Pan American Silver Faces the Crash in Metals

Next Tuesday, Pan American Silver (NASDAQ: PAAS  ) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed knee-jerk reaction to news that turns out to be exactly the wrong move.

Gold got all the headlines last month with its $140 single-day plunge, but silver prices have also been on the decline, hurting Pan American Silver and other miners. With the company facing other challenges as well, how can it handle the inevitable margin squeeze that will result if silver doesn't rebound quickly? Let's take an early look at what's been happening with Pan American Silver over the past quarter and what we're likely to see in its quarterly report.

Stats on Pan American Silver

Analyst EPS Estimate

$0.25

Change From Year-Ago EPS

(57%)

Revenue Estimate

$257.03 million

Change From Year-Ago Revenue

12.3%

Earnings Beats in Past 4 Quarters

1

Source: Yahoo! Finance.

Will Pan American Silver's earnings be tarnished this quarter?
Analysts have severely cut their view on Pan American Silver's earnings prospects. For the first quarter, they've chopped $0.18 per share from their estimates from three months ago, while they've shaved about a third from their full-year 2013 and 2014 earnings figures. The stock has responded similarly, falling nearly 30% since early February.

Falling silver prices have been painful for Pan American and its peers ever since the white metal hit its peak price near $50 in 2011. With its silver production dwarfing that of competitors Hecla Mining (NYSE: HL  ) and First Majestic (NYSE: AG  ) , especially in light of the long closure of Hecla's Lucky Friday mine that just recently came back on line, Pan American has huge exposure to changing silver prices.

Yet another important component of Pan American's woes comes from the cost side of the equation. First Majestic has done an excellent job of maximizing its profit margins, keeping its costs down despite pressures throughout the industry from labor and capital expenditures. Pan American has managed to stay ahead of archrival Coeur d'Alene (NYSE: CDE  ) on the cost curve, but moves like its recent $100 million impairment charge on its Navidad mine in Argentina threaten Pan American's track record of operational efficiency.

One key sign of the impact of the recent plunge in silver could make itself felt in Pan American's dividend. Just in February, the company raised its payout by a whopping 150%, citing expectations to generate solid net cash flow. Yet CEO Geoff Burns referred specifically to the health of its cash-flow projections "at the current silver price," raising the question of whether lower prices could force it to do a quick about-face on its payout.

In Pan American's quarterly report, watch closely for news of the Navidad mine, which has suffered from adverse business and political conditions in Argentina. Moreover, until prospects for silver prices rebound, you'll need to keep a close eye on the impact the price plunge has on earnings and cash flow going forward.

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