PAAS - Pan American Silver: Tough Times But Brighter Future Ahead?

Summary

• Pan American Silver Corp. recently reported its Q4 2022 and full-year 2022 financial results.
• All-in sustaining costs soared due to global inflationary pressures.
• The company is nearing the completion of its Yamana Gold transaction, a transformative deal.
• Is Pan American a buy, hold, or sell?

This is an update on senior silver and gold miner, Pan American Silver Corp. ( PAAS ), which recently reported its Q4 2022 and full-year 2022 financial results .

It was not a great quarter or year by any means: Pan American's operations, like many other mining companies, were negatively impacted by global inflationary pressures, supply chain issues, and project delays, which resulted in higher cash costs.

Additionally, Pan American was hit with a backlog of inventory in Q4 caused by the timing of its sales. Higher-than-expected zinc inventories also contributed to higher costs.

However, there are several reasons to be optimistic, as Pan American looks to the future. Here's an overview of its Q4 earnings report and why investors might want to place a wager on the stock.

Pan American Silver Earnings: What the Heck Happened?

Production was strong: Pan American produced 4.8 million ounces of silver in Q4 and 18.5 million ounces in FY 2022, along with gold output of 164,400 ounces (Q4) and 552,5000 ounces (2022). This silver production fell in line with Pan American's revised guidance, while its gold production came in higher and was within its original guidance.

Cash costs rose more than anticipated: Pan American's all-in sustaining costs for silver rose about 10% from last year to $17.79 per silver ounce, while its gold cash costs fell (but still remain highly elevated) to $1,502 per ounce, hurting its margins.

A large net loss: For the quarter, it reported a large net loss of $172.1 million, or -$.82 per share. However, this is largely due to the $157.3 million hit it took to move forward with the acquisition of South American assets from Yamana Gold Inc. ( AUY ); Pan American had to pay that sum as a termination fee in connection with the terminated arrangement agreement between Yamana and Gold Fields.

On an adjusted earnings basis, things weren't nearly as bleak. Pan American had an adjusted net loss of $4.8 million, or $.02 per share; for the full-year 2022, it reported positive earnings of $17.9 million, or $.09 per share.

High capex: Capital expenditures remained high in 2022, finishing at $290.4 million, as Pan American advanced several key projects, most notably, the La Colorada Skarn project.

Balance sheet still strong: The company finished the year with $142.3 million in cash and short-term investments (not including long-term investments), $423.5 million in working capital, and $340 million available under its revolving credit facility. Total debt is at a manageable $226.8 million.

2023 Operating Outlook Unknown

Pan American has yet to release its 2023 production and cash cost guidance, even though we're already nearing the end of Q1 2023.

However, that's due to the company nearing the completion of its Yamana Gold transaction, which is expected to happen in March. Its updated outlook will be released thereafter and will include production from the newly acquired Latin American assets, plus a forecast for G&A expenses, exploration, and project development costs.

Why the Yamana Gold Transaction is Bullish

That leads me to the most important development for Pan American Silver: its acquisition of several Latin American mines from Yamana Gold.

Pan American and Agnico Eagle Mines ( AEM ) are paying $4.8 billion to acquire Yamana; Agnico will own 100% of the Canadian Malartic mine, while Pan American will take over 4 producing mines and 1 development project in South America.

This is an absolute game-changing move for Pan American Silver for several reasons:

• It increases its annual silver production by 50% and its gold production by 102% immediately. It's expected to increase annual silver production by approximately 9.5 million ounces and annual gold production by approximately 550,000 ounces.

• It adds over 100 million ounces of silver and 13 million ounces of gold to its reserves and diversifies its operations into Brazil and Chile.

• Yamana's Latin American assets are expected to produce gold at all-in sustaining costs of approximately $981/oz (2022 figure), which greatly reduces Pan American's cost profile.

• The acquisition is expected to provide significant potential synergies of US$40 million to US$60 million per year through operational efficiencies and cost savings, according to Pan American Silver.

• The company also claims that the deal gives it more firepower to internally fund the La Colorada Skarn development and other growth projects.

Jurisdiction Risk is High

Based on its pro forma revenue, most of its production comes from "tier-2" mining jurisdictions. These aren't necessarily bad places to do business, they just don't rate as high compared to places like the U.S., Canada, and Australia, for example.

Here's a list of Pan American's updated jurisdiction profile (top 5 countries), and country rankings for investment attractiveness based on the Fraser Institute's 2021 Mining Survey :

*Pan American's Navidad mine is located in Chubut, which ranked 73/84; Cerro Moro is located in Santa Cruz.

The most worrisome jurisdiction is Peru, which saw a decline in its PPI score of almost 29 points compared to the 2020 Mining Survey. This is the single largest PPI score decline in Latin America and the Caribbean Basin.

"Respondents raised significant issues around environmental regulations (+49 points), regulatory duplication and inconsistencies (+40 points), and security (+31 points)."

Chubut, Argentina also ranked in the top 10 least attractive jurisdictions for investment (in the second year in a row) based on the rankings, along with Venezuela, Philippines, Nicaragua, Zimbabwe, Congo, Bolivia, Kyrgyzstan, and Mongolia.

However, the Cerro Moro mine (to be acquired from Yamana) is located in the Santa Cruz province of Argentina, which is considered a better place to do business, ranking 41/84 in the survey.

Pan American Silver: The Final Verdict

Despite being impacted by inflationary pressures, supply chain issues, and project delays, Pan American Silver Corp.'s acquisition of several Latin American mines from Yamana Gold is expected to be a game-changer for the company. The deal will increase annual silver production and gold production, add over 100 million ounces of silver and 13 million ounces of gold to its reserves, and diversify its operations into Brazil and Chile.

However, investors should consider the higher jurisdiction risk associated with most of its production coming from "tier-2" mining jurisdictions, including several jurisdictions that have been in decline.

If investors are comfortable with that risk, Pan American Silver Corp. may be a strong bet here.

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