Speculation is always an interesting discussion, especially when speculative stocks are in a sector that is in a bull market. I have presented a thesis that all precious metals will benefit from the inflationary actions of central banks worldwide in the coming years and silver (SLV) could possibly outperform them all in 2013. Whereas metals such as platinum and gold trade at high valuations, silver is in contrast much more affordable for the average retail investor at a current price of $30.16. Aside from silver being a precious metal, it also has many real world applications and, therefore, will always have demand, especially when the global economy comes fully out of recession. Silver is best played in the following order long-term: physical bullion and coins, one of the ETFs that track silver prices and finally through one of the individual silver companies. While I still prefer physical assets, I think the following speculative stocks could deliver outsized gains relative to the physical metal once the price of silver appreciates. Further, all of the companies I outline in this article have corrected 10% or more in the last three months, providing the long-term investor with an attractive entry point.
Silvercorp Metals (SVM)
SVM is a metals and mining company that 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 2.0%. However, the stock has had some issues this year and is down 21% 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 earnings reports. Alfred Little has a significant short position in the company and has been aggressively campaigning against the company for some time. 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. The company recently announced it changed auditors as well on December 24, 2012 (effective November 27, 2012) from Ernst and Young to Deloitte and Touche LLP.
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 recently updated reserve analyses indicate that there are significant high grade silver-zinc-lead deposits at its SGX mines site. Further, fiscal 2014 for the company, beginning March 2013, 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 to $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 $5.05 with a 52 week trading range of $4.89-$8.45 and with average volume of 1.3 million shares exchanging hands daily. It has a multiple of 19.0 yet a high PEG of 3.8. SVM pays the highest annual dividend of all the silver miners.
Great Panther Silver (GPL)
GPL is primarily a 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 comparisons. 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.
The 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 $1.57. GPL has a 49 P/E multiple with average daily trading volume of about 620,000 shares. The stock has a 52 week trading range of $1.38-$2.94.
Mag Silver Corp (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 company's 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 property which have halted all progress. Evidently, the landholders from Benito Juarez who control the property on which Cinco de Mayo is locate 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 its 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, the company 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. MVG 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 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 $10.00 on average volume of 120,000 shares daily. The stock has a 52-week range of $6.07-$13.42.
Precious metals stand to gain significantly from balance sheet expansion at central banks. I believe silver and subsequently silver companies will perform exceedingly well in the long term. While I prefer investors purchase physical bullion whenever possible, this above list represents my favorite speculative silver stocks for 2013. At current levels, I believe silver and silver companies are opportunity buys, especially for the long-term investor.
Disclosure: I am long GPL.