3 Reasons to Buy Pan American Silver

Shares of Pan American Silver have outperformed the price of silver. Here are three reasons to consider buying the company.

Jul 12, 2014 at 9:39AM

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. 

Gold To Silver Ratio

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.

Lior Cohen has no position in any stocks mentioned. The Motley Fool owns shares of Silver Wheaton. (USA). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers