The stock prices of Pan American Silver (PAAS) and AuRico Gold (AUQ) are trading at below book value once replacement cost of reserves is factored in, said Eric K. Cinnamond, CFA, a Vice President as well as a Portfolio Manager for the ASTON/River Road’s Independent Value Portfolio at River Road Asset Management, LLC.
Explaining how he appraises these stocks, Cinnamond explained: “…so if you look at our largest miner holding, Pan American Silver, and the other large holding is AuRico Gold, both of these companies have extremely strong balance sheets. So we’re not saying gold and silver are going to spike higher in the near term. We don’t have an opinion on that. But what we are saying is we can buy their mines, their gold and silver reserves, at meaningful discounts to what it would cost to replace those reserves.”
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Speaking about the numbers behind the value of the PAAS stock specifically, Cinnamond continued, “We think there’s significant value there where book value is around $17 a share, and we can buy the stock today for under $11 a share. And of course book value can be written down, but if you look at the mine replacement cost actually coincides nicely with book value, and we think that is an appropriate valuation.”
In terms of understanding the full valuation of PAAS, Cinnamond claimed it must take into account its various assets. “How much would it cost to replace these mines, and in Pan American‘s case, their Dolores mine in Mexico and the La Colorada mine in Mexico, we think those mines combined are worth as much as the total enterprise value of Pan American Silver, and so in essence you’re getting the other five mines for free and a significant development property, Navidad, in Argentina, which the market is giving no value to, for free as well,” he said.
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