- Silver Miners have rallied in recent weeks, and shares of Great Panther Silver have gained more than 20% since the start of the year.
- Production results published for the year 2013 bode well for the upcoming earnings call. We expect improvements in productivity and significant cost reductions.
- Outlook for 2014 is strong due to development of a new mine and the associated economies of scale.
Almost exactly one year ago we reported on Great Panther Silver (GPL) and suggested "that investors consider shorting Great Panther Silver". As correct as this call proved at the time, we now believe that the tide has turned for this primary silver miner. Several data points have been published ahead of the next earnings call indicating strong upside potential.
We felt that it was a good point in time to get in touch with Robert Archer, the company's CEO, and discuss recent developments with him, picking up from where we left off with our last interview.
In the present report we will provide an update on this company based on the answers we got from Robert Archer, and we will try to look at what the future might hold for Great Panther Silver in 2014.
(Silver Panther on display in the company's board room)
Great Panther Silver is a precious metals mining company with two operating mines in Mexico: the legendary Guanajuato mine which has been mined since the 16th century, and the Topia mine complex. Detailed information on these two assets can be found in this article, or following the links above.
The company has managed to maintain a very strong balance sheet throughout the times of silver price volatility in 2013. Great Panther Silver is debt free, and had $23.7M in cash at the end of September. A current ratio of 7 and working capital of $35.9M further support the impression of strong financial footings for this company.
At the time of writing shares were trading for just under $1 translating into a market capitalization of $137M.
Operating cash flow dipped precariously below zero in mid-2013 along with dropping revenues caused by the low silver price that seems to have become the new normal. Operational improvements combined with cost control measures have brought about a distinct turn for the better in Q3; and the latest operational results for Q4 lead us to expect further improvements and a continuation of the positive trend going into 2014.
Year End Operating Results
As is customary with mining companies, Great Panther Silver has released operating results for Q4/2013 and the full year 2013 well ahead of the earnings call for the same periods. In studying these operational results we have every reason to expect strong financial results to be forthcoming when the company will release them in early March.
After adjusting for lost time over the holiday season Q4 results appear every bit as strong as for the previous third quarter. Most importantly among the reported metrics we note that silver-equivalent production is up 14% year-on-year, and we also note that gold production has increased disproportionately, leading us to expect comparatively low cash costs again for the 4th quarter due to high by-product credits.
The balance between gold and silver production is influenced mainly by the mine plan at the Guanajuato mine. Robert Archer explained it as follows during our interview:
"Not only do the overall grades have an impact on cost per ounce but the ratio of silver to gold grades plays a role as well. Our Cata area at Guanajuato has very high silver grades but the Santa Margarita area is gold-rich with relatively low silver grades. So, as we mine more tonnes from the latter, our overall gold grade goes up while the silver grade goes down. This increases the gold production and, as we report cash cost per ounce of silver net of by-product credits, it can have the effect of lowering our cash costs. Consequently, we have to try & maintain a balance between what we mine from the different zones at the mine."
Overall, Great Panther Silver has achieved annual record production of 1.7M ounces of silver and 15,700 ounces of gold in 2013; translating into 2.84M silver-equivalent ounces. We note, that for the first time in quite a few years the company has actually achieved (and exceeded) its original annual guidance of 2.4M to 2.5M.
Great Panther Silver has built a reputation of producing silver at a relatively high cost compared to other primary silver miners. Cash costs of $12.24/oz were reported for the full year 2012, and despite hopes for the contrary cash costs exploded to $18.60 in Q1/2013 and remained stubbornly high at $18.14/oz for Q2/2013 - a period of time when silver prices dropped from $32/oz in January 2013 to below $20/oz in June.
Results for Q3 finally brought about the mentioned tide change. Cash costs dropped to $9.89/oz while operational results broke several records. Robert Archer explained his recipe for success as follows:
"We initially focused on operational efficiencies through the reduction of labour and materials costs and a few other initiatives. On the labour side of the equation, we took some steps to reduce the labour force through a reduction in the number of mining contractors at Guanajuato and the renegotiation of mining contracts to create greater accountability for material and labor costs. We mine in many different areas of each operation, so we are always looking at ways to best deploy labour and equipment in order to increase production in the most profitable areas."
"Earlier in the year, we implemented wide ranging cost reduction initiatives that included reductions to exploration, general and administrative expenditures, including salary deferrals for the board of directors and senior management, and reduced capital expenditure and development programs, focusing on those with the greatest return on investment."
"In addition, we make sure that each mine within the Topia district is profitable and if it is not, it can be closed without any impact on the others. This gives us a lot of flexibility at Topia and we closed 3 mines in 2013 with the possibility of future closures in 2014. Men and equipment have been deployed to other, more profitable, mines such that overall production has not been affected."
Where to in 2014?
With costs apparently under control and positive cash flow from operations reinstated the outlook for 2014 seems promising. The company gives guidance for a 10% increase in silver-equivalent output. The CEO explained his strategy to achieve this increase as follows:
"While we think we can increase our year over year production at both Guanajuato and Topia, we decided to guide on the conservative side with roughly the same levels as 2013. With San Ignacio still under development, there are always uncertainties regarding ground conditions, ore grade variability, etc. so, again, we are being conservative on the anticipated production as we gradually ramp up through 2014. Consequently, the additional production from San Ignacio results in a ~10% increase in overall production to about 3.1 to 3.2 million silver equivalent ounces in 2014. If San Ignacio goes well, we will be more than happy to increase our guidance mid-year!"
Great Panther Silver is possibly the only silver producer to make a mine development decision in 2013. The San Ignacio project had been developed by the company for some time, and is ideally positioned to provide mill feed to the company's Cata plant some 20km away in Guanajuato. Additional ore from this mine will not only lead to increased production, it will also fill available capacity at the mill and lead to opportunities to reduce costs through associated economies of scale. We asked Robert Archer about progress at the project:
"Yes, San Ignacio is on schedule. As of year-end, more than 130 metres of development had been completed on the access ramp. Ramp development was temporarily delayed due to the presence of incompetent rock associated with a fault, requiring additional rock support, but that has been resolved"
"That fault, however, also revealed a section of the Intermediate Vein, the primary production target, and an exploration level was constructed from the access ramp to define the mineralization at this elevation. As of December 31 we had mined 1,082 tonnes of ore grading 121g/t Ag and 2.11g/t Au. That ore was transported to the processing plant at Guanajuato. Additional exploration crosscutting will be constructed on different levels from the access ramp in order to confirm the continuation of the Intermediate Vein to depth."
"Significant progress has been made at San Ignacio in terms of ancillary surface infrastructure. The access road to the mine portal was completed, a diesel tank station was installed on site to supply the mine equipment, and the construction of the electrical substation is underway. The waste dump was completed and a mechanical services workshop is under construction. Also, water and compressed air lines to supply the mine equipment were established."
Great Panther Silver controls another project that could potentially become a satellite mine for the Guanajuato mine. This project is called El Horcon (The Pitchfork). The company has been quietly chipping away at this project. With San Ignacio going into production in coming months, El Horcon is next in the project pipeline. Says Robert Archer:
"We are gathering information in order to apply for the necessary government permits to allow further exploration and development. The initial results on the Diamantillo, Diamantillo HW, San Guillermo and Natividad veins were encouraging and totaled 214,402 tonnes @ 3.22g/t gold, 68g/t silver, and 2.36% lead, or approximately 2.47 million silver equivalent ounces. This project has the potential to be a satellite to our Guanajuato Mine, just like San Ignacio, leveraging the excess capacity at our Cata processing plant. We expect the permitting phase could last 6-9 months."
Great Panther Silver has been almost to hell and back within just one year. The share price got obliterated in the first half of 2013 and Great Panther Silver under-performed in a sector that already was under severe pressure.
The company has improved its operational performance and has successfully adapted to the new normal silver price environment. Unlike most primary silver producers Great Panther Silver has organic growth opportunities that it intends to realize in 2014. This growth should come at very little cost since plenty of capacity exists at the Cata plant.
If Great Panther Silver catches up in lost ground, and realizes the described growth opportunities along the way then this company has a very good chance of outperforming peers in 2014.
We fully expect the upcoming earnings call to provide some impetus to the share price and will ponder initiating a position on dips prior to the call.
- The Q4 and full year 2013 earnings call in early March should confirm continuing improvement in financial performance based on low cash costs and the reported solid production.
- First ore from San Ignacio should be processed soon and together with news flow on mine development should provide positive catalysts throughout H1.
- Permitting for the El Horcon mine is scheduled to be completed within 6-9 months leading us to expect good news about this development project in Q3, hopefully along with positive exploration results.
First and foremost the silver price needs to be mentioned under this heading. This cantankerous item has been a thorn in the side of many investors, and might well continue to misbehave for some time to come. Great Panther Silver has a very strong balance sheet and has fortified operations to withstand further periods of volatility, but the share price would suffer regardless in such an event.
We expect the first quarter financial results to lag behind recent successful quarters since Q1 is traditionally the time of greatest expenses for the company. A drop in silver prices in coming weeks would therefore have a disproportionate effect on Q1 results.
The effects of the new mining tax legislation in Mexico are still to be determined. A portion of the new taxes is coming off before seduction of sustaining capital and will hurt low-margin producers more than companies with high margins.
Great Panther Silver has made progress controlling costs and has a promising organic growth project coming online in 2014.
We believe that Great Panther Silver has turned a corner and represents value for money at current share price levels for investors looking for exposure to silver.