Pan American Silver Corp (TSX: PAAS) 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. The company’s operating properties in South America include Shahuindo, La Arena, Huron, Morococha, San Vicente and Manantial Espejo. Its exploration and portfolio assets also include La Colorada Skarn and Navidad.

Investment rationale

• Virtually Debt Free Company: The company is virtually debt-free with a Total Debt/Total Equity ratio of 0.02x v/s the industry median of 0.21x. Moreover, the company has a Net Cash position at the end of the quarter, so there is negligible balance sheet risk.

• Solid Q2FY21 Performance: Strong mine operating earnings of US$103 million and strong operating cash flow in Q2 have improved the company’s financial position. Together with the sale of non-core assets, its cash, and short-term investments increased by US$34 million in Q2 2021. On June 30, 2021, Pan American had cash and short-term investment balances of US$240.4 million, working capital of US$603.1 million, and US$500.0 million available on its revolving credit facility

• Future Growth Catalyst: Three large catalysts which would grow shareholder value are: 1) Escobal, Guatemala – large, already-built silver mine with 264.5 M ounces of silver in reserves, 2) La Colorada, Mexico – a new discovery with an estimated 100.4 M tonnes of inferred mineral resource; and 3) Navidad, Argentina – large undeveloped silver deposit with 632.3 M ounces of silver in measured and indicated resources.

• Increase in Quarterly Dividend: Based on the strong financial position and the company’s expectation for improving free cash flow over the remainder of the year, the Board of Directors has approved an increase in the cash dividend of 44% from US$0.07 to US$0.10 per common share, or approximately US$21.0 million in aggregate cash dividends, payable on or about September 3, 2021. This marks the third dividend hike in the past 18 months.

• Reaffirming 2021 Guidance: The group is expecting a 35% increase in silver production relative to 2020 and record gold production in 2021, and the company is seeing a robust free cash flow level. Further, its ability to overcome the extraordinary challenges over the past year while managing its nine operations, generating substantial free cash flow, advancing their La Colorada skarn project, and re-paying all the company’s bank debt is a testament to the team and the benefit of having a diversified portfolio of quality assets. Further, the company anticipate 2021 to be a much stronger year across all the company’s operations.

• Promising Silver Future Demand: Demand for silver would be in the limelight led by a wide range of reasons; a) Silver has the highest electrical and thermal conductivity of all metals, making it an important metal in the transition to a low carbon economy; b) ~10% of silver supply used for photovoltaics (construction of solar panels); c) ~30% of silver supply used in electrical applications; shift to a low carbon economy involves an increase in electrical componentry, including electric vehicles; d) Silver is an important component in the buildout of 5G networks, the next major evolution in communication technology; e) Silver has medical and sanitary applications because of its anti-bacterial properties. Also, the macro environment is supportive of precious metal prices (high levels of negative-yielding debt, significant fiscal/monetary stimulus, and lower real rates globally).

• Potential Trend Shift in Silver on the Cards: On the weekly price chart, Silver Futures are taking strong support near US$ 22.092/oz, which is a crucial support level. Recently, it tested that support and bounced back. It seems like Sliver Futures have formed a triple bottom kind of pattern, which is typically considered as a bullish chart pattern. Moreover, the RSI is still hovering in the neutral zone, and reversal was spotted on the weekly price chart. Given the triple bottom chart pattern and reversal happening in the RSI, we believe a trend shift could take place in Sliver in the short term.

Technical Price Chart, Source: REFINITIV, Analysis by Kalkine Group

• Risk Associated to Investment: Shares of PAAS is significantly 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 third wave of Coronavirus could hamper the group’s production, which could weigh on the group’s financials as well.

Financial Highlight: Q2FY21

Source: Company Filing

• In the quarter under consideration, the company’s revenue surged by 53% to US$382.13 million compared to US$249.51 million in the same quarter of the FY20. The increase in consolidated revenue was mainly on the back of the increased production, and higher average realized prices on Silver and Gold.
• Average Silver realization prices in Q2FY21 was US$26.88/oz vs. US$ 16.58/oz in the second quarter of FY20.
• Gold average realization prices in the second quarter were US$ 1,809/oz vs. US$ 1,708/oz in the same quarter of the corresponding financial year.
• Silver production surged by 61% to 4,484 thousand tones, and gold production surged by 47% to 142.3 thousand tones.
• Production of Zinc, Copper and Lead was also substantially higher compared to Q2FY20.
• Net income was US$71.2 million (US$0.34 basic income per share), driven largely by strong mine operating earnings of US$103.0 million.
• Capital expenditures of US$66.0 million were comprised of US$53.2 million of sustaining capital and US$12.8 million of non-sustaining capital. The majority of non-sustaining capital was directed to project capital for exploration drilling activities at the La Colorada skarn project and the Wetmore project at Timmins.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 25.38% of the total shareholding. The Van Eck Associates Corporation and the Vanguard Group, Inc. hold the maximum interests in the company at 10.59% and 2.97%, respectively. The institutional ownership in the PAAS stood at 53.36%.

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

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation

The group is a leader in the silver mining sector for a number of years.  The company has 30 years of silver production and ten years of gold production in the ground (at 2020's extraction rate on proven/probable reserves) all over Central, South and North America. A total of 9 mines are in operation, with three more under development or awaiting government approval.

Strong mine operating earnings of US$103 million and strong operating cash flow in Q2 have further improved the company's financial position. We expect cash flows to further improve in the second half of the year, with the anticipated rise in throughput rates at La Colorada along with the normalization of inventory levels that were built up during the first half of 2021. Based on the strong financial position and expectation of improving free cash flow over the second half of 2021, the company has increases quarterly dividend to US$0.10 per common share, a 44% increase on a YoY basis. Moreover, this is the third dividend hike in the past 18 months, which reflects the quality of earnings and consistency in generating free cash flow.

Also, the company is a leader in high margin and low-cost prediction, with a strong financial position and capital discipline.

Further, Silver prices are taking strong support US$ 22.09/oz and bouncing back from that level; we believe silver prices to improve and remain firm in the short-term to the mid-term range, which would further lead to higher cash flow, margin expansion, and bolstered balance sheet position.

Therefore, based on the above rationale, considering the risk associated and valuation, we recommend a "Buy" rating on the stock at the closing price of CAD 31.40 on August 26, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

1-Technical Price Chart (as on August 26, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV

* Recommendation is valid at August 27, 2021 price as well.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.