Pan American Silver Is Now Debt Free

Summary

• The Canadian company reported a fourth quarter profit of $168.89 million ($0.80 earnings per share). The adjusted income was $0.57 per share or $120.5 million.
• Quarterly production was 152.9K Au Oz and 4,872K Ag Oz, or a total production for 2020 of 522.4K Au ounces and 17.3 million Ag ounces.
• PAAS should be accumulated at or below $32.
• Looking for a helping hand in the market? Members of The Gold And Oil Corner get exclusive ideas and guidance to navigate any climate. Get started today »

Source: Pan American Silver Corp. La Colorada Mine.

Investment Thesis

Vancouver-based Pan American Silver Corp. (NYSE:PAAS) released its fourth quarter of 2020 on Feb. 17, 2021.

Pan American posted better-than-expected earnings in the fourth quarter as the surge in gold and silver prices mitigated the negative effects of COVID-19 induced mine suspensions and lower ore production. However, gold and silver production was below guidance.

The company is a good play in gold and silver (which took the spotlight recently).

However, as you can see, the market is extremely volatile and unpredictable. Hence it is crucial to trade a large part (about 40%) of your short-term position. I call it trading your long position.

PAAS follows the iShares Silver Trust ETF (NYSEARCA:SLV) and is up 56% on a one-year basis, as we can see below.

Data by YCharts

Reminder: Pan American Silver is now more a gold miner than a silver miner after acquiring Tahoe. It was a timely acquisition that paid off handsomely.

However, the recent rally in silver, which is now above $24, will benefit the stock even, so the silver price has retreated from its high at $29+ in August.

PAAS - Company Balance Sheet And Production In 4Q 2020 - The Raw Numbers

Pan American Silver	4Q'19	1Q'20	2Q'20	3Q'20	4Q'20
Total revenue in $ Million	404.38	358.43	249.51	300.41	430.46
Net Income in $ Million	21.44	-76.81	20.06	65.74	168.89
EBITDA $ Million	135.76	57.18	87.72	148.91	239.86
EPS diluted in $/share	0.25	-0.37	0.10	0.31	0.80
Operating Cash flow in $ Million	129.47	114.05	62.75	114.94	170.57
CapEx in $ million	50.32	55.75	30.34	38.83	53.64
Free Cash Flow in $ Million	79.15	58.30	32.41	76.11	116.94
Total cash $ Million	238.34	239.17	261.57	231.63	279.06
Total debt in $ Million	316.21	299.23	299.23	129.8	0
Dividend per share in $	0.05	0.05	0.05	0.07	0.07
Shares outstanding (diluted) in Million	209.87	209.98	210.25	210.36	210.38
Gold/Silver Production	4Q'19	1Q'20	2Q'20	3Q'20	4Q'20
Gold Production K Oz	173.9	156.1	96.6	116.9	152.9
Silver Production M oz	6.622	5.561	2.791	4.087	4.872
AISC $/Oz by-product Silver	11.37	13.1	12.54	6.01	10.37
Gold price realized $/Oz	1,479	1,580	1,708	1,914	1,874
Silver price realized $/Oz	17.84	16.60	16.58	24.77	24.72

Click to enlarge

Data Source: Company filing

Silver And Gold Production Details For The Third Quarter of 2020

Note: Please read my preceding article about the Q4 production.

1 - Total Gold/Silver production

Quarterly production was 152.9K Au Oz and 4,872K Ag Oz, or a total production for 2020 of 522.4K Au ounces and 17.3 million Ag ounces. Production for 2020 was below guidance due to the disruptions caused by COVID-19.

The Huaron and Morococha operations were halted for about three months through the third quarter of 2020. The Timmins operation in Canada continued to operate throughout 2020 at reduced rates to accommodate COVID-19 related protocols.

Details per mine below: Also, the company produced zinc, lead, and copper, as indicated below.

AISC (Ag) for the fourth quarter was $10.37 per ounce, and AISC (Au) was 1,023 per ounce.

The company posted 2020 silver and gold production of 17.3 million ounces and 522.4K ounces below guidance. It was a disappointment.

In the preceding third-quarter results, Michael Steinmann, CEO, said in the Q3 conference call:

We are maintaining our forecast for gold production of 525,000 to 575,000 ounces in 2020. We are expecting increased gold production in Q4 as replenishment of inventories on our heaps was complete in Q3. We do expect similar gold production from our Timmins operation in Q4 as we continue to address geotechnical conditions at the Bell Creek mine, where we have discovered wide zones of new resources adjacent to reserves.

Another matter is that the Escobal mine is still frozen by a bitter consultation in a country with a weak legal frame. The last news that I have read is not encouraging, and I wonder when the mine will be authorized to restart, if ever?

Patience will be needed for the shareholders who own the contingent value right ("CVR"), trading under PAASF around $0.93 now, which is high.

Unfortunately, I do not see a quick resolution for the mine and a potential restart within two or three years. However, PAASF had jumped more than 30% since its lows in December 2020.

2 - 2021 Guidance

Source: Presentation

The company is guiding higher in 2021 with a total of 22.5Moz - 24.0Moz for silver and 605K - 655.1K Oz for gold compared to 18 -19 Moz for silver and 525K - 575K Oz for gold in 2020.

CEO Michael Steinmann said in the conference call:

We are expecting production in 2021 to improve markedly over 2020 based on assumption that the impact of COVID-19 will diminish over the year as indicated in our guidance for 2021 issued on Jan. 19. That means production will be back-end loaded to the second half of 2021.

Pan American Silver: Financial Analysis

1 - Total revenue was $430.46 million in 4Q'20.

The Canadian company reported a fourth-quarter profit of $168.89 million ($0.80 earnings per share). The adjusted income was $0.57 per share or $120.5 million.

Net earnings in Q4 2020 were driven by record mine operating earnings of $137.2 million and the recognition of deferred income tax assets, including $41.0 million relating primarily to mine life extensions at the Timmins and La Arena operations.

The company announced a 40% increase in the quarterly dividend to $0.07 per share or a yield of 0.88%.

2 - Free cash flow was $116.94 million in 4Q'20 Note: Generic free cash flow is the cash flow from operation minus CapEx.

The graph above indicates that the company managed a free cash flow of $116.94 million in 4Q'20. 2020 free cash flow is $283.76 million.

The Board of Directors has approved a cash dividend of $0.07 per common share, or approximately $14.7 million in aggregate cash dividends, payable on or about March 11, 2021, to holders of record of Pan American's common shares as of the close on March 1, 2021.

3 - PAAS is debt-free

In 2020, Pan American repaid a net of $275 million on its revolving credit facility. On Dec. 31, 2020, the company had cash and short-term investment balances of $279.06 million, working capital of $495.2 million, and no amounts drawn on its $500 million credit facility.

Conclusion and Technical Analysis

Pan American Silver is a good long-term investment. The takeaways for 2020 are that the company took care of the debt and doubled the dividend.

The apparent weakness that the stock is experiencing now relates to the price of gold and silver weakening sharply from their high.

Unlike many analysts, I find this downtrend quite normal and healthy. If we look at the 10-year chart for gold (adjusted from inflation), we can see a bullish cup and handles pattern. We are now in the handle part, in search of lower support—no big deal. Hence, use these weaknesses to accumulate and wait for the rebound that will follow.

Technical Analysis

PAAS forms a symmetrical wedge pattern with resistance at $33 and support at $30.35. The symmetrical wedge is considered bearish if the pattern is entered the support, but it is not the case here. The short-term trading strategy is to accumulate between $31.50 and $30.70 and see if support is holding. The first selling zone is about $33-$34, where it should be reasonable to take 30% off.

Watch the gold and silver prices like a hawk.

Note: If you find value in this article and would like to encourage such continued efforts, please click the "Like" button below as a vote of support. Thanks!

Analyst’s 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.

I started again in a mid-term position and will accumulate on weakness.

Comments

[Peter 81]

If we get the week to close >$35, that'd be great.

[Fun Trading]

@Peter 81

Watch tomorrow for profit-taking...

[Peter 81]

@Fun Trading Probably need some positive action in silver to get it done. Or Escobal...

[gret]

Nice

[6228371]

"PAAS should be accumulated at or below $32."

Why? Why $32? I view PAAS shares as being worth $45+ with Escobal in operation, however perhaps only around $20 or less without Escobal. A price of $32 is around midway between these two scenarios. At around $32, Imo PAAS shares are too risky. The stock was downgrades by Deutsche bank on 1/13. I'm long PAASF rights. I used to have many PAAS shares, but sold them and put around 1/3 of the profits in PAASF rights, and bought many SBSW shares. Here is a chart of the ratio of SBSW divided by PAAS. A rising chart shows SBSW outperforming PAAS. SBSW also pays much higher dividends than PAAS. SBSW will likely have a dividend yield of over 6% of the current price for this year, vs around 1% for PAAS. I have many SBSW shares now, many PAASF rights, and no PAAS shares. If PAAS declines to around $22 I might buy a few PAAS shares, and much more if it gets under $20. PAAS is now trading at over 16 times 2021 expected earnings vs around 5x for SBSW. SBSW is now the largest miner of both rhodium and platinum, second largest palladium miner, and also gets around 1/4 of its revenue from gold. After Escobal reopens, PAAS might become the largest silver miner. For now though they get more than twice as much revenue from gold than from silver.
Rhodium keeps hitting new all time highs. The gold price has been weak lately.

https://schrts.co/IaTGeBCV

www.marketwatch.com/...

www.marketwatch.com/...

[6228371]

I advised people last summer to sell the PAAS shares at around $36, buy 10 PAASF rights at around 75 cents for each PAAS share sold, and put the rest of the money in SBSW shares at around $11. Holding those PAAS shares gave a negative return as they declined from $36 to $31, however making the exchange outlined above would now give around $60 value for each PAAS share exchanged then. Lets see how the value of 2.6 SBSW shares plus 10 PAASF rights compares to the price of a PAAS share as time goes by. When Escobal reopens, the 10 PAASF becomes 0.497 PAAS.

[Fun Trading]

@6228371

Be careful not to fall in love with a stock or a sector, it makes your argumentation weak.

[Fun Trading]

@6228371

PAASF could be a potential but it is not for me.

[Doc 224899]

If we take a longer view of the chart, we might think of the period since July 2020 as a consolidation stage, in a trading range, which would be necessary to protect all the gains that grew so rapidly from March 2020 to July 2020.

Or, we can think of it as a period of increasing price volatility, crashing through support, building up to a disastrous crash.

Your call, oh Great And Powerful Oz.

[Klarminite]

If you follow the news more carefully, you can make sense of the PAASF trading.
www.bnamericas.com/...

[Fun Trading]

@Klarminite

Thank you for the link.

[Easy Al]

@Fun Trading The natives who oppose the operation of Escobal mine appears to be advised by some anti mining NGOs. The publications by those organizations view every well intentioned move with big suspicion. They even slammed PAAS for providing the community around the mine with face masks, food and other essential things during the covid - 19 break out last year.

[Fun Trading]

@Easy Al

They are not playing a fair game, as you know. Of course, there are issues about water pollution, etc., but the situation is clearly politicized and far from helping the community. I am sure this problem could be solved in less than a week, and many people could be working as we speak earning a good salary.

[dnikosd]

Nice article, PAAS is a buy under 32$.

[Fun Trading]

@dnikosd

Thank you.

[Miners to the Moon]

@dnikosd, congratulations - your orders were filled.

[Chris Guenther]

Agreed, this is a great way to play the silver bull market which has a long way to go IMO, with a quality company with great assets and lots of upside

[SA-NJ52]

@Vooter

I don't remember, but I am sure it was something shiney...LOL.

@gandc

[BuffteethrBlog]

Great company and good article.

[Fun Trading]

@BuffteethrBlog

Thank you.

[Doc 224899]

The bid for PAAS is 30.68 right now, PAAS is debt free, silver dropped below 26, gold is falling, tech is tanking, and the sky is falling. The only question is how will we know when the bottom is in.

[jimklawyer]

@Doc 224899

This looks to me like just some normal rotation and high level nervousness. Growth and momentum plays, at least today, are out. Tech has undperformed since last October A few food stocks, say, BGS and TSN, are in, at least today.

When interest rates start moving up and the price of crude oil does too, what are investors to think? They probably think that inflation and/or slower growth are on the horizon. As for tech, if distance learning in schools may soon be a thing of the past, for the most part, and nearly everyone who needs a new device has one, that may account for the relative weakness in tech.

[Fun Trading]

@Doc 224899

It will happen and you will know it without a doubt. Volume and RSI help.

[User 38801156]

@Doc 224899 . One excellent indicator of when bottom is in , is the level of participation in articles like this one. I can notice that the number of comments has shrunk to extremely low levels over the past few weeks. It's as if no one is interested anymore . This shows a extreme bearish sentiment, Even though gold ,silver price is way above the march 2020 price.

[jimklawyer]

Accumulate PAAS below $32? Today it's $30 and change. My read on support levels is $27-$28 but incrementally I agree, at $30-$31 PAAS is a bargain.

The price of silver is, as always with PAAS, a determining factor--note, not *the* determining factor now that PAAS is debt free. All of which is just my humble opinion, on the fundamentals and technicals.

[Fun Trading]

@jimklawyer

Yes, accumulation always precedes support. In my chart above I have indicated an accumulation between 31.50 and 30.70. It is what I have done now.

[Miners to the Moon]

@Fun Trading, excellent piece - I did the same, adding more @ $ 30.90 to an already full position.

[Fun Trading]

@Miners to the Moon

Thank you. Gold should be close to the bottom now. Watch for a big jump with high volume at one time maybe next week.

[SA-NJ52]

I followed Josh Brown's advice yesterday. He gave up on PAAS and bought the metal.

I have done the same thing for the same reasons he gave.

@gandc

[Fun Trading]

@gandc

What metal?

[Vooter]

@Fun Trading
Ummmm...silver?

[Fun Trading]

@Vooter

PAAS is a gold miner as well...

[BlueTower5000]

Excellent summary. I keep adding but I’m not hopeful in a gold/silver rebound until the Federal Reserve steps in with another QE package upgrade. Sad state of affairs when a $2 trillion dollar stimulus package isn’t providing more rocket fuel to get back to August highs. Accumulate and wait I suppose.

[Fun Trading]

@BlueTower5000

Thank you. Yes, gold is weak and the gold/silver miners are weak as well. I see it as an excellent accumulation period.