At 5-Year Lows Is GPR A Buy?
https://seekingalpha.com/article/2661075-at-5-year-lows-is-great-panther-silver-finally-a-buy?ifp=0
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At 5-Year Lows, Is Great Panther Silver Finally A Buy?
Summary
- Great Panther Silver is a junior silver miner with three mines in Mexico; the company has solid production growth potential.
- With silver under $16 an ounce, Great Panther is not profitable since all-in sustaining costs are estimated at $19-$20 an ounce; Q3 results showed a $1 million loss.
- Thankfully, Great Panther has a solid balance sheet with $20.4 million cash and $35 million working capital to weather the silver downturn.
- I think company is a takeover target here at lower silver prices.
Great Panther Silver (NYSEMKT:GPL) is a primary silver producer with three silver mines in Mexico: the Topia, San Ignacio and Guanajuato mines. At current silver prices, Great Panther is not a profitable company, but that doesn't necessarily mean the stock isn't a buy.
With 3 million ounces of silver production estimated for full-year 2014, a solid balance sheet with $20.4 million cash, no debt, and $35 million working capital, a growing silver resource base of 33 million silver equivalent ounces, and exciting exploration potential at the El Horcon silver-gold project, I think Great Panther looks like an interesting, yet speculative long-term buy here. I suspect the company is a takeover target for a larger silver miner.
Great Panther Silver
Recent Stock Price: $.67
Shares Outstanding: 139 million
Market Cap: $93.7 million
52-Week Range: $.66 - $1.49
Enterprise Value:$77.35 million
Book Value Per Share: $.54
GPL data by YCharts
Why Great Panther?
Here are a few reasons why I think Great Panther could be a buy here.
Leverage to silver: Junior mining companies like Great Panther arehighly leveraged to the price of silver. So if you think silver prices will eventually recover from current levels and rise to $30+ levels again, Great Panther Silver could be a great way to play it.
(click to enlarge)
(Credit: Yahoo Finance)
Just take a look at the above chart, which shows the performance of Great Panther compared to the price of silver (NYSEARCA:SLV). During the 2011 breakout when silver rose from $16 to $49, Great Panther greatly outperformed the silver price, rising close to 600% compared to its 160% climb.
Of course, leverage works both ways and means an underperformance on downturns, with Great Panther underperforming the metal over the past two years, losing 64.9% of its value compared to 52.9% loss in silver. Still, over the past five years, Great Panther has outperformed the metal slightly, as you can see above.
Strong Balance Sheet: As mentioned, Great Panther Silver has one of the strongest balance sheets among silver juniors, with $20.4 million in cash, zero debt, and solid working capital. This means the company should be able to weather this current silver downturn for the foreseeable future. It also makes the company as even more attractive takeover candidate in my view.
Further Growth Potential: For example, the company's 7 million ounce resource at the San Ignacio silver and gold mine only covers 650 metres of strike length out of 4km potential, according to the company.
Recent drilling has been very successful, with one recent drill intersecting 1,133 g/t silver and 6.86 g/t gold over a true width of 5.26 metres, 130 metres outside the current resource base. The mine currently operates at a rate of 200 tonnes per day but will increase to 250 tonnes per day by the fourth quarter.
Great Panther has reported an impressive compound annual growth rate in production of 12%, increasing annual production from 2.2 million in 2011 to 3-3.1 million ounces estimated for full-year 2014.
Q3 Results Were Decent
Here's a summary of Great Panther's most recent quarterly results:
- The company achieved record metal production of 890,641 silver equivalent ounces, a 13% increase year-over-year. This was partly due to it being the first full quarter of production from San Ignacio.
- Silver accounted for 55% of production, with 37% gold and 8% zinc and lead.
- Revenue totaled $12.7 million, a 11% decrease mainly due to lower silver prices.
- Net loss was $1 million, compared to a loss of $1.5 million a year ago. Adjusted EBITDA was just $1.3 million. Great Panther's focus here with silver at $15 an ounce isn't to make money, it's to lose as little as possible. And with a loss of just $1 million, I think it did a pretty good job at that.
- Consolidated cash costs per silver ounce increased 10% to $10.91. Cash costs per silver payable ounce was $9.13 at the Guanajuato Mine Complex, a 133% increase, and $15.82 at Topia, a 12% decrease.
- Cash and equivalents stood at $20.4 million compared to $21.8 million last year, while net working capital decreased by $2.9 million, to $35.3 million.
- The company remains focused on cost controls and improving operating efficiencies. - All-in sustaining costs per silver ounce decreased 17% to $19.95, down from Q2's total of $24.73 an ounce and Q3 2013's total of $24.01 an ounce.
- 2014 objectives remain the same: produce 3 - 3.1 ounces of silver at cash costs of $12 - $13 an ounce, further reduce operating costs and overheads, and improve grade control and operating efficiencies.
Great Panther: A Takeover Target
Even though Great Panther can't turn a profit at current silver prices (not many silver miners can), it still looks like one of the more obvious takeover candidates in the gold and silver mining industry for a few reasons.
First, the company has a solid resource base in Mexico with 33 million silver equivalent ounces that are currently being valued at just $2.3 per ounce. And with a healthy balance sheet, a takeover company can add some cash to shore up its balance sheet.
A comparable acquisition that comes to mind is Couer Mining's 2013 takeover of Orko Silver, a U.S. silver producer, for $379 million. Orko's main asset was the La Preciousa silver deposit in Mexico, which currently contains 66.9 million ounces of silver in reserves and an additional 59.5 million ounces in resources. Unfortunately, there have not been too many other takeovers in the silver sector since then, but I think this will change now that silver has fallen below $16 an ounce as company's will need to merge or be acquired just to survive.
The most likely suitor for Great Panther is Endeavor Silver (NYSE:EXK), a mid-tier silver company with three high-grade underground mines in Mexico. The company's Bolanitos mine is located just 5 kilometers from the city of Guanajuato, while the El Cubo mine is a 20 minute drive outside the city. This is basically right next door to Great Panther's Guanajuato mine complex.
In addition, Endeavor had $44 million in cash and equivalents and $99 million in current assets at the end of the second quarter, but also has some debt in the form of accounts payable ($20.6 million) and a revolving credit facility ($29 million). A merger or takeover of Great Panther would give the company another $20.6 million in cash to strengthen its balance sheet and pursue another acquisition if it wanted to. I think a merger is a more likely scenario, as the two companies can combine cash balances and become one, instead of Endeavor likely having to issue equity to complete the takeover.
The second most likely candidate for a takeover is First Majestic Silver (NYSE:AG), a company which owns and operates five producing silver mines in Mexico. First Majestic is nearly twice the size of Endeavor but had just $66.6 million in cash and equivalents at the end of the last quarter. A takeover of Great Panther would increase the company's production profile by 3 million silver equivalent ounces, from 15 million to 18 million ounces for full-year 2014, while also increasing its cash reserves to $87 million. First Majestic could issue 8-10 million shares to complete this transaction.
So while Great Panther Silver is currently an unprofitable company, growing production, exploration upside and a strong balance sheet make the company an attractive takeover candidate. For these reasons, I think investors should consider initiating a position here at depressed levels.