According to an Aug. 9 research report, Pan American Silver Corp. (PAAS:TSX; PAAS:NASDAQ) achieved an earnings per share beat in the second quarter. "Adjusted EPS of $0.18 was substantially higher than our forecast of $0.07 and consensus of $0.10 on the back of higher revenue and lower costs," Kaip wrote.
The silver company's Q2/17 operating cash flow of $43M was in line with BMO's estimate of the same amount "as a result of negative working capital adjustments and deferred taxes," reported Kaip. Free cash flow of $1M, however, missed BMO's expectation of $3M. Pan American had $161M in cash as of June 30, 2017.
During the quarter, Pan American produced 6.3 Moz silver and 38 Koz gold, both in line with estimates, Kaip said. "Revenue beat our estimates on higher-than-expected silver and copper sales," he added.
Pan American reiterated production guidance and lowered its cash cost guidance to $5.50–6.50/oz from $6.45–7.45/oz "as a result of solid cash performance in H1," wrote Kaip.
As for capital expenditures, the report indicated the silver producer plans to spend $12.5M on development of Joaquin and COSE, its newly acquired projects in Argentina, and $5M on finishing the Dolores expansion. "Presently, the company is advancing two major expansions at Dolores and La Colorada, expected to grow its production profile in 2017," the analyst said.
With respect to those efforts, Kaip's research also revealed the advancements Pan American made during Q2/17:
1. At Dolores, it finished "construction of the pulp agglomeration plant and commenced commissioning. Initial underground stope mining is expected to begin before year-end," Kaip noted.
2. At La Colorada, it reached production of 1,800 tpd in June, said Kaip, and "development of the underground mine is advancing ahead of plan."
About BMO's investment thesis for Pan American, Kaip said, "PAAS remains a higher-quality name amongst silver miners, but we believe recent share performance incorporates the execution of its Mexican expansions and the steady three-year production outlook. Beyond these milestones, the company offers limited catalysts, as longer-dated projects require firmer timelines and deliverables to establish a meaningful pipeline."
BMO Capital has a Market Perform rating and $17.50 price target on Pan American Silver. The company today is trading at around $15.96.
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Additional disclosures about the sources cited in this article
Disclosures from BMO Capital Markets, Pan American Silver, Aug. 9, 2017
Analyst's Certification: I, Andrew Kaip, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets and their affiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in generating new ideas and in communication of ideas to clients, performance of recommendations, accuracy of earnings estimates, and service to clients.
Analysts employed by BMO Nesbitt Burns Inc. and/or BMO Capital Markets Limited are not registered as research analysts with FINRA. These analysts may not be associated persons of BMO Capital Markets Corp. and therefore may not be subject to the FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
Company Specific Disclosures
Disclosure 5: BMO Capital Markets or an affiliate received compensation for products or services other than investment banking services within the past 12 months from Pan American Silver.
Disclosure 6C: Pan American Silver is a client (or was a client) of BMO Nesbitt Burns Inc., BMO Capital Markets Corp., BMO Capital Markets Limited or an affiliate within the past 12 months: C) Non-Securities Related Services.
Disclosure 9: BMO Capital Markets makes a market in Pan American Silver.
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