PAAS: Pan American Silver Corps 11/7/19

Pan American Silver Corp (NYSE:PAAS, TSX:PAAS) owns ten operating mines across Canada (Bell Creek and Timmins West), Mexico (Dolores and La Colorada), Peru (Huaron, Morococha, Shahuindo, and La Arena), Bolivia ( San Vincente) and Argentina (Manantial Espejo/COSE/Joaquin), expected to produce 570-620,000 gold ounces and 26.6-27.6 million silver ounces at an AISC of $7.75-$10.75/oz silver in 2019, implying an operating cash flow of US$300-400 million ($1.50-$2 per share) at $16 silver and $1400 gold .

The company is looking for a buyer for its Canadian mines, which are primary gold producers, so it can maintain its silver focus. The company also owns two other significant assets, which are company makers if they ever see the light of day: the newly acquired Escobal mine in Guatemala capable of producing 21 million silver ounces a year, and the stalled Navidad project in Argentina with the potential to produce 275.5 million silver ounces over a 17 year mine life

Under its previous owner Tahoe Resources, in early 2017 the Escobal mine was shut down by the Guatemalan government following protests from the local community. Tensions reached a fever pitch when Tahoe security personnel opened fire on some of the protestors using rubber bullets. The affected protestors, financed by certain anti-mining NGOs, filed a lawsuit against the company in the Supreme Court of British Columbia. Tahoe was on the path to ruin, with investors having given up on the company as a lost cause. But in what could either be a brilliant move or the heights of lunacy, Pan American proposed to acquire Tahoe last November, diluting its own shareholders by 32%. Within a year of the acquisition it has already reached a settlement with the affected protestors. The company has experience operating in Bolivia, a no-go zone for all other majors. So, it might just manage to turn around the situation with Escobal.

While we are including Escobal in our NAV calculation and allowed it to influence our perspective on the company’s growth trajectory, some caution is warranted, drawn from its own history. In 2010, PAAS acquired Aquiline Resources for their Navidad project in Chubut province, Argentina. Aquiline was stuck with a dead asset, in this case due to a provincial law that prevented open pit mining and the use of cyanide.

PAAS swooped in thinking they could get the law changed.

In their Preliminary Assessment report, they expected Navidad to be in commercial production by 2014.

But to date, they have had no success, and Navidad is still a dead asset.

Regardless, neither Navidad nor Escobal give us the best reasons to buy this company. Pan American has a 25-year track record of giving silver investors what they want. It is one of the world’s largest silver producers. It is one of the lowest cost silver producers among its large cap peers and operates in mining friendly jurisdictions. Gives us plenty of diversification in one company (with 10 mines spread around the world). It even pays a small dividend. And offers value as well as an anchor in our portfolios.

The shares are currently trading at 8-10 times this year’s expected cash flows, and at a considerable discount to their potential value at prices for silver that come anywhere near our fair value estimate.

It’s not easy to know what value they will offer when silver prices reach our long term $250 target in 5-10 years and gold reaches its $5k levels or more following a decade of unprecedented central bank intervention into the capital markets and decades of excess in public and private expenditures. The reason is that costs will change too. Profit margins are not likely to be much greater and may or may not shrink. What will be greater is the fiat representation of the bottom line regardless of those facts. And it is likely that it will grow faster than the price of the product they’re selling. So, there is going to be leverage to silver prices. That of course cuts both ways. But we are making the bullish case.

Past bull markets offer the best clue as to the sensitivity of shares to the price of the underlying metal, and we can rest assured that the sensitivity is greater than 1.0 for most silver shares. In the last bull market 2001-08, PAAS shares gained 18 times, or 52% for seven consecutive years. It was starting from a smaller size then. But it is reasonable to see it turn into a 10-bagger given our long-term gold/silver price forecasts.

Stay ahead of the masses,

Seth Maniscalco
Founder, Crypto Wealth Coach LLC
Owner, Modern Wealth Management LP
Stay ahead of the masses,

Seth Maniscalco
Founder, Crypto Wealth Coach LLC
Owner, Modern Wealth Management, LP
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