Pan American Silver (PAAS, Financial) is making good progress as far as productivity, all-in-sustaining costs, cash costs, and exploration are concerned. Pan American Silver remains on track to achieve its full-year production and all-in-sustaining costs guidance for the full year amid declining silver prices across the world. Its total consolidated production has been 19.4 million ounces of silver and 117,000 ounces of gold for the first three-quarters of fiscal 2014. While its combined all-in sustaining cost and cash cost has been at $18.02 and $10.83 for last three quarters, its AISC is slightly above from its actual guidance so far this year.
Looking ahead
Looking ahead, the company remains confident realizing its original annual production guidance of 25.77 to 26.75 million ounces of silver for the full year. Also, it is quite upbeat to achieve its annual gold production guidance of 155,000 to 165,000 ounces of gold for the full year. Pan American has additionally affirmed its all-in-sustaining costs and cash costs guidance. It is expected to achieve its all-in-sustaining costs and cash costs guidance of $17.00 to $18.00 and $11.70 to $12.70 per ounce. This is certainly encouraging news for shareholders.
However, the company had higher all-in-sustaining costs during the third quarter. Its AISCSOS grew slightly above its original guidance to settle at $20.55. This includes $2.48 in extra costs due to its noncash adjustments to the net realizable value of its heap and ore stockpile inventories. The declining silver and gold prices during the quarter led to this booking. Also, its cash costs were impacted due to heavy rain in Mexico, leading work stoppage during the quarter. Still, it came within the higher range of company’s guidance for the quarter.
Nevertheless, the company has taken effective post rain measures that have concentrated the piled up inventory. It is now strategically engaged revaluing its heap leach and stockpile inventories to the recoverable value at the lower silver and gold prices. This should perhaps result in higher gold production rate going forward. Also, the growing mining rates coupled with enhanced dilution control and change in mine sequencing should complement its production in the future.
Growth expectations
Pan American Silver projects 10% growth in silver and gold production in the fourth quarter 2014. Also, it is confident to reduce its cash costs to as much as by 5% compared to the third-quarter 2014. Taking this into consideration its cash costs will be below $10.00 per ounce this quarter.
Pan American is experiencing exceptional performance at its Peruvian operation. The smart moves such as re-squeezing the mining blocks and demanding cost control actions are gearing up its productivity. It has converted this highest cost operation into the one that has the lowest-cost operation in the industry through these initiatives. Unquestionably, this is the best way to fight the dominant lower silver price environment. These strategic moves helped the company to radically curtail its cash costs at both Huaron and Morococha mines for its Peruvian operation. These mines witnessed cash costs below $8.00 per ounce net of by-products.
In addition, these smart moves are enhancing the base metal grades primarily copper followed by zinc and lead. The company expects the Peruvian mines to exceed its original production outlook. Moreover, the base metal prices are in much better position as compared to silver and gold that should assist the company to offset the expected decline in silver and gold prices.
Pan American expects its Peruvian mines to produce approximately 44,000 tonnes of zinc, 15,000 tonnes of lead and about 8000 tonnes of copper during the fourth-quarter 2014.
Mine exploration program to boost its productivity….
Furthermore, the company continues to see enhanced production at its La Colorada and San Vicente mines. It expects these higher grade mines to remain profitable even at lower precious metal price going forward. Its exploration programs are pretty appealing. Pan American has drilled more than 50,300 meters of its operation on exploration spending of $5.4 million on drilling associated costs.
It has recently completed the exploration at both Huaron and Morococha mines. It is excited about the newly discovered expansion of Sevilla ore body that has huge reserves. This mine contains 173 grams of silver, 5.2% zinc at 12.8 meters, 160 grams of silver and 5.3% Â zinc at 6.2 meters and 180 grams of silver, 0.6% lead and 1.3% zinc at 4 meters.
Likewise, it is seeing higher productivity at its La Colorada mine. It has realized grades NC7 with water split range N2 structure at its La Colorada in Candelaria and Estrella. These mines are registering excellent results at 1.1 meters containing 2.3 kilogram per ton of silver, 5.3% lead and 15.6% zinc; at 0.53 meters with 5.9 kilograms of silver, 3.8% lead and 22% zinc; and at 0.63 meters with 2.8 kilograms of silver, 10.1% lead and 22.8% zinc.
The production at Huaron, Morococha and La Colorada looks pretty healthy. Also, these mines are capable enough to produce higher grades with lesser operational costs. These positive signs should help the company deliver handsome returns to investors in the future. Also, PAAS expects this higher productivity at these mines along with base metal focused mine sequencing to drive its cash costs dramatically in the future that should advance its bottom line performance in the future. Its cash costs at these mines have improved 41%, which is remarkable effort from Pan American Silver.
Looking ahead, it has accelerated its exploration budget from 108,000 meters to about 130,000 meters as these mines have higher potential with high grade deposits. It is now focusing on higher productivity mines like Huaron, Morococha and La Colorada that should enhance its profitability in the future.
Final words and valuation
Pan American Silver looks like a good bet, looking at its notable efforts that are driving its productivity and reducing its cash costs. These efforts should deliver good results to the company in the future even at the lower price environment. Its balance sheet carries total cash of $377.49 million, which is more than enough to cover its entire debt of $78.06 million. PAAS has operating cash flow of $169.52 million and levered free cash flow of $77.87 million.
