Many thanks for you wise post, Sanbrunobaby. By now there are growing signs that the pms – first and foremost, silver – is turning up and there is, IMO, huge upside here specifically in PAAS.
A distinctive feature of PAAS, as you point out, is the shareholder-friendly dividend policy. Currently this provides well over 4%. The second special factor is that PAAS has a world-class property at Nvidad that cannot currently operated for political reasons and because of local opposition. If PanAmerican can manage to solve these problems the market view of prospects would improve drastically.
The SeekingAlpha site is taking an active interest in PAAS as a blue-chip pm stock. Useful inks provide the graphics and include the following:
Today's best contribution is the following. I consider it to be a reliable overview:
Should You Buy Pan American Silver? Jul 11 2013, 17:36 | 5 comments | about: PAAS
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
This article is about Pan American Silver (PAAS), which is the world's second largest mining company focused on silver.
1: About Pan American Silver
Pan American Silver has a fully diluted market cap of $1.8 billion. It is one of only a handful of silver mining companies that pays a dividend, which is currently at $0.50 per year, giving the stock a 4.45% dividend yield. It owns and operates 7 producing silver mines that are predominantly located in Latin America. The company is primarily a silver miner, although I should note that in the first quarter of 2013 only 70% of its revenues came from silver, 18% came from gold and 12% from base metals.
Pan American Silver produced approximately 25 million ounces of silver in 2012 and it anticipates growing production to 30 million ounces or so by 2016. The company has 1.2 billion ounces of reserves and resources, but unfortunately more than half of these ounces are located at the company's Navidad property in Argentina, where it is currently illegal to mine.
Thus a downside to owning Pan American Silver shares is that the company faces political and litigious interference as it has several mines in Peru, Argentina and Bolivia. However, as a company with several producing mines, it has the diversification necessary to mitigate the risk that one or two of these mines will be shut down.
2: Resources and Production
Pan American Silver has an estimated 1.3 billion ounces of silver at around 90 grams per ton and 5.5 million ounces of gold at around 0.7 grams per ton on 11 properties (or about 1.6 billion silver equivalent ounces assuming the current gold/silver ratio of 64:1). The breakdown into reserves, resources and inferred resources (i.e. the descending level of certainty in the accuracy of the predictions) is provided in the table below. Category Tons (millions) Ag (g/t) Tota Ag Au (g/t) Total Au Reserves 140.8 70 316.9 0.62 2.42 million Resources 231.8 103 735.4 0.85 1.94 million Inferred Resources 113.7 91 262.8 0.66 1.09 million
Of the company's 11 properties with reportable resources (the company has 13 properties in all) seven are currently producing. They have an average cost of production of roughly $12/ounce with gold and base metal off-sets based upon 2012 figures, although if we account for other costs such as repairs, administrative costs, exploration and so on, this figure rises to roughly $20/ounce.
Thus presently the company breaks even, or has razor thin profit margins. However if we look at individual projects, as I do below, it becomes apparent that should the silver price continue to languish the company has several properties that are comfortably profitable at $20/ounce and it can shut down its more costly mines and focus on the profitable ones.
The company anticipates that it will produce roughly 25 million ounces of silver in 2013. This figure is expected to rise over the coming years although not by much. The company's rough 2016 estimate is around 30 million ounces of annual production. If we use these figures we can calculate the company's estimated cash flow at various silver prices.
Silver Price Pan American Silver's Cash Flow $15/ounce -$125 million $20/ounce $0 $25/ounce $125 million $30/ounce $250 million $40/ounce $500 million $50/ounce $750 million $100/ounce $2 billion
From these figures it is apparent that Pan American Silver has the potential to be highly profitable, but it will not offer a lot of leverage to the silver price to investors. Presently, with the company breaking even it is overvalued relative to its cash flow. However if we anticipate a higher silver price, it is easy to imagine Pan American Silver's shares trading much higher than they currently are, especially if we back out the company's $490 million in cash from its market capitalization. Right now if we assume that the shares are fairly valued at 10-times cash-flow then investors are either over-valuing the company (which is at break-even), or they are anticipating a silver price of around $25/ounce. If the silver price rises further, for instance to $40/ounce, the shares would be worth around $5.5 billion, or around three times higher than they are currently trading at. Thus they would offer 1.5-times leverage to the price of silver.
3: Pan American Silver's Properties
A: North America
Most of Pan American Silver's North American properties are located in Mexico, which is one of the best countries in the world in which to mine.
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Production
Dolores
Dolores is an open pit mine located in Mexico. It was acquired by Pan American Silver in 2012 when the company purchased Minefinders. Of all of Pan American's properties Dolores is estimated to have the most gold, however it also has significant silver deposits. Currently the company estimates that Dolores has about 100 million ounces of silver, with 75 million of these ounces being classified as "reserves." While this silver is not very high grade (the grade averages around 25 grams per ton), the property also has over 2 million ounces of gold at just over 0.5 grams per ton, with 1.5 million of these ounces being classified as "reserves."
The mine is estimated to produce around 3.3 million ounces of silver and 65,000 ounces of gold in 2013. Given that gold production is used to offset the cost of silver production, Dolores is one of the lowest cost mines in Pan American Silver's portfolio, with "all-in" costs estimated to be just under $16/ounce. Thus despite the depressed silver price Dolores remains profitable, and it will provide high leverage to the price of silver for Pan American Silver's investors.
Alamo Dorado
Alamo Dorado is a small mine in Mexico that has just over 20 million ounces of silver, with the vast majority of these ounces classified as "reserves." Despite the relatively small size of the mine it is estimated to produce 5 million ounces of silver in 2013. This figure is down from 2012, and I expect this figure to continue to decline given the size of the resource. In fact the company estimates that it will only be producing at Alamo Dorado for another 4.5 years.
One positive provided by Alamo Dorado is the low capital costs which are just $15/ounce. Thus this mine will provide valuable cash flow to Pan American Silver over the next few years.
La Colorada
La Colorada is located in Mexico. It has more than 90 million ounces extremely high grade silver, with roughly 65 million ounces of reserves estimated at nearly 400 grams of silver per ton. In 2013 Pan American Silver estimates that it will mine roughly 4.6 million ounces of silver, which is up from 4.4 million ounces in 2012. Given the size of the resource the company should be able to continue mining at La Colorada for many years to come.
Currently the property's all-in mining cost at La Colorada is approximately $17/ounce, which means that the mine is profitable at the current depressed silver price, and it will offer substantial leverage should the silver price rise.
Exploration/Development
Waterloo
Waterloo is Pan American Silver's only property in the United States. While the company says that the property is not material, it is worth noting that it contains 100 million "unclassified" ounces of silver at an estimated 93 grams per ton (i.e. the silver is not classified as reserves or resources).
La Virginia
Pan American Silver acquired La Virginia when it purchased Minefinders. Minefinders found some high grade silver mineralization on the property when it drilled in 2010, although Pan American Silver has not done any exploration of its own, and it is difficult to see how this property fits into the company's portfolio.
La Bolsa
Of the company's early stage properties in North America La Bolsa in Mexico is the most interesting. Like La Virginia it was acquired when the company purchased Minefinders. Based on current estimates it has just under 10 million ounces of "classified" silver (i.e. there has been geological research), and over 600,000 ounces of gold. While the silver is fairly low grade at a little over 8 grams per ton, the gold is over 0.5 grams per ton, which means that this could be an economical mine. However it will likely take years to bring into production.
B: South America
Before I discuss Pan American Silver's South American properties I should point out that these properties are located in higher risk jurisdictions than Mexico, and they should be valued as such. The following map lays out the company's South American properties.
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Production
Huaron
Huaron is a high grade silver mine in Peru with 60 million ounces of reserves and 55 million ounces of resources at roughly 170 grams per ton. Despite the fact that Huaron is a high grade mine it is an underground mine, and so the company's production costs are relatively high at nearly $24/ounce all in. The mine is expected to produce just under 3 million ounces of silver in 2013, and so it will lose roughly $12 million at the current silver price. Despite these anticipated loses, however, this mine has especially high leverage to the silver price.
Morococha
Morococha, which is 92.5% owned by Pan American Silver, is another high grade mine in Peru with 34 million ounces of silver reserves at just under 200 grams per ton and 47 million ounces of silver resources at roughly the same grade. Despite this high grade Morococha is by far the least efficient of Pan American Silver's producing mines, with all-in costs at roughly $31/ounce. Given that the company anticipates producing roughly 2.5 million ounces at Morococha in 2013 this equates to a loss of $27 million for the year.
San Vicente
San Vicente, which is 95% owned by Pan American Silver, is the company's only mine in Bolivia. It is the company's highest grade property with 70 million ounces - half reserves and half resources - at 350-400 grams of silver per ton. The company anticipates producing nearly 4 million ounces of silver at San Vicente in 2013. Despite the high grade ore at San Vicente, it is an underground mine, so all-in costs are nearly $27/ounce, which means that the mine will lose $28 million annually at the current silver price.
Manantial Espejo
Manantial Espejo is the company's only producing mine in Argentina. It has 21 million ounces of silver reserves and 25 million ounces of resources at a little more than 100 grams of silver per ton. It also has a significant amount of gold with 240,000 ounces of reserves at over 2 grams per ton and 250 grams of resources at 1-1.5 grams per ton. In 2013 Pan American Silver anticipates producing around 3.4 million ounces of silver (along with 55,000 ounces of gold) at an all-in cost (net of gold by-products) of roughly $15/ounce, Thus at the current silver price the company will make approximately $17 million annually at Manantial Espejo.
Exploration/Development
Pico Machay
Pico Machay was acquired by Pan American Silver when it purchased Aquiline Resources. It is a gold property in Peru with resources of approximately 700,000 ounces of gold at an estimated grade ranging from 0.56 - 0.9 grams per ton. It does not fit into the company's portfolio of silver mines. Given that the property is barely economical at the current grade, and given its location, I doubt it is worth very much to an acquirer.
Calcatreu
Calcatreu was also a part of the Aquiline purchase. It is a gold development project in Argentina with an estimated 900,000 ounces of gold at over 2 grams per ton, which is relatively high for a potential gold mine, and so it will likely be deemed economical after Pan American Silver completes its feasibility study.
Navidad
Navidad in Argentina has a 750 million ounce silver resource at an average of over 100 grams per ton. This is huge - more than half of the company's total reserve and resource estimates.
Unfortunately the company has been forced to stop developing the project in order to comply with government regulations. Thus a lot depends on government action, or how the company is able to reconstruct the mine so that it is compliant with Argentinean law.
This is the bad news. The good news is that the bad news is already priced into the stock, and if anything should change for the better this property can add enormous value to the company. How much is hard to say, but if the silver at Navidad is valued at just $1/ounce then the stock price can jump by over 40%.
4: Risks
A: The Price of Silver
The price of silver has performed terribly over the past two years, having declined from $48/ounce to under $20/ounce. While there is significant technical support at the current price the downtrend that began in May 2011 is still intact.
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Most silver producers cannot turn a profit at the current price, and this is a reason that the silver price has likely reached or is near a bottom. Still the downtrend in the price of silver is intact, and Pan American Silver's profits will be closely linked to the price of silver.
B: Geopolitical Risk
Pan American Silver holds several properties in South American that are in risky countries - Peru and Argentina. Investors must consider the possibility that these properties could be nationalized or that their mining rights could be revoked. The company's Navidad property is a perfect example of this in Argentina. Nevertheless investors must consider the possibility that a capricious act of government can decrease the value of Pan American Silver shares rather meaningfully.
Conclusion
Pan American Silver is an excellent holding for investors who want the diversification of seven producing silver mines and a dividend that will be tied to the silver price over the long term. As silver prices rise the company's shares will perform very well, although it will likely not outperform the price of silver by much. Thus investors looking for growth and leverage to the silver price will probably want to look elsewhere. Investors who are especially concerned about owning mines in risky jurisdictions should also look elsewhere.
AI
