Pan American Silver — A taste of things to come

Pan American Silver (NYSE: PAAS)

Last close As at 19/06/2024

USD19.93

0.31 (1.58%)

Market capitalisation

USD7,268m

More on this equity

Research: Metals & Mining

Pan American Silver — A taste of things to come

Pan American Silver (PAAS) has seen an encouraging start to the year with Q124 silver and gold production in line with management expectations and costs for both segments below its quarterly guidance. Q1 is typically one of the slowest quarters for PAAS and the company’s maintained guidance points to significant improvements in production and costs in H224. This should be supported by the current strength in commodity prices. We have increased our FY24 EBITDA estimate by 25% and upgraded our valuation from US$22.2/share to US$23.4. We believe there could be further upside to the share price if commodity prices remain at elevated levels and the company delivers on its operational guidance in FY24.

Written by

Andrey Litvin

Energy and Resources Analyst

Metals & Mining

Pan American Silver

A taste of things to come

Q124 results update

Metals and mining

14 May 2024

Price

US$19.8

Market cap

US$7,200m

Net debt (US$m) at Q124, including short-term investments of US$30m

475

Shares in issue

362.9m

Free float

100%

Code

PAAS

Primary exchange

TSX

Secondary exchange

NYSE

Share price performance

%

1m

3m

12m

Abs

4.2

62.9

21.4

Rel (local)

2.3

54.5

(4.1)

52-week high/low

US$20.63

US$12.21

Business description

Pan American Silver is one of the largest global primary silver producers and a sizeable gold miner, with operations in North, Central and South America since 1994. Following the acquisition of selected assets as part of the Yamana transaction, the company owns 11 producing operations, the currently suspended top-tier Escobal silver mine and several large-scale advanced exploration and development projects.

Next event

Annual mineral resources statement

August 2024

Analysts

Andrey Litvin

+44 (0)20 3077 5700

Andrew Keen

+44 (0)20 3077 5700

Pan American Silver is a research client of Edison Investment Research Limited

Pan American Silver (PAAS) has seen an encouraging start to the year with Q124 silver and gold production in line with management expectations and costs for both segments below its quarterly guidance. Q1 is typically one of the slowest quarters for PAAS and the company’s maintained guidance points to significant improvements in production and costs in H224. This should be supported by the current strength in commodity prices. We have increased our FY24 EBITDA estimate by 25% and upgraded our valuation from US$22.2/share to US$23.4. We believe there could be further upside to the share price if commodity prices remain at elevated levels and the company delivers on its operational guidance in FY24.

Year
end

Revenue
(US$m)

EBITDA
(US$m)

EPS*
(US$)

DPS
(US$)

EV/EBITDA
(x)

Yield
(%)

12/22

1,494.7

272.0

(0.54)

0.45

25.6

2.3

12/23

2,316.1

680.6

0.19

0.41

10.2

2.1

12/24e

2,743.8

958.6

0.58

0.40

7.3

2.0

12/25e

2,400.4

827.9

0.54

0.40

8.4

2.0

Note: *EPS excludes exceptional items.

Q124 results: A good starting point

Q124 silver and gold production was in line with company expectations and cash costs for both segments were below its quarterly guidance. The silver segment cash cost was down 34% q-o-q to US$12.7/oz, while the gold cash cost increased 10% but remained at a very comfortable US$1,207/oz. The strength of the company’s cost performance should be viewed through the prism of a reduction in quarterly silver and gold sales, which sequentially fell 14% and 16%. The decline in sales was partly offset by the higher realised gold price. As a result, PAAS reported Q124 revenues of US$601m, down 10% q-o-q, and EBITDA of US$162m.

Maintained guidance points to strong H224

PAAS has maintained its 2024 operating guidance, which suggests a significant improvement in cost performance and production in H224. Coupled with the current strength in commodity prices, it implies a visible boost to financial performance this year. We have upgraded our FY24e EBITDA by 25% to US$959m.

Escobal consultation delay

PAAS reported a delay in the ILO 169 consultation process at Escobal since the new government took office in Guatemala in January 2024. The government remains committed to completing the consultation process but has not yet provided an update on the timeline. We have changed our approach to the valuation of Escobal and now value the project on a standalone NPV basis.

Valuation: Commodity prices remain supportive

We have upgraded our valuation of PAAS from US$22.2/share to US$23.4. The increase is mainly due to the higher FY24 commodity price assumptions. Despite the recent healthy rebound in the share price, we believe there could be a further upside if commodity prices remain at elevated levels and the company continues to deliver on its cost and production guidance throughout 2024.

Q124 results review: An encouraging start to the year

PAAS has had an encouraging start to the year, with Q124 silver and gold production in line with company expectations and cash costs for both segments remaining below its quarterly guidance (Exhibit 2). We note that the results are not directly comparable to Q423 due to seasonality and Q123 due to the timing of the Yamana asset consolidation. Nevertheless, the silver segment cash cost was down 34% q-o-q to US$12.7/oz, mainly because of the reduction in costs at Cerro Moro and La Colorada, while the gold cash cost increased 10% but stayed at a very comfortable level of US$1,207/oz. The strength of the company’s cost performance should be viewed through the prism of a visible reduction in quarterly silver and gold sales, which sequentially fell 14% and 16%, respectively, as Q4 is normally the seasonally strongest quarter. At the top-line level, however, the reduction in sales was partly offset by the higher realised gold price, which increased 5% q-o-q to US$2,078/oz. As a result, PAAS reported Q124 revenues of US$601m, down 10% q-o-q, with EBITDA of US$162m. The company’s adjusted EPS was US$0.01 compared to a loss of US$0.04 in Q423.

PAAS finished the quarter with net debt of US$475m compared to US$361m at end FY23. This increase includes the share buyback of US$21.5m, with an additional US$2.8m spent since the quarter end. The company declared a dividend of US$0.1/share with respect to Q124. Further, on 1 May, PAAS announced the sale of the producing La Arena gold mine and La Arena II project for US$245m in cash, US$50m in deferred consideration and 1.5% in gold royalty. Among other things (see our recent note), the divestment should strengthen the company’s balance sheet, with pro forma Q124 net debt of US$230m.

Exhibit 1: Q124 results summary, US$m

 

Q124

Q423

q-o-q, %

Q123

Silver production, koz

5,009

4,835

3.6

3,891.0

Gold production, koz

223

248

(10.2)

122.7

Silver segment cash cost, US$/oz

12.7

19.3

(34.4)

12.2

Silver segment AISC, US$/oz

15.9

26.6

(40.3)

14.1

Gold segment cash cost, US$/oz

1,207

1,096

10.1

1,120.0

Gold segment AISC, US$/oz

1,580

1,411

12.0

1,196.0

Revenue

601

670

(10.2)

390

Cash production costs

(392)

(441)

(11.1)

(231)

D&A

(124)

(143)

(13.1)

(73)

Royalties

(14)

(20)

(31.5)

(9)

Mine operating earnings

71

65

9.4

77

Care and maintenance

(9)

(9)

(4.4)

(22)

Exploration

(3)

(4)

(26.3)

(1)

G&A

(22)

(19)

21.1

(10)

EBITDA (Edison)

162

201*

(19.8)

117

Reported PBT

4

(48)

N/A

25

Reported EPS, US$

(0.08)

(0.19)

(55.4)

0.08

Adjusted EPS (company), US$

0.01

(0.04)

N/A

0.10

Source: PAAS, Edison Investment Research. Note: *EBITDA includes US$25m in upwards PPA inventory adjustment.

PAAS reported a delay in the ILO 169 consultation process at Escobal since the new government took office in Guatemala in January 2024. The government has confirmed its commitment to completing the consultation process, but has not provided an update on the possible timeline. In light of these developments, we have changed our valuation approach to Escobal and now value the project on a standalone NPV basis (see below).

Revised earnings estimates

The company maintained its FY24 operational guidance and expects to produce 21–23Moz of silver and 880–1,000koz of gold at costs shown in Exhibit 2. Production is expected to be second-half weighted and costs are anticipated to reduce, especially in the silver segment due to the anticipated production recovery at La Colorada, towards the end of the year. Importantly, the company’s cost guidance is based on assumed gold and silver prices of US$1,950/oz and US$23.5/oz. If commodity prices continue to trade above these levels, cost estimates could look increasingly conservative. The spot gold and silver prices are currently c US$2,340/oz and US$28.2/oz, which from a cost point of view should be beneficial for the projects with large silver/gold by-product credits, in particular Cerro Moro and El Penon.

Exhibit 2: FY24 quarterly guidance

 

Q124

Q224

Q324

Q424

FY24

Silver production, Moz

4.75–5.30

5.36–5.78

5.44–5.97

5.45–5.95

21.0–23.0

Gold production, koz

204–231

221–252

229–258

226–259

880–1,000

Silver segment cash cost, US$/oz

16.5–18.5

15.5–17.5

10.5–12.9

4.6–7.7

11.7–14.1

Silver segment AISC, US$/oz

21.3–23.3

20.2–22.2

15.6–18.0

7.7–11.0

16.0–18.5

Gold segment cash cost, US$/oz

1,270–1,370

1,170–1,240

1,140–1,220

1,080–1,160

1,165–1,260

Gold segment AISC, US$/oz

1,500–1,700

1,500–1,590

1,460–1,570

1,400–1,500

1,475–1,575

Source: PAAS

We have updated our estimates for the Q124 results and made a number of project-related adjustments. While most of our underlying operational and cost assumptions at the project level remain broadly unchanged, we have made the following adjustments:

We have assumed that the La Arena sale will complete at the end of Q324 and that the project will only contribute for three quarters this year. We have reflected the cash payment of US$245m in our model’s cash flows. La Arena is a relatively high-cost mine and its sale should result in a marginal reduction in the gold segment costs.

At Dolores, we factored in the end of mining activities this year and have modelled the subsequent leaching operations for three years for gold and eight years for silver, in line with the company’s disclosure, based on 4.3Moz of silver and 35.4koz of gold inventory.

Finally, while we assume an improvement in production rates at La Colorada in H224 as ventilation issues are gradually resolved, we take a relatively cautious view and model the project’s FY24 cash cost at the top end of the company’s guidance range of US$16.6–19.3/oz.

Overall, our FY24 silver production estimate is broadly unchanged at 21.9Moz, while the gold production forecast of 922koz is 6% lower. We expect a further 8% reduction in gold production in FY25, mainly due to the La Arena divestment. Our FY24 gold and silver cash cost estimates are little changed and we model a gradual reduction in costs in FY25.

Exhibit 3: Changes to operational and cost estimates

 

FY24e

FY25e

FY24

 

New

Old

New

Guidance

Total silver production, Moz

21.9

22.0

23.4

21–23

Total gold production, koz

922

983

851

880–1,000

Silver segment cash cost, US$/oz

12.7

12.4

10.5

11.7–14.1

Silver segment AISC, US$/oz

16.8

16.6

14.6

16.0–18.5

Silver price, US$/oz

26.2

23.5

25.0

23.5

Gold segment cash cost, US$/oz

1,182

1,207

1,093

1,165–1,260

Gold segment AISC, US$/oz

1,522

1,524

1,373

1,475–1,575

Gold price, US$/oz

2,230

1,987

2,004

1,950

Source: PAAS, Edison Investment Research

We have also revised our commodity price estimates for the year, given the recent strength in gold and silver prices. Our updated gold price of US$2,230/oz is 12% above our previous estimate, while our silver price assumption of US$26.2/oz is 11% higher. We keep our commodity price assumptions beyond FY24 unchanged for now.

Overall, we are upgrading our FY24 revenue estimate by 6% to US$2,744m and our EBITDA estimate by 25% to US$959m. Both forecasts are somewhat above consensus, which currently points to FY24 EBITDA of US$884m. Importantly, we expect PAAS to sell 926koz of gold (0.4% above production vs 2.4% in Q124 and 1.2% in FY23) and 20.9Moz of silver in FY24. We have introduced FY25 estimates, excluding Escobal, which we had previously expected to start production in mid-2025. The anticipated sequential reduction in revenues and EBITDA is mainly due to our assumed lower commodity prices and estimated reduction in gold production.

Exhibit 4: Changes to financial estimates

 

FY24e

FY25e

US$m

New

Old

% change

New

Revenue

2,744

2,578

6.4

2,400

Cash production costs

(1,603)

(1,640)

(2.3)

(1,402)

D&A

(492)

(496)

(0.9)

(396)

Royalties

(64)

(62)

4.5

(58)

Exploration, care and maintenance

(40)

(39)

3.3

(38)

G&A

(78)

(73)

7.6

(75)

EBITDA

959

765

25.4

828

Reported EPS, US$

0.55

0.24

128.5

0.54

Normalised EPS (Edison), US$

0.58

0.24

140.8

0.54

Source: Edison Investment Research

Valuation: Supportive commodity prices

We have upgraded our valuation of PAAS from US$22.2/share to US$23.4. The main increase in the valuation comes from our revised earnings estimates on the back of the higher commodity prices. We have also changed our approach to the valuation of Escobal. We previously assumed the project would start production in mid-2025. However, given the likely delay in completing the ILO 169 consultation process, we now value it on a standalone NPV basis using a real discount rate of 5%, which we increased by 1pp to account for the higher uncertainty introduced by the recent political changes in Guatemala, and our long-term silver price of US$24/oz. We make no changes to the operational assumptions for Escobal, which are based on the feasibility study and discussed in more detail in our PAAS initiation report. Our valuation now includes the sale of La Arena (the cash consideration only), which we assume will complete at the end of Q324, and the recent share buyback.

Despite the recent healthy recovery in the share price, which we believe was mainly driven by the strength in the commodity prices and the share buyback, on our estimates PAAS still trades at FY24 EV/EBITDA of 7.3x (7.9x consensus). We believe there is further upside to the share price if commodity prices remain at elevated levels and the company continues to deliver on its operational outlook throughout 2024. Any progress on bringing the Escobal project back into production could be an additional strong catalyst for the share price.

Exhibit 5: PAAS valuation summary

WACC – nominal (FY24-28e)/real (from FY28e)

7.4%/5.0%

Tax on EBIT

40%

Number of shares outstanding, including share buyback

362.9m

US$m

US$/share

Sum of discounted free cash flow, currently producing operations

5,763

15.9

Add exploration/development assets

748

2.1

Add Escobal

2,087

5.8

Less FY23 net debt, adjusted for La Arena sale

111

0.3

Implied equity value

8,487

23.4

Source: Edison Investment Research

Exhibit 6: Financial summary

US$m

2022

2023

2024e

2025e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

1,494.7

2,316.1

2,743.8

2,400.4

Cash production costs

(1,094.4)

(1,479.2)

(1,602.6)

(1,401.7)

DD&A

(316.0)

(484.2)

(491.9)

(395.7)

Royalties

(35.9)

(55.9)

(64.3)

(57.5)

Gross Profit

48.4

296.8

585.0

545.4

G&A

(29.0)

(61.4)

(78.0)

(75.0)

Other operating costs

(63.5)

(96.8)

(40.3)

(38.3)

Operating profit (before amort. and excepts.)

 

 

(44.1)

196.4

466.7

432.1

EBITDA

 

 

272.0

680.6

958.6

827.9

Other operating expenses

(6.4)

3.4

0.0

0.0

Exceptionals

(211.8)

(103.9)

0.0

0.0

Reported operating profit

(262.3)

38.1

466.7

432.1

Net Interest and other finance expense

(22.5)

(91.4)

(92.0)

(74.2)

Profit Before Tax (norm)

 

 

(73.0)

108.4

374.7

358.0

Investment income (loss)

(16.2)

(5.5)

(10.8)

0.0

Profit Before Tax (reported)

 

 

(301.0)

(58.8)

363.9

358.0

Reported tax

(39.1)

(46.1)

(163.8)

(161.1)

Profit After Tax (norm)

(112.1)

62.3

211.0

196.9

Profit After Tax (reported)

(340.1)

(104.9)

200.2

196.9

Minority interests

1.7

(1.2)

0.8

0.8

Net income (normalised)

(113.8)

63.5

210.2

196.1

Net income (reported)

(341.8)

(103.7)

199.4

196.1

Average Number of Shares Outstanding (m)

211

327

364

363

EPS - basic normalised ($)

 

 

(0.54)

0.19

0.58

0.54

EPS - normalised fully diluted ($)

 

 

(0.54)

0.19

0.58

0.54

EPS - basic reported ($)

 

 

(1.62)

(0.32)

0.55

0.54

Dividend ($)

0.45

0.41

0.40

0.40

BALANCE SHEET

Fixed Assets

 

 

2,444.1

5,823.1

5,456.7

5,339.5

Tangible assets

2,226.4

5,675.1

5,308.7

5,191.5

Investments

121.2

0.0

0.0

0.0

Other

96.6

148.0

148.0

148.0

Current Assets

 

 

804.4

1,389.9

1,745.5

1,863.4

Inventories

471.6

711.6

746.4

710.4

Receivables

136.6

138.0

142.8

131.5

Cash

107.0

399.5

715.4

880.6

ST investments

35.3

41.3

41.3

41.3

Other

53.8

99.5

99.5

99.5

Current Liabilities

 

 

(380.8)

(624.2)

(609.2)

(587.0)

Creditors

(308.1)

(498.0)

(483.0)

(460.8)

Short term borrowings and leases

(27.3)

(52.4)

(52.4)

(52.4)

Other

(45.5)

(73.8)

(73.8)

(73.8)

Long Term Liabilities

 

 

(666.0)

(1,816.4)

(1,786.4)

(1,756.4)

LT debt and leases

(199.5)

(749.2)

(749.2)

(749.2)

Other long term liabilities

(466.5)

(1,067.2)

(1,037.2)

(1,007.2)

Net Assets

 

 

2,201.6

4,772.4

4,806.6

4,859.4

Minority interests

(6.1)

(11.8)

(12.6)

(13.4)

Shareholders' equity

 

 

2,195.5

4,760.6

4,794.0

4,846.0

CASH FLOW

Operating Cash Flow

(340.1)

(104.9)

200.2

196.9

D&A, exceptionals, other

555.2

663.5

709.7

609.6

Working capital movement

(42.0)

68.9

(54.7)

25.1

Tax

(137.8)

(149.4)

(188.8)

(191.1)

Net Interest

(3.4)

(27.9)

(54.1)

(52.8)

Net operating cash flow

 

 

31.9

450.2

612.4

587.8

Capex

(274.7)

(379.0)

(374.5)

(277.5)

Acquisitions/disposals

8.7

759.3

0.0

0.0

Equity financing

0.9

0.0

0.0

0.0

Dividends

(94.7)

(130.4)

(145.5)

(145.1)

Other

20.0

(15.3)

223.5

0.0

Net Cash Flow

(307.9)

684.8

316.0

165.2

Opening net debt/(cash), including ST investments

 

 

(289.4)

84.5

360.7

44.8

FX and other

(66.0)

(961.0)

0.0

0.0

Closing net debt/(cash)

 

 

84.5

360.7

44.8

(120.4)

Closing net debt/(cash), excluding ST investments

119.9

402.0

86.1

(79.1)

Source: Pan American Silver accounts, Edison Investment Research


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United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

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United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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JDC Group — Well on track in 2024

JDC Group (JDC) reported strong Q124 results. Revenue growth accelerated to 21.6% from 10% in FY23, driven by its Advisortech division (+22.6%). In terms of profitability, the EBITDA margin increased to 7.6% from 7.3% in Q123. JDC reiterated its FY24 revenue guidance of €205–220m, 24% y-o-y growth at the midpoint, partly driven by the acquisition of Top Ten Financial Network, which management expects to contribute more than €18m in revenues this year. EBITDA is also expected to increase to a guided range of €14.5–16.0m (FY23: €11.7m). We make no changes to our estimates. Our DCF provides a valuation of €34.0/share.

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