Pan American Silver Corp. (TSX: PAAS) is a diversified mining company. The company is engaged in the production and sale of silver, gold, zinc, lead and copper as well as other related activities, including exploration, extraction, processing, refining and reclamation. 

Investment Rationale

• Silver Prices continue to remain elevated: Growing industrial demand for silver from the global transition to decarbonization and electrification will keep silver prices firm in the mid-to-long term. Higher silver prices will bolster PAAS financials, including revenue growth, margin expansion, earnings growth, and higher free cash flow generation.
• Consistently rewarded Shareholders: The company has a consistent track record of quarterly dividend payment since 2010 regardless of the economic cycle; this reflects the strength of the business model to generate consistent free cash flow. At the last closing price, PAAS shares are yielding ~1.58 %, which is relatively higher compared to Canada 10-Year Government Bond yield of 1.54%.

• No Balance Sheet Risk: The company is virtually debt-free with Net Cash on the balance sheet, driven by the solid free cash flow generation ability of the company, which help them to maintain balance sheet flexibility.
• Solid Second Quarter Performance: The company reported solid Q2FY21 performance on a YoY basis with topline growth of ~53%, and Basic EPS surged 240% on a YoY basis, driven by higher average commodity realization prices and increased production across the segment. Mining operation earnings surged by 113% primarily because of a 61% surge in silver production and a 62% hike in the silver average realization prices.
• Moved above downward sloping trendline: PAAS shares registered a breakout above the downward sloping trend line and sustaining above it for the five consecutive days, implies that bearishness has exhausted, and stock is up for a positive move from the current trading level. Moreover, 14-day RSI is also hovering in a neutral zone with a bullish bias at 57.9.

Technical Price Chart (as of October 14, 2021). Source: REFINITIV, Analysis by Kalkine Group

• Outlook-Stable: The group is expecting a 35% increase in silver production in FY21 vs FY20 and expecting a robust free cash flow level. Further, the company’s ability to overcome the extraordinary challenges over the past year while managing their nine operations, generating substantial free cash flow, advancing their La Colorada skarn project, and re-paying all the company’s bank debt to their team and the benefit of having a diversified portfolio of quality assets.

Risk Associated

Shares of PAAS is significantly exposed to the volatility in the underlying commodities prices ranging from Silver, Gold, Copper and Zinc. The group's financial performance is significantly dependent upon the movement in the silver and gold prices for the next few quarters. Any adverse movement in silver prices could have a substantial drag on the group's financials. Other risks include interest rate risk, forex risks, a resurgence in COVID-19 cases and other macro-economic risks.

Financial Highlights: Q2FY21

Source: Company Filing

• Solid Revenue Growth: During the second quarter of fiscal 2021, the company reported revenue stood at USD 382.13 million, up ~53% on a YoY basis, driven by higher underlying commodity realization prices and increased production against the Q2FY20.
• Production Highlights: During the Q2FY21, the company’s silver production surged by ~61% to 4.5 million ounces, gold production up 47%, Copper production up by ~600% to 2.1 thousand tonnes, zinc production up ~188% and Lead production up by 182% respectively.
• Higher Underlying Commodity Realization Prices: In Q2FY21, silver average realized prices reported a jump of ~62% to USD 26.88/oz from USD 16.58/oz reported in Q2FY20, average gold realization prices up 47% on a YoY basis, Copper average realized prices nudged by 86%, respectively.
• Solid Improvement in Mining Operation Earnings: In Q2FY21, the company reported a whopping 113% jump in the mining operation earnings to USD 103.05 million against USD 48.4 million reported in the same period of the previous financial year.
• Strong Bottom line performance: The company reported a ~267% jump in Net Income to USD 71.2 in Q2FY21 against the same period of the previous financial year, primarily driven by solid mine operating earnings of USD 103.0 million.
• Increased Cash Dividend: During the quarter, the board has approved an increase in the cash dividend from USD 0.07 to USD 0.10 per common share, an increase of 43% on a YoY basis. This marks the third dividend hike in the past 18 months.

Top-10 Shareholders

Top-10 shareholders together hold ~25.38% stake in the company, with Van Eck Associates Corporation and The Vanguard Group, Inc. are among the major shareholders holding approximately 10.59% and 2.97% stake in the company. Institutional stake in the company stood at 54.43%.

Source- REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to Sales Based Valuation Metric

*1 USD = 1.23 CAD

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

Pan American Silver is the world’s premier silver mining company. The company has maintained a strong balance sheet with low to zero debt and a strong liquidity position. Further, the business model helps the company to generate lot of free cash flow, which is useful in maintaining a solid balance sheet hence, the company is consistently rewarding its shareholders through dividend distribution.

Further, the recent recovery in the underlying commodity prices (Silver and Gold) in the wake of heightening inflationary pressure will have a positive impact on the PAAS share prices.

Moreover, rising industrial demand of metal further elevate the silver prices; hence mid-term price outlook for silver looks promising. Additionally, a bullish RSI rage shift has taken place in the stock, where 14-day RSI has moved above 60 on the daily price chart, indicating that bullish are getting control over bears.

Hence, based on the above rationale and valuation, we recommend a "Buy" rating  at the closing price of CAD 31.65 (as of October 14, 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-Year Price Chart (as of October 14, 2021). Source: REFINITIV, Analysis by Kalkine Group.

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

*Recommendation is valid on October 15, 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.