Pan American Silver: Has The Potential To Improve Performance Significantly (NYSE:PAAS)

Introduction

The Green Dream, Carbon Zero Targets, Sustainability and Renewable Energy are all part of everyday parlance. The importance of the need to harness wind power and solar power to meet our ever-increasing demands for energy is constantly being highlighted. Silver is a ‘must have’ metal in these operations due to its resistance to corrosion and its superior ability to conduct electricity. When we add the additional demand for silver for EVs, telephones, medical applications, computers, and their associated monitors, the importance of silver comes into focus.

In order to get a ‘feel’ for the demand for silver, we turn to the Silver Institute whose recent publication entitled: Metals Focus Presentation on World Silver Survey 2024 (PDF) Published 2024, from which we can glean the following:

The following chart compares supply and demand, and it clearly shows the that demand has outpaced the supply over the last few years. There are a myriad of factors driving the demand side which would be too lengthy to go into in this article but will be the subject of a standalone analysis in the near future.

When demand outstrips supply, the tendency is for the price of the underlying commodity to rise, and this appears to be true for silver as the price per ounce flirts with $30.00. This in turn is good news for the producers, who have struggled with lower prices for some time now.

Today we will take a quick look at just one silver mining stock, Pan American Silver Corp. (NYSE:NYSE:PAAS) a company that has been prominent in the silver mining space since 1995 and is one of the world’s biggest producers of silver.

The reason for bringing this stock to your attention is that it has recently sprung into life, with the stock’s value increasing by 36.31% over one month.

As readers know I do own physical silver which I acquired a long time ago and my focus these days is firmly on the producers who offer a leveraged play in a rising silver market.

Past experience has taught me that good quality silver producers usually make gains in multiples of 2X or 3X the percentage gains of the underlying commodity.

As an example of this divergence, we can glean from the investor’s presentation of 02 April 2024 that the cash costs of silver production are $13.07/Oz, with an AISC of $18.17/Oz. Now, when silver was priced at $20.00/Oz that would generate a profit of $1.83/Oz. Today’s spot price for silver is around $27/Oz, generating a profit of around $9.00/Oz which is almost a five-fold increase. The charts show us that silver has increased in price from early March when it traded at around $22.00/Oz to today’s price of around $28.00/Oz, registering an increase of 36%. PAAS over the same time period has increased from around $12.00 to $19.00 registering an increase of around 58%. So my expectation is that as this Silver Bull Market develops, Pan American will do very well.

Fundamentals

Pan American Silver Corporation is a mining company based in Vancouver, British Columbia, Canada and derives its income from mining operations in Canada, Brazil, Bolivia, Mexico, Peru, Argentina, and Chile. It should be noted that this company also owns the Escobal mine in Guatemala that has been dogged by environmental issues which need to be remedied in order for this mine to be operational. As this mine is considered to be one of the largest silver mines in the world, it is critical that it comes back into production as soon as possible. A time frame for the restart may become available in the Q1 reporting period, which would be useful in ascertaining the possible contribution that this mine will have to the overall profitability of this company.

The following table compares Pan American Silver Corp with four other stocks in the silver space. It is clear that investors have taken a keen interest in this sector and that Pan American features strongly with a 36% capital gain in one month.

Financials

Pan American has a market capitalization of $6.954B,a 52-week trading range of $12.16 – $20.60, and an EPS (TTM) of -0.32. The liquidity is good with an average volume of 4,615,188so nimble traders can enter and exit out of this stock on a short-term basis.

In terms of future potential, they have 486.8 Moz of silver and 7.7 Moz of gold in reserves, coupled with a large exploration portfolio. They also have a good cash position of $441M and a revolving credit facility, which takes their total available liquidity to $1,191M. As they have shown with the acquisition of Yamana they do have a keen interest in M&A and further acquisitions should not come as a surprise to us.

Taking a quick look at Seeking Alpha Quant Ranking, this stock has a EPS (FWD) 0.42 and a PE (FWD) of 45.95 and is Ranked in Sector 128 out of 281, which is disappointing. Pan American is also ranked in sixth place out of the top nine silver producers, so there is a lot of room for improvement. In terms of the top material stocks, it is ranked 128th out of 279 and has a valuation of C-. All in all, this assessment suggests that Pan American is a long way from being the best in class. By way of comparison Silvercorp Metals (SVM) is placed 17^th in this sector. In terms of a consensus, we can glean from SA Quants that SA Analysts have it as a sell, Wall Street as a buy and Quant as a buy. It should be noted that as investors we are all very different in many ways, such as our aversion to risk, which ranges from the most conservative to the most cavalier of investors, so as always do your own due diligence.

In terms of risk, I become slightly nervous when the euphoria surrounding the EV market is nothing but blue skies ahead. A number of manufacturers and countries have been supportive throughout the introduction of these vehicles via generous subsidies, which I imagine will come to an end sooner or later. Also, as they are relatively new, and their longevity has yet to be proved and if their life span is short to the point that it affects sales then demand may become more subdued, having a knock effect on the demand for silver. Finally, if there is a global recession, then the populous may tighten its belt and ‘make do’ with their current vehicle in order to reduce their outgoings.

It will be interesting to see what Pan American First Quarter 2024 Results look like when they are reported on the 8^{th of} May 2024 as a week can be a long time in the life of a silver producer.

Pan American is listed on the NYSE: PAAS and the TSX: PAAS

A Quick Look At The Chart Of Silver Prices

The chart below shows the increase in the price of silver from around $22.00/Oz a few weeks ago to today’s price of around $28.00/Oz. Silver had been rather subdued of late, especially when compared to gold, which has formed a new all-time high. However, this chart suggests that silver may now be getting the attention it deserves and a rally to much higher ground is on the cards. Although it should be noted that nothing goes up in a straight line, and therefore corrections along the way should be expected in this tiny but very important sector of the market.

Note that there is a small gap at the $26.00 level, which silver may return to and backfill. Given that silver is overbought on a TA basis, it may be prudent to wait for a correction before making an acquisition at the moment. Although I must add that I am already Long on this stock.

A Quick Look At The Chart Of Pan American Silver Corp

PAAS has jumped from $12.00 to $20.00 in two months, following the Silvers breakout, and has kept pace with many of its peers.

The RSI is above the ’70’ level, which suggests that it is overbought, and a correction could follow in the near term. The MACD and the Stochastics are also in the overbought zone. It should be noted at this point that if silver prices correct significantly, then some of the ‘froth’ could well be wiped off this current stock price. This would also apply to the other silver producers in this sector.

Conclusion

The Financials leave a lot to be desired at the moment, however the upcoming Q1 figures may give us a clearer idea of the company’s future performance.

Both silver and Pan American are currently overbought from a Technical Analysis standpoint, but in an aggressive Bull Market the accompanying euphoria could override such analysis

I am of the firm belief that silver is destined for much ground and that nearly all the silver producers will feel the benefit, including Pan American.

I am Long this stock and happy to hold on to it for now.

For the record, I have been long physical gold and silver for a number of years and also own a portfolio of stocks in the precious metals sector, including:

Sandstorm Gold Ltd. (SAND), Wheaton Precious Metals Corp. (WPM), Agnico Eagle Mines Limited (AEM) and SSR Mining Inc. (SSRM). Endeavour Silver Corp (EXK) Fortuna Silver Mines Inc (FSM) First Majestic Silver Corp. (AG) Silvercorp Metals Inc. (SVM) IMPACT Silver Corp. (IPT:CA) Pan American Silver Corp.

Now, whether you are a Silver Bug or not, please feel free to comment on this article as the readers’ comments add balance to the debate and enable all of us to make better trading decisions.

Go gently, as these are difficult times for all of us.