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.

Key highlights

• Bullish industry scenario: The company is deriving decent share of revenue from silver, and the demand for the above metal is likely to remain elevated in the coming days supported by its abundant usage across several industries like electric vehicles, manufacturing of Solar Panels in renewable energy etc. Additionally, as per the US Department of Energy’s National Renewable Energy Laboratory, the country would require 8,000 solar carport stations to provide a minimum level of urban and rural coverage nationwide.
  

• Reported higher silver production:For Q1 2022, consolidated silver production stood at 4.62 million ounces, which is improved from 4.58 million ounces produced in Q1 2021. The improvement was primarily driven by a higher production at La Colorada and Manantial Espejo mines, and partially offset by lower production from San Vicente and Morococha mines.
  

• Elevated production prospects for FY 2022: Silver output in 2022 is estimated to be between 19.0 and 20.5 million ounces, which is between 1% lower and 7% higher than the 19.2 million ounces consolidated production in 2021. The FY 2022 operating outlook includes Morococha output and expects a progressive relaxation of operating limitations. While gold output in FY 2022 is estimated to range between 550.0 to 605.0 thousand ounces, this is comparable with production levels in 2021. Production at Dolores and Shahuindo is expected to increase due to improvements in irrigation efficiencies in the leach pads, which will allow for a higher ratio of ounces produced to stacked.

• Robust Cash flow from operations: The company’s cash flow from operations in Q1 2022 totaled USD 68.8 million, USD 38.9 million more than the USD 29.9 million generated in Q1 2021. The increase was primarily driven from less cash used in working capital changes, increased cash mine operating earnings and decreased income tax cash payments.

• Sequentially improving operating matrix: Despite the unstable environment, the Company maintained its pace and delivered strong results in its operating matrix. The group is working hard to maintain its winning streak and has seen increasing scale on a sequential basis, which is encouraging.

• Healthy Balance sheet:In Q1 2022, the company reported its D/E ratio of 0.02x, as compared to the industry median of 0.22x. This is impressive as it provides higher financial flexibility and is a key positive. Another positive aspect is its long-term debt to total capital, which stood lower at 1.2% in Q1 2022, as compared to the industry median of 12.7%, which indicates lower balance sheet risks.

• Improvement in cash conversion period:In Q1 2022, the company reported its cash conversion period of 132.2 days, which is the lowest since last five quarters. A decline in cash conversion period is a healthy sign as it denotes that the company is taking lower time to convert its investments to cash flows.

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.

Financial overview of Q1 FY 2022 (in thousands of U.S.D)

• Higher Revenues: In Q1 2022, the company posted elevated revenue at USD 439.8 million against USD 368.0 million in the previous corresponding period. An increase in the revenue was primarily due to higher quantities of metal sold and higher metal prices.

• Increase in cost of sales: The company’s cost of sales in the reported period of Q1 2022, increased to USD 373.1 million compared to USD 278.1 million in pcp.

• Lower mine operating earnings: As a result of higher cost of sales and higher depreciation, the mine operating earnings were dented to USD 66.7 million in Q1 2022, against USD 89.9 million in pcp.

• Rise in earnings from operations: Despite the company reporting higher general and administrative expenses along some other expenses, it lifted its earnings from operation to USD 90.6 million against USD 73.2 million in pcp, primarily on the back of gains and income from associated in Q1 2022.

• Turnaround from net loss to net profit: In Q1 2022, the company transformed its losses into net earnings of USD 76.8 million, compared to a loss of USD 7.5 million in pcp, partially offset by higher finance expenses.
  

Top-5 Shareholders 

The top 5 shareholders are illustrated in the pie chart below, which forms around 19.63% of the total shareholding. Van Eck Associates Corporation and The Vanguard Group, Inc. hold the company's maximum interests at 10.64% and 3.18%, respectively. The company's institutional ownership stood at 53.26%. Higher institutional holding boosts the confidence in the mind of retail investors.

Valuation Methodology (Illustrative): EV to Sales based

Stock Recommendation 

Pan American Silver Corp. 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 Q1 2022, the company reported revenue of USD 439.8 million and operating cash flow of USD 68.8 million. It also shared higher production guidance for FY 2022, 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, due to higher inflation. Hence, considering the aforesaid rationales and valuation, we recommend a “Buy” rating in the stock at the last closing price of CAD 28.00 on June 16, 2022. Moreover, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on June 16, 2022). Source: REFINITIV, Analysis by Kalkine Group

*Recommendation is valid on June 17, 2022, price as well. 

Technical Analysis Summary

Disclaimer

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