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Background

Speculation is always an interesting discussion, especially when speculative stocks are in a sector that is in a long-term bull market. Gold and silver have pulled back significantly from highs hit on October 4, of 2012, 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 (NYSEARCA:GLD) and the iShares Silver Trust (NYSEARCA: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 (NYSEARCA:GDX) and the Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) are down 30.0% and 32.8%, respectively in six months. The Global X Silver Miners ETF (NYSEARCA:SIL) is also down more than silver itself losing 27.8% in that time. I regard these ETFs all as strong buys, given that prices have stabilized in the short term, and the long-term tailwinds are solidly in place.

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 U.S. central bank, which is a buy signal for the metals and miners. The fears 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 gold and silver companies are just oversold and are now opportunity buys for the long-term investor looking to initiate or add to a silver position. Why consider silver and silver equities? Metals such as platinum and gold trade at high valuations whereas silver is much more affordable for the average retail investor at a current price of $28.76. 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 and best-of-breed companies in the sector, the purpose of this article is to highlight two speculative stocks that could be a leveraged way to profit from moves to the upside in silver prices.

Mag Silver Corp (NYSEMKT: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 17, 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 was 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 17, 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 by 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 17 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 two analysts currently covering the company still have one strong buy and one moderate buy rating on the company. The stock currently trades at $9.48 on average volume of 70,000 shares daily. The stock has a 52-week range of $6.63-$13.42.

Silvercorp Metals (NYSE: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 2.7%. However, the stock has had some issues this year and last is currently down 22.3% 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 from Ernst and Young to Deloitte and Touche LLP.

On February 13, SVM reported financial and operating results for the third quarter that showed some strength. In Q3 SVM produced 5,676 ounces of gold and 1.52 million ounces of silver. The company had revenues of $58.7 million. After costs, the company reported income of $14.9 million, which equates to $0.09 per common share. SVM continued its strong dividend history paying another $0.025 cents to shareholders, which at current share prices of $3.98 equates to a 2.7% yield at a 38% payout ratio.

I believe that despite 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 $3.98 with a 52-week trading range of $3.37-$7.20 and with average volume of 1.4 million shares exchanging hands daily. It has a multiple of 22.0 yet a high PEG of 3.2. However, the forward p/e is an attractive 8.6. Further, SVM pays the highest annual dividend of all the silver miners. Given that it appears the stock has bottomed and the worst is behind it, SVM is offering a compelling speculative investment.

Bottom Line

Precious metals stand to gain significantly from balance sheet expansion at central banks. The fears in Europe have stabilized the prices of gold and silver. I believe silver and subsequently silver companies will perform exceedingly well in the long term and will possibly outperform gold. While I prefer investors purchase physical bullion whenever possible, the two stocks above represent two stocks that I believe could provide outsized returns when silver rebounds above $30. At current levels, I believe silver and silver companies are opportunity buys, especially for the long-term investor.

Source: Speculative Silver Stocks That Could Deliver Outsized Returns

Additional disclosure: I am also long another speculative stock with large upside potential not covered here, Great Panther Silver Ltd. (NYSEMKT:GPL)