Should You Book Profit on This NASDAQ Listed Silver Mining Stock – PAAS

Mar 23, 2022 12:00 AM PDT | Team Kalkine
Should You Book Profit on This NASDAQ Listed Silver Mining Stock – PAAS

Pan American Silver Corp.

Pan American Silver Corp. (NASDAQ: PAAS) is a silver mining company that focuses solely on exploration and development. In 2011, it produced almost 22 million ounces of silver. The company's primary markets are Central and South America. It also offers zinc, lead, copper, and gold, which are byproducts of its silver mining operations.

Why should investors Book Profits?

  • Macro Headwinds: The relationship between precious metals prices and interest rates has been negative in the past. It's impossible to say, but metal prices tend to climb when interest rates decrease and fall when interest rates rise. In such prosperous times, the appeal of a safe haven investment evaporates, and with interest rates rising and the home currency strengthening, the short-term gold price should decline. Recent market fears about the Federal Reserve raising interest rates to combat inflation will put downward pressure on current metal prices, affecting the company's operational profitability.
  • Industry Lagging Margins: PAAS's Gross, EBITDA, and net margins have deteriorated year over year. In FY21, its Gross, EBITDA, and net margins were 22.5%, 37.1%, and 6.0%, respectively, significantly lower than the industry medians of 48.9%, 40.9%, and 13.0%.
  • Fall in Return Ratios: The company's ROE fell to 3.7% in FY21 from 7.0% in FY20. It also reported a decrease in the reinvestment rate from 5.2% in FY20 to 1.0% in FY21.
  • Metal Price Risk: The highly volatile and uncontrollable prices of gold, silver, and base metals on the global market significantly impact PAAS' operations. As a result, any adverse price movement could harm the company's bottom line.

Valuation Methodology: Price/Earnings Per Share Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

PAAS's share price has surged 16.10% in the past month and is currently leaning towards the mid-band of the 52-week range of USD 20.74 to USD 36.14. We have valued the stock using the Price/Earnings-based relative valuation methodology and arrived at a target price of USD 25.00.

Also, Silver Futures have moved below its crucial short-term support of 50-day SMA and taking resistance of the same for the last few trading sessions. Also, the leading momentum indicator 14-day RSI has recorded a reversal from bullish momentum and moved below 60, implying that the commodity's bullishness is exhausting.

Considering the surge in share prices in a brief span, industry lagging margins, macro headwinds, exhausting bullishness in the underlying commodity, current valuation, and associated risks, we recommend a "Sell" rating on the stock at the current price of USD 27.77, down 0.39% as of March 22, 2022, 11:20 AM PDT.

Three-Year Technical Price Chart (March 22, 2022; at 11:20 AM PDT). Analysis by Kalkine Group

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.