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

• Clocked higher silver and gold production: In FY21, the company registered its gold production of 579.3 thousand ounces, more than 522.4 thousand ounces in FY20. This growth was driven by higher gold production from Dolores and La Arena mines during 2021. On the other hand, total silver production stood higher at 19,174 thousand ounces in FY21 v/s 17,312 thousand ounces in FY20. Silver production was higher from Huaron, La Colorada, Morococha, San Vicente and Manantial Espejo mines.

Source: Company Filing

• Improved 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.
  

• Strong liquidity and working capital position: As of December 31, 2021, the Company has USD 335.3 million in cash and short-term investment balances, USD 613.5 million in working capital, and the whole USD 500.0 million available under its revolving credit facility. The Company's cash and short-term investment balances increased by USD 56.2 million in 2021, driven by an increase in cash and cash equivalents from accumulated operating cash flow of USD 116.4 million, while working capital increased by USD 118.3 million from December 31, 2020, due to the increased cash and cash equivalents.
• Higher dividend payment: In FY21, the company reported a surge in the dividend payment of USD 71.5 million, which is significantly higher than USD 46.2 million in FY20. This is impressive, as most of the organizations are lowering their dividend payment in order to retain liquidity.
  

Risks associated with investment

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 FY 2021

Source: Company Filings

• The company reported an increase in the mine operating earnings at USD 367.9 million, improved from USD 360.1 million in FY20. The surge was primarily due to a higher income, partially offset by a surge in the cost of sales (USD 1,264.8 million in FY21 v/s USD 978.6 million in FY20).
• The company reported a prudent cost structure which resulted to a lower input cost and subsequently resulted in higher earnings from operations (USD 320.9 million in FY21 v/s USD 209.9 million in FY20). Notably, mine care and maintenance expense stood significantly lower at USD 31.7 million in FY21 v/s USD 102.1 million in FY20. On the other hand, general and administrative cost stood marginally lower at USD 34.8 million in FY21, v/s USD 36.3 million in FY20.
• The company reported net earnings of USD 98.5 million in FY21, declined from USD 176.4 million in FY20. This was primarily attributable to a higher income tax expense of USD 146.4 million in FY21 v/s USD 75.5 million in FY20.
  

Valuation Methodology (Illustrative): Price to Cash Flow based

Analysis by Kalkine Group 

Stock recommendation

Strong operating cash flows led in a rise in cash holdings of USD 116.4 million in 2021. The firm ended the year with USD 283.6 million in cash and cash equivalents and USD 51.7 million in short-term investments, allowing it to raise the return to shareholders through a new dividend policy. Simultaneously, their excellent financial position allows them to engage in expansion by moving through with the huge La Colorada Skarn project.

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 “Hold” rating at the last closing price of CAD 35.15 as on April 01, 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 April 01, 2022). Analysis by Kalkine Group

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