Whenever I make a purchase, I like to share my buys to document my journey towards financial independence. This latest purchase diverges from the normal buys that I normally pursue, as I shared in this post – Multipronged Approach to Investing. So far, I have relied on companies with growing dividends, but the current market leaves me nervous wanting me to look elsewhere. I started to look at contrarian trades and looking for undervalued assets and decided to make further moves in this space.
Last week, I shared my first move in the precious metals space with a purchase of Silver Wheaton Corp (SLW.TO) (details here). Continuing with the theme, this time I am directly targeting a mining company. Investing in precious metals can take many forms and I have discussed some methodologies here and here. To recount from those articles, investors may choose to invest using bullion (comes with ownership/storage costs), ETFs (paper contracts, loses the point of investing in precious metals) or mining companies (comes with risk, such as exploration risks, management issues, lack of understanding space etc).
Last month, I initiated a position in Pan American Silver Corp (PAA.TO) (also trades as NASDAQ:PAAS) with 100 shares @ C$19.09. The company yields 0.26% adding US$5 to my annual passive income. Nothing to write home about. But as I mentioned earlier, this investment is not focused on the dividend, but a contrarian move strengthening my precious metals position.
Pan American Silver Corp. (Pan American) is engaged in the production and sale of silver, gold and base metals including copper, lead and zinc, as well as other related activities, including exploration, extraction, processing, refining and reclamation. The Company’s primary product (silver) is produced in Peru, Mexico, Argentina and Bolivia. The Company has project development activities in Peru, Mexico and Argentina, and exploration activities throughout South America, Mexico, and the United States. The Company’s properties consist of the Huaron and Morococha mines located in Peru, the Alamo Dorado, La Colorada and Dolores mines located in Mexico, the San Vicente mine located in Bolivia and the Manantial Espejo mine located in Argentina. The Company’s subsidiaries include Pan American Silver Huaron S.A., Compania Minera Argentum S.A., Minera Corner Bay S.A. de C.V., Plata Panamericana S.A. de C.V. and Minera Argenta S.A.
Recent Buy Decision
- Silver is a precious metal that is a good value store, similar to gold. Exposure to precious metals is warranted given the current economic outlook. There are plenty of challenges facing the financial and monetary system. It is not a question of ‘if’, but a question of ‘when’, the next recession or financial crisis will hit the markets. Once investors face challenges in the financial markets, everybody runs to safe havens such as gold and silver.
- The gold-to-silver ratio indicates that silver has more upside potential than gold.
- Silver is also an industrial metal used for various things (see Further Reading section below). One aspect of silver that excites me is that it plays a crucial part in solar PV cell manufacturing. With the renewable energy space gaining momentum, silver is a proxy (albeit a very small one) to invest in solar energy.
- Total global supply for silver declined from 1.06 billion oz to 1.04 billion oz in 2015 (third consecutive year of supply decline). The global supply is expected to decline a bit more over the next few years supporting higher prices. On the flip side, demand is expected to increase from the current 1.17 billion oz.
- The materials/precious metals sector has been the most hated/underperforming sector over the past 3-4 years. We could possiblybe on the cusp of a new bull market. (Image Source: Seeking Alpha)
- Some investors are already calling to taking profits and think the rise in silver/gold is done for now. While the metal prices take a breather, a look at the long term charts shows that silver prices are still very depressed with plenty of room to run.
Why Pan American Silver?
- Pan American is a diversified silver (and other metals) producer. With a market cap of approx C$3B, the company is usually categorized in the juniors section (albeit one of the larger juniors out there), but is large enough with a diversified and proven reserves; and with a great track record over the years. The founder and chairman Ross Beaty is a majority shareholder and is a very respected geologist/entrepreneur/businessman in the field.
- Mining operations in stable-political countries.
- PAA is expected to mine 24-25M oz of silver, 175-185K oz of gold and more of other base metals (details can be found in AGM presentation linked below) in 2016. The company continues to drive down costs year after year increasing the margins.
- Not only is PAA a silver miner, PAA is now entering into the royalty/streaming business. For those unaware of what/how streaming business work, see my post here (another article linked in Further Reading section below). PAA will be 54% majority owner in Maverix, the new relaunched streaming business.
- PAA is financially stronger than other miners and currently has more cash ($177M) than debt ($80M).
- A mining company is only as good as the reserves it has a stake on. The following chart summarizes the proven and probable reserves and the changes between 2014 and 2015. As can be seen, the company still has amazing resources at its disposal.
- The continued strength in US$ means that precious metals can face continued pressure on the prices. This could be a damper on the stock price for Pan American Silver.
- Silver prices might collapse bringing the all-in costs for mining silver higher than spot price. PAA’s current all-in costs are hovering close to $13/oz. Although the company expects to control the costs over the coming years, it is paramount that the costs remain lower than spot price in order to avoid burning cash through the bear market.
- Miners may also face a risk of a reserve failing to produce and the company miscalculating the assets present in ground.
I have been eyeing precious metals investments for over a year now and have been thinking that the time was not right. The continued strength in US$ keeps the asset prices depressed and may continue to do so over the course of next couple of years. I wanted to see some movement before making my first move and we finally saw that with the US$ stumbling in the first quarter. I have now started accumulating…and this is the second of many such purchases I will be making in hard assets such as gold and silver over the coming months. Silver represents a great opportunity with the continued increase in demand and supply-side deficit. Pan American Silver is one of the larger juniors, but has sustainable proven reserves led by a great management team. In addition to mining silver, the company mines gold and other base metals. Further, the company is now entering into the royalty/streaming business with a majority ownership agreement, which should provide additional leverage to gold and silver prices.
- Since I am a novice in mining, I am including one of the resources that I read over the past few months about how to understand and value mining companies: Valuation of Metals and Mining Companies
- Pan American Silver AGM May 2016
- Pan American Silver 2015 Annual Report
- Precious Metals Royalty And Streaming Companies: A Qualitative Analysis
- Case study of a growth driver – silver use in solar
- Silver’s Industrial Demand: The Best Is Yet to Come
- See my previous buys
Full Disclosure: Long PAA.TO, SLW.TO. My full list of holdings is available here.