, the ventilation shaft is now in place. Sounds like it's going pretty well. Could you maybe elaborate? Is it functioning as expected? How has that sort of helped airflow? And ultimately, I guess what I'm trying to get to is, um in terms of getting to 2 000 tons per day you said you're going to get to it by year end along with higher grades is it going to be more a straight line sort of increase from now until then or is there going to be some kind of step change and is that going to be part of the fact that as you mentioned overall q4 is going to be stronger than q2 yes thanks cosmos uh yeah the the shaft completion and the installation and startup are

of the funds was right on time, as we indicated for the, you know, since beginning of the year. That will happen mid-year. It happened mid-year. It looks very exciting what we see on the results side, on the impact to the mine of that shaft, which, as you know, was a multi-year project, really, to kind of bring us back on track here with the production . But Steve, maybe give some more detail.

Sure. And good morning, Cosmos. Thanks for the question. I have to say we're incredibly happy with the results of this new shaft. Immediately when we turned the fans on on July 11th, we increased overall flow rates into the mine by about 200,000, 300,000 cubic feet per second of airflow, or feet per minute, sorry. And immediately we saw temperatures drop in the Candelaria East Zone by three degree wetfall Celsius. So a substantial improvement which led immediately, we saw a bump in tonnage of 25% over what we've been seeing up until that point through the year. We were about 1,400 tons a day going in for the year before we started that fan. We're now up at around 17, a little over 1,700 tons a day. So between now and the end of the year, the other thing I wanted to mention is that we also bumped our development up 10%. from where we were prior to when that fan started up. So within the two and a half, three weeks of running the fan, we've seen incredible boost of production and development rates. That'll continue to ramp up. You know, I think for purposes of quarterly reporting, it'll be a bit of a straight, you know, line ramp up. Obviously, day to day, there's fluctuations that take place. But we're feeling good that we're starting from a good base and we'll wrap up through the rest of the year.

Yeah, that's great to hear. And then maybe on the quarterly guidance as well, Michael, as you mentioned, due to weather-related issues, silver production was lower than your quarterly guidance. However, I do see that your cost on sustaining costs was also lower. or better than your quarterly guidance. So how we would achieve that lower cost despite lower production, and ultimately, what's the, you know, your ability to sustain those lower costs on a go-forward basis? Can we see that once again in terms of that, you know, better cost once again in Q3 and Q4?

Well, don't forget that especially at La Palada and other places with increased production, later in the year, and La Colorado is the best example of that. We obviously have a fixed cost there, and having a larger denominator will bring the cost per ounce right down. That's really the reason why we forecast those lower costs at La Colorado going into the year, really based on that ramp up of the production. So that's, of course, still there for us.

Yeah, just to add, Cosmos, I think in the first half of the year, some of the lower costs we've seen has been related to the timing of our inventory of byproduct credit sales relative to what we're producing. We sold a bit more byproduct than what we produced during that period. So that'll offset as we look to the second half of the year. As Michael says, we do anticipate reduced unit cost per ton substantially at Long Colorado. We are seeing some improvements that we've made at Cerro Moro and Jacobina. They're coming in at pretty good cost per ton. So we've kind of projected that out with the actual byproduct credits. And that's where we're saying that we feel we'll come in in line with what we guided for our cash and East Coast costs for the year.

One last point, Cosmos, as I always mention, on the cost side, currency fluctuations have a big impact on our cost. We saw a devaluation in the quarter, especially on the Mexican peso and the Brazilian real, and that had a, you know, positive impact on our costs and will continue to do so if that continues down the road. Just on the flip side of that, obviously, when you have the devaluation of the currency, we see kind of an increase of our non-cash tax expense due to those currency fluctuations. So you see that in our earnings numbers, but that's a non-cash tax expense there. I really like to see the positive impact to our costs that we have now. It's a very exciting combination of lower costs and higher metal prices, which obviously must reflect the record cash flow.

I agree. And maybe one last question on Escobar. It seems like from your MD&A meetings are still continuing into Q3. despite the fact that the appointment of the Vice Minister of Sustainable Development is still pending. Is that, am I reading that correctly and is there any more updates in terms of Guatemala and Escobar?

Yeah, we have actually quite a large number of meetings with government officials during the quarter and I think, you know, after a bit of slow startup, I think, of the new government. They have most of the people in place. There are still a few people missing to be put there, but I think, yeah, the meeting schedule between us and the government officials has definitely improved, and looking forward to continue and go back into the full consultation meetings that we need to have to advance this.

Great. That's great to hear. And thanks again, Michael, Steve, and Serene, and team, and those other questions I have.

Your next question comes from Don DeMarco with National Bank Financial. Your line is now open.

Thank you, operator, and Michael and team. Maybe first question, just continuing on with basketball. So, you know, I've been looking at the price of the contingent value rights, and they've eased a little bit over the recent months. Do you think this is a fair indicator of the likelihood of a restart or just the tenor of activities at Escobar related to the consultation process?

You know, I will be careful when you look at the price of the contingent value rights. As you know, there is a $300,000 30 million CVRs out there, so a large number. And when you look at the trading numbers, this is a very limited trading on those CVRs. So they obviously follow the Pan American share price, of course. And then I think the fact that The new government needed a bit longer to set everything up here. Could have had an impact to that, but I will not read too much into it as a status. It is a very, very limited trading of those CVRs.

Okay. And then just, I mean, it's encouraging to hear that there's a number of meetings that have been held, but is there any, you know, visibility for next meetings or the filling of that vacancy? This is just kind of, maybe repeating some of the questions that were asked by the last caller, but just wondering what we might anticipate in the coming months on this process.

Look, I mean, we anticipate that that role will obviously be filled by the government in time, and we'll pick up, I think, with that kind of the style of meetings we had before. As I said, at the moment, all I can say is that there has been quite an impressive number of meetings government officials between the company and us. And, you know, it was really like quite a slow start of the year with the new government, which kind of has to be expected, obviously. A new government, as you can imagine, a lot of new officials in place that need to be brought up to speed that, you know, have other issues to deal with in the country than just Escobar, as you can imagine. And, you know, now there are in place most of the time, probably five, six months now. So I think we see kind of a normalizing meeting schedule here in the future.

Okay. Okay. We'll look forward to that. And so next question, the quarter, we see a true portfolio effect here. You've got lower costs offsetting higher costs at different operations. The cornerstone mines look strong, Jacobin in particular. And now you've got this optimization work that's underway. the mine's running seemingly great at 8,400 tons per day. Are you still, is the optimization still looking at maybe trying to increase that throughput or what are some of the areas of focus that we can look forward to whenever that report will be released?

Yeah, we're very excited about Jacobina and as you see, very, very strong cash flow for us, very strong production, uh, you know, very, very long mine life. So, uh, Yes, we're still working on the optimization. I think there's much more to do at Jacobino, but maybe, Steve, you want to give that? I know you're not ready yet with the studies already, but maybe a few little points.

Sure. Thanks for the question, Don. Yeah, the optimization work is proceeding at full bore. We are seeing benefits to changing some of the mining methods, particularly at depth, as we've talked in the past. that would allow us to capture more of the resource recovery, reserve recovery with the same development. That could lead to the higher throughput. You kind of said it well. We're really happy running 8,400 tons a day. We got a throttle there. Everything's coming in line. We're making a few upgrades to circuits in the process plan, a few upgrades in some of the systems in the mine. We're very happy with where it's running there. And we want to make sure that the optimization study is done in a way that will achieve the same kind of stable, steady state run at a higher throughput with understanding all aspects of that. So there's still a lot of work to do. We're still talking sometime in the first half of next year to come out with the results. We do, I would say, tend to think it's going to show us higher throughput, but I don't really want to give any numbers on it right now.

Okay, thanks for that, Steve. And, well, in the meantime, it's looking great. So, last question. Looking to the Mexican administration, Cloudy has been in the seat now for a few months. Have you had a chance to meet with the new administration, and are there any concerns or issues that... that might potentially develop into concerns in the quarters ahead with this change?

Yeah, the new administration has been elected, you're right, but they're not, they did not take office yet. September 1st, well, the change happened, so. It's a bit early to answer your question. Look, I think we will continue to happily work with the government in Mexico. Mexico has always been a good place for us to work. We have very strong operations in Mexico. Oh, sorry, sorry. October 1st, sorry. Okay. Will be the change of government. So, as I said a bit early, but I, you know, I don't foresee any big changes how we work with the government in Mexico. Governments, as you know, change in every country we're working over time, and we are dealing with very long reserve lives in some of our assets, especially when you look at the La Corada's car. You know, there will be many, many administrations passing while we produce for decades and decades on that asset in the future. So I'm very happy to work in Mexico. I don't see any issue at this point.

Okay, Michael, thanks so much for that and good luck with Q3.

Thank you. Operator? Hello? Hello, operator? Nicholas, if you can hear us, you're in the queue to ask a question.

Thanks, Michael, for taking my question here. I just had a question on Sarah Morrow, if I could. I understand that grades have been a little bit variable here for the previous two quarters, and that's been due to some regulated impacts, but I was hoping that you guys could provide some color on what the next quarter or two might look like there with respect to grades and throughput. Thank you.

Yeah, and it's really interesting on the zone that we are mining that is 25 kilometers away from Sera Moro, high-grade satellite, and we couldn't really access that site all the time during Q2 because of the really, really strong rains and snowfalls during winter. We are obviously getting now into springtime soon, and access has been reestablished. So that's why I've been, you know, maintaining obviously our outlook for the production there. Steve, if you want to give some details.

Yeah, sure, Nicholas. And, you know, we were pushing pretty hard to get NADI online towards the end of last year. We talked about it. It was kind of the next grade zone, if you will. We were going to open up after mining out the higher grade portions of the ZOE deposit. It was very important to us. So we pushed out there, got that up and running quite well early in Q1, and it was starting to deliver pretty well. You know, I have to admit, yeah, we had some pretty good rains there, you know, higher than normal. But we also, our road wasn't really built to the kind of standards we would have liked to have seen. So the combination of the two definitely limited, restricted our ability to access the pit. We didn't really have dewatering systems in place. to the degree that we should have to dewater the pit in these kind of rainstorms. So we've been, as we've regained access and now we are mining back in Naughty at the rates we like to mine, we're upgrading those roads, we're upgrading those dewatering systems so that we can face these storms in the future. And we're also looking at plans now to accelerate production in Naughty to kind of claw back what we missed in Q2 there. We feel pretty good that we got a good plan in place to be able to do that, but that's going to load up Q4 more so you won't see as much coming out in Q3. So when you look at the distribution at Cerro Moro, it's going to be stronger in Q4 than Q3.

Got it. Okay. That's helpful. Thanks, Keith. Just if I could sneak in one more. We're almost halfway through the quarter of the year. And I understand that the La Reina II transaction is still expected to close sometime this quarter. I was just wondering if you guys could provide any updates or color on when you see that happening, and if there's anything with respect to approvals that you're still waiting for.

Yes, Nicholas, that's right. And at the moment, we're still waiting for some regulatory approvals. And, you know, at the moment, it's still planned for Q3.

Great. Thanks, Michael. Thank you.

There are no further questions at this time. I will now turn the call over to Michael for closing remarks.

Thank you, operator, and thanks, everyone, for tuning in to call today. It's very exciting, very exciting times coming here for Permanent Lease. You got a glimpse here when you look at the record revenues, record cash flow, free cash flow. It's obviously a very nice combination here when you go into a high metal price environment. At the same time, we finalized the ventilation system at La Corada after quite a few years of very, very hard work to get there. As Steve explained, we already see an increase in not only production number, but also development meters. We're nearly back on development meter track where we want to be at about 2,000 meters a month, I believe. That will lead to a ramp-up at La Colorado, as I explained, that will lead to lower costs at La Colorado, and a very exciting combination. While we still obviously work on our exciting SCARN deposit, no doubt that this is one of the worldwide largest discoveries of silver and base metals over the last decade. We'll continue our work on that, and of course, they'll have the optionality Lots of exciting projects ahead of us and right out there to harvest the fruits of high metal prices with a combination of lower costs. I'm looking forward to report on Q3 later this year. Until then, have a good time. Thanks, everyone.

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