Pan American Silver Corp. (PAAS) BMO 33rd Global Metals, Mining & Critical Minerals Conference (Transcript)

Pan American Silver Corp. (NYSE:PAAS) BMO 33rd Global Metals, Mining & Critical Minerals Conference February 27, 2024 10:00 AM ET

Company Participants

Michael Steinmann - President and CEO

Conference Call Participants

Jackie Przybylowski - BMO Capital Markets

Jackie Przybylowski

Good morning. My name is Jackie Przybylowski, mining analyst here at BMO. And I'm happy to welcome our next presenter. We're going to do a fireside chat format. We've got Michael Steinmann, President and CEO of Pan American Silver. Thank you very much, Michael. And as a reminder, I will have questions, of course. But if you have any questions for Michael, please feel free to put them in the app and we'll get to as many of those as we can. Well, thanks for joining us.

Michael Steinmann

Thanks for having me.

Jackie Przybylowski

It's our pleasure. Let's talk first about your portfolio and portfolio rationalization. One of the strategic initiatives that you've mentioned in your Q4 update is further portfolio rationalizations. What does that mean to you, how do you identify which assets in your portfolio could be divested?

Michael Steinmann

Yes, and thanks for the question. I put the slide up there where you see our map with all the assets, it's a big portfolio in South America, that's where we're active. And maybe just a very quick recap of last year just because it was such an exceptional year last year. It's not even a year that we closed the Yamana transaction to actually add those assets in Latin America. So it's very recent, very successful integration, I think, of those assets, four mines, two very large, Peñón and Jacobina, but four mines. Lot of people that we added, very successful, I think, to the Pan American way how we do business. But not only that, as you said, we sold actually three assets and then some other smaller investments that we had very quickly. I think it was done after about one and half quarter later. So I think we did really what I promised that we're going to optimize that portfolio very quickly. And then last but

So that's just like a really quick recap what happened last year, but when you look at our portfolio and what we have, there has been a few assets that were not in the right home, really. I mean, when you do transactions, there's always something coming that doesn't really fit, and MARA was one of those. We owned 56%. For people that are not familiar of MARA, it was a Glencore, Newmont, Yamana joint venture in Argentina. While we actually negotiated the deal with Yamana, Glencore bought the Newmont piece, so of course, I knew that there is a willing buyer for that asset. And I was very clear that it's not really our business to build a big copper porphyry in Argentina. So just was the logic to divest that the first one. I think it has been a very, attractive price that we got but also very nice deal for both sides, really. Worked for Glencore and then I know that they speak very highly of MARA. And we got we got nearly $400 million cash and royalty out of it. So when you look at the at our strategy, of course, we don't produce only silver. Silver doesn't -- you cannot find silver on its own, it comes with base metals, it comes with gold. Actually, transaction increased our silver production last year by about 11%, but a 60% increase on the gold production at the moment as well, that will be followed up at some silver projects, of course, here down the road. But that's really what we focus on.

So when you look at it, we sold MARA, we have another copper porphyry in our portfolio, which is La Arena II in Peru and probably following the same logic, it's not a deposit that we really want to develop, and will be available for divestment. But you know what, at the end, it's a really nice portfolio. I think I like the diversification. You see there in the pie chart there that there is not one country that has more than like 25% of our revenue. I think when you look at country risks and this distribution, it's a very nice diversification that we have, and I really want to maintain that. But you will see, as I said, this year a few more divestments before we kind of settle down what we have.

Jackie Przybylowski

Does especially -- specialization that you have in Latin America give you an advantage in terms of negotiating with communities and governments or just interacting with governments in general? Do you feel like you have sort of a better understanding of the region than some of your peers might?

Michael Steinmann

Absolutely. Look, I mean, I spent all my life -- when I studied in Switzerland and then left the country, and I spent all my life and career in South America, in many different countries, and I lived there for a long time. I obviously still work there and so is a large part of our team. And I think it's unbelievably important. It always has been. I've seen many companies fail, even 20, 25, 30 years ago with kind of the fly in fly out mentality to go to a different place. At the end, we go to a country. It's not different than when somebody comes to Canada and wants to run a business here or a mine here that, for us, it would be normal that people get hired locally that we use management that is locally, that's what we would ask for, right, in Canada, and of course everybody in those countries will ask the same. So in that sense, it's really not rocket science, it's something that everybody has kind of similar idea across the world. But to understand and obviously speak the language and understand those cultures that are very different from one country to the other, of course, is definitely an asset for us.

Jackie Przybylowski

In terms of the sort of synergies between different countries, I know you said they're all different, of course. But does it allow you to maybe operate more operations or more mines and more locations than maybe you otherwise would if you were more geographically spread out?

Michael Steinmann

I think that helps for sure. But I think the reason is that we are very decentralized and that's really what helps us to run all these assets. How we are structured, we have an office in Vancouver, we have a tiny office now in Toronto from the transaction. But the main office is in Vancouver, and it's for the size of the company, it's not very large, it's like a core technical group, accounting and legal to support our business. Bu we have in each country a country office and a country manager and kind of like a structure there in place that can take care of that country. So at the end, we have a lot of communication between those country managers, we bring the people together at least twice a year, discuss a lot of technical issues, safety issues, whatever it is, and people help each other out, but realities are very different. You know, reality in Brazil is quite different from Bolivia, Chile, Argentina, Peru, e tcetera. So while on the technical side, there's a lot of help that can be provided. I think when you look at the social and political side, it's quite different. And there, it's very important that you have that local team in place with local people that understand the situation.

Jackie Przybylowski

You mentioned La Arena II, when you're looking at divestment and maybe this is a good opportunity to talk about it, because presumably you've had some corporate development meetings while you've been here. What's the environment like for acquisitions right now, are you seeing a lot of interested buyers in assets or I guess conversely, are you seeing other things you might be looking to buy yourself? How competitive is the market right now?

Michael Steinmann

Yes. Look, I get that question very often and it follows even a bit further, and people say, when is a good time to buy something, right? And I also -- you know, it's always a good time to buy a good asset, that's really no -- that's never a good time to buy a bad asset,t hat's just like it. And that's sounds like a joke, but it's really true actually. Just because the metal price is a bit higher at a certain time doesn't really justify to buy a mediocre asset, because you know when you go through the cycles, you're going to have troubles with that. So if it's a good asset, it's really a question of how you get a deal structured, what price you're going to pay, can you still structure an accretive transaction. I think with the Yamana side, we achieved that because we split it up and did that three way deal where Agnico took the rest of Malartic and we, at a discount, bought the assets in South America. So even when they're well valued, I think, there is ways, accretive ways to structure, a transaction, but really the first decision always has to be on the quality of the asset.

And I think that's the same when people look at MARA, when people look at La Arena II, they look at the quality of the asset before anything else. These are long term assets. It doesn't matter really where the metal prices are today or tomorrow, because these are assets that are going to be in production for a very long time in the future. And normally like in the case of MARA, obviously, Glencore thinks way longer term. These buyers are large companies that don't think just how the market's going to react the next month or the next quarter, and they don't really think what metal price is going to be in next quarter or next year. I think it is longer term. And I think, you know, when we have discussions here with shareholders, I think when you look at copper or silver, importance in the future for the future for the energy transition, I think, we all have kind of similar views where this is going. But right now it's not really crystallizing, right? We see more pressure on metal prices right now, but that's for different reasons. And I think, when you look at development pipelines and projects for the next 10, 20, 30 years then that short term noise maybe doesn't matter.

Jackie Przybylowski

And building on that, what is your long term outlook for silver? I guess, it sounds like you still would like silver exposure, you're still pretty positive on silver?

Michael Steinmann

Yes. Look, I mean, I really like silver in a sense. It's a very different metal. It's a very critical metal in the sense, for the world, and not only for the energy transition, but we all use more and more electronics. We want to generate clean energy for sure and you need all that silver for the solar panels. You see, I think we are already at about 60% uptake on the industrial side now with all the silver we've seen. When you look at the number quite a deficit in the silver market over the last few years. Of course, there's still silver above ground that fills that gap at the moment. But there's really no way to make a phone or a car, it doesn't have to be an electric car or any computer or any electronic component without silver, so it's a really, really important metal. It's a very hard metal to find big deposits. I'm a geologist and when I look around it's way easier to find larger scales not easy, but way easier to find larger scale gold deposits than find very large scale silver deposits. And on top of it often on the silver side the metallurgy is way more complex. So of course, when you put that all together, everybody would say, well, the prices should be way higher. It's not. I think when you look at today where we stand, we have investor outflows on the ETFs and silver and gold continuously. There's not a lot of interest for obvious reasons, you can put your money in government bonds and make a pretty decent return right now. So that’s what's happening. But we still have quite high metal prices. And on the gold side, it's very central bank buying that keeps the price up. On the silver, it's probably not exactly where we expect to have it when you look at the gold silver ratio, but it's really supported by that strong industrial demand. And when you layer on top of that strong industrial demand, some investment buying when that comes back that should be a pretty good run for the silver price.

Jackie Przybylowski

So you mentioned that silver prices are pretty strong. Gold prices are obviously pretty strong too. You mentioned that maybe investors are not quite there yet. Bridging that gap, how do you get investors back? You've announced a 500 million -- 240 million NCIB. How do you think about using that NCIB and maybe helping to support your share price?

Michael Steinmann

Yes. Look, for me, share buybacks, I think, probably a bit different about this. When I look at my career and share buybacks, what I've seen in the past with lots of companies in Pan America, normally, we did, we had only in the past way back, short term of share buyback, we normally pay dividend. We pay dividend since 2010 and we just approved another $0.10 this quarter. Now we generate enough cash to easily do that, and we love paying dividend. And I'm normally in the view that I should leave the decision to the shareholders if they want to buy more Pan Am or not, it's their investment. But I think at the moment you have this situation where when I look back people buyback shares from many companies see when they sit on a lot of cash. That means normally that the metal price is very high normally the share price is high. And for me it's just looking at any other transaction, it should be accretive, so you shouldn't overpay when you buyback your stock. The same is the opposite. You see often companies not buying back when their share price is actually at a discount, because they don't have cash because the metal price is low, so that's the normal situation. So it's very difficult for the precious metals sector to buyback shares. Well, we ended the year at record cash holding, as I said, we created those royalties when we sold those assets, so there's probably another $150 million to $200 million sitting there whenever we want to take it from those royalties. I think it's not the right time to do right now and very strong financial position. At the same time, for us very clearly that we are now in a discount when you look at our share price. So I think layering on top of the strong dividend payment, share buyback, very opportunistic for this situation, makes a lot of sense. And there was a lot of very positive remarks that I received here.

Jackie Przybylowski

Absolutely. Counter cyclical is great in theory, but it's so hard to really do it in practice. So that's…

Michael Steinmann

And as I said, it's really -- the strong balance sheet is really what helps. And it's -- I always said that, mining, you need strong balance sheets. Obviously, you have to be reacting, able to react to opportunity. And wherever that opportunity is, buying back your stock or buying another business, investing in growth in your own business, doing exploration and finding a big asset like we did at La Colorada. So you have to have that ability to do that. And for that you should not sit on big debt, you should use that very carefully and you should always maintain a strong balance sheet and that gives you that flexibility.

Jackie Przybylowski

You mentioned La Colorada, and I know you said you wanted to talk about it later, so let's hop to a question on La Colorada. You've invested pretty significantly at that site. You're building a -- you've just finished building a ventilation shaft and you're installing some vent fans, right now. As you move forward into this Skarn project, how do you see that sort of bigger investment in this Skarn or are you looking to bring in a partner to help with that? Could you build that yourself? What would be your preference?

Michael Steinmann

Yes. When you look at La Colorada, you really have to split it in two pieces, right? One is the La Colorada mine that we are mining. It's one of our biggest silver producers and has caused a lot of headaches over the last two years. And you know, to be fair, quite some disappointments in our quarterly numbers, because we were just finding that ventilation problem that can only be solved with that ventilation shaft, which you do two or three rounds, a day, you can only dig that fast, and it just takes time. I wish we could have done it way faster but that's just what it takes. So we reached the bottom of the shaft in December, it's connected now to the mine, there are no fans yet, there's like 2,000 horsepower fans going, so that’s why it's a very big, big, big installation, and it's -- we put about $48 million in that shaft. And that will bring La Colorada in the second half of this year back to kind of the normal production we had before. I mean, a normal year at La Colorada was somewhere around 7 million ounces of silver. This year -- last year, we did only 4.3. This year, we're going to be somewhere in the middle, because it's half a year, still continued operation and then half a year of the advanced and a huge impact to our cost, of course, because the denominator will grow so quickly when you look at the cost performance ounce, the cost will be reduced, same that happened -- the opposite last year when we had lower production and a really big cost overrun there.

So that's just like La Colorada top. We still have probably eight to 10 years reserve there. We replaced most of these reserve. So that will continue. But when you go deeper down those veins, actually continue into the Skarn, and I think if you see in our PA and the Skarn, it's very clear now what I was talking the last few years about. This is a real world class discovery. It's one of the largest zinc discoveries over many, many years. We looked at about 50,000 ton underground operation in the future, would generate about 430,000 ton of zinc a year, very high grade concentrate, nearly 60%, but also 17 million ounces of silver a year and we're going to look at multi decade operation here, it's a very big ore body. We didn't find really the edge yet, we are close to 300 million ton in resource already and that will continue to grow. So that's a completely different deposit now than what we're mining on the top. We guided about, in the PA, about $3 billion off bill, and that's your question, absolutely not that we're going to build that ourselves. I think I was very clear already in the press release and in the call, on the earnings call again, what I'm interested is really that silver, there's a lot of silver there. For me, I step back and say there's just a lot of value. The geologists have said, how often does it happen and you make a world class discovery in a brownfield program? I've never seen it. It's great to have it. And I just see value at the moment. How do we split that? Well, that's this year I will work on that. There has been a lot of interest for potential partners on this deposit, just because of the size, right, because they don't really access that long life. And the underground component, as we know, not only in Mexico but it will get harder and harder, I think, in the next 40, 50 years for big open pits. And we have to find a way to build very large, highly mechanized, underground mines, and this is a very good example for that. So how could a partnership look like this? As I said, don't just think in a simple joint venture 50/50, because that's not what we are really looking for, but kind of think it's splitting the metals.

Jackie Przybylowski

So more like a stream almost…

Michael Steinmann

It's probably -- the silver is too big just to pull out the stream, it would take out too much value, like 25% of the revenue. But kind of that idea that you split the metals and we will participate with some kind of capital number, but it's probably way smaller number than the number we put out there. We can easily do that. And I think it's just sensible. We have other projects for growth that we want to follow and look at and follow that idea of the silver and saying, you know, this is like 2,000 -- north of 2,000 tons of zinc concentrated a day. This is quite a bit different business than what we normally focus on and do. And that's -- I think it's a great way for us to harvest that value but not have to run the same side, but take advantage of the silver side. So that's kind of my idea. We'll stay tuned for the year. I hope that during this year we have something to announce, a kind of a structure. And I think once we have that the market kind of add value to our share price for that deposit, the moment, I think there's kind of a token value in there. But everybody is obviously wants to have a resolution how that capital number looks like. And as I said, it's not going to be $3 billion for us.

Jackie Przybylowski

Makes sense. Before we run out of time, I have to ask you about Escobal . So I mean, maybe you could give us an update on the ILO process, maybe just what that is and how it's going for people who don't know? With the transition to a new government in Guatemala, how that's affected the process or not and how you see that maybe going forward? I know you're not able to give us a timeline on the resolution and we all probably wish you could. But any updates on how that's going would be really would be helpful?

Michael Steinmann

Yes. No. Look, I mean, when you look back what happened when we did the Tahoe transaction, obviously, the mine was already in care and maintenance. I look at it and say this is the best already built silver mine in the world. How can we transact on that and convince our Pan Am shareholders to buy this that it’s in care and maintenance. And then at that time the Tahoe shareholders to divest it without getting value for it, that's not the case, right? So we structured that CVR, the contingent value right on it, which will be basically paying our Pan Am shares for each CVR when we start to mine up. So that's kind of how we took care of that, that we pay kind of later, we pay something, but we kind of pay later. So we kind of get a free option on the best silver mine in the world. And our annual option payment, I look at this as our car maintenance cost. So it has taken quite a while to start that, that's a court mandated ILO process, consultation process with an indigenous group, and that took quite a while to start. Of course, we had COVID right coming in the middle, which kind of took two years out, because they're all in person meetings, obviously, especially in South America, everything got shut down for a long time. But it took really -- a very nice process over the last, I would call it, year and a half, a lot of meetings, it's very prescribed how to do this.

Everything is very transparent, everything is recorded and available on the Ministry of Mines Web site. And good -- lots of discussions, lots of interactions as a consultation should be, right? I mean, you have to do this together.

And a lot of advances but now we have a new government in place, right? So it's not completely finished. New government came in on the 14th January. I think, you know, it was a bit of a slow process, the transition, bit issues on the transition side. And it took a bit a while to have all the new government and minister and vice ministers in place, which are running the process. That's now the case and we had last week the first meeting, mostly discussions about information and information transfers and restarting that discussion. So it's a little bit early for me to tell where we stand exactly. I think it's probably fair to say that that change of government has probably slowed it a little bit down, just normal people have to get back up to speed, et cetera. But good commitment to the process from all sides, which I think is the most important part to continue. As you said, I wish I could give you a date, but I don't. and I don't speculate because it's not in our hands.

Jackie Przybylowski

No, there's no point in speculating. Would you -- is it fair to say your first impressions of the new mines minister and deputy are fairly pro mining or constructive so far?

Michael Steinmann

I think they're very, very constructive with the process of the consultation, that's really what we are focusing on it. And I think everybody agrees that that consultation is an important process that has to be followed really the right way and prescribed very well, and that's what everybody is focused on. That's really what we have to do right now. And I think it's -- it will be the next few months and really everybody focusing on that again and get everybody up to speed and continue the process.

Jackie Przybylowski

We see sometimes when mines are closed for a long time that the restart process can take a while. So you might have to do some rehabilitation. I know you're doing care and maintenance, obviously, rehiring, safety inductions, things like that. If you got the green light to restart the mine, how long would it take to get all -- through all that and back up to maybe a full-ish production kind of level?

Michael Steinmann

Yes. And in this case, it's a bit different, because I mentioned what I’d call the option payment, our care and maintenance cost, which is about $20 million a year, so it's a substantial amount of money. And it's really because we maintained the mining in good shape, the plant in great shape, everything, to accelerate that process. And so we think within probably a four months period we could have some kind of production if you get the green lights. It for sure will take the better part of a year to bring it back to kind of the 20 million ounce range, but it's a very short time, because we spent that money ongoing to keep everything in good shape. If you will cut back on that, of course, you could still go in and restart the mine. It would just extend that timeline.

Jackie Przybylowski

Absolutely. It's good to have access to the to the property at least so you can do that.

Michael Steinmann

Exactly.

Jackie Przybylowski

You mentioned I just want to circle back on something you mentioned in Mexico, on the sort of advantages of underground mining. You do have both underground and open pit mines in Mexico, and some of the comments that the current President AMLO has made about banning open pit mining, has kind of gotten some people a bit nervous. How do you think about the outlook for open pit mining in Mexico specifically? Do you think that there's any serious risk to your assets closing or is this any serious risk to new mines not being able to be developed?

Michael Steinmann

Well, I don't really see a risk to our mines, because in Dolores, which is our only open pit in Mexico, is actually we finished mining this year. And then it will go into a multiyear cycle of leaching, it's a heap leach, gold and silver heap leach, very unusual to have the silver heap leach, so it takes many, many years to get all that silver out. So that will take quite a long time, probably up to six years or more to do that, but there won't be any open pit mining anymore at the end of this year. So that won't be affected by it. I really don't know where that law is going to go at the of the day. Everybody has different views on that so we will see how that advances in Mexico. But as I said, me personally, I really believe that, as I said, when we look at the next 40, 50 years, there will be less and less open pit mines in the world. One is a geological reason. We found all the close to surface deposits when I was young and we mined them, and it's very hard to find them. As you know, most of the discoveries are really deep seated and you have to find really ways for very mechanized underground mining. The other one is obviously the impact that is bigger from an open pit mine than an underground. And I think we have the technology available to be very productive with underground mining. And I think in the future when we look at, as I said, way beyond my career, that will be the preferred way for the world.

Jackie Przybylowski

I think there's a lot of new interesting technologies, maybe exploration, maybe mechanized mining, but, yes, absolutely shaping mining going forward. Unfortunately, I can't even finish my questions. We are -- apologize to the questions in the app, we're unfortunately out of time. But thank you very much, Michael. Appreciate your time.

Michael Steinmann

Thank you very much. Thanks, Jackie.

Question-and-Answer Session

End of Q&A