Pan American Silver Corp.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Pan American Silver Corp. is a silver mining company with a diversified portfolio of silver-producing assets across the Americas.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Pan American Silver (PAAS) is primarily engaged in the exploration, development, extraction, processing, refining and sale of silver and other precious metals, including gold. Its operations are primarily concentrated in Latin America, with mines in Mexico, Peru, Bolivia, Argentina and Chile. The company’s revenue streams are derived from the sale of these metals, and are therefore influenced by prevailing market prices for silver and gold.

The company has transitioned from focusing on growth to maximizing free cash flow, as it has sold some of its non-core assets.

  • Revenue Distribution: The company generates revenue by selling silver, gold and other metals, with silver being the primary driver. Revenue is therefore directly exposed to commodity prices. This means the company is a price-taker and does not exert pricing power. The prices of the precious metals they sell will fluctuate as per the market conditions.

The revenues are also impacted by production output from the various mines, which is often impacted by regulatory and community negotiations.

  • Industry Trends: The mining industry is cyclical, with both demand and prices for precious metals fluctuating based on several factors, including economic growth, industrial demand, and investor sentiment. The silver industry is influenced by its dual role as an industrial metal and a precious metal (which is seen as a safe haven for investors during economic uncertainty). There is also an increasing focus on sustainability and Environmental, Social, and Governance (ESG) practices in the mining sector.

The demand for silver is also increasing with the increase in Solar Panel production and the electrical industry.

  • Margins: Pan American’s profitability can fluctuate significantly with changes in metal prices, which means it’s operating profit margins aren’t consistent. The recent financial reports show an improvement in margins compared to previous periods. This indicates better operational control of costs with increases in commodity prices. The company has also reduced operating and maintenance expenses by increasing efficiencies.

Their profits are always higher when the gold and silver prices are higher. The price-taking characteristic of the business means that their profit margins are directly affected by market forces.

  • Competitive Landscape: The silver mining industry is fragmented, consisting of many competitors, from large-scale producers to smaller and mid-tier players. Major players include companies like Fresnillo, Hecla, and Fortuna Silver Mines. Some small players include First Majestic and Endeavour Silver. This competitive landscape poses a threat of price-erosion if some companies increase production.

There has been some consolidation in the industry in recent years with companies trying to expand into more profitable assets. There are a lot of private mining companies as well, and these mostly operate in emerging markets.

  • What Makes PAAS Different: Pan American’s strength comes from its diversified assets in the Americas, which can allow it to withstand political and economic changes in different countries. It is also one of the largest primary silver producers which gives it size-based benefits. Pan American is also committed to responsible mining practices and has a growing focus on green-energy projects. These are seen as important factors by investors these days.

Management has shown an emphasis in growing per-share value of the company, as the per-share production has increased over time, even as the overall production remained flat or even decreased.

Financial Analysis

  • Revenue Growth: Recently Pan American has seen an increase in revenue growth, which reflects higher metals prices, specifically silver.

Pan American has produced 5.8 million ounces of silver, and the average selling price of silver was $23.42 an ounce.

  • Cost of Revenue and Gross Profit: As a price-taker company, cost management is one of the key determinants of a profitable company. Pan American has increased its focus on cost efficiency and has improved both its production and cost output.
  • Earnings: EPS has swung from large losses to big profits depending on changes in commodity prices. However, earnings are expected to stabilize as the cost-saving strategies get fully implemented in the coming years.

The company has recently announced positive guidance for production in 2024 and 2025, as they have completed their drilling plan and are ready for production at their new La Colorada Skarn mine. They believe they are also on track to achieve their goal of 10 million ounces per year of silver production within a few years.

  • Balance Sheet:
    • Assets: The company has more than $500 million in cash and marketable securities as per the latest report, which is more than the long-term debt. Also the ratio of current assets to current liabilities is 2, which is considered a good metric.
    • Liabilities: PAAS has been able to bring down its debt significantly in recent years and doesn’t have a problem in servicing debt.

The company has a healthy balance sheet with good liquidity.

  • Cash Flow: Operating cash flows were at a record for the latest quarter and are expected to continue to grow in the coming quarters as the new projects start producing and new contracts roll over at higher silver prices.

Moat Assessment: Pan American Silver’s moat is relatively weak, and is rated as 2/5.

  • Brand: Although the company benefits from a global brand presence, it does not confer pricing power.
  • Patents/Intellectual Property: The company relies on natural resources and mining licenses, not patents. These are usually regulatory licences, and aren’t hard to obtain for all competitors.
  • Switching Costs: Buyers of silver and gold are not subject to high switching costs. There are lots of suppliers in this sector, and it is easy to move from one to another.
  • Network Effect: There is no network effect in place.

It mainly relies on low cost of production due to superior mining processes. This is hard to protect due to easy knowledge dissemination.

  • Cost Advantages: The company’s focus on high-quality mines is geared to reducing production costs. However, many competitors can also implement similar techniques. And also, it can be overcome if some low-cost producers decide to compete and can get better access to resources.

The company has some advantages from its large size and diverse mining presence in America, which also adds to the diversification.

  • Barriers to entry: The barriers to entry are relatively low. New mines can be opened and new players can emerge quite often with enough capital. The expertise and technology are readily available for other market entrants as well.

Risks to the Moat and Business Resilience: * Commodity Price Volatility: Fluctuations in silver and gold prices significantly impact Pan American’s profitability. A prolonged period of depressed prices would be devastating for the business. * Geopolitical Risks: Operating in multiple Latin American countries exposes the company to political instability, regulatory changes, and varying tax regimes. These factors can suddenly impact production, costs, and profitability. * Operational Challenges: Mining operations are subject to a variety of risks, including geological uncertainties, weather disruptions, equipment failures, and environmental regulations that could impact production, costs, and profitability.

Regulatory and Community Issues: Mining companies often face regulatory changes and community issues that can impact existing mines or expansion plans. This might lead to a decrease in production and profitability.

Understandability Rating: The company’s business model is fairly straightforward, earning it a 3/5 in understandability. However, analyzing their assets, liabilities, and complex financial statements requires some amount of financial acumen. The fluctuating nature of commodity prices requires some knowledge of market drivers. Furthermore, mining operations are impacted by multiple other factors like geopolitical climate, environmental risk and the ability of the management.

Balance Sheet Health: The company’s balance sheet health is very good. With significant liquidity and improving cost management, it has a 4/5 in balance sheet health. The management has made reducing debts and improving financials a core goal, which is clearly visible in the financial statements.

Recent Concerns and Management Outlook:

  • Controversy: A recent concern with a silver miner was a corruption issue that has led to a criminal case. While the company itself had no connection with that, this showed that silver mining operations in high-risk emerging market are subject to ethical and legal vulnerabilities.
  • Management outlook: The management is bullish about the future of the company. With prices of silver reaching new highs, the current market conditions are favorable for its operations, and its cost management has been effective over the past quarters. The new La Colorada Skarn mine is expected to provide consistent production and free cash flow, which will lead to increased value for the shareholders. Furthermore, the management has reiterated its commitment to shareholder value by reducing debt and focusing on profitable core operations.

The company’s future strategy involves focusing on increasing production in existing mines and developing new mines within their current jurisdiction.