Recommendation: Buy Pan American Silver Corp. (PAAS:TSX; PAAS:NASDAQ, US$28.63–28.64) with a limit of $28.70. This $6 billion market-cap company is the fourth-largest silver producer in the world, with meaningful production of both gold and zinc as well. Silver accounts for about 30% of production last year and this, but that is expected to increase, as the underground silver mines were more affected by lockdowns. Moreover, gold production is forecast to be a record this year, while silver will be lower than normal (because of mine sequencing). Of reserves, 46% are silver, though this includes a large non-producing silver mine.
Founded by mining legend Ross Beaty, Pan American is a conservative company, and currently has over $200 million in cash with no long-term debt. Based on current mines, Pan American is a solid company, with top management, solid balance sheet, and diversified long-life mines with attractive margins and reasonable valuations.
Leverage to silver from non-producing assets
Pan American has two non-producing mines. First is Escobal in Guatemala, which it acquired from distressed company Tahoe Resources Inc. at a very attractive price. Mining was suspended due to local protests, and in truth the former company reputedly had not put sufficient effort into community relations. Pan Am has a superb reputation in this area and has committed to "not rushing but doing it right," however long it takes.
The closure was because the government had not followed its own rules on local consultation. The formal process began last month. Pan America is a bit of an observer in this process but is doing all the right things, including providing COVID relief to the local communities last year. The government wants the mine reopened. Sooner or later, it will reopen, under Pan American control, and will nearly double the company's silver production.
Even larger, but less certain (and most definitely longer term) is Navidad in Argentina, the largest undeveloped silver deposit in the world (623 million ounces of reserves against 264 million at Escobal). By law, mining is suspended in Chubut. In reality, the area where the deposit is located is not a particularly sensitive environmental region, but efforts are underway to carve exemptions for certain parts of the province. The company has also made attempts to redesign its mine plan to diminish any footprint. This will be a long process, but with good faith, at some point this mine could be built.
Why is the stock down?
The stock has dropped from $34 as we entered this month to the current price, which is very close to its one-year low. (It has been as high as $39/share in the past year.) Obviously, PAAS was affected by the selloff in gold and silver and precious metals stocks after the Federal Reserve's mention of maybe, perhaps, raising rates two years out. I think the market reaction was completely overdone, starting from a market that had moved since early March without any meaningful pullback. To me, the real story was: "Fed will not raise rates for next two years," but I don't write the headlines!
The second factor, of course, is the presidential runoff election in Peru, where socialist Pedro Castillo appears to have won, though as of now no result has been declared. Pan Am operates four mines in that country. There were concerns about Peru following Venezuela's path should he win, but though his election would be a less desirable result, the worst fears are overblown. He moderated his message during the campaign; his prospective economics minister is less extreme; and his party and allies are a minority in the assembly, so he would find it difficult to get his more extreme proposals approved.
No doubt there would be higher taxes on the industry, as we are seeing in many jurisdictions, and we shall have to wait to see exactly how punitive they are.
Take advantage of decline to buy this great company for the long term
In short, we have a great opportunity to buy this top mining company, with excellent management with a solid balance sheet, which offers extreme leverage to silver as one (and eventually perhaps two) of its hailed silver mines come into production. This is one of the more conservative mining companies, but given all mining is risky, we will put it in our mid-risk category. Buy Pan American Silver at $28.70 limit.
Originally published June 18, 2021.
Adrian Day, London-born and a graduate of the London School of Economics, is editor of Adrian Day’s Global Analyst. His latest book is "Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks."
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