Is Pan American Silver Corp a Buy?

Does the company's successful cost-cutting program outweigh the threat of lower silver prices?

Mar 31, 2014 at 11:45AM

Pan American Silver (NASDAQ:PAAS) reported record silver production of 26 million ounces and record gold production of 149,800 ounces for 2013. Record silver production was attributable to production gains at existing mines, and record gold production was attributable to production and higher grades.

During 2013, Pan American Silver implemented a cost-cutting program that was quite successful. All-in sustaining costs net of by-product credits were $18.33, a decrease of 18% from 2012. Pan American Silver has a strong financial position with $422.7 million in cash and short-term investments and $689 million working capital at the end of 2013, while long-term debt was only $40 million. It also offers an industry-leading yield of 3.8% and has maintained it even during a difficult 2013, which saw many silver miners cut their dividends.

The cons
Like the rest of the sector, Pan American Silver's stock price was pummeled throughout most of 2013 due to lower silver prices. The sharp drop in silver led to lower revenue in 2013 as Pan American Silver generated $824.5 million of revenue, 11% lower than 2012. However, the revenue decrease would have been worse if not for being partially offset by the record silver and gold production. For 2013, Pan American Silver generated a net loss of $445.8 million; however, most of the loss is attributable to non-cash impairment charges totaling $420.4 million (net of tax impact) on the Dolores mine and a non-cash deferred tax charge of $86.8 million relating to Mexican tax reforms.

For the full-year 2013, Pan American generated $131.5 million in mine operating earnings, 58% lower than in 2012. The decline in annual and quarterly mine operating earnings was directly attributable to lower realized prices for silver and gold. Operating cash flows for the full-year 2013 were $119.6 million which was 38% lower than in 2012.

Impact of Mexican tax reforms
Pan American Silver was hit with a big tax bill to end 2013, due to tax rate changes. With the recent Mexican mining tax reforms, which include a 7.5% mining tax on sales and a 0.5% gross revenue charge on silver, gold and platinum, silver miners with substantial operations in Mexico such as First Majestic Silver Corp (NYSE:AG) and Couer Mining Inc. (NYSE:CDE) will be negatively affected. First Majestic has five operating silver mines in Mexico and is projecting production of 12.7 million to 13.35 million ounces of silver in 2014. Couer Mining operates the Palmarejo mine in Mexico which is expected to produce roughly 7 million ounces of silver this year. For Pan American Silver with more than 40% of its silver production coming from Mexico, these new taxes will continue to weigh on the bottom line.

Foolish Takeaway
In 2014, Pan American expects to produce 25.75 to 26.75 million ounces of silver, which will be about the same as 2013. This means that they are not likely to achieve revenue growth through production increases. In 2014, Pan American expects all-in sustaining costs in the range of $17.00 to $18.00, net of by-product credit, which gives them some breathing room at current silver prices, but not a lot. At current silver prices, it is hard to see much upside in Pan-American Silver shares. However, with an attractive dividend yield this still remains a viable silver play even at current silver prices.

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