Next week Pan American Silver (NASDAQ:PAAS) will report 2016 net earnings of an estimated $.64 per share based on my analysis from public quarterly company releases. This turnaround from their loss of $1.49 per share in 2015 (company 2015 annual report), is remarkable enough, but one has to look at the accumulating piles of cash generation to truly appreciate the value of this stock that currently trades at $21.15 per share. The company had $245 million in cash on the balance sheet through the third quarter and will likely report more next week.
In the previous year (2015), the company ran a positive cash producing business (net cash of $88.7 million) but recorded a net adjusted loss of $58 million. That year was full of impairment charges based on lower silver and gold prices, but 2016 conditions have improved considerably and costs have fallen dramatically.
Company realized silver prices have moved up from an average of $15.53 per ounce in 2015, to an estimated $17.09 in 2016, and gold prices climbed from an average of $1,162 per ounce to an estimated average of $1,231 in the same period. A 10% and 6% uptick in silver and gold prices is worthy enough, but the company also will announce dramatically lower All in sustaining cash costs (AISCOS) per ounce -to an estimated 26% drop-from $14.92 per ounce in 2015 to an estimated $11.00 in 2016. I am relying on company preliminary operating results that have proven to be both conservative and very accurate.
Pan American has reported operating activity net cash of $28.4 million, $53.4 million, and $102.3 million during the first three quarters of 2016 , and I estimate they will report net cash of $42 million in their upcoming 4th quarter release. These positive cash builds are exceptional among most all other miners. The company will be able to continue to acquire silver and gold mines on attractive terms with such a strong balance sheet. The company recently announced their intention to purchase of 100% of the Joaquin project from Coeur Mining for $15 million in cash and $10 million in stock. The project is located within 45 kilometers of their existing Manantial Espejo mine in Argentina-where mining costs have plunged due to President Macri's removal of punitive taxes on mining.
The global demand for gold and silver continues to be strong. In December, China reportedly purchased 158 tons of bullion gold from Switzerland, according to Swiss Federal Customs Administration. This is a huge 508% increase from about 31 tons in November. Gold and silver prices tend to move up together, being among the most sought after precious metals and money assets, that offer safe havens against the paper currencies that are being devalued across the world.
In my previous article on this turnaround story, I suggested that the stock price at $16.57 was quite a bargain relative to its surging profits. The stock has moved up to $20.56 (2/7/17) and its prospects continue to improve. BMO Capital forecasted that silver price will move to an average price of $23.63 (38% rise from average price last year) in 2017 and that gold will average $1,413 per ounce. Pan American Silver is on an epic roll as its cash flow is astounding. I estimate the stock price should move to $35 per share as physical demand continues to push higher in 2017.
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.