How Much Will Pan American Silver Earnings Drop?

Pan American Silver (PAAS 3.52%) will release its quarterly report on Thursday, and given the big drop in silver prices earlier this year, it's no surprise to see the stock having plunged year-to-date. But even though Pan American Silver earnings will be down sharply as a result of tighter margins on its silver sales, the longer-term prospects for the company could be more positive.

Pan American Silver is one of the largest silver producers in the world, and as a result, its fortunes are closely tied to the changing prices of silver. With the Federal Reserve and other central banks having signaled a possible end to the extraordinary monetary policy actions that helped drive precious-metals prices higher, investors are nervous that the exit from quantitative easing could prompt further price declines. Let's take an early look at what's been happening with Pan American Silver over the past quarter and what we're likely to see in its quarterly report.

Stats on Pan American Silver

Source: Yahoo! Finance.

Can Pan American Silver earnings shine brighter?
In recent months, analysts have slashed their views on Pan American Silver earnings, with a more than 75% cut in June-quarter estimates and a 70% reduction in full-year 2013 projections. But after its big drop earlier in the year, the stock has actually bounced back somewhat, climbing more than 7% since early May.

Pan American has actually held up reasonably well in silver's slide compared to its peers. Year-to-date, the stock has dropped about 28%, which is actually less than the 30% decline in the iShares Silver Trust (SLV 6.81%). Operational discipline is a key reason why Pan American hasn't fallen further, with the company's first-quarter report included 14% silver-production growth and a rise of 65% in gold production coming largely from the company's Dolores mine, which it bought early last year. With total cash costs per silver ounce of $11.33, Pan American remains solidly profitable despite the big plunge in the market price.

Clearly, Pan American will have to adapt to a lower-price environment. But the company has already said that it's moving in that direction by balancing the needs to keep its business efficient against the objective of finding more growth from its exploration and mine-construction projects.

One open question has to do with Pan American's dividend. Fellow miner Hecla Mining (HL 6.43%) and silver-streaming giant Silver Wheaton (SLW 2.98%) both reduced their dividends earlier this year in response to falling silver prices, but Pan American managed to avoid cutting its dividend in May and showed no signs of future cuts. Nevertheless, with earnings falling below the quarterly payout, Pan American won't be able to sustain current dividend levels forever without a more significant bounce in silver.

In the Pan American earnings report, watch for comments from management on whether it believes the recent price increases in silver back above the $20 per ounce level are sustainable. If so, they could indicate a new push higher for the white metal -- and for Pan American's prospects going forward.

Click here to add Pan American Silver to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.