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 and seemed to have bottomed in the last week or so. At the time of this writing, the SPDR Gold Trust (GLD) and the iShares Silver Trust (SLV) are down 9.1% and 15.8% respectively in the last six 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 30.0% and 32.8%, respectively in six months. The Global X Silver Miners ETF (SIL) is also down more than silver itself losing 27.8% in that time.
In light of the Federal Reserve announcement to continue to accelerate its debt-buying program, I believe that currency devaluation is a goal of the US central bank which is a buy signal for the metals and miners. The worries in Cyprus, namely the fear that this country's idea of raiding citizen's bank deposit accounts could spread throughout Europe, gives investors more reason to buy the metals. 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 just 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, 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 with about three million shares exchanging hands daily.
SLW just reported their 2012 performance. A few of the highlights are
- Fourth consecutive year of record attributable silver equivalent production of 29.6 million ounces compared to 25.4 million ounces in 2011, representing an increase of 17%.
- Record silver equivalent sales of 27.3 million ounces compared to 21.1 million ounces in 2011, representing an increase of 30%.
- Record revenues of $849.6 million compared to $730.0 million in 2011, representing a 16% increase.
- Record net earnings of $586.0 million ($1.66 per share) compared to $550.0 million ($1.56 per share) in 2011, representing a 7% increase.
- Record operating cash flows of $719.4 million ($2.03 per share) compared to $626.4 million ($1.77 per share) in 2011, representing a 15% increase.
- Cash operating margin of $26.79 per silver equivalent ounce, compared to $30.56 in 2011, representing a 12% decrease.
- Average cash costs rose to $4.30 per silver equivalent ounce, compared to $4.09 in 2011, representing a 5% increase.
It was an excellent year for the company and it demonstrated why it is an excellent investment in the space. Further, it has demonstrated it can grow and deliver results despite weakness in silver and gold prices in much of 2012. SLW currently trades at $30.98, down about 5% in the last month. SLW's 52 week trading range is $22.94-$41.30. The company trades at a 19.9 multiple, but only at a 0.27 five year PEG ratio, and currently yields 0.9%.
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, especially given its 2012 performance.
PAAS reported its 2012 annual performance in late February and demonstrated its strength as a premier silver miner, despite some setbacks in its 4th quarter (which saw adjusted earnings of $0.37 per share; unadjusted there was a loss). Major highlights for 2012 include:
• Record gold production of 112,300 ounces and record silver production of 25.1 million ounces.
• Record revenue of $928.6 million.
• Consolidated cash costs of $12.03 per ounce of silver, net of by-product credits.
• Mine operating earnings of $311.4 million.
• Net earnings of $87.5 million, or $0.62 per share.
• Adjusted earnings of $177.9 million, or $1.26 per share.
• Operating cash flows before changes in non-cash operating working capital of $215.5 million or $1.53 per share.
• Cash and short term investments of $542.3 million at December 31, 2012.
• Working capital of $779 million at December 31, 2012.
PAAS had a record year of production with strong working capital at the end of the year. Looking to 2013, it wants to produce 25.0 to 26.0 million ounces of silver at cash costs of $11.80 to $12.80 per ounce. It currently trades at $16.77 a share, down 7.8% in the last three months. PAAS has a 52 week range of $13.49 to $22.83. Further, it only trades with a 1.2 five-year PEG ratio, which is very bullish. The analysts covering the stock have a median $22.23 price target on the stock, with the low estimate being $17.00 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 3.0% annually after announcing a massive 150% increase in its dividend.
Conclusion: The losses in silver and silver equities in 2013 have added 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 its accommodative policies, trouble brewing in Europe and the United States' addiction to debt, I reiterate that 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.