Pan American Silver — Q224 results: Steady progress

Pan American Silver (NYSE: PAAS)

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USD22.42

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Research: Metals & Mining

Pan American Silver — Q224 results: Steady progress

Pan American Silver (PAAS) delivered a robust set of Q224 results, with lower silver production offset by the stronger sales and commodity prices. This was coupled with good cost control in the gold segment and resulted in a 65% increase in mine operating earnings and 31% growth in EBITDA. Strong cash flow generation was the main highlight of the results, with free cash flow exceeding that of the whole of FY23. PAAS expects production to be more heavily weighted to Q4 and silver output to be towards the lower end of guidance. We have reduced our FY24e EBITDA by 3.6% but our valuation remains virtually unchanged at US$23.5 per share due to a slightly lower weighted average cost of capital (WACC).

Written by

Andrey Litvin

Energy and Resources Analyst

Metals & Mining

Pan American Silver

Q224 results: Steady progress

Quarterly results

Metals and mining

14 August 2024

Price

US$19.8

Market cap

US$7,202m

Net debt (US$m) at Q224, including short-term investments

441

Shares in issue

363m

Free float

100%

Code

PAAS

Primary exchange

TSX

Secondary exchange

NYSE

Share price performance

%

1m

3m

12m

Abs

(16.4)

(0.7)

25.0

Rel (local)

(13.6)

(4.5)

2.7

52-week high/low

US$24.18

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

Mineral reserves and resources

August 2024

Q324 results

November 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) delivered a robust set of Q224 results, with lower silver production offset by the stronger sales and commodity prices. This was coupled with good cost control in the gold segment and resulted in a 65% increase in mine operating earnings and 31% growth in EBITDA. Strong cash flow generation was the main highlight of the results, with free cash flow exceeding that of the whole of FY23. PAAS expects production to be more heavily weighted to Q4 and silver output to be towards the lower end of guidance. We have reduced our FY24e EBITDA by 3.6% but our valuation remains virtually unchanged at US$23.5 per share due to a slightly lower weighted average cost of capital (WACC).

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

27.0

2.3

12/23

2,316.1

680.6

0.19

0.41

10.8

2.1

12/24e

2,791.1

924.2

0.22

0.40

7.9

2.0

12/25e

2,396.2

803.6

0.50

0.40

9.1

2.0

Note: *EPS excludes exceptional items.

Strong cash flow generation

Despite a 9% q-o-q reduction in silver production to 4,567koz, silver sales were up 12% in Q2, while gold sales were down 4% to 219koz on flat production. However, mixed sales numbers were more than offset by the stronger commodity prices, resulting in revenue growth of 14% to a record US$686m. Despite a double-digit increase in silver cash cost, cost control in the gold segment (main driver of financial performance) was good, with the gold cash cost falling 2% to US$1,186/oz. As a result, PAAS saw a 65% jump in mine operating earnings and a 31% increase in EBITDA to US$212m. One of the main highlights of the results was the impressive cash flow generation, with net operating cash flow reaching US$163m and free cash flow exceeding that for the whole of FY23. Net debt reduced from US$475m at end-Q124 to US$441m.

Guidance unchanged but more conservative in tone

PAAS has maintained its 2024 cost and operating guidance but noted that silver production will be toward the lower end of the 21–23Moz range and that production will be more heavily weighted to Q4. In light of these comments and Q2 results, we have taken a slightly more conservative view on operating performance at some of the projects, lowering our FY24 silver production estimate to 21Moz from 22Moz. With our production adjustments largely offset by the slightly higher commodity price assumptions, we have reduced our FY24e EBITDA by 3.6% to US$924m.

Valuation: Commodity prices remain supportive

Our valuation of PAAS remains virtually unchanged at US$23.5 per share as slightly lower earnings estimates were offset by the reduction in WACC on the back of the lower risk-free rate. Despite the overall healthy recovery in the share price mainly driven by the strong commodity prices and share buyback, we believe that the market reaction to the results was overly negative. Given the favourable commodity price environment, we see a further upside to the share price if the company continues to deliver on its operating guidance in 2024. Further progress on Escobal could be another strong catalyst for the shares.

Q224 results review: Strong cash flow generation

While PAAS’s Q224 results were somewhat masked by the below guidance silver production of 4,567koz (down 8.8% q-o-q), the company achieved an impressive 12% increase in silver sales of 4,771koz. According to PAAS, the weaker-than-expected silver production was mainly due to weather-related disruptions at Cerro Moro and Dolores. The gold production of 220koz was broadly flat q-o-q and was at a lower end of the quarterly guidance, with gold sales sliding 4% to 219koz. Given that silver contributed c 20% to Q2 production on an equivalent gold ounces basis, gold continues to drive the company’s financial performance. As such, a 12% q-o-q increase in realised gold price, coupled with a 24% jump in silver price and strong silver sales, more than offset the marginal reduction in gold sales. This resulted in revenues growing 14% q-o-q to a quarterly record of US$686m.

Despite a 14% q-o-q increase, the silver segment cash cost of US$14.5/oz was visibly below the quarterly guidance (see Exhibit 2), while the gold segment cash cost fell 1.6% to US$1,186/oz and was within the guidance range. Relatively good cost control, with cash production costs up 8% qoq in absolute terms, led to a 65% jump in mine operating earnings (US$117m) and 31% growth in EBITDA (US$212m). The bottom line was once again negatively affected by the non-cash currency and inflation related increases in taxation to the tune of US$53.2m. On a company adjusted basis, however, EPS grew from US$0.01 to US$0.11. One of the main highlights of the results was strong cash flow generation, with net operating cash flow (OCF) rising to US$163m (US$61m in Q124) and free cash flow of US$87m (net OCF less capex), exceeding that for the full FY23. PAAS finished the quarter with net debt of US$441m compared to US$475m at end FY23 and declared a dividend of US$0.1 per share, with respect to Q224.

Exhibit 1: Q224 results summary

 US$m

Q224

Q124

q-o-q %

Q223

Silver production, koz

4,567

5,009

(8.8)

6,024

Gold production, koz

220

223

(1.1)

248

Silver segment cash cost, US$/oz

14.5

12.7

14.4

9.3

Silver segment AISC, US$/oz

19.1

15.9

20.0

15.7

Gold segment cash cost, US$/oz

1,186

1,207

(1.7)

1,045

Gold segment AISC, US$/oz

1,584

1,580

0.3

1,342

Revenue

686

601

14.1

640

Cash production costs

(425)

(392)

8.3

(405)

D&A

(128)

(124)

3.2

(150)

Royalties

(16)

(14)

18.0

(14)

Mine operating earnings

117

71

64.6

71

Care and maintenance

(9)

(9)

1.1

(27)

Exploration

(3)

(3)

14.3

(6)

G&A

(24)

(22)

5.8

(18)

EBITDA (Edison)*

212

162

31.3

202

Reported PBT

72

4

1,892

(62)

Reported EPS, US$

(0.06)

(0.08)

(28.8)

(0.13)

Adjusted EPS (company), US$

0.11

0.01

1,000

0.08

Source: PAAS, Edison Investment Research. Note: *EBITDA adjusted for US$2.4m restructuring costs at Dolores.

Guidance and earnings revisions

PAAS maintained its operational and cost guidance for FY24 that envisages production of 21–23Moz of silver and 880–1,000koz of gold (Exhibit 2). However, the company now expects silver production to be at the lower end of the range and sees both silver and gold production more heavily weighted towards Q4. The anticipated production recovery at La Colorada remains one of the main drivers behind the guided improvements in silver output and costs. The new ventilation infrastructure at the mine was installed in July, in line with the initial timeframe, and PAAS reported that ventilation conditions have been improving and mining rates from the higher-grade zone of the mine increasing. PAAS expects throughput rates at La Colorada to increase to 2,000tpd (c 730ktpa) by year end.

As we noted before, the company’s cost guidance is based on gold and silver price assumptions of US$1,950/oz and US$23.5/oz. Commodity prices continue to trade above these levels, which, along with the weakness in some of the local currencies, provide support to cost performance and make the cost guidance look increasingly conservative. The spot gold and silver prices are currently c US$2,440/oz and US$28.0/oz, which from a cost point of view should continue to benefit projects with large silver/gold by-product credits, such as Cerro Moro and El Peñon.

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 Q224 results and made a number of small operating and cost adjustments at the projects level. In line with the company’s guidance, we continue to assume that the La Arena sale will complete at the end of Q324 and that the project will only contribute for three quarters this year. La Arena is a relatively high-cost mine and its sale should result in a marginal reduction in the gold segment costs in FY25. While we model a visible improvement in production rates at La Colorada in H224 as ventilation issues are gradually resolved, we maintain a relatively cautious view and expect the project’s FY24 cash cost to be at the top end and production at slightly below the lower end of the respective guidance ranges. Similarly, following the Q2 results, we took a more conservative view on the H2 performance at Cerro Moro and see its FY24 silver production slightly below the guidance range. Overall, we have lowered our estimated FY24 silver production from 21.9Moz to 21.0Moz and gold production from 922koz to 913koz (9m La Arena contribution). Our FY24 silver segment cash cost estimate increased from US$12.7/oz to US$13.2/oz. Our gold segment cash cost estimate remains broadly unchanged at US$1,191/oz.

We have also slightly updated our commodity price assumptions for the year, mainly due to the continuing strength in the gold price. Our FY24 gold price estimate is 3% higher at US$2,290/oz, while our silver price assumption is broadly unchanged at US$26.5/oz. We make no changes to our commodity price assumptions beyond FY24 for now.

Overall, our FY24 revenue estimate is 2% higher but our EBITDA forecast is 4% lower. The logic behind these changes is that the lower production was offset by higher commodity prices at the topline level but resulted in higher unit costs that drove earnings slightly lower. While consensus estimates have recently caught up with our more ambitious estimates, we are now c 2% below the market at the EBITDA level for FY24.

Exhibit 3: Changes to financial estimates

 

FY24e

FY25e

US$m

New

Old

% change

New

Old

% change

Revenue

2,791

2,744

1.7

2,396

2,400

(0.2)

Cash production costs

(1,671)

(1,603)

4.2

(1,414)

(1,402)

0.8

D&A

(501)

(492)

1.7

(391)

(396)

(1.4)

Royalties

(64)

(64)

(0.6)

(54)

(58)

(6.2)

Exploration, care and maintenance

(45)

(40)

13.0

(41)

(38)

7.1

G&A

(90)

(78)

15.4

(84)

(75)

12.0

EBITDA

924

959

(3.6)

804

828

(2.9)

Reported EPS, US$

0.20

0.55

(63.1)

0.50

0.54

(8.3)

Normalised EPS* (Edison), US$

0.22

0.58

(61.3)

0.50

0.54

(8.3)

Source: Edison Investment Research. Note: *Normalised EPS excludes investment profit/loss.

Commodity prices continue to support valuation

Our valuation of PAAS remains virtually unchanged at US$23.5 per share. We have updated our WACC estimates from 7.4% to 7.2% (nominal) and 5.0% to 4.7% (real) to reflect the reduction in risk-free rate (10-year Canadian government bond). Our valuation includes the sale of the La Arena project, which we assume will complete at the end of Q324, and the recent share buybacks. On our updated forecasts, the shares trade at FY24e EV/EBITDA of 7.9x.

Despite the recent healthy recovery in the share price, driven by the strength in the commodity prices and the share buyback, we believe the market reaction to the Q2 results was overly negative. Given the favourable commodity price environment, gold in particular, we see further upside to the share price if PAAS continues to deliver on its operating outlook throughout 2024. Any progress on bringing the Escobal project back into production could be an additional strong catalyst for the share price.

Exhibit 4: PAAS valuation summary

WACC nominal (FY24–28e)

7.2%

WACC real (from FY28e)

4.7%

Tax on EBIT

40%

Number of shares outstanding, including share buyback

363.0m

US$m

US$ per share

Sum of discounted free cash flow, currently producing operations

5,786

15.9

Add exploration/development assets

748

2.1

Add Escobal

2,122

5.8

Less FY23 net debt, adjusted for La Arena sale

116

0.3

Implied equity value

8,539

23.5

Source: Edison Investment Research

Exhibit 5: 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

2,791.1

2,396.2

Cash production costs

(1,094.4)

(1,479.2)

(1,670.5)

(1,413.5)

DD&A

(316.0)

(484.2)

(500.5)

(390.5)

Royalties

(35.9)

(55.9)

(63.6)

(54.4)

Gross Profit

48.4

296.8

556.5

537.8

G&A

(29.0)

(61.4)

(90.0)

(84.0)

Other operating costs

(63.5)

(96.8)

(45.2)

(40.7)

Operating profit (before amort. and excepts.)

 

 

(44.1)

196.4

421.3

413.1

EBITDA

 

 

272.0

680.6

924.2

803.6

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

421.3

413.2

Net Interest and other finance expense

(22.5)

(91.4)

(88.3)

(81.8)

Profit Before Tax (norm)

 

 

(73.0)

108.4

333.0

331.3

Investment income (loss)

(16.2)

(5.5)

(7.8)

0.0

Profit Before Tax (reported)

 

 

(301.0)

(58.8)

325.2

331.3

Reported tax

(39.1)

(46.1)

(250.4)

(149.1)

Profit After Tax (norm)

(112.1)

62.3

82.6

182.2

Profit After Tax (reported)

(340.1)

(104.9)

74.8

182.2

Minority interests

1.7

(1.2)

1.0

2.4

Net income (normalised)

(113.8)

63.5

81.6

179.8

Net income (reported)

(341.8)

(103.7)

73.8

179.8

Average Number of Shares Outstanding (m)

211

327

363

363

EPS - basic normalised ($)

 

 

(0.54)

0.19

0.22

0.50

EPS - normalised fully diluted ($)

 

 

(0.54)

0.19

0.22

0.50

EPS - basic reported ($)

 

 

(1.62)

(0.32)

0.20

0.50

Dividend ($)

0.45

0.41

0.40

0.40

BALANCE SHEET

Fixed Assets

 

 

2,444.1

5,823.1

5,502.6

5,437.4

Tangible assets

2,226.4

5,675.1

5,354.6

5,289.4

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

1,629.3

1,702.2

Inventories

471.6

711.6

768.9

735.8

Receivables

136.6

138.0

145.3

131.3

Cash

107.0

399.5

574.3

694.3

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)

(615.9)

(598.7)

Creditors

(308.1)

(498.0)

(489.7)

(472.5)

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)

(1,837.0)

(1,822.0)

LT debt and leases

(199.5)

(749.2)

(749.2)

(749.2)

Other long term liabilities

(466.5)

(1,067.2)

(1,087.8)

(1,072.8)

Net Assets

 

 

2,201.6

4,772.4

4,678.9

4,719.0

Minority interests

(6.1)

(11.8)

(12.8)

(15.2)

Shareholders' equity

 

 

2,195.5

4,760.6

4,666.1

4,703.7

CASH FLOW

Operating Cash Flow

(340.1)

(104.9)

74.8

182.2

D&A, exceptionals, other

555.2

663.5

804.9

593.1

Working capital movement

(42.0)

68.9

(105.3)

29.8

Tax

(137.8)

(149.4)

(197.3)

(164.1)

Net Interest

(3.4)

(27.9)

(54.0)

(53.5)

Net operating cash flow

 

 

31.9

450.2

523.1

587.6

Capex

(274.7)

(379.0)

(373.0)

(272.4)

Acquisitions/disposals

8.7

759.3

0.0

0.0

Dividends

(94.7)

(130.4)

(145.2)

(145.2)

Other

20.0

(15.3)

171.0

(50.0)

Net Cash Flow

(307.9)

684.8

175.9

120.0

Opening net debt/(cash), including ST investments

 

 

(289.4)

84.5

360.8

186.1

FX and other

(66.0)

(961.1)

(1.1)

0.0

Closing net debt/(cash)

 

 

84.5

360.8

186.1

66.1

Closing net debt/(cash), excluding ST investments

119.9

402.1

227.4

107.4

Source: Pan American Silver accounts, Edison Investment Research

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