Pan American Silver Corp.
Q1 2016 Earnings Call Transcript

Published: 12 May 2016

[Operator:]

Welcome to the Pan American Silver First Quarter 2016 Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions [Operator Instructions]. At this time, I'd like to turn the conference over to Kettina Cordero, Manager of Investor Relations. Please go ahead.

[Kettina Cordero:]

Thank you, operator, and good morning ladies and gentlemen. Welcome to Pan American Silver's 2016 first quarter unaudited results conference call. I'm joined by our President and CEO, Michael Steinmann; our Chief Operating Officer, Steve Busby; our Chief Financial Officer; Rob Doyle, and our Vice President of Business Development and Geology, Chris Emerson. I'll remind our listeners that this call cannot be reproduced or retransmitted without our consent and that certain statements and information in this call will constitute Forward-Looking Statements and forward-looking information within the meaning of applicable securities laws. All statements other than statements of historical facts are forward-looking statements that reflect the company's current views with respect to future events and are necessarily based upon a number of assumptions and estimates that, while considered reasonable by the company, are inherently subject to significant business, economic, competitive, social, political and uncertainties and contingencies. Many known and unknown factors could cause actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements and the company has made assumptions and estimates based on or related to many of these factors. We encourage investors to refer to the cautionary language included in our news release dated May 11, 2016 as well as the factors identified under the caption, Risks Related to Pan American's Business in the company's most recent Form 40-F and Annual Information Form. Investors are cautioned against attributing undue certainty or reliance on forward-looking statements and the company does not intend or assume any obligation to update these forward-looking statements or information, other than as required by law. With that, I will leave you with Michael.

[Michael Steinmann:]

Thank you, Kettina. Good morning ladies and gentlemen. I will start with a short overview of our first quarter of 2016, then I will let Steve, Rob, and Chris provide you with more details on our operations and project our financial performance for the beginning of 2016 and of course, our exploration updates, before moving to Q&A session. To begin, I am pleased to announce, that yesterday, our Board of Directors approved a second quarterly cash dividend of 2016 in the amount of 2016 in the amount of $0.125 per common shares. The dividend will be payable on or about Monday, June 6, 2016 to holders of record of common shares, as of the close of Tuesday, May 24, 2016. Pan American's dividends are designated as eligible dividends for the purpose of the income tax act in Canada, and as is standard practice, the amounts and specific distribution dates of any future dividends will be evaluated and determined by the Board of Directors on an ongoing base. Now let's have a look at our production performance; we had an excellent start to 2016, with a very strong production quarter. I am sure Steve will provide you with much more granularity regarding each of our operations. We produced 6.42 million ounces of silver, quite a bit ahead of our forecasted prediction, with strong silver production at most of our mines. Gold production came in slightly below our predicted production at 41,200 ounces. But more importantly, we lowered our costs beyond our expectations, with cash costs of $8.03 per ounce of silver, net of byproduct credits. This is a reduction of 31% compared to the same quarter in 2015 and an 11% reduction compared to Q4 of last year, and we accomplished this, even though byproduct metal prices were lower. We saw strong cost reduction across our operations. But I would like to highlight here, our two proven operations, Morococha and Huaron. Our investments in mechanization are paying back handsomely, with 100% of the production at Huaron and about 80% production at Morococha coming from mechanized mining. We increased throughput at Morococha by 16% compared to Q1 2015 and nine higher base metal grades, and we did all this with 28% fewer people. Huaron saw similar throughput as a year ago, but great increase substantially and personnel were reduced by 16%. This is a remarkable transformation of our large polymetallic vein deposits and I would like to applaud our improving mining and management teams for their efforts, and incredible results. Of course, those efforts were held somewhat by weaker Peruvian sol and lower energy costs, but the sustainable cost savings are astonishing. The strong production and lower costs allowed us to generate very healthy cash flow from operations of $24.8 million or $0.19 per share before changes in working capital. Those large change in working capital during the quarter, largely, as a consequence of the timing of our sales, which increased our trade receivables by about $27 million. But this is just temporary, and we will be collecting our cash in the second quarter. Now I will let Steve provide you with detailed accounts in our operations and expansion projects during the quarter.

[Steve Busby:]

Thank you, Michael. It is my pleasure to provide the additional details on our quarterly results, and progress on our two valuable expansion projects. Starting off, our La Colorada mine in Mexico produced 1.4 million ounces of silver during the quarter, which was 9% more than Q1 of 2015, largely because of greater throughputs that was obtained from the new mining equipment that had been purchased, as part of the expansion project. The increased throughput, particularly from the deeper sulfide ores, powered a 30% increase in zinc production to 2,700 metric tons, and a significant 56% increase in lead production to 1,500 metric tons, both new quarterly records for the mine. These strong byproduct metal production records, combined with the local currency weakness, fueled an 18% reduction in the cash costs, to $6.34 per ounce, despite substantially weaker zinc and lead prices. Looking forward, we expect La Colorada's production rates to remain fairly similar for the remainder of the year, or at least until the new shaft goes into operation some time during the fourth quarter, at which time we will begin our steady production ramp-up to the targeted 1,800 tons per day, which will be achieved by the end of 2017. Slashing of the top 200 meters of the new raise bore shaft from the drill, 2.4 meter down under -- to the full 5.1 meter design shaft diameter, has just recently been completed, which allows us to return to normal underground operational advance rates, that had been slowed temporarily during the shaft/inverters. We anticipate this increase in operational development rates will marginally increase our cash cost per ounce through the remainder of the year, delivering within or better than the original production and cost guidance ranges. Our Dolores mine in Mexico delivered a solid quarter, producing 1.1 million ounces of silver and 21,400 ounces of gold, which was 8% and 18% greater than the first quarter of 2015 results, respectively. Cash costs benefitted from the favorable currency exchange rates, improved diesel fuel and other consumable prices, and increased gold grades, driving costs down 31% compared to the same quarter last year to $6.10 per ounce. The Dolores gold production is anticipated to increase and silver to marginally fall over the remainder of the year, according to the mine sequencing, ending the year in line with our original full year guidance projections. Somewhat dependent on the local currency fluctuations, we expect cash costs to reduce going forward the rest of this year, as more gold is produced in subsequent quarters, also ending the year within our guidance projections. Our Alamo Dorado mine in Mexico produced 560,000 ounces of silver at a cash cost of $11.85 per ounce from processing of the residual stockpile of ores that remain, following the completion of open pit mining late December last year. We expect silver production from the stockpile of materials to slowly taper downwards and cash costs to increase somewhat during the second quarter. Production could possibly continue into the third quarter, provided metal prices, operating costs, productivity rates and grade reconciliations remain at current performance levels. Quarterly silver and copper production at our Huaron mine in Peru increased 6% compared to the first quarter of 2015, took 950,000 ounces of silver and 1,700 metric tons of copper. Whereas, production of zinc increased 34% to 4,600 metric tons and lead 49% to 2,400 tons, both new quarterly records for this mine, given the mine sequencing combined with a highly productive mechanized mining metals. The combined benefits of the mining mechanization efforts and the favorable currency exchange rates, drove our cash costs down 33% compared to the same quarter last year to $7.95 per ounce. The mine is now essentially 100% converted to mechanized mining methods and as such, we are expecting fairly flat silver production throughout the remainder of the year, that are based on -- byproduct grades are expected to marginally fall from the record Q1 levels according to the mine sequencing. All in all, achieving our full year guidance production levels. We also expect our cash costs per ounce will marginally increase through the remainder of the year, with the lower base metal grades comfortably achieving or potentially even beating our full year guidance cost range. Quarterly silver production at our Morococha mine in Peru to the company's account, rose 36% from Q1 of 2015 levels to 699,000 ounces, while zinc and copper production both increased 46% to 3,900 and 2,200 metric tons respectively. Lead production fell 8% to 700 tons, all largely thanks to the benefits of the mine mechanization program and the mine sequencing, which includes production from the Esperanza ore body that was discovered about a year and a half ago. These factors contributed to significantly reducing Morococha's cash cost 69% from last year's comparable period to $5.24 per ounce. Remarkably, the lowest cash cost performance for all of the company mines during the quarter. We forecast comfortably achieving our annual silver and lead production guidance, while meeting or exceeding our annual zinc and copper production targets. Likewise, we anticipate comfortably meeting or beating our full year annual cash cost guidance at Morococha. In Bolivia, our San Vicente mine produced 1.1 million ounces of silver, 1,700 tons of zinc, and 200 tons of lead, at a cash cost of $11.84 during the quarter, which was 13% more silver, 48% more zinc, and 26% more lead, at 6% lower cash cost than achieved last year, due to a 7% increase in throughputs obtained through additional debottlenecking efforts, slightly reduced mining dilutions through enhanced ore controls and mine sequencing into higher grade ores. We expect reasonably steady state production in costs at San Vicente for the remainder of the year, achieving our annual guidance targets. Our Manantial Espejo mine in Argentina encountered harder ores during the quarter, that led to a 10% reduction in both throughput and silver production compared to last year's results, partially offset with 12% higher gold grades from the mine sequencing, leading to 677,000 ounces of silver and 14,900 ounces of gold produced during the quarter. A substantial devaluation of the local currency in Argentina last December has fueled a 41% reduction in cash costs from last year's comparable quarter to $8.13 per ounce during the first quarter of 2016. Subsequent to the quarter end, and according to our news releases, we did incur a two week work stoppage during April, which has since been resolved. In addition, we managed to complete the installation of a supplemental SAG mill feed crusher, which is served to overcome the harder ore throughput bottleneck we encountered during the first quarter. As such, we anticipate possibly regaining the production shortfalls over the remainder of the year, hopefully achieving close to or at our original full year production guidance. We are also confident in achieving or beating our original full year cash cost per ounce guidance range, but much of that will depend on curbing the high inflation rates that have persisted over the past several years, particularly now that the local currency exchange rate has been stabilized. On the capital side, we are tracking well with the sustaining capital spending on our seven operations, and believe our full year guidance ranges will be met. With regards to our two expansion projects, I am extremely pleased with the progress made on our La Colorada expansion during the first quarter, advancing the construction of the new sulfide plant to 85% completion, commissioning of the hoisting and headframe and advancing the new shaft concrete lining and steel installations to a depth of 165 meters beneath surface or about 65% complete. Construction on parts of the new 115 KV power line to the site also began during the quarter. Overall, the La Colorada expansion is advancing on budget and remains on schedule to reach the planned 1,800 metric tons per day processing rate, before the end of 2017. The Dolores mine expansion projects also advance during the quarter, including construction of the new high voltage power line to the site, which is now approximately 90% complete at quarter end. We also advanced on the underground ramp, an additional 222 meters during the quarter, and continued engineering procurement for the new pulp agglomeration plant, in anticipation of construction that is just beginning as we speak. Once again, our operating teams continue to effectively and efficiently address the numerous operational challenges we face in the mining industry, keeping us on track to meet our annual production guidance of between 24 million to 25 million ounces of silver at cash costs within our [indiscernible] guidance of $9.45 to $10.45 per ounce. Meanwhile, our experienced and effective project teams are advancing construction of our two outstanding organic growth projects, safely and extremely efficiently. Our companywide focus on safety, productivity and quality continues to bolster this company's mission to be the preeminent primary silver producer of the world. With that, I will now turn the call over to Rob Doyle for the financial update.

[Rob Doyle:]

Good morning ladies and gentlemen. The stellar operating performance described by Steve, also translated into solid financial results in Q1. Despite the decline in revenues from a year ago, on lower metal prices, we achieved significant improvements in our reported mine operating earnings, net income and adjusted earnings. The waterfall slide presented depicts the main factors which led to the $23.4 million improvement in adjusted earnings from Q1 2015. The two main opposing factors were firstly, the decline in revenue, on account of lower prices and slightly lower sales volumes from a year ago, which were more than offset by the steep drop in operating costs and depreciation charges. Our analysis of the operating cost reductions from a year ago, excluding non-cash inventory valuation adjustments, which is the $28 million green bar on your screens now, shows that approximately 30% of the decline can be attributed to favorable devaluations of local currencies, with the remaining 70% being a result of cost cutting and production efficiency initiatives, aided by lower prices for reagents, fuel and other consumables. The jurisdiction where we saw the greatest benefit of a weaker local currency during Q1 2016, was Argentina, followed closely by Mexico. The sharp drop in our operating cost was also the dominant factor in our unproved all-in sustaining costs per silver ounce sold, which declined by 8% from a year ago, to $13.12 per ounce. The table on your screen, now, shows how the decrease in production costs resulted in a $4.05 per ounce decline in [indiscernible] relative to Q1 2015, which is a 28% drop. That decrease was partially offset by lower byproduct credits and high declining capital. The decline in byproduct credits was driven by lower gold sales from Manantial Espejo and Dolores for the quarter. While the increase in sustaining capital was due to elevated spending on the leachpads at Dolores. Our cash flow generation in Q1 was especially pleasing. Operating cash flow, before interest, taxes and working capital movements, was $35.1 million, our strongest quarterly cash flow in the past seven quarters. That cash flow comfortably covered our sustaining capital, taxes and dividends for the period. The timing of some concentrate shipments towards the end of the quarter, resulted in a significant buildup of accounts receivable balances, which had the effective increasing working capital and reducing our operating cash flow, but we expect it to release back into cash, as we go through our usual collection cycle, and our concentrate contracts. Our project expenditures relating to the expansions at La Colorada and Dolores, total $23.6 million during the quarter, and we paid down $2 million in loans and leases, which was funded out of our treasury assets. Our balance sheet position and liquidity remained extremely strong at the end of Q1, which positions us well to complete the expansion projects over the balance of this year, and into 2017, and to look at other strategic opportunities. The working capital portion of our balance sheet decreased marginally by $8.6 million during Q1, with working capital around $383.7 million. The change in working capital was principally reflected in lower cash and short term investment balances, offset by increases in accounts receivable previously mentioned and a net $8.5 million decrease to current liabilities. Our total debt stands at only $59.5 million. Together with our strong balance sheet, we have $264 million of undrawn revolving lines of credit that mature in April 2020. With that, over to Chris for an exploration update.

[Chris Emerson:]

Thanks Rob. Good morning. The deck what you're seeing on your screen is summary of the drilling for the first three months of this year. In total, we have drilled 18,543 meters, which represents 20% of [indiscernible]. Huaron and San Vicente mines have started slowly this year or just starting due to undefined development requirement and [indiscernible] [22

[Michael Steinmann:]

Thank you, Chris. We introduced this slide during our Q4 2015 conference call in February, showcasing our production predictions and planned cost reductions from 2016 to 2018. Our consolidated cash costs shown in green, will steadily decline during the next three years, and should reach a level between $5.50 and $7.50 by 2018, thanks to increased efficiencies and additional low cost production that will come from our La Colorada and Dolores expansions. The first quarter cash cost of 2016 are indicated with a star, well below the annual guidance of $9.45 to $10.45 per ounce, net of byproduct credits. As a result of cost savings achieved at all our operations, especially in Peru, Argentina and Mexico. The savings are largely a combination of increased productivity and to a lesser extent, evaluation of local currencies and lower energy costs. We have been very active on the corporate development side as well. Although, most is closed in Q2 [ph] I would like to give you some additional details on two subsequent events. On April 18th, 2016, Pan American and MacMillan Minerals jointly announced that they have reached an agreement to launch Maverix Metals, as a new publicly traded royalty and streaming company. Maverix will consolidate and expose to market valuation at portfolio of 13 precious metal royalties and streams, previously widely dispersed and largely concealed within Pan American's asset base. When a transaction is complete, Pan American will hold 54% or 63% fully diluted maturity ownership position in Maverix, and therefore retain meaningful upside exposure and leverage to the assets and to Maverix's ability to grow and diversify the portfolio. In the second transaction, Pan American Peru has completed the sale of 75% of shares in Compania Minera Shalipayco to Votorantim Metais, Cajamarquilla for $15 million in cash and 1% net smelter returns royalty. Votorantim will also provide Pan American Silver Peru with a free carry of its remaining 25% ownership interest to commercial production. Shalipayco is the owner of the large Shalipayco zinc development project located in the departments of Pasco and Junin in Peru. The project consists of 49 mining concessions covering an area of 21,000 hectares. Pan American Silver and Votorantim initially entered an exploration and purchase option agreement for this base metal project back in 2006. Votorantim has drilled 241 diamond holes for a total of nearly 89,000 meters on the project. It is our understanding, that it is Votorantim's intention to aggressively move this project over to development position. Before we move on to the question-and-answer session of our call, I would like to briefly review the highlights of our Q1 2016 performance. We saw strong silver and base metal production at a cash cost of $8.03 for silver, a 31% reduction in our cash cost compared to a year ago. We produced 6.42 million ounces of silver and 41,200 ounces of gold. We increased our operating cash flow to $28.4 million or $0.19 per share before working capital changes, in spite of lower metal prices. Mine operating earnings were $16.7 million and adjusted earnings came in at $3.4 million or $0.02 per share. Our expansion project for the La Colorada and Dolores, which we are able to fully fund from our cash on hand are advancing nicely, and will provide significant cost reduction and additional silver production over the coming years. As I said, at the start of this call, we had an excellent start for 2016. I would to end my presentation with a few remarks regarding the silver market. The Silver Institute released last week, a 2016 World Silver Survey, compiled by the GFMS team at Thomson Reuters. The silver market saw a record demand in 2015, with the jewelry, coin, bar and photovoltaic sectors reaching new heights, boosting the total demand to 1.17 billion ounces in 2015. We saw a third successive annual silver market deficit of nearly 130 million ounces, more than 60% larger than in 2014, even with a 4% decrease of industrial demand, due to sluggish global economy. In addition to the strong demand we saw in 2015, Thomson Reuters predicts a supply decrease of about 2% in 2016, due to production cuts, mostly in the lead and zinc production. In short, there are lots of reasons to be optimistic, regarding the silver price for the coming years and Pan American Silver is exceptionally well positioned to deliver value to this period. And with that, I would like to ask the operator to open the lines for the Q&A session.

[Operator:]

Well I am happy that our call has been so clear, and looking really forward to talk to you in August, it will be, when we will join you on a call to talk about our Q2 results. Until then, have a good day. Thank you very much.

[Operator:]

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