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From the Survey: Pan American Silver
Pan American Silver (PAAS) was founded in 1994 with the intention to provide investors with a vehicle to gain exposure to silver prices. Today, after 18 years of production and financial growth, Pan American owns and operates seven silver mines in Peru, Mexico, Argentina and Bolivia. The company also owns the Navidad silver deposit, one of the largest undeveloped silver deposits in the world. In addition, Pan American owns the Calcatreu gold project in Rio Negro, Argentina and the La Virginia development project in Sonora, Mexico.
During the last decade, the company has added more than 230 million ounces of silver reserves, which is 20% more than the amount it mined. While acquisitions have been and will continue to remain a key source of growth, development of owned mines provide the most bang for the buck. In the same period, $85 million in mine-site exploration added new reserves at a paltry cost of roughly $0.40 per ounce of silver.
During 2012, Pan American increased silver production to 25.1 million ounces and gold production to 112,300 ounces. For 2013, this miner is looking for a substantial advance in gold output to between 140,000 ounces and 150,000 ounces. However, it is looking for relatively flat year-over-year production of silver, zinc, lead, and copper. To make matters worse, a recent strengthening in the United States dollar, as well as the impending departure of Quantitative Easing by the Federal Reserve Bank, has resulted in falling prices for most commodities in general and precious metals in particular. In fact, a substantial price correction leaves silver trading at approximately $22.00 an ounce. Given that global supplies of silver are on pace to rise substantially, fundamentals are apt to remain unfavorable.
Taking these factors together, PAAS’ stock and earnings growth prospects have fallen sharply. Despite the fact the company is positioned to grow output to 35 million ounces by 2015, share earnings are unlikely to reach record highs ($2.34) established in 2011 any time soon.
The company improved its portfolio of assets with the acquisition of Minefinders Ltd. and its flagship Dolores gold/silver mine in the state of Chihuahua, Mexico. However, an anticipated boost in resources elsewhere failed to materialize. In 2012, the local government in Chubut, Argentina drafted legislation that would regulate all oil & gas and mining activities in the province, substantially increasing royalties and imposing the province’s direct participation. While the company remains committed to the project, it has deferred development efforts until authorities establish a more conducive operating environment.
With ample liquidity, the company is well positioned to deploy capital toward a number of fronts. Pan American Silver closed out the first quarter with roughly $490 million in cash, which positions it to fund an above average dividend (4.0%), repurchase stock, and meet capital spending requirements. With development work at Navidad scaled back, we look for expenditures in the years ahead to be sharply below earlier expectations. This suggests Pan American Silver will attempt to buy new assets that have been depressed by silver’s moderation.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.