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:

• Improved 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 Report

• 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.

• Improved prospects from Dolores mine: For FY22, the company expects its gold production in between 157.5 to 179.0 thousand ounces, which is higher than 160.1 thousand ounces in FY21. This is primarily due to an expected improved mid-point gold production over 2021. Additionally, the mine is expected to report its silver production within the range of 2.85 and 3.15 million ounces in 2022, significantly higher than 2.24 million ounces in FY21, driven by higher silver grades from an open pit mine.

Risks associated with the business:

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.

FY21 Financial Highlights: (in thousands of USD)

FY21 Income Statement Highlights (Source: Company Report)

• PAAS announced its full-year results, wherein the company posted its revenue of USD 1,632.7 million in FY21, higher than USD 1,338.8 million in FY20. The revenue increase was driven by higher metal prices coupled with a surge in sales volumes.

Source: Company Report

• 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 CF based

Analysis By Kaline Group

Stock Recommendation:

For FY22, the company expects its total gold production in between 550.0 - 605.0 thousand ounces, while its silver production is expected in between 19.00 - 20.50 million ounces. Cash cost in FY21 is expected in between 970 to 1,070/ ounce, while the company expects its AISC cost in between 1,240 to 1,365/ 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 Silvercorp Metals Inc, MAG Silver Corp etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of PAAS at the closing market price of CAD 30.09 on February 24, 2022. 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 February 24, 2022). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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