Pan American Silver CVR PAASF
June 29, 2022 - 6:14pm EST by
2022 2023
Price: 0.70 EPS 0 0
Shares Out. (in M): 314 P/E 0 0
Market Cap (in $M): 218 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0

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The Pan American Silver CVR ("PAASF") was created through Pan American's acquisition of Tahoe Resources (TAHO). Legacy TAHO shareholders received the CVR as partial consideration in the transaction. The CVR pays out on the first commercial shipment of concentrate out of the Escobal mine post the re-start of production, with a deadline of February 2029. Holders of the CVR are entitled to 0.0497 shares of PAAS per CVR held if this milestone is hit. I believe that there is a very high (~80%) probability that the Escobal mine is allowed to restart production in the near term.


TAHO's marquee asset was the Escobal silver mine in Guatemala. It was one of the top 2 largest silver mines in the world (in terms of annual production). According to sellside estimates at the time of the transaction, Escobal represented 50%+ of TAHO's NAV. Pan American bought TAHO largely for Escobal.


Escobal commenced mining operations in September 2013 after receiving its exploitation license earlier that year. In May of 2017, an anti-mining NGO, CALAS filed a claim in the Supreme Court of Guatemala alleging that the rights of indigenous Xinka people were violated by the granting of the Escobal mining license as they were not consulted in advance of the granting of the license. The Xinka's represent less than 0.1% of the total population surrounding the mine. The Constitutional Court of Guatemala ruled that the mine's license shall remain suspended pending an ILO 169 consultation with the Xinka communities residing in the area of the Escobal mine.


The merger circular did a good job of explaining the ILO 169 process:

"The cornerstone principles of ILO 169 are consultation and participation—principles that Tahoe embraces. ILO 169 is intended to be an instrument for good governance and a tool for conflict resolution and reconciliation of diverse interests. ILO 169 does not contemplate a veto of development projects. In the case of the Escobal Mine, a successful consultation process will identify any concerns from the Xinka Indigenous communities in the area of influence and seek to determine, in good faith, acceptable mitigations to those concerns in order for the mine to restart operations."



I believe the mine is highly likely to restart production in the next two years for the following reasons:

  • Under the framework of the consultation process within Guatemala the indigenous people have very limited rights to deny / block the project. They are only consulted and the company is supposed to work collaboratively with them to try to find ways to mitigate potential negative externalities.
  • Experts I’ve consulted suggest that only a small minority of the people on the ground in Guatemala actually want the mine shut down. The vast majority of those in opposition just want more compensation (i.e. to extract more community benefits / higher royalties from the mine)
  • Less than 0.1% of the population of the town where the mine is located are Xinka
  • There are two precedents for ILO 169 consultation processes in Guatemala. The first was a hydro plant that was resolved in ~6 months with a positive outcome for the company. That situation had some more positive attributes than this one does (less contentious asset type, owned by locals instead of foreigners) but still is an encouraging signpost. The second, a nickel mine owned by foreigners, is a more comparable situation. That mine was reopened earlier this year following a successful consultation process.
  • The economic impact of the project is important to the area (job creation, royalties to local municipalities, locally sourced content, etc). The Escobal mine generates ~2% of Guatemala's GDP (both through direct and indirect impact).
  • Experts suggest that there are no major issues with any of the initial reports that underpin the approval of the mine (i.e. it has a low environmental footprint, etc).
  • A government official recently told the press that the consultation is expected to be completed in February. The Ministry of Energy and Mining seems very committed to getting the mine re-opened.



Note: there  is a very interesting nuance buried in the merger document. If there is ever a change in control of PAAS, the CVR immediately becomes due and payable, irrespective of whether the Escobal mine is restarted, which provides incremental optionality.


The market seems to be ascribing limited value to Escobal through PAAS, potentially due to the company's lack of disclosure around the consultation process and timelines. At current prices (69.5c PAASF and $20.52 PAAS), the CVR has ~47% upside to its PAAS value. However, I believe PAAS will also trade up substantially in the event of a positive Escobal outcome. Layering in a 25% re-rating of PAAS in an Escobal re-opening scenario yields ~85% upside for the CVR. For perspective, in Escobal's last 12 months of undisturbed production, the mine produced 21mm oz of silver at ~$8.60/oz AISC. At current silver spot of ~$20.80, that would be ~$250mm of annual pre-tax profit to PAAS (after sustaining Cx).


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Consultation process concludes successfully and mine reopens

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