Get Exposure to Silver Through Pan American Silver

The Canadian miner represents a good opportunity to take advantage of an expected bull market for the precious metal

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Alberto Abaterusso
Jul 23, 2021

Summary

  • Pan American Silver runs highly profitable operating activities, which should help to deliver strong cash flow this year.
  • The stock doesn't seem expensive relative to some financial ratios.
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As a result of the economic recovery, inflation has increased substantially, causing investors to fear for the value of their assets. For the time being, the Federal Reserve doesn't want to do anything about the rising rates. The U.S. central bank will hike the current target range of 0.00% to 0.25% for the federal funds rate only if inflation spirals out of control.

While low interest rates usually favor equities, keeping the current range so depressed doesn't help investors' confidence as it means inflation could remain elevated for a while.

A high rate of inflation may act as a stimulus for individuals to spend less and save money, so the government will have to create less debt to support households if the situation worsens due to the Covid-19 variants. On the other hand, lower spending on goods and services can impact corporate profits, contributing to uncertainty and, therefore, to greater volatility in the financial market.

Thus, against a combination of higher inflation and volatility, more and more investors will seek protection through investments in safe haven assets such as gold and silver. This means demand for these commodities should increase over the next several months.

Investing in the grey metal could be a wise decision. Analysts project its price will rise by more than 30% to $33.5 per troy ounce within a year. An ounce negotiated through silver futures with expirations in September 2021 was trading at $25.50 as of the time of writing.

A way to exploit the expected uptick in the price of silver is to purchase stocks in U.S.-listed mining companies, as these securities usually climb very strongly when the precious metal market is bullish.

Pan American Silver Corp. (

PAAS, Financial) is a good player in the industry. The Canadian miner is positioned to deliver above-market performance in the months ahead, taking advantage of operations that are producing a high rate of return and topping most of its competitors significantly. Thanks to a fruitful reserve base, which is the largest in the world with 550 million ounces of silver located across Canada, Mexico and South America, the company can transform on Ebitda of almost 45% of total revenue, while the industry's Ebitda margin doesn't exceed 24%.

Despite some operating issues in South America that should be resolved throughout the second half of 2021, the company continues to expect a robust annual production of silver, likely surpassing 22 million ounces at an all-in sustaining cost of approximately $15 per ounce. From its deposits, Pan American Silver will also produce gold, unearthing more than 655,000 ounces at an AISC per ounce of $1,190 or lower if 2021 turns into a positive year for mining activities.

Additionally, the company will allocate $238 million to capital expenditures, of which 25% will be used to fund the development of mineral assets and the remaining 75% will be spent on care and maintenance at the mine sites.

Based on this guidance for production and costs for the full year, the cash flow is on track to be robust in 2021, representing a valid catalyst for higher share prices.

The stock closed at $26.9 per share on Thursday for a market capitalization of $5.65 billion. The stock doesn’t seem expensive. Following a 26.63% decline over the past year, the shares now trade significantly below the midpoint of the 52-week range of $25.86 to $40.11 as well as below the 50-day moving average of $29.12 and the 200-day moving average of $31.90.

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Furthermore, the stock has a price-book ratio of 2.2 versus the industry median of 2.45 and the enterprise value-Ebitda ratio is 9.06 versus the industry median of 10.9.

The 14-day relative strength index of 38 suggests the stock is not oversold despite the drop in share price.

As a result of a quarterly cash dividend of 7 cents per common share, the stock grants a forward dividend yield of 1.04% compared to the industry median of 2.14%.

Wall Street has issued one strong buy, six buy and four hold recommendation ratings. The stock has an average target price of $42.45.

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Disclosures

I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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