Pan American Silver Corp. (NASDAQ:PAAS) Q3 2022 Earnings Conference Call November 10, 2022 11:00 AM ET
Company Participants
Siren Fisekci – Vice President, Investor Relations
Michael Steinmann – President and Chief Executive Officer
Steve Busby – Chief Operating Officer
Ignacio Couturier – Chief Financial Officer
Conference Call Participants
Cosmos Chiu – CIBC
Lawson Winder – Bank of America Securities
Craig Hutchison – TD Securities
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] I would now like to turn the conference over to Siren Fisekci, VP, Investor Relations. Please go ahead.
Siren Fisekci
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 will now turn the call over to Michael Steinmann, Pan American’s President and CEO.
Michael Steinmann
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 naturally 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 pounds placed at higher grades.
Our plan contained ounces placed on the heaps 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 estimate 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 sounds 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 two 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 thinking 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 investment 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’s current mineral resource. We now have 95.9 million pounds in the indicated category, containing 94.4 million ounces of silver, 2.7 million tons of zinc, and 1.2 million pounds of lead. In addition, we estimate an inferred mineral resource of 147.8 million tons containing 132.9 million ounces of silver, 3.4 million tons of zinc and 1.5 million tons 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 a 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’s strategy for divesting this portfolio was to crystallize value for a group of assets in Pan American’s mining portfolio that was largely unrecognized and unrecognized by the market at that time. Over the years, Maverix continued to grow the value of its portfolio through 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 finding 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 the Yamana and Yamana would sell certain subsidiaries and partnerships that hold the 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 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 three 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 American’s management team.
Finally, as far as timing is concerned, 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 portfolio to 12 operating mines and is estimated to increase our silver production by approximately 50% and coal production by approximately 100%. Pan American has over 28 years of a proven expertise and experience building and operating mines in Latin America. Yamana has built a portfolio of long-life assets with extensive exploration potential and we have been impressed by the quality of their mining and management teams during our due diligence.
The combination of our two teams and the assets will create the 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 large 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 two 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 the strong leader in precious metals concentrated in Latin America with unparalleled exposure to silver.
And with that, we will be happy to take your questions.
Question-and-Answer Session
Operator
[Operator Instructions] The first question is from Cosmos Chiu from CIBC. Please go ahead.
Cosmos Chiu
Thanks, Michael and team and congratulations on the deal. Maybe my first questions are around the acquisition here. Michael, as you mentioned with the acquisition, you will now have – you will have 12 operating assets, what’s your interest level in terms of running 12 assets, even though they are all in LATAM, and in that case, maybe too early, but have you thought about core versus non-core assets and at this point in time, anything that you can share with us?
Michael Steinmann
Sure. Thank you, Cosmos for the question. Look, I mean, it’s very early, still. As I said, there will be lots of opportunity to optimize that portfolio over time once we are ready to own them for a while and run them for a while. But I think, as you know we are coming in on Dolores just like in the last what 2, 2.5 years of mine production and then we will go into 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 in our portfolio is soon coming to an end with the resource. So there is a lot of opportunity to optimize that portfolio and really focus later on the – at the larger cornerstone assets, but as I said it’s very early, too early to decide at this point.
Cosmos Chiu
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 goldfields? I am sure there is transactional cost 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
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 goldfields. Yamana funded the other $150 million. You said it there is cash and debt, we will take on the two bonds that the Yamana has currently and we will 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
Great. And then on the bond that you are taking off for Yamana, I checked out Yamana’s MD&A 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 PanAm 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 their rating right now is investment grade. So, any potential for an upgrade in terms of our rating or risk of downgrade anything that you can share with us?
Michael Steinmann
Yes, thank you. I would pass the question on to Ignacio, our CFO.
Cosmos Chiu
Hi, Ignacio.
Ignacio Couturier
Hi, Cosmos. Yes. So obviously, as you mentioned, those are very attractive coupons on those – on the two bonds. So we will strive of course to keep those. So in due course, we will be talking to the rating agencies. They both S&P and Moody’s has already put out in their bulletin their expectations. And so far, everything we have seen is that they are neutral. So yes, we will do everything in our power to keep those two bonds valid. But yes, we will keep you informed. Our expectation is that the bonds will be re-rated upon closing or the new rating will come out upon closing.
Cosmos Chiu
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, will 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
Yes. And look that was, of course, one of the attractions to this portfolio that it immediately increases our silver production by about 50%. So, as you said, there is a large amount 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 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 ILO-169 consultation is proceeding. I don’t have for the timing, as I have talked about it many times. But if you have an Escobal back in there, it would bring us right back to probably high-30% of silver versus gold. So, very, very strong silver producer.
Cosmos Chiu
Great. That’s great to hear. Thanks Michael, Ignacio, Siren and team. And those are the questions I have. Thank you.
Michael Steinmann
Thank you, Cosmos.
Operator
The next question is from Lawson Winder from Bank of America Securities. Please go ahead.
Lawson Winder
Hi. Good morning. Thank you for the update, guys. 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 accumulates a pretty shocking amount of air miles. So, with that expanded portfolio, even with a few non-course sales, it would still be quite large, do you expect any sort of expansion of the existing management team?
Michael Steinmann
We are actually 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’s actually while there is 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 and in very close by or same jurisdiction that we already are doesn’t really make changes that much. I mean in the case of Argentina, we already have our offices and our team because they are running mines there for about 1.5 decade nearly and as well as Brazil and Chile, which asserts neighboring countries to Peru and Argentina where we already have our offices. So, as I have said, look, over time there will be optimization of that portfolio for sure. But at the moment with that structure that we have of strong local management teams, I really don’t see a big problem. And as I have said in my call, we really have been very impressed with the teams that we encountered from Yamana, when we did due diligence. And that makes me feel really very good looking at the impact of 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 am really looking forward to integrate those teams, because I think it will be – it’s a very, very good fit.
Lawson Winder
Thank you for that perspective. With regards to the La Colorado Skarn, will this acquisition once it closes in any way deemphasize the development or perhaps extend the development timeline? Thank you.
Michael Steinmann
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 that discovery of that 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 timeline, maybe we will try to go on mine that’s on first. But there is 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’s a project will be I see La Colorado over long-term as an absolute cornerstone. You saw the numbers, large, large resource, and that’s come, it’s going to be multi-decade of possible production. And that will go ahead. I mean the beauty here is that this will make very strong – financially very strong company with very strong cash flows and will actually help to develop development project further.
Lawson Winder
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
I pass it on to Steve.
Steve Busby
Yes. Good morning, Lawson. That’s a great question. And it really depends on mining methods. As we have talked about in the past, we have been looking at some of the sub-level caving methods that may get up in the range of 20,000 tons a day. Those are kind of some of the estimates we saw. If you remember back the long haul studies, we were down in the 10,000 ton a day range is what we have been discussing. And as Michael says, this high grade zone offers 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 are looking at, depending on the mining methods we apply.
Lawson Winder
Okay. Yes. Thank you for that, Steve. I wanted to ask you about the dividend also. So, you announced the $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
So, our dividend policies stage, it’s calculated for the additional dividend based on net cash on our balance sheet. So, that’s following that policy and resulted in the $0.10.
Lawson Winder
Okay. Sorry, I thought it would have been $0.11 based on having greater than $100 million of net cash.
Ignacio Couturier
Hi, this 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 our balance sheet, which is just limited to the leases that we have, the operating leases. So, when you do all that it is below the threshold of $100 million.
Lawson Winder
Yes. Short-term investments, I didn’t realize that was netted out. Thanks Ignacio for clearing that up. And then just finally, if I could just get your thoughts on La Arena 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? Thank you.
Michael Steinmann
Look, I mean we are working in Argentina for a long time. We know that – as I have said, Manantial will come pretty soon to the end of its reserves. But this transaction, as we said, will add another additional operation to us which is great, because we have infrastructure ready for it. As I have said, we have – Yamana has a strong team there and has been very successful operating Cerro Moro for a number of years, and replacing reserves. I don’t want to speculate how Argentina is going to change in the future. This 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 are happy in the country and happy to take on, as I said, that Cerro Moro has a really high-grade, very high-grade asset into our portfolio.
Lawson Winder
Okay. Thank you all very much.
Michael Steinmann
Thank you, Lawson.
Operator
[Operator Instructions] The next question is from Craig Hutchison from TD Securities. Please go ahead.
Craig Hutchison
Hi, good morning, guys.
Michael Steinmann
Hey Craig.
Craig Hutchison
Hi Michael. 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 maybe there is a follow-up question. Any sense on free cash flow? Are there any major capital spins required for either yourselves or the assets being acquired for the remainder of 5-year period excluding obviously Escobal?
Michael Steinmann
Yes. Look, we can certainly do metal prices, I am sure it’s probably an analyst consensus stack that has been used. So, we can pass it on to you, but I am sure you have it as well, that we used for that calculation. Capital, you mean capital project capital, in addition to sustaining capital, is that your question?
Craig Hutchison
Yes.
Michael Steinmann
Yes. Look, I mean Yamana has like us some high quality development assets, and they will need some capital to move them forward. I think in my view, one of the biggest one is obviously in Canada, which is not going to be in our portfolio anymore. The main producing assets, there is I think some projects that Yamana has to, in some cases to expand production, in some cases to improve or expand tailings facilities, etcetera. But nothing like out of the extraordinary that I can see.
Craig Hutchison
Okay. I am interested at showing – you mentioned that this is probably inventory related to lower rainfall rates, which impacted irrigation. Is that something that you guys can mitigate through your wells or something, so that doesn’t happen in the future, or is it really going to be kind of rain dependent?
Steve Busby
Yes. Craig, this is Steve. We are looking at expanding on some of the wells that we have access to. And 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 that typically is. As the leach pad grows, as the heap 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 heap grows, but also we will be looking the other direction as to trying to divert some of the runoff water around the facility. So, it’s quite an interesting dynamic situation. Again, as it grows, we actually get access to more precipitation on water for inventories on the heaps. So, in the future, we think it will be less of a problem.
Craig Hutchison
Okay. And then one last question for you guys. Just on La Colorado, 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 be behind you going into 2023?
Michael Steinmann
Yes, that’s correct. We 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 have 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 are quite comfortable where we are at today. It will take us through the rest of Q4 to get through that and we feel we will be back in where we should be mining out the reserve grades of La Colorado.
Craig Hutchison
Okay. Thanks for your responses.
Operator
This concludes the question-and-answer session. I would like to turn the conference back over to Michael Steinmann for any closing remarks.
Michael Steinmann
Thank you, operator and thank you everyone for calling in. It’s 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 talk about the end of the year, I guess at the end of later in February. Until then stay safe and have 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.
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