The parabolic move up in silver prices this spring helped provide a real stimulus to the share prices in some of the mining stocks. When silver prices pulled back after the Chicago Mercantile Exchange (Nasdaq: CME) raised margin rates over and over, the share prices of silver producers were negatively impacted.
The hot money has fled the sector and won't be back for a while, with equity prices now trading in the middle of their 52-week range. This gives patient investors, who are not chasing the current money, a chance to add or increase their exposure to silver miners without paying a pretty penny.
Why Pan American Silver is a "Buy"When I look at a mining company, there are a few things I have learned to look for: Is the company already leveraged to the gills? How leveraged is it to the upside of its sector? Is it operating at a profit? Does it have a track history of operating at a profit?
In the case of Pan American Silver Corp., the company passes the test.
- It has seven active silver mining operations and four developmental projects.
- It has 1 billion ounces in resources, including proved and probable (P&P) holdings.
- And it has no debt.
Additionally, the company is currently moving four new projects along - one in Mexico, one in Peru, and two under development in Argentina.
The new projects include the massive Navidad project in Argentina, which could produce about 20 million ounces per year for its first five years. The mine is expected to have a 17-year life span, with a cash cost of $6.03 per ounce net of byproduct credits. If the development is finished, production will begin in 2014.
Pan American's operations give the company more than 1 billion ounces of silver equivalent. This gives investors a nice cushion of assets with stable production. It also offers what I like to call "Massive Organic Growth" potential.
The company is leveraged to silver prices with about 66% of its revenue coming directly from its silver production. It has built a basket of projects with production cost of about $7.83 cents in the last quarter.
And, best of all, Pan American has no debt. That means the company is not at the mercy of its bankers. It also means that if Pan American decided it needed to grow, it would have the capacity to expand by tapping its unleveraged balance sheet.
Pan American sports a market cap of about $3.3 billion with an enterprise value of $2.8 billion once net cash and debt are considered. Ironically, when a company has no debt and has a small horde of cash, its enterprise value drops, as it become cheaper to take over using its own net cash against it.
We will want to watch the enterprise value going forward, as it starts to become a cash bait target in the M&A world.
Shares of Pan American closed Thursday at $30.89.
Pan American Silver Corp. is a "Buy" at current market prices for silver. The company has a great history of operating its resources at a cheap break-even price per ounce. This makes the company nicely levered to silver prices, which are still higher today than they were a year ago.
Let's look to pick up 50% of our position around the $30.00 per share range via the use of limit orders. We are in highly volatile times, and the price of silver could easily weaken again, before breaking out to new highs.
Lets put in a limit order for the other half around $27.50, in case market volatility increases in the near term.
(**) Special Note of Disclosure: Jack Barnes has no interest in Pan American Silver Corp. (NASDAQ: PAAS).
Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.
Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning on Mondays. In his BSH column last week, Barnes analyzed Valero Energy Corp. (NYSE: VLO).
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