Pan American Silver Corp (TSX: PAAS) is a mining company focused exclusively on the exploration and development of silver mines. The company is based in British Columbia and operates primarily in Central and South America. It also sells the byproducts from its silver mining operations, including zinc, lead, copper, and gold.

Investment Rationales

• Silver Prices continue to remain elevated: In the medium to long run, rising industrial demand for silver as a result of the worldwide shift to decarbonization and electrification will keep silver prices stable. We believe the company’s revenue growth, margin expansion, earnings growth, and better free cash flow generation will all benefit from higher silver prices.

• Consistently rewarded Shareholders: Since 2010, the company has paid quarterly dividends on a constant basis, independent of the economic cycle; this demonstrates the robustness of the business model's ability to generate consistent free cash flow. PAAS shares are yielding 1.66% at the time of writing, which is greater than the 1.45% yield on Canada's 10-year government bond.

• Rising Cash flow from operations: In Q3 2021, the firm generated a higher cash flow from operations of USD 157.0 million, up USD 42.1 million over the previous equivalent period of USD 114.9 million. The key reasons for the increased cash flows were an increase in cash mining operating earnings and a decrease in care and maintenance expenditures.

• 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. In Q3 2021, the company’s debt to equity stood at 0.02x compared to an industry median of 0.22x.

Source: Company Presentation

• Production guidance for 2021: Management has revised the full year consolidated precious metals production projections and revised the range of projected Silver Segment Cash Costs and AISC based on YTD 2021 production results and expected production for the balance of the year. The Company is sticking to its Gold Segment Cash Costs and AISC estimate. In addition, the company is lowering its projections for sustaining and project capital expenditures.

Source: Company filing

• Healthy liquidity: The Company's cash and short-term investments increased by USD 75.1 million during Q3 2021 to USD 315.4 million. The increase was driven by a USD 100.4 million increase in cash and cash equivalents from strong operating cash. Along this the company also holds USD 500.0 million under its Sustainability-Linked Credit Facility, making a consolidated liquidity of USD 815.4 million as on September 30, 2021. We believe the company is holding strong liquidity to carry its operations without any interruption.

Source: Company Presentation

Risks associated with investment

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 overview of Q1 2021 (In thousands of USD)

Source: Company Filing

• Higher Revenues: In Q3 2021, the company posted elevated revenue at USD 460.3 million against USD 300.4 million in the previous corresponding period. It was benefited from the sale of dore and concentrate inventories built-up in prior periods.
• Increase in cost of sales: the company’s cost of sales in the reported period increased to USD 269.4 million compared to USD 117.2 million in pcp. As a % of sales it stood at 58.5% in Q3 2021 V/s 39.0% in pcp.
• As a result of higher cost of sales and higher depreciation, the mine operating earnings were dented to USD 98.8 million against USD 124.5 million in pcp.
• Rise in earnings from operations: the company managed to bring down its mine care and maintenance cost along this it also reported gain on sale of mineral properties, all thse factors helped the company to lift its earnings from operation to USD 101.1 million against USD 84.2 million in pcp.
• On the back of losses incurred on investments and higher income tax expenses, its net income fell to USD 20.2 million compared to USD 65.2 million in pcp.
  

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which forms around 24.55% of the total shareholding. Van Eck Associates Corporation and The Vanguard Group, Inc. hold the company's maximum interests at 10.39% and 3.05%, respectively. The company's institutional ownership stood at 54.74%.

Source: Refinitiv 

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 

Pan American Silver is the world's leading silver mining firm, with a solid balance sheet, low to no debt, and a good liquidity position. Furthermore, the business strategy enables the company to generate a large amount of free cash flow, which is beneficial in keeping a strong balance sheet; as a result, the company routinely distributes dividends to its shareholders. In Q3 2021, the company reported revenue of USD 460.3 million and operating cash flow of USD 157.0 million. It also shared its FY 2021 production guidance along lower capex, which is a key positive.  

We are bullish on the precious metal prices and believe that despite a little pullback, they would continue to remain in the limelight as uncertainty over the global economic growth is still prevailing. Further ETFs are showing no sign of decline in gold buying, which is likely to increase the gold prices higher. We anticipate that the average realized prices per ounce will continue to rise, resulting in higher margins. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the current market price of CAD 30.06 at 10:21 am Toronto time as on December 10, 2021.

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

Technical Summary Analysis

One-Year Price Chart (as on December 10, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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