Pan American Silver (NASDAQ:PAAS) is a diversified mining company with 557 million ounces of silver and 5.1 million ounces of gold reserve. The company identifies itself as a premier silver mining company. However, it’s gold sales that’s likely to trigger growth for the company and upside for PAAS stock in the coming quarters.
Since I believe that higher gold prices will imply revenue growth, it’s important to discuss the positive triggers for gold. The Federal Reserve has pledged to keep interest rates near-zero levels until full employment and inflation are back.
Additionally, the Fed’s balance sheet has swelled to $6.6 trillion and this indicates aggressive expansionary policies. I expect the dollar to weaken and this will be positive for gold. Furthermore, demand for gold as an asset class will remain strong as economic uncertainty prevails globally.
Easy money will continue to take the precious metal higher. For the first quarter, Pan American reported average realized gold price of $1,580 an ounce. Gold is already higher at $1,700 an ounce. As EBITDA margin expands, the company is positioned to benefit in the coming quarters.
Strong Fundamentals to Navigate Challenging Times
One of the primary factors to analyze in uncertain times is the company’s credit health.
As of the first quarter, Pan American reported $239.2 million in cash and short-term investments. Additionally, the company had $240 million available under the revolving credit facility. Therefore, the company has a strong liquidity buffer of $480 million.
Another big positive is that the company reported total debt of $299.2 million at the end of the quarter. Low debt gives the company ample flexibility to leverage.
From a cash flow perspective, Pan American reported an operating cash flow of $114 million. This implies an annualized cash flow of $400 to $450 million. Even if cash flow is relatively lower due to mining disruptions, OCF adds to the liquidity buffer.
Overall, the company’s financial health seems robust and Pan American is well positioned to sustain current annual dividends of 20 cents.
Attractive Margins on Gold Sales
The in first quarter, Pan American reported revenue of $358.4 million as compared to Q1 2019 revenue of $253.7 million. The primary reason for surge in revenue was higher gold production coupled with higher realized prices.
Gold production was 156.1 thousand ounces as compared to 80.5 thousand ounces in the prior year comparable quarter. The surge in production was due to inorganic growth. Further, the average realized gold price for the quarter was $1,580 an ounce.
Revenue is likely to remain strong in the coming quarters as average realized price trends higher. Furthermore, the all-in-sustaining-cost for gold production was $969 an ounce. With gold at $1,700 an ounce, I expect robust EBITDA margin and cash flows.
It’s worth noting that silver production for the quarter was 5,561 thousand ounces. While the average realized price was $16.5 an ounce, AISC was $15.26 an ounce. Therefore, in the silver segment, rising AISC is a concern and impacts margins.
In the near term, the focus is likely to be on incremental gold production and robust cash flows. This can take PAAS stock higher.
My Final Views on PAAS Stock
Among the risk factors, I believe that AISC related to silver mining operations needs to decline. For Q1 2019, the company’s silver production AISC was $10.83 an ounce. This jumped to $15.26 an ounce in the recent quarter.
Cost increased in the quarter due to disruption in mining activity coupled with exploration activities. It remains to be seen if Pan American can stabilize the AISC at a lower level for silver production.
However, in the foreseeable future, this concern will be more than offset by gains from higher gold production. Robust realized prices will also trigger higher cash flows. This will continue to take PAAS stock higher.
Additionally, the company has a strong balance sheet and low energy prices is also a potential tailwind. The stock is therefore worth considering with a medium to long-term investment horizon.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock-specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.