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Reasons To Like Great Panther Silver

May 11, 2017 11:34 PM ET|4 comments| About: Great Panther Silver Limited (GPL), Includes: AG, GDXJ, SLV
Viking Analytics

Summary

GPL has underperformed GDXJ since its addition to the index.

The company has zero debt and significant cash reserves.

GPL is fundamentally less expensive than many of its silver mining peers.

Great Panther Silver (NYSEMKT:GPL) operates two silver mines in Mexico and is expected to close on a transaction for a silver mining operation in Peru here in the second quarter of 2017. One highlight from GPL's most recent corporate presentation is shown below. What we like most about GPL is that it has zero long-term debt, and maintains a substantial cash reserve for mine expansion and/or acquisitions. The most recent corporate presentation in its entirety can be reviewed here.

In the chart below, we show the share price of GPL (candlesticks) versus the value of the iShares Silver Trust (NYSEARCA:SLV). Some highlights from the chart below include:

GPL is currently trading at the bottom of its recent range and appears to be forming a rounded bottom near $1.20/share.
The top of the current trading range is near $2.25/share, and was reached in late April 2016 and in February 2017.
The purple star below denotes the day on which GPL issued new shares at $1.60/share (along with warrants priced at $2.25/share); this cash was raised in order for GPL to expand its operations. More details on this financing can be found on GPL's website.
The orange star below denotes the day in which GPL was added to the VanEck Vectors Junior Gold Miners (NYSEARCA:GDXJ). One can see the very large volume spike on that day, December 16th, 2016.
Three days after GPL's addition to the GDXJ, GPL announced that it was acquiring a mine in Peru.
Following these two news events, GPL rallied from near $1.30/share to over $2.25/share.

GPL share price has fallen since late February due to at least four items:

A disappointment in Q4 2016 earnings
The falling price of silver
The falling price and disruption in the junior mining indices created by GDXJ oversubscription
The closing delay of the planned acquisition of the Peru mining operation.
It is possible that most of this bad news has already been fully priced in.

Note on GDXJ

Any investor in precious metal miners will already be aware of the market disruption caused by GDXJ getting too large for its constituency. There are many articles to refresh one's knowledge on this topic. The second paragraph in this article might be a good place to start for further research. GDXJ appears to be the largest shareholder in GPL and once owned 26.7 million shares. GDXJ has since trimmed its position by 16% to 22.4 million shares in GPL. We are not sure whether GDXJ will continue to adjust its GPL position or not.

The chart below shows the relative performance of GPL vs. GDXJ and the SLV ETFs since the day that GPL joined the GDXJ index. Since that day (before the announcement of the Peru acquisition), GPL is down 14%, while GDXJ is up 6%, and the SLV ETF is down 1%. GPL appears to have underperformed both GDXJ and SLV.

Finally, we created a table to compare the cash mining contribution of a few silver miners below. We first calculated a miner's enterprise value, which is the value of equity plus long-term debt, minus cash and cash equivalents.

Then, we calculated the variable contribution from mining activities based upon each company's guidance for mining production and cash cost per ounce and assuming full-year values for gold and silver.


We then took the enterprise value of each firm and divided it by the forecast 2017 cash contribution. This, of course, is just a simple metric and is not based upon the all-in sustaining costs of a mining operation. Nevertheless, this metric can provide a comparison look at which miners might be undervalued or overvalued relative to their peers. GPL would seem to be a great acquisition target for some of the larger miners. First Majestic (NYSE:AG), for example, has publicly stated that its next production target is to have over 20 million ounces of production in Mexico. If First Majestic acquired GPL, it would achieve that target right away; in addition, at current relative share prices, such an acquisition would appear to be accretive.

Conclusion

GPL has underperformed GDXJ and many of its mining peers since late December 2016. It appears to be undervalued and poised for a rally. Having zero debt, substantial cash reserves, and no streaming contracts (which decrease margins), GPL would appear to be a great acquisition target for a larger miner.

Continued weakness in precious metals pricing could cause GPL to break down below its current range. On the other hand, a sustained rally in silver and gold prices could enable GPL to outperform its peers. Good news from the company regarding its Peru mining transaction may also be received favorably by the markets.

Any individual mining company, however, presents unique and non-diversified risks. Any investor should do their own research before making any investment such as GPL.

Disclosure: I am/we are long GPL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

https://seekingalpha.com/article/4072478-reasons-like-great-panther-silver