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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 American 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 Steinmann, Pan American's 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 31. 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-end 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 $0.13 per share. This reflects noncash accounting impacts. Notably, a $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 31.
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 onetime in nature from purchase price accounting, we have adjusted them from the earnings.
The adjusted earnings were $14.7 million or $0.04 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-linked 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 31, 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 3 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 per our capital allocation objectives, we intend to fully repay the $280 million drawn on our credit facility as of June 30, '23. The remainder of the proceeds will increase our cash balance, further strengthening our balance sheet and position us to advance our growth projects, including the La Colorada Skarn Project as well as paying dividends to the shareholders.
We announced yesterday a $0.10 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 Yamana transaction, and I'm pleased with our progress to date.
Turning to the La Colorada Skarn project. Work continues on the preliminary economic assessment of PEA, which we aim to release as part of an updated La Colorada property technical report later this year. The PEA will include our view of project development, operating and capital cost estimates for the Skarn.
At the La Colorada 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 2 exhaust plants are installed, I mean 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 Skarn project.
At the Escobal mine in Guatemala 3 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 advisers 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 operations.
Following the meeting, we responded to a request for additional information and continue to work with MEM, the Ministry of Energy and Mines in the process. Now that all parties have delivered to our institutional presentations, demand considers that the information transfer process for Phase II of the consultation is complete. The MEM 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. Escobal continues under the care and maintenance and at this time, no date has been set for a potential restart of the operations.
Please see that the Ministry of Energy and Mines website for further information, activities and the time line for the Escobal ILO 169 process. A link is provided on our website on the Escobal 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 Yamana assets is progressing well, and we are on track to capture the $40 million 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'll 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.
[Operator Instruction] First question comes from Lawson Winder at Bank of America Securities.
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 1 with the dividend I would expect and with a much larger asset base you have now with the Yamana assets, 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 Yamana acquisition, I mean does it make sense for Pan American to be repurchasing its shares?
Yes. Thanks, Lawson. Look, I think our capital allocation did not change what we did the last few years in the sense that, first of all, we maintain a very strong balance sheet. I think we proven already in the first quarter here that we are on track doing so. We announced last week the sale of a few non-core assets for about $593 million cash and some high-quality royalties as well.
We just announced that, Lawson, so that closing will happen for most of them, I would guess in Q3. So the money is obviously not in our bank account yet, but it will come. And of course, that's where your question, I guess, hints on to on the capital allocation. So strong balance sheet, low debt levels.
You know that we took on 2 bonds from Yamana. They're very attractive interest rates on those bonds. They're long-term bonds, so that's fine. We took some money on our line of credit, net flow of credit, which, as you can imagine, with the current interest rate situation is more expensive debt and will be paid back when we receive the cash from that -- those transactions. 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 $0.10 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 and -- 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 and I think the door will be open there to anything like dividends, share buybacks, et cetera.
But don't forget that we also have some high-quality projects, and that's really the core of our business to build out high-quality projects and do that with cash in our balance sheet. So La Colorada Skarn, of course, will be a focus on that -- and as I mentioned in the call just before the PA should be out on summer later in this year.
Okay. If I could also follow-up on the asset sales. It would make a lot of sense that La Arena 2 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, we I think, we had only holding these assets for about 3 or 4 months, we have been able to come through -- follow-through here and come out with a very strong group of non-core asset sales. We are working on others. So this is not done by any means. We have a lot of assets in our portfolio some from Pan American and some from Yamana side.
So we'll continue looking at that and optimize our portfolio. And I think I made statements before that copper for us is not obviously another focus. We are 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 loyalty copper royalty to keep our hands on the upside of the future copper price.
So kind of the similar structure than we did with MARA. You're right that La Arena still has a few years of gold production from the oxides on the top I'm not worried about that. There will be many different ways to structure like a deal on something like that where you keep it all, keep mining and hand over the asset later on or a new buyer, who wants to look at the sulfides below, finishes the mining of the oxide and pays us for the gold. So, I mean, we're not worried about that. I think that's just the 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, by the way, thank you for providing the quarterly guidance. So unit costs stepped down in Q3 versus Q2 on higher production and then there's still even higher production in Q4, but the cost step back up. Is that just -- are you expecting a decline in some of the byproduct credits in Q4 versus Q3?
Yes. 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.
Yes, really weather-related [ they are having ] many places, when we go from the wet into the dry season. It's just something to the quarterly guidance, Lawson, in case people didn't see that it's in our MD&A. And when you look at the quarterly in the Q1 -- yes, sorry, In the Q1 MD&A. And if you look at our guidance there per quarter, we actually -- 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.
The next question comes from Craig Hutchison of TD Securities.
I had a question on the MARA project you plan to retain, and I think you could have kind of touched on it. Is that something you hold longer term? Or would you be looking to monetize that post the deals close? 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 as I said, whenever we can try to keep access to future upside through royalties. I think it has worked for us really, very well in the past. I would like to remind everybody of the Maverix transaction we did with our former portfolio of royalties we had in 2015 where we started Maverix Metals, when we're a strong and long time shareholder until the company got sold earlier this year. I think it's after -- yes.
What's going on the transaction side. So that worked out really very well for us. I think we got in about $152 million cash from quite a smaller portfolio -- this royalties we're talking now are very strong royalty as you can imagine.
When we're talking, especially in the case of MARA, about life of mine, copper royalty probably 1 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 this royalty is 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, and we'll decide later on how we create most value for our shareholders out of that portfolio.
Okay. Great. Maybe one last question. Just on the tax, you mentioned taxes, cash tax is 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 just for catch-up payments from 2022?
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 some taxes. Specifically, I think it was in Chile. But yes, that's just a normal cadence of our tax payments. Installments have been a catch-up and sometimes the margin [indiscernible]. So do you like either lines in Q1 or Q2.
But yes, you're right. It's normally our biggest largest tax payments are in the first 2 quarters of the year.
That's correct.
The next question comes from Don DeMarco from National Bank Financial.
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 H1?
Yes. Look, a very good point. I mean that 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. The biggest ones for the care and maintenance costs with the Morococha and of course, MARA.
It really depends when the transaction closes. But as soon as they close, yes, that will go away, depending which month we may going to adjust a little bit the care and maintenance capital down at the end of the year, but it really depends on that date. But definitely for future years, there will be a big improvement.
Okay. And what we see with the reporting last night at 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 Shahuindo and El Peñón that are above the ranges on AISC. Jacobina positively the bottom of the guidance range. So what are some of the factors that are driving the swings at these 3 mines? And -- and would we expect a reversion to sort of midpoints of the guidance range in H2?
Yes. Thanks, Don. Steve here. Maybe I'll start with Jacobina. Jacobina is having very, very good success on some of their cost control programs. And we have enjoyed some pretty good cost -- 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 reais 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 Peñón, there's quite a bit going on there in terms of rescheduling some of the mine plan. We've enjoyed some really good silver production coming out of El Peñón 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, or particularly strong Q4 at El Penon.
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 Cerro Moro, I think that was the other 1 you were talking about.
Or no it was Shahuindo.
Shahuindo, yes. At Shahuindo, I would say, right now, it's really -- we're focused on this blending of course 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 their 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.
Yes. But maybe just add in general really -- the general cost driver, a big cost driver when you look at, of course, sustaining capital 1 and that varies, as we said before, say month-to-month -- that's a seasonality to that, which depends on the weather pattern or on the dry and wet season of different countries we are working in, when we can do certain work and when not. So that's just [ a given ] and especially in Peru that the dry season starts in Northern Hemisphere winter. Byproduct, very important byproduct timing of sales of that and prices of byproduct as all our costs are net of byproducts -- those have a big impact on our cost. And then the last 1 that Steve alluded to is currencies, right? Depending on 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 kind of different impacts and of course, and we have to follow our capital schedule and [ certain ] byproduct and currencies are out of our control. So just keep in mind, when you look at all-in sustaining costs that those are big factors as well that play into it.
Okay. Okay. We'll keep modeling the guidance ranges for time being. And -- yes, but final question, just going over to the ILO 169 process. It sounds like an encouraging quarter. I mean [ getting ] sounds like good progress there. They are asking questions. There seems to be some dialogue there. 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?
Yes. So, 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. Look, 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 core clarification. So I don't have really dates for you exactly. I just encourage everyone to follow that website from the government of Guatemala from the Ministry of Mines and 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.
[Operator Instruction] There are no further questions at this time. Mr. Steinmann, I turn the call back over to you.
Yes. 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 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, the integration is going really well. We are very happy with our local teams and everything advancing well. And harvesting of synergies is right on plan between our $40 million to $60 million. So -- we'll continue that arrive down under our path, and we're looking forward to report the next quarter to you in November until then, enjoy the rest of the summer. 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.