Pan American Silver — Q122 results – good cost control

Metals & Mining

Pan American Silver

Q122 results – good cost control

Quarterly results update

Metals & mining

18 May 2022

Price	US$22.11
Market cap	US$4,650m

Net cash (US$m) at Q122, excluding short-term investments		224.8

Shares in issue	210.5m
Free float	100%
Code	PAAS

Primary exchange	TSX
Secondary exchange	NYSE

Share price performance

%	1m	3m	12m
Abs	(25.9)	(10.1)	(34.5)
Rel (local)	(20.4)	(3.7)	(33.3)

52-week high/low

US$33.97

US$21.01

Business description

Pan American Silver is one of the largest global primary silver producers and a sizeable gold miner with operations in North, Central and South America since 1994. The company owns eight producing operations, the currently suspended top tier Escobal silver mine and a number of large-scale advanced exploration projects.

Next events

Mineral resources update

August 2022

Analysts

Andrey Litvin	+44 (0)20 3077 5700
Lord Ashbourne (formerly Charles Gibson)	+44 (0)20 3077 5700

mining@edisongroup.com

Edison profile page

Pan American Silver is a research client of Edison Investment Research Limited

Pan American Silver’s (PAAS’s) Q122 financial results were supported by strong gold and silver sales, while production was affected by the latest COVID-19 outbreak. The company maintained its guidance for FY22 and expects production to be second-half weighted. Costs were generally under control, with an impressive cost performance in the silver segment. Although PAAS is seeing increased cost pressures, its full-year cost expectations remained unchanged. We have updated our estimates to reflect the results and lower commodity prices, reducing our valuation from US$31.0/share to US$29.5/share. Following the recent weakness, the shares look attractive at an FY22e EV/EBITDA of 7.5x.

Year end	Revenue (US$m)	EBITDA (US$m)	EPS* (US$)	DPS (US$)	P/E (x)	Yield (%)
12/20	1,338.8	469.1	0.57	0.22	38.6	1.0
12/21	1,632.8	593.2	0.60	0.34	36.7	1.5
12/22e	1,710.5	564.7	0.68	0.48	32.5	2.2
12/23e	1,629.9	580.4	0.81	0.64	25.4	2.9

Note: *EPS is normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Slower start to the year, costs remain in check

PAAS reported Q122 revenue and EBITDA of US$440m and US$128m on the back of the strong silver (+40% y-o-y) and gold (9%) sales. Production was affected by the COVID-19-related absenteeism and was broadly in line with Q121 for silver and slightly down for gold. PAAS expects production to be second-half weighted, as was the case in FY21. Costs were generally in check, with an impressive silver segment cash cost of US$10.2/oz (-17%) below FY22 guidance. While the gold segment cash cost was up 26% y-o-y from a relatively low base, it remained at a comfortable level of US$1,069/oz and was at the upper end of the guidance range. PAAS declared a quarterly dividend of US$0.12/share.

Maintained FY22 guidance; revised estimates

PAAS maintained its FY22 production guidance as COVID-19-related challenges have subsided and workforce availability has been gradually improving. The company has also retained its full-year cost expectations, noting that it is seeing increased cost pressures in fuel and consumables. We have revised our estimates to incorporate Q122 results and weaker commodity prices, lowering our FY22e EBITDA by 7.9% to US$565m. In other news, PAAS continues to make progress at Skarn, focusing on infill and step out drilling, and Escobal, where the pre-consultation process remains underway.

Valuation: Weak commodities weigh on the stock

Having revised our estimates and updated WACC to 7.2% (from 7.0%), we lower our valuation of PAAS from US$31.0/share to US$29.5/share. The shares have fallen c 26% from their peak in April against the backdrop of weak commodity prices driven by the global economic and inflationary concerns. While these concerns are justified, we believe the shares have overreacted, currently trading at FY22e EV/EBITDA of 7.5x on our updated estimates.

Q122 results review

PAAS reported a solid set of Q122 financial results against a challenging backdrop characterised by the outbreak of the COVID-19 omicron variant. While production was affected by the reduced workforce availability, the overall performance was supported by the strong gold and silver sales. One of the key highlights of the results was the impressive cost performance in the silver segment, where the cash cost and all-in sustaining cost (AISC) were below the FY22 guidance range. We discuss the salient features of the Q122 results below:

■

Total silver production was 4,619koz, up 0.8% versus COVID-19-affected Q121 and a reduction of 12.5% compared to an operationally strong Q421. The gold production was down 4.8% y-o-y to 131.0koz and a more pronounced 16.4% q-o-q. Despite the relatively weak operational performance in Q1, the company maintained its guidance for FY22 production and expects it to be second-half weighted. This is similar to FY21, when silver and gold production was distributed 47%/53% and 48%/52%, respectively, between the first and second halves.

■

Flat to slightly lower production was compensated for by the strong sales numbers, with the silver sales up 40% y-o-y to 4,890koz and the gold sales 8.9% higher at 148.1koz versus Q121. Relative to Q421, silver sales were down 3.5%, while gold sales were up 3.9%.

■

Quarterly revenue was US$439.9m, a 19.5% increase versus Q121 and a 4.2% increase versus Q421. In addition to the strong sales numbers, the top line was supported by the higher realised gold price of US$1,877/oz (vs both Q121 and Q421). The realised silver price of US$24.0/oz was lower than in Q121 but higher than in Q421.

■

At the cost level, the silver segment achieved a unit cash cost of just US$10.2/oz, down 16.8% y-o-y and up 5% q-o-q and an AISC of US$13.4/oz. We note that the segment’s cost performance might have been supported by the high share of sales from inventory versus actual production. In the gold segment, the cash cost was up 26.4% y-o-y to US$1,069/oz from a relatively low base seen in Q121. AISC showed similar performance patterns for both segments.

■

PAAS maintained its FY22 cost guidance, noting the increased cost pressures, particularly for diesel and consumables. Given the current high inflationary environment, we note the silver segment Q122 cash cost and AISC were below the FY22 guidance of US$10.7–12.2/oz and US$14.5–16.0/oz, respectively. In the gold segment, Q122 cash cost was at the upper end of the US$970–1,070/oz range, while the AISC was above the top end.

■

We estimate Q122 EBITDA at US$127.9m, down 13.1% y-o-y and 2.1% q-o-q. Despite the strong top-line performance, earnings were negatively affected by the increase in costs in the gold segment, which generates a higher proportion of revenues and higher margins.

■

At the bottom line, the net profit was supported by a one-off charge related to changes in accounting of the company’s 17% stake in Maverix Metals and a small positive contribution from investment income. Adjusting for these items, we estimate that the company’s net profit was down 6.9% y-o-y to US$29.1m (PAAS adjusted US$32.0m) and up 44.2% q-o-q.

■

Operating cash flow before interest and tax was US$128m (US$92.3m in Q121), while net operating cash flow was US$68.8m (US$29.9m). The company spent US$61.5m in capex in Q122 and paid US$25.3m in dividends. Excluding short-term investments of US$54.4m, the net debt was US$224.8m (FY21: US$237.7m). In line with its new dividend policy PAAS announced a dividend of US$0.12/share.

Exhibit 1: PAAS Q122 results

US$m	Q122	Q121	Difference, %	Q421	Difference, %
Silver production, koz	4,619	4,583	0.8	5,276	-12.5
Silver sales, koz	4,890	3,490	40.1	5,067	-3.5
Silver segment cash cost, US$/oz	10.2	12.3	-16.8	9.7	5.0
Silver segment AISC, US$/oz	13.4	17.0	-21.1	13.6	-1.2

Gold production, koz	131.0	137.6	-4.8	156.7	-16.4
Gold sales, koz	148.1	136.0	8.9	142.6	3.9
Gold segment cash cost, US$/oz	1,069	846	26.4	963	11.0
Gold segment AISC, US$/oz	1,502	1,058	42.0	1,461	2.8

Revenue	439.9	368.1	19.5	422.2	4.2
Cash production costs	(278.8)	(193.2)	44.3	(263.4)	5.8
D&A	(84.5)	(75.1)	12.6	(76.1)	11.0
Other operating costs	14.1	(26.5)	N/A	(29.9)	N/A
EBIT	90.6	73.3	23.7	52.8	71.8
EBITDA*	127.9	147.3	-13.1	130.6	-2.1
PBT	88.3	30.4	190.2	43.2	104.4
Net profit attributable to equity holders	76.5	(7.8)	N/A	14.1	443.2
Adjusted net profit*	29.1	31.2	-6.9	20.2	44.2

Source: PAAS, Edison Investment Research. Note: *EBITDA and adjusted net profit are Edison estimates

Project-by-project review

Below we take a closer look at the operational performance for some of the key projects.

The company’s flagship La Colorada project produced 1,419koz of silver, a 10% reduction versus Q421 and reported 1,620koz in silver sales, down 3% q-o-q. Production in Q1 benefited from higher grades (and a slightly higher implied silver recovery) as improved ventilation rates allowed access to higher-grade zones. The project reported a cash cost of US$9.7/oz in Q122 compared to US$11.6/oz in Q421 and an AISC of US$12.2/oz.

At Huaron, silver production was 899koz versus 838koz in Q421. Despite the broadly flat q-o-q tonnes milled, the project benefited from higher silver grades and higher implied silver recovery. As a result of this, and due to the higher by-product credits, Huaron reported a negative cash cost of US$1.15/oz in Q122 compared to a positive US$3.49/oz in Q4. AISC was US$3.5/oz vs US$9.6/oz in the previous quarter.

Dolores saw lower gold production of 34.6koz (40.1koz in Q421) due to the slightly lower gold grades and somewhat lower estimated implied gold recovery. At the same time, payable gold sales were 40.8koz versus 34.3koz in Q421. Silver production was slightly higher at 518koz due to the higher estimated implied recovery. The project’s cash cost was US$977/oz versus US$932/oz in Q421. We estimate that production costs adjusted for NRV inventory were c 5% higher quarter-on-quarter at US$1,044 per ounce of gold equivalent sales.

Gold production at Shahuindo was down 7% q-o-q to 34.3koz, mainly due to the lower throughput rates, while payable gold sales were 14% lower at 33.8koz. The project’s cash cost came in at US$915/oz versus US$832/oz. Compared to Q121, gold production was up 16% due to higher tonnes stacked and more gold recovery.

La Arena saw a significant reduction in gold production in Q1 on the back of the lower throughput, which was down almost 50%. At the same time, payable gold sales were 11% higher compared to Q421. The project’s cash cost was US$963/oz versus US$819/oz in Q421, while AISC increased to US$1,424/oz from US$1,197/oz in Q4.

At Timmins, gold production was down 7% q-o-q to 31.8koz as higher throughput was offset by lower gold grades. At the same time, payable gold sales were up 18% q-o-q to 35.4koz. The project’s cash cost increased 9% q-o-q to US$1,414/oz, while AISC was up 5% q-o-q.

PAAS continues exploration and early-stage development work at La Colorada Skarn, with exploration focusing on infill and step out-drilling to increase confidence in the existing resource and define further extensions. An update on the project’s resource base will be provided as part of the company’s wider mineral resources report later this year. Engineering work at the Skarn is focusing on defining a mining method that will dictate the size of the plant.

There was no specific update on the Escobal project. At the post-results conference call, management mentioned that the latest pre-consultation meeting took place on 9 May and the next is expected in late June.

Earnings lower on commodity prices and costs

We have updated our earnings estimates to reflect the Q122 results and the recent commodity price weakness. We now assume an average silver price of US$23.0/oz in FY22, a reduction of 6% versus our prior estimate (for details see our initiation reported published in April 2022) and a gold price of US$1,850/oz, down 3%. The lower commodity price assumptions had the biggest impact on our FY22 estimates but it was largely offset by the higher metal sales assumptions due to strong Q1 and Morococha’s contribution to revenues in January-February before the project was placed on care and maintenance. In addition, we have slightly adjusted our cost estimates for some of the gold projects, which resulted in our FY22e gold segment cash cost of US$1,048/oz, a 3% increase versus the prior estimate, and an AISC of US$1,334/oz (from US$1,300/oz). Our silver segment costs are broadly unchanged for now.

All in all, the above adjustments lower our FY22 revenue estimate by 0.5% to US$1,710.5m and our EBITDA estimate by 7.9% to US$565m. We note that a 10% reduction/increase in our FY22 silver and gold price assumptions lowers/boosts our FY22e EBITDA by 8% and 20%, respectively. Our revised estimates compare with FY22e consensus revenues of US$1,724m and EBITDA of about US$600m (source: Refinitiv).

The near-term cost performance remains the key focus. It is yet to be seen how the current elevated cost inflation will affect the performance at an individual mine level and to what extent it will be offset by the recovery in production (in particular, at La Colorada) and weaker currencies (for example, Canadian dollar). This in turn will determine the extent of a likely margin contraction this year. Our current estimates imply a relatively modest reduction in FY22 EBITDA margin to 33% (FY21 36%). Our estimates for FY23 and the subsequent years remain broadly unchanged for now.

Exhibit 2: PAAS earnings estimates revisions

US$m	FY21	FY22e old	FY22e new	Difference, %	2023e old	2023e new	Difference, %
Silver price, US$/oz	25.1	24.5	23.0	-6.9	23.6	23.6	0.0
Silver production, moz	19.2	20.0	20.0	0.1	19.8	19.9	0.3
Silver segment cash cost, US$/oz	11.5	11.1	11.0	-1.0	10.0	9.3	-6.6
Silver segment AISC, US$/oz	15.6	15.0	14.6	-2.6	13.4	12.7	-5.6

Gold price, US$/oz	1,799	1,910	1,850	-3.1	1,749	1,749	0.0
Gold production, koz	579	585	584	-0.1	596	603	1.2
Gold segment cash cost, US$/koz	899	1,015	1,048	3.2	939	963	2.6
Gold segment AISC, US$/koz	1,214	1,300	1,334	2.7	1166	1,188	1.9

Revenue	1,632.8	1,719.1	1,710.5	-0.5	1,617.9	1,629.9	0.7
Cash production costs	(925.5)	(970.1)	(1,015.8)	4.7	(907.7)	(923.1)	1.7
Royalties	(36.4)	(41.3)	(40.3)	-2.4	(39.2)	(40.0)	2.0
D&A	(303.0)	(291.4)	(300.9)	3.3	(279.2)	(283.5)	1.6
Exploration, care and maintenance	(42.9)	(50.3)	(46.0)	-8.5	(48.3)	(46.5)	-3.7
G&A	(34.9)	(44.1)	(43.7)	-0.8	(39.8)	(39.9)	0.3
EBIT normalised	290.2	321.8	263.8	-18.0	303.7	296.9	-2.2
EBITDA	593.2	613.2	564.7	-7.9	583.0	580.4	-0.4

Source: Edison Investment Research, PAAS

Valuation update

Having revised our estimates and updated WACC from 7.0% to 7.2% (due to the higher risk-free rate), our valuation for PAAS falls from US$31.0/share to US$29.5/share. Among other factors that contributed to the lower valuation is a reduction in the market value of the company’s 17% interest in Maverix Metals. The PAAS shares are down c 11% ytd and 26% from their April peak on the back of the lower commodity prices driven by the increased risks to global economic growth, spiralling inflation and faster-than-expected monetary tightening. As a result, the silver price is now down c 17% from its latest peak in March, while the gold price is c 11% lower, with the gold/silver ratio expanding to 84x compared to the 2021 average of 72x. While economic concerns appear justified and slower growth is likely to affect physical silver consumption, investment demand for silver remains supportive. Based on data from Refinitiv, total silver ETF holdings continued to expand this year, reaching a local peak in April 2022 and falling only marginally since then. On our updated estimates, PAAS is trading on FY22e EV/EBITDA of 7.5x (7.1x consensus) which we believe is an undemanding multiple, both relative to peers and historically. Apart for the commodities performance, the near-term share price catalysts include the company’s ability to absorb the industry wide cost pressures as well as the production recovery post-COVID-19-affected Q122.

Exhibit 3: Financial summary

	$m	2020	2021	2022e	2023e
31-December		IFRS	IFRS	IFRS	IFRS
INCOME STATEMENT
Revenue		1,338.8	1,632.8	1,710.5	1,629.9
Cash production costs		(696.7)	(925.5)	(1,015.8)	(923.1)
DD&A		(254.5)	(303.0)	(300.9)	(283.5)
Royalties		(27.5)	(36.4)	(40.3)	(40.0)
Gross Profit		360.2	367.9	353.6	383.3
G&A		(36.4)	(34.9)	(43.7)	(39.9)
Other operating costs		(109.2)	(42.9)	(46.0)	(46.5)
Operating profit (before amort. and excepts.)		214.6	290.2	263.8	296.9
EBITDA		469.1	593.2	564.7	580.4
Other operating expenses		(5.5)	30.7	2.6	0.0
Exceptionals		0.0	0.0	44.6	0.0
Reported operating profit		209.1	320.9	311.1	296.9
Net Interest and finance expense		(20.1)	(16.2)	(14.6)	(12.1)
Profit Before Tax (norm)		194.5	274.0	249.2	284.8
Investment income (loss)		63.0	(59.7)	0.0	0.0
Profit Before Tax (reported)		252.0	245.0	296.5	284.8
Reported tax		(75.6)	(146.4)	(103.8)	(99.7)
Profit After Tax (norm)		118.9	127.6	145.5	185.1
Profit After Tax (reported)		176.5	98.6	192.7	185.1
Minority interests		(1.4)	1.1	2.2	2.1
Net income (normalised)		120.4	126.5	143.3	183.0
Net income (reported)		177.9	97.4	190.5	183.0

Average Number of Shares Outstanding (m)		210	210	211	211
EPS - basic normalised ($)		0.57	0.60	0.68	0.87
EPS - normalised fully diluted ($)		0.57	0.60	0.68	0.81
EPS - basic reported ($)		0.85	0.46	0.90	0.87
Dividend ($)		0.22	0.34	0.48	0.64


BALANCE SHEET
Fixed Assets		2,577.0	2,517.4	2,532.9	2,444.9
Tangible assets		2,415.0	2,344.6	2,315.0	2,227.0
Investments		71.6	78.7	123.7	123.7
Other		90.4	94.2	94.2	94.2
Current Assets		856.9	1,001.2	1,073.4	1,205.0
Inventories		406.2	500.5	514.9	505.8
Receivables		127.8	128.2	134.3	129.5
Cash		167.1	283.6	335.2	480.7
ST investments		111.9	51.7	51.7	51.7
Other		43.9	37.3	37.3	37.3
Current Liabilities		(361.8)	(387.7)	(391.0)	(382.0)
Creditors		(281.9)	(306.1)	(320.0)	(311.1)
Short term borrowings and leases		(12.8)	(14.1)	(3.4)	(3.4)
Other		(67.0)	(67.5)	(67.5)	(67.5)
Long Term Liabilities		(466.3)	(494.9)	(481.6)	(475.0)
LT debt and leases		(20.7)	(31.8)	(18.5)	(11.9)
Other long term liabilities		(445.5)	(463.1)	(463.1)	(463.1)
Net Assets		2,605.8	2,636.0	2,733.7	2,792.9
Minority interests		(3.3)	(4.5)	(6.7)	(8.8)
Shareholders' equity		2,602.5	2,631.6	2,727.1	2,784.1

CASH FLOW
Operating Cash Flow		176.5	98.6	192.7	185.1
D&A, exceptionals, other		280.5	498.9	367.9	392.3
Working capital movement		97.0	(71.1)	(6.5)	4.8
Tax		(81.6)	(129.2)	(103.8)	(99.7)
Net Interest		(10.0)	(5.1)	(2.2)	(0.3)
Net operating cash flow		462.3	392.1	448.1	482.3
Capex		(178.6)	(243.5)	(271.4)	(195.5)
Acquisitions/disposals		22.5	45.8	0.0	0.0
Equity financing		4.7	0.6	0.0	0.0
Dividends		(46.2)	(71.5)	(101.0)	(134.7)
Other		59.1	(2.3)	0.0	0.0
Net Cash Flow		323.8	121.2	75.7	152.0
Opening net debt/(cash), including ST investments		77.9	(245.5)	(289.4)	(365.1)
FX and other		(0.5)	(77.3)	0.0	0.0
Closing net debt/(cash), including ST investments		(245.5)	(289.4)	(365.1)	(517.1)
Closing net debt/(cash), excluding ST investments		(133.5)	(237.7)	(313.4)	(465.4)

Source: Pan American Silver, Edison Investment Research

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Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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