Vancouver-based Pan American Silver Corp. (PAAS, Financial) experienced a significant transition last year, acquiring four operating mines from Yamana Gold (AUY, Financial) on March 31, 2023. These mines included the Jacobina mining complex in Brazil, the El Peñón and Minera Florida mines in Chile and the Cerro Moro mine in Argentina.
The acquisition also included 56.25% of the MARA development project in Argentina. The company subsequently sold its 56.25% interest in the MARA project in Argentina, its 92.3% interest in the Morococha mine in Peru and its 57.74% interest in Agua de la Falda for a total cash consideration of $545.55 million. The deals were closed between Sept. 20, 2023 and Dec. 31.
According to its fourth-quarter and full-year 2023 results, which were released in February, the company now owns 11 producing mines in the Americas and has declared a mineral reserve of 486.80 million ounces of silver and 7.70 million ounces of gold.
Source: PAAS presentation.
Pan American reported a loss per diluted share of 15 cents, or $51.50 million, for the quarter. However, revenue increased 78.30% year over year to $669.60 million.
However, gold and silver production for 2023 reached a new record, as shown in the graph below:
During the conference call, CEO Michael Steinmann said, "In 2023, the nine-month contribution of the assets we acquired grew 11% in silver production and a 60% increase in gold production over 2022, resulting in record revenue for both Q4 and for the full year."
The company said the consolidated silver and gold production was within the guidance range. For the full year, silver production was slightly below guidance, however, while gold production was within the expected range.
Investment thesis
Pan American Silver remains a good long-term gold and silver investment despite a poor stock performance in 2023 that significantly underperformed the sector.
The recent acquisition of some Yamana Gold properties and the possibility of Escobal reopening within a year or two support the long-term narrative, particularly given the recent rally in gold and silver prices.
Fundamentally, the balance sheet is solid with an excellent cash and liquidity position. Further, with high metals prices expected in 2024 and the Federal Reserve signaling a few interest rate cuts for the remainder of 2024, gold prices were boosted to over $2,350 per ounce and silver to nearly $27 per ounce.
Even though metal prices will likely retrace a little entering the second half, the company will probably have a record year in 2024, with liquidity of $1.19 billion and solid production expected.
Source: PAAS presentation
Two strong catalysts in the medium term are the Escobal Silver Mine and the La Colorada skarn. The La Colorada Silver Mine is the company's largest fully-owned silver mine, with proven and probable reserves of 86.3 million ounces of silver and 59,000 ounces of gold.
I believe the Guatemala-based Escobal Silver Mine will reopen by the end of 2025, assuming a positive ruling from the Guatemalan Supreme Court, potentially late in 2024.
The company has yet to provide an estimated timeline for a potential restart, showing a long and difficult road ahead. However, investors should view this as purely speculative, with the indigenous Xinka's opposition remaining strong, but willing to negotiate.
A new government took office in January 2023. The company had its first meeting with the new Ministry of Energy and Mines on Feb. 7, with the meeting for the ILO 167 held on Feb. 21.
Source: PAAS presentation
Stock performance
Given the current high price of metals, Pan American could perform better. Despite a significant increase in April, the stock is still down 5% from the previous year. It is not keeping up with the iShares Silver Trust (SLV, Financial), which has gained 9% in the past year.
Gold and silver stocks are generally late to follow a metal rally of this magnitude and often retrace abruptly based on the general economy. Thus, it is very important to trade the stock regularly using the LIFO method supported by technical analysis.
Gold and silver production commentary
The production for the fourth quarter totaled 4.83 million silver ounces and 267,800 gold ounces. Silver production was below guidance, but gold production was within management's guidance ranges for 2023. As we can see in the chart below, the company is mainly a gold producer despite its name.
Fourth-quarter 2023 production of gold and silver
The company said in a press release:
"Consolidated 2023 silver production of 20.40 million ounces was below the 2023 operating outlook due to La Colorada's ventilation constraints in the higher-grade mine zones and the temporary suspension of operations in October2023, partially offset by higher silver production at SanVicente."
With regard to production per mine, Pan American produced gold and silver from its eleven mines, as shown in the chart below:
The miner also produces zinc, lead and copper.
2024 guidance
Pan American Silver is anticipating producing 21 million to 23 million ounces of silver and 880 to 1,000 thousand ounces of gold in 2024.
The average all-in-sustaining cost for silver will fall between $16 and $18.50 per ounce; for gold, it will be between $1,475 and $1,575 per ounce.
If we look at the historical data, we can see that Pan American's silver AISC will improve in 2024, while the gold AISC is expected to increase by 8%.
Financial analysis
The miner's total fourth-quarter revenue was $669.60 million.
The Canadian company, however, reported a loss of $51.5 million, or 15 cents per diluted share. It is a significant improvement over the net loss of $172.76 million, or 82 cents per share, in the prior-year quarter.
The miner has achieved record revenue of $669.60 million in the current quarter, up 78.30% from a year ago and 8.60% sequentially. The adjusted quarterly income was $16.30 million, or 4 cents per share.
Its free cash flow was $48.50 million.
During the final quarter of 2023, there was a gain of $48.50 million. The company's free cash flow for the past 12 months was positive at $71.20 million. Moreover, the board of directors authorized a cash dividend of 10 cents per common share.
Pan American has announced its plans to purchase approximately 5% of its stock between March 6, 2024 and March 5, 2025. This would mean purchasing around 18.20 million shares at the current level. While I would have preferred an increase in the dividend from 10 cents to 15 cents, the new share buyback program will benefit shareholders.
On the balance sheet as of the fourth quarter, the company recorded total cash of $440.9 million and total debt of $703.70 million.
As of Dec. 30, the company had cash and short-term investment balances of $440.90 million. The long-term debt, including current, is $703.70 million (total debt equals $801.60 million). Available liquidity is $1.19 billion.
Technical analysis and commentary
Pan American Silver's stocks displays an ascending channel pattern, with $16.75 representing support and $19.35 serving as resistance. Shares rose from $14 on March 25 to over $19 today. The relative strength index, which is currently around 82, appears heavily overbought and flashing a sell signal. However, with gold over $2,350 and silver nearly $28 per ounce, the stock could eventually go higher and potentially over $20 before retracing.
Technically, ascending channel patterns are a bullish formation but will likely end with a breakdown.
The goal is to trade roughly 50% of your position LIFO and hold onto a core position for a long-term retest of $20 and potentially above, which should happen in the second half of 2024 or 2025, most likely after Escobal restarts.
I recommend accumulating shares between $17 and $16.25, with possible lower support at $15.50. Conversely, I suggest selling about 50% of your position between $18.65 and $19.50, with potential higher resistance at $20.
Warning: The TA chart must be updated frequently to be relevant.
