La Colorada Skarn And Juanicipio Integration Will Transform Long Term Silver Margin Profile

Catalysts

About Pan American Silver

Pan American Silver is a leading precious metals producer focused on large scale silver and gold mines across the Americas.

What are the underlying business or industry changes driving this perspective?

• Integration of Juanicipio, a very low cost high grade silver mine, is rapidly scaling attributable production while structurally lowering silver segment all in sustaining costs, supporting higher operating margins and free cash flow.
• Advancement of the phased La Colorada Skarn development, leveraging newly defined high grade resources and shared infrastructure with the vein mine, is expected to add meaningful, long life silver volumes at lower unit costs, enhancing long term earnings power.
• Comprehensive optimization at Jacobina, including tailings filtration, paste backfill and a streamlined plant flowsheet, is designed to relieve capacity constraints and improve recoveries, which should extend mine life, lift throughput and reduce operating costs, supporting higher net margins.
• Focused development programs at Huaron, Timmins and other underground mines to build inventories of high grade stopes and improve geotechnical performance are set to increase production reliability and grade profiles, driving stronger revenue and more stable cash generation.
• A robust balance sheet with approximately 1.7 billion dollars of liquidity and growing free cash flow provides capacity to fund organic growth, advance partnerships and maintain an attractive dividend, which together can accelerate net asset value realization and support higher earnings over time.

Assumptions

This narrative explores a more optimistic perspective on Pan American Silver compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Pan American Silver's revenue will grow by 19.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 19.5% today to 46.1% in 3 years time.
• The bullish analysts expect earnings to reach $2.5 billion (and earnings per share of $5.59) by about December 2028, up from $634.1 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $2.2 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 15.4x on those 2028 earnings, down from 33.1x today. This future PE is lower than the current PE for the US Metals and Mining industry at 21.5x.
• The bullish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.23%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Extended technical and geotechnical issues at key gold operations such as Cerro Moro, El Peñon, Timmins and Minera Florida, including dilution, ground support challenges and development delays, could persist beyond 2025 and lead to structurally higher cash costs and all in sustaining costs for the gold segment. This could constrain growth in segment earnings and consolidated net margins over time.
• The multi year development push at underground mines like Huaron and Timmins, which depends on building inventories of prepared high grade stopes, could take longer or cost more than expected or fail to deliver the anticipated grade uplift. This could limit future production stability and keep silver and gold production below guidance, which would pressure long term revenue and free cash flow generation.
• The phased La Colorada Skarn development and associated partnership strategy may face delays in engineering studies, permitting, partner negotiations or construction. Any slowdown in bringing this high grade, lower cost ore online would reduce the expected step change in low cost silver volumes and weaken the long run improvement in unit costs, operating margins and earnings power.
• Reliance on optimization projects and brownfield expansions at Jacobina, including tailings filtration, filter stack construction, paste backfill and extensive plant reconfiguration, introduces execution and sequencing risk that could disrupt operations, increase capital intensity and fail to deliver expected throughput and recovery gains. This could limit margin expansion and reduce the return on invested capital.
• The equity accounted Juanicipio joint venture, including the timing and magnitude of cash distributions and the durability of its very low cost profile, may not match current expectations. Any sustained shortfall in attributable production, higher costs or reduced dividend flows from the JV would diminish the anticipated structural reduction in silver segment all in sustaining costs and lower consolidated earnings and cash flow.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Pan American Silver is CA$84.11, which represents up to two standard deviations above the consensus price target of CA$72.07. This valuation is based on what can be assumed as the expectations of Pan American Silver's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$84.11, and the most bearish reporting a price target of just CA$60.02.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $5.5 billion, earnings will come to $2.5 billion, and it would be trading on a PE ratio of 15.4x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of CA$68.41, the analyst price target of CA$84.11 is 18.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.