Endless easy money policies from central banks around the globe have created a long-term tailwind for precious metals. In recent articles, I have suggested that precious metals prices have long-term tailwinds in the form of extensive inflationary pressures and have recommended considering several gold plays, most notably the SPDR Gold Trust (GLD) and the iShares Gold Trust (IAU) or through the gold miners ETF (GDX). While gold is a straightforward way to benefit from the currency debasement occurring globally, I believe all precious metals will benefit from the inflationary actions of central banks worldwide in the coming years, and I have stated that platinum could outperform gold.
Whereas platinum and gold trade at high valuations, silver is in contrast much more affordable for the average retail investor. Aside from silver being a precious metal, it also has many industrial applications and therefore, will always have demand, especially when the global economy comes fully out of recession. Common ways silver is utilized include:
- Currency; coins and bullion
- Silverware; utensils, cutlery
- Electronics, mirrors and optics
- Musical instruments
- Medical devices and instruments
Silver, as opposed to gold, and to some degree platinum, has real-world everyday uses. It's one of the most conductive metals out there and a key part of many electronics and batteries. It remains in high demand for film photography applications, even in a digital age. Silver even has antibacterial qualities, making it an important element of surgical tools and other medical devices. In a recent article, I laid out the bullish case for silver and recommended that investors interested in silver should purchase the following in hierarchical order: physical bullion and coins, one of the ETFs that track silver prices and finally through one of the individual silver companies. In response to feedback received, in this article, I wish to highlight seven of the individual silver stocks that I like best. While I still prefer physical assets, I think these stocks could deliver outsized gains relative to the physical metal once the price of silver appreciates as a result of central bank actions.
In rank order of my preference:
Silver Wheaton (SLW): SLW operates as a worldwide silver streaming company. Silver streaming is basically a process by which the company purchases a mining firm's silver production in order to distribute that silver in the market. SLW has contracts to purchase silver in bulk at prices well below market value and then proceeds to sell the silver at a higher price. The company has "14 long-term silver purchase agreements and two long-term precious metal purchase agreements whereby it acquires silver and gold production from companies located in Mexico, the United States, Greece, Sweden, Peru, Chile, Argentina, and Portugal." I am becoming fond of so-called streaming companies, as there is less direct risk than the miners, yet the company is subject to the performance of the miners it contracts with, and by extension, the stock is tied to the price of silver. SLW currently trades at $35.74 and has a 52 week trading range of $22.94-$41.30. On average, about 4.6 million shares exchange hands daily. The company trades at a 23 multiple but only a 0.67 PEG ratio, and currently yields 0.8%.
Hecla Mining (HL): One of the oldest and low cost silver miners in the United States, HL operates out of Coeur d'Alene, Idaho. HL seeks to discover, acquire, develop and produce silver, gold, zinc and lead mines in the United States. HL currently has two mines operating in Alaska and Idaho, and is the largest silver producer in the U.S. In 2011, HL produced over 9.5 million ounces of silver at a cash cost of a paltry $1.15 per ounce. HL pays a unique dividend that is a minimum of $0.01 per common share. It also attempts to pay dividends that are tied to the payments it receives for the silver it produces. As this is highly correlated to the price of silver, it fluctuates throughout the year, but has ranged from $0.003 cents per share to $0.022 cents per share in 2012, resulting in an estimated 1.2% dividend yield this year.
This miner which has flown under my radar for some time is quickly becoming one of my top picks in the space. Production is set to ramp up in 2013 as the Lucky Friday mine is set to re-open next year. The company has $200 million in cash with little debt, and anticipates 15 million ounces of silver production by 2015. HL currently trades with a 52 multiple at $5.68 a share and has a 52 week trading range of $3.70-$6.94. On average, about 4.3 million shares exchange hands daily.
Central Fund of Canada Limited (CEF): CEF is a closed-ended commodity mutual fund launched and managed by Central Group Alberta, Ltd. It "invests in the precious metals commodity markets. The fund primarily invests in silver and gold. The Company provides an alternative for investors in holding marketable silver related investments. It invests its assets in holdings of unencumbered, allocated and segregated silver bullion and holds its assets in international bar form. CEF's nominal holdings of bullion certificates are deposited with Canadian Imperial Bank of Commerce." I encourage investors to consider this company because of the fact that shares are backed by physical bullion. My close followers know that I always prefer investments to be backed by something, which is often the case why I recommend the Sprott Physical Silver Fund ETF (PSLV) over the most popular iShares Silver Trust (SLV). Shares of the company currently trade at $22.82 on average volume of 840,000. CEF has a 52 week range of $18.44 to $24.46.
Pan American Silver Corp (PAAS): PAAS explores, develops, and "operates silver producing properties and assets. The company engages in silver mining and related activities, including exploration, mine development, extraction, processing, refining, and reclamation. It produces and sells silver, gold, copper, lead, and zinc. The company has seven mining operations in Mexico, Peru, Argentina, and Bolivia; the Navidad silver development project in Chubut, Argentina; and the La Preciosa joint-venture project in Durango, Mexico." I think PAAS is a strong mining company, but some of the assets, such as those in Argentina are subject to political risks as the nation has been toying with the idea of partially nationalizing metals and mining assets for some time. However, the stock is cheap. It currently trades at $18.35 a share with a 52 week range of $13.49 to $27.11. It trades at a discount 11.2 multiple with a 1.5 PEG ratio and yields a nice 1.1% annually.
More speculative silver bets
Silvercorp Metals (SVM): SVM engages "in the acquisition, exploration, development, and mining of precious and base metal properties in China and Canada. It operates four silver, lead and zinc mines comprising the Ying, TLP, HPG, and LM mines located in the Ying Mining District in the Henan Province of China. The company also holds interests in the XBG silver, gold, lead and zinc mine with a mining permit covering 26.36 square kilometers; and the XHP silver-gold, lead and zinc mine comprising a 14 square kilometer mining permit located in the Ying Mining District in Henan Province of China. In addition it engages in operating the BYP gold, lead and zinc project in Hunan Province, as well as mining at the GC silver, lead and zinc project in Guangdong Province in China."
I like this company mainly for its yield of 1.9%. However, the stock has had some issues this year and has been a been a dog this year, down 16.7% year to date. The company's issues are mainly due to Alfred Little, a company that released a report alleging that SVM's historical resources were significantly exaggerated and that the company misrepresented data, primarily by overstating its resources and inflating its earning reports. Alfred Little has a significant short position in the company and has been aggressively campaigning against the company for sometime. SVM of course sued Alfred Little, but the case was recently dismissed, further hurting the stock. The stock has had large swings after each news update regarding this battle. In the end, SVM did announce lower reserves, somewhat substantiating the claims against it. However, a thorough legal analysis of this back and forth battle between SVM and Alfred Little is beyond the scope of this article, but it has been the primary driving force behind the underperformance of the stock, followed by a decline in silver prices since the highs of 2011.
I believe, however, that the worst is behind it and that the prospects for the company are strong moving forward especially if the price of silver stays high. The recent updated reserve analyses indicated that there are significant high grade silver-zinc-lead deposits at its SGX mines site. Further, fiscal 2014 for the company, beginning March 2013 for the company is projected to be its strongest in some time. Production is forecast to increase 64.4% as production is projected to increase from 5.9 million ounces of silver in fiscal year 2013 to 9.7 million ounces of silver for 2014. Operating cash flow is forecast to increase 55% or $88 million from $160 million $248 million while capital expenditures are forecast to drop 54% or $41 million from $90 million in fiscal year 2013 to $49 million in 2014. Analyst estimates call for an increase of earnings to $0.55 for 2014.
SVM, currently trades at $5.24 with a 52 week trading range of $4.89-$8.45, with average volume of 1.3 million shares exchanging hands daily. It has a multiple of 19.7 yet a high PEG of 3.9. SVM pays the highest annual dividend of all the silver miners.
Mag Silver (MVG): MVG is an exploration-stage silver company that could be a winner if it can execute its long-term growth plans successfully. MVG is engaged in the mineral acquisition, exploration and development business with properties located throughout Mexico. MVG's properties include the Juanicipio property, which covers over 19,000 acres and is located in Zacatecas State, Mexico. MVG's Cinco de Mayo property is located approximately 190 kilometers northwest of the city of Chihuahua, in northern Chihuahua Sate, Mexico. MVG's Mojina Property is located in northern Chihuahua State, five kilometers from the town of Ricardo Flores Magon and 40 kilometers south of the company's Cinco de Mayo property. MVG also has other smaller properties such as the Lorena claims, the Nuevo Mundo claims, the Guigui claim options, and the San Ramone claims. For 2013, the company is also expected to lose money ($0.15 per share), attributable to the companies investment efforts in expanding operations.
In order to be a long-term winner, it will have to work out some of the property issues it is facing at its Cinco de Mayo which have halted all progress. Evidently, the landholders from Benito Juarez who control the property on which Cinco de Mayo is located, decided during an assembly meeting of the local community (known as the "Ejido") in the evening of Saturday, November 17th, to expel the company from its Cinco de Mayo property and establish a 100-year mining moratorium. This could have major implications for the company, but the manner in which it occurred is likely illegal and will probably be overturned by the state/federal authorities. Regardless, the stock dropped 11% on the news, and is down 30% in just two weeks.
In their first news release on the matter, the company made it clear that it is strongly of the view that the assembly meeting was called and conducted illegally as a result of the efforts of a concentrated group of radical activists opposed to mining in the region. In its second news release and in the special conference call on the matter, reiterated its strong view that the November 17th assembly meeting was illegally called and orchestrated by a small group of radical agrarian activists, known as El Barzón, who are opposed to mining and industrial agricultural development in the region. MVG has been advised by several local sources that key signatures required to properly call the meeting were fraudulent. Significant concerns have also been expressed by local community members that the vote taken at the meeting was fraught with irregularities, including a significant number of votes being cast by unverified proxies and the exclusion from the meeting of voting members of the Ejido who are supportive of MVG's activities due to the economic benefit they bring to the region.
MVG also notes that the Ejido assembly has no ability at law to impose a ban on mining as mining is an activity that falls under federal jurisdiction. While permission of the Ejido assembly is required to obtain surface access, MAG believes that the El Barzón group and its supporters do not represent the will of the majority of the 421 voting members of the Ejido or the 12,000 other citizens in the project area.
MVG is in the process of pursuing legal remedies at State and Federal levels to have the November 17th meeting declared null and void. MAG remains highly confident that the illegal resolutions will not be permitted to stand. MVG will also concurrently ask government officials to oversee a new assembly meeting of the Ejido to ensure that the necessary procedural and governance rules are respected and the vote is properly conducted. MVG has every reason to believe that it has the support of a majority of the members of the Ejido and that the requisite authorizations will be obtained in due course at a properly constituted meeting.
The outcome will likely favor MVG, but even if the company lost the property entirely, it is not responsible for much of the company's revenues. The property at Juanicipio and the various other claims throughout Mexico are being developed and a significant portion of production comes from these areas and will be responsible for much of the growth for the company. The company will grow with or without Cinco de Mayo, however, it was a major investment of the last few quarters, thus MVG will likely devote great resources to ensuring the property is kept. The four analysts covering the company still have one buy and three outperform ratings on the stock. The stock currently trades at $9.68 on average volume of 115,000 shares daily. The stock has a 52-week range of $5.95-$13.42.
Great Panther Silver (GPL): GPL is a speculative silver mining and exploration company. GPL's operational activities are focused on the mining of precious and base metals from its wholly owned properties in Mexico. GPL is also pursuing acquisition opportunities throughout Latin America to add a third mine to its portfolio of properties. GPL has two primary mining properties, the Topia mine and Guanajuato mine. GPL also owns a development stage property, San Ignacio, which is approximately 20 kilometers from its Guanajuato processing plant, and an exploration stage property, Santa Rosa, which is located approximately 15 kilometers northeast of Guanajuato. The company has had some issues delivering this year yet sits on some massive proven reserves.
The stock's underperformance stems mostly from reduced production, lower silver prices and increased investment spending. The August quarterly report demonstrated that the company had difficult year over year. For the quarter ended June 30, 2012, the company had revenues of $14.5 million, which is a 70% increase compared to revenues of $8.5 million reported in the comparable quarter in 2011, but due to increased mining and exploration costs coupled with lower silver prices, diluted earnings per share was $0.00 per share in that quarter compared with $0.02 per share in the comparable 2011 quarter. The company also produced about 3% less silver in the quarter vs. the comparable 2011 quarter, producing 374,000 ounces vs. 386,000 ounces in the quarter the year before.
This company is taking action to expand and build its future profitability in the long term. On July 18, 2011, GPL announced the acquisition of four mining concessions in the Santa Rosa project. In late August, GPL also inked a deal to secure the purchase of the complete interest of certain surface rights on its wholly owned San Ignacio project in Guanajuato, Mexico, which will increase the company's revenue stream.
In September, GPL announced it had purchased a 100% interest in the El Horcon Silver/Gold Project in Jalisco State, Mexico, from Compania Minera El Dore, a private Mexican company, for $1,600,000 in cash. El Horcon covers 7,908 hectares in 17 contiguous mining concessions and is located 60 kilometers northwest of GPL's Guanajuato Mine Complex. One advantage of the close proximity is that it is within trucking distance of the Cata Processing Plant. GPL's CEO Robert Archer spoke highly of the deal, saying that it "has excellent potential to be a satellite mine for our Guanajuato Operations." He also added that GPL is "very pleased with this acquisition as it is consistent with our strategy to acquire assets with near-term production potential in the districts where we already operate, while looking for a larger scale, standalone acquisition elsewhere in Latin America."
The stock currently trades at $1.65. GPL has a 52 P/E multiple with average daily trading volume of about 634,000 shares. The stock has a 52 week trading range of $1.51-$2.94.
Conclusion: Precious metals stand to gain significantly from balance sheet expansion at central banks. While gold is certainly an excellent play off of the stimulus coming from governments worldwide, I believe silver and subsequently, silver companies, may will perform exceedingly well in the long term. While I prefer investors purchase physical bullion whenever possible, this list represents my favorite silver stocks and my favorite speculative bets on silver. At current levels, I believe silver and silver companies are opportunity buys, especially for the long-term investor.