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2019-08-14 22:17:48

Source: Pan American Silver Corp. Huaron Mine in Pasco, Peru.

Investment Thesis

The Vancouver-based Pan American Silver Corp. (PAAS) presents a new mining profile after the company completed a merger-acquisition with Tahoe Resources (NYSE: TAHO) on February 22, 2019.

It is taking months for the full integration process to show its total benefit, and the company is still working on the issue. However, these second-quarter results are giving a good idea of what the new company will achieve the next few years.

As it was expected, the stock price dropped significantly after February 22 due to the Tahoe acquisition and reached a low of $10.50 in June. But, since then, with the price of gold turning extremely bullish, the stock started its explosive uptrend and reached a price recently above $17 per share or a 60% jump in less than three months.

Data by YCharts

It is not a surprise for shareholders that Pan American Silver is now trading at an overbought level. While I recognize the potential for future growth, it is hard for me to recommend buying PAAS at this hefty level, even if the prices of gold and silver seems very strong.

Tahoe Resource brought some significant producing gold/silver mines (e.g., La Arena, Shahuindo and Timmins mines) and one controversial but potentially significant silver mine actually on care & maintenance in Guatemala called Escobal silver mine.

Production numbers below represent only 38 days since the merger completion.

Michael Steinmann, the CEO, said in the conference call:

Gold volumes more than doubled quarter-over-quarter, reflecting the strong contribution from our new La Arena and Shahuindo mines in Peru, as well as the Bell Creek and Timmins West Mines in Canada.

Thus, Pan American Silver is a dependable company that I consider the right candidate for a long-term investment in the gold and silver sector. However, as I have explained many times, it is essential to trade short term about 30% of your portfolio and take advantage of the volatility.

PAAS - Company Balance Sheet And Production In 2Q 2019 - The Raw NumbersPan American Silver1Q'182Q'183Q'184Q'181Q'192Q'19Total Revenue in $ Million206.96216.46187.72173.36232.64282.95Net Income in $ Million47.3836.19-9.46-63.8133.2818.37EBITDA $ Billion89.3483.9020.8519.1994.4175.34EPS diluted in $/share0.310.24-0.06-0.420.190.09Operating Cash flow in $ Million34.4066.9541.7011.93-12.9183.52CapEx in $ Billion32.5743.4335.5642.3040.8866.26Free Cash Flow in $ Million1.8423.528.14-30.37-53.7917.25Total Cash $ Million224.89250.25252.66212.51121.56138.82Total Debt in $ Million10.09.78.46.7363.1335.0Dividend per share in $0.0350.0350.0350.0350.0350.035Shares outstanding (diluted) in Million153.54153.55153.49153.54176.59209.57Gold/Silver Production1Q'182Q'183Q'184Q'181Q'192Q'19Gold Production K Oz46.253.442.137.280.5154.6Silver Production M oz6.106.296.306.1276.1256.474AISC $/Oz by-product Silver6.556.4513.7315.8610.456.12Gold price realized $/Oz133313041212122613001314Silver price realized $/Oz16.7816.4014.8814.5415.5214.90

Source: Company filings and Morningstar

Silver and Gold Production Details For The Second Quarter of 2019

1 - Total Gold/Silver production (including 38-day Tahoe Resources mines)

The total production of the new company from the merger-acquisition is now in plain view starting 2Q'19.

We can see that Pan American Silver is now mainly a gold producer. However, it will change again when the company can sell the Timmins mines which represent a gold production of 43.8K Au Oz.

Michael Steinmann said in the conference call:

Strong operational cash flow was more than sufficient to cover our sustaining capital taxes, interests, dividends and project capital while adding $17 million to our cash and short-term investment balance, which was about $139 million at June 30.

2 - AISC per mine is $6.12 per Ag ounce

Source: PAAS presentation (montage)

Pan American Silver: Financial Look

1 - Total Revenue was $282.95 million in 2Q'19 (not including assets held for sale).

The Canadian company reported second-quarter earnings of $18.4 million or a profit of $0.09 per share. Earnings, adjusted for non-recurring gains, were $9.0 million or $0.04 per share.

Revenue was $282.95 million this quarter, up 21.6% sequentially. However, revenues are not including the Timmins mines classified held for sale that raise the revenues to $340.45 million. Net cash generated from operations was $83.5 million this quarter.

Michael Steinmann, the CEO, said in the conference call:

Revenue in Q2 2019 was roughly $283 million, up 31% from Q2 2018, driven by higher quantities of metal salt except copper. This number excludes revenue of $57.5 million from our Timmins mines, which are classified as assets held for sale. Gold volumes more than doubled quarter-over-quarter, reflecting the strong contribution from our new La Arena and Shahuindo mines in Peru, as well as the Bell Creek and Timmins West Mines in Canada.

2 - Free Cash Flow was a loss of $17.25 million in 2Q'19

Free cash flow is not a significant component for the company due mainly to the fact that it is still in the process of integrating Tahoe Resources. Also, the Timmins mines are still held for sale, and any deal for these two mines could considerably brighten the picture.

However, the graph above indicates that the company managed a gain of $17.25 million in 2Q'19 again.

Yearly free cash flow is a loss of $58.77 million due to the Tahoe acquisition. But I am confident that it will turn positive before the end of 2019, especially with the metals prices that will be significant starting Q3.

3 - Net Debt and liquidity. Net debt is $240 million in 2Q'19

Total debt was about $378.8 million, which includes $28.1 million in lease liabilities.

Michael Steinmann, the CEO, said in the conference call:

Total debt was $378.8 million, comprised of $43.8 million of lease liabilities and $335 million drawn in our credit facility. We continued to have $165 million available under the credit facility and total liquidity of $304 million.

Source: PAAS Presentation

The company has amended and extended its revolving credit facility from $200 million to $500 million which matures on February 1, 2023.

The company intends to reduce the debt as soon as it possibly can. Timmins mines have been classified as held for sale, and the cash proceeds of the potential sale will go toward reducing debt.

4 - 2019 Guidance adjusted from Tahoe mines acquisition

Source: PAAS presentation

The company revised its annual 2019 cost guidance.

Consolidated silver cash costs are now expected to be between negative $3.30 and negative and $1.80 per ounce.All-in sustaining cost guidance has been reduced to between $7 and $9 per ounce.Guidance for annual 2019 silver and gold production has been revised slightly, because of the postponement of commercial output from the COSE and Joaquin projects in Argentina by about three months. Silver production in 2019 is now expected to be between 25.3 million ounces and 26.3 million ounces, gold production between 550,000 and 600,000 ounces.Conclusion And Technical Analysis

Pan American Silver is not merely one of the largest silver companies with a gold touch, but a very well managed mining company as well. Pan American has taken advantage of a weak precious metals market. It has extensively expanded its assets at a discount price, which will have positive repercussions for many years to come.

Two essential elements that should not be overlooked are:

1 - The Escobal mine in Guatemala, which has tremendous future potential despite what is going on right now. Michael Steinmann said in the conference call:

Our activities are limited to the care and maintenance of the Escobal mine, as the Guatemalan government continues with the ILO 169 consultation process. We will fully support and participate in this government lead consultation process, and we will continue to put forth our best efforts, silver to establishing peaceful dialogue with the communities near the Escobal property.

The terms, timelines, and mechanism for the consultation process are underway, but still to be indicated. It is a long process and no guarantee of success. However, I believe the mine has a fair chance to continue producing down the road, after open and honest communication with all the parties involved.

2 - Strong catalysts for growth present in La Colorada exploration discovery called the Skarn discovery.

I would like to touch on the recent drill results from our La Colorada skarn discovery, which we provide in the news release on August 1st. Those results included the best skarn drill intersects so far. Drill hole 51 returned 140 meters at 109 grams per ton silver, 1.66% lead and 3.8% zinc, and hole 46 intersected 126 meters at 55 grams of ton silver, 3.8% lead and 6.55% zinc, just to mention two of the outstanding results... The potential of the La Colorada discovery is one significant catalyst within a solid well capitalized company that is delivering strong operational and financial performance.

In short, the company presents a good profile, excellent growth potential, and is supported by exceptional prices of gold and silver.

Technical Analysis

PAAS is now overbought at $17.20, which is now new resistance. To be able to cross this further resistance decisively, I see only two potentials.

First, the gold price must continue its uptrend above $1,525 per ounce, which is possible. Second, the company manages to sell the Timmins mines at a reasonable price that could allow the company to eliminate its debt. The market for such gold mines is much better right now, and we could get a deal pretty fast.

However, without any new catalysts, the stock has reached a potential top. Thus, I recommend using the $17+ area to take some profit off the table assuming some retracement at long-term support that I see around $15.25.

PAAS is highly correlated to the price of gold and silver, and any decision must be taken based on the precious metals outlook.

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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.


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