It is increasingly difficult to find a good-yielding company for your income portfolio as the stock market continues to rise. Pan American Silver (NASDAQ: PAAS ) is one of those companies. The miner offers an attractive 4.52% yield. Pan American, like Silver Standard Resources (NASDAQ: SSRI ) and First Majestic Silver (NYSE: AG ) , was hit by the new Mexican tax on miners. However, I believe that the company will continue to provide value to shareholders despite this negative event.
The impact of the tax
The Mexican government chose an improper time to increase the tax burden for miners. Gold and silver prices are low, and miners struggle to cut their costs and operate profitably. Despite this difficult situation, the government imposed a new 7.5% tax on mining companies' earnings before interest, taxes, depreciation, and amortization. In addition, it imposed a 0.5% charge on sales of gold, silver, and platinum.
This tax affects three of Pan American's mines in Mexico: Alamo Dorado, La Colorada, and Dolores. These three mines accounted for 49% of the company's silver production in the third quarter. What's more, if we look at the balance sheet, we will find that the Dolores mine alone accounts for 54% of carrying value of Pan American's mineral properties.
The company states that it is still evaluating the consequences of the new tax. The tax also affects the valuation of its La Virginia and La Bolsa projects in Mexico. Given the new rules, the company could be reluctant to spend on them.
Pan American also has operations in Canada, U.S., Peru, Bolivia and Argentina. The situation is much worse for First Majestic Silver, all of whose operations are in Mexico. First Majestic stated that the new tax would significantly impact its capital investment decisions. However, First Majestic has little room for maneuver.
The situation is similar for Silver Standard Resources, whose big Pitarilla project is situated in Mexico. The company has a sole operating mine, Pirquitas, and desperately needs to get another mine to production to provide growth. Silver Standard stated that the new tax delayed construction decision on Pirquitas into 2014. Another Silver Standard project, San Luis in Peru, is stalled as well due to negotiations with local community.
The bright side
Now, let's get to more positive things about Pan American Silver. First, the company has switched from loss to profit in the third quarter. The company lowered its cash cost guidance from the range of $11.80-$12.80 per ounce of silver to the range of $11.25-$11.80.
Pan American Silver reported that its all-in sustaining costs were $16.26 per ounce. It was the third quarter when the company reported this metric. However, Pan American stated that all-in sustaining costs for the whole year will be under $19 per ounce. It is clear that the company had higher costs in the first two quarters.
When you buy a stock from an income point of view, you should evaluate if the dividend is sustainable. Net cash flow covered capital expenditures in the third quarter, but the $18.9 million dividend was paid from cash in the company's treasury.
Pan American still had $421 million of cash on its balance sheet at the end of the third quarter. Given that the company has just $60 million of debt, you can expect that the dividend is sustainable in the foreseeable future.
If you need a new position for your income portfolio, Pan American Silver is the company of choice. Despite low silver prices, the company managed to operate profitably in the third quarter. Pan American is able to fund its capital expenditures from net cash flow, which is a healthy sign. The yield is attractive, and the big cash position ensures the dividend.
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