Company Overview: Pan American Silver Corp. (NASDAQ: PAAS) is a silver and gold mining company that engages in related activities such as exploration, mine development, extraction, refining, and reclamation. The company also produces and sells zinc, lead, and copper. PAAS owns and operates silver and gold mines in Peru, Mexico, Argentina, Bolivia, and Canada. The company's Escobal mine in Guatemala is still on care and maintenance as of September 30, 2021, pending the successful completion of a consultation process undertaken by Guatemala's Ministry of Energy and Mines.

PAAS Details

Key Takeaways from Q3FY21 (ended September 30, 2021)

• Boost in Topline: The company's revenues in Q3FY21 were USD 460.35 million, a 53.24% increase from USD 300.41 million in Q3FY20, due to increased quantities of metal sold and sale of dore and concentrate inventories.
• Decline in Bottomline: Net income was USD 20.22 million in Q3FY21, compared to USD 65.26 million in Q3FY20, representing a diluted EPS of USD 0.10.
• Silver Production: 83 million ounces (Moz) of silver were produced in Q3FY21, up 18.20% from 4.09 Moz in Q3FY20.
• Gold Production: 6 thousand ounces (Koz) of gold were produced in Q3FY21, up 21.98% from 116.9 Koz in Q3FY20.

Revenues & Gross Profit Key Highlights; Analysis by Kalkine Group

Recent Developments

• According to PAAS, the executive of Argentina's Province of Chubut issued a decree to the legislature on December 20, 2021, repealing a legislative bill passed on December 15, 2021, that would have changed the provincial mining law to allow open-pit mining in certain zones in the Departments of Gastre and Telsen.
• On November 10, 2021, PAAS stated that it would drill a new La Colorada Skarn extension with a 77-meter interval containing 119 g/t silver, 7.7% lead, and 13.62% zinc. PAAS is moving on with infrastructure initiatives for the La Colorada Skarn to aid the current operations, including constructing a refrigeration facility and excavating a 5.5-meter diameter 600-meter-deep concrete-lined ventilation shaft.

Steady Dividends

• PAAS announced an interim dividend of USD 0.10 per common share, which was paid on December 03, 2021, to shareholders of record on November 22, 2021. Over the last five years, the company has regularly paid dividends, as also reflected in the chart below (every D represents a dividend payment):

Consistent Dividends (Data Source: REFINITIV)

Balance Sheet & Liquidity Position

• Growth in Cash Balance: The company exited Q3FY21 with a cash balance (including short-term investments) of USD 315.45 million, up 13.04% from USD 279.06 million as of FY20 end.
• Progress in Cashflow from Operations: Net operating cash inflow in Q3FY21 was USD 157.02 million from USD 114.94 million in Q3FY20.
• Increase in Debt Profile: As of September 30, 2021, PAAS total outstanding debt (including lease liabilities) amounted to USD 44.98 million, a 34.00% increase from USD 33.57 million reported at the end of FY20.

Key Metrics: PAAS's ROE and Reinvestment ratio in Q3Y21 were 2.8% and 2.3%, higher than the industry median of 1.5% and 1.9%, respectively. Its Debt/Equity ratio is relatively stable to 0.02x as of Q3FY21.

Leverage and Return Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 24.55% of the total shareholding, while the top 4 constitute the maximum holding. Van Eck Associates Corporation and The Vanguard Group, Inc., hold the maximum stake in the company at 10.39% and 3.05%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group

Risk Analysis

• Credit Risk: PAAS has contracts to sell zinc, lead, copper, and silver concentrate. The conditions of the concentrate contracts may compel the company to deliver concentrate worth more than the amount received at the time of delivery, exposing the company to the credit risk of concentrate buyers. Should any of these counterparties fail to honour purchase agreements, the firm may incur losses for products already shipped and may force to sell its concentrates on the spot market, or it may not have a demand for its concentrates, resulting in considerably lower future operational results.
• Metal Price Risk: Gold, silver, and other metals prices on the global market are highly volatile and unmanageable, significantly impacting PAAS' operations. As a result, any adverse price movement may harm the company's financial performance.
• Foreign Exchange Rate Risk: A portion of the PAAS' operating and capital expenses are in local currencies other than the USD. These expenses are subject to fluctuations in the USD to the local currency. Part of the company's currency risk is mitigated from time to time by acquiring local currencies and entering into contracts that fix or limit the company's exposure to changes in the value of local currencies relative to the USD. While these contracts mitigate this risk, they do not remove the financial consequences of exchange rate fluctuations.

Outlook

• Looking ahead, PAAS expects to produce 19.0-20.0 Moz of silver and 560.0-588.0 Koz of gold in FY21. Silver segment cash costs and All-in Sustaining Costs (AISC) has been raised to USD 11.60 to USD 12.50 and USD 15.75 to USD 16.75, respectively.
• The company's sustaining capital projections have been lowered to a range of USD 217.5 to USD 226.0 million, and project capital estimates have been reduced to a range of USD 43.5 to USD 45.0 million.

Valuation Methodology: Price/Earnings Per Share Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock has corrected ~24.06% in the past twelve months. It is currently leaning towards the lower band of its 52-week range of USD 21.39 to USD 39.62. We have valued the stock using the Price/Earnings-based illustrative relative valuation method and arrived at a target price with an upside of low twenties (in percentage terms). We believe that the company can trade at a premium compared to its peer's average, considering its silver production capabilities, stable return profile, and negligible debt. We have taken peers like Fortuna Silver Mines Inc. (NYSE: FSM), Hecla Mining Company (NYSE: HL), and others. Considering the robust top-line growth, proven track record, strong return profile, encouraging outlook, and current valuation, we give a "Buy" recommendation on the stock at the current price of USD 24.40, down ~0.85%, as of December 22, 2021, 10:15 AM ET.

PAAS Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

Disclaimer

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