Pan American Silver: Diversified Precious Metal Miner With Robust Balance Sheet (PAAS)

Introduction

Pan American Silver (NYSE:PAAS) is one of my favorite silver miners. Since Yamana’s acquisition, the company has added quality assets, considerably expanding its reserves and resource base. PAAS assets are in countries with relatively low political risk in the Western Hemisphere. Besides that, the revenue per country does not exceed 25%.

3Q23 production figures were not impressive at first glance, being on the lower limit of the guidelines. Despite that, PAAS output grew significantly due to the acquisition of Yamana assets. Silver cash costs declined, resulting in lower AIC. 3Q23 net income is still negative, although the operating cash flow increased 100% YoY.

The company has sound financials with $356 million cash and $830 million total debt (including leases). PAAS profit margins have improved over the last few quarters. PAAS trades at 2.9 EV/Sales, 11.5 EV/EBITDA, and 1.1 P/BV. Price action is supportive for initial longs. Adding the macro tailwinds being long silver and gold miners is a wise decision. I give PAAS a buy rating.

3Q23 results overview

In 3Q23, PAAS produced 5.7 M oz of silver and 244 k of gold. Gold production falls below 3Q23 guidelines, while silver production is on the lower limit. The silver production 3Q23 increased by 25% YoY, driven by Yamana assets, which added 2.37 M oz of silver. Gold production in 3Q23 doubled compared to 3Q22. Yamana mines added another 128 M oz of gold to PAAS’s quarterly gold output.

The table below shows 3Q23 production figures.

Silver segment

Due to ventilation issues, La Colorada mine in Mexico delivered 1 M oz silver in 3Q23, or 32% lower than in 3Q22. PAAS has advanced the construction of concrete-lined ventilation shafts. The plan is to reach a depth of 593 meters in 4Q23. In 3Q23, the excavation achieved 522 meters. By mid-2024, exhaust fans are planned to be installed.

Cerro Moro is from the newly acquired assets. PAAS has invested $14 million since the acquisition in March 2023. In 3Q23, the mine delivered 2.66 M oz of silver and 54.4 k oz of gold. Silver cash costs were negative, at $0.08/oz, and AISC was $5.8/oz.

Huaron mine in Peru produced 0.9 M oz silver in 3Q23, or 5% compared to 3Q22. The main driver is the improved ore grades. Base metals production grew significantly YoY, copper by 37%, zinc by 6%, and lead by 20%. Higher ore grades and improved recovery for copper contribute to increased output in 3Q23. Cash costs grew by $1.0/oz, caused by rising refining charges and lower by-product credits. The latter declined due to lower zinc prices. AISC grew by $4.3/oz due to increased sustaining capital expenditures.

San Vincente mine had a strong 3Q223, scoring higher production figures across all metals. Silver output grew by 11% YoY, zinc by 7%, lead by 19% and copper by 53%. Higher ore grades and increased throughput contributed to the rising quarterly production. 3Q23 cash costs were $6.21/higher than 3Q22 due to the timing of zinc and silver concentrate shipments, resulting in lower by-product credits. AISC increased by $7.88/oz YoY.

3Q23 silver cash cost is lower than 3Q22 cash costs ($14.6/oz). The decline is due to higher gold by-product credits from Cerro Moro and lower OPEX costs at the Manantial mine, which is in care and maintenance. La Colorada mine had lower ore grades and by-product credits from declining base metals production (lead and zinc). Silver cash costs YTD remain lower than 2022 YTD for the abovementioned reasons. Silver AISC in 3Q23 grew by $0.22 compared to 3Q22. Huaron and San Vincente required higher sustained capital investments, increasing AISC. Silver AIC in 3Q23 was $18.19/oz and cash cost was $13.13/oz. Both slightly exceed the 2Q23 guidelines figures.

Gold segment

PAAS Jacobia and El Penon were acquired from Yamana. The former produced 96.6 k oz of gold for 2Q23 and 3Q23 at $808/oz cash cost and $$1,146/oz AISC. PAAS has invested $30.2 million since the acquisition. El Penon mine produced 2Q23 and 3Q23 2.05 M oz gold at $1,020/oz cash cost and $1,213/oz IASC. The lower-than-expected ore grades caused declining production. PAAS invested $11.6 million in mine equipment upgrades and exploration.

Gold cash costs were $1,187/oz in 3Q23, while 3Q22 cash cost was $1,184/oz. The challenging ground conditions in Timmins mine in Canada resulted in lower production figures. Minera Florida also added pressure on the cash costs as a higher-producing mine. On the positive side, Jacobina balanced the adverse developments as a lower-cost producing mine. Gold AISC fell by $164 YoY to $1,451/oz in 3Q23.

Other highlights from 3Q23

On November 6, 2023, PAAS completed the divestment of the Agua de Falda (ADFL) project. The company had a 57% interest in ADFL; Nacional del Cobre de Chile owns the remaining shares. Rio Tinto Chile SPA (Rio Tinto Subsidiary) paid $45.5 million in cash. PAAS will receive a net smelter royalty of 1.25% on all precious metals and a net smelter return royalty of 0.2% on all base metals.

ADFL is the third asset divestment in 2023, after the MARA project in Argentina and the Morococha mine in Peru. MARA was sold to Glencore for $574 million in cash and copper net smelter royalty of 0.75% on 100% interest for the whole mine life. Alpayana SA acquired the Morococha mine for $28.6 million in cash. The proceeds from both deals were used to repay its obligations and improve the company’s cost structure by reducing additional care maintenance and project developments.

3Q23 financials

The table below shows PAAS YoY changes in the company`s income statement.

3Q23 revenue was $277 million higher compared to 3Q22. Yamana assets contribute $211 million due to higher production volumes. 2023 was a strong year for gold and silver prices, boosting additionally PAAS revenues. 2023 YTD revenue was $527 million higher than YTD 2022 due to the same dynamics. EPS and net earnings were still negative in 3Q23 but improved compared to 3Q22.

Operating cash flow YTD 2023 was $282 million. For reference, YTD 2022 was $144 million. 3Q23 operating cash flow is $114 million, while 3Q22 is $54 million. PAAS announced $0.10 dividends per share in 3Q23, translating into a 2.05% yield. The total capital allocated for dividends is $94 million.

2023 preliminary report and 2024 projections

Yesterday, PAAS published its preliminary results for 2023. Silver production at 20.4 M oz silver was below the lower limit of the guidelines (21.0 – 23.0 M oz silver). However, compared to 2022, silver production grew by 11%. Gold output reached 882.9 k oz in 2023, achieving the company`s guidelines for 2023. YoY growth is 60%. Jacobina mine was one of the primary drivers for gold production growth. The mine delivered 147k oz of gold under PAAS ownership. Copper and lead production met the company`s guidelines, although zinc was lower than expected.

PAAS shares its guidelines for 2024.

The silver segment is anticipated to deliver 14.9-16.1 M oz of silver, while the gold segment is expected to deliver 6.1-6.9 M of gold. The primary drivers for silver are El Penon, La Colorada, and Cerro Morro. Jacobina, El Pennon, and Timmins are expected to deliver around 50% of 2024 output. Silver Cash cost and AISC is expected to be $11.7/oz-$14.1/oz and $16.0/oz-$18.5/oz. Gold Cash costs and AISC are expected to be $1,165/oz-$1,260/oz and $1,475/oz-$1,575/oz. AISC and cash costs project $23.5/oz silver and $1,950/oz gold prices.

PAAS expects 30% higher silver output in the La Colorada mine due to better ore grades, resulting in 20% lower AISC than in 2023. The ventilation system updates are expected to be complete in mid-2024. Cerro Moro is expected to deliver lower silver ore grades due to changing the mine’s operations to gold. Gold output is expected to remain unchanged. Jacobina is projected to achieve processing rates of 8,400 tons/day and gold recovery rates of 96%.

One of the priorities stated in the preliminary report is progressing with the La Colorada Skarn project. The plan is to invest $25.0-$26.0 million in in-fill drilling and exploration for the Skarn project. The next point on PAAS’s to-do list is to optimize Jacobina`s production rate at 8,400 tons/day. The company will invest approximately $15 million in 2024 to upgrade processing plants, including grinding circuits, carbon-in-pulp circuits, and tailing pipelines.

PAAS balance sheet

PAAS has $386 million cash and $750 million available under its credit facility. The company has $830 total debt and $726 million long-term debt. A sizable portion of the debt is related to the Yamana acquisition financed with two senior notes issues. PAAS management maintained a conservative capital structure, as seen below:

Maintaining total debt to equity below 20% over five years in such a volatile business as mining is an impressive achievement. Net interest payments ($35 million) are well below PAAS operational cash flow ($170 million).

In September 2023, PAAS undrawn its $750 million revolving credit facility. In 3Q23, the company made a $280 repayment. The interest rate on the facility is calculated as SOFR plus a 1.15% to 2.3% premium. The undraw amount is subject to an annual fee of 0.2-0.4%. The credit facility matures in August 2025.

To fund the Yamana acquisition, PAAS issued $283 million senior notes with a 4.625 % coupon and maturity in December 2027 and $500 million with a 2.63% coupon and maturity in August 2031. Both note issues are unsecured, and interest is paid semiannually.

Let’s compare PAAS solvency and liquidity metrics versus Hecla Mining (HL) and First Majestic (AG).

PAAS holds the pole position with 16.9% total debt to equity, 1.5 total debt to EBITDA, and 13.3 EBITDA to interest expenses. To be fair, HL and AG have strong balance sheets, too.

Profitability and dividends

In the last quarter, they delivered production figures in the lower range of company guidelines. However, the prices of precious metals and Yámana assets boosted the company`s revenue and cash flow.

PAAS profit margins have improved over the last few quarters, unlike HL and AG’s declining margins. However, HL scores the best margins, while PAAS is the second. HL has the lowest costs in the group, while AG has the highest. PAAS is in the middle with $13.13/oz cash costs and $18.19/oz AIC.

PAAS pays dividends with a 2.05% yield. This is not an impressive figure; however, it is much higher than HL (0.39%) and AG (0.5%). PAAS payout ratio is 45%, meaning the company has spare firepower for capital investments or share buybacks. However, the latter is not popular among those three companies.

Valuation and price action

PAAS is cheaper than HL with 2.9 EV/Sales, 11.5 EV/EBITDA, and 1.1 P/BV. All figures are LTM.

The cheapest on the list is Fortuna Silver (FSM). Its mines are in high-risk countries such as Burkina Faso, Senegal, and Cote d’Ivoire. PAAS mines are located only in the Western Hemisphere in safer countries for doing business. HL has mines in Peru and the US, while AG is focused on Mexico.

In the long term, all precious metals miners offer value due to solid tailwinds for gold and silver. The latter has an advantage over gold due to its industrial application. The transition to green energy requires a lot of silver for EVs and solar panels. I consider PAAS the best bang for the buck in the group.

The price action is very supportive. The price is on the verge of breaching 20 monthly moving averages (MMA) and 18 months of resistance.

SQN indicator is in a bull-quiet regime. This regime is productive for taking long positions. Of course, it is not considered in isolation but with other factors, such as MMA and support and resistance. I will enter above the high level of the January candle at the present price. I will add the pullbacks once we have confirmed the bull trend (at least two monthly bull candles above 20 MMA).

Final Thoughts

PAAS has high-quality assets located in solid jurisdictions. Yamana acquisition added quality assets such as Jacobina and Cerro Moro mines. Due to diversified operations, Pan American carries lower political risks than HL, AG, and FSC. PAAS assets are spread across seven countries. Besides that, the revenue per country does not exceed 25%. Financially, the company is sound, with ample liquidity and a conservative capital structure.

The significant risk derives from the prices of precious metals. In my opinion, we will see higher gold and silver prices in 2024. Silver is an industrial metal with a growing deficit, while gold is a geopolitical hedge. The former benefits from the transition to green energy while the latter from the looming Cold War 2.0.

PAAS is one of my favorite stock picks in mining. Since 3Q23, I have been building a position. The price seems to have found a bottom. Once it pushes through 20MMA, I would add more. I give PAAS a buy rating.