Pan American Silver Corp

TSX:PAAS

Earnings Call Transcript

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Pan American Silver Third Quarter 2022 Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions]

I would now like to turn the conference over to Siren Fisekci, VP, Investor Relations. Please go ahead.

[Siren Fisekci;VP, Investor Relations and Corporate Communications, executive]

Thank you for joining us today to discuss Pan American Silver's Q3 2022 results and our agreement with Agnico Eagle Mines Limited to acquire Yamana Gold. This call includes forward-looking statements and information and makes reference to non-GAAP measures. Please see the cautionary statements in our Q3 2022 MD&A and news release and the presentation slides for our call today, all of which are available on our website.

I'll now turn the call over to Michael Steinmann, Pan American's President and CEO.

[Michael Steinmann, executive]

Thank you, Siren, and thank you for joining our call today. We have been looking forward to this call and being able to finally discuss our agreement with Agnico to acquire Yamana. But before we get into the discussion, let me first provide a brief recap of our Q3 results.

The underlying performance of our gold segment operations was in line with our expectations, although production came in below our quarterly guidance range because of an in heap inventory buildup of 28,900 ounces of gold, largely at Shahuindo and La Arena. At Shahuindo, the buildup was partially related to lower rainfall rates, which reduced irrigation flow rates and recovered ounces during the quarter, despite stacked ounces exceeding the plan by 18%.

At La Arena, gold production not only modestly exceeded plan in the quarter, but ounces stacked also surpassed expectations by 25% with greater tons placed at higher grades. The above plan contained ounces placed on the heap at Shahuindo and La Arena during Q3 positions us to reaffirm our annual gold production guidance towards the lower end of 550,000 to 605,000 ounces.

We are also reaffirming our estimates for gold segment all-in sustaining costs of between $1,450 and $1,550 that we provided with our Q2 results. We are revising the estimate for full year 2022 silver production to be between 18 million to 18.5 million ounces from the 19 million to 20.5 million ounces we provided in our original operating outlook.

The revision is largely due to lower production from lower grade ores in Phase 9B open pit at Dolores and revising our mine sequencing into lower grade silver ores at La Colorada during the second half of 2022. Reestablishing mining from the higher grade ore zones at La Colorada has proven more challenging given our ground control systems have been compromised to a greater extent than expected from the prolonged exposure to high heat and humidity during the constrained ventilation we faced between 2017 and early 2022.

During Q3, we deployed additional resources with 2 development contractors to accelerate ground control system upgrades necessary to access the higher grade ores in the deeper portions of the Eastern Candelaria deposit. We expect to reestablish near reserve grade ore mine sequencing towards the end of 2022.

We are pleased with the current ventilation conditions in the mine, the progress on sinking the new ventilation shaft that will further secure long-term ventilation systems and the accelerated ground control system replacements and development advances to access the higher-grade ore sounds.

Cost inflation and supply disruptions continue to be an industry-wide issue, which has led us to expect that silver segment cash costs and all-in sustaining costs could be marginally above the high end of the range in our 2022 original operating outlook, which indicated an all-in sustaining cost for silver segment of $14.50 to $16 per ounce in 2022.

Our financial position remains strong with cash and short-term investments of $187.2 million and an undrawn line of credit of $500 million at close of Q3. We declared a dividend of $0.10 per share, in line with our dividend policy. In September, we updated our La Colorada Skarn mineral resource. We now have 95.9 million tonnes in the indicated category containing 94.4 million ounces of silver, 2.7 million tonnes of zinc and 1.2 million tonnes of lead.

In addition, we estimate an inferred mineral resource of 147.8 million tonnes, containing 132.9 million ounces of silver, 3.4 million tonnes of zinc and 1.5 million tonnes of lead. This mineral resource estimate does not include drill results released on November 1, 2022, and on July 21, 2022, that indicate the high-grade silver zone of mineralization, which will be part of the next resource update.

This morning, Triple Flag Metals Corp. announced the acquisition of all of the outstanding shares of Maverix Metals for share and cash consideration. In July 2016, Maverix acquired a portfolio of 13 royalties, precious metal streams and payment agreements from Pan American Silver. As consideration for that portfolio, Pan American received at that time 42.85 million common shares and 20 million common share purchase warrants.

Pan American strategy for divesting this portfolio was to crystallize value for a group of assets in Pan American's mining portfolio that was largely unrecognized by the market at that time. Over the years, Maverix continued to grow the value of its portfolio to acquisitions and additional metal streams and royalties. On May 28, 2020, Pan American sold a portion of its shares for gross proceeds of $45.4 million.

With the transaction announced today, Pan American will receive approximately $102 million in Triple Flag shares and cash. Using our royalty portfolio to start Maverix Metals in 2016 has been a very successful way to create value for our shareholders from assets largely unrecognized by the market.

Let's now move on to the Pan American and Agnico arrangement agreement with Yamana. On November 4, 2022, Pan American and Agnico Eagle Limited announced that we have delivered a definitive binding offer to the Board of Directors of Yamana Gold.

Under the proposal, Pan American would acquire all of the issued and outstanding common shares of Yamana and Yamana would sell certain subsidiaries and partnerships that hold Yamana's interest in its Canadian assets to Agnico Eagle, including the Canadian Malartic mine.

On November 8, 2022, Pan American and Agnico Eagle further announced that the arrangement agreement among Pan American, Agnico Eagle and Yamana became effective upon the termination of the agreement between Yamana and Gold fields.

To summarize a few of the terms of the transaction. The total consideration was $4.8 billion or $5.02 per Yamana share as of November 4, 2022, when we announced the binding proposal. The consideration is made up of $1 billion in cash funded by Agnico Eagle, approximately 36.1 million shares of Agnico Eagle and approximately 153.5 million shares of Pan American Silver. Pan American will retain all the Yamana's Latin American assets.

The transaction requires Pan American and Yamana shareholder approval as well as certain other regulatory approvals. It is important to note that Agnico Eagle has committed to provide market support to the purchase of up to $150 million of Pan American shares.

Pan American will appoint 3 independent Directors of Yamana to be added to the current Pan American Board, and Pan American will work cooperatively with Yamana to integrate Yamana management into Pan America's management team.

Finally, as far as timing is concerned, we would exceed -- we would expect Pan American and Yamana shareholder votes to take place in late January next year, with closing sometime in Q1 2023. The transaction would increase Pan American's portfolio to 12 operating mines and is estimated to increase our silver production by approximately 50% and gold production by approximately 100%.

Pan American has over 28 years of proven expertise and experience building and operating mines in Latin America. Yamana has built a portfolio of long-life assets with extensive exploration and potential, and we have been impressed by the quality of their mining and management teams during our due diligence.

The combination of our 2 teams and assets will create a leading silver and gold producer concentrated in Latin America, well suited to realize further value from the combined portfolio and producing mines and development assets. The transaction would also be expected to enhance Pan American's overall financial position and improve its ability to internally fund growth projects.

It presents multiple opportunities for operational and administrative synergies, particularly between Pan American's and Yamana's corporate offices in Canada. The transaction is accretive per share to key financial and operating metrics and will make Pan American a lower-cost producer with anticipated annual operating cash flows of over $650 million for the first 5 years.

It will also add significantly to our proven and probable silver and gold reserves and could increase our annual revenues to over $2.5 billion. The enlarged company will benefit from further geographical diversification and create opportunities for future portfolio optimizations. As before, Pan American will maintain a strong balance sheet.

Total debt, including the 2 Yamana bonds and the Pan American equipment leases will be around $850 million with a debt-to-EBITDA ratio of only 0.8x. Total liquidity will be over $680 million, including our sustainability linked revolving credit facility. This is a very exciting opportunity for Pan American and Yamana shareholders to create a strong leader in precious metals concentrated in Latin America with unparalleled exposure to silver.

And with that, I will be happy to take your questions.

[Operator]

[Operator Instructions] The first question is from Cosmos Chiu from CIBC.

[Cosmos Chiu, analyst]

Congratulations on the deal. Maybe my first question is around the acquisition here. Michael, as you mentioned with the acquisition, you'll now have -- you will have 12 operating assets. What's your interest level in terms of running 12 assets even though they're all in LATAM? And in that case, maybe too early, but have you thought about core versus noncore assets? And at this point in time anything that you can share with us?

[Michael Steinmann, executive]

Sure. Look, I mean, it's very early still. As I said, there will be a lot of opportunity to optimize that portfolio over time once we have really owned them for a while and run them for a while. But I think, as you know, we're coming -- Dolores is like in the last, what, 2, 2.5 years of mine production, and then will go into a leach cycle, probably until 2030. So that will use much less of our attention on the mining side for that.

As you know, Manantial Espejo portfolio is soon coming to an end with the reserves. So there's a lot of opportunity to optimize that portfolio and really focus later on at the larger cornerstone assets. But as I said, it's very early -- too early to decide at this point.

[Cosmos Chiu, analyst]

Of course. Maybe my next question -- Michael, as you mentioned, Pan American Silver is buying essentially Yamana, the company. And I would assume that you also take on Yamana's cash and Yamana's debt. Could you maybe walk through -- there is a termination fee that's payable to Gold Fields. I'm sure there's transactional costs as well. Is that going to be coming out of Yamana's cash? And what are your plans in terms of Yamana's debt?

[Michael Steinmann, executive]

Yes. And look, I don't have the final numbers on that. You probably saw in the press release that we funded $150 million of the break fee that went to Gold Fields. Yamana funded the other $150 million. You said it, there's is cash and debt. We will take on the 2 bonds that Yamana has currently, and we'll take on the remainder of the cash as well. So we have to advance that further now, obviously, and see. I don't have final numbers yet on the exact closing cost for the transaction.

[Cosmos Chiu, analyst]

Great. And then on the bond that you're taking off Yamana, I checked out Yamana's MD&A. It looks to be a fairly attractive interest rate. From that perspective, has Pan American Silver approached the ratings agencies for a credit rating impact assessment of the transaction, given that Pan Am doesn't have any debt right now? So I don't know if you have your own sort of rating.

And at the same time, I see that -- for example, Yamana, the rating right now is investment grade. So any potential for an upgrade in terms of that rating or a risk of downgrade? Anything that you can share with us?

[Michael Steinmann, executive]

Yes. I'll pass the question on to Ignacio, our CFO.

[Ignacio Couturier, executive]

Yes. So obviously, as you mentioned, those are very attractive coupons on those -- on the 2 bonds. So we will strive, of course, to keep those. So in due course, we'll be talking to the rating agencies. Both S&P and Moody's has already put out in their bulletin their expectations. And so far, everything we've seen is that they're neutral.

So yes, we'll do everything in our power to keep those 2 bonds valid. But yes, we'll keep you informed. Our expectation is that the bonds will be rerated upon closing, or the new rating will come out on closing.

[Cosmos Chiu, analyst]

That's great to hear. And then maybe one last question here before I pass it on, commodity mix, Michael with this acquisition, silver as a percentage based on my numbers, we'll go from high 20s to low 20% and then with the increase in gold. Any concern in terms of that mix, in the end, Pan American Silver is a silver company. But any comments on that in terms of near-term and long-term?

[Michael Steinmann, executive]

Yes, look that was, of course, 1 of the attractions to this portfolio that it immediately increases our silver production by about 50%. So as you said, there's a large part of gold coming in as well. Our silver gold mix depending on metal prices, if you look at revenue, will drop a few percentage points on the silver side at this, but it's still a very strong lower 20% number to start with.

And then don't forget Escobal, as I said look, we had further meetings on that process, that process of the ILO 169 consultation is proceeding. I don't have -- for the timing, as I talked about it many times, but if you add in Escobal back in there, it would bring us right back to probably high 30% of silver versus gold so very, very strong silver producer.

[Operator]

The next question is from Lawson Winder from Bank of America Securities.

[Lawson Winder, analyst]

I wanted to follow-up on Cosmos' first question also with regard to the size of the new portfolio. So I imagine your team already accumulated a pretty shocking amount of air miles. So with that expanded portfolio, even with a few non-core sales, it will still be quite large. Do you expect any sort of expansion of the existing management team?

[Michael Steinmann, executive]

We are actually a very decentralized company. So our head office in Vancouver is quite small. We have very strong local teams, and I see very similar strategy of Yamana. So that actually -- while there's still a lot of travel, keeps that quite well under control because it's -- our assets historically and today are run by very strong local teams. So it's not that we do everything out of Canada.

So adding further mines in very close by or same jurisdiction that we already are doesn't really make changes that that much. I mean in the case of Argentina, we already have, obviously, offices and the team because we're running mines there for about a decade and a half nearly. And that will add Brazil and Chile with us those neighboring countries to Peru and Argentina, where we already have our offices.

So as I said, look, over time, there will be optimization of the portfolio for sure. But at the moment, with that structure that we have of strong local management teams I really don't see, I really don't see -- a big problem. And as I said in my call, we have been very happy and very impressed with the teams that we encountered from Yamana when we did due diligence and that makes me -- it makes me feel very, very good looking at the integration.

They are very similar ways. A lot of focus on safety, a lot of focus on ESG, a lot of focus on high-quality production and assets and very similar than what we are focused on. So I'm really looking forward to integrate those teams because I think it will be -- it's a very, very good fit.

[Lawson Winder, analyst]

With regards to the La Colorada Skarn, will this acquisition once it closes in any way, deemphasize the development or perhaps extend the development time line?

[Michael Steinmann, executive]

Look, the Skarn is a long-term project. We all know it's a very high-quality discovery. We all know it will take a number of years to move that forward and develop it. I think that discovery of the high-grade zone or in some drill holes, absolute bonanza grade, that we discovered and published over the last few months. Maybe that changes a little bit our development time line.

Maybe we'll try to go on mine that zone first, but there's still a lot of drilling and engineering to be done for that, and we have to include that zone in our resource update. But that the project will be -- I see La Colorada over long-term as an absolute cornerstone. You saw the numbers, large, large resource, and that's - that's going to be a multi-decade of possible production.

And that's -- that will go ahead. I mean the beauty here is that this will make a very strong, financially very strong company with very strong cash flows and will actually help to develop -- development projects further.

[Lawson Winder, analyst]

As you work towards that preliminary economic assessment on LC Skarn, what are you kind of thinking in terms of a range of throughput sizes at this point today?

[Michael Steinmann, executive]

I'll pass it on to Steve.

[Steven Busby, executive]

That's a great question, and it really depends on mining methods. As we've talked about in the past, we've been looking at some of the sublevel caving methods that may get up in the range of 20,000 tonnes a day. Those are kind of some of the estimates we saw. If you remember back the long-hole studies, we were down in the 10,000 tonne a day range is what we've been discussing.

And as Michael said, this high-grade zone offers us up an opportunity perhaps to get in early with the long-haul system. So I think that we haven't settled in on what the throughput rate would be, but those are the kind of numbers you're looking at, depending on the mining methods we follow.

[Lawson Winder, analyst]

Okay. I wanted to ask you about the dividend also. So you announced a $0.10 dividend, so effectively paid no special dividend. But according to the formula, shouldn't you have paid a $0.01 out in the dividend?

[Michael Steinmann, executive]

So our dividend policy states is calculated for the additional dividend based on net cash on our balance sheet. So that's following that policy and the resulted in the $0.10.

[Lawson Winder, analyst]

Okay. Sorry. I thought it would have been $0.11 based on having greater than $100 million of net cash.

[Ignacio Couturier, executive]

This is Ignacio, so just a couple of details on that calculation. So it is net cash excluding short-term investments. So you have to remove the short-term investments from the number and then as well as net out any debt in the balance sheet, which is just limited to the leases that we have, the operating leases. So when we do all that, it is below the threshold of $100 million.

[Lawson Winder, analyst]

Yes short-term investments, I didn't realize that was netted out. And then just finally, if I could just get your thoughts on Argentina so I mean it is a relatively challenging place to operate. Would you be inclined to continue operating in Argentina? And then just looking at the regulatory environment there, particularly from a federal level, do you see any changes developing to improve that situation?

[Michael Steinmann, executive]

Look I mean, we're working in Argentina for a long time. We know that, as I said, Manantial Espejo come pretty soon to the end of its reserves. But this transaction, as you said, we'll add another additional operation to us, which is great because we have infrastructure ready for it. As I said, we have -- Yamana has a strong team there and has been very successful operating sort of more now for a number of years and replacing reserves.

I don't want to speculate how Argentina is going to change in the future. These are like everywhere we work. There are political changes that go on with elections and changes come and go. I mean, our assets stay there, and we are active there. We have in the country and happy to take on, as I said, that Cerro Moro has really high-grade very high-grade asset into our portfolio.

[Operator]

[Operator Instructions] The next question is from Craig Hutchison from TD Securities.

[Craig Hutchison, analyst]

With respect to the presentation here today, there is a mention of the pro forma operating cash flow of $650 million a year for the next 5 years, excluding Escobal. Can you give us the metal prices for those assumptions? And then maybe just a follow-up question any sense on free cash flow? Are there any major capital spend required for either yourselves or the assets being acquired for the remainder of 5-year period excluding, obviously Skarn?

[Michael Steinmann, executive]

Yes look, we can send you the metal prices. I'm sure it's probably an analyst consensus stack that has been used. So we can pass it down to you, but I'm sure you have it as well that we use for that calculation. Capital -- you mean capital like project capital in addition to sustaining capital. Is that your question?

[Craig Hutchison, analyst]

Yes.

[Michael Steinmann, executive]

Yes. Look, I mean Yamana has, like us, some high-quality development assets and they would need some capital to move them forward. I think -- in my view, 1 of the biggest one is obviously in Canada, which is not going to be in our portfolio anymore. The main producing assets, there's, I think, some projects that Yamana has to, in some cases, to expand production, in some cases, to improve or expand tailings facilities, et cetera. But nothing like out of the extraordinary that I can see.

[Craig Hutchison, analyst]

Okay. And then just to Shahuindo, you mentioned that the -- I guess, there's a build of inventory related to lower rainfall rates, which impacted irrigation. Is that something you guys can mitigate through either wells or something that doesn't happen in the future or is it really going to be kind of rain dependent?

[Steven Busby, executive]

Yes, Craig, this is Steve. We are looking at expanding on some of the wells that we have access to. In this period that we saw during Q3 was really an extension of the dry season. It lasted longer than it typically does and a little bit drier than it typically is. As the leach pad grows, as the heat grows, we actually are able to retain more and more precipitation as the wet season comes through.

So we actually anticipate not only reducing our reliance on wells as the heat grows, but also we'll be looking the other direction as to trying to divert some of the runoff water around the facility. So it's kind of an interesting dynamic situation. Again, as it grows, we actually get access to more precipitation and water for our inventories on the heat. So in the future, we think it will be less of a problem.

[Craig Hutchison, analyst]

Okay. And then 1 last question for me guys, just on La Colorada. I think in your remarks, you said you think you can get back into the high-grade zones by end of this year. Is that correct? Should these issues really be behind you going into 2023?

[Steven Busby, executive]

Yes, that's correct. We've got a very good assessment now on the ground control systems that had been compromised from the time periods of the ventilation constraints. We hadn't realized they were quite as severe in terms of corrosion and erosion of our ground support system, the rock bolts, the meshes, things of that nature.

We've launched a very extensive program with support from outside contractors to accelerate that redoing, reestablishing of that ground control that we need to get back into those high-grade zones. So we're quite comfortable where we're at today. It will take us through the rest of Q4 to get through that, and we feel we'll be back in where we should be mining at the reserve grades in La Colorada.

[Operator]

This concludes the question-and-answer session. I'd like to turn the conference back over to Michael Steinmann for any closing remarks.

[Michael Steinmann, executive]

Thank you, operator, and thank you, everyone, for calling in. It's a great pleasure to update you on this transaction and on the quarter and looking forward to give you an update on the year-end and obviously, how this transaction progresses in January. So we talk about the end of the year, I guess, at the end of -- later in February until then, stay safe and at a good end of the year. Thank you.

[Operator]

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.