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It wasn't supposed to be this way. Precious metals are supposed to increase in value when global financial paradigms careen into turmoil and collapse. Gold and silver prices are supposed to balloon with the U.S. national debt.
Of course, nothing today is behaving as it's supposed to, and silver has tested the will of safe-haven seekers everywhere by daring to dip back into single digits. Although major silver miner Pan American Silver (Nasdaq: PAAS ) managed to eke out a profit for the third quarter, the accelerated deterioration of metal prices through the first half of this fourth quarter is wafting scents of losses into the air. Meanwhile, the company expended $6.61 for each ounce of silver mined, nearly twice the cost from a year earlier. More importantly, today's silver price of $9.48 sits beneath the company's latest all-in cost of production of $9.53, prompting Pan American to hunker down in a big way.
Until prices rebound into the profitability zone, Pan American will implement the following defensive measures:
- Total workforce reduction of 500 employees.
- 10% wage reduction for all senior executives. (BRAVO!)
- Suspension or substantial curtailing of all exploration activity.
- Cancellation of all discretionary capital spending.
- Reworking of mine plans to pursue higher-grade ores in the near term.
If these metal prices persist, I believe announcements like these will become the status quo … eventually bolstering prices by virtue of worldwide project delays and cancellations. In the meantime, Agnico-Eagle Mines (NYSE: AEM ) CFO David Garofalo sees bankruptcies among many junior miners as "inevitable." Even the once-mighty Teck Cominco (NYSE: TCK ) is engulfed in uncertainty, as lower metal prices call its ability to repay debt into question. Among silver seekers, both Hecla Mining (NYSE: HL ) and Coeur d'Alene Mines (NYSE: CDE ) have retreated more than 88% from their 2008 peaks. Even the low-cost, fixed-cost business model of Silver Wheaton (NYSE: SLW ) provided no shelter from these market conditions.
Pan American, however, carries zero debt, enjoys $167 million in working capital, and has already funded near-term growth projects. Two new mines will ramp up in 2009, including the low-cost Manantial Espejo mine in Argentina, which is slated to produce 4.1 million ounces of silver and 60,000 ounces of gold annually. For these reasons, I consider Pan American among the best-positioned silver miners to withstand these challenges, and I expect silver prices to rebound with a vengeance before long.