{"id":63181,"date":"2023-09-19T20:08:34","date_gmt":"2023-09-20T00:08:34","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/pan-american-silver-growing-reserve-base-but-high-operational-risk-nysepaas\/"},"modified":"2023-09-19T20:08:42","modified_gmt":"2023-09-20T00:08:42","slug":"pan-american-silver-growing-reserve-base-but-high-operational-risk-nysepaas","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=63181","title":{"rendered":"Pan American Silver: Growing Reserve Base, But High Operational Risk (NYSE:PAAS)"},"content":{"rendered":"
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Thesis<\/strong><\/h2>\n

Pan American Silver (NYSE:PAAS<\/span>) experienced strong reserve growth year over year. The primary driver was the deal with Yamana. The Jacobina mine, a producing asset with enormous potential for exploration with high grades and low AISC, became part of the Pan American portfolio.<\/span><\/p>\n

PASS has a clean balance sheet with sufficient liquidity. Ross Beaty is among its directors and it’s still undervalued to its peers when measured by NAV. The current price offers the opportunity to start building a long-term position while using pullbacks to add more.<\/p>\n

Despite all the positives, Pan American has scattered its operations in seven countries. Before considering an investment in PAAS, I will wait patiently to see how the management will handle the incoming challenges. Having mines in more than a few countries, even in one region, puts the company’s leadership in a precarious situation in my view. That said, I give PAAS a hold rating for now.<\/span><\/p>\n

Company Overview<\/strong><\/h2>\n

Pan American Silver is among the major silver miners in the world. However, the production of silver contributes to around 20% of their income, gold contributes to about 65%, and base metals (copper, zinc, and lead) make up the remaining 20%. By acquiring Tahoe Resources, they joined the group of silver miners who had expanded into the gold mining industry.<\/p>\n

Pan America’s plausible reserve base is outstanding. They have 24.2 million oz of gold and nearly 1.3 billion oz of silver. They are expected to produce roughly 930,000 oz of gold and 22 million oz of silver in 2023.<\/p>\n

Those numbers exclude the Escobal mine in Guatemala, which has permit problems due to political issues. The Escobal restart will add another 20 million oz silver annual production with low AICS. PAAS has another project in its pipeline: the enormous and underdeveloped Navidad in Argentina. The Escobal and Navidad projects now have permit concerns that might not be resolved.<\/p>\n

PAAS anticipates producing 930,000 oz in 2023 at all-in costs of about $1,550 per oz to have a healthy cash flow. Additionally, they have a strong balance sheet, especially for a business of their size, and their next long-term debt payment isn’t due until 2027.<\/p>\n

The deal with Yamana brought four producing mines to Pan American’s portfolio. This gives them 12 operating properties in seven countries in the Americas. No single operation provides more than 23% of production, giving them diversification if they lose a mine.<\/p>\n

Among Yamana’s mines, I like Jacobina in Brazil. It comes with a large land package measuring around 80,000 hectares, among the largest and undoubtedly one with a significant exploration upside compared to other operating mines. It is more significant than Chapada, a former Yamana asset, and almost twice as significant as Hounde. The latter is one of Endeavour Mining’s mining assets in the Birimian Greenstone belt in West Africa. The table below from Mining data online shows Jacobina’s resource, reserve base, and ore grade.<\/p>\n

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\"Jacobina<\/span>
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Mining data online<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

As seen, the numbers are impressive. The grade exceeds the world average for underground mines. Currently, Jacobina is under Phase 3 expansion to increase its annual production to 270 thousand ounces of gold.<\/p>\n

This is significant for Pan American because Jacobina, the company’s arguably best asset, produces about 190,000 ounces at under $900 per ounce all-in sustaining costs, making it one of the highest-margin gold assets in the sector even though it only operates at 50% of what could be its maximum annual capacity (about 350,000 ounces).<\/p>\n

Special mentions are deserved for Ross Beaty. He, along with Sean Boyd, Mark Bristow, and Pierre Lassonde, is a living legend in the precious metals mining industry. Mr. Beaty is Chairman of another excellent miner, Equinox Gold (EQX). He has a distinct style of managing his company’s financial affairs. Among his best traits is his prudent approach to debt. PAAS has a solid liquidity position with well-diversified debt.<\/p>\n

Q2 results<\/strong><\/h2>\n

PAAS had an exceptional last quarter. A few points I wish to highlight. 6.02 million ounces of silver and a record 248.2 thousand ounces of gold were produced-production up 55% for silver and 102% for gold compared to Q1 2023. The table below from the last company financial report shows the 2023 projections.<\/p>\n

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\"2023<\/span>
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Pan American Q2 financial statement<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

All-in Sustaining Costs per silver ounce were $15.70, respectively-Gold AISC $1,342. The production growth is reflected in the company`s revenue. The latter increased by 64% to $639.9 million from Q1 2023 to Q1 2019. The table below represents the Q2 income statement.<\/p>\n

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\"Income<\/span>
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Pan American Q2 financial statement<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Revenues almost doubled while production costs increased by less than 50 %. The company’s non-cash accounting impacts result in the bottom line. PAAS realized a net loss of $47.4 million, including a $42.4 million impairment charges related to the sale of its 92.3% ownership interest in the Morococha mine and $26.1 million net of tax fair value adjustments on finished goods inventories related to the Yamana transaction accounting.<\/p>\n

Adjusted earnings, which do not include the impairment charge and the fair value adjustment mentioned above, were $14.7 million, or $0.04 adjusted earnings per share. On August 9, 2023, PAAS declared a dividend of $0.10 per share for Q2 2023.<\/p>\n

Company Financials<\/strong><\/h2>\n

As I mentioned, Pan American has robust financials for miners. The table below shows some liquidity and solvency metrics I use to asses balance sheet health. The data is from the last financial report.<\/p>\n

<\/span><\/p>\n\n\n\n\n\n\n\n\n\n\n
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EBITDA\/Interest expenses<\/p>\n<\/td>\n

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15.6<\/p>\n<\/td>\n<\/tr>\n

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EBITDA – CPX\/Interest expenses<\/p>\n<\/td>\n

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3.96<\/p>\n<\/td>\n<\/tr>\n

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Quick ratio<\/p>\n<\/td>\n

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0.94<\/p>\n<\/td>\n<\/tr>\n

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Current ratio<\/p>\n<\/td>\n

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2.13<\/p>\n<\/td>\n<\/tr>\n

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Net debt\/EBITDA<\/p>\n<\/td>\n

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1.87<\/p>\n<\/td>\n<\/tr>\n

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Net debt\/EBITDA – CPX<\/p>\n<\/td>\n

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7.4<\/p>\n<\/td>\n<\/tr>\n

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Long-term debt\/Equity<\/p>\n<\/td>\n

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19.6 %<\/p>\n<\/td>\n<\/tr>\n

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Total debt\/Equity<\/p>\n<\/td>\n

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19.6 %<\/p>\n<\/td>\n<\/tr>\n

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Total liabilities\/Total assets<\/p>\n<\/td>\n

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39 %<\/p>\n<\/td>\n<\/tr>\n<\/table>\n

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