Pan American Silver: Quality Silver Producer

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About: Pan American Silver Corp. (PAAS)
by: Don Durrett
Summary

Excellent risk/reward profile.

Large silver and gold producer.

Strong management team, with a history of being investor friendly.

Highly undervalued versus their potential cash flow at higher silver/gold prices.

My favorite silver miner at this time.

Stock Name

Symbol (US)

Type

Risk

Share Price (US)

FD Shares

FD Mkt Cap (6/8/2019)

Pan American Silver

PAAS

Silver

Moderate

$11.59

211M

$2445M

Back in 2008, when the miners crashed, the one stock that stood out to me that was severely undervalued versus its potential future cash flow was First Majestic Silver. It then jumped from $2 a share to $28 (from 2009 until 2011) without a discovery and without an acquisition. It jumped because they achieved their production and cost guidance and silver prices rose to $49.

Today, the stock that sticks out for being highly undervalued is Pan American Silver. I will get into the valuation below, but I find it amazing that a company of this quality can be so cheap versus its potential cash flow. While I don't expect it to have the stunning returns that First Majestic Silver had, its share price has a good chance of reaching $100 if the stars align and all of my expectations are fulfilled. Perhaps $100 is a stretch, but $50 to $75 is a solid expectation if we get to $100 silver and Escobal is producing.

Company Overview

Pan American Silver is one of the best silver producers. They get about half of their revenue from silver production, about a quarter from gold, and the rest in base metals (zinc, lead, and copper). They recently acquired Tahoe Resources. Amazingly, their FD market cap is about the same as it was prior to the acquisition at $2.5 billion.

The combined resources of Pan American and Tahoe are huge. They have about 1.5 billion oz. of silver and 25 million oz. of gold. In 2019, they will produce about 25 million oz. of silver and 450,000 oz. of gold. Plus, this does not include their Escobal mine in Guatemala that has had political issues. If Escobal resumes production, that adds 20 million oz. of annual production at low cash costs. Even without Escobal, this stock is very cheap versus their potential cash flow at higher gold/silver prices.

Investors are being very conservative. They don't like the debt that was assumed from Tahoe, which now gives them $360 million in debt and only $121 million in cash. They don't like the fact that Escobal is an unknown. And they don't like some of the locations, such as Guatemala, Bolivia, Argentina, and Peru. They also have producing mines in Mexico and Canada.

Investors can say that it is selling at around 25x free cash flow, which is not cheap. But in my opinion, the real value is in the upside potential for the long term. If silver mining stocks come into favor for investors, this stock could do really well. It's trading at $11 today, but reaching $50 would not be that big of a surprise at higher gold/silver prices. At its current valuation, Pan American might be the best silver miner from a risk/reward standpoint.

Project Information

Producing Countries (sorted by production)

Mexico

Peru

Canada

Argentina

Bolivia

Silver Properties

Resources: 1.5 billion oz. (90 gpt)

6 Operating Mines

La Colorada, Mexico (8 million oz.)

Dolores, Mexico (5.3 million oz.)

Huaron, Peru (3.6 million oz.)

Morococha, Peru (2.8 million oz.)

San Vicente, Bolivia (3.5 million oz.)

Manantial Espejo, Argentina (3.5 million oz.)

Escobal, Guatemala (20 million oz., currently not producing)

Silver Production and Costs

2019 production about 25 million oz.

Cash costs about $7 per oz.

All-in costs (free cash flow) about $13 per oz.

Gold Properties

Resources: 25 million oz. (.6 gpt)

3 Operating Mines

Shahuindo, Peru (150,000 oz.)

La Arena, Peru (120,000 oz.)

Timmins, Canada (155,000 oz.)

Gold Production and Costs

2019 production about 440,000 oz.

Cash costs about $800 per oz.

All-in costs (free cash flow) about $1,150 per oz.

Management

They have an excellent management team. The Chairmen is Ross Beaty, who founded the company in 1994. Pan American has always been shareholder friendly because of Beaty's influence. He has always been an investor first and miner second. That's how he became a billionaire.

Balance Sheet

Their balance sheet is okay with $120 million in cash and $360 million in debt. They inherited the debt from Tahoe Resources. Before the merger that had zero debt, which shows their cash focus.

Concerns

As with all silver mining stocks, I am concerned with the high-risk associated from the list of unknowns. This list includes lower silver prices, lower grades, mine production problems, higher taxes and royalties, and political/legal issues. For Pan American Silver, my main concern is with the silver price. This stock should be fine as long as the silver price doesn't crash. However, they do have several mines in locations that are not ideal. This added risk will lower their potential returns.

Future Valuation

Estimated future free cash flow (silver): 45 million oz. X $75 = $3.3 billion

Estimated future free cash flow (gold): 500,000 oz. X $1,000 = $500 million.

Estimated future market cap: $3.8 billion x 10 = $38 billion

Comparing the current market cap ($2.5 billion) to the future market cap ($38 billion), you get a potential 1,400% increase.

This return is on the optimistic side. They may not reach their production potential and investors may not give them a full valuation based on the location of some of their mines.

This valuation assumes that Pan American Silver will reach 45 million oz. of annual silver production, with all-in costs at $25 per oz., and future silver prices at $100. Plus, they reach 500,000 oz. Of annual gold production, with all-in costs of $1,500 and future gold prices at $2,500. This is a best-case scenario for the long term.

Conclusion

If I had to pick one silver mining stock, this would be it. I would expect them to reach a share price of at least $50 if we get to $100 silver. They reached $40 at $49 silver and it is a larger company now. I don't expect them to reach my $150 target, with an FD market cap of $38 billion. However, I think $100 is a legitimate target for the long term if Escobal resumes production. That mine is the key to their returns.

Note: You can check the data included in this analysis at Pan American Silver's Website.

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.