Pan American Silver (PAAS, Financial) has a relatively strong balance sheet, which will allow it to expand its business at a good pace. Overall, Pan American’s cash cost in the third quarter of 2014 was reported at $12.29 per ounce of silver, total of by-product credits, remaining equivalent to its cash costs in the second quarter of 2014. These higher cash costs signify the effect of work held due to extreme rainfall in Mexico. Year-till-date, its cash costs amounted to $10.83 per ounce and well within its complete year forecast ranging from $11.70 to $12.70 per ounce for 2014.
Smart improvements will lead to better times
The Peruvian operations of Pan are performing exceptionally well, illustrating shift from peak-cost operations to nearly least-cost of its operations. Both Morococha and Huaron registered quarterly cash costs lesser than $8 per ounce when considering net of by-products. The Huaron mine is forecasted to produce 933,000 ounces of silver during the quarter, an increase from the 872,000 during the same period last year. Pan brought down the quarterly cash cost to $7.63 per ounce from $12.85 last year by focusing on greater productivities coupled with the mining activities focused on base metals.
These significant cost-cutting efforts through the improvement in the mining technologies and base metal focused production are believed to balance the huge debt levels on the company’s balance sheet.
The bad weather conditions in Mexico had drained the earnings of Pan by increasing the operating costs. However, the gainful Peruvian operations are believed to partially offset the earnings decline for Pan.
In the third quarter, Pan’s Peruvian operation witnessed solid expansion in the grades of base metal, mainly copper where it registered a 60% expansion in production over last year. Year-till-date, the production of copper, lead and zinc all exceeded the company expectations and is estimated to exceed its earlier production prediction declared earlier this year.
Improving production
The enhanced grades and better mining rates for Pan have resulted in solid quarterly silver production of about 1.3 million ounces at the La Colorada mine compared to only 1.1 million ounces of production during third quarter last year. Pan targets production for the first phase of its development project to be 1,500 tonnes of production per day by mid-2016.
The increased production of all the key metals for year-till-date and improvement in the metal grades are expected to open up an entirely new and innovative growth dimension for Pan, going forward.
The quarterly cash cost for La Colorada of $8.58 per ounce was recorded in line with the expectations and under the previous year’s third quarter cash cost of $10.19 per ounce.
Alamo Dorado delivered 0.7 million ounces for the quarter, processing increased amount of lower grade ores by operating in an open pit mine. The lower grade ore processing has resulted in increasing the company’s cash costs to $17.04 per ounce during the quarter.
The rising cash costs for the company operations at Alamo Dorado owing to the poor grade ore mining is estimated to lower the company’s cash position.
Going forward, Pan expects over 10% production increase at Alamo Dorado leading to a 10% reduction in cash costs with improved productivity.
The Dolores mine delivered 1 million ounces of silver in the quarter, matching the company expectations. Gold production for the quarter reduced to 15,400 ounces owing to heavy rains. This reduction in the gold production, lowered mining and depleting crushing productivities due to the rain has led to increase in cash costs to $14.57 per ounce.
The unfavourable weather conditions are estimated to increase the cost of production thus forcing Pan to limit its exploration activities.
The silver production at Morococha declined to 637,000 ounces for the quarter from the 675,000 ounces of silver produced during the same period last year.
At Manantial Espejo, Pan produced 972,000 ounces of silver for the quarter, exceeding the last year's production of 782,000 ounces for the same period coupled with 13,200 ounces of gold, slightly below the preceding year's 13,900 ounces.
The mix performance of increased silver production at the Manantial Espejo mine and lowered metal production at the Morococha mine when combined is not expected to provide any benefit to Pan.
Conclusion
Overall, the investors are advised to skip investing into the stock as of now looking at the huge forward P/E of 494.50, depicting considerable company costs, going forward. The profit margin of -40.00% signifies no profit but huge loss.
