Riding the wave of silver prices

Pan American Silver‘s (PAA-T, PAAS-Q) seven operating mines in Mexico, Peru, Argentina and Bolivia churned out a total of 24.3 million ounces of silver in 2010, a year-on-year rise of 5%, leaving the company with more than US$360 million in the bank.

“By almost every measure, 2010 was the best year in Pan American’s history,” Geoffrey Burns, Pan American’s president chief executive said in a prepared statement. 

Net income last year surged 82% to a record US$112.6 million, or US$1.05 per share, with cash flow from operations increasing 44% to US$218.3 million, or US$2.04 per share. Cash costs edged up 3% to US$5.69 per oz. silver, net of by-product credits. (Gold production reached 89,555 ounces, a drop of 11% from 2009, due to declining gold grades.)

Other highlights from 2010 included paying the first dividend in the company’s history in February and doubling the frequency of distributions nine months later. It also completed the acquisition of its Navidad silver development project in Chubut, Argentina, and invested US$37.5 million into the project.

Before the year was out, a preliminary assessment estimated Navidad could produce an average of 19.8 million ounces of silver over the first five years of its operation. Navidad would have a 17-year-plus mine life, and generate an after-tax return of US$1.2 billion at a 5% discount rate, assuming a US$25 per oz. silver price. The study looked at a 15,000 tonnes-per-day operation that would cost about US$760 million in pre-production.

Pan American anticipates completing an environmental impact assessment in the second quarter of 2011 and a full feasibility study in the fourth quarter, and says it will spend about US$44.7 million on development, including US$16 million on diamond drilling.

This year the company forecasts silver production of between 23 and 24 million ounces, a decrease from 2010 of about 3%. It is also forecasting lower gold production, of between 76,000 and 78,000 ounces. Zinc and lead production in 2011 are expected to reach between 44,000 and 46,000 tonnes and 14,000 tonnes respectively, with copper remaining flat at between 5,200 and 5,500 tonnes.

Inflationary operating costs along with stronger local currencies are likely to drive up cash costs to between US$7 and US$7.50 per oz. silver, net of by-product credits.

In addition to its 2011 spending plans at Navidad, Pan American Silver will invest about US$1 million at its La Preciosa joint-venture in Durango, Mexico, to finish a preliminary assessment by the middle of the year. It spent US$10 million at the joint venture in 2010.

Other expenditures outlined for this year include US$54 million in sustaining capital at its seven operating mines, including US$11 million for brownfield exploration, with an additional US$12 million earmarked for Greenfield exploration.