Pan American Silver Corp
TSX:PAAS
Earnings Call Analysis
Q4-2023 Analysis
Pan American Silver Corp
In the call, Pan American Silver emphasized a strong balance with over $440 million in cash and short-term investments at the end of the year. They have demonstrated a commitment to returning value to shareholders, laying out their plans to repurchase shares, citing market dislocation between equity and asset valuations. In 2023, dividends totaled $130.4 million and a continuation of the policy was announced with a cash dividend of $0.10 per common share. The company also revealed its intention to pay around $95 to $100 million in tax payments in the first quarter of 2024, setting up a robust financial scenario as they enter the new fiscal year.
Pan American projected a drop in production costs, especially for La Colorada, as they expect to reverse the high costs incurred in the previous quarter. The company will maximize the production of gold in Q4 at Cerro Moro, utilizing by-product credits to manage costs. Additionally, they discussed the decommissioning of a plant built by Tahoe, as they've found more economic blending solutions, with plans to market some of the unused plant equipment in the future.
The company anticipates free cash flow generation to be back-end loaded in the year, with heavier tax payments and extra capital allocated to the first half, but still expects to pay dividends without tapping their credit facility. Pan American expressed confidence in their cost guidance for key mines, factoring in modest inflation and potential wage adjustments. They noted that their cost performances are influenced largely by productivity, metal prices, and foreign currency fluctuations, factors that are considered in their guidance and strategy moving forward.
The transcript revealed continuous work on asset divestments, leveraging the value creation from the previous year's successful divestments, which yielded royalties in the range of $150 million to $200 million. Pan American outlined their ongoing focus on finding partners and divesting assets strategically, especially with projects like La Colorada and potential copper deposits, continuing to actively manage their portfolio for optimized growth and shareholder value.
Pan American updated stakeholders on the resumption of ILO consultation meetings for project development, with the new government signaling commitment to the process. The company is working to maintain progress with all parties involved, ensuring continued dialogue with the government and stakeholders, which is critical for advancing projects like Escobal.
Additionally, Pan American showcased their dedication to maintaining a conservative financial strategy, emphasizing their avoidance of short-term debt and ensuring sustainable growth and investment capabilities. They stressed the value of their existing projects, such as the exciting PEA published for La Colorada Skarn, as drivers of long-term growth. Bringing the focus back to value, the company reiterated their stance on executing a share buyback and maintaining dividends as strategic levers to enhance shareholder value, reinforcing their optimistic outlook for 2024.
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Good morning, ladies and gentlemen, and welcome to the Pan American Silver Fourth Quarter 2023 Unaudited Results Conference Call and Webcast. At this time, all lines are on a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions]. This call is being recorded on Thursday, February 22, 2024. I would now like to turn the conference over to Siren. Thank you. Please go ahead.
Thank you for joining us today for Pan American Silver's Q4 and Full Year 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 Q4 2023 audited 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 past year was a dynamic period of growth and change for Pan American. We added 4 new mines in 2 new jurisdictions. We streamlined our portfolio to the sale of noncore assets, and we announced the preliminary economic assessment for the La Colorada Skarn. With the integration of the assets we acquired from Yamana now complete, we continue our focus on improving margins through safe, cost-efficient operations, harvesting synergies and further portfolio optimization. In 2023, the 9-month contribution of the assets we acquired drove an 11% increase in silver production and a 60% increase in gold production over 2022 and resulted in record revenue for both Q4 and for the full year. Operating cash flow for Q4 was $167.4 million, net of $32.4 million in taxes paid and inclusive of $56.1 million of cash from working capital. We recorded a net loss of $0.19 per share in Q4, driven by 3 noncash charges. The first relates to the final purchase price allocation for the acquired Yamana assets. An American finalized the purchase price allocation or PPA asset values for the Yamana Gold acquisition in Q4 2023, resulting in a $16.5 million improvement to previously reported Q2 2023 and Q3 2023. IFRS accounting standard reporting rules for business acquisitions required that all accounting impacts to earnings from the finalization of PPA asset values, retrospectively recast to prior quarters. As a result, the additional $16.5 million or $0.05 per share in earnings for the year related to revised depreciation charges for the final PPA asset values must be retroactively applied to Q2 and Q3 rather than applied to Q4 2022 earnings. There is no impact on full year 2023 earnings. The second factor impacting Q4 earnings was a $36.2 million impairment charge for the crushing and agglomeration plant of Shahuindo. The plant was constructed prior to Pan America's purchase of the mine in 2019, and we have never operated it.The third factor was a $13.8 million closure and decommissioning expense, largely due to the revised recoation estimate at Alamo Dorado in order to withstand high intensity rainfall events to the installation of impermeable barriers for the waste dump and enhanced site drainage system. The closure of the tailings storage facility at Alamo Dorado has been successfully completed. The impact of the impairment and the closer of decommissioning liability was removed from adjusted earnings. Production in 2023 was prereleased on January 17, 2024, and largely in line with our expectations. Silver was slightly below our guidance range at 20.4 million ounces while gold was within guidance range at 882,900 barrels. Shortfall in silver production was largely due to the ventilation constraints at La Colorada, together with the temporary suspension of operations in October 2023. We are looking forward to the completion of the new ventilation system mid-2024 in order to access the higher-grade mine zones for the Northeast. Escalation of the new 5.5-meter concrete line ventilation shaft was completed the final depth of 581 meters on schedule in December 2023, and the remaining key pieces of infrastructure to large exhaust fans to draw the hot humid air out of the mine are expected to be installed by the end of Q2. On the first 2 quarters of this year will continue to reflect the challenging operation conditions. We expect significant improvement in the second half of the year with high throughput and lower costs thereafter. The production shortfall at La Colorada and higher mining costs at both La Colorada and Huaron, resulted in cash costs and all-in sustaining costs for our silver segment operations coming in above our guidance range for 2023. We increase were partially offset by lower cost at Cerro Moro from higher-than-expected gold byproduct credits and at San Vicente from lower costs and higher silver production. Oil production and gold segment all-in sustaining costs were within our guidance range for 2023. Our cash cost for the gold segment came in above the guidance range, largely due to the lower gold production at El Penon. As disclosed in the third quarter of 2023, cocreates mined at El Penon were lower than we had anticipated in certain high-grade sections of the mine. We are increasing the drill density at El Penon after drilling fell behind late in 2022 and early 2023 due to a change of a contract to by Yamana. We expect to provide more information on El Penon with the midyear reserve update and released our guidance for 2024 and January '17. In 2024, we expect to produce between 21 million and 23 million ounces of silver and between 880,000 and 1 million ounces of gold. All-in sustaining costs for the silver segment are expected to be between $16 and $18.50 per ounce and between $14.75 and $15.75 per ounce for the gold site. At Jacobina, we are expecting processing rates of approximately 8,500 tonnes per day with stable gold recovery rates around 96%. The new carbon in pulp tanks were mechanically completed and the new concentrate leach system began operating late 2023. We are undertaking a comprehensive optimization study of Jacobina to evaluate alternative mining methods and enhancements to the processing facility to optimize the long-term throughput and economics of that mine. At El Penon, we are assuming that grades and throughput rates will be similar to what we realized in the second half of 2023, ending the new infill drilling results. We expect to complete mining at Dolores by Q3 2024 with residual leaching to follow for several years thereafter. [ Silver ]production is expected to be largely back-end loaded from improved ventilation conditions at La Colorada and an expected improvement in grades at Cerro Moro as we access and bring into production the Nat satellite deposit, which is located 25 kilometers from the plant side. Costs will reflect that production profile being heavily weighted to the first 2 quarters and significantly decreasing in the back half of 2024, as shown in the quarterly operating outlook provided with our Q4 disclosure. We also expect to spend between $295 million to $310 million on sustaining capital and another $80 million to $85 million on growth projects, primarily for advancing the La Colorada Skarn, completing the tailing filtration project that Barron, finishing the paste fill facility at Bell Creek and completing some plant upgrade projects initiated by Yamana Jacobina. Sustaining capital is largely to expand tailings dams and leach pads to extend underground mine ventilation systems and open pit mine waste dumps for exploration to replace our whole mobile equipment and for certain operating lease payments. Turning now to our strategic initiatives. In January, we filed an updated technical report for our La Colorada property, which included the preliminary economic assessment for the La Colorada project. Our objective is to provide investors with exposure to silver and [ Tuscan ] provides that exposure and scale. Annual silver production is estimated to average 17.2 million ounces during the first 10 years. It is also expected to produce 427,000 tons of sync annually during that period. Given the volume of base metals in the deposit, we are assessing interest from base metal producers and other capable parties to explore long-term partnerships to develop this polymetallic project. We are focused on the large amount of anticipated silver production from this deposit. Turning to Escobal, a new government to meeting with the new Ministry of Energy and Mines of MAM on February 7, 2024. The meeting for the ILO 169 consultation was held yesterday on February 21, with the newly appointed Vice Minister of Energy and Mines and Xinka representatives. During which, the presentation on the observations of the sinkers appointed consultants was communicated. We look forward to receiving the reports and working with the man to ensure accurate information is communicated to the Xinka participating in the consultation process. As usual, we are not providing a time frame for completion of the consultation or the potential restart of the mine. An Americas financial position strengthened over 2023. At year-end, our cash and short-term investments reached a record of $44.9 million, and we had the full $750 million available under our undrawn revolving sustainability-linked credit facility. Total debt of $801.6 million was mostly related to 2 senior notes we acquired through the Yamana acquisition. We expect cash flow generation to improve in 2024 as we realize the contribution of a full year of the 4 new mines and cost savings through synergies and lower car maintenance costs. However, we expect cash flow to be back-end weighted given the production and associated cost profile I previously outlined. As well, we expect approximately half of the estimated $95 million to $100 million of tax payments will be paid in the first quarter of 2024. Yesterday, we announced our intention to begin buying back some of our shares. We have been opportunistic in the past when making acquisitions. With the current market dislocation between our equity and asset valuations, we believe that shell buyback is a prudent and accretive use of capital, and we will apply the same opportunistic approach in repurchasing Pan American shares. We also announced yesterday a cash dividend of $0.10 per common share, in line with our policy. In 2023, dividends paid totaled $130.4 million. Before opening up for questions, I would like to welcome Scott Campbell, who is coming back we joined the company in April. Scott will help oversee the company's operations and lead the corporate projects group reporting to our Chief Operating Officer, Steve Busby. The senior operational expertise will be very valuable as we work to optimize our portfolio and advance our growth projects. On behalf of the entire team at Pan American, I'd also like to thank George Greer for his contributions to the company over the past 17 years. We wish you all the best for your retirement coming up later in this year. 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. [Operator Instructions]. Your first question comes from the line of Cosmos Chiu from CIBC.
Thanks, Michael and team, and thanks, George as well. Happy retirement. Maybe my first question is on your quarterly guidance. Thanks, Michael, for providing us with quarterly guidance. As we can see, it improves quarter-over-quarter. My question is, I understand the second half is going to be better than first half, but do see a big drop or improvement in terms of silver costs in Q4. Just wondering how you're going to get there. I think it's a fairly big drop even from Q3 into Q4 in terms of all-in sustaining costs for silver.
Yes, Cosmos. Thanks. And yes, it's a big drop, of course, heavily impacted by La Colorada changes back to bigger production, more ounces after the ventilation circuit is back working. Of course, that was the reason for the high cost last quarter. So that big impact will be reversed and that's why it's a bit. But I hand it over to Steve to give us a bit more color on the cost side.
Yes, Cosmos, I think I would add, the other thing to look at is on Cerro Moro. We have a back-end loaded gold production in Q4. It's quite high, and that's a by-product credit there. So that's really driving a big part of the Q4 change as well.
Great. And then Michael, as you mentioned, there were a number of onetime items in your earnings in Q4, including Shahuindo, the crushing agglomeration plant, $36.2 million write-down I'm just wondering, was that something that you could have sold did no one want it? Or do you trying to sell it?
Again, we'll start and then Steve will have more color to this. This plant has been built by Tahoe before we actually purchased the company. We had obviously looks at our plant during operation. We opted for a solution of blending between coarse and fine grain material as a more economic solution than using the plant. So the plant is now -- let me just think probably 7 years old, 8 years old. We have never used it. And I think where we stand right now and with the blending solutions that we found, we came to the conclusion that we will not turn it on looking forward, but Steve may be able to give us more detail.
Yes, Cosmos, Michael is precisely right. And really, the issue was we were trying to decide -- we were trying to look at all the alternatives of treating the high clay ores of Shahuindo and looking at the blends, looking at the rock availability. And so we kind of kept that plant in check just in case we didn't have enough rock. That may have been the alternative to go to now. We're more confident with our blending capabilities. We understand the [ calculation ] characteristics on the heat. So we've made the decision. We didn't need that plant anymore.
Yes. Okay. I'm just wondering, I know I used to cover Tahoe as well. I know it was no longer needed. I'm just wondering if it's something that you can actually just monetize in terms of we wanted --
Yes. If I could add, Cosmos, we do plan to market that equipment. There's some that we want to keep for other developments we have internally, but there's large pieces of crushing and agglomeration equipment that we will try to market over the next year or so.
And then maybe one last question on Dolores. As you mentioned, mining will likely come to an end soon. This is going to be a residual leach sort of operation. Can you maybe talk about the ongoing, what would you call it maintenance costs or closure costs that you will need to spend? And then as you enter the closure period, what would you need to do in terms of ensuring the safety of site, the structural integrity of the leach pads and making sure that no accidents happen?
Yes, Cosmos, that's a great question. I can tell you, we're focused on trying to structure the operation when it's in this residual leaching as efficiently as we can. We will absolutely maintain all of the monitoring systems, all of the geotechnical monitoring elaborate monitoring that we have on the heaps and the dumps during the residual leaching. Those aren't expensive items to instruments that are run. The real cost is going to be on just circulating solutions through the heat. And then the big question is going to be what we monitor, what we operate. We'll do it as streamlined as we can. We've made some estimates in this guidance, particularly in Q4 where it's all residual at that time. But until we get there, and we actually structure and see how it goes, it may change from that point.
Your next question comes from the line of John Tumazos from John Tumazos Independent Research.
Thank you for all the explanations. Michael, the La Colorada Skarn PEA with $2.8 billion of capital if you go to 50,000 tons a day at $2.6 billion, if you stop at 30,000 tons a day is a big future item, the share buyback and potentially in 2024, maybe you have a lot of time to earn money in 3, 4, 5 years from now, you're heavy into the construction and La Colorada Skarn. Should we take this essentially as your expression of confidence that you're going to complete a JV with a base metal partner and that your share of the capital might be less than half of the PEA number or the subsequent studies are going to reduce that CapEx number and reduce your capital call?
Yes. Thanks for the question. Absolutely. I think I made it very clear from the first call on that the focus now is to find the right partner for that project. As you can imagine, for such a large, I would call it the silver zinc deposit, but the largest in the world. And there is quite some interest from the base metal side just because of the long life, the underground nature and the big packs in production. So yes, that's absolutely my confidence to work on that on such an agreement that obviously will reduce our share on the on the capital, but always stay focused on that very large silver production. As you remember, there's about a 50,000 tonne about 17 million ounces for the first 10 years average silver production, which really will be our focus in any agreement that hopefully, we come to.
Should we also take this perhaps is an expectation that the silver or the zinc prices might rebound to help your economics or that Escobal restarts in Guatemala?
I don't have control, obviously, but the silver and zinc prices are going. I think all the listeners have their view on that. I have my view I think once we see interest rates move the other direction where we'll see a strong rebound on precious metals for sure. I don't know when that will happen this year, there's the different views out in there. But just to remind everyone, like last year, we repaid the $400 million debt and we paid about over $130 million in dividends, while we ended the year with a record cash and short-term investment balance of over $440 million. So those are very important numbers here. And obviously, one of the reasons why we decided at this point in the market where we believe there's a lot of value La Colorada is one of them that are not fully included in our share price, but it's a good time and an accretive time to buy back some of our shares. Of course, we're looking forward, as you saw there in the quarterly guidance to a stronger and strong 2024, especially the second half and costs come off, as we explained because most earlier in the call. So all that combination and, obviously, last but not least, we will continue to work on divestments. We have been, I think, very successful last year on the divestments, and we'll continue to work on that. So all that together and the fact that we probably created last year royalties out of those divestments that we did, which I will probably are somewhere in the $150 million to $200 million range at today's prices. So another big value bucket that we have under our control. So I think it's a very prudent approach for us to obviously pay the dividend and come out with that share buyback at this time.
And your next question comes from the line of Craig Hutchison from TD.
Just on La Colorada, can you give us a sense of what the grades will be in the second half of this year? Obviously, there's going to be a big inflection point? And then how durable are those higher grades going forward? Is it more of a year or 2? Or is it a very short period of time?
Yes. Craig, this is Steve. Fortunately, we are seeing the grades at La Colorado that we expect. During Q4, we were about 288 grams silver. That's close to the reserve grade. It's what we expect going into next year. It's really a matter of tonnage. We got to get our tonnage up and the tonnage that we got to increase is in the high-grade portion of the Candelaria Deep zone. So that's what the ventilation shaft and the vent fans will give us access to, to get that tonnage of. But we're pretty happy with the grades where they are. We're pretty confident those grades are going to sustain over a long period of time. We see potential to continue to add as we drill out more on local.
Yes, we have at the moment, probably about 8 or 9 years of proven probable reserves is throughput. So yes, they can sustain a long time. Obviously, there will be advances on the skarn during that time period. But yes, I think there's a long reserve in the veins later on those plans will [indiscernible] skarn deeper down.
Okay. So the plan from a throughput perspective is around 2,000 tonnes a day. Is that we should be modeling in this year?
Yes. Once we get the ventilation up and running, that's our target is get above the 2,000 tonnes a day. So once the ventilation fans are running, we do have some development acceleration that we have to do in that Candelaria zone, so you'll see it start to ramp up from the current 1,300 tonne a day range. It will take us a couple of months, 2, 3 months to wrap up from there to the 2,000 tonnes a day once the vent fan is running.
Okay. Great. And just in terms of, I guess, the free cash flow you guys are going to generate here, do you guys anticipate being free cash flow positive in the first half of this year given the higher taxes you have to pay usually weighted to the first half? Or you anticipate free cash flow more of a second half story?
Craig, this is Ignacio. That's a great question. And just following up on what Steve just said, our forecast is for it to be back-end loaded. And as usual, there is heavy taxes being paid in the first half of the year plus some extra capital. So we will be able to pay our dividends in the first half of the year without drawing from our credit facility, but the bulk of the free cash flow does come in the second half of the year.
And your next question comes from the line of Don DeMarco from National Bank Financial.
So first question, you had some strong cost performance in Q4 at a couple of your flagship mines, both quarter-over-quarter and relative to 2024 guidance. So I'm referring to El Penon Q4 [ ASIC ] 11.78 midpoint guidance is $12.50. Jacobina 10, 22 and the midpoint of the 24 guidance is 1,300. So in light of this Q4, are you feeling more confident on guidance at these mines and maybe even tracking the lower end of the ranges?
Thanks, Don. I mean, we feel very confident with the guidance we put out for those mines, which does show a modest inflation rate that we'll absorb like 5% to 7%. We've got some wage adjustments that we believe need to be made in Brazil and some added payroll costs that we have to look at there. So I think what we forecasted out, we were quite confident enough. There is some potential upside to those things, but it's really driven on productivity. That's really where we're focusing our efforts there. But I think from the cost side, we're pretty confident in our guidance.
Just on to add here. Don't forget that big impacts to our costs if we have more than one product at the mine is the byproduct credit from our pipe product metal. So that metal price has a big impact. And last but not least, currencies. So foreign currencies can have a big impact. You saw that in Mexico, where obviously with a strong peso that was a headwind on the cost side for us. It can be very strong tailwinds as well. So those are the things that we have no control over, but yes, we are very confident with our guidance over the items that we're controlling.
Okay. So just shifting to Escobal then, the ILO consultation meetings are resumed, and meeting was held yesterday. It's good to hear that the new minister was present. Is there any feedback from this initial meeting or insight into the next meeting or any next steps?
Yes, it was the vice minister that was present yesterday and it was the first meeting after a few weeks of transition with the new government, the government that has indicated to us to be committed to the ILO169 process. Of course, there was some time needed to transition and integrate the new government. That's absolutely normal. And. And you're correct me at the last meeting was yesterday. I think there are some working meetings planned here for the future. But for us, really looking forward to continue to process with all the parties involved, and there will be for sure, I guess, from time to time updates on the MARA upside for the consultation. So just have to open there for updates from demand directly.
Okay. Fair enough. And final question then with producer valuations where they are in the market right now, call it to prep, are your plans for asset divestment, maybe deprioritized until valuations recover?
No, not really. I mean it depends obviously on the valuation and prices we got. I think we have been very successful in divesting assets last year at very, very successful prices and royalties, I think. And most of these projects are especially like last year, when you looked at MARA, these are long-term projects, big buyers, big companies, they look at very, very long or a much longer time frame than just current metal prices. So I don't think so that it really impacts a lot their valuation when they look at assets. And I see that continuing into this year. So it all depends on on the prices and the valuations we get from potential buyers this year. But now I'm very confident that we can continue that rout down and divest on ourselves this year.
Okay. And just as a follow-up to that, I think La Arena to the sulfide project has been mentioned as a candidate, others certainly are. Can you share any color on what might be the top candidates for divestment consideration?
Look, I mean, I think we talked about La Arena. Obviously, La Arena, our oxide mine is producing. So a very strong producer for us. I think everybody knows, we extended actually that oxide life from probably when we purchased power like 2021 to 2026, so a very successful exploration program on that asset as well. The deep sulfide or deeper sulfides, the copper deposit, obviously, like a similar bucket for us than MARA's. It's not our commodity ready to build out copper deposits. But the rest of the divestments, look, we are very active working on it. We are very active working on the search for a partner for La Colorada, and I would like to leave it with that at the moment. Obviously, we'll inform the market as soon as anything is ready to share.
There are no further questions at this time. Mr. Steinmann, please proceed.
Yes. Thanks, operator, and thanks, everyone, for being on the call. It has been a very dynamic year last year, as we indicated, with the close of the transaction, integration of the asset, selling multiple assets, retaining not only good cash values for that but also strong royalties. And last but not least, coming out and publishing that really exciting PA on La Colorada Skarn, so a very active year. A lot of cash movements in our portfolio over the year, as I mentioned, strong repayment of debt. We don't not short-term that anymore, very strong cash balance and be in the fortunate situation to be able to use that cash for further growth and keep investing in our project not only sustaining capital, but also approach our capital on something like La Colorada to advance that project, but still be obviously in the position to maintain our dividend and to buy back some of our shares at this, what I would think very low valuation. So really looking forward to 2024 and looking forward to keep you updated in May of our Q1 results. Until then, thank you very much.
Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may all disconnect.