Pan American Silver is a Canada-based premier silver mining company, with large silver reserves and a diversified portfolio of producing mines, with nine operations in America. It also produces and sells gold, zinc, lead and copper. Its properties in North and Central America include Timmins, La Colorada, Dolores and Escobal. Its operating properties in South America include Shahuindo, La Arena, Huaron, Morococha, San Vicente and Manantial Espejo. Its exploration and portfolio assets also include La Colorada Skarn and Navidad.

Investment Rationale

• Gold and Silver are Likely to Regain the Value Soon: Following Pfizer and BioNTech SE announcement that they have a vaccine with a 90% efficacy rating against coronavirus, Precious metals plummeted recently, as an expected V-shaped recovery amplified by the vaccine deployment, investors shifted their focus from safe-haven assets to reviving companies. And, both gold and silver witnessed a sell-off. However, despite the fact that Pfizer’s vaccine is more than 90% effective in preventing COVID-19, the extremely low temperature of minus 70 degrees Celsius storage requirements and pending FDA approval can pose a big challenge for a successful rollout. Thus, gold and silver are likely to regain its value soon, as a second wave threat could lead to more lockdowns.

• Shares are Hovering in a Long-run Bullish Zone: 200-day Simple Moving Average is considered as the long-term crucial support level for a stock as it reflects a support base in a stock created over 200-days of trading sessions. The Price/ 200-day SMA ratio of PAAS’ shares stood at 1.15x, which implies that shares of PAAS are trading approximately 15% above the 200-day or long-term support level, which implies a long-term bullish trend given the stock is trading lower double-digit above its psychological long-term support level.

• Decent Q3FY20 Performance: Low operating costs and strong precious metal prices contributed to robust mine operating earnings of USD 124.6 million in the third quarter of 2020. Further, all operations are running, and projects are proceeding. The company has generated strong operating cash flow year-to-date of approximately USD 292 million. In line with the group’s capital allocation priorities, it has substantially reduced debt with only USD 60 million drawn on the Credit Facility. Also, the company is aiming to have no bank debt by the end of the year. The group has also increased the dividend for the second time this year, raising the quarterly dividend by 40% to USD 0.07 per common share.

Source: Company Presentation

• Low Balance Sheet Risk: At the end of September quarter of 2020, the group’s Long-term Debt to Total Capital ratio stood at 4.6%, significantly lower than the industry median of approximately 14%, with an interest coverage ratio of 11.20x. This implies negligible balance sheet risks for the company. Also, the company’s free cash flow yield stood at 3.3%, which implies adequate availability of funds to easily weather any short-term challenges and fund growth as well. 

• Solid Relative Price Strength: Pan America’s shares have significantly outperformed the benchmark S&P/TSX over the past 1-Year with relative outperformance of 85.4% and outperformed the index by 44% on a YTD basis. This implies a strong relative price strength in the stock. 

• Risk Associated to Investment: The group is exposed to the volatility in a varied number of commodities ranging from Silver, Gold, Copper and Zinc. However, the majority of changes in financial performance could come from volatility in silver and gold prices. Also, the second wave of Coronavirus could hamper the group’s production, which would weigh on the group’s financials as well.

Q3FY20: Financial Highlights

Source: Company Presentation

• Revenue in Q3 2020 of USD 300.4 million was 15% lower than in Q3 2019, primarily due to decreased quantities of metal sold, partially offset by higher realized precious metal prices. Metals sales were impacted by the replenishment of dore and in-process inventories, COVID-19 related throughput reductions and mine suspensions, and timing of sales.
• Net income of USD 65.3 million (USD 0.31 basic income per share) was recorded for Q3 2020 compared with net income of USD 37.7 million (USD 0.18 basic income per share) in Q3 2019. The USD 27.5 million increase in earnings mainly reflects a USD 60.7 million increase in mine operating earnings, with the decreased revenues being more than offset by lower cost of sales. The increase in earnings was partially offset by a USD 23.1 million decrease in investment income, reflecting lower gains recognized in Q3 2020 on the fair-value measurements of certain equity investments owned by the Company, and a USD 20.8 million increase in care and maintenance costs due to the COVID-19 related suspensions of Huaron and Morococha
• Adjusted earnings of USD 72.1 million, (USD 0.34 adjusted earnings per share) was recorded in Q3 2020 compared to the Q3 2019 adjusted earnings of USD 71.2 million (USD 0.34 basic adjusted earnings per share).
• Cash flow from operations in Q3 2020 totaled USD 114.9 million, USD 33.0 million more than USD 81.9 million generated in Q3 2019.
• As at September 30, 2020, the Company had cash and short-term investment balances of USD 231.6 million, working capital of USD 465.6 million, and USD 410.0 million available under its USD 500.0 million revolving credit facility.

Source: Company Presentation

• Total debt of USD 129.8 million was related to the USD 90.0 million drawn on the Credit Facility, USD 5.6 million of loans in Peru, and the remainder to lease liabilities. In Q3 2020, the Company repaid USD 110.0 million on the Credit Facility and made an additional repayment of USD 30.0 million in October 2020.
• Consolidated silver production in Q3 2020 of 4.09 million ounces was 39% lower than the 6.67 million ounces produced in Q3 2019, primarily reflecting the COVID-19 related suspensions of Huaron and Morococha, reduced operating capacities at the other mines on account of adopting stringent COVID-19 protocols.

Q3FY20 Production. Source: Company Presentation

• Consolidated gold production in Q3 2020 of 116.9 thousand ounces was 22% lower than the 150.2 thousand ounces produced in Q3 2019, primarily reflecting the replenishment of in-process inventories at the heap leach operations, as expected, following the drawdown of inventories that occurred during the COVID-19 related suspensions earlier in 2020.

Cash Costs per ounce sold: Q3FY20

• Silver Segment Cash Costs were USD 7.14 per silver ounce sold.
• Gold Segment Cash Costs were USD 793 per gold ounce sold.

Source: Company Presentation

All-In Sustaining Costs per ounce sold: Q3FY20

• Silver Segment AISC were USD 6.01 per silver ounce sold.
• Gold Segment AISC were USD 1,057 per gold ounce sold.
• Consolidated AISC per silver ounce sold, including by-product credits from the Gold Segment gold production, were negative USD 8.42 per silver ounce sold.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 28.33% of the total shareholding. Van Eck Associates Corporation and The Vanguard Group, Inc. holds the maximum interests in the company at 10.27% and 2.89%, respectively. Further, the shareholding pattern reflects that 3 out of top-10 shareholders have increased their stake in the company, with Arrowstreet Capital, Limited Partnership and RBC Global Asset Management Inc. are among the top investors those have increased their stakes by 2.65 million and 0.75 million, respectively. The institutional ownership in “PAAS” stood at 59.45%, and ownership of the strategic entities stood at 1.60% respectively.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV to EBITDA based Valuation Metrics

Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters).

Peer Comparison

Source: Refinitiv (Thomson Reuters)

Stock Recommendation: The company reported decent third-quarter performance, led by lower operating costs and strong precious metal prices. Further, all operations are running, and projects are proceeding. The company has generated strong operating cash flow year-to-date of approximately USD 292 million. In line with the group’s capital allocation priorities, the company has substantially reduced debt. Also, the company is aiming to have no bank debt by the end of the year.

The group has outperformed the industry median on various parameters, which is visible from the below chart.

Source: Refinitiv (Thomson Reuters), Kalkine Group

Further, the group’s liquidity remains strong to pass through current challenging times. The company’s liquidity is sufficient to satisfy their anticipated 2020 working capital requirements, planned capital expenditures, and to discharge liabilities as they come due. Moreover, the company is virtually debt-free, which implies no balance sheet risk. And a price recovery in Gold and Silver could further bolster the group’s performance in the near-term.

Therefore, based on the above rationale and valuation, we have given a “Buy” recommendation at the closing price of CAD 42.88 on November 12, 2020 with lower double-digit upside potential.

PAAS daily technical chart. Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at November 13, 2020 price as well.

Disclaimer

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