3 Reasons to Buy Pan American Silver

The silver market is heating up again as the price of silver added 8.5% to its value during the year (up to date). Because of this recovery, Pan American Silver (NASDAQ: PAAS  ) , a silver producer, has benefited from this rally, and the company's stock jumped by more than 32%, year to date. As a result, many analysts covering this stock have given it a hold rating. Why is this company an interesting investment for investors seeking to increase their exposure to precious metals?

1. Silver's recovery
The rally of gold and silver prices kept silver undervalued compared to gold. The chart below shows the ratio of gold to silver prices during 2013-2014. 

Source of Data: CME.

This ratio shows that gold has outperformed silver during the past year and a half as the ratio grew from the low 50s to the mid-60s. This ratio may suggest silver has more room to grow than gold has. In times when precious metals thrive, silver tends to pick up the pace and outperform gold (as was the case during 2009-2011). But in times when precious metals fall (as in the past few years), silver tends to underperform gold. Thus, if precious metals keep recovering, this could bring down the ratio of gold to silver, which means silver may outperform gold in the near term. In such a case, silver companies such as Pan American Silver would perform better in the stock market than gold producers. 

Most of the growth in the company's revenue is likely to come from the potential recovery in the price of silver since the company doesn't plan to increase its silver production this year: Its full-year forecast ranges between 25.75 million silver ounces and 26.75 million silver ounces, or an average of 26.25 million silver ounces. In comparison, back in 2013, total silver production was 26 million ounces -- a 1% gain, year over year.

Silver Wheaton (NYSE: SLW  ) , a silver and gold streaming company, also estimates its 2014 silver sales to remain close to its silver equivalent sales in 2013. 

2. Debt
One of the main advantages Pan American Silver has over its peers is the low level of debt it holds. As of the last day of March 2014, the company's debt-to-equity ratio was only 0.275. Other gold and silver producers such as Hecla Mining (NYSE: HL  ) hold higher debt on their balance sheets -- Hecla's debt-to-equity ratio is 0.38. This low level of debt allows Pan American Silver to take on more debt to expand its operations if needed and maintain low financial risk. 

3. Valuation
Despite the importance of the factors listed above, it all boils down to the company's valuation. Is Pan American Silver's stock overvalued? 

Comparing the company to other gold producers won't account for the difference in metals; comparing it to Silver Wheaton is also misleading because Pan American Silver produces silver, and Silver Wheaton is a steaming company with a much higher market cap. Therefore, we will need to consider other small market cap precious metals producers such as Hecla Mining and First Majestic Silver (NYSE: AG  ) . Looking at these companies' enterprise value to EBITDA ratios, Hecla Mining has a ratio of 14.5. The enterprise value to EBITDA ratio of First Majestic Silver is 13.72. On the other hand, Pan American Silver's ratio is only 9.68. This means the current valuation of Pan American Silver is low and the company has more room to grow, especially if the silver market continues to recover. 

Pan American Silver is a silver producer with low debt that isn't valued highly compared to its peers. This makes Pan American Silver an asset worth considering for investors who want precious metals exposure in their portfolio. 

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.

Read/Post Comments (0) | Recommend This Article (4)

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.

Be the first one to comment on this article.

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: 3024421, ~/Articles/ArticleHandler.aspx, 9/5/2015 8:24:45 AM

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...

Lior Cohen

Lior has been a contributor for the Fool since 2012. His main interests are in commodities, and energy and materials companies.You can follow him on Twitter to stay up to date with his industry analysis. @tradingnrg

Today's Market

updated 11 hours ago Sponsored by:
DOW 16,102.38 -272.38 -1.66%
S&P 500 1,921.22 -29.91 -1.53%
NASD 4,683.92 -49.58 -1.05%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/4/2015 3:59 PM
PAAS $6.62 Down -0.05 -0.75%
Pan American Silve… CAPS Rating: ***
AG $3.00 Down -0.04 -1.32%
First Majestic Sil… CAPS Rating: ***
HL $1.96 Up +0.03 +1.55%
Hecla Mining Compa… CAPS Rating: ***
SLW $11.40 Down -0.18 -1.55%
Silver Wheaton Cor… CAPS Rating: ****