On May 6, Canada-based Pan American Silver (NASDAQ:PAAS) announced results for the first quarter ended March 31. Year-to-date PAAS stock is down around 9%. In comparison, the Global X Silver Miners ETF (NYSEARCA:SIL), one of the largest silver miner exchange-traded funds, is about flat.

The volatility in broader markets is making investors wonder if commodities like silver and silver miners should be in their portfolios. More importantly, they are questioning whether PAAS stock would be able to participate in a potential rally in the sector, especially in the second half of the year.

The group is a primary silver producer with a diversified portfolio throughout the Americas. If silver prices rise, I believe that the share price of Pan American Silver will also join in the party. Let’s take a closer look.

Q1 Results

In the first quarter of 2020, revenue was $358.4 million, which translated into an adjusted loss of $7.6 million or -4 cents per share.

Mines in five countries contribute to the miner’s revenue:

• Mexico (about 31% of revenue)
• Peru (about 43% of revenue)
• Bolivia (about 6% of revenue)
• Argentina (about 5% of revenue)
• Canada (about 15% of revenue)

In addition to the silver income, extra revenue is generated from other metals including gold, copper, zinc, and lead. Due to the COVID-19 pandemic, the group suspended operations at the mines in Mexico, Peru, Argentina, and Bolivia in the latter part of March 2020. As a result of the closures, year-over-year (YoY) silver production has decreased. In Q1 2020, it produced 5.6 million ounces of silver, down 9.2% YoY from the 6.31 million ounces produced in Q1 2019.

Meanwhile management has also taken a set of measures to decrease capital spending and to preserve the strength of the balance sheet.

The quarterly report stated that most of the operations are expected to resume later in May. If that time frame for phased openings holds, then the company can potentially expect to put the adverse effects of the pandemic behind it in the second half of the year.

Finally, the Board has decided to maintain the dividend. The current yield stands at 0.9%.

From a fundamental perspective, I find the stock to be overall fairly valued. For example, its price-sales (P/S) ratio is about 3.3x. Analysts prefer a low P/S multiple, ideally below 1x. But a P/S number between 1x and 2x is more common. To put the metric into perspective, the S&P 500’s average price-sales ratio is 2.1x. In comparison, P/S ratio for First Majestic Silver (NYSE:AG) stock is 4.6x.

However, if the adverse effect of the viral outbreak on production levels continues or if the balance sheet comes under stress, then PAAS stock may also feel he pressure in the rest of the year.

Could an Increase in the Price of Silver Help PAAS Stock?

To fully appreciate the price dynamics of silver, it’d be important to understand the role silver currently plays globally. Like gold, silver is considered a precious metal and is used as an investment medium in the form of bullion, coins, jewelry, or utensils, i.e. table silverware.

Silver exhibits high levels of electrical and thermal conductivity. Thus it also has an important role in industrial production. Over 50% of the annual silver demand comes from industrial applications. But only about 10%-15% of global gold demand comes from industrial use. Put another way, the rest of the gold demand comes from jewelry making or as investment.

Thus the two metals do not have exactly the same price dynamics. In Sept. 2018, the price of silver was around $14 per ounce. By Sept. 2019, it was over $19.5. And in Feb. 2020, it was over $18.5.

Currently the price of silver is around $15.5 per ounce. February and March saw the price of the bullion become especially choppy — with a downward bias — on worries that the spread of the coronavirus globally may impact industrial demand adversely.

Between early 2019 and 2020, the price of PAAS stock almost doubled, mirroring the increase in the price of silver. It went from about $14 in Jan. 2019 to hit a 52-week high of $26.20 (Feb. 24). Now the share price is hovering around $22.5.

Louis Navellier recently wrote a detailed bullish piece on PAAS stock. In the article, he discusses the “all-in sustaining cost, or AISC. In fiscal year 2019, Pan American’s consolidated silver basis AISC was a remarkably low $4.44 for each silver ounce sold. As a basis of comparison, the spot price of silver stayed close to $15 per ounce throughout the month of April.”

Should Investors Pay Attention to the Gold-to-Silver Ratio?

InvestorPlace readers may be familiar with the gold-to-silver ratio. Markets use it to calculate how many ounces of silver it’d take to purchase one ounce of gold. Over time, prices of the two metals tend to move in tandem. Yet silver tends to be a lot more volatile. Put another way, the gold-to-silver ratio is not stable, but changes drastically over time.

Currently, the ratio sits over 111. Theoretically, that means you could buy 111 ounces of silver for one ounce of gold. Historically, it has been around 60.

For example, in November 2008, silver was around $8.50. By March 2011, it has hit almost $46.50. Between that time frame, the gold-to-silver ratio was closer to its historical average.

In other words, silver has lately been underperforming gold. The Street would likely argue that silver is rather cheap.

What could this mean for the price of silver?

If you think that the ratio would eventually revert back to the mean, i.e. toward the 60 level, then either the price of silver would have to go up or the price of gold would have to go down.

The silver price has been increasing since late March. Gold has also recently hit a high for 2020. In fact the gold spot price is up over 12% YTD, hovering around $1,710 per ounce. Yet gold is still well below the highs it saw in 2011.

My bet is on the price of silver going up in the long run. However, for now, we’re likely to witness high levels of volatility in the metal.

Bottom Line on PAAS Stock

A rising tide usually lifts most stocks in an industry. Thus, if you believe that the price of silver may go up in the coming months, then you may want to consider adding a mining stock like Pan American Silver to your portfolio.

If you are an investor who also pays attention to technical charts, then you may be interested to know that I’m expecting PAAS stock to continue its recent move up. I believe it is likely to aim first for $24 and then for $25 in the coming weeks. It is likely to take a breather if and when it gets to these levels, though. I’d consider buying the dip.

Therefore, if you’d like to have silver or silver miners exposure, but are nervous about putting all your eggs into one basket in the industry, then you may also consider buying an ETF such as the iShares Silver Trust (NYSE:SLV), the ETFMG Prime Junior Silver ETF (NYSEARCA:SILJ), the iShares MSCI Global Silver Miners ETF (CBOE:SLVP) or the Global X Silver Miners ETF.

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, she held covered calls on SIL (May 15 expiration).