Pan American Silver Corp. (PAAS) Earnings Call Transcript

Thank you for standing by. This is the conference operator. Welcome to the Pan American Silver Second Quarter 2026 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Siren Fisekci, VP, Investor Relations. Please go ahead, Ms. Fisekci.

Thank you for joining us today for Pan American Silver's conference call and webcast to discuss our second quarter 2026 results. This call includes forward-looking statements and information and references non-GAAP measures. Please see the cautionary statements in our MD&A Q2 news release and presentation slides for the period ended June 30, 2026, all of which are available on our website. I'll now turn the call over to Michael Steinmann, Pan American's President and CEO.

Good morning, everyone, and thank you for joining us today for our Q2 2026 conference call. Q2 delivered strong financial results, strong silver production and meaningful progress on our growth projects. We generated $344 million of attributable free cash flow returned a record of $300 million to shareholders and reached an important milestone at La Colorada in early August with the first cut of the 588 decline to access the Skarn deposit. Attributable silver production of 6.5 million ounces in Q2 was at the high end of our quarterly guidance range. driven by continued strong performance at La Colorada and Juanicipio. We remain on track to achieve our full year silver production guidance of 25 million to 27 million ounces. Q2 silver segment all-in sustaining costs were $17.80 per ounce, primarily reflecting higher cost ounces from the inventory drawdown that had accumulated at La Colorada in the first quarter of 2026. Higher royalties at La Colorado from mining more tonnes than initially planned from the adjacent third-party concession, unfavorable currency exchange rates and higher labor-related costs. Attributable gold production was approximately 166,000 ounces, which was below the quarterly outlook issued in February. We expect Q2 to be the weakest gold production quarter of the year with production more heavily weighted to the fourth quarter as we indicated in Q1. Gold segment all-in sustaining costs or $1,984 per ounce in Q2, slightly above our quarterly outlook due to the lower than forecasted production as well as labor and materials inflation. Importantly, for the first half of the year, all-in sustaining costs were below the low end of our guidance range for silver and in line with our guidance range for gold. Based on performance to date, we are reaffirming our full year 2026 operating outlook ranges for silver and gold production, silver segment and gold segment, all-in sustaining costs and sustaining capital. Within that outlook, we now expect full year gold production to be at the low end of the 700,000 to 750,000 ounce guidance range. We have also revised our third quarter goal outlook to approximately 3,000 to 6,000 ounces below the low end of the quarterly guidance range of 178,500 to 192,000 ounces of gold. The change in our near-term gold outlook primarily reflects lower-than-expected production at Jacobina and El Peñon. At Jacobina, gold production is now expected to be approximately 10,000 ounces below the low end of the original annual guidance range of 181,000 to 191,000 ounces reflecting changes to mining sequencing. The mining method employed at Jacobina over the last 4 years has been open stoping with very few of the stope backfill. Over the last several years, Jacobina has experienced seismic events. While these events have not resulted in any interest or infrastructure damage after reassessing the risk associated with seismicity, we have implemented measures in Q2 that include leaving larger pillars, reducing production rates in some higher-grade areas and increasing development rates to open more mining zones. These measures will result in overall mining grades coming in closer to average mineral reserve grade. Longer term, we are evaluating alternative Avoca type mining methods in certain areas with very strong backfill and cemented backfill as part of the optimization of the Jacobina operation. Jacobina continues to be a standout performer in generating cash flow with a long reserve life and significant optimization potential. We are advancing several process plant upgrades, including installation of new carbon in pulp banks and electrical control systems, both of which are expected to be commissioned this year. We're also advancing conceptual engineering to streamline and simplify the process plant flow sheet, which will feed into a trade-off study to evaluate whether upgrading the existing process plan circuitry and removing obsolete equipment or building a new state-of-the-art processing facility is the optimal choice for this long-life asset. At El Peñon, silver production is expected to remain within the original annual guidance range of 3.65 million to 3.95 million ounces. Coal production is now expected to be approximately 10,000 ounces below the low end of the original annual guidance range of 104,000 to 111,000 ounces reflecting lower-than-expected continuity in certain secondary structures. Across the portfolio, we expect gold production to improve over the balance of the year weighted to the fourth quarter as previously indicated. Second half production is expected to benefit from higher gold grades and higher throughput at Timmins and Shahuindo. We're also managing the effects of El Niño at our operations in Chile and Argentina, extreme rain storms have affected site access for key personnel in July and into August. Our teams are actively managing these conditions with safety remaining the top priority. Turning to our financial results. Revenue was $1.1 billion and attributable revenue, including our 44% interest in Juanicipio was $1.3 billion. Net earnings were $305 million or $0.72 per share, which included a tax expense of $179 million. Adjusted earnings were $0.73 per share. Cash flow from operations was $320 million after $205 million of income tax paid and $17 million used for working capital. Attributable cash flow from operations was $418 million and attributable free cash flow was $344 million, including our share from Juanicipio. Q2 is expected to be the highest period for taxes paid in 2026 due to final settlement of taxes for 2025. Higher metal prices have increased profitability and tax payments. As a result, we have increased our 2026 guidance range for income taxes paid to be between $585 million to $635 million. Our financial position remains very strong. We ended the quarter with $1.8 billion of cash and short-term investments, including cash attributable to Juanicipio. In July, we renewed and demanded our 5-year senior unsecured revolving credit facility, doubling its size to $1.5 billion and adding a $750 million accordion feature. The facility remains undrawn, and our total available liquidity is approximately $3.2 billion. This financial strength gives us substantial flexibility to invest in our operations advanced organic growth projects and return capital to shareholders. At La Colorada, development of the 5 ATAD client to access this Skarn deposit is underway. This is a key step in advancing the planned expansion outlined in the revised PEA released in March. Engineering for the material handling system and ventilation shaft is also progressing with the design, cost, schedule and recommendation expected before year-end. At Timmins, we are advancing the first phase of the Timmins camp project, including the Bell Creek shaft expansion and 2 exploration drifts to access Vogel and Samson deposits. We plan to release updated mineral resource and mineral reserve estimates in the third quarter and a preliminary economic assessment for the Timmins camp project in the first half of 2027. At Escobal, the ILO 169 consultation process continues Government representatives visited the mine in May. We met with representatives of the Ministry of Energy and Mines and the Vice Minister of Sustainable Development in June and the bilateral meeting between the government and the single representatives was held in July. There remains no time line for conclusion of the consultation process and not at for the restart of Escobal. Our strong free cash flow is translating into meaningful shareholder returns. In Q2, we returned a record of $300 million in share repurchases and dividends. To date, in 2026 we have repurchased over 7 million shares under our normal course issuer bid. We have also declared a Q2 dividend of $0.184 per common share. The enhanced shareholder return framework we announced in May operating as intended. Repurchases reduced the share count, increasing dividends per share and each shareholders' exposure to our asset base and future free cash flow generation. generation remains robust, and we will continue to balance shareholder returns with investments in our growth portfolio. And with that, I will turn over for questions.

[Operator Instructions] The first question comes from Lawson Winder with Bank of America Merrill Lynch.

Thank you, operator. Michael and team, thanks for today's update. I'd like to start, I guess, with the elephant in the room, which is Jacobina and the production issues at that asset and what that has meant for 2026 guidance, your expectations to now be at the lower end of the gold production range. When you think about what's happened and what you've provided the market with today, -- what does it mean for sustaining gold production at that mine into 27 and beyond at that just under 200,000 ounce per year range. Does it impact 2027 at all?

Look, I mean, when you look at Jacobina and of course, this seismic activity. And I just want to make very clear, the seismic activity has not created any damage to our infrastructure or anything like that. But this is something that is going on for many years at Jacobina. The mining is an open stoping made pillars -- and of course, if you go on mining for a long time, you see activity. And that's -- if you recall, it was always our plan to put as part of our optimization study, a backfill plant in place. For several reasons, obviously, we want to move over this tailings at the conventional tailings dam in a dry stack tailings time over time. And the new some of that tailings as backfill in the mine. So that was always the plan. Consulting with a lot of our specialists and our systems we have in place, we decided to move on this faster. -- release a little bit the main zones and develop faster into other zones that we have in the mine. So that requires a bit more development right now, obviously. And as you saw, impacted that gold production. I think we guided down about 10,000 ounces less production. So not a massive impact this year. There's a lot of mitigation that we have. As we described, we live larger pillars at the moment as a short-term mitigation. But for that, once we have payback fill in place, we will be able to recover a large part of those pillars. So these reserves are not lost. Let me just go into some other areas. Some of them have a little bit lower grade coal than what we mind right now. Hence, the difference. But this is really just a postponement of the production in the future and investment in the future stronger and larger Jacobina. So really part of the program coming in a bit quicker because we just want to really be on the safe side. But I don't see any impact really over the long term program of multi. This is -- Jacobina has a reserve life that goes way into the 2050 right now and will continue -- we have continued strong success in exploration. So when you look at the big picture here at Jacobina, I don't see really a major impact of that. But for sure, short term, -- that's what we just reported with that about 10,000 ounces lower production this year.

Okay. Thank you for that perspective on the short-term nature of these issues. You also described in the MD&A that El Nino impact may continue to cause disruptions through the remainder of 2026. Will those potential impacts have been factored into the updated language around the gold production guidance.

Yes. Look, I mean, the El Niño impact, we've seen mostly in Chile so far. I'm sure -- most of the people on the phone have heard about the big impact of some of the copper production in Chile. We had very, very strong rains, especially in the South in Florida and actually carried over all the way to Cerro Moro, where we have lots of rains, obviously, when it gets very wet there's some daily challenges in moving your ore to the plant and pushing it through the plant when it's very wet, but nothing of a major impact there. I think the biggest impact we've seen was not actually rain related to our operation because the biggest impact was at El Peñon. Obviously, we are far in the north. It's a very dry area, but a lot of the roads, major highways in Chile have been interrupted. -- which made it quite challenging to fulfill at 100% our shift changes and bring all the people in. So we are mitigating that with different transport routes with flying people in and out. to Antofagasta, et cetera, et cetera. So that's all included in our plan. Well, remains to be seen how the Niño effect advances this year. looks like it's going to be quite a strong phenomenon this year, temperature are quite high in the water. That will move up for the north, obviously, and we'll normally affect closer around Christmas or so of Peru, Hanston, El Niño. It actually comes from there that it's happening normally closer to Christmas. And so we would expect more range in this area. And then later on, the effect of Niño obviously goes all around the globe. We're going to see effect in Australia and Europe, et cetera. So we are preparing and are prepared and preparing further at our operation, making sure that allow our diverse channels and holding ponds are ready for bigger rain events at the moment. So we'll see how that advances. Obviously, if it has a bigger impact then we will inform the market. But at the moment, as I said, it was more a secondary impact so far at El Peñon, just due to a lot of infrastructure damage in the road system of Central and South Chile.

Okay. Great. So it sounds like that is well factored in. And then just finally, -- not a lot of direct discussion about the plan to return up to $1 billion of cash to shareholders this year through both buybacks and dividends. Can you just confirm that remains the target despite that it hasn't been really clearly highlighted this quarter the way it was last quarter?

Well, we put that in the press release last quarter with the plan, and I think it's very clear that we're following on that plan. Actually, we -- you probably saw we returned $300 million this quarter. Obviously, that puts us kind of ahead in the plan. But you recall, we put a plan in place really after Q1. So we had to catch up some on Q1, where we paid, obviously, the normal dividend. But I think we only spend about $25 million in share buybacks in Q1 -- so hence, the catch-up we are right on track, obviously, right now. I think the idea that we published was about 35% to 40% of cash to be distributed to our shareholders. that's still absolutely still in place. I think we continue maybe Ignacio how many shares did we buyback so far this year?

Above 7 million.

And how much is there already now again? And I mean, we continue, obviously, in June to buy back shares -- sorry, in July.

In July, we've -- I think it's over 2 million shares.

Yes. So we continue, obviously, that program very strong. I mean, obviously, the total amount loss on if it's exactly $1 billion or less, that depends on the share price of our buyback. I'm really focused on the amount of shares and number of shares that we're buying back. And absolutely, that program is stronger than ever. So if you look, we're quite a bit ahead of the plan.

The next question comes from Wayne Lam with TD Securities.

Yes. Maybe just following up at Jacobina. Back a couple of months ago at the Investor Day, the discussion has still centered around the potential to increase production and the efficiencies at Jacobina. So I was just curious, was there a seismic event that occurred in the past couple of months to kind of prompt this reevaluation of the mining method underground -- and in light of changes here in potentially moving to more selective mining, is there still potential to scale that production at Jacobina going forward as per some of the optimization work that you're undertaking?

Yes. Yes, absolutely. As I said before, this is, as I see more short-term impact, there's ongoing activity on the seismic side. So said, it's really a precaution we wanted to do when we looked at this with our microseismic system to make sure that everything is safe for our people, for our infrastructure. As we pointed out, there has been no damage to it. And over mid and long term, absolutely, the potential for expansion of Chacopina is exactly the same. We are working at full speed on the optimization. You probably heard hearing the call that we quite some investment in the plant and actually looking at alternatives there as well. And let me pass it on to Martin who will give us a bit more details on that plan.

Yes. Wayne, Yes, absolutely. As we look at this optimization project going forward, we're looking at really completely revamping the plant as 1 thing, and the tailings facility, as Michael mentioned, -- you need to go over the filter tens there, and we're looking at -- been looking for some time, the pace backfill underground and we've completed a lot of the test work that we need to do on that in terms of the strength of the reology of the pace -- so all these things are advancing. The plant is going to take a bit of time. The current facility is maxed out, but we'll be looking at increases to the size of that plant as we go forward. And we haven't really arrived at what can the mine do to provide the plant in the future, but that's some of the things that we're working on as we advance this study. We do expect because of this that will go backwards a bit more towards the mine reserve average grade as we open up new areas in line. Okay. So then it sounds like there's work being done to increase the mill capacity, but you haven't quite done all the work to see whether the mine can sustain the expanded mill capacity?

Well, nothing has changed on that program and what we showed obviously in at the Investor Day, but this is ongoing work, and it's not completed yet. But yes, we are obviously still working on that optimum size of mill. And as you saw there in the press release, we're looking at either increasing productivity in our current mill and we are working right now on that and increasing recoveries or looking at a completely new mill in the future. As I mentioned before, we're looking at the mine plan here, way into the 20s and with probably strong reserve replacement for many, many years to come. And at one point, having a larger state-of-the-art plant at Jacobina would probably make a lot of sense, but Martin and his team are still working on the technical side of that. But yes, all going ahead as planned on that side and going ahead at full speed.

Okay. Got it. Okay. Maybe moving to Peñon. We've discussed in the past the fact that the mine has always had a pretty short reserve life that has been continually extended out. With the depletion of the stockpiles, I was just curious what the proportion of production that had been historically? And then do you see this phase of lower continuity mineralization as transitory? Or is that something we should be kind of modeling on a go-forward basis? And is that going to be reflected in the upcoming reserve update, just want to better understand how we should think about it going forward.

Yes, of course, we're going to put our reserve update out in early September for the midyear reserves. So of course, all these changes and discoveries on the exploration side, et cetera, will be included in that reserve update. When you look at those smaller structures, there are smaller parallel structures to the main structures to have last continuity and need more drilling. So we removed them from the reserves for the time being. Some of them have follow-up programs with Chris and his team on exploration to add an additional drilling. And we replaced them with material from other structures that, in this case, have been higher silver grade and lower coal grade. Hence, we are right on track on the silver production, but we are we're tracking a bit lower on the gold production. So there's still enough places, obviously, to go. We are still drilling and exploring a lot that tenant has been in this level. It's a very, very large cash flow for us and has been an amazing deposit over the years, and there's still a lot to discover there. But -- at the moment, as I said, that moves into higher grade silver will probably continue for the foreseeable future this year. So hence, we made that now cut back a little bit on the gold and confirmed the silver production for the year.

Okay. Great. And maybe just last one, just at Timmins, can you give us a bit of context or a bit more color on the guided increase in production in the second half, and just with the planned increase in the mining rates, can you give us an update on the ground condition issues that you had encountered last year?

Yes, sure. Things went going quite well at Timmins. Right now, we've had some ups and downs in our production rates. But in terms of the geotechnical seismicity. We're not getting any real big events recently. And the pace backfill that we implemented at Bell Creek is really helping from that regard in terms of body recovery and controlling things.

Obviously, still the same plan, Wayne, here. probably earlier, latest mid next year, we will present the UPA on Timmins, as we call the new Timmins with all the additional slides that we are developing right now towards 2 and exploration, and we'll have the new plan for Timmins, something that we gave you an idea at the Investor Day, but obviously, the PA will have all the details in there then with updated resource resources updated mine plans, cost capital requirements, et cetera, to add probably substantial mine life to our Timmins deposits.

The next question comes from Cosmos Chiu with CIBC.

Maybe my first question is on the financial side. You missed earnings compared to consensus this quarter, in part due to higher taxes. So could we maybe talk about higher taxes? I noticed that the tax rate turned out to be about 37% in Q2, higher than the 32% in your first half. So with commodity prices where they are today, is the new normal. And then in the MD&A also talked about the fact that more taxes resulting from higher commodity prices. However, for the second half of the year for tax purposes, you're forecasting $60 an ounce and $4,000 an ounce, which is slightly lower than where spot is today. So if -- again, commodity prices are to stay at the more elevated levels compared to what you're expecting, could taxes come in even higher than your revised guidance? .

It's Ignacio here. So yes, in terms of the taxes Cosmos, in terms of the taxes, yes, we definitely see variability quarter-to-quarter on the effective tax rate. As you mentioned, in Q2, we saw in the high 30s. However, in Q1, we did see high 20s. And if we look at the year as a whole so far, we're in the low 30s, which is more or less where we expected it to be. And yes, unfortunately, there is some variability in Q2, we did see some true-ups related to previous quarters, so some adjustments. But in terms of the overall year, we're tracking in that low 30s area, and that's more or less where we expect to be. So do keep in mind that, unfortunately, on the tax expense side, there is some variability. You'll see that in previous years as well, there was quite a bit of variability in what that effective tax rate is. But when you see the year as a whole, it's more or less where we expect. In terms of the actual taxes paid, yes, we've always guided that typically in the first half of the year, there's higher payments in the second half of the year, and that's to do with the true-up that we have to pay in typically at the end of Q1 or early Q2. And yes, a lot of it has to do with the profitability of the previous year. And specifically in 2025, we saw a spike in profitability just in -- so that's been the big driver for these larger installments -- or sorry, larger true-ups that we saw at the end of Q1 and into Q2. And that's what's driving the higher tax payments that we've posted for the first half of the year. In terms of the rest of the year, yes, we have reguided to a range of $585 million to $635 million. That's more or less what we expect where metal prices are today. Higher profitability is driving that. The other factor, too, is that with our strong cash flows at the operations level, we are generating quite a bit of cash at the site, and that cash has to be repatriated. And a lot of that cash that's repatriated has withholding -- so that's just frictional cost of moving money around the company. So that's another factor that's affecting that -- the overall range of $585 million to $635 million.