Pan American Silver Corp. , which has its sights set on becoming the world’s largest silver producer, sees itself as a solid investment even if resource-shy investors are steering clear of the stock.
The Vancouver-based company, unable to turn around a stock price trading at half its year-ago value even as it reports profits, pays dividends and targets growth, is taking matters into its own hands, announcing plans on Wednesday to resume a share buyback plan halted last year.
“As a method of actually investing shareholders’ money and indirectly returning shareholders’ money to them, it seems the best investment we can make right now is in our own stock,” Pan American Silver president and chief executive officer Geoff Burns said in an interview.
Mining company shares have been some of the hardest hit as global investors move to “risk-off,” or exit stocks seen as vulnerable in a weaker global economic environment. In Toronto, which has one of the world’s largest concentrations of mining equities, the materials index is off more than 24 per cent for the past three months alone.
Pan American shares are off 37 per cent in that same time period, trading as high as $26.15 per share in late February and falling to $15.09 on Wednesday.
“If three or four months from now we’ve completed the program and we’re still trading at $15 to $16 ... and we continue to generate the kind of cash flow that we have been, then yes, I would go back to the board and make a recommendation that we reapply and essentially refill the program,” Mr. Burns said after announcing plans to buy back up to 1.8 million shares.
Like other resource stocks, Pan American shares have also been hurt by falling commodity prices and rising costs of production in areas ranging from materials, to energy and labour.
Silver prices fell more than 3 per cent on Wednesday to about $27 (US) an ounce, nearly 7 per cent lower than where they started the week.
Pan American bases much of its decision making on average prices of silver of $25 per ounce over the long term, Mr. Burns said.
Pan American is banking on the market rewarding it eventually for the $1.5-billion (Canadian) acquisition earlier this year of Mexico-focused Minefinders Corp., a move meant to convert it into a low-cost, long-life silver-producing powerhouse.
While applauded by investors for the most part, the cash and stock acquisition was highly dilutive to Pan American stock, requiring the issue of nearly 54 million shares.
But it also added immediately to the company’s production profile, creating a combined company valued at $4-billion that will double Pan American’s silver production to 50 million ounces by 2015.
In its first-quarter report this week, Pan American raised its silver production forecast for the year to as much as 24.5 million ounces in 2012, from a previous 22.5 million in a report in February, boosted by output from the newly acquired Dolores silver and gold mine in Mexico’s Chihuahua state.
The company, which is one of the world’s largest primary silver producers, estimated cash costs of between $11.50 an ounce and $12.50 an ounce, or slightly higher than some analysts expectations.
“While guided costs at Dolores were higher than expected, some of the difference could be attributed to more conservative accounting treatment,” UBS Investment Research analyst Chris Lichtenheldt said in a report. He added that he expected cash costs for the company to increase over the next three quarters.
Under the current mine plan, Dolores will produce about four million ounces of silver and up to 80,000 ounces of gold per year, with average cash costs of between $5 and $6 per ounce of silver.
Over the longer term, the company plans to build a mill to process higher-grade ore and it may look at turning the open pit into an underground mine.