Silver mining stocks are not exactly known for their dividends. The precious metal they produce has mostly been in free fall since the beginning of the year. These miners have to preserve liquidity in the face of these challenges, so it's no surprise that only four out of twelve silver stocks listed on American exchanges are currently paying dividends. However, Pan American Silver (PAAS 0.30%) is yielding a hefty 3.7%. Is it worth your attention?
Sustainability of the Dividend
Pan American Silver finished the second quarter with an adjusted net loss of $9.9 million. Yet the company has paid $18.9 million in dividends to its shareholders this quarter. Is this sustainable? I think so. Pan American Silver had $440 million in cash on its balance sheet at the end of the second quarter. This is more than enough to continue to deliver the dividend while silver prices remain depressed.
The company had to take a one time impairment charge of $185.2 million against the goodwill that arose from the purchase of the Dolores mine in 2012, lowering earnings but not affecting the cash position.
Cutting costs
Just like any other company in the sector, Pan American Silver had to take cost-cutting measures. The company has managed to cut the cost of producing a ton of ore by 2% compared to a year ago. However, this was not enough to pull Pan American Silver into profitable territory. The decline in silver prices was just too big. In addition to that, the company has recorded a $9.9 million foreign currency loss on its Canadian dollar bank balances and a $13.2 million writedown on inventory due to lower silver prices.
Other miners are more active on the cost-cutting front. Silver Standard Resources (NASDAQ: SSRI) has eliminated 25% of positions in its corporate office. The company also reduced its exploration budget. Silver Standard Resources recorded $221.7 million of impairment changes and writedowns. Most of the impairment was related to the Pirquitas mine in Argentina, and, just as in Pan American's case, the move was forced by lower silver prices.
Hecla Mining (HL 1.33%) has taken big steps in reducing its spending. The company announced that it cut its 2013 capital expenditures forecast by 13%. At the same time, Hecla is cutting its exploration spending by 28% and its pre-development spending by 35%. Hecla has had a decent quarter, as silver production rose 64%, due in part to one of the company's mines, Lucky Friday, returning to production. Hecla is one of few silver miners to pay a dividend. However, it currently yields only 0.28%, and there are no signs that this will be boosted in the near future.
Bottom Line
Pan American Silver is a stable dividend play. The company has a lot of cash on its balance sheet and almost no debt, which helps in preserving its dividend. The absence of interest expense is a big advantage in a low silver price environment. I do not think that investors should be scared by write-downs and impairments. When silver prices rebound, the company will test its assets and adjust their value.
Silver is priced under $25 right now, which is less than half the highs achieved in 2011. Typically, you want to get exposure to cyclical industries when prices are depressed rather than when they are elevated.
If you believe that silver prices will rebound, Pan American Silver is a better choice. It's almost impossible to predict the exact timing of the silver price rebound. The miners' shares could fluctuate back and forth near current levels for a while. Unlike other silver miners, Pan American Silver would provide a decent income stream, and this is a big advantage.
