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 company operates primarily in Central and South America. It also sells the by-products from its silver mining operations, including zinc, lead, copper, and gold. Pan American Silver is based in British Columbia.

Investment rationales

• Healthy balance sheet: On June 30, 2020, the company had cash, and short-term investment balances of USD 261.6 million and total debt was USD 236.9 million. The company has a net cash position which reduces the balance sheet risk to a large extent. The company repaid USD 140.0 million on its four-year million Credit Facility, reducing the amount drawn as on June 30, 2020, to USD 200.0 million.

• Rising silver and gold prices are likely to enhance margin: Silver is trading at about USD 24.82 (Oct 20, 2020) an ounce, reflecting more than 41% increase on a Y-o-Y basis. The recent spike in the silver price is expected to benefit the company in terms of sales and cash flow. Further, the group’s margin profile is also expected to expand given a decent increase in the gold prices since June quarter as it derives a certain portion of revenue from gold sales. We believe that the average realized prices of gold and silver are going to expand in the upcoming quarter, which would improve the company’s financial position.

• Encashing Investments: The company realized cash proceeds of USD 81.1 million from the divestment of investment interest and non-core assets, primarily related to the sale of 10.35 million common shares of Maverix Metals Inc. 

Financial Overview (in thousands of U.S. dollars except per share amount)

Source: Company

• The company posted the Revenue of USD 249.5 million in Q2 2020, 27% lower than in Q2 2019, primarily due to decreased quantities of metal sold on account of lower metal production, partially offset by higher realized precious metals prices.

• Net income of USD 19.4 million deriving an EPS of USD 0.10 was recorded for Q2 2020 compared with net income of USD18.5 million and EPS of USD0.09 in Q2 2019.

Production (Amount in USD)

Source: Company

Risk associated to investments

The Company is exposed to many risks, but fluctuations in prices for metals directly affect the Company’s profitability, margins, and cash flows, as it derives its revenue from the sale of silver, zinc, lead, copper, and gold. Energy inputs, labour, materials, supplies and services, fluctuations in currency markets are also other risks which are associated with the Company’s performance.

Upcoming Event

Third Quarter 2020 Unaudited Results on November 4, 2020

Valuation Methodology (Illustrative): EV to EBITDA

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months 

Stock recommendation

We are bullish on the precious metal prices and believe that despite a little pullback, they would continue to remain in the limelight as uncertainty over the global economic growth is still prevailing. Further ETFs are showing no sign of decline in gold buying, which is likely to increase the gold prices higher. We believe that average realized gold prices per ounce would continue to expand, which would lead to margin expansions. Therefore, based on the above rationale and valuation, we have given a “Buy” rating at the closing price of CAD 43.29 on October 20, 2020.

PAAS daily technical chart. Source: Refinitiv (Thomson Reuters)

Westshore Terminals Investment Corporation

Westshore Terminals Investment Corporation (TSX: WTE) operates a coal storage and loading terminal at Roberts Bank, British Columbia. The company derives its revenue from rates charged for loading coal onto seagoing vessels.

Investment Rationale:

• Resilient Business: The company’s business model comes under ‘essential services’ and is resilient in nature. Despite a tepid economic scenario, the company has retained its top line. We expect the business stability to continue in the coming days, driven by renewal of the order book by the existing customers.

• Dividend play: Due to the stable business operations, the company has decent cash flow levels and distributed consistent dividend to its shareholders. At the last traded price, the stock was offering a dividend yield of ~4.5%, which is decent considering the current interest rate environment.

• Solid Fundamentals: The group has maintained a robust margin profile over the past few quarters. The group reported EBITDA margin above 50% since 2Q18 and net margin above 20% at the same time.

Q2FY20 Financial Highlights:

• Westshore posted Q2FY20 revenue at CAD 96.816 million, slightly lower than CAD 98.714 million in Q2FY19, due to a lower performance from the loading segment, partially offset by significantly higher income from other segment. The group reported a total shipment of 7.7 million tonnes, against 7.6 million tonnes in the previous corresponding period (pcp).
• Total expenses, during the quarter, was higher at CAD 48.007 million, as compared to CAD 47.566 million in Q2FY19, due to a higher administrative expense, partially offset by slightly lower operating expense.
• Profit for the period stood at CAD 34.653 million, against CAD 34.96 million in Q2FY19.
• The company ended the quarter with cash and cash equivalent of CAD 161.708 million, while total assets were recorded at CAD 1,230.783 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The group is exposed to the volatility on the global demand and supply of seaborne coal. A decline in average loading rate might dampen the top-line of the company.

Valuation Methodology: Price to CF Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of WTE corrected ~25% so far this year. The company expects FY20 throughput of 29.5 million tonnes, at par with FY19 rates. The company reported normal operations during the quarter and the business is likely to remain stable in the coming days. The group has renewed the contracts with the existing clients, which would help in generating stable cashflow. The company is focusing on diversification and attracting the producers of other commodities. Further, with the revival of the economic activities, we believe the demand for coal is likely to improve in the coming days, which would further support the company’s shipment levels. We have valued the stock using Price 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 Superior Plus Corp, TFI International Inc etc. Considering the aforesaid facts, current price movement, we recommend a 'Buy' rating on the stock at the closing market price of CAD 14.12 on October 20, 2020.

WTE Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.