OLI Co. Spotlight - Pan American Silver PAAS

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Company Spotlight: Pan American Silver (PAAS-NASDAQ)

Eletronics Silver Rush

The Good: Large proven reserves.
The Bad: Photograph market is declining.
The Beautiful: Extremely high net profit margin.

January 21, 2008 - Pan American Silver (PAAS-NASDAQ) has found a silver lining but not in the clouds. The exploration and mining company produces more than 13 million ounces of silver annually and has proved and probable reserves of more than 200 million ounces. Its producing mines, all located in the Americas, include the Quiruvilca and Huaron silver mines, both in Peru. While the company expects silver to make up about half of its total revenue going forward, in the years leading up to 2006 zinc was actually its largest revenue maker. The company also mines copper, gold, and lead. Founded in 1994, Pan American Silver has development projects in Argentina and Mexico.

Since 2001, this stock has been on the rise, starting at a low of $2.40 and recently hitting an all-time high of $39.74. What's interesting is that earnings haven't been all that sterling except for 2006 and 2007. They were negative since 1997, finally entering into the black in 2006 at 76 cents a share. 2007 should show 97 cents a share, and this year analysts expect $1.70. It would seem investors believed these numbers were coming as they bid the stock higher in anticipation. Management hasn't let them down.

The company is at the whims of the price of silver. In 2007, it was up 13% and now trades around $15 an ounce. Some experts believe the trend will continue, and the bright stuff should average about $15.50 an ounce for the full year.

The silver market is about to shift as supply will most likely come from in the ground sources only. Governments, particularly the U.S., India and China, have been selling a majority of their stocks over the last few years. With that drying up, silver producers should have better control of their pricing. Furthermore, silver is beginning to move in line with gold which has seen extraordinary strength as the dollar weakened. If the correlation holds and the dollar continues to go lower, expect silver to enjoy enhanced attraction.

Another positive for the company is strong demand from the electronics industry. This helped offset the waning photographic market as photos went digital. However with more digital devices using silver as a critical component, there should be a net gain for the company.

There's a new Pan Am mine coming on line at Manantial Espejo. Originally scheduled for opening in March of this year, it is now 45% done. Delay of one month due to equipment delivery problems is the current estimate. Once completed, it will be the company's largest producer, bringing up 4.1 million ounces of silver and 60,000 ounces of gold annually for about 8 years.

Some numbers: Market cap of $2.8 billion with 76.5 million shares outstanding. Return on equity is should be 13% for 2007, expected to be 18.5% in 2008. Current assets are 4 times current liabilities with $153 million in cash. There is no dividend. Net profit margin should be 24.5% for 2007, 29.5% in 2008.

The question is: how long will silver prices rise? If you're bullish on silver, look into this stock as a way to take advantage of it. At some point, when profit margins are this high, more supply will definitely come into the picture. With more supply comes lower prices and you know the rest.

- Company Web site: www.panamericansilver.com

- Ted Allrich

2009

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Company Spotlight: Pan American Silver (PAAS-NASDAQ)

Eletronics Silver Rush

SUBSCRIBE to our FREE
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