This Silver Miner Is a Rare Dividend Play

Silver mining stocks are not exactly known for their dividends. The precious metal they produce has mostly been in free fall since the beginning of the year. These miners have to preserve liquidity in the face of these challenges, so it's no surprise that only four out of twelve silver stocks listed on American exchanges are currently paying dividends. However, Pan American Silver (NASDAQ: PAAS  ) is yielding a hefty 3.7%. Is it worth your attention?

Sustainability of the Dividend 

Pan American Silver finished the second quarter with an adjusted net loss of $9.9 million. Yet the company has paid $18.9 million in dividends to its shareholders this quarter. Is this sustainable? I think so. Pan American Silver had $440 million in cash on its balance sheet at the end of the second quarter. This is more than enough to continue to deliver the dividend while silver prices remain depressed.

The company had to take a one time impairment charge of $185.2 million against the goodwill that arose from the purchase of the Dolores mine in 2012, lowering earnings but not affecting the cash position. 

Cutting costs

Just like any other company in the sector, Pan American Silver had to take cost-cutting measures. The company has managed to cut the cost of producing a ton of ore by 2% compared to a year ago. However, this was not enough to pull Pan American Silver into profitable territory. The decline in silver prices was just too big. In addition to that, the company has recorded a $9.9 million foreign currency loss on its Canadian dollar bank balances and a $13.2 million writedown on inventory due to lower silver prices.

Other miners are more active on the cost-cutting front. Silver Standard Resources (NASDAQ: SSRI  ) has eliminated 25% of positions in its corporate office. The company also reduced its exploration budget. Silver Standard Resources recorded $221.7 million of impairment changes and writedowns. Most of the impairment was related to the Pirquitas mine in Argentina, and, just as in Pan American's case, the move was forced by lower silver prices.

Hecla Mining (NYSE: HL  ) has taken big steps in reducing its spending. The company announced that it cut its 2013 capital expenditures forecast by 13%. At the same time, Hecla is cutting its exploration spending by 28% and its pre-development spending by 35%. Hecla has had a decent quarter, as silver production rose 64%, due in part to one of the company's mines, Lucky Friday, returning to production. Hecla is one of few silver miners to pay a dividend. However, it currently yields only 0.28%, and there are no signs that this will be boosted in the near future.

Bottom Line

Pan American Silver is a stable dividend play. The company has a lot of cash on its balance sheet and almost no debt, which helps in preserving its dividend. The absence of interest expense is a big advantage in a low silver price environment. I do not think that investors should be scared by write-downs and impairments. When silver prices rebound, the company will test its assets and adjust their value.

Silver is priced under $25 right now, which is less than half the highs achieved in 2011. Typically, you want to get exposure to cyclical industries when prices are depressed rather than when they are elevated.

If you believe that silver prices will rebound, Pan American Silver is a better choice. It's almost impossible to predict the exact timing of the silver price rebound. The miners' shares could fluctuate back and forth near current levels for a while. Unlike other silver miners, Pan American Silver would provide a decent income stream, and this is a big advantage.

Looking for more commodities-based ideas? Download the free report, The Tiny Gold Stock Digging Up Massive Profits. The Motley Fool's analysts have uncovered a little-known gold miner they believe is poised for greatness; find out which company it is and why its future looks bright -- for free!


Read/Post Comments (1) | Recommend This Article (5)

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 August 23, 2013, at 2:26 PM, EllenBrandtPhD wrote:

    Underperformance of this one re its index peers the past couple of days is not only apparent to everyone, everyone knows WHY and more importantly WHO.

    Certain Kiddie Prop Desk traders and their parent institutions are not only making pretty much everyone in the world very angry with their Temper Tantrum behavior, it has now come to the point that they are losing their "followers," fickle at best, in droves.

    Markets should be Markets, not computer games.

    And Traders should be Responsible Traders, not three-year-old brats holding their breath until their little faces turn red.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2601636, ~/Articles/ArticleHandler.aspx, 8/28/2014 9:22:52 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement