Pan American Silver(PAAS) - 2024 Q3 - Quarterly Report

Introduction, Core Business, and Strategy Introduction This MD&A explains Pan American Silver Corp.'s Q3 2024 performance, to be read with IFRS financial statements, and includes non-GAAP measures - This MD&A is for the three and nine months ended September 30, 2024, and should be read with the Q3 2024 Financial Statements[3] - The report utilizes non-GAAP financial measures such as "all-in sustaining costs per ounce sold" (AISC) and "cash costs per ounce sold" to evaluate operating performance. Detailed explanations and reconciliations are provided in the "Alternative Performance (Non-GAAP) Measures" section[4] Core Business and Strategy Pan American Silver focuses on silver and gold mining and exploration across the Americas, aiming to be a premier producer through sustainable profits, reserve growth, and innovation - The company's primary activities are silver and gold mining, exploration, development, extraction, processing, refining, and reclamation across the Americas[8] - Key strategic pillars include: generating sustainable profits, growing reserves through exploration, fostering positive long-term relationships, upgrading assets, and promoting innovation[9] Strategic Disposition Pan American agreed to sell its La Arena gold mine and La Arena II project in Peru to Zijin Mining Group for $245 million cash, a 1.5% royalty, and a potential $50 million contingent payment - Pan American agreed to sell its La Arena gold mine and La Arena II project in Peru to Zijin Mining Group[10] Term | Details | :--- | :--- | | Upfront Payment | $245 million in cash | | Royalty | 1.5% life-of-mine gold net smelter return royalty for the La Arena II project | | Contingent Payment | $50 million in cash upon commencement of commercial production from La Arena II | | Expected Closing | Q4 2024 | Q3 2024 Highlights Q3 2024 Operational and Financial Highlights Pan American reported Q3 2024 silver production of 5.47 million ounces and gold production of 225.0 thousand ounces, with revenue increasing to $716.1 million and net earnings reaching $57.1 million Production Overview | Metric | Q3 2024 | Q3 2023 | Change | | :--- | :--- | :--- | :--- | | Silver Production (M oz) | 5.47 | 5.69 | (3.9%) | | Gold Production (k oz) | 225.0 | 244.2 | (7.9%) | Cost Metrics | Cost Metric ($/oz) | Q3 2024 | Q3 2023 | Change | | :--- | :--- | :--- | :--- | | Silver Segment Cash Costs | $15.88 | $13.13 | +$2.75 | | Silver Segment AISC | $19.63 | $18.19 | +$1.44 | | Gold Segment Cash Costs | $1,195 | $1,187 | +$9 | | Gold Segment AISC | $1,496 | $1,451 | +$45 | Financial Performance Summary | Financial Metric ($M) | Q3 2024 | Q3 2023 | | :--- | :--- | :--- | | Revenue | $716.1 | $616.3 (derived) | | Net Earnings (Loss) | $57.1 | $(20.6) | | Adjusted Earnings | $115.1 | $5.2 | | Cash Flow from Ops | $226.2 | $114.6 | - As of September 30, 2024, the company had $780.0 million in working capital, including $469.9 million in cash and short-term investments, and $750.0 million available under its credit facility[14] Operating Performance Consolidated Operating Performance Q3 2024 consolidated silver production decreased to 5.47 million ounces and gold to 225.0 thousand ounces, leading to increased AISC for both segments due to lower volumes and operational cost pressures Consolidated Production | Production | Q3 2024 | Q3 2023 | YTD 2024 | YTD 2023 | | :--- | :--- | :--- | :--- | :--- | | Silver (koz) | 5,467 | 5,687 | 15,044 | 15,602 | | Gold (koz) | 225.0 | 244.2 | 668.3 | 615.1 | | Zinc (kt) | 11.2 | 9.5 | 31.0 | 29.4 | - Q3 2024 silver production decreased mainly due to planned sequencing into lower grade zones at Cerro Moro and reduced stacking of lower grade ore at Dolores following the cessation of mining[16] - Q3 2024 gold production decreased due to lower grades at Cerro Moro, processing stockpiles at Dolores, and heavy rainfall impacting Minera Florida[16] AISC per Ounce Sold | AISC ($/oz sold) | Q3 2024 | Q3 2023 | YTD 2024 | YTD 2023 | | :--- | :--- | :--- | :--- | :--- | | Silver Segment | $19.63 | $18.19 | $18.25 | $16.05 | | Gold Segment | $1,496 | $1,451 | $1,553 | $1,350 | Silver Segment Operations Q3 2024 Silver Segment performance was mixed, with La Colorada production up 32% and AISC down, while Cerro Moro production fell 36% with higher AISC due to lower grades - La Colorada: Q3 silver production rose 32% to 1.33M oz, and AISC fell by $8.05/oz to $22.25/oz, driven by significant ventilation improvements that boosted productivity[22] - Cerro Moro: Q3 silver production fell 36% to 0.80M oz, and AISC increased by $13.97/oz to $20.88/oz, due to planned mining of lower-grade zones and higher dilution[23][24] - Huaron: Q3 silver production was stable at 0.89M oz, while AISC decreased by $3.60/oz to $16.77/oz, mainly due to lower treatment charges from favorable commercial terms[25] - San Vicente: Q3 silver production increased 4% to 0.81M oz, and AISC decreased by $5.09/oz to $16.28/oz, benefiting from higher by-product credits[26] Gold Segment Operations Q3 2024 Gold Segment results varied, with Jacobina and Timmins increasing production and El Peñon lowering AISC, while Minera Florida and Dolores experienced production declines and cost increases - Jacobina: Q3 gold production rose 4% to 50.4k oz, with AISC decreasing to $1,195/oz due to lower sustaining capital expenditures[29] - El Peñon: Q3 gold production decreased 8% to 26.8k oz, but AISC fell to $1,314/oz due to processing higher-grade material and higher by-product credits[30] - Timmins: Q3 gold production increased 5% to 33.9k oz, with AISC decreasing to $1,912/oz due to reduced sustaining capital investments[31] - Dolores: Q3 gold production fell 32% to 18.4k oz, and AISC rose to $1,262/oz following the planned cessation of mining activities in July 2024 and a significant NRV inventory adjustment[37][38] Financial Performance Income Statement Pan American reported Q3 2024 net earnings of $57.1 million, a significant improvement from a prior-year loss, driven by $99.8 million higher revenue from increased metal prices, partially offset by a $44.4 million rise in income tax expense Net Earnings and EPS | Metric | Q3 2024 | YTD 2024 | Q3 2023 | YTD 2023 | | :--- | :--- | :--- | :--- | :--- | | Net Earnings (Loss) ($M) | $57.1 | $4.9 | $(20.6) | $(37.1) | | Basic EPS (Loss) | $0.16 | $0.01 | $(0.05) | $(0.11) | - The increase in Q3 2024 revenue was driven by a $155.9 million positive impact from higher metal prices, partially offset by a $66.5 million decrease from lower quantities of metal sold[40] - Income tax expense for Q3 2024 was $44.4 million higher than Q3 2023, mainly due to increased mine operating earnings and a $46.8 million tax settlement related to prior years in Mexico and Argentina[53] Statement of Cash Flows Q3 2024 operating cash flow increased to $226.2 million due to higher revenue, while investing activities used $75.2 million and financing activities used $49.6 million, resulting in a $101.3 million increase in cash and short-term investments Cash Flow Activities | Cash Flow Activity ($M) | Q3 2024 | Q3 2023 | | :--- | :--- | :--- | | From Operations | $226.2 | $114.6 | | From Investing | $(75.2) | $193.7 | | From Financing | $(49.6) | $(336.4) | - The increase in operating cash flow was mainly driven by a $99.8 million increase in revenue[58] - Financing activities in Q3 2024 included $36.3 million in dividend payments and $12.2 million in lease repayments[60] Liquidity and Financial Position As of September 30, 2024, Pan American maintained strong liquidity with $780.0 million in working capital, $469.9 million in cash, an undrawn $750.0 million credit facility, and $815.2 million in total debt - Working capital was $780.0 million at September 30, 2024, an increase of $14.2 million from December 31, 2023[61] - The company's $750.0 million SL-Credit Facility was undrawn and fully available as of September 30, 2024[62] - The company has two series of senior notes: $283.0 million at 4.625% due 2027 and $500.0 million at 2.63% due 2031[62] - During YTD 2024, the company repurchased 1.72 million common shares for $24.3 million under its Normal Course Issuer Bid (NCIB)[64] Selected Annual and Quarterly Financial Information Selected Annual and Quarterly Financial Information This section summarizes key financial results for the past eight quarters and annual data for 2023 and 2022, highlighting Q3 2024 revenue of $716.1 million and net earnings of $56.7 million Quarterly Financial Summary | Metric (in millions USD, except per share) | Q3 2024 (ended Sep 30) | Q2 2024 (ended Jun 30) | Q1 2024 (ended Mar 31) | | :--- | :--- | :--- | :--- | | Revenue | $716.1 | $686.3 | $601.4 | | Net (Loss) Earnings | $56.7 | $(21.9) | $(30.9) | | Basic (Loss) Earnings per Share | $0.16 | $(0.06) | $(0.08) | | Cash Flow from Operating Activities | $226.2 | $162.7 | $61.1 | Operating Metrics Operating Metrics This section provides detailed mine-by-mine operating data for Q3 and YTD 2024, including tonnes mined and processed, ore grades, and metal production volumes, with comparative figures for 2023 - Provides detailed mine-level data on tonnes mined, tonnes processed, ore grades (g/t or %), and production (koz or kt) for Q3 and YTD periods of 2024 and 2023[73][76] Total Production | Total Production | Q3 2024 | Q3 2023 | | :--- | :--- | :--- | | Silver (koz) | 5,467 | 5,687 | | Gold (koz) | 225.0 | 244.2 | | Zinc (kt) | 11.2 | 9.5 | | Lead (kt) | 5.2 | 4.9 | Alternative Performance (Non-GAAP) Measures Per Ounce Measures (Cash Costs and AISC) The company uses non-GAAP Cash Costs and AISC per ounce, net of by-product credits, to measure performance, with Q3 2024 Silver Segment AISC at $19.63/oz and Gold Segment AISC at $1,496/oz - Cash Costs and AISC are non-GAAP measures used to compare the net production costs of primary metals (silver and gold) after deducting revenues from by-products[78] Q3 2024 AISC Reconciliation Summary ($M) | | Silver Segment | Gold Segment | | :--- | :--- | :--- | | Cash Costs | $52.3 | $242.0 | | NRV inventory adjustments | $(4.2) | $(4.1) | | Sustaining capital | $15.7 | $59.0 | | Reclamation cost accretion | $0.9 | $5.8 | | All-in sustaining costs | $64.7 | $302.7 | | Ounces sold | 3.3 Moz (silver) | 202.4 koz (gold) | | AISC per ounce sold | $19.63 | $1,496 | Adjusted Earnings Adjusted earnings, a non-GAAP measure, normalizes earnings by removing volatile items, with Q3 2024 adjusted earnings at $115.1 million compared to $57.1 million net earnings, primarily due to tax settlement and inventory adjustments - Adjusted earnings is a non-GAAP measure that eliminates items management deems unrelated to core operations for a given period to better reflect normalized earnings[99] Q3 2024 Reconciliation of Net Earnings to Adjusted Earnings ($M) | Description | Amount | | :--- | :--- | | Net earnings for the period | $57.1 | | Tax settlements related to prior years | $46.8 | | Net realizable value heap inventory expense | $11.6 | | Unrealized foreign exchange gains | $(3.8) | | Derivative unrealized gains | $(5.8) | | Other adjustments (net) | $8.4 | | Adjusted earnings for the period | $115.1 | Total Debt, Capital, and Working Capital The company defines non-GAAP measures Total Debt, Capital, and Working Capital to evaluate financial leverage, enterprise value, and short-term liquidity, providing insights beyond standard financial statements - Total Debt: Calculated as total current and non-current portions of debt (including senior notes and credit facility draws) and lease obligations[99] - Capital: Calculated as total equity plus total debt, less cash, cash equivalents, and short-term investments[100] - Working Capital: Calculated as current assets less current liabilities, used to evaluate the ability to meet current obligations[102] Risks and Uncertainties Financial Risk Exposure The company faces financial risks including metal price volatility, credit risk, interest rate changes, and foreign currency fluctuations, which are managed through cash flow monitoring and derivative contracts - Key financial risks include metal price, credit, interest rate, foreign currency exchange, and liquidity risk[104] - Credit risk exists with concentrate buyers ($20.3M receivable), refineries (holding $65.2M in precious metal inventory), and supplier advances ($11.1M)[107] - The company uses foreign currency collars and forwards to hedge exposure to the Mexican peso, Peruvian sol, Canadian dollar, Chilean peso, and Brazilian real[111] - Liquidity risk is managed by continuous monitoring of cash flows, planning, and budgeting to ensure sufficient funds for operations and capital plans[114] Foreign Operations and Political Risk The company faces political and operational risks in host countries, including regulatory changes like Mexico's 2023 mining law reform, security incidents such as at La Colorada, and ongoing suspension of Guatemala's Escobal mine - The company is exposed to political, economic, and social risks in Peru, Mexico, Argentina, Bolivia, Brazil, Chile, and Guatemala[115] - In Mexico, significant mining law reforms enacted in May 2023 could materially impact current and future activities. The Supreme Court has granted an injunction against parts of the decree[116] - Security is a major concern, highlighted by an armed robbery at the La Colorada mine in October 2023 that caused a temporary operational suspension[116] Taxation Risks The company faces increasing taxation risks from new taxes, re-interpretations, and aggressive audits, exemplified by a recent Mexican tax settlement and new mining royalties in Chile and transfer pricing rules in Brazil - Governments are increasingly targeting the mining sector for revenue, leading to more frequent audits, new taxes, and aggressive positions by tax authorities[117] - The company recently reached a conclusive settlement with the Mexican tax authority (SAT) regarding audits from 2016-2022[119] - Chile enacted a new mining royalty bill effective January 1, 2024. Brazil implemented new OECD-aligned transfer pricing rules effective January 1, 2024[119] Claims and Legal Proceedings Pan American is subject to various legal proceedings, including the ongoing suspension of Guatemala's Escobal mine pending consultation and a surface land ownership dispute at Mexico's La Colorada mine - The company is subject to various claims and legal proceedings in the ordinary course of business, including labor and tax claims in Argentina and Brazil[120] - In Guatemala, the Escobal mine license remains suspended pending an ILO 169 consultation, with the timing and outcome remaining uncertain, especially after a change in government[122] - At the La Colorada mine in Mexico, the company is challenging a process before the agrarian authority (SEDATU) regarding a claim to declare a portion of the mine's surface lands as national property[122] Climate Change The company recognizes climate change as a global challenge, posing transition risks from evolving regulations and physical risks from extreme weather events that could disrupt operations and supply chains - The company faces transition risks from evolving climate change policies and regulations, which could increase compliance costs[123][125] - Physical risks from climate change, such as extreme weather events, water shortages, and fires, could adversely impact operations, damage facilities, and disrupt access and shipping[125] Material Accounting Policies, Standards and Judgements Material Accounting Policies, Standards and Judgements The company's accounting policies align with 2023 statements, with IAS 1 amendments having no material impact, while the future adoption of IFRS 18 from January 1, 2027, is currently being assessed - Effective January 1, 2024, the company adopted amendments to IAS 1 (Classification of Liabilities as Current and Non-Current), which did not have a material impact[129] - The IASB has issued IFRS 18 (Presentation and Disclosure in Financial Statements), which will replace IAS 1 and is effective for annual periods beginning on or after January 1, 2027. The company is currently assessing its impact[130] Subsequent Events Subsequent Events In October 2024, the company settled disputed Mexican tax items from 2016-2022 with the SAT, resulting in a $45.9 million payment and a corresponding $40.5 million income tax expense recorded in Q3 2024 - In October 2024, the company settled with the Mexican SAT for disputed tax items from 2016-2022[133] - A payment of $45.9 million (including $16.3 million in interest) was made. A $40.5 million net income tax expense was recorded in Q3 2024 related to this settlement[133] Disclosure Controls and Procedures Disclosure and Internal Control Procedures Management confirmed the effectiveness of Disclosure Controls and Procedures (DC&P) and Internal Control over Financial Reporting (ICFR) as of December 31, 2023, with no material changes to ICFR during the nine months ended September 30, 2024 - Management, including the CEO and CFO, concluded that the company's Disclosure Controls and Procedures (DC&P) and Internal Control over Financial Reporting (ICFR) were effective as of December 31, 2023[135][136] - No changes occurred in the company's ICFR during the three and nine months ended September 30, 2024, that materially affected, or are reasonably likely to materially affect, its ICFR[137] Cautionary and Technical Notes Technical Information All scientific and technical information in this MD&A has been reviewed and approved by designated Qualified Persons under NI 43-101 standards - All scientific and technical information has been reviewed and approved by designated Qualified Persons as defined in NI 43-101[140] Cautionary Note Regarding Forward-Looking Statements This MD&A contains forward-looking statements subject to significant known and unknown risks, including metal price fluctuations, political instability, and operational hazards, which could cause actual results to differ materially - The report contains forward-looking statements subject to numerous risks and uncertainties, including fluctuations in metal prices, currency markets, political developments, and operational hazards[141][142] Cautionary Note to U.S. Investors This note cautions U.S. investors that mineral reserve and resource estimates are prepared under Canadian NI 43-101 standards, which differ significantly from SEC requirements and carry higher uncertainty than SEC-defined reserves - Mineral reserve and resource estimates are prepared under Canadian NI 43-101 standards, which differ from SEC rules. U.S. investors are cautioned that these estimates may not be comparable to those of U.S. companies[144]