Pan American Silver: An Elite Gold/Silver Producer (NYSE:PAAS)

Introduction

Normally, I focus on big-upside stocks. Well, guess what? This potentially is a big upside stock. In fact, it’s trading under $16 today and could easily fall to $12 or $13 during the coming market sell-off (my expectation). Having the opportunity to buy such a quality name should not be ignored. I consider this one of my must-own stocks.

Why do I like Pan American (NYSE:PAAS) so much? They have quality projects in tandem with a quality management team. Plus, they tend to make good acquisition decisions to grow the company. Their recent acquisition of four operating mines from Yamana was brilliant. It gave them added diversification. They now have 12 operating mines in seven countries. None of their operations are critical to their success.

If I had to pick a favorite PM miner, it might be this one. It should be an excellent performer as gold and silver prices trend higher. I expect the share price to potentially reach $75 to $100 and pay dividends along the way. Of course, I’m a speculator, and I consider this a gamble, as I do with all PM mining stocks. There are no sure things with any miner. They can all disappoint you.

My assumptions are a stretch for most investors. 1) I expect PM prices to rise substantially, to at least $2,500 gold and $50 silver over the next 3-5 years. 2) I expect costs, taxes, and royalties not to explode. 3) I expect Pan American not to get acquired. 4) I expect their management team to continue to execute like pros. I could easily get disappointed if any of these assumptions prove false (which could easily happen).

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Company Overview

Pan American Silver is one of the largest silver producers, but they’re currently primarily a gold producer. They get about 20% of their revenue from silver production, about 65% from gold, and the rest in base metals (zinc, lead, and copper). They acquired Tahoe Resources and joined the ranks of silver miners who have diversified into gold.

Pan American’s resources are huge. They have about 1.2 billion oz of silver and 11 million oz of gold. In 2023, they will produce about 22 million oz of silver and 930,000 oz of gold. Plus, this production does not include their Escobal mine in Guatemala, which has had permit issues due to local political issues. If Escobal resumes production (a strong possibility), that will add about 20 million oz of annual silver production at low cash costs. Plus, the undeveloped Navidad project in Argentina also is huge (with 600M oz of silver), and could potentially get permitted.

I’m not including either the Escobal or Navidad projects in my future valuations since both currently have permit issues that may not get resolved.

Last year, Pan American was trading at $32, and today it’s down below $16. I’m expecting to see it reach triple digits, although that will require much higher gold/silver prices and Escobal back in production.

It has a few red flags. They mine in Guatemala, Bolivia, Argentina, Chile, and Peru. They also have producing mines in Mexico and Canada. Overall, the location risk is significant, but I have confidence that management can find a way to grow. Also, currently, their all-in (breakeven) cost per oz for silver is around $18 to $19. That’s not low. But if Escobal comes back online, their overall costs will be much lower.

Gold production is currently giving them a nice cushion. They have solid cash flow from their expected 930,000 oz of production in 2023, with all-in (break-even) costs around $1,550 per oz. Plus, they have a good balance sheet, especially for a company of their size, with no long-term debt due until 2027. This is because their Chairman (Ross Beaty) is shareholder-friendly and understands the value of a good balance sheet. Most PM miners of this size tend to hold a lot of debt on their balance sheet. That is not Beaty’s style, which I like.

If they can get Navidad in Argentina permitted, that project has 600M oz (120 gpt AG) of M&I silver. That’s a huge potential mine, but permits won’t be easy for a mine of that size. I’m not giving them any value for Navidad. If it gets built, along with Escobal coming back online, then they’re extremely cheap. Neither of those large mines are part of their future valuation. In fact, you could argue that their gold resources and gold production are worth more than their market cap.

In 2023, they added four producing mines acquired from Yamana. This gives them 12 operating properties in seven countries in the Americas. No single operation provides more than 23% of production, giving them diversification if they lose a mine.

Company Info

Cash: $513 million

Debt: $783 million

Current Gold Resources: 11 million oz.

Estimated Future Gold Resources: 11 million oz.

Current Gold Production: 930,000 oz.

Estimated Future Gold Production: 900,0000 oz.

Current Gold All-in Costs (breakeven): $1,550 per oz.

Estimated Future Gold All-in Costs (breakeven): $1,750 per oz.

Current Silver Resources: 1.2 billion oz.

Estimated Future Silver Resources: 750 million oz.

Current Silver Production: 23 million oz.

Estimated Future Silver Production: 25 million oz.

Current Silver All-in Costs (breakeven): $19 per oz.

Estimated Future Silver All-in Costs (breakeven): $25 per oz.

Scorecard (1 to 10)

Properties/Projects: 9

Costs/Grade/Economics: 8

People/Management: 8

Cash/Debt: 8

Location Risk: 7

Risk-Reward: 8

Upside Potential: 7.5

Production Growth Potential/Exploration: 7.5

Overall Rating: 8

Strengths/Positives

Significant upside potential

Strong management

Quality properties

Strong balance sheet

Diversified

Risks/Red Flags

Location risk in Central and South America.

Dependence on higher PM prices.

Speculation stock.

Future Valuation ($2,500 gold / $50 silver)

Gold production estimate for the long term: 900,000 oz.

Gold All-In Costs (break-even): $1,750 per oz.

900,000 oz. x ($2,500 – $1,750) = $675 million annual FCF (free cash flow).

Silver production estimate for the long term: 25 million oz.

Silver All-In Costs (break-even): $25 per oz.

25M oz. x ($50 – $25) = $625 million annual FCF (free cash flow).

Total FCF = $675 million + $625 million = $1.3B

$1.3 billion x 20 (FCF multiplier) = $26 billion

Current FD market cap: $5.8 billion

Upside potential: 350%

Note: I used future PM prices of $2,500 gold and $50 silver because I am a long-term investor who plans to wait for higher silver prices. I expect to see these levels reached within 3-5 years.

Note: My All-In Costs are the expected costs that will generate FCF (free cash flow).

Note: I used a future FCF multiplier of 20 because I’m confident that investors will bid up its valuation when they have large margins. They should be one of the popular gold/silver miners and receive a high multiple.

Balance Sheet/Share Dilution

I consider Pan American’s balance sheet to be strong. They have a lot of cash, with about $500M in the bank. Plus, they do not have any principal debt payments until 2027. And they can raise money, if necessary, by issuing shares. Prior to the Yamana deal, they had zero debt, and their board/management team believes in being cash focused with a clean balance sheet.

Risk/Reward

The No. 1 risk, which is the same for all PM miners, is that PM prices could drop. If this happens, the stock will likely fall. That’s a given because PM prices have such a large impact on a PM miner’s valuation. Plus, on a typical year, PM prices correct at least once more than 10%, and often 20% or more, creating a lot of volatility in PM mining share prices.

Because of this expected volatility, it’s better not to be risk-averse. If you are risk-averse, then PM miners are not for you. This is speculating. I’m expecting much higher PM prices and for costs and taxes not to rise to a level that reduces our expected margins. I’m also expecting the company to hit estimated production and cost targets. I’m making a lot of assumptions.

The other substantial risks I worry about are share dilution, bankruptcy, mine shutdowns, and nationalization. Of course, those are not the only risks. This is speculation investing, and many things can go wrong.

The best thing about Pan American is its risk-reward profile. They’re one of the best gold/silver miners, which lowers your risk to a certain extent, although risk always remains high. Plus, they have the potential to have extremely high FCF if PM prices trend higher, providing a good way to get leverage on higher PM prices.

Plus, because they are considered an elite PM miner, they could easily exceed my estimated valuation target because institutional money will likely flood into this stock once it has large margins.

Investment Thesis

I use a pyramid approach to investing with less risky investments at the base of my pyramid. Above the base, I like to own quality PM producers. I want to own as many quality PM producers as I can find at good entry prices. Pan American fits that strategy nicely. This is why I consider it a must-own stock. And if you can get it on sale, that’s even better. I would consider sub $14 to be on sale.

I like the fact that if PM prices explode, the odds are excellent that Pan American will participate and is significantly leveraged for that outcome. I want to make sure that I own many quality PM miners that will participate when PM prices increase. If my price targets for gold and silver are right, then quality stocks like Pan American should do extremely well.

So, the key is to find quality PM miners with a get a good entry price. For Pan American, I think $18 or less is a good entry price, and the lower the better. If you can get in for under $13, consider yourself lucky. Of course, no matter your entry price, our assumptions still need to come true. We’re still speculating.