Pan American Silver Corp.

Pan American Silver Corp. (TSX: PAAS) is a mining company focused exclusively on the exploration and development of silver mines. The group’s operations are located mainly in Central and South America, and the byproducts from its silver mining operations, including zinc, lead, copper, and gold. 

Key Highlights:

• Encouraging FY21 guidance: For FY21, the company expects its annual silver production to remain between 20.50 to 22.00 million ounces, which is higher than 17.312 million ounces in FY20. Moreover, FY21 gold production is expected in between 605.0 to 655.1 koz, which is higher than 522.4 koz in FY20. The company expects total cash costs for silver in between USD 9.60 to 11.60 per ounce, while cash cost for gold is expected in between USD 825 to 925 per ounce. Total capital expenditure is expected in between USD 285 to 305 million.

Source: Company Presentation

• Industry beating margins: The company reported better margins than its peers, which indicates higher operational efficiency. Notably, the company reported EBITDA margin and pretax margin of 41.3% and 26.4%, respectively, in Q2FY21, which was higher than the industry median of 40.1% and 23.1%. Moreover, the net margin stood at 18.6% in Q2FY21, as compared to the industry median of 15.7%.
• Higher dividend distribution amidst turbulent times: The company reported higher dividend distribution amidst the global uncertainties, which is a key positive. Notably, the total dividend distribution stood at USD 29.438 million in H1FY21, higher than USD 21.003 million in pcp.

Q2FY21 Financial Highlights:

• PAAS announced its quarterly result, wherein the group reported its revenue of USD 132 million, jumped from USD 249.509 million in the previous corresponding period (pcp). The quarter was marked by higher gold and silver production coupled with higher realization prices.
• Mine operating earnings stood at USD 103.048 million, significantly higher than USD 48.386 million in pcp. The increase was driven by higher revenue, partially offset by an increase in production costs and higher royalties.
• Earnings from operations stood at USD 93.772 million, as compared to a loss of USD 18.333 million in the previous corresponding period (pcp). The period was marked by lower Mine care and maintenance, higher gains on sale of mineral properties, plant and equipment, partially offset by higher foreign exchange losses.
• The group reported net earnings of USD 71.241 million, up from USD 19.412 million in pcp. The growth was supported by above-mentioned factors, partially offset by lower Investment income and higher income tax expense.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: The group’s revenue is dependent on the commodity prices, and volatility in commodity price would affect the company’s realization price and cash flows. In Q2FY21, the company reported a surge in production costs, and continuation of the above trend might pose a threat to the company’s profitability and margins.

Valuation Methodology (Illustrative): Price to Cash flow

Stock Recommendation:

For H1FY21, the company reported higher production of gold and silver at 280.0 koz and 9067 koz, respectively, compared to 252.7 koz and 8,352 koz, respectively in pcp. Moreover, the company also reported ramp-up in production toward the end of Q2FY21 at the Company's open pit gold mines, which is expected to support the company’s production profile. We have valued the stock using the Cash to CF-based relative valuation method and have arrived at a double-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 ‘Buy’ rating on the stock at the last closing price of CAD 29.84 on September 27, 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 Technical Price Chart (as on September 27, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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