Q225 results: Strong cash flow generation

PAAS produced 5.1Moz of silver and 179koz of gold in Q2, in line with quarterly guidance. After the stronger-than-expected cost performance in the first quarter, Q2 saw some cost escalation in the silver segment, while gold segment costs were more consistent with Q1. Nevertheless, all-in sustaining costs (AISC) for both segments came in comfortably within the guided ranges. Lower sales and higher costs were more than offset by stronger commodity prices, with EBITDA up 10% q-o-q to US$362m. Once again, cash flow generation was the main highlight of the results: operating cash flow of US$293m reached another record and boosted net cash to US$289m. As a result, the quarterly dividend was raised by 2c to US$0.12.

Upgrading estimates, MAG transaction on track

Following the results we have upgraded our estimates on stronger commodity price expectations, raising our FY25e and FY26e EBITDA by 9% and 18%. On 10 July, MAG shareholders approved the proposed acquisition by PAAS; the transaction is expected to close in H225. MAG’s main asset, a 44% interest in the large-scale, low-cost Juanicipio mine in Mexico, will boost PAAS’s exposure to silver and lower costs. In H125, Juanicipio generated US$279m in EBITDA and US$173m in net profit at a negative cash cost of US$2.4/oz and an AISC of just US$1.4/oz. It distributed US$62m in cash to MAG Silver.

Valuation: Raised to US$38.0/share pre-MAG

We have revised our valuation of PAAS (ex-MAG) from US$33.7/share to US$38.0/share. Despite the upward share price move post results, on a standalone basis, PAAS continues to trade at an attractive FY25e EV/EBITDA of 7.3x, falling to 6.5x in FY26. We see further upside as earnings momentum continues to build through the seasonally stronger H2, supported by favourable commodity prices. PAAS valued 44% in Juanicipio at US$1.9bn, citing significant exploration potential and a bullish silver outlook. Our modelling, based on the current mine plan and latest mineral reserves, yields a more conservative value for MAG of c US$2 per PAAS share and can be viewed as a floor valuation.

Q2 results review

PAAS delivered another strong set of quarterly results, with higher commodity prices offsetting slightly lower sales and some sequential cost increases. In Q2, the company produced 5.1Moz of silver, up 2% q-o-q, and 179koz of gold, down 2%, while sales were down 8% q-o-q for silver (following an inventory draw of 0.45Moz in Q1) and 4% for gold. Silver production was within the quarterly guidance range and at the lower end of the range for gold.

AISC for both segments were comfortably within the respective quarterly guidance ranges and broadly in line with Q224. The silver segment AISC of US$19.7/oz was up 3% y-o-y, while cash cost increased 2% to US$14.7/oz. At the project level, Huaron saw the biggest increase in costs due to a number of technical reasons, including higher mining costs, while Cerro Moro remained the top performer thanks to high gold by-product credits. In the gold segment, AISC was up 2% y-o-y to US$1,611/oz, while the cash cost grew 11% to US$1,312/oz. Higher segment costs were mainly a result of lower grades at Timmins and Minera Florida and a higher strip ratio at Shahuindo, offset by the earlier divestment of the relatively high-cost La Arena operation.

Overall, despite sequentially lower metal sales and somewhat higher costs, strong realised commodity prices led to a 5% q-o-q increase in reported revenue to US$812m, with EBITDA increasing 10% to US$362m (c 3% above consensus estimate). Adjusted EPS grew 2% while reported EPS was up 12%. Once again, strong cash flow generation was the main highlight of the results. Thanks to tight working capital management and lower cash taxes versus Q1, the company reported record operating cash flow (OCF) of US$293m, resulting in free cash flow of US$233m (OCF less capex). As a result, net cash increased from US$119m in Q125 to US$289m (including short-term investments of US$28m), leading to a 2c rise in the declared quarterly dividend to US$0.12/share. Including share buybacks, the company distributed US$47m in cash to shareholders in Q2 and US$103m in H125. Despite the US$500m cash payment as part of the MAG Silver transaction (c US$343m net of acquired cash), it is possible that the quarterly dividend will remain above the US$0.10/share base level throughout the year.

Revising estimates on higher commodities

The company has maintained its operating guidance for FY25, noting that gold production will be more heavily weighted to Q4 than originally indicated. Typical seasonality and a favourable precious metals price environment point to a strong H2 ahead. Having made some small adjustments to our operating assumptions on the back of the Q2 results, we are revising our financial estimates on stronger gold and silver prices. Consensus commodity price expectations for FY25 have moved from US$3,008/oz for gold and US$33.5/oz for silver at the time of our previous report in May to US$3,169/oz and US$35.8/oz, respectively, with even more pronounced upgrades to FY26. As a result, we now expect FY25 and FY26 EBITDA of US$1,548m (+9%) and US$1,732m (+18%). Our estimates are c 3% below consensus for FY25 and c 9% lower for FY26.

As was reported earlier, on 11 May, PAAS entered into a definitive agreement to acquire MAG Silver. On 10 July, MAG shareholders approved the transaction, and it is now expected to close in H225 subject to customary regulatory approvals. PAAS expects to issue 59.7m new shares and pay US$500m in cash as part of the deal. MAG’s main asset is its 44% interest in the large-scale, low-grade Juanicipio mine in Mexico. The remaining 56% is held by Fresnillo, which operates the project. We covered the transaction in our note published in May. The acquisition will boost PAAS’s exposure to silver and lower silver segment costs. Juanicipio is guided to produce 14.7–16.7Moz of silver on a 100% basis in FY25 at a cash cost of US$(1.0)–1.0/oz and an AISC of US$6–8/oz. At mid-ranges, this implies FY25 pro-forma silver production of c 27Moz (PAAS standalone 20.5Moz) at an AISC of c US$14.7/oz (PAAS US$17.3/oz). Juanicipio is a highly cash-generative operation. In H125, it reported US$279m in EBITDA and US$173m in net profit ( US$76m on an attributable basis) and had a cash cost of US$(2.4)/oz and an AISC of just US$1.4/oz.

Exhibit 3 below shows pro-forma consolidated financials for Q125 as disclosed by MAG. We note that in Q225 MAG received US$62m in dividend and loan/interest payments from Juanicipio, with cash at end Q2 increasing to US$172m (c US$157m adjusted for the dividend to be paid on 1 September). MAG’s income from equity investment in Juanicipio was US$76m in H125. Our preliminary modelling suggests Juanicipio’s FY25e EBITDA and net profit of US$549m and US$324m ( US$143m attributable), rising to US$584m and US$351m in FY26e as stronger consensus commodity prices and higher by-product metal grades are likely to offset some gradual silver grade normalisation. We will wait for more details from PAAS on the level of disclosure for Juanicipio to adjust our consolidated financial estimates.

Valuation: Ex-MAG Silver DCF moves to US$38/share

Having revised our financial estimates, we are upgrading our ex-MAG DCF-based valuation of PAAS from US$33.7/share to US$38.0/share, using an unchanged nominal weighted average cost of capital of 7% (5% real). Despite the upward share price move post results, on a standalone basis, PAAS continues to trade at a relatively undemanding FY25e EV/EBITDA of 7.3x, falling to 6.5x in FY26. We see further upside as earnings momentum continues to build through the seasonally strong H2, driven by the stronger operational performance and favourable commodity prices.

Based on the transaction disclosure, PAAS valued the 44% stake in Juanicipio at US$1,930m. This valuation is underpinned by the significant exploration potential at Juanicipio, which was described by management during the Q2 results call as having one of the biggest exploration upsides, and the company’s bullish view on silver. Our tentative valuation of Juanicipio is more conservative and is exclusively based on the project’s current mine plan with some adjustments based on the latest reserves statement, translating into an approximately 10-year mine life. We would therefore view it as a floor value for the project. All in all, our current modelling suggest that on a net present value (NPV) basis the MAG Silver transaction adds c US$2 per share to the PAAS valuation.