- Silver is up slightly which is interesting from a mining perspective.
- I’ll analyze Pan American Silver to continue with our sector analysis.
- This article ends with a comparative table of the miners analyzed up to this point.
Last month, I discussed how silver looks like an interesting risk reward hedge to whatever might happen in the future, from loose monetary policy to even increased industrial demand.
I’ve discussed some silver miners that also represent interesting investing opportunities, so today I’ll first give a short update on silver and continue with my discussion on a few silver miners.
Silver Is Up A Bit
In the last month, silver prices have increased from $16 to the current $17 which might not seem like much, but it is for silver miners as every dollar increase in prices is pure pre-tax profit for them.
Silver is up on higher inflation expectations and more geopolitical turmoil, but we must keep in mind that silver prices are volatile and one never knows where they will go in the short term. Let’s continue to look at silver miners to see if the risk reward opportunities are better than with physical silver.
Pan American Silver Corp (NASDAQ: PAAS)
The first nice thing about PAAS is that the cash mining costs are below $5 and all-in sustaining costs are $10.79 which should allow for significant cash flows and profits. There is also a 0.8% dividend yield, which isn’t bad for a hedge.
The low costs lead to $527 million of available liquidity and the 288 million proven and probable reserves indicate lots of future steady mining. The company has a diversified asset base in the Americas (Mexico, Bolivia, Peru, and Argentina).
The company produced 25 million silver ounces in 2017, but expects to produce about 33 million ounces per year by 2020. The growth in past production has been staggering.
However, as is the case with many other silver miners, most of the revenue comes from other metals.
Let’s take a look at fundamentals.
Pan American’s Fundamentals
The book value is around $10 per share, the company doesn’t have much debt as total long term liabilities are at $88 million. The revenue in 2017 was $816 million with net earnings of $123 million, or $0.8 per share, which leads to a relatively high PE ratio of 20. But cash flows are the key with miners, and PAAS had $224 million of operating cash flows in 2017 which is a price to cash flow ratio of 12.
Another important factor to look at is the value of the metal in the ground, and just the gold in PAAS’s proven and probable reserves is more valuable the company.
The 1.9 million ounces of gold at current prices are worth almost $2.5 billion, while the 288 million ounces of silver are worth another $4.9 billion. Which means that the current market cap is 30% of the proven and probable reserves. So, if you wouldn’t mind keeping your gold and silver in the ground, you could buy it all at a 70% discount to market prices.
What’s also interesting is that PAAS owns the Navidad project in Argentina which holds 600 million ounces of silver as a resources.
The problem with the project is that the Province of Chubut passed a law in 2003 (Law 5001) that prohibits open pit mining and the use of cyanide in mineral processing in the entire province, effectively preventing the development of Navidad. To date, this law remains in place. So, things like this will remain an opportunity as the company could have huge economic benefits if the government in Argentina changes its mind, but also if silver prices surge, that would make it more attractive to mind the silver there. So, it is a nice free optionality.
Given the low debt, low mining costs, resources, diversification, flexibility, and projects, PAAS looks like an interesting hedge in this environment. However, one must always look at the risks. As we can see below, PAAS’s stock is relatively volatile and moves much more than the price of silver.
As always, the biggest risk comes from lower silver prices while other risks come from operational issues. Nevertheless, PAAS is a company that I am putting on my watch list.
Here is the list of the stocks we have touched on up to this point:
|Wheaton Precious Metals||NYSE: WPM||Undervalued streamer - PCF 16???||Canada Tax - San Dimas production??|
|Fresnillo||LSE: FRES, OTC: FNLPF||Huge pipeline, growth, lower cost||High CAPEX, Mexico - Good Company|
|Industria Penoles||OTCPK: IPOAF||Owns 75% of Fresnillo + a bit more||High CAPEX, Mexico - Good Company|
|Coeur Mining||NYSE: CDE||HUGE with higher prices||HUGE with lower prices (leverage + high costs)|
|First Majestic Silver||NYSE: AG||HUGE with higher prices||HUGE with lower prices (pure silver play)|
|Pan American Silver||NASDAQ: PAAS||Div, low cost, reserves, diversified||Good company to follow|