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.

Investment Rationales

• Silver Prices continue to remain elevated: In the medium to long run, rising industrial demand for silver as a result of the worldwide shift to decarbonization and electrification will keep silver prices stable. We believe the company’s revenue growth, margin expansion, earnings growth, and better free cash flow generation will all benefit from higher silver prices.

• Production guidance for 2021: Management has revised the full year consolidated precious metals production projections and revised the range of projected Silver Segment Cash Costs and AISC based on YTD 2021 production results and expected production for the balance of the year. The Company is sticking to its Gold Segment Cash Costs and AISC estimate. In addition, the company is lowering its projections for sustaining and project capital expenditures.

Source: Company filing 

• Rising Cash flow from operations: In Q3 2021, the firm generated a higher cash flow from operations of USD 157.0 million, up USD 42.1 million over the previous equivalent period of USD 114.9 million. The key reasons for the increased cash flows were an increase in cash mining operating earnings and a decrease in care and maintenance expenditures.

• No Balance Sheet Risk: The company is virtually debt-free with Net Cash on the balance sheet, driven by the solid free cash flow generation ability of the company, which help them to maintain balance sheet flexibility. In Q3 2021, the company’s debt to equity stood at 0.02x compared to an industry median of 0.22x.

Source: Company Presentation 

Financial overview of Q3 2021 (In 000 of USD)

Source: Company Filing

• In Q3 2021, the company posted elevated revenue at USD 460.3 million against USD 300.4 million in pcp. It was benefited from the sale of dore and concentrate inventories built-up in prior periods.
• Cost of sales in the reported period increased to USD 269.4 million compared to USD 117.2 million in pcp. As a % of sales it stood at 58.5% in Q3 2021 V/s 39.0% in pcp.
• As a result of higher cost of sales and higher depreciation, the mine operating earnings were dented to USD 98.8 million against USD 124.5 million in pcp.
• The company managed to bring down its mine care and maintenance cost along this it also reported gain on sale of mineral properties, all thse factors helped the company to lift its earnings from operation to USD 101.1 million against USD 84.2 million in pcp.
• On the back of losses incurred on investments and higher income tax expenses, its net income fell to USD 20.2 million compared to USD 65.2 million in pcp.
  

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. 

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

Pan American Silver 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. It also shared its FY 2021 production guidance along lower capex, which is a key positive. 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 “Buy” rating at the current market price of CAD 31.24 at 10:07 am Toronto time on December 22, 2021. 

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary:

One-Year Price Chart (as on December 22, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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