Will Pan American Silver Reach Its Quarterly Goals?

Has Pan American Silver performed well in the second quarter? Here is a preview of the company’s quarterly earnings report.

Lior Cohen
Lior Cohen
Jul 14, 2014 at 12:16PM
Energy, Materials, and Utilities

Pan American Silver (NASDAQ:PAAS) will release its second quarter earnings report next month. In anticipation of this release, let's review the main factors that could impact the company's stock. 

Reaching production and costs goals
In the first quarter, the company exceeded its guidance mainly in its gold production, which reached 45,900 ounces. The table below summarizes the changes in the quarterly production in silver and gold in the first quarter of 2014 and 2013. 

Source: Pan American Silver

In the first quarter, most of the growth in output came from Pan American Silver's Manantial Espejo and Dolores mines, which recorded a 24% and 22% gain, year over year, respectively. 

If these mines keep producing at such a high pace, this could result in better than expected growth in yield in the coming quarters. 

For the second quarter, based on the company's 2014 guidance and the output in the first quarter, its silver production increased by 5.6%, year over year. Its gold output jumped by 27%, as indicated in the table below. 

Source: Pan American Silver

Besides reaching its production quota, the company's cash costs per ounce of silver are another key factor that could impact its profit margin. 

As you can see in the first table above, the company's production cost per ounce reached $8.25 -- 27% below last year's rate. This level is well below management's annual guidance. Most of this drop is attributed to lower than anticipated operating costs, and higher by-product production. Despite this lower than estimated cost per ounce, the company's management hasn't changed its annual guidance, so this suggests Pan American Silver's cash costs could pick up in the coming quarters. In the second quarter, its cash cost may have inched up compared to the same quarter last year. The ongoing low silver prices and little change in cost per ounce suggest the company's profit margin hasn't improved in the second quarter compared to the same quarter last year. 

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Following the plunge in the prices of gold and silver back in 2013, leading precious metals companies such as Goldcorp (NYSE:GG) and Yamana Gold (NYSE:AUY) have also been aiming toward cutting down their production costs. This year, Yamana plans to reduce its operating cost per ounce by 2.3% compared to 2013. Goldcorp's production cost per ounce of gold is expected to fall by 5.4%.   

Pan American Silver also continues to seek ways to reduce its G&A and sustaining capital. The sustaining capital provision is expected to fall from $111.6 million in 2013 to $95.5 million in 2014. This 15% decline will improve its margins. In the first quarter, Pan American Silver's sustaining capital reached $24.7 million -- close to its annual guidance. 

The rise in the production cost per ounce of silver compared to the first quarter and the low prices of precious metals reduced the profit margin of Pan American Silver during the second quarter. Finally, the rise in bullion production didn't seem to offset the adverse effect of gold and silver prices on the company's revenue.