American gymnast Shawn Johnson may wish she had won gold in the all-around at the Olympics, but I believe the value of her silver medal will appreciate substantially.
Silver has fallen 40% since the broader correction in precious metals began in March. Not surprisingly, Pan American Silver (Nasdaq: PAAS), along with competitors like Hecla Mining (NYSE: HL) and Silver Wheaton (NYSE: SLW), have truly been taken to the cleaners.
Amid all the negative sentiment, it's very difficult to gauge the market's reaction to Pan American's second-quarter earnings, released this week. Unlike Coeur d'Alene Mines (NYSE: CDE), which fanned the flames of investors' malcontent with a quarterly loss, Pan American Silver reported record cash flow for the second quarter of $45.7 million, an increase of 45% over the prior year. Adjusted net income rose 35% to $25 million on sales of $104.1 million.
Pan American dug up 4.7 million ounces of silver at a cost of $5.28 per ounce after accounting for by-products like copper and lead. While the production cost ballooned beyond the $4.27 mark that the company had forecast as the 2008 average, Pan American is hardly alone in this plight. This earnings season has been characterized by revisions in production costs for miners, including Agnico-Eagle Mines (NYSE: AEM) and Goldcorp (NYSE: GG). Largely because of increased energy and labor costs, Pan American raised its full-year cost guidance by 19% to $5.10 per ounce.
Aside from the cost overrun, Pan American's results were noteworthy for the distinct lack of any reported problems. All seven operating mines are producing well, the Manantial Espejo mine remains on pace for a fourth-quarter start-up, and the expansion at San Vicente is on schedule for completion by year-end. It might be a sign of the times, but considering the number of delays and hiccups reported among miners recently, the lack of bad news is great news for investors.
Pan American expects 2008 production of 18.8 million ounces, followed by 25 million ounces in 2009 for 33% production growth. President and CEO Geoff Burns is "optimistic that silver will trend higher over the balance of the year, leading to continuing strong financial results for Pan American." I agree, and view Pan American as a solid choice in the sector.
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