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TICKERS: FSM; FVI; F4S, PAAS

Undervalued Silver Producers Present Investment Opportunities With These 'Very Strong Buys'
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Adrian Day Adrian Day of Adrian Day's Global Analyst discusses Pan American Silver and Fortuna Silver, two companies he believes, despite their rough patches, offer value to investors.

Our favorite silver producers have experienced difficult times recently, with COVID restrictions hitting Mexico, Peru, and Argentina particularly hard. For both, stock prices are very weak, but both are undervalued and very strong buy recommendations.

Pan American On Track for Full Year After Tough Months

Pan American Silver Corp. (PAAS:TSX; PAAS:NASDAQ) (23.93) has been through a rough patch. Over the past year, the company mined only 75% of previous silver output, mostly due to COVID restrictions in Peru and Mexico, as well as a ventilation problem at La Colorada mine in Mexico. Repairs are well underway, allowing access to a high-grade portion of the mine. The company expects production to ramp back up by the end of the year and expects to be back to 2019 output by the first quarter. Meanwhile, gold production stayed steady.

Overall, the second quarter saw a small improvement on the first quarter, though still below previous expectations. However, the company should have a strong finish to the year as these particular issues are resolved and delayed shipments from the second quarter add to this quarter's shipments and revenue.

In addition to lower production, year-end reserves fell sharply — silver by approximately the same as last year's production and gold by one-and-a-half times production, some of this due to asset sales. The company is likely to continue to sell marginal assets to focus on its core mines; it favors high-grade and low capex projects.

The company has a strong balance sheet, with over $140 million net cash as well as shares in other companies, including Maverix Metals Inc. (MMX:TSX.V; MMX:NYSE.American), a royalty company it helped spawn. The dividend was boosted by $0.03 to $0.10 a quarter, for a yield of 1.7%.

Progress made at high-potential, on-hold projects

Though neither this year, so far, nor indeed last year, were positive ones for Pan Am, two large, longer-term projects are slowly making progress. The Guatemalan government ordered a cultural and spiritual study, though the third public meeting on the issue was postponed from July because of COVID. The courts ruled that the government had not undertaken sufficient consultation with local people when it approved the Escobal mine under prior ownership. Pan Am has been very cautious of providing any timeline on when the mine, the third largest silver mine in the world, might restart.

In Argentina, where Pan Am owns the large, undeveloped Navidad project, the provincial legislature rejected a bill that would have prohibited mining in all the province. It has not yet voted on a bill to allow mining in some areas. Navidad is in a less sensitive part of the province, but has been caught up in a province-wide ban on open-pit mining, which effectively prohibited the mine from moving forward. Navidad is one of the largest undeveloped silver mines in the world.

With strong management and a solid balance sheet, and recovery of production as La Colorada's issues are fixed, Pan Am is a very strong buy at this level. (Option investors could sell Sept. 24 puts for $1.10, almost 5% premium for one month, with an extremely attractive purchase price if the stock were put.)

New Mine Issues Sees Fortuna Cut Guidance

Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) (3.83) has also faced problems, including a slow ramp-up at Lindero in Argentina and challenges to its license and royalties at San Jose, now compounded by the normal difficulties of building a mine in a new jurisdiction in West Africa. In the quarter, the company experienced 16 days stoppage at Lindero, and it has revised its guidance for the full year because of delays caused by ongoing Covid restrictions there. It now expects to produce only about two-thirds of earlier guidance, though the missed ounces are not lost but pushed into next year.

The good news is that Fortuna Silver is now able to have foreign specialists at site to help with the complex circuit. Moreover, grade reconciliation has proven to be very good, so once the mine is up and running, it should operate well. Although it reduced its guidance for gold, the company expects silver production, about 40% of revenue, to meet earlier guidance.

In Côte D'Ivoire, the company is in detailed negotiations with the government on the mining convention for the Séguéla mine. Total capex is estimated at $150 million, with many of the larger items toward the end of the build. The company is confident that with existing cash, its credit facility, and ongoing cash flow it has sufficient funds to build the mine without additional equity.

Fortuna ended the quarter with $122 million cash and a net debt of $38 million, which is lower than expected following about $36 million in payments related to the purchase of Roxgold (change-of-control payments and payout of vested stock to employees).

Some shareholders depart as new ones attracted to cash flow

The stock continues to be weak on the back of ongoing problems at Lindero and San Jose. Moreover, with the purchase of Roxgold, Fortuna is losing its silver premium and adding an Africa discount. But the stock decline is overdone, trading at valuations below even inexpensive West African miners, and far below mid-tier precious metals miners (more so silver miners). It may take longer before the end of the rotation of shareholders from silver-focused investors to those interested in the company's compelling free cash flow-generating possibilities, but this presents us with an opportunity. Fortuna is a very strong buy at these levels.

Originally published on Aug. 21, 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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Disclosure:
1) Adrian Day: I, or members of my immediate household or family, own securities of the following companies mentioned in this article: Fortuna Silver Mines Inc. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. Funds controlled by Adrian Day Asset Management hold shares of the following companies mentioned in this article: All. I determined which companies would be included in this article based on my research and understanding of the sector.
2) The following companies mentioned in this article are billboard sponsors of Streetwise Reports: None. Click here for important disclosures about sponsor fees. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
3) Statements and opinions expressed are the opinions of the author and not of Streetwise Reports or its officers. The author is wholly responsible for the validity of the statements. The author was not paid by Streetwise Reports for this article. Streetwise Reports was not paid by the author to publish or syndicate this article. Streetwise Reports requires contributing authors to disclose any shareholdings in, or economic relationships with, companies that they write about. Streetwise Reports relies upon the authors to accurately provide this information and Streetwise Reports has no means of verifying its accuracy.
4) This article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the decision to publish an article until three business days after the publication of the article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Fortuna Silver Mines Inc. and Pan American Silver Corp., companies mentioned in this article.

Adrian Day's Disclosures: Adrian Day's Global Analyst is distributed by Investment Consultants International, Ltd., P.O. Box 6644, Annapolis, MD 21401. (410) 224-8885. Publisher: Adrian Day. Owner: Investment Consultants International Ltd. Staff may have positions in securities discussed herein. Adrian Day is also President of Global Strategic Management (GSM), a registered investment advisor, and a separate company from this service. In his capacity as GSM president, Adrian Day may be buying or selling for clients securities recommended herein concurrently, before or after recommendations herein, and may be acting for clients in a manner contrary to recommendations herein. This is not a solicitation for GSM. Views herein are the editor's opinion and not fact. All information is believed to be correct, but its accuracy cannot be guaranteed. The owner and editor are not responsible for errors and omissions. ©2021. Adrian Day's Global Analyst. Information and advice herein are intended purely for the subscriber's own account. Under no circumstances may any part of a Global Analyst e-mail be copied or distributed without prior written permission of the editor. Given the nature of this service, we will pursue any violations aggressively.




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