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Pan American Silver Corp (NASDAQ:PAAS)
Q1 2020 Earnings Call
May 9, 2020, 8:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for standing by. This is the conference operator. Welcome to the Pan American Silver First Quarter 2020 Results Conference Call.

[Operator Instructions]

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

Siren Fisekci -- Vice President, Investor Relations and Corporate Communications

Thank you, operator, and welcome, everyone, to Pan American Silver's first quarter 2020 conference call. We released our results after yesterday's market close and a copy of the news release, MD&A and presentation slides for today's call are available on our website. In a few moments, I will turn the call over to Pan American's President and CEO, Michael Steinmann, who will provide a brief review of our results.

We will then open the call to questions and answers. Joining us for the Q&A portion are Pan American's Chief operating Officer, Steve Busby; Chief Financial Officer, Rob Doyle; Senior VP, Technical Services and Process Optimization, Martin Wafforn; and VP of Business Development and Geology, Chris Emerson.

I'd like to remind everyone that our news release and certain statements and information in this call constitute forward-looking statements and information. Please review the cautionary statements included in our news release and presentation as well as the risk factors described in our most recent Form 40-F and annual Information Form. Media and other participants on the call are invited to participate in listen-only mode.

I will now turn the call over to Michael.

Michael Steinmann -- President and Chief Executive Officer

Thank you, everyone, for joining us today to discuss our first quarter results. Q1 is obviously marked by the COVID-19 pandemic, which affected lives and businesses around the world. We're all working together to contain the spread of the virus, and I expect many of you are listening to this call from a remote work location. I hope you and your loved ones are healthy and well. The mining sector, particularly those with operations in Latin America has been and continues to be severely impacted by COVID-19. Pan American immediately engaged its crisis response team to manage the highly dynamic and disrupting cascade of events related to COVID-19.

The health and safety of our employees and communities is always the primary concern. In order to prevent an outbreak of the virus at our site, we adopted health and safety protocols consistent with those recommended by the local health authorities. Best management practices and the World Health Organization across all our operating sites and corporate offices. Where possible, we established remote work arrangements for employees and contractors. We voluntarily reduced throughput at sites, not subject to suspensions to enhance physical distancing among our personnel. In addition to our existing community programs, we are supporting our local communities through donations of food and hygiene supplies and providing access to healthcare.

As previously reported, Pan American suspended normal operations at its mines in Mexico, Peru, Argentina and Bolivia, in the latter part of March 2020 to comply with mandatory national quarantines imposed in response to the COVID-19 pandemic. Limited production has continued at the open pit mines from circulation of process solutions on the heap leach pads as well, the Timmins West and Bell Creek gold mines in Canada have continued to operate at 90% of throughput capacity. That has allowed us to achieve close to our expected consolidated gold production for the quarter. Silver production in Q1, however, was impacted largely by the suspension of the polymetallic silver mines in Peru, Huaron and Morococha as well as La Colorada silver production was affected by lower-than-planned ore grades related to the ventilation issue and reduced throughput from the COVID-19 measures to increase physical distancing.

Ventilation issue at La Colorada relates to a failure of one of the primary ventilation raises in the eastern high-grade portion of the mine. This necessitated an adjustment to our mine sequencing toward low-grade ores while we advanced efforts to replace the failed ventilation raise. We have been able to continue that work during the COVID-19 restrictions. The work in progress on the primary ventilation circuit includes new raises that are being bought between the surface and the 345 and 528 levels. As there are areas of weak rock that resulted in the previous failure, the area is being pre-supported by grouting before the raises our bored [Phonetic].

We expect an interim ventilation solution will be completed in Q2 2020, with the long-term infrastructure complete in the first half of 2021. These deep eastern ventilation constraints have also limited the amount of underground drilling on our exciting skarn deposit, necessitating more directional drilling from surface rigs for definition of the large deep mineral resource. This has proven to be quite effective and efficient. However, we have curtailed this surface exploration work during the COVID-19 operational suspension, but are still on track for a resource update in conjunction with our annual reserve and resource estimates in mid-2020. Despite the impact of COVID-19-related disruptions, our operations generated $114.1 million of net cash flow, mine operating earnings of $50.1 million and free cash flow of $63.8 million in Q1.

Earnings in the quarter, however, were impacted by several unusual items, resulting in a net loss of $77.2 million or $0.37 basic loss per share. The loss reflects a tax expense of $52.7 million driven by weakening of local currencies against the U.S. dollar on deferred tax liabilities, a noncash $28.3 million investment loss, primarily from unrealized mark-to-market adjustments on our interest in New Pacific Metals Corp., $16 million in care and maintenance and $8.8 million of loss on commodity and foreign currency contracts. Adjusting for many of these noncash items resulted in a net loss of $7.6 million or $0.04 per share loss. Importantly, we do not adjust for the noncash investment loss, which represents about $0.13 per share. We ended the quarter with cash and cash equivalents of $147.8 million, an increase of $27.3 million compared to December 31, 2019, despite the large cash tax payment of $36.5 million, a $15 million repayment on our credit facility and an increase to the dividend to $0.05 per share last quarter. Please remember that a large portion of our annual taxes are paid in Q1. Our short-term investments decreased by $26.4 million in Q1 due primarily to mark-to-market value declines in our New Pacific shareholdings, which is now fully recovered. At the end of Q1, we had total debt, excluding lease liabilities of $260 million. We also maintained our quarterly dividend of $0.05 per common share.

While we are in a strong financial position to manage this current business environment, we are still dealing with much uncertainty regarding the course of the COVID-19 pandemic. As a precautionary measure, we drew $80 million on the credit facility in April to further improve liquidity with currently no plan to deploy these funds. This follows earlier steps to reduce spending by instituting corporatewide spending controls in mid-March, deferring certain capital and exploration spending and reducing remuneration for senior management and Board members. A limited workforce is conducting care and maintenance activities at all our suspended operations and our demobilized workforce remains on standby to be redeployed once the government restrictions are lifted, and we determine that we have the necessary sanitary and health protocols to safely resume operations.

Meanwhile, we are closely monitoring our critical supply availabilities and delivery logistics, which to date, have remained largely uninterrupted. Restart of the operations will be under a phased and careful approach following healthcare guidelines and government decrease in each country we operate, which could take several weeks. We expect a gradual resumption of activities with modifications to accommodate greater physical distancing and with appropriate protocols in place to protect the health and safety of our workforce and communities. We currently have no confirmed case of COVID-19 at any of our Pan American Silver operations or offices. Given the level of uncertainty regarding a ramp-up to normal operations in Q1, we withdrew our guidance in 2020. We intend to provide revised guidance as soon as we have sufficient clarity to do so. I will now review the current status in each of our operating jurisdictions.

I would like to caution you that this information is as of today, and circumstances are changing rapidly and are difficult to predict. In Mexico, the government extended the health emergency to May 30. However, the latest decree included the provision that may permit to restart of nonessential activities, including mining, beginning on May 18, if located in a municipality with low or no active COVID-19 cases. Our operations are both situations in municipality that today have very few or no cases. We are now deploying plans, potentially restarting our Mexican mines initially at reduced capacity, pending local authorizations and acceptance.

In Argentina, following the national quarantine that suspended our operations in March, mining was subsequently deemed as essential business by the federal government on April 3. We are currently restarting the Manantial Espejo operation at reduced underground mining rates and redeploying personnel for the restart of COSE and Joaquin operations. In Bolivia, we are currently preparing for the restart of our San Vicente operation, following the government authorization that mining activities can resume on May 7, 2020. In Peru, discussions are advancing with government officials on restarting large scale, greater than 5,000 tonnes per day, open pit mining operations at reduced capacities, which could permit the restart of our La Arena and Shahuindo operations potentially on May 11, 2020.

In Canada, the Timmins mines continue to operate at 90% of throughput capacity under reduced staffing and strict health and safety protocols. Our Escobal operation in Guatemala remains in care and maintenance as required under the mines environmental management plan. The government of Guatemala declared a state of calamity on March 5. And on April 29, extended it by a further 30 days, imposing restrictions on travel, movement within the country and meetings and suspended all nonessential activities. We don't expect any progress has been made regarding the ILO 169 consultation process considering these circumstances. I have been extremely impressed with the ability of our teams and in-country management to safely manage the extraordinary crisis presented by this pandemic while being sensitive to the health and well-being concerns of employees, their families and communities. That is what gives me the confidence that we will successfully navigate this temporary period of disruption and return to the normal productive operations we had beforehand. I'm equally impressed and deeply moved by the heroic efforts of our frontline healthcare workers who are fighting daily against this worldwide pandemic.

Before closing, I must say a few words on our incredible La Colorada skarn discovery. We continued with exploration drilling and initial engineering efforts on the skarn during Q1, before these activities were suspended in April. We haven't released any new drill results this quarter as we were unable to process all samples due to the COVID-19 suspensions. But we are still anticipating providing an updated resource estimate after skarn with our June 30 reserve and resource updates, which will be released with our Q2 results in August. We continue to advance on the initial engineering and potential project layout design efforts throughout this year. You will find additional information and a short video regarding this exciting discovery on our website.

And with that, I would like to open the call for questions. By the way, we are doing this call from different locations, so please be patient if I direct the questions to the relevant member of our management team.

Questions and Answers:

Operator

[Operator Instructions] The first question is from Chris Thompson of PI Financial. Please go ahead.

Chris Thompson -- PI Financial -- Analyst

Hi. Good morning, guys. Good morning, Michael. Just a couple of quick questions here. Obviously, a challenging quarter for like Colorado, some adjustments being made, I guess related to the ventilation issues there. I wonder if you could just walk us through the -- I guess how should we be looking at this from a near-term production perspective. I'm looking at, say, tonnes processed, grade, what should we be looking for Q2, Q3?

Steve Busby -- Chief Operating Officer

Yeah. Good morning, Chris. Steve Busby here. Basically, we're putting in -- the key raise for us right now is from the 345 level down to the 528. We're putting -- would call an interim raise in that should be in, in the next -- by the end of June, and that will get us back into mining high grade at probably close to the rates that we had before we lost the main ventilation raise above the 345. Probably roughly in round numbers, about a quarter of our production comes from this high grade, deep sulfide zone. And this is super high grade. We affectionately know this as our jewel box. So having limited production there definitely impacts our grades.

So I'd say, as we move into Q3, we expect with success of this lower raise, we will be back up to the rates that we saw before. But I think it's important to mention that given the ground conditions, which we've always addressed, we've always had issues with the ground at La Colorada. It's pretty fractured up broken ground. We decided to go to this new technology that's available, proven technology that's been used in other mines in Mexico, pre-grouting the pillar material before we pull a big raise bore there. These are 3.1 meter-diameter raise bores for our long-term ventilation needs there.

Given what's happened here in and that loss of the one raise bore, we're actually taking advantage of this. And with this new design, it is kind of incorporating some longer-term concepts because this will be a very durable long-term infrastructure project for the site. It will actually help support even as we move into the skarn, it's -- because the skarn is kind of adjacent on that eastern edge of the mine. So long term, this not only provides maybe enhanced production out of that high-grade East zone but allows us access to understand the skarn even better yet. So there's some -- it's a pretty positive thing overall. It's just a temporary disruption for this first kind of six months in 2020.

Chris Thompson -- PI Financial -- Analyst

Okay. Thanks, Steve. Just moving on, I guess, Dolores. So wonder if you could just give us an update on the underground there as well as the agglomeration component of the mine.

Steve Busby -- Chief Operating Officer

Yeah. Prior to the operating suspension there, Chris, I'll start with the pulp agglomeration plant was running very well. We have all the filter plants at full capacity now, and we were achieving 5,500-plus tonnes a day through that plant pretty consistently. So we look pretty good on the pulp agglomeration plant. The underground, we're kind of at this 1,000 tonne a day rate, we're trying to open up more to the west side of that mine -- sorry, to the north side of that mine, some additional stopes that take us up to that 1,500 tonne a day.

So that will probably happen toward the latter part of the year. But I think the big thing at Dolores that we saw during Q1 was kind of residual from Q4 last year, and we have a lot of solution inventory given the size of these pads, that we are working through. And toward the end of Q1, we really started to see that production rate finally starting to come up through all that dilution that we took on in the wet season of last year in 2019. So unfortunately, with the suspension, I mean the pads keep producing. So that's good there. But we didn't have -- we need to get more ore on that pad as we go through 2020 to meet kind of what we think that's capable in meeting this year.

Definitely, the indications are positive. The pulp agglomeration plant is running well. It does give us a big boost at the start of the production of the high grade as we're mining into it now. But right now, we're focused on getting that operation back up and running as soon as we can once the restrictions allow us to.

Chris Thompson -- PI Financial -- Analyst

Thanks. And then finally, Steve, just La Arena, look, I'm just noticing the drop-off in tonnes mined and loaded compared to the Q4. And I understand that Q4 was an exceptional quarter for the mine. A little disappointed with the limited tonnes, I guess, mined and loaded in the Q1. You got a comment on that?

Steve Busby -- Chief Operating Officer

Yeah. I mean it's basically -- Chris, it's just the nature of the stripping necessary and when we open up ore, when we're into ore, given it's all run of mine, as we mine whatever tonne of ore we mine goes right to process, that minute. So we knew at the end of Q4, we were at the bottom of the pit. We're into a solid ore. It generates a lot of ore in a short period of time, but we're back to laying back that kind of, we call it, Phase 8, if you will, of the pit. So the ore release out of that mine plan is pretty limited.

So we always said, even when we projected out La Arena production for this year, we always said it was back-end loaded, just like 2019. If you go back to 2019, you're almost looking at a mirror image here of what's happening, and we'll be in the high-grade ore. Again, following the disruption of the COVID suspension, we'll be back in the high-grade ore at the end of that part.

I think the other very interesting thing at La Arena is we do see some potential opportunities to expand some of the resource down at the bottom of the pit and to adjacent to kind of the ultimate Phase 8 pit design that we have now. So we're anxious to do a bit more exploration drilling there, which is also at that property currently suspended. But once we get back in there, we think we can do a bit of exploration in some highly prospective areas that might lead to a little bit of a increase in life of that asset. So we're pretty excited about it, particularly with these gold prices.

Chris Thompson -- PI Financial -- Analyst

Great. Thank you, Steve. Thanks a lot.

Michael Steinmann -- President and Chief Executive Officer

Just to add here, and I alluded to this already during the call. Of course, while even the heap leach operations we have are on standby, we continue to leach on our leach pads. We continue to circulate the solution and recover gold in La Arena and Shahuindo, we recover gold and silver at Dolores. Just keep in mind that there will be certain working capital requirements once we start up again as we need to replenish, obviously, the inventory that we draw out of the heap leach now. That goes much lower. In the case of silver for Dolores, as we all know, the leach curve is very flat for Dolores and a bit quicker on the gold side.

Chris Thompson -- PI Financial -- Analyst

Thanks, Mike.

Operator

[Operator Instructions] The next question is from John Tumazos of John Tumazos Very Independent Research. Please go ahead.

John Tumazos -- John Tumazos Very Independent Research -- Analyst

Thank you for your presentation and taking my question. Concerning the drilling at La Colorado or other places that, I guess, would have to hold as soon as the government puts in a lockdown, are you able to maintain QA/QC procedures or essentially the security of samples and have everything sprinkled, 43-101 compliant through the lockdown?

Michael Steinmann -- President and Chief Executive Officer

Yes, John, absolutely. But I'll pass it on to Chris Emerson to give you more details on that.

Chris, can you take that?

Christopher Emerson -- Vice President, Business Development and Geology

Absolutely, Mike. John, yes. No, of course, the QA/QC is obviously a very important part of the system of control and assurance for all of our exploration drilling, etc. And certainly, if we -- we've suspended a lot of that, as Mike alluded to, through March. Everything we're shutting down. So all the samples that have been drilled are all in locked areas. Anything that's done at the mine site goes through that normal QA/QC at the mines as we do a lot of stuff in-house for the resource and reserves, which is just the normal infill and exploration drilling at the mine sites. And really, the only exploration project of significance is the La Colorado skarn, which is obviously shipped out to external, but that's all done under lock and key and all the protocols applied.

John Tumazos -- John Tumazos Very Independent Research -- Analyst

So the third-party independent guy didn't have his wife call them home and leave you stranded.

Christopher Emerson -- Vice President, Business Development and Geology

No, no. And actually, certainly for La Colorado, we got in a certain amount of batches, and we've actually withheld and haven't sent to the labs that where all under lock and key and everything is secure.

John Tumazos -- John Tumazos Very Independent Research -- Analyst

So Michael, with the interruptions that have already occurred, do you think it's possible that the second quarter might hit 100,000 ounces of gold and 4 million ounces of silver?

Michael Steinmann -- President and Chief Executive Officer

I don't have numbers yet, John, for the second quarter. As you can imagine, this is a very fluid situation. Things are changing by the day. I explained there the start ups in each country that there will be steps to that and phases to this, like the reopening, we see right since yesterday here in British Columbia, that we see in Europe and in the U.S., and there are obviously similar kind of steps everywhere in the world. So we don't have all these details yet, how quickly and how fast and to what tonnage we can get, John.

So unfortunately, I don't have a forecast yet for the quarter. Just in general, as we did not give a new guidance, yes, that's obviously the same reason. I mean nobody knows how this pandemic evolves right now, nobody in the world, neither us. So it wouldn't make any sense to speculate here from our side on production profile. But as soon as we have more clarity, of course, we will give out new guidance on our production costs and capital.

John Tumazos -- John Tumazos Very Independent Research -- Analyst

Do you have any locations that are operating normally?

Steve Busby -- Chief Operating Officer

John, this is Steve Busby. I would say Timmins is pretty close to normal. I mean we're guiding 10% lower at current capacities. But reality is that's 10% below where we expected to be because remember, we were doing a modest expansion of that operation this year. And what's happened is more a case that some of the equipment we've ordered has been delayed with COVID-19 impacts. So our expandability is pushing out a few months from where we originally had it. So net-net, I would say -- I would tend to say, when you think about Timmins and you look back over the previous quarters, we're pretty close to those kind of rates. It's just not at the expanded rate that we were kind of forecasting this year. But outside of that, all the other eight operations, besides the heap leaches that continue to produce off of the inventories has been suspended.

Michael Steinmann -- President and Chief Executive Officer

Just in general here, obviously, there is no normal, nowhere in the world right now. I'm doing all the marketing remotely. We do all work from home. And we obviously have to follow social distancing anywhere we work. So that's a reality for the time being. I'm sure we're going to get beyond that, and it will go absolutely back to normal as it was before, John.

John Tumazos -- John Tumazos Very Independent Research -- Analyst

Thank you.

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 -- President and Chief Executive Officer

Thank you, everyone. Definitely challenging times here for the world. Absolutely a situation that none of us ever have seen in our lives. But this will pass as well. We will get through this on the plan, and we go -- we'll find a solution and go on. Luckily Pan Am is a very strong company, and looking forward to give you an update for Q2 in August. Until then, stay healthy and safe. Thank you.

Operator

[Operator Closing Remarks]

Duration: 30 minutes

Call participants:

Siren Fisekci -- Vice President, Investor Relations and Corporate Communications

Michael Steinmann -- President and Chief Executive Officer

Steve Busby -- Chief Operating Officer

Christopher Emerson -- Vice President, Business Development and Geology

Chris Thompson -- PI Financial -- Analyst

John Tumazos -- John Tumazos Very Independent Research -- Analyst

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