Pan American Silver: Buy, Sell, or Hold?

PAAS stock (TSX:PAAS) is up 44% in the last year alone! But it’s not all down to the rise in the price of silver.

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If there’s one company remaining under the radar from investor headlines, it has to be Pan American Silver (TSX:PAAS). The silver producer has seen its shares rise about as fast as the price of silver. But is the company’s share price all down to the increase in the mineral, or from its performance as well? Let’s get into it.

Buy

There are certainly many compelling reasons to consider buying PAAS stock on the TSX today. First, there’s the company’s strong first-quarter performance. In Q1 2024, Pan American Silver demonstrated robust financials with cash flow from operations before working capital changes of $133.2 million. Despite certain accounting adjustments leading to a net loss, the underlying operational performance was solid, with revenue reaching $601.4 million. 

What’s more, the company maintained healthy working capital of $693.5 million, including substantial cash and investments of $331.4 million. PAAS stock also strengthened its bottom line through the sale of its La Arena asset in Peru for an upfront cash payment of $245 million. This divestment aligns with the company’s focus on high-quality assets while retaining future upside through royalties. 

The proceeds from this transaction will further strengthen Pan American’s financial position, enabling it to pursue its capital allocation priorities, including investments in core assets, debt reduction, and returning capital to shareholders. And as a leading producer of silver and gold in the Americas with a three-decade-long presence in the region, Pan American Silver enjoys a strong industry reputation for sustainability performance, operational excellence, and prudent financial management.

Sell

Still, a strong quarter does not a company make. Despite strong operational performance, the company reported a net loss of $30.8 million for Q1 2024. This loss was driven by various factors including an inflation adjustment in Argentina, NRV inventory expenses, and non-cash investment losses. Such financial indicators may raise concerns about the company’s profitability and financial stability, potentially discouraging investors.

Then there’s the dependence on precious metals. Pan American Silver’s revenue heavily depends on the prices of silver and gold, which are subject to market volatility. While the company has performed well in terms of production and costs, fluctuations in commodity prices could significantly impact its financial performance and stock valuation. Investors seeking stability might be wary of investing in a company exposed to such market risks.

And there are overall operational challenges. The delay in the ILO 169 consultation process at the Escobal mine in Guatemala, coupled with the lack of clarity from the government, presents operational challenges and regulatory uncertainty for Pan American Silver. Such uncertainties can impact production schedules, increase costs, and hinder the company’s ability to execute its long-term plans effectively. Investors may perceive these uncertainties as potential risks to the company’s future performance and stock value.

Hold

So perhaps then it might be better to hold PAAS stock, for now. The company’s Q1 2024 results show strong operational performance, with silver and gold production meeting management’s expectations. Additionally, costs for both metals were lower than anticipated, indicating efficient cost management and operational execution. Such consistent operational performance is a positive signal for investors.

That operational performance was supported by the sale of the La Arena asset in Peru, demonstrating its commitment to portfolio optimization and financial strengthening. This sale, expected to generate significant upfront cash, aligns with the company’s strategy and could enhance its financial position. While divesting assets might raise concerns for some investors, it could be seen as a prudent move to focus on high-quality assets and debt reduction.

What investors will need to watch are updates on its projects and exploration, as well as industry reputation and financial position. Considering these factors, holding onto Pan American Silver stock on the TSX could be a reasonable decision for investors seeking exposure to the precious metals sector. However, investors should conduct thorough research, monitor market conditions, and assess their investment objectives and risk tolerance before making any decisions.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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