2023-11-08 15:58:16 ET
Summary
- Pan American Silver Corp. silver production was at the low end and gold production slightly below guidance ranges for Q3 2023, which was abysmal.
- Production costs remain high for many miners, including Pan American, hindering meaningful earnings growth.
- Despite higher silver and gold prices, the company is not meaningfully profitable.
- Where traders should be looking.
Pan American Silver Corp. ( PAAS ) is a silver mining stock that we have traded many times over the years. Gold prices have done pretty well this year, while silver prices have yet to really move the way it has been expected they would. The gold to silver ratio continues to expand over time. But the other problem, and it is not unique to Pan American, is that production costs simply remain too high for many of these miners to see real meaningful earnings growth. And as such, these remain great trading stocks.
In and out is how you should play most of these names, including PAAS. Even with great gold prices and decent silver pricing, significant profit increases just are not happening. Seems the best times to trade these vehicles are when cash flow is near a bottom of a swing with metal prices, forcing companies to pull out all the stops to cut costs. Then, with anticipation of better days ahead, shares move higher. So, we are on the way down in recent months. You can trade in this range, but we would wait.
Gold and silver prices ebb and flow, but in this column we will review the critical metrics you should be aware of from Pan American Silver's just-reported Q3. One catalyst is in the future, which will be the reopening of Escobal. For now, we think this heads sideways to lower in the near term. Let us talk production.
Production figures well below expectations
We liked what we saw on the production front here, though the headline numbers might confuse some. This was reflected in all lines of performance. Pan American saw silver production of 5.7 million ounces and gold production of 244.2 thousand ounces. Silver production was at the low end and gold production was slightly below management's guidance ranges for Q3 2023. Brutal result, all things considered. Here is a look at mine-specific production:
So we see some mines accelerated production and others reduced production. We have also seen some moves in the mines which we think are positive, offloading some assets. Remember there were some recent sales of the MARA project, the Morococha mine which a year ago was on maintenance, and just this week the company finished selling its interest in Agua de la Falda
Cost trends in Q3
One of our primary concerns in the last two years has been the costs of doing business in the mining space. This is why the miners largely are trading vehicles in our opinion. It is an expensive endeavor to mine, and despite a lot of efforts by many miners to rein in costs, they are high, but the margins relative to AISC are positive with better pricing metals prices. However, the costs seem to grow ever-higher over the years. Miners with huge cost increases right now for production should be avoided. PAAS has maintained strong fiscal discipline, but costs rose in many areas in Q3. While some mines saw increases, others saw decreases, but the overall story here was that total costs did rise from last year.
AISC are up from last year, and while there are of course some operational changes from last year, the La Colorado costs spiked as did Huaron from last year. There were declines at Manantial Espejo (60% lower) while San Vincente was up about 60%. Overall consolidated AISC were $18.19, up from $17.97 a year ago. In terms of gold segment costs, consolidated AISC excluding NRV adjustments were flat from a year ago, with notable declines at Dolores and increases at Timmins. With lower production and slightly higher costs it came down to metal prices.
Gold/silver/base metal prices all down, except for Zinc
Metal prices fell badly. The average realized price of silver dropped to $18.76 per ounce, down from $24.16 a year ago. However, gold prices were a bit more stable, but still down to $1,705 per ounce versus $1,782 per ounce a year ago.
Compared to last year silver realized prices were up to $23.11 from $18.76 while gold was up to $1927 per ounce, up from $1705. That is strong. Copper prices were also up to $8343 per ton from $7707, but zinc prices at 2170 were down heavily from $3232, which is unfortunate as this is this is the biggest base metal byproduct sold.
Revenue fell heavily and lead earnings lower
Take a look at the consolidated results, with better metal pricing on gold and silver and flattish costs from a year ago.
The results missed analyst consensus badly on the top line . This was largely due to lower production than guided. The company saw $616 million in revenue, which missed consensus by $48 million. That is quite ugly. The company actually lost money here on a GAAP basis, losing $22.7 million. Making adjustments, income was just $3.1 million, or $0.01 per share.
Despite selling off some losing assets and making strategic merger moves, if miners cannot profit heavily with these precious metals prices, it will be hard to see a stock rally. Of course, the base metal pricing fluctuates, and they were hit with lower zinc prices this quarter. We were pretty surprised that despite this performance on production, management reaffirmed its operating outlook, but does expect gold and silver to be toward the lower end. So, forget about the higher end of that range coming in.
As we look ahead, the big catalyst for Pan American Silver Corp. will be Escobal mine in Guatemala seeing operations come back on line. That will give production a lift, though it is unclear how the costs will look there. With that said, PAAS stock remains great for trading, but it is a tough investment. We would wait for sub $13 to consider a swing higher. The stock looks to be headed toward the COVID lows if it breaks through the $13.50 level.
For further details see:
Brutal Q3 For Pan American Silver: Traders On Alert