Pan American Silver Corp.
Q1 2017 Earnings Call Transcript

Published: 10 May 2017

[Operator:]

Welcome to the Pan American Silver First Quarter 2017 Results Conference Call. As a reminder all participants are in listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions [Operator Instructions]. I'd now like to turn the conference over to Siren Fisekci, Vice President, Investor Relations. Please go ahead, Ms. Fisekci.

[Siren Fisekci:]

Thank you, operator and welcome everyone to Pan American Silver's first quarter 2017 conference call. We released our results after yesterday's market close, and a copy of the press release and presentation slides for today's call, are available on our Web site. In a few moments, I will turn the call over to Pan American's President and CEO, Michael Steinmann who will provide an overview of the quarter. We will then open up the call to questions-and-answers. Joining us for the Q&A portion are Pan American's Chief Operating Officer, Steve Busby; our Chief Financial Officer, Rob Doyle; our Senior Vice President, Technical Services and Process Optimization, Martin Wafforn; and our Vice President of Business Development and Geology, Chris Emerson. Before we get started, I'd like to remind everyone that our press release and certain statements and information in this call constitute forward-looking statements and information. Please review the cautionary statements included in our press release and presentation, as well as the risk factors described in our most recent Form 40-F and annual information form. I will now turn the call over to Michael.

[Michael Steinmann:]

Thank you, Siren, and welcome everyone joining us today to discuss the first quarter results. Operating performance in the first quarter was right on track to achieve our guidance for 2017. We also made good progress on our expansions of La Colorada and Dolores. Further supporting future silver production we announced recently two acquisitions in Argentina. Before discussing operations in more detail, let me get you with the highlights for Q1 financial performance. Revenue was up 26% to just under $200 million compared with Q1 last year, largely reflecting the 17% increase in silver prices over that period. As you know roughly half of the revenues we generated from silver sales with the other half generated from sales of gold, copper, lead and zinc. Prices for those metals were also up quarter-over-quarter. Quantities of all metals sold were similar to Q1 2016. A decrease in direct selling costs also contributed to the increase in revenues. Direct selling costs mainly reflect lower treatment and refining charges primarily due to improved concentrate treatment changes in Peru. The growth in revenue drove the significant increase in net earnings coming in at $20 million or $0.13 a share for the quarter and cash flow from operations which totaled about $39 million. All-in sustaining costs or AISCSOS also came down quarter-over-quarter. Q1 2017 AISCSOS costs up $12.63 reflect the reflect the higher prices for our by-product metals plus higher silver sales and lower direct selling and sustaining costs. An increase in production cost, the majority of which is due to NRV adjustments partially offset these factors. The negative NRV adjustments in the quarter totaled $11.2 million or $1.87 per ounce, without these NRV adjustments, our ace cost would be $10.76. Within the higher income levels recorded in 2016, cash flow in the quarter was impacted by 25 million in net income tax payments. To run thus reflect the two upper amount for taxes, so cash taxes in the remaining quarters should be significantly less. Adjusted earnings for Q1 2017 were $9 million or $ 0.06 per shares. Cash flow generated in the quarter was more than sufficient to fund our mines, project capital, higher taxes and our dividend. However, we did through down our cash and short-term investment balance by about $13 billion to fund the acquisition of Joaquin project in Argentina. Our financial position remains very strong with a cash and short-term investment balance at the end of Q1 of about $205 million and still very low debt of about $44 million. Turning to the operations, Q1 silver production of 6.2 million ounces was similar to last year's Q1 of 6.4 million ounces. Production of other metals was also steady quarter-over-quarter with the exception of gold which was down about 9%. We expect that gold production to decline Q1 2017 because of lower grades at Alamo Dorado from processing of lower grade stockpiles and at Manantial Espejo due to mine sequencing. Gold production from Manantial Espejo in 2017 is expected to be significantly less than last year due to the completion of open pit mining around the middle of this year. However, growth from Dolores is expected to mitigate the production loss from Manantial Espejo and Alamo Dorado. Following the completion of the expansion and mine sequencing, gold production from Dolores is expected to grow over the 2017 to 2019 period. Consolidated cash cost continues to impress, coming in at $6.18 per ounce in Q1, down 23% from Q1 last year. Quarter-over-quarter decrease reflects higher prices for our by-product metals. Taking a closer look at operating performance at each of our mines, the most notable improvement was at La Colorada due to the expansion project. Following completion of the new mine shaft and sulphide processing plant in 2016, we have seen a significant increase in throughput with rates reaching around 1.7000 tons per day over Q1, resulting in 19% increase in silver production from La Colorada in the quarter. Cash costs are half what they were a year ago $3 per ounce in Q1 2017. The decline was largely driven by higher by-product credits. We're expecting throughput rates to continue to decline achieving around 1,800 tons per day by the end of this year. Development of the underground mine to support these rates is progressing well. We also constructed new power line to power the expanded facility at La Colorada which will be energized in Q2. Silver production at Dolores declined about 10% quarter-over-quarter, while gold production was 14%. This is due to very long-term extraction kinetics associated with the silver heap leach operation. We expect silver and gold production to rise over 2017, following development of the underground mine and completion of the pulp agglomeration plant. Construction of the plant was 80% complete at the end of the quarter, on track to begin commissioning mid of this year. We continue to expect the underground mine to achieve ore mining rates of 1,500 tons per day by the end of the year. Processing of the stockpile at Alamo Dorado was completed in Q1. We do have some additional values remaining in process inventories, but we will continue to report a very small amount of production from Alamo Dorado in Q2, highly profitable ounces I might add since they don't require much work. We continue our acclimation activities at this mine. Turning now Peru, our Huaron and Morococha mines reported significant reductions in cash costs due to higher by-products. Cash costs at Huaron were down to $0.77 per ounce, while at Morococha they came in at negative $3.18 per ounce in Q1. Drilling rates declined at both Huaron and Morococha due to mine sequencing, which also led to the increase in zinc production at Huaron and lead production at Morococha. While Peru has suffered heavy rains during February and March this year, we were able to manage our operations with minimal impact. At our San Vicente mine in Bolivia, production was down relative to last year due to plant shutdowns. One of the shutdowns was to repair a mill bearing, work had been scheduled for April, but which is now completed. The other shutdowns were to address safety awareness. In Argentina, changing grades due to mine sequencing and open pit mines expansion at Manantial Espejo's Concepcion open pit resulted in higher silver production up 16% and lower gold production down 32%. The decrease in gold production reflects pre striping into Concepcion pit, while the decrease in gold production and the pre striping cost contributed to higher costs in the quarter, we should see a corresponding benefit in Q2. In addition costs at Manantial were impacted by the elimination of the Patagonia port credit incentive late in 2016 and higher inflation rates in Argentina. The increase in quarter-over-quarter ace costs at Manantial Espejo was further affected by negative NRV adjustments. We expect to complete the open pit mining in Manantial around the middle of this year, while underground mining should continue well into 2019. Over the past few months, we also announced two acquisitions of high grade silver deposits that provide excellent synergies with our Manantial Espejo mine. We closed our 100% of the Joaquin project from core mining in February and announced our 100% acquisition of the Cap-Oeste Sur Este project from Patagonia Gold late in April. Both projects have some attractive high grade materials that are within trucking distance to Manantial on existing transportation corridors. The plant at Manantial will have capacity to process the feed and no additional tailings pond will be required. We are aiming to have preliminary economic studies complete for both projects later this year. The three year production profile we provided on January 12 of this year does not include any contribution from these projects nor does our capital expenditure reflect any corresponding investments. However, we expect the capital investment to benefit from existing infrastructure and our invested capital at Manantial Espejo. We believe this will enable us to add attractive silver ounces to our production profile. Operating results for the first quarter keep us on track to achieve our guidance for 2017. As such we have made no changes to our 2017 guidance. We expect to produce in the range of 24.5 million to 26 million ounces of silver at cash costs between $6.45 and $7.45 per ounce. All-in sustaining costs are expected to be between $11.50 and $12.90. Further information on our guidance is provided in our MD&D for the period ended March 31, 2017. We've also made no changes to our capital spending estimates for the year. We expect to complete spending on the expansions at La Colorada and Dolores at the end of this year and sustaining capital requirements are expected to remain fairly stable. We did not differ spending on our plants and equipments during the period of low precious metal prices. In fact, we invested in our business to improve project returns. We intend to follow the same strategy going forward and our strong financial position enables us to do so. We have seen silver prices weaken recently, but our cost structure enables us to manage a period of lower prices. We plan to continue to seek opportunities in growth both through acquisitions and with internal improvements. And with that I would like to open the call for our Q&A session. Thank you, operator.

[Operator:]

Thank you. We will now begin the question-and-answer session [Operator Instructions]. The first question comes from Lucas Pipes with FBR Company. Please go ahead.

[Lucas Pipes:]

Hey, good morning everybody and good job on the quarter. I wanted to follow up a little bit on your Argentina additions, it seems like you see a lot of potential there around the three reserve blocks. Could you speak a little bit more about the synergies at the Manantial Espejo operation in terms of what you've added around there? I would appreciate maybe a little bit more details in terms of magnitude as with the down the road. Thank you.

[Michael Steinmann:]

Sure, good morning Lucas. While you know that the plan at Manantial Espejo is to finalize not only the open pit mine but also the underground mining somewhere in 2019, at least that's the current plan. This additions are really attractive to us for several reasons, mostly we invested obviously a substantial amount capital to build the plant as Manantial Espejo not only the mine but the processing plant, tailings, pond facilities et cetera, et cetera. So to be able to continue using that is very attractive to us. And these additions although not huge and you've seen some of the resources probably in core statements. We will give you a technical report during this year that gives you more detail on how much we believe we can mine from both of these assets from the higher grade portion that makes obviously - has to be higher grade and so it makes sense to ship it or truck it to Manantial. But that's very attractive to us because it not only allows us to keep going at Manantial Espejo, but it keeps the door open for further exploration potential on our own land because we continue to explore there. You may recall that we have been still able to replace our reserves last year with brownfield exploration, but also opens us exploration potential on the other two blocks that we purchased beside the already existing resource there.

[Lucas Pipes:]

Got it, that's very helpful. As Argentina appears to be a focus, Michael, would it be possible for you to give us an update in terms of the political situation down there. I know in the past it was difficult from time to time, how would you describe it? I would appreciate your update on the situation in how you see things evolving in terms of also getting there and technology that you need to continue to grow in the region. Thank you.

[Michael Steinmann:]

So I mean all the changes we've seen and you heard me describing it in many occasions that this - changes at the new Federal administration has been very positive for us. You've seen it last year in the results, reflected in the results for Manantial Espejo, the fact that there's free flow of capital again and we can actually easily import goods and parts and equipment which really help us out big time at Manantial Espejo and for future development project. On the other hand we still see quite high inflation rates in Argentina, which is a bit of concern that came down and hopefully that will continue the decline. That's the plan the Federal government announced and I hope that that will be a reality here going down the road. But I've seen very positive changes in Argentina so far and it's for sure much different situation to do business there now than it was say a couple of three years ago.

[Lucas Pipes:]

That's very helpful. I appreciate your color. And I'll jump back in the queue. Good luck.

[Michael Steinmann:]

Okay, thank you.

[Operator:]

The next question comes from Chris Terry with Deutsche Bank. Please go ahead.

[Chris Terry:]

Hi, Michael and team. Yeah , a couple of questions from me, just in terms of the acquisition strategy are you seeing at the moment that the best opportunities are in these sort of smaller options or synergies the arrangements like you've done in Argentina. Are you still looking something potentially bigger or do you think at the moment that that's the best way to do it. Just sort of I guess put a lot of options into the portfolio.

[Michael Steinmann:]

Good morning, Chris. Well, it's really an opportunistic approach to what we see around, what is available and what really helps us out. As I explained in Argentina big time to take advantage of our former investments, so that does not mean that we're not looking at different countries to invest and expand or larger or other small opportunities in this space. I mean we are very aware likely as well of finalizing an opportunity large or small in this space and we continue monitor that market. So I don't want to say that we're just looking small ones, but that's just the opportunities that came up and obviously very timely I would like to say for Manantial Espejo.

[Chris Terry:]

Okay, thanks. And just following on from Lucas's question, if your release the technical studies in the second half of this year on those additional projects, are you saying we could see production by 2019 time frame?

[Michael Steinmann:]

I'll pass that down to Steve and Martin.

[Steve Busby:]

Yeah. Good morning, Chris. This is Steve. Yeah, I mean I don't want to put a data out there without the technical studies done. We are in both cases Kosice and in working, we're looking at building an underground ramp back sales mine. So the ramps themselves may take us year and a half to two years to build at each property, we'll try to look at both of these things simultaneously. Kosice is probably in a better position from a permit standpoint. We do have to permit both projects, but we think we can probably - given what work Patagonia Gold's already done at Kosice, take advantage of that and streamline that permit. So again I don't want to say when the start date will be, but once we get on the ground, once we get started, I would say within a year and a half of to three years we should be producing.

[Michael Steinmann:]

As I mentioned we're working on a technical report, so that will give you much clarity on not only on timing but obviously also on production, permits and grades.

[Chris Terry:]

Thanks, Michael and Steve. And then just at La Colorada, just an update on the sulphide processing plant there you finished late last year obviously, is everything running to plan there. You're sort of hitting the run rate pretty consistently, getting recoveries that you're after et cetera.

[Steve Busby:]

Yeah, from the plant standpoint, the plant's been running marvelously. The mine's definitely braising to feed that plant, it's a hungry plant. So we're quite pleased with the plant performance. We did have a minor crusher issue, one of the new crushers kind of - we lost a bearing on it during Q1, so we did incur some cost to kind of fix that and get it back up. But again the plant capacity wasn't an issue, so we were able to make up that tonnage pretty quickly within the quarter and did not see the effect. Overall, the plant's running marvelously, plenty of capacity, the shafts are running marvelously, plenty of capacity, it's really advancing on these developments and I got to say in Q1 as Michael alluded to close to 1,700 tons a day was better than we were expecting, so we're definitely tracking better than expected in terms of the ramp up at La Colorada.

[Chris Terry:]

Okay, thanks Steve. And the last one from me, just in terms of the gold production in the first quarter and I think you're saying that that was largely as you expected and that's supposed to ramp up during the year. Do we think about that as just - as you complete your expansion projects that will be the highest in 4Q or I guess, what's the progression on gold between 2Q, 3Q and 4Q?

[Steve Busby:]

Yeah, definitely, just as you describe Chris is that as we start commissioning at Dolores the pulp agglomeration circuit, which we hope to start commissioning during July or August period. We'll see that production rate ramp up and that's really what's going to drive that gold production up, so Q4 will definitely be our strongest quarter, but assuming that commissioning goes smoothly.

[Chris Terry:]

Great, thanks for the color. That's all for me.

[Operator:]

The next question is from Cosmos Chiu with CIBC. Please go ahead.

[Cosmos Chiu:]

Hi, Michael, Steve, Rob and team. And congrats on a very solid Q1. Maybe to follow up quickly on Dolores, I guess should we be expecting higher recoveries in the second half of 2017 as you commissioned a pulp agglomeration plant, Steve?

[Steve Busby:]

Yeah, good question Cosmos. Certainly the concept of the pulp agglomeration is to bring us higher recoveries, you know what it is, the heap leach. So recoveries do take time even in an agglomerated state, we do expect kinetics, the rate of recovery to be improved with the agglomeration plant. So net-net yes, I think we're anxious to start seeing that plant come online, we're anxious to start seeing the kinetics of recoveries improve and the overall recovery rate improve. How fast that's going to ramp up, it's easy to get overly excited about it, it is a heap leach and I learned many years ago that heap leaches teach you how to be very patient and not to be too greedy. So my hopeful advise is kind of you know it will take some time to ramp that up, but we're pretty excited about the opportunities.

[Cosmos Chiu:]

Okay, I guess in that case Dolores sort of full year guidance in terms of production, that's not dependent on any kind of substantial increase in recovery.

[Steve Busby:]

Correct, yeah. It's not dependent on yeah.

[Cosmos Chiu:]

Okay and then switching gears a little bit on La Colorada here, you're trying to get up to 18,000 tons per day, underground mining, throughput by year end, so I may have missed it, but where are you at right now and then to increase from where it is today to 18,000 tons per day, is it just a matter of getting more working phases going, where are you right now in terms of working phases, where do you need to get to for 1,800 tons per day?

[Steve Busby:]

Yeah, 1,800 tons per day is our target by year end, it is dependent on opening up more phases. So right now we're generating development mark underneath and above on the stops that we plan to mine underneath. And then as we assess those stops and actually start stop mining, that's when we'll start to see that kind of final bid of the rate increase come in. Again, we're projecting towards the end of the year, we're tracking better than expected, we may start to see that 1,800 tons a day sooner than the end of the year and as I mentioned we hit nearly 1.700 tons a day during Q1, which was ahead of where we thought we would be. So we don't anticipate that falling back, it will only go up from where we're at and we feel quite confident, we'll certainly achieve the 1,800 tons a day probably in Q4.

[Cosmos Chiu:]

That's great and I guess maybe switching gears a little bit, maybe a question for Rob, $25 million of cash taxes in Q1 was certainly as Michael mentioned a true up for the profitability from last year, but Michael also mentioned that likely going to be less cash taxes for the future quarter. So I guess, number one to confirm that Q1 true up that kind of settles what the higher profitability for 2016 I guess and number two, what kind of tax ratio you'll be using for the rest of 2017 and how does it work. Again I guess if the profitability in 2017 is good the taxes is it going to come due into 2018 and I believe there's a one year lag

[Rob Doyle:]

That's exactly right Cosmos. So as expected Q1 was by far our heaviest tax payment quarter, the 25 we expect to come down. 2Q will be a little bit heavier again but it will be probably more in the sort of 8 million range is what we expect and then probably dropping down around 5 for Q3 and Q4. So it's another 18 million for the balance of the year. So really as you described, what that reflects is we need to catch up which has largely happened in Q1 and then our installments that we pay throughout 2017 are based on our 2016 performance. Our installments have gone up and that's why you'll see high cash taxes this year than last year.

[Steve Busby:]

To answer your question I guess is if everything stays similar in 2017 than 2016 there won't be a huge true up payment at the beginning of 2018.

[Cosmos Chiu:]

Great and then one last question to Michael, I don't want to be the dead horse, but certainly you've made great acquisitions in terms of Argentina and leveraging of current infrastructure. Is that sort of like of an opportunity only sort of encapsulated in Argentina or are you seeing some of those kind of add on sort of tag on opportunities in other countries as well, like in Mexico and Peru, whereby you can actually leverage off your existing infrastructure.

[Michael Steinmann:]

It's definitely very interesting concept Cosmos, there are always - as you know it's easier to make smaller discoveries than huge discoveries for exploration companies, so they tend to find them and they obviously tend to find them somewhere in kind of proximity of existing mines. So it's always an interesting concept for us. Yeah, I think when we started the option contract for La Negra was very similar, I know we're now planning to truck that to an existing plant, but we knew obviously that we're going to have a plant available to us from Alamo Dorado. So it's an interesting concept, obviously doesn't work very easy everywhere and we have to match in if you want to add something like that to La Colorada, you would have to find very, very high grade to pay for trucking and displacing our already very high grade ore. But we're not at that same stage like a place La Colorada, we still have many, many, many years of reserves ahead of us. So that will be knowing in a long time from now when we would look at similar opportunities around La Colorada and I think we have huge exploration potential as well around our other mines, so we will hopefully work first with that. But if there are opportunities close by and very high grade and it economics sound sure why not.

[Cosmos Chiu:]

Great, thank you. That's all I have.

[Operator:]

[Operator Instructions] The next question comes from Chris Thompson with Raymond James. Please go ahead.

[Chris Thompson:]

Hey, good morning. Congratulations guys on a good quarter. Just two quick questions, firstly on Dolores, I'm just want to focus in on the open pit there, obviously I don't know where the mining cycle there sort of dictated sort of lower grades earlier in the year, moving into high grades later in the year. Historically is that what we can expect moving forward?

[Steve Busby:]

Yeah, definitely there's some sequencing that Dolores with the phasing of the pits, we have actually 10 phases of the pits and some of the phases are actually sub phase so there's even more of those and as we mine each phase we mine kind of top to bottom and as we get deeper on the bottom of each phase the overall pit gets deeper and deeper and as we get deeper we do see the higher gold grades. Silver is a little more radic throughout the deposit, we see high grades and low grades kind of mix throughout the deposit. So we're coming in and out of that throughout that. The current cycle we're in, we were into some decent grades in Q1, I suspect that's going to come off a little bit into Q2 and Q3 before we start seeing that come back in kind of Q3, Q4 period. So the time between the kind of grade dilled if you will for gold it's becoming shorter with each phase of the pit as we mine it. But that's kind of a general description, again I think I would reference you to the 43101 for an annual kind of view of how that cycles and that same annual cycle you kind of see the bid up in the quarters as well.

[Chris Thompson:]

Right, because I mean obviously was that variant positive towards the end of the year from the open pit and then you got the underground coming on I guess, you're getting some pretty good gold grades coming out there?

[Steve Busby:]

We're definitely looking forward to some decent gold grade at Dolores in the future, absolutely.

[Chris Thompson:]

And Steve, when can we expect open pit production - underground production to start up.

[Steve Busby:]

Well, our plan is to have it started up - have stop mining started by the end of this year, maybe our first stops would be mining into the first part of next year. With that said, similar to our discussion at La Colorada there is development that we do produce on ore zones along the way, it's not as good a grade as the stop mark, and I can say we've already started producing some of that development mark and we're sending some of that to the heap as we speak.

[Chris Thompson:]

Okay, great thanks. Just moving on very quickly to La Colorada, I'm interested in looking at the split I guess between underground oxide and underground sulphide, what was that split during the quarter.

[Rob Doyle:]

Yeah, I don't have that data right in front of me, Chris.

[Chris Thompson:]

Okay, no worries. We can catch up on that later, but I mean do you anticipate similar sort of split moving forward?

[Rob Doyle:]

Yes, we do. As they ramp up the production I think Q1is probably pretty reflective of the sulphide, oxide split that we're seeing. I mean there's not much left in that ramp up as you can appreciate. We're done with the last 100 tons a day. So I think it will be - we are seeing some oxides in this ramp up too, so I want to say Q1 is probably the kind of split we're going to see going forward.

[Chris Thompson:]

Great, alright and then final quick question, revisiting I guess an increased dividend here, I mean is that something that you guys are talking about at the moment. If so what would you be looking for executing on that?

[Michael Steinmann:]

As you know the dividend is discussed really quarter-by-quarter by the board taking into account a lot of parameters for that. Capital spending on new projects which as you know is coming pretty much to an end somewhere at the end of Q2 or Q3 obviously and we look at just the stable sustaining capital. Again any further project development that we will see on working and Kosice is not included in that plan and we have to wait for the titan to report. But the board is looking at that obviously it depends on our cash flow and our metal prices we see, but we look at it every quarter. As you know we are and have been always very keen to return value to our shareholders and the dividend is a very important part of that.

[Chris Thompson:]

Alright, fair enough Michael. Okay guys, thanks a lot, congrats.

[Michael Steinmann:]

Thank you.

[Operator:]

This concludes the question-and-answer session. I would turn the conference back over to the management for any closing remarks.

[Michael Steinmann:]

Thank you, operator and thank you for joining us today on this call. Our results for the first quarter are solid and we're on track to achieve our guidance for 2017. Our three year outlook affirms our view that we're the low cost silver producer with growing production plus the optionality of a number of advanced projects in our pipeline. We look forward to keeping you informed of our progress over the coming quarters. Talk to you in Q2, I think it's early of August. Thank you very much. That's all operator.

[Operator:]

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