Gold and silver were under pressure last week once again. The reasons for the decline last week and what to expect this week are detailed here. Gold and silver have pulled back significantly from highs hit on October 4th this year after spiking following global central bank actions in August and September. The precious metals and the miners that find and refine them are, in my opinion, presenting a buying opportunity as prices are back to levels not seen since last summer.
At the time of this writing, the SPDR Gold Trust (GLD) and the iShares Silver Trust (SLV) are are down 6.1% and 8.6% respectively in the last three months. The ETFs that track the miners of these metals are down even further during the last three months. The Market Vectors Gold Miners ETF (GDX) and the Market Vectors Junior Gold Miners ETF (GDXJ) are down 14.2% and 20.0%, respectively in three months. The Global X Silver Miners ETF (SIL) is also down more than silver itself losing 11.4% thus far.
With the recent Federal Reserve announcement to continue to accelerate its debt-buying program, I believe that currency devaluation is a goal of the US central bank. Further, I believe that inflation will pick up in the next few quarters. As such, with the recent weakness in the metals, I believe it is a good time to initiate or add to existing positions in the sector, particularly for the long-term investor. Further, while the aforementioned ETFs should perform well in 2013, individual stocks can offer substantially better returns relative to the ETFs and physical assets if selected carefully. With the recent sell-off, some of the best of breed silver companies are becoming oversold and are now opportunity buys for the long-term investor looking to initiate or add to a silver position. The purpose of this article is to review and highlight a few of my favorite stocks in the silver space that make for great long-term buys.
Silver Wheaton (SLW): SLW is a worldwide silver streaming company. Streaming is a very unique and long-term solvent business approach in the gold and silver space. The company offers a superior alternative to traditional precious metal mining stocks, because in general, the approach SLW takes offers a stronger opportunity for revenue growth with lower long-term overhead than mining companies, many of which are in unstable jurisdictions. Rather than mine for metals directly, SLW generates its profits by providing up front financing for other companies in the mining space looking to expand and drill for precious metals.
In exchange for the up-front financing of these companies, the SLW acquires the right to purchase a portion of production generated from the mines at a fixed cost. SLW has contracts with companies around the world to purchase silver production in bulk at prices well below market value. Once SLW acquires the silver at the predetermined upfront investment cost, it then proceeds to sell the silver at higher prices. 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 was sold down on average volume this, with about three million shares exchanging hands daily. SLW currently trades at $35.17, down 5% last week. SLW's 52 week trading range is $22.94-$41.30. The company trades at a 22 multiple, but only at a 0.92 five year PEG ratio, and currently yields 0.83%.
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 several mining operations in Mexico, Peru, Argentina, and Bolivia. 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. PAAS currently operates the Manantial Espejo silver mine in Argentina's Santa Cruz province.
Due to large budget gaps, the provincial Governor has proposed legislation to increase royalties collected from mining companies in the province. Further, after spending $80 million on its Navidad development project in Argentina, PAAS has suspended investment in the site because the Chubut, Argentina governor, has also proposed legislation to add another 5% royalty on the company. Despite the problems in Argentina, the company is attractive, and the stock is cheap. It currently trades at $16.82 a share, down 5.7% in the last week. PAAS has a 52 week range of $13.49 to $27.11. It trades at a large discount to its peers in the space at only a 10.3 multiple. Further, it only trades with a 1.3 five-year PEG ratio, which is very bullish. The analysts covering the stock have a median $25.00 price target on the stock, with the low estimate being $19.00 and the high estimate being $30.00. Analysts also expect earnings growth in 2013 of 45% over 2012 earnings. Finally, the company pays a nice dividend that yields 1.2% annually.
Hecla Mining (HL): HL operates out of Coeur d'Alene, Idaho and is one of the oldest mining companies in the United States. 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 in 2012.
Production is set to ramp up in 2013 as the Lucky Friday mine is set to re-open. The company has $200 million in cash with little debt, and anticipates 15 million ounces of silver production by 2015. This miner is one of my top long-term picks in the space and is presenting an attractive level to establish a position. HL has 52 week trading range of $3.70-$6.94 and on average, about 4.3 million shares exchange hands daily. HL currently trades at $5.27 a share, dropping nearly 4.4% this week. With production ramping up, the long term tailwinds for silver thanks to additional monetary easing coupled with the sell-off from the highs, HL is increasingly attractive.
Conclusion: Last week's losses in silver and silver equities add to the decline since mid-October, and each have corrected well over 15% since the highs of fall 2012. With continued Federal Reserve action to accelerate is accommodative policies. I reiterate with the recent weakness it is a good time to initiate or add too physical silver holdings, silver ETFs and the silver miners for the long-term investor. I expect increased silver prices in the coming years will rapidly increase the value of physical holdings, as well as pad revenues for the silver companies directly impacting their bottom line, and by extension, resulting in appreciation of share values from current levels.