Shares of Pan American Silver (NASDAQ:PAAS), a silver and gold mining company with seven mines located in Central and South America, surged as much as 13% during Tuesday's trading session following the company's third-quarter earnings release after the closing bell on Monday.
For the quarter, Pan American Silver generated $233.6 million in revenue, a 47% increase from the year-ago period. Despite a modest decline in silver production to 6.36 million ounces from 6.61 million in the prior-year quarter (a reflection of the Alamo Dorado mine reaching the end of its life and Dolores producing lower ore grades from mine sequencing), higher silver and gold spot prices played quite the part in pushing revenue higher. By comparison, Wall Street was expecting just $194.8 million in revenue.
For its bottom line, Pan American Silver generated net earnings of $43.4 million, or $0.28 per share, which compared to a net loss of $67.5 million in Q3 2015, or $0.44 per share. Wall Street had been looking for a profit of just $0.16 per share, meaning Pan American Silver topped the consensus by $0.12. Considerably lower cash costs helped Pan American Silver crush estimates, and it was able to use some of its $102 million in cash flow to help reduce a portion of its debt load.
Looking ahead, Pan American Silver also increased its fiscal 2016 production guidance to a range of 25 million to 25.7 million ounces of silver at a cash cost of $6.25 to $7 per ounce. The company had previously guided to a range of 24 million to 25 million ounces of silver production in 2016, with a cash cost per ounce of $6.50 to $7.50. Inclusive of its byproducts (zinc, lead, and copper), its all-in sustaining costs net of byproducts should be between $10.75 and $11.50 per silver equivalent ounce (SEO), which currently provides almost a $6 SEO margin.
Precious metals and metal mining stocks have been throttled since Donald Trump was elected president, but Pan American Silver's earnings report is a good reminder that the fundamentals of mining companies have drastically improved from where they were last year. Pan American's costs are well under control, with the company reducing its full-year capital expenditures and its cash costs, and production expansion at La Colorada is right on track and under budget. In other words, we're on the cusp of seeing production increase while costs decrease.
Following today's move higher, Pan American Silver is valued at slightly more than 20 times next year's EPS, which might cause some hesitation from value investors. However, the company is still trading slightly below 10 times next year's cash flow per share estimate from Wall Street, which, when combined with its prudent cost management, gives me reason to believe there could be modest upside left in its shares.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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