Thursday morning, Pan American Silver ((NASDAQ:PAAS) released a strong earnings report that sent shares soaring more than 5 percent. Pan American Silver owns and operates several silver mines throughout the Americas. Many of these mines also produce some gold as well as copper, lead, and zinc. Investors have seen the shares fall substantially over the past couple of years in the face of falling silver prices. However, for those investors who believe that the price of silver has turned around, this recent earnings release is good news that should send the shares higher.
Despite lower silver prices and related write-downs that led to a loss for 2013, Pan American Silver was able to increase its silver production to 26 million ounces up from 25 million ounces a year earlier. Furthermore, costs were down which helped dampen the blow from the declining silver price. All-in production costs came in at just over $17/ounce, down 33 percent year-over-year. This means that the company was able to operate profitably for the entire year and that it should be operating profitably now with the silver price at $21/ounce. The year 2013′s net earnings were negative due to write-downs relating to lower silver prices, but cash flow came in at $120 million, or $0.79/share.
Pan American Silver has set itself apart from its peers in that it has devoted a lot of its cash-flow to dividends and share repurchases as opposed to growth. Thus going forward the company’s silver production will remain around 26 million ounces, although it will pay in industry –high dividend yield of 3.4%, which is far higher than other silver mining companies or the S&P 500, which pays a 1.9% dividend.
It should have no trouble distributing this capital in the following year with its strong working capital position of nearly $700 million versus its market capitalization of just $2.2 billion. Also, costs are expected to be down slightly next year. While operating costs will rise by about $1.50/ounce, the company’s all-in production costs should be about $16.50, which means that at $21/ounce silver it should be generating $4.50 per ounce of silver produced, or $117 million before taxes. If the price of silver rises modestly to its resistance level of $26/ounce this figure skyrockets to $255 million. Clearly, Pan American shares are a good way for investors to leverage their exposure to the precious metal.
One issue that wasn’t adequately addressed in the news release that I think is important is the state of the Navidad project in Argentina. This is a huge project that is in the permitting stage just before construction. The company has had trouble getting permission to develop this mine and, as a result, it has just been sitting idly. Investors need to know what the company’s plans are for the Navidad project. Currently, the company is sitting on a lot of cash, and presumably some of it is meant to go towards this project’s development whenever this occurs. Management needs to either pursue this matter more aggressively or to give it up and find another use for this capital.
Barring this issue, Pan American appears to be a solid investment, trading at a depressed valuation due to the weak silver market. Investors looking for deep value or rapid growth should probably look elsewhere, but investors looking for an investment with cash flow, relative stability, and good value should consider Pan American Silver after this solid earnings release.