Pan American Silver Corp.

PAAS Details

Key Positives:

Increasing Demand of Silver, Negligible Leverage (Debt/Equity Ratio of 0.02x as of September 30, 2021, vs. Industry Median of 0.24x), Improvement in Cash Cycle (140 Days in Q3FY21 vs. 169 Days in Q2FY21)

Key Negatives:

Metal Price Risk, Foreign Exchange Rate Risk, Legal Risk, Decline in Net Margin (4.4% in Q3FY21 vs. 18.6% in Q2FY21)

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

Latest News:

• Favorable Regulation: On December 21, 2021, PAAS announced that 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. PAAS owns the whole Navidad silver property, located in the province's north-central region, and believes that adequately allowed and regulated mining activity, together with environmentally and socially sustainable mining practices, might benefit the Chubut people.

Q3FY21 Results:

• Surge in Topline: PAAS reported YoY growth of 24% in revenues to USD 460.35 million in Q3FY21 compared to USD 300.41 million in Q3FY20 attributable 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 vs. USD 65.26 million in Q3FY20.
• 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.

Key Risk:

• 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.

Outlook:

• PAAS anticipates 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) have been increased from USD 11.60 to USD 12.50 and USD 15.75 to USD 16.75, respectively.
• The company's sustaining capital projections and project capital estimates have been lowered to a range of USD 217.5 to USD 226.0 million and USD 43.5 to USD 45.0 million.

Valuation Methodology: Price/Earnings Per Share Multiple Based Relative Valuation

(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:

PAAS' share price has declined 34.05% in the past nine months and has made a new 52-week low today. We have valued the stock using the Price/Earnings - based relative valuation methodology and arrived at a target price of USD 25.77.

Considering the significant correction in the stock price in the past nine months, strong top line performance, favorable regulation, low leverage, current valuation, and associated risks, we recommend a "Buy" rating on the stock at the closing price of USD 21.13, down 1.81% as of January 28, 2022.

One-Year Technical Price Chart (as on January 28, 2022). Source: REFINITIV, Analysis by Kalkine Group

Technical Analysis Summary:

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 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 unfavourable movement in the stock prices.

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 on 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. 

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