The Good And Bad In Pan American Silver's Q2 Earnings

| About: Pan American (PAAS)


Pan American Silver’s EPS was only 1 cent – 5 cents below expectations.

Higher production brought revenue up and offset the decline in silver prices.

If the company doesn't bring down AISC, its profit margins will continue to dwindle.

Pan American Silver (NASDAQ:PAAS) recently released its second quarter earnings report. Adjusted earnings per share reached 1 cent, which was 5 cents short of the market expectations. Let's examine the key factors related to the company's quarterly results and analyze the strong and weak points the reports presented.

Expanding output

In the past quarter, the company was able to increase its volume of silver and gold produced by 5.8% and 26.1%, respectively. This production volume is in line with the company's annual goals: This year, its volume of silver is estimated to reach 26.25 million ounces and 160,000 ounces of gold.

Source of Data from Pan American Silver

The higher output also brought Pan American Silver's sales to $200.8 million - a 14% gain year over year. So the higher output mostly in gold more than offset the drop in precious metals prices.

But the production volume isn't the problem the company faces. The lower silver prices and its high all in sustaining costs will remain the main issues curbing down the company's revenue and profit margins.

Bringing down AISC

The main issue will remain the company's efforts at bringing down its all in sustaining costs, or AISC. This rate came down by nearly $3.3 to $18.3 per ounce, as indicated in the table below.

Source of Data from Pan American Silver

This comes after Pan American Silver's AISC dropped to $15.5 in the first quarter. This recent rise in the quarter over quarter AISC is why the company didn't adjust its annual AISC guidance as it remained around $17.5 per ounce. This means, we could see high AISC in the coming quarters compared to the first. Considering the company's operating profit was only 8.4% in the first quarter, the current guidance of $17.5 per ounce will keep its profit margin razor thin.

The table above also shows the profit margin per ounce of silver produced. Even though the profitability grew to 6.9%, which is a 1.9 percentage points gain compared to the same quarter last year, this profit margin is very low. This is a key factor that could bring down the company's valuation down over the long run.

Silver prices

This issue isn't under the company's control and will continue to have a significant impact on its bottom line. The current price of silver is around $20 per ounce.

The low silver prices are also adversely impacting other leading silver related ETFs and stocks such as iShares Silver Trust (NYSEARCA:SLV) and Silver Wheaton (NYSE:SLW).

If prices don't pick up soon, Pan American Silver will start to take on additional loans to finance its projects such as expanding its Dolores mine in Chihuahua, Mexico. This expansion may cost around $105 million, according to early estimates.


Pan American Silver is taking steps in the right direction by keeping its production growing and bringing down its AISC, but these steps may not be enough to finance its capex and dividend payments. If the company doesn't show a significant change in its AISC, this could have an adverse impact on the company's stock.

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