Pan American Silver Corp. (NASDAQ:PAAS) is one of the top-producing silver miners in the world, and its future success will follow the rising price of the precious metal. The stock currently trades at $17.67 per share, well off its April 2011 high of $42.65. 2011 was the year where the average price of silver was $35.12 per ounce, a stunning 74% gain compared to 2010.
Silver is a rare and precious metal that is experiencing surging demand. On October 13, 2015, GFMS Thomson Reuters reported that the U.S. Mint was forced to place silver bullion coins on allocation in the 3rd quarter due to demand that exceeded availability. On October 13, Pan American Silver was trading at only $7.59 per share. In the past 9 months, the price of PAAS as climbed from $7.59 to $17.67, while the price of silver has risen from $16 per ounce to $20 per ounce. The company benefits from being able to sell silver at its "spot" price, since it does not hedge its prices. Most of its production derives from mines in Mexico - where the peso is depreciating and energy costs have fallen. The company is operating in a perfect storm of falling production costs and rising silver prices.
On April 13, Deutsche Bank (NYSE:DB) agreed to settle litigation brought by U.S. investors that it illegally manipulated the price of silver, to the detriment of investors. The Bank of Nova Scotia (Canada) (NYSE:BNS), and HSBC Holdings PLC (NYSE:HSBC) were also named in the lawsuit as engaging in silver price "distortion". The "London Silver Market Fixing Limited" company operated the Silver auction markets until August 2014. The question remains, how severely did this group restrain the price of silver? Here are the average silver prices during the years 2011-2014 (prices that would have been higher without manipulation).
- 2011 - $35.12 per ounce
- 2012 - $31.15 per ounce
- 2013 - $23.79 per ounce
- 2014 - $19.08 per ounce
(Silver Institute data)
Pan American Silver is flush with $177 million in cash, and unlike most competitors, is able to fund its current operations entirely without having to access outside capital. Few financial institutions will lend money to competitive miners until the price of silver moves much higher. Pan American continues to cut costs and selectively produces only from its most economic mines, mostly located in Mexico.
Normally when physical supply deficits occur, the commodity price moves higher. The supply of silver has been in a 3-year period of physical deficits. The reason the silver price declined is due largely to manipulation.
Silver is valued as a safe haven of money by people from the United States, China and India, among many countries. Silver coins such as my 1963 Kennedy half dollar is worth 20 times the face value, but a paper dollar is losing its value over time. The more paper money that is printed by global central banks, the faster our paper currencies (fiat money) devalue. Savvy investors are reacting to this global phenomenon by purchasing increasing silver bullion.
Pan American Silver also produces a sizable amount of gold, which is also rising in price ($1,350 per ounce and rising). Gold is also valued during challenging economic times, particularly during times of currency devaluation such as today. Silver price predictions range from $50 to $140 per ounce over the next several years. A silver price of $50 per ounce would likely bid up the price of PAAS to $60 per share. If the precious metal hits $100, we will likely see the stock at $120 (based on a 21% premium assigned to PAAS over the price of silver).
Disclosure: I am/we are long PAAS.
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.