A 16-per-cent, one-day share price jump for Pan American Silver Corp. (TSX-PAA; NASDAQ-PAAS) prompted, rather than discouraged, an upgrade from BMO Capital Markets analyst Jessica Fung, who expects more of the same. The analyst asserts that there are further gains to be had over the next few quarters, due to the strong performance she expects at Pan American's La Colorada mine and the senior silver producer's successful efforts to improve margins.
The company is a higher-quality name amongst silver mining stocks, says Ms. Fung. Once Pan American completes expansions at its La Colorada and Dolores projects in Mexico by late 2017, operating margins should become even stronger, she says.
The analyst raises her recommendation to 'outperform' and her one-year target share price to $28. The latter is based on a 2.2 multiple on price-to-net asset value (P/NAV) and an 8.5 multiple on the estimated 2017 enterprise value-to-earnings before interest, taxes, depreciation, and amortization (EV/EBITDA).
Ms. Fung's valuation assumes that Pan American's precious metals mines will achieve 2016 payable production of 23.1 million ounces of silver, and 182,000 ounces of gold at a co-product all-in-sustaining cost of US$13.45 per ounce of silver equivalent.
Ms. Fung asserts that the company's balance sheet remains strong. She also notes that its operations provide base metal exposure. In particular, zinc represents 11 per cent of total revenue.
Based on strong production thus far, the company revised its 2016 production guidance upwards to 25 million to 25.7 million ounces of silver, 48 kilotons to 53 kilotons of zinc, 18.8 kilotons to 20.7 kilotons of lead, and 14.8 kilotons to 15.2 kilotons of copper.
Pan American also lowered project capital spending guidance for the year to between $185 million and $200 million for the year, reflecting lower project costs at La Colorada, now complete.
However, the company raised 2016 sustaining capital spending guidance to between $80 million and $85 million from a range of $64 million and $75 million previously to reflect additional exploration and equipment replacement.
Pan American ended the quarter with $210 million in cash and $41 million in debt, along with a largely unused $300-million revolving credit line.
Ms. Fung forecasts 2017 free cash flow of $97 million at spot metal prices, or $187 million on BMO prices, including the remaining $76 million in capital spending at Dolores and her assumption of higher sustaining capital across the board next year.
Management says it is considering external acquisitions in South America with a focus on silver, possibly as a replacement for Alamo Dorado. Since liquidity is strong, future acquisitions in the region are possible, says Ms. Fung.
This is an edited version of an article that was originally published for subscribers in the December 23, 2016, issue of Investor's Digest of Canada.You can profit from the award-winning advice subscribers receive regularly in Investor's Digest of Canada.
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