Pan American Silver (NASDAQ:PAAS) has spent most of the past year quietly restructuring their project portfolio and creating value to be unlocked in the future.
The strategic acquisition of Minefinders earlier in 2012 was a smart move adding an attractive asset to their portfolio. Minefinders had been hampered by a lack of capital and having the backing and experience of Pan American will go a long way towards unlocking value at the mine.
Work has already begun to optimize the Dolores deposit with construction of heap leach pad 3 being finalized as work begins to optimize recoveries and mill options.
The disposition of the Quiruvilca operation in Peru to Southern Peaks Mining LP removes a high cost asset from the portfolio while retaining some future value with the potential to receive back either a NSR or royalty. While the future returns may not be that large it adds some change to the pocket after allowing for a gain of more than $11 million on the sale of the asset.
The portfolio was further streamlined with Pan American relinquishing the right to La Preciosa.
Developments in Argentina regarding the Navidad project in the Chubut province are a setback as the law entails a significant increase in royalties and participation by the province in all mining projects. Under IFRS there is the potential for a writedown of the value of the project if the law is passed as written and the project is put on care and maintenance. However, this should not be looked at as a negative as the mineral resources and reserves in the ground will not change. It will just be put back on the shelf until such time that the project becomes more economic to develop.
The Waterloo development project in San Bernardino County, California has become extremely attractive. The property contains a large historical resource of 100 million ounces of silver (SLV, AGQ) and Pan American has been actively drilling to confirm the historical results by the previous owner. Although the 100 million ounce resource is attractive, the historical estimate was completed before the implementation of NI 43-101 so it cannot be relied upon as accurate.
Pan American had a difficult year last year with production flattening and costs rising squeezing margins but the moves made so far this year make the stock more attractive to investors.
A refocused portfolio will benefit shareholders as the silver price is poised for a breakout to new highs next year.
Financially, management's intention to cash settle the Minefinders convertible bond, meaning there will be no further share dilution, is a significant positive for shareholders.
In a sign of confidence the dividend was increased on August 14th by 33% to an annual rate of $0.20 per share giving the stock an attractive rate of just under 1%.
If Navidad is written down under IFRS rules and the stock price takes a hit investors should seize the buying opportunity it presents. As the price of silver rises the mineral value in the ground becomes even more valuable and the project can sit in the portfolio until such time as the political environment becomes more attractive to exploitation.
Even after the recent runup, a refocused Pan American Silver is an attractive asset for investors in the silver sector based on its Price-to-2012 Earnings Estimate ratio and Price/NAV when compared to their competitors.
Additional disclosure: Source: 2012 2nd Q MD&A available on Sedar.