The stock of Pan American Silver, the “world’s leading silver producer,” is considered severely undervalued and a potential runaway winner when precious metals prices rise. Is the stock already a buy and how did it fare in previous gold and silver rallies? Our analysis.

Pan American: More gold than silver!

Pan American Silver ($PAAS) was founded over 25 years ago by the now legendary Ross Beaty and is now one of the established names in the mining business. The company brings around 5.7 billion US$ to the stock exchange scales. Through the takeover of Yamana Gold‘s Latin American activities, which was completed at the end of March, silver production has increased by 55 percent, while gold production has more than doubled. Pan American Silver – like all its major competitors – is now more of a gold company, despite the “silver” in its name. In 2023, 21 to 23 million ounces of silver and 870,000 to 970,000 ounces of gold are to be produced. Taking the respective average of these forecasts, silver worth $506 million and gold worth $1.775 billion will be mined this year. This calculation assumes a silver price of US$23 per ounce and a gold price of US$1,930 per ounce.

The reorientation from silver to gold of many former “silver companies” is easy to understand. At a gold price of US$1,500/ounce, most are still making money. At silver prices below 20 US dollars/ounce, on the other hand, the companies are threatened with bankruptcy. Of course, the same calculation works the other way around: the profit of a metal producer with a high silver content increases disproportionately when the silver price rises sharply.

Spectacular gains and losses

For a long-term investor in the precious metals sector, the royalty company Franco-Nevada has been the ideal stock over the past twenty years. The stock slightly lagged the market in bull market phases, but hardly fell during the bear markets, which often lasted several years. Pan American Silver, on the other hand, is not a stock that can be bought and then forgotten (see chart above). It has been tops in gold and silver in uptrends, and has lost disproportionately in bad times.

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The phases of bull market and bear market can be easily seen on the chart. From 2001 to 2008, the share price increased more than tenfold from $3 to $40. From February to August 2016, the price of silver rose 37%, and Pan American Silver gained a whopping 200%. After the Corona crash in 2020, the price of silver doubled from extremely low levels in a few months, with Pan American Silver up 175%. But this also worked in the opposite direction: over the past three years, the price of silver has declined 15%, and Pan American Silver’s stock has more than halved. So whether this stock is a good or bad investment depends to a large extent on the development of metal prices.

Lowly valued compared to competitors

Fundamentally, Pan American Silver is valued low. Following the Yamana acquisition, the company operates ten mining operations in Latin America (Mexico, Peru, Bolivia, Brazil, Argentina, Chile) and one in Canada. The 56.25% interest in the Mara project under development in Argentina included in the Yamana portfolio was sold for $475 million in cash and a 0.75% copper NSR royalty. In addition, some smaller assets were divested for a combined $120 million. The figures for the second quarter, the first after the acquisition of Yamana’s mines, were better than expected by many observers.

Pan American now has three mines, each with about 180,000 ounces of gold equivalent annual production (Jacobina in Brazil, Cerro Moro in Argentina, El Penon in Chile). This concentration of production resulted in better margins. Silver costs decreased from US$17.30/ounce to US$15.70/ounce, and gold costs decreased from an excessively high US$2,051/ounce to an acceptable US$1,342/ounce (AISC). Revenue grew 88% year-over-year to $639.9 million, and operating cash flow was $117 million (Q2 2022: $20.8 million).

Growth profile becomes clear!

Despite these good results, Pan American Silver’s price/cash flow ratio is below that of competitors of much lower quality, such as First Majestic or Hecla Mining. Compared to how Pan American Silver was previously valued, the stock is downright dirt cheap. With the Jacobina and Cerro Moro expansion and work on the massive Colorado Skarn project, Pan American Silver has the best growth profile compared to its peers. The dividend yield is currently around 2.6%.

Escobal mine in Guatemala a nuisance and a wild card

If Pan American Silver succeeds in restarting the Escobal mine in Guatemala, acquired in 2018 through the acquisition of Tahoe Resources and already shut down the year before, it would be an additional driver: silver production would almost double from about 22 million ounces to about 38 million ounces per year. Whether this will actually happen is difficult to judge from our position. Pan American Silver’s optimism on the matter is part of the business. If it were to reopen, Escobal would be one of the largest and most profitable silver mines in the world.

The history of the mine, located in southern Guatemala, accompanied by lawbreaking, murder and state violence, can be traced quite well. Goldcorp (now part of Newmont) began exploration in 2007, but offloaded the project to Tahoe Resources in 2011. In April 2013, the mine received a 25-year operating permit from the Guatemalan central government, despite strong protests from local residents. This was illegal, but also unsurprising in one of the most corrupt countries on earth. The mine, with its gigantic dimensions, is located on the land of the indigenous Xinka people. However, the rights of Guatemala’s indigenous peoples are protected under a 1995 law, and the mine should not have been approved without the consent of the local parliament. The local population of the nearby small town of Las Flores (population 4,000) blocked access roads to the mine, and several Xinka were abducted or killed in large-scale police and military operations. In 2017, Guatemala’s Constitutional Court finally ordered that the mine remain closed until a settlement was reached. The following year, the mine fell into Pan American Silver’s portfolio through its acquisition of Tahoe.

Opponents and supporters of the Escobal mine

Pan American Silver hopes that Guatemala’s Supreme Court will lift the operating ban on the mine because, from the company’s point of view, the consultations with the local population required by the court have taken place as requested. Opponents, in turn, are demanding its permanent closure. In August, a new president was elected in Guatemala, the social democrat Bernardo Arévalo. His main concern is to fight corruption. It remains to be seen whether this is relevant to these disputes. From a shareholder’s point of view, the reopening of the Escobal mine would of course be positive. However, it should not be firmly planned for.

Conclusion: Historically and also compared to competitors, Pan American Silver’s stock is very favorably valued. And even without the controversial activities in Guatemala, this is an attractive company that will benefit from the acquisition of Yamana’s mines in Latin America. If precious metal prices rise, the leverage from the stock should be tremendous, as the historical ups and downs show. If so, the stock will be one of the favorites among precious metals producers.

Please note: Investments in the capital markets are associated with a high level of risk. Investors can lose all of their capital – and more. Remember to do your own due diligence! The content of this website is intended exclusively for readers who are permanent residents of Germany. The German disclaimer applies (see below). 

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Graphics: Das Investor Magazin, Pixabay, Pan American Silver

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