The recent sell-off in silver has created a buying opportunity in the silver miners. Pan American Silver Corporation (PAAS) recently reported record quarterly earnings. This Zacks #1 Rank (strong buy) is cheap, at just 12.7x forward estimates.
Pan American Silver is one of the largest silver miners in the world. Headquartered in Vancouver, the company has 7 operating mines in Mexico, Peru, Argentina and Bolivia.
It also has several projects that are not yet operational, the largest being the Navidad project in Chubut, Argentina which has the potential to double Pan American’s silver output. The company has been waiting on changes in the law that bans openpit mining, however.
Record Earnings in Q1 as Silver Prices Soared
On May 18, Pan American Silver reported its first quarter results and saw record earnings which surprised on the Zacks Consensus by 5 cents per share, or 9%. Earnings per share were 60 cents compared to the consensus of 55 cents.
Revenue soared 40% to $190.5 million on, not surprisingly, higher metal prices. Silver prices jumped 88% in the first quarter compared to the last year. Gold prices were up 25%. But even zinc, lead and copper prices were higher by 5%, 17% and 33%, respectively.
However, the volumes declined on both silver and gold compared to a year ago. It produced 5.3 million ounces of silver, down 3%, and 18,640 ounces of gold, down 33%. Volume slipped at the Peru, Bolivia and Argentinean operations due to lower-than-expected grades and throughput.
Cash is King
Impressively, Pan American Silver has no debt, with the exception of minor capital leases and construction advances. It has a $150 million credit facility, just in case, but it remains undrawn.
The company is cash rich with $397.2 million in cash and short-term investments which rose $26.7 million in the quarter.
In February 2010, the company started rewarding shareholders with a dividend. It currently yields 0.3%. Neither of its peers, Coeur d’Alene (CDE) or Hecla Mining (HL) pays a dividend.
Political Risks
A few weeks ago, Pan American Silver shares stumbled after the Bolivian government announced it might re-take some silver mines.
However, Pan American Silver has never received official notification from the government that its San Vicente mine will be affected. According to the company, it also has the backing of the unions.
Peru could also be a source of instability as the country is holding elections on June 5 to pick a new president.
Left-wing candidate Humala is currently trailing in the polls, but in the past he has advocated nationalizing a large portion of the country’s natural resources, a position he has now backtracked on. All investors in the miners should be watching Peru’s election closely.
Zacks Consensus Estimates Rise
2011 is expected to be a strong year for Pan American Silver as the price of silver stays elevated.
3 estimates have moved higher on 2011 in the last week, pushing the Zacks Consensus Estimate up to $2.57 from $2.49.
That is earnings growth of 145%.
Analysts aren’t too sure about growth in 2012 however. While the 2012 Zacks Consensus also rose to $2.60 from $2.54 per share in the last 7 days, this is earnings growth of just 1% over 2011.
Attractive Valuations
When silver hit nearly $50 an ounce, shares of PAAS traded at new 2-year highs. But when silver crashed, shares fell dramatically.
But it looks like most of the worst selling may be over (for now).
The result is a company with very attractive valuations. In addition to a P/E under 15, it has a price-to-book ratio of just 2.3, well under the “value” cut-off of 3.0.
It also has a solid 1-year return on equity (ROE) of 10.7%.
[The author of this article owns shares of Pan American Silver.]
Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor in charge of the Turnaround Trader and Insider Trader services. You can follow her at twitter.com/traceyryniec.
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