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Introduction

In an earlier article I wasn't very bullish on Great Panther Silver (GPL) as its high cash costs scared me. In this article I'll have a look at the Q2 financial results and the updated balance sheet to see if Great Panther was able to generate free cash flow at the relatively low silver prices in Q2.

The Q2 Financial results

GPL announced a Q2 production of 397,000 ounces of silver at a total cash cost of $18.14/oz, which is a 59% increase from the cash cost of just $11.42 in Q2 last year. There was however a decrease in cash cost compared to Q1 of this year, thanks to an increased production as a result of higher silver and gold grades.

The company recorded a net loss of $5.1M for the quarter, mainly caused by a decrease in gross profit and higher depreciation charges.

Looking at the cash flow statements (which give a better idea about the profitability of the company as non-cash expenses aren't taken into consideration). The company had a net cash increase of $845,000, but this was mainly caused by a non-recurring sale of short term investments, which generated approximately $5.1M. Without this sale, the company would have been net cash flow negative losing approximately $4.25M in cash during the quarter. This was mainly caused by a $3.75M expense mainly caused by further underground development works.

The company only spent $1M in exploration, mainly at the El Horcon project, and the General and Administrative expenses were $2.5M.

The Balance sheet

As of June 30, 2013, the Company had a working capital of $35.1 million compared to a working capital of $44.5 million six months earlier. The company still has no long-term debt, so its balance sheet will be able to weather a few more tough quarters.

Outlook

I'm a bit concerned the company is deferring a lot of exploration into 2014, which is only a short term solution if the silver prices don't rise. As the cash operating cost of the Topia Mine was $19.67/oz in Q2, I think we can conclude Great Panther Silver's Topia mine is costing the company money as its all-in cash costs will without any doubt be higher than the current price of silver.

The company has reduced its expected sustaining capex and exploration expenditures to $12-14M, down from its earlier guidance of $15-20M for the year. This includes the development of the San Ignacio zone which should start producing next year.

Investment thesis

It's clear Great Panther Silver is still losing money, as expected. The company is guiding for a silver production of approximately 1.5-1.6Moz (and approximately 2.5Moz silver-equivalent) at a cash cost of $15-16/oz. I'm afraid that's a bit too optimistic, as it would mean the cash cost will fall to just $14/oz in H2 2013 to compensate for the relatively high H1 cash cost of $18.35/oz.

Great Panther offers excellent leverage to the price of silver, but the company had a net cash outflow of $4.25M in Q2 of this year if you don't take the one-time sale of short term investments into consideration, so the company will need a higher silver price to break even. For silver-bulls who believe we'll revisit the $40-50/oz trading range shortly, Great Panther Silver offers excellent leverage.

Source: Following Up On Great Panther Silver