UPDATE 1-Pan American Silver shares wobble on profit drop

Wed Aug 15, 2012 4:33pm EDT

* Q2 profit drops 61 percent on lower metal prices

* Earnings miss analyst estimates

* Increases quarterly dividend by 33 pct

* Shares close down 0.13 percent at C$15.18 on TSX

TORONTO, Aug 15 (Reuters) - Shares of Pan American Silver Corp recovered to close little changed on Wednesday after dropping 3 percent on a profit miss, as investors turned their attention to the company's forecast output and a dividend increase.

Late on Tuesday, the company said second-quarter net earnings fell to $44 million, or 29 cents a share, from $113.5 million, or $1.04 a share, in the year-earlier period.

Adjusted to remove one-time items, earnings were $17.1 million, or 11 cents a share, in the quarter ended June 30. That was well below the average analyst expectation of 32 cents a share, according to Thompson Reuters I/B/E/S.

The miss drove shares down more than 3 percent shortly after market opened. The stock later curbed losses to close down 0.1 percent C$15.18.

"Even though that adjusted number relative to analyst expectations probably hit the market pretty hard, at the end of the day, it wasn't entirely bad news going forward for the company," said David West, an analyst with Salman Partners.

He noted that while the company missed expectations on silver sales in the quarter - it sold 0.7 million less ounces than it produced - the company will likely make up those sales in the third quarter.

"Overall, they are going to catch up on their sales," said West. "It will work itself through."

Pan American's revenue fell 13 percent to $200.6 million in the quarter as its realized silver price dropped 23 percent to $29.53 an ounce. Costs rose 29 percent to $11.85 an ounce.

The Vancouver-based miner said it is boosting its quarterly dividend by 33 percent to 5 cents a share and it maintained its 2012 silver production target of 24.25 to 25.5 million ounces.

At the same time, Pan American said it has slowed development efforts at its massive Navidad silver mine in the Chubut province of Argentina until a new mining law is passed and the economic impacts of the legislation can be measured.

While the provincial legislation proposed in July would allow the open-pit project to proceed, it boosts royalties and imposes government involvement in mining projects, making the project uneconomical, the miner said.

"Without a clear potential for positive economic returns, it is impossible to justify further investment in this world-class silver development project," the company said in a statement.

While no firm decision has been made on Navidad, RBC Capital Markets analyst Dan Rollins highlighted the growing uncertainty around the project in a note to clients.

"The company has not written down the project yet, but we highlight the risk that Pan American may write off a portion of $560 million carrying value if the legislation is not amended," he said.

Pan American, which owns projects in Mexico, Peru, Argentina and Bolivia, produced 6.4 million ounces of silver and 32,244 ounces of gold in the quarter.

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