Pan American Silver: Is Now The Time To Buy?

| About: Pan American (PAAS)


The last time I covered Pan American Silver was in May and I maintained a hold rating.

Q4 production numbers are out and I dig into the metrics to see if they support changing my rating.

We need to continue to focus on costs and the prices of metals.

The last time I covered Pan American Silver (NASDAQ:PAAS) was in May and I maintained a hold rating. Well we all know where gold and silver has gone since then. I have to say that this was once one of my favorite silver miners. The company has grown its silver production tremendously over the last decade and it was one reason I liked the name. Of course, because the finances were just too dire, I could not recommend a buy. I'd rather have confirmation of a turn-around rather than bottom fish. And those who have gone bottom fishing in this sector have lost dearly. That said, I continue to watch the sector, waiting for not only a turn-around, but to gauge how the companies are weathering the down turn. Many have turned to increasing production while trying to lower costs and that is what Pan American Silver has done.

Just this afternoon we learned that the company produced 6.79 million ounces of silver during this last quarter of 2015. This helped the company produce a record 26.12 million ounces of silver. On top of that, the company produced 48,200 ounces of gold during Q4 2015, and so that means the company has set a new record for annual gold production at 183,700 ounces.

Of course, production alone isn't necessarily what you should look at. I have erred on the side of producing more, and being cautious about sales. Some want miners to keep the product in the ground until prices rebound. I'd like to agree, but the company needs to generate revenues somehow, while cutting costs. The latter is a key metric. Miners have been working hard to reduce costs. The company has released that net of by-products its consolidated cash costs are $9.09 per ounce for the fourth quarter. For the year 2015, these costs are approximately $9.70 per ounce, which is great because it was nicely below the guidance of $10.00 to $10.50. Further, this is 15% lower than last year's costs. What is great is that the two highest producing mines, La Colorada and Dolores produced at some of the lowest costs, coming in at $7.41 and $9.28 per ounce. Another strong mine was Manatial Espejo with $7.33 per ounce in costs.

It is important to note that for the year the company's copper production rose 67% to 15,000 tons. This was mostly due to mine sequencing into higher copper grade ores in Peru, as well as higher throughput obtained at the Morococha site. Despite rising gold, silver and copper production, zinc production declined 7% to 40,600 tons, while lead production declined 3% from 2014 to 14,600 tons.

I was pretty happy with these results and look forward to the financial report. That said, I was disappointed with production guidance volume, though pleased with cash costs. In 2016, annual silver production will actually decline to 24.0 million and 25.0 million ounces, while gold production is expected to be between 175,000 and 185,000 ounces. It will also produce between 46,000 and 48,000 tons of zinc, 15,000 to 15,500 tons of lead and 13,000 to 13,500 tons of copper. As far as costs, the company is projecting production costs to range from $9.45 and $10.45 per ounce of silver, net of by-product credits.

The bottom line here is that rising production is a good thing so long as it is being done cheaply and the company is wise in its selling practices. I am disappointed that after setting a record the company foresees a decline in production. I am also concerned with the ongoing fiscal issues plaguing miners and when combined with administrative expenses, expect another loss for the company. These continued losses are why I am concerned. Q1 2016 has looked a little better considering the metals rebounded in response to the extreme selloff. Although it has been 7 months since my last check in with the company, I think shareholders should sit tight and monitor the company's costs as well as the price of silver and gold. I maintain a hold rating.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles, which are time sensitive, actionable investing ideas. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.