Hi-Yo Pan American Silver, Away!

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The Lone Ranger rode a mighty steed, indeed. These days, a masked man on horseback with six-shooters on his hip is more likely to attract the scrutiny of Homeland Security than he is to attain hero status.

Fortunately, Fools have the option to ride a different sort of silver altogether, and Pan American Silver (Nasdaq: PAAS  ) is one of several silver thoroughbreds that I consider capable of carting investors to sizeable long-term gains.

Pan American galloped into earnings with a 67% surge in fourth-quarter profit to $46.4 million. Fools eager to gauge the impact of silver's dramatic late-2010 price gains upon the profitability of miners will note that Pan American scored more than 40% of its full-year profit during the quarter, even though fourth-quarter silver production accounted for just 23.5% of the 2010 total.

The miner delivered its fifteenth consecutive year of production growth with output of 24.3 million ounces, though the 1% to 5% decline anticipated for 2011 appears poised to interrupt that impressive streak. Citing a range of pressures from exchange rates to labor costs, Pan American revealed guidance for a 23% to 32% cost increase, to a range between $7 and $7.50 from the impressive mark of $5.69 achieved for 2010.

To assuage the concerns of cost-conscious Fools, I hasten to point out that at present silver prices above $30 per ounce, even at the high end of that cost estimate, Pan American could still enjoy an operating margin of 75% or more! In fact, I expect continued strength from silver in 2011 to defend those margins against contraction. It is worth noting, however, that China-focused Silvercorp Metals (NYSE: SVM  ) continues to impress with a negative production cost of ($5.93) per ounce of silver for its third quarter of fiscal 2011. After applying its lead and zinc sales to the silver cost structure, in other words, Silvercorp is essentially paid to pull silver out of the ground.

Looking further afield, we find Pan American's aspirations for nearly doubling the scale of its production profile trailing those of superstar Silver Wheaton (NYSE: SLW  ) by only one year's time. While Silver Wheaton's projected growth spurt rests on the heels of two slam-dunk projects -- the ongoing expansion of Goldcorp's (NYSE: GG  ) Penasquito output, and the subsequent completion of Barrick Gold's (NYSE: ABX  ) Pascua Lama mine -- Pan American carries its silver eggs in one somewhat less certain basket.

Although the company expresses confidence that Argentinean law will be amended to permit construction of the Navidad project, the fact that the region remains subject to a mining ban forces the market to discount the project substantially. On the other hand, with an enterprise value that's more than 70% smaller than that of Silver Wheaton, Pan American investors can look forward to a brisk revaluation of shares to follow any such political victory for Navidad.

While I do vastly prefer recent AMEX inductee Great Panther Silver (AMEX: GPL  ) and fellow growth engine Endeavour Silver (AMEX: EXK  ) for some of the highest-octane exposure to silver, Pan American remains a large-cap thoroughbred of undeniable quality and value. Add your favorite silver steeds to your Motley Fool watchlist by clicking on the links below, and track all the Foolish coverage of these silver bullets.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Endeavous Silver, Goldcorp, Great Panther Silver, Pan American Silver, Silvercorp Metals, and Silver Wheaton. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 17, 2011, at 1:54 PM, silverhairfool wrote:

    Chris, Thanks for the analysis. Re: Navidad, Coro Mining received a week ago its EIS approval for an open pit gold/copper mine in Mendoza, a couple of provinces north of Chubut. The language of the company's press release, EIS summary, etc., are similiar to PAAS's re: benefits, environmental protections, etc. As a land use attorney for 15 years, this all seems typical, in a "we all know the outcome, its just going through the motions and seeing how much we are going to have to pay the local government to get the approval" kind of way. My gut is that PAAS is doing what it has to do to get the approval, and with the increasing desire of the leaders of all countries to get on with the process of growing their middle class in a developed country style, I would bet that PAAS is correct in indicating that it expects approval of open pit mining in Chubut.

  • Report this Comment On February 17, 2011, at 3:30 PM, XMFSinchiruna wrote:


    I agree with the entirety of your comment! I simply wanted Fools to be aware of the factors in play, but I agree that the likelihood of a positive determination for Navidad is very strong. Thank you for posting.

  • Report this Comment On February 18, 2011, at 10:54 AM, frankinCA wrote:

    Hey, the lone ranger forgot to compare to CDE. This company is making a big comback and I hear it might declare a dividend making it a company moving from the junior "Tonto" status to the Mining investment class suitable for S & P status. Get in now before the LR rides into the sunset and leaves the best behind! Also remember CDE is an American company and will not be subjected to possible future taxation or ? that of non US companies subjected to. US needs jobs jobs jobs and I don't mean only Steve.

  • Report this Comment On February 22, 2011, at 12:17 PM, frankinCA wrote:

    Hey buyaluminium, Lots of people are required to mine silver and, no automation when surface or subsurface mining takes place. Any increase in business encourages more mining and more prospecting, drilling and in the long term more silver at a reasonable price that has many industrial and medical uses including batteries for that lightweight . car that we should be developing. Aluminum has it's place but it is not a panacea except for beer drinkers. Much of the silver mining is taking place in South America and the miners are being paid well enough to buy American made products even aluminum products including Coke in cans.

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