Pan American Silver: A "Cheap" Way to Play Precious Metals

06/21/2019 5:00 am EST


Gavin Graham

Chief Strategy Officer, INTEGRIS Pension Management Ltd

Gavin Graham has held senior positions in financial organizations in London, Hong Kong, and Toronto and is a trustee of the Royal Medical Foundation Investment Committee. Here, the contributing editor to Internet Wealth Builder looks at a precious metals play.

One way of playing the rise in precious metals that is looking particularly cheap now is the second largest silver miner in the world, Pan American Silver (PAAS).

Silver is selling near a 20-year low in terms of its relationship to gold, at levels which in the past have seen silver outperform gold as the ratio adjusts back to historical norms.

In addition, Pan American is down 34% over the last year and 24% year-to-date, largely due to the additional shares issued in its takeover of Tahoe Resources, a deal which many analysts feel has been misunderstood.

Vancouver-headquartered Pan American Silver is the world's second largest primary silver miner. The company produced 24.8 million ounces of silver and 179,000 ounces of gold in 2018 at an all-in sustaining cost (AISC) of $10.73 per ounce of silver (figures in U.S. dollars). Silver currently trades at $14.99 per ounce.

The company owns a diversified portfolio of assets including properties in such mining-friendly jurisdictions as Mexico, Peru, Canada, Argentina, and Bolivia. Following its takeover of Tahoe, it also owns the Escobal mine in Guatemala that is currently not producing.

Pan American is not merely the largest silver company by several measures but a very well managed mining company that has taken advantage of the bear market in precious metals to substantially expand at an attractive price.

While some investors have been worried about the suspension of Escobal, Tahoe's only producing silver mine, Pan American structured the deal so that Tahoe shareholders received so-called contingent value rights (CVRs).

Each CVR can be exchanged for 0.0497 of a Pan American share upon first commercial shipment of silver concentrate from Escobal following resumption of mining. The CVRs can be traded and have a 10-year life. If they are exercised, the percentage of Pan American owned by Tahoe shareholders rises from 27% to 32%.

In other words, Pan American will only end up paying for Escobal if it comes back into production. Escobal produced 21 million ounces of silver at an AISC of $8.63 during the last four quarters it was in operation. That was almost the same amount as Pan American's total silver production.

Guatemala's Constitutional Court has provided a process for resolution of the dispute that could lead to Escobal being reopened although there is no timeline at present. Even without Escobal reopening, Pan American will enjoy strong growth from the Tahoe gold operations and its COSE and Joaquin silver mines in Argentina, which are opening later this year.

It also has discovered a major new reserve at depth at its La Colorada mine in Mexico and will have its first reserve estimate later this year. Our current recommended action is "Buy".

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