NEW YORK (TheStreet) -- Pan American Silver (PAAS) 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.
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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.
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Due to relatively high profit margin, Pan American Silver is able to offer a hefty dividend of 12 cents a share per quarter. This comes to an annual yield of 3.5% -- among the highest dividend yields for precious metals producers.
The company also has a very low debt of less than $60 million on a $2.7 billion balance sheet and its debt to equity ratio is at 0.027. This relatively low debt risk makes Pan American Silver more appealing especially in times when precious metals producers have growing debt burden; e.g. Barrick Gold (ABX) has a debt-to-equity ratio of 0.96.
The recovery of Pan American Silver will continue to rely on the direction of silver. But if the company keeps cutting costs, maintains a low debt burden and continues to pay a hefty dividend, then precious metals enthusiasts will keep this stock in their portfolio.
At the time of publication the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
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TheStreet Ratings team rates PAN AMERICAN SILVER CORP as a Sell with a ratings score of D+. TheStreet Ratings Team has this to say about their recommendation:
"We rate PAN AMERICAN SILVER CORP (PAAS) a SELL. This is driven by a number of negative factors, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its feeble growth in its earnings per share, deteriorating net income, disappointing return on equity and poor profit margins."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- PAN AMERICAN SILVER CORP's earnings per share declined by 50.0% in the most recent quarter compared to the same quarter a year ago. The company has reported a trend of declining earnings per share over the past two years. During the past fiscal year, PAN AMERICAN SILVER CORP swung to a loss, reporting -$2.98 versus $0.57 in the prior year.
- The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Metals & Mining industry. The net income has significantly decreased by 66.0% when compared to the same quarter one year ago, falling from $20.15 million to $6.84 million.
- Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Metals & Mining industry and the overall market, PAN AMERICAN SILVER CORP's return on equity significantly trails that of both the industry average and the S&P 500.
- The gross profit margin for PAN AMERICAN SILVER CORP is currently lower than what is desirable, coming in at 32.63%. It has decreased from the same quarter the previous year. Along with this, the net profit margin of 3.26% significantly trails the industry average.
- PAAS, with its decline in revenue, underperformed when compared the industry average of 0.2%. Since the same quarter one year prior, revenues fell by 13.7%. The declining revenue appears to have seeped down to the company's bottom line, decreasing earnings per share.
- You can view the full analysis from the report here: PAAS Ratings Report