NEW YORK ( TheStreet) -- Pan American Silver (PAAS - Get Report) keeps recovering in the stock market, despite the stagnation in the silver market in recent months. What is driving higher the demand for this $2.2 billion precious metals producer?
For one, even though the price of silver remained close to the $20 to $21 range in the past few months, the company's profit margin slightly improved in the first quarter compared to the preceding quarters on account of lower production costs: During the first quarter, the company's cash cost per ounce of silver, which includes all direct costs related to production but doesn't include depreciation provision, fell to $8.33 per ounce or 27% lower than in the same quarter a year earlier. This lower production costs curbs down the adverse impact from the lower precious metals prices compared to the first half of 2013.
In addition, the company mostly produces silver (nearly 70% of its precious metals yield come from silver). So while most other precious metals producers focus of gold, this company's exposure to silver is high. Why is this a good thing? In recent months the ratio between the price of gold and silver dropped from 66 to 63. This means, the current price of gold is 63 times higher than silver, while several months ago it was 66 times higher. The lower ratio suggests that silver outperformed gold. If silver continues to outpace gold, this could draw more bullion enthusiasts away from the yellow metal and towards silver.
This bring us to the third issue, Pan American Silver continues to show sizable profit margins compared to other precious metals producers. In the first quarter, the company's operating profit was at 15%. In comparison, other small cap precious metals producers such as Hecla Mining (HL) recorded only a profit margin of 6.3%.
Wednesday, Pan American Silver started on a positive note, up 2.5% to $14.82 per share. Other precious metals producers such as Hecla Mining also jumped by 3.2% to 3.21 a share.