Pan America Silver Corp. (PAAS) gets into my value stock screening mainly because of the large decline in market value from the beginning of the year, combined with reasonable valuation and ample profit improvement over a 10-year period. Since the bottom at the end of 2008, where the stock was trading at $10.3 per share, it then advanced to $42.5 in April 2011. Right after that, it fluctuated along a downtrend gradually, to only $21 per share at this time of writing.
PAAS engages in the business of operation and development, and exploration for silver-producing properties and assets. Although other metals such as gold, zinc, lead and copper are also produced and sold, silver is still the main source of PAAS revenue. In the revenue contribution, silver accounts for 65%, whereas gold is the second-largest metal, with 15% of the total sales.
So the company's fundamental performance relies much on metal prices, especially silver and gold. In 2010, the silver price has performed quite well. In the beginning of the year, it was sold at $17 per ounce, and it finished the year at the decades-long record of more than $30 per ounce. Not stopping from that, it shot up to more than $48 in April and fluctuated around $30-$45 in the next six months, and now it is staying at $27.45 per ounce. The 10-year silver price continuously experienced an upward trend, with a high of $48.5 and a low of $4.2.
Following the annual report of 2010, the total estimated reserves for PAAS were 230 million ounces of silver and 698,000 ounces of gold, in the operating mines, not including the development exploration projects. The cost of production ranged around $9-$10 per ounce with yearly production of 23 to 24 million ounces. So it was estimated that with no new reserves added, the operating mines of PAAS would last for around 10 years. At reserves of 230 million ounces, and a price of $27 per ounce, the total reserves of PAAS would be worth $6.2 billion. And if we assume the price goes back to the beginning of 2010 level, it would stay around $17 per ounce, making the total reserves worth $3.9 billion.
The good thing about PAAS is the conservative financial structure. The D/A is only around 20%, with very little interest-bearing debt outstanding. In addition, it has 24% in cash and cash equivalents — $485 million. Even with the market capitalization of $2.23 billion, the enterprise value of the company is only $1.75 billion. Since 2004, PAAS began to generate positive operating cash flow continuously; then the free cash flow became positive since 2009. PAAS seems to trade at quiet a cheap valuation, with a P/E at 6.5x, P/B at 1.4 and P/CF at only 6.7x, whereas historically, it was trading at double-digit average P/E and P/CF valuation of 38.8x and 17.1 respectively, and P/B was at 2.9x.
We haven’t talked about the development projects such as La Preciosa and Navidad, which if successful, would be major drivers for PAAS's growth in producing output. But it is quite uncertain and we cannot predict anything in the future. Besides, even though it was at quite a cheap valuation, like other mining companies, is subject to significant operation and market risks, such as: the operation risk derived from emerging countries such as Peru, Bolivia and Argentina, where it has operating mines; and the market risks derived from silver and gold price fluctuation. As PAAS does not have a metal price hedge, the operation might be subject to a much greater degree of volatility.
It is clearly speculation in the value manner, with the stock of ample financial strength. Investors if interested might consider put a small portion of their wealth into the stocks to somehow speculate in the silver prices but under a company with good prospects and solid balance sheet.
This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk.