Pan American Silver Corp. (TSX: PAAS) is a mining company, which is engaged in the exploration and development of silver mines. The company’s operating mines are primarily located in Central and South America.

Key Updates:

• Reported higher silver production: For Q1FY22, consolidated silver production stood at 4.62 million ounces, which is improved from 4.58 million ounces produced in Q1FY21. 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.

Source: Company Report

• Healthy Balance sheet: In Q1FY22, 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. Long term debt to total capital stood lower at 1.2% in Q1FY22, as compared to the industry median of 12.7%, which indicates lower balance sheet risks, and is a key positive.

• Improvement in cash conversion period: In Q1FY22, the company reported its cash conversion period of 132.2 days, which is the lowest since last five quarters. A decline 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 the Investment:

Volatility in international commodity prices is likely to dampen the realization of the company. Furthermore, any imposition of lockdown restrictions would dampen the company’s production.

Q1FY22 Financial Highlights:

Q1FY22 Income Statement Highlights (Source: Company Report) 

• PAAS announced its Q1FY22 result, wherein the company posted its revenue of USD 439.8 million, stood higher than USD 368.0 million in pcp, primarily due to increased quantities of metal sold and higher metal prices.
• Production costs and depreciation & amortization costs stood higher than the previous corresponding period and hence mine from operation dipped to USD 66.7 million from USD 89.9 million in pcp.
• The period was marked by higher general & administrative expense, increase in mine care & maintenance expense and higher foreign exchange losses. Gains and income from associates stood higher at USD 45.0 million v/s USD 0.1 million in pcp. Earnings from operations stood higher at USD 90.6 million v/s USD 73.2 million in pcp.
• The quarter turned profitable and posted net earnings of USD 76.8 million v/s a net loss of USD 7.5 million in pcp. This was supported by higher earnings from operations along with lower income tax expenses.

Valuation Methodology (Illustrative): Price to CF based

Analysis By Kaline Group

Stock Recommendation:

The company expects its silver and gold production in between 19.00 to 20.50 Moz and 550 to 605 koz, respectively. On the other hand, zinc is expected to be produced at 35.0 to 40.0 kt for 2022. AISC costs is expected in between 14.50 to 16.00 per ounce, while AISC for Gold segment is likely to remain in between 1,240 to 1,365 per ounce. We have valued the stock using the Price to CF-based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like First Majestic Silver Corp, MAG Silver Corp etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of PAAS at the last closing market price of CAD 28.65 on May 25, 2022.

One-Year Technical Price Chart (as on May 25, 2022). Analysis by Kalkine Group

Note- The reference data has been partly sourced from REFINITV

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