Share Value (US)
FD Mkt Cap (6/eight/2019)
Pan American Silver
Again in 2008, when the miners crashed, the one inventory that stood out to me that was severely undervalued versus its potential future money circulate was First Majestic Silver. It then jumped from $2 a share to $28 (from 2009 till 2011) with out a discovery and with out an acquisition. It jumped as a result of they achieved their manufacturing and value steering and silver costs rose to $49.
Right this moment, the inventory that stands proud for being extremely undervalued is Pan American Silver. I’ll get into the valuation under, however I discover it superb that an organization of this high quality could be so low cost versus its potential money circulate. Whereas I do not count on it to have the gorgeous returns that First Majestic Silver had, its share worth has probability of reaching $100 if the celebs align and all of my expectations are fulfilled. Maybe $100 is a stretch, however $50 to $75 is a stable expectation if we get to $100 silver and Escobal is producing.
Pan American Silver is likely one of the greatest silver producers. They get about half of their income from silver manufacturing, a couple of quarter from gold, and the remaining in base metals (zinc, lead, and copper). They just lately acquired Tahoe Sources. Amazingly, their FD market cap is about the identical because it was previous to the acquisition at $2.5 billion.
The mixed assets of Pan American and Tahoe are large. They’ve about 1.5 billion oz. of silver and 25 million oz. of gold. In 2019, they’ll produce about 25 million oz. of silver and 450,000 oz. of gold. Plus, this doesn’t embrace their Escobal mine in Guatemala that has had political points. If Escobal resumes manufacturing, that provides 20 million oz. of annual manufacturing at low money prices. Even with out Escobal, this inventory may be very low cost versus their potential money circulate at greater gold/silver costs.
Traders are being very conservative. They do not just like the debt that was assumed from Tahoe, which now offers them $360 million in debt and solely $121 million in money. They do not like the truth that Escobal is an unknown. And so they do not like a number of the areas, reminiscent of Guatemala, Bolivia, Argentina, and Peru. Additionally they have producing mines in Mexico and Canada.
Traders can say that it’s promoting at round 25x free money circulate, which isn’t low cost. However in my view, the actual worth is within the upside potential for the long run. If silver mining shares come into favor for buyers, this inventory may do very well. It is buying and selling at $11 as we speak, however reaching $50 wouldn’t be that massive of a shock at greater gold/silver costs. At its present valuation, Pan American may be the perfect silver miner from a threat/reward standpoint.
Producing International locations (sorted by manufacturing)
Sources: 1.5 billion oz. (90 gpt)
6 Working Mines
La Colorada, Mexico (eight million oz.)
Dolores, Mexico (5.three million oz.)
Huaron, Peru (three.6 million oz.)
Morococha, Peru (2.eight million oz.)
San Vicente, Bolivia (three.5 million oz.)
Manantial Espejo, Argentina (three.5 million oz.)
Escobal, Guatemala (20 million oz., at the moment not producing)
Silver Manufacturing and Prices
2019 manufacturing about 25 million oz.
Money prices about $7 per oz.
All-in prices (free money circulate) about $13 per oz.
Sources: 25 million oz. (.6 gpt)
three Working Mines
Shahuindo, Peru (150,000 oz.)
La Area, Peru (120,000 oz.)
Timmins, Canada (155,000 oz.)
Gold Manufacturing and Prices
2019 manufacturing about 440,000 oz.
Money prices about $800 per oz.
All-in prices (free money circulate) about $1,150 per oz.
They’ve a superb administration workforce. The Chairmen is Ross Beaty, who based the corporate in 1994. Pan American has all the time been shareholder pleasant due to Beaty’s affect. He has all the time been an investor first and miner second. That is how he grew to become a billionaire.
Their steadiness sheet is okay with $120 million in money and $360 million in debt. They inherited the debt from Tahoe Sources. Earlier than the merger that had zero debt, which exhibits their money focus.
As with all silver mining shares, I’m involved with the high-risk related from the record of unknowns. This record consists of decrease silver costs, decrease grades, mine manufacturing issues, greater taxes and royalties, and political/authorized points. For Pan American Silver, my most important concern is with the silver worth. This inventory ought to be wonderful so long as the silver worth does not crash. Nonetheless, they do have a number of mines in areas that aren’t ideally suited. This added threat will decrease their potential returns.
Estimated future free money circulate (silver): 45 million oz. X $75 = $three.three billion
Estimated future free money circulate (gold): 500,000 oz. X $1,000 = $500 million.
Estimated future market cap: $three.eight billion x 10 = $38 billion
Evaluating the present market cap ($2.5 billion) to the longer term market cap ($38 billion), you get a possible 1,400% improve.
This return is on the optimistic aspect. They could not attain their manufacturing potential and buyers could not give them a full valuation based mostly on the situation of a few of their mines.
This valuation assumes that Pan American Silver will attain 45 million oz. of annual silver manufacturing, with all-in prices at $25 per oz., and future silver costs at $100. Plus, they attain 500,000 oz. Of annual gold manufacturing, with all-in prices of $1,500 and future gold costs at $2,500. It is a best-case situation for the long run.
If I needed to decide one silver mining inventory, this could be it. I’d count on them to succeed in a share worth of at the very least $50 if we get to $100 silver. They reached $40 at $49 silver and it’s a bigger firm now. I do not count on them to succeed in my $150 goal, with an FD market cap of $38 billion. Nonetheless, I believe $100 is a official goal for the long run if Escobal resumes manufacturing. That mine is the important thing to their returns.
Word: You may verify the info included on this evaluation at Pan American Silver’s Web site.
Disclosure: I’m/we’re lengthy PAAS. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (aside from from Looking for Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.