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Great Panther Silver: Avoid The Laggards

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About: Great Panther Mining Limited (GPL)
by: Taylor Dart
Taylor Dart
Long/short equity, momentum, gold & precious metals
Summary

Despite the price of silver up double-digits this year, Great Panther Mining's share price has fallen off a cliff.

The company continues to have a challenging year with two consecutive downward guidance revisions, and more issues at their newly acquired Tucano Mine.

Despite the higher silver price, Great Panther Mining is one of the only companies in the Silver Miners group without positive annual EPS.

I see the stock as an Avoid at any level, and believe any 30% rallies are opportunities to exit the stock.

Great Panther Mining (GPL) has long been a laggard in the Silver Miners group (SIL), and when net losses began to mount again in FY-2018, it was time to pull the plug. The stock has managed to underperform both silver (SLV) and the Silver Miners ETF massively this year, with a (-) 34% year-to-date return vs. a 9% return for silver, and a 16% return for the Silver Miners ETF.

The catalyst was the most recent pit-wall failure at their new Tucano Mine in Brazil, a self-inflicted wound after the company tried to reduce the strip ratio with insufficient ground monitoring at their UCS Pit. Unfortunately, to add insult to injury, the company is now having issues at its other pits, which were supposed to replace production. This has prompted downward guidance revision, and this should lead to costs coming in at the high end of their guided range for FY-2019. Given that Tucano is the only mine in the company's portfolio worth writing home about, these issues are a potential coup de grâce for the stock. While bounces are possible, even when stocks are in bear markets, I would view any rallies as selling opportunities. Bottom-fishing strategies may work for great companies being unfairly punished, but I would not stick my fishing pole in the water in hopes of catching Great Panther stock.

(Source: TC2000.com)

It's been a challenging year for Great Panther Mining stock, to say the least, and unfortunately, this dispiriting year has been shouldered by Beadell Resources (OTCPK:BDREF) shareholders as well. Great Panther acquired Beadell Resources in Q1 of 2019, after doing due diligence on their Tucano Mine in Brazil. The hope was to turn around operations and compensate for their Mexican operations, where there are barely enough margins to generate free-cash-flow. After a pit-wall failure, and new issues at the company's other Tucano pits that have led to a 40% drop in Great Panther's share price, Beadell Resources shareholders have gone from the frying pan into the fire. Beadell's share price performance wasn't impressive by any means either before Great Panther acquired them, but this likely isn't the fresh start that shareholders were looking for.

(Source: Pixabay.com, Author's Edit)

(Source: Company News Release)

As we can see from the company's FY-2018 results, the company's operations at its silver mines in Mexico and Peru were not cutting it. The company reported all-in sustaining costs last year of $15.72/oz, and this was barely low enough to generate any margins. Based on the need for a better-producing asset, Great Panther announced it would acquire Beadell Resources with its Tucano Mine and Corriancha Project last September. The hope was that this would solve their cash-flow problems. While the purchase price was reasonable at $105 million and issuance of just over 100 million of Great Panther's shares, this led to significant dilution, with the share count now over 275 million shares, from roughly 165 million shares previously.

The biggest issue for the Tucano Mine was outlined in the Q3 earnings call in more depth, as the company tried to reduce the strip ratio, and this resulted in a pit-wall failure. In my opinion, this was avoidable, and the company is lucky that there was no one seriously injured when the failure occurred. The pit-wall failure came as a result of the company removing some of the catch benches in the Urucum South Central Pit, as well as steepening the benches as they went down the wall. In addition to being ambitious with the pit slope, Great Panther didn't adequately plan in terms of monitoring, design, and review when adjusting the mine plan. This was relayed in the most recent conference call by CEO Jeffrey Mason.

(Source: Kuchling.com)

The Urucum South Central Pit was pivotal to Q4 production, and since its failure, the area has been quarantined with work now needed on a geotechnical basis to assess the situation. This led to a downward revision in guidance in October from 130,000 ounces at the mid-point to 132,500 ounces at the mid-point. Investors got another dose of bad news last week, as we found out that we would see yet another downward revision in guidance. The most recent stated guidance has dragged production down further to 31,000 to 33,000 ounces for Q4 2019, from the 39,000 to 44,000 ounces previously to deliver 131,500 ounces at the mid-point. This is undoubtedly disappointing as it's a nearly 25% drop in planned production from the 130,000 ounces previously being guided for by the company.

(Source: Earnings Call Presentation, Author's Photo)

If we look at the new 2019 outlook, revised guidance for Tucano is 102,000 - 104,000 ounces from the March 5th acquisition closing to year-end, and this has dropped total gold-equivalent production for Great Panther down to 145,500 ounces at the mid-point. Furthermore, this will affect all-in sustaining cash costs, and I expect them to come in near the high end of the range at $1,280/oz for FY-2019. This should lead to barely 10% margins, and will likely see the company post yet another net loss for the year despite a massive improvement in metals prices.

(Earnings Call Presentation, Author's Photo)

The big issue now with the Tucano Mine is that we have 160,000 ounces of reserves in jeopardy at the Urucum South Central Pit [UCS Pit] if the pit wall failure issue can't be remedied. Worse, the pits where Great Panther has transitioned to, in the meantime, are also giving the company trouble. Urucum North and Urucum South are experiencing increased pit congestion due to more constrained mining geometries, as well as smaller blasts needed to separate ore and waste to reduce dilution. While these issues are nowhere near as significant as the UCS Pit wall failure, we've now got uncertainty as to whether the company can generate much cash flow from Tucano to bolster their balance sheet. Based on Great Panther's net debt of roughly $6 million and significant expenditures next year related to exploration, these issues are the last thing the company needed. A steady stream of cash-flow would have been quite helpful to reduce the required dilution if the company has to sell shares either through financing or ATM [At-The-Market Offering]. Unfortunately, given the recent adverse developments, this is not the case.

If we take a look at Great Panther's annual EPS below, we can see that they have posted net losses in six of the past seven years, and are expected to post a net loss of $0.06 per share for FY-2019. While FY-2020 estimates are sitting at $0.02 per share currently, I would argue that these estimates are ambitious as they were posted before the recent downward revision to guidance. Ultimately, I would be surprised to see the stock put up positive EPS of even $0.01 next year. However, even if Great Panther does manage to put up positive EPS of $0.02 for FY-2020, it is trading at a forward P/E ratio of roughly 23x based on the current share price near $0.47. This is only a slight discount to most other gold majors that are diversified and have significant free-cash-flow.

(Source: YCharts.com, Author's Chart)

Given that many other gold majors have substantial earnings growth and are seeing positive annual EPS even at $1,200/oz, there is no reason to go bottom-fishing for Great Panther Silver at similar valuations. If there are several different miners available at 27.0x - 31.0x forward earnings multiples like Barrick Gold and Newmont Goldcorp (NEM), paying 23x for a miner with negligible margins seems unnecessary. At all-in sustaining costs of $1,384/oz for the first nine months of 2019 for Great Panther, the company has some of the lowest margins in the industry currently.

(Source: Management Discussion & Analysis, Great Panther Filings)

Based on the fact that Great Panther has negligible margins to put up positive earnings per share and is already at risk of not having enough capital for its FY-2020 capital expenditures, I see the stock as extremely high-risk. The market hates uncertainty, and this is especially true when the uncertainty is surrounding a company's flagship asset. With a high likelihood of an increased share count next year, I see it as unlikely that Great Panther will generate more than $0.01 in positive annual EPS.

If we look at the below daily chart, there isn't much to like here either. Great Panther has strong resistance overhead at $0.70 and $1.15, and I would consider any rallies that can't reclaim the $0.70 level to be noise. This is because these rallies would be occurring below prior broken support, and they would also carry a P/E ratio of over 50 based on the $0.01 in EPS I expect as the ceiling for FY-2020. Besides, the next support level does not come in until $0.36, which is another 20% below current prices.

(Source: TC2000.com)

While bounces are possible for Great Panther after a steep drop, I do not see this as a stock worth betting on, even at current prices. I would view any rallies back to the $0.65 plus area as selling opportunities, and believe that capital is better utilized in gold miners without mine issues, and with positive earnings per share. Many value investors will argue that the stock is cheap at current levels, but the problem is that it's cheap for a good reason. The same was said of Guyana Goldfields at over $1.00 per share with similar mine operational issues, and it has since plunged another 50%. Based on this, I continue to rate Great Panther as an Avoid.

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.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.