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TICKERS: PAAS

Adrian Day: With Stock Price Down, Silver Miner Is a Buy
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Adrian Day Adrian Day provides a brief recommendation for Pan American Silver, noting the well-known company has a "solid balance sheet and diversified long-life mines," and the time to buy is now.

Recommendation: Buy Pan American Silver Corp. (PAAS:TSX; PAAS:NASDAQ, US$28.63–28.64) with a limit of $28.70. This $6 billion market-cap company is the fourth-largest silver producer in the world, with meaningful production of both gold and zinc as well. Silver accounts for about 30% of production last year and this, but that is expected to increase, as the underground silver mines were more affected by lockdowns. Moreover, gold production is forecast to be a record this year, while silver will be lower than normal (because of mine sequencing). Of reserves, 46% are silver, though this includes a large non-producing silver mine.

Founded by mining legend Ross Beaty, Pan American is a conservative company, and currently has over $200 million in cash with no long-term debt. Based on current mines, Pan American is a solid company, with top management, solid balance sheet, and diversified long-life mines with attractive margins and reasonable valuations.

Leverage to silver from non-producing assets

Pan American has two non-producing mines. First is Escobal in Guatemala, which it acquired from distressed company Tahoe Resources Inc. at a very attractive price. Mining was suspended due to local protests, and in truth the former company reputedly had not put sufficient effort into community relations. Pan Am has a superb reputation in this area and has committed to "not rushing but doing it right," however long it takes.

The closure was because the government had not followed its own rules on local consultation. The formal process began last month. Pan America is a bit of an observer in this process but is doing all the right things, including providing COVID relief to the local communities last year. The government wants the mine reopened. Sooner or later, it will reopen, under Pan American control, and will nearly double the company's silver production.

Even larger, but less certain (and most definitely longer term) is Navidad in Argentina, the largest undeveloped silver deposit in the world (623 million ounces of reserves against 264 million at Escobal). By law, mining is suspended in Chubut. In reality, the area where the deposit is located is not a particularly sensitive environmental region, but efforts are underway to carve exemptions for certain parts of the province. The company has also made attempts to redesign its mine plan to diminish any footprint. This will be a long process, but with good faith, at some point this mine could be built.

Why is the stock down?

The stock has dropped from $34 as we entered this month to the current price, which is very close to its one-year low. (It has been as high as $39/share in the past year.) Obviously, PAAS was affected by the selloff in gold and silver and precious metals stocks after the Federal Reserve's mention of maybe, perhaps, raising rates two years out. I think the market reaction was completely overdone, starting from a market that had moved since early March without any meaningful pullback. To me, the real story was: "Fed will not raise rates for next two years," but I don't write the headlines!

The second factor, of course, is the presidential runoff election in Peru, where socialist Pedro Castillo appears to have won, though as of now no result has been declared. Pan Am operates four mines in that country. There were concerns about Peru following Venezuela's path should he win, but though his election would be a less desirable result, the worst fears are overblown. He moderated his message during the campaign; his prospective economics minister is less extreme; and his party and allies are a minority in the assembly, so he would find it difficult to get his more extreme proposals approved.

No doubt there would be higher taxes on the industry, as we are seeing in many jurisdictions, and we shall have to wait to see exactly how punitive they are.

Take advantage of decline to buy this great company for the long term

In short, we have a great opportunity to buy this top mining company, with excellent management with a solid balance sheet, which offers extreme leverage to silver as one (and eventually perhaps two) of its hailed silver mines come into production. This is one of the more conservative mining companies, but given all mining is risky, we will put it in our mid-risk category. Buy Pan American Silver at $28.70 limit.

Originally published June 18, 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: None. 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: Pan American Silver. 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.
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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 Pan American Silver, a company 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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