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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