Right now one of the sectors that offers the most value for money is the basic materials sector, in particular, the silver miners.
Unfortunately, silver mining companies have been lumped with the same reputation as gold miners and have been aggressively sold off as investors are terrified about falling returns, equity dilution and, in worst case, bankruptcy.
Baupost's investment process involves "never-ending" gleaning of facts to help support investment ideas Seth Klarman writes in his end-of-year letter to investors. In the letter, a copy of which ValueWalk has been able to review, the value investor describes the Baupost Group's process to identify ideas and answer the most critical questions about its potential Read More
However, for the majority of silver miners this is not the case and the negative read-across from the depressed gold mining sector has meant that some silver miners look very attractive at these prices.
Pan American Silver is one of them.
A quick glance at Pan American Silver Corp. (NASDAQ:PAAS) reveals that the company is well capitalized, nearly debt free and currently trading at a discount on the value of its assets. According to the company’s first quarter results, net cash stood slightly under $500 million, or $3.30 per share, inventories stood at $280 million and total current liabilities came in at $200 million. Overall, the company had a quick ratio of 3.4. Additionally, long term debt stood at $67 million and short term debt was $7 million. Net cash stood at $426 million and current assets covered total liabilities around 1.5 times. On valuation grounds, Pan American’s asset value is around $18 per share.
Having said all of that, it is not Pan American Silver Corp. (NASDAQ:PAAS)’s valuation that makes it look so attractive.
Unlike Gold Miners, Pan American is Reporting Positive Net Cash
Over the past few years, the rush to get precious metals out of the ground and sell them at high prices has led to record levels of capital spending among miners. This has led to rising levels of debt, deteriorating shareholder equity and negative cash flows as more cash is spent on capital projects than received from the sale of goods.
For example, excluding the issuance of stock or debt, during the last three years, Barrick Gold Corporation (NYSE:ABX), Goldcorp Inc. (NYSE:GG) and Newmont Mining Corp (NYSE:NEM), (currently the largest three gold miners by market cap) have all noted negative changes in cash and cash flows have needed to be reinforced with stock issuance and borrowing.
The rapid outflow of cash at the mining companies has been one of the major reasons for their decline, but Pan American on the other hand has registered a positive change in net cash for the last four years.
In addition, for the last three out of four years, Pan American Silver Corp. (NASDAQ:PAAS) has reported a larger net change in cash than reported net income – reported free cash flow has been 16% of revenue.
Pan American Appears a Solid Value
Moreover, Pan American Silver Corp. (NASDAQ:PAAS)’s silver production is set to nearly double to 50 million ounces per year by 2015, which when coupled with the company’s strong management team and good cash management, will significantly boost profitability and shareholder returns. Unfortunately, this increase in production has come at a cost to shareholders in the form of equity dilution as the company issued 54 million shares to finance the acquisition of Mexico-based Minefinder Corp. However, although initially dilutive, in the long term it would appear that shareholders are set to benefit as Pan American has already set about buying back stock, spending a net amount of $44 million over the last four quarters to repurchase 5.3 million shares, or 3.5% of the company’s issued share capital. This trend should be set to continue as the company’s cash flow grows and more value is returned to investors.
So overall, Pan American Silver Corp. (NASDAQ:PAAS) is a financially strong, cash flow positive mining company that is in the process of doubling production and offers a dividend yield of 4%. Furthermore, the company is currently trading below the value of its net assets. All in all a solid value play.