Pan American Silver: This Silver Stock Is a Good Investment

Pan American Silver's (PAAS) financial performance has been weak as the company has been under pressure due to weak silver prices. Earlier this month, when Pan American announced its second-quarter results, its revenue was down 13% from last year to $174 million. The weak top line performance of the company was primarily driven by a 7% and 16% fall in gold and silver prices, respectively.

As a result, Pan American declared a net loss of $7.3 million, or $0.05 per share, in the second quarter. This was wider than the net loss of $5.7 million, or $0.04 per share, in the second quarter of 2014.

The year-over-year decline in both the top and bottom lines of the company is mainly due to the weak global commodity environment that's affecting the margins of Pan American.

Focus on cost control and higher production is a smart move

But, to overcome the weak pricing environment, Pan American is focusing on reducing costs. Pan American is focusing on improving quantity-led copper and gold by-product credits and smaller net realizable value ("NRV") adjustments, which will lead to a decline in its all-in sustaining costs per silver ounce sold (AISCSOS). However, these gains have been somewhat offset by weaker quantities of silver ounces that were sold during the second quarter of 2015, particularly due to weakness at the company's Manantial Espejo and Alamo Dorado mines.

Despite bottlenecks, during the second quarter of 2015, Pan American produced 6.65 million ounces of silver, 1% greater than the previous year and 9% greater than the first quarter of 2015. Only Alamo Dorado was an exception, which delivered 250,000 ounces of reduced silver production, while all of its other key operations recorded significant silver production gains. As a result, the company was able to balance the decline in production at Alamo Dorado.

Further, Pan American produced 44,400 ounces of gold, up 18% as compared to last year, primarily due to significant quantities of gold produced at the Dolores and Manantial Espejo. The improvement in production of gold and silver from a majority of Pan American's mines signifies the advanced mining technology that the company is using.

Is now a good time to buy?

Shares of Pan American Silver have more than halved during the past year. Moreover, this steady fall is expected to continue due to constant currency printing from the Federal Reserve, according to analysts. However, analysts feel that this is a smart opportunity for investors to capitalize on by investing aggressively in Pan American and purchase its shares at a low cost. Once the commodity market recovers completely from the ongoing price decline, investors who buy Pan American at current levels can get substantial returns.

As a result, equity analysts seem to be quite positive about the growth prospects of Pan American Silver. This is why they are encouraging investors to park their funds in the stock, mainly driven by the prospective recovery in market conditions.

Conclusion

Overall, I think Pan American Silver is a good investment as the stock looks undervalued with a PEG ratio of just 0.41. Additionally, Pan American is a cash rich company with low debt and a lot of cash on the balance sheet. The company has generated levered free cash flow of $206 million in the past year, and its liquidity position is strong as well. Also, its debt-equity ratio stands at a meager 0.54. Thus, considering all the arguments discussed in the article, Pan American Silver looks like a good investment.

Published on Aug 27, 2015
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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