Compared to the S&P 500, which has modestly rallied 9% year-to-date to new all-time highs, most silver miners have trended down 10% to 30%. The decline of silver prices from $35.00 in October 2012 to $28.00 in March 2013 has contributed to a decrease in the miners' net income. This has driven the price-per-share of several silver miners to 52-week lows. On the other hand, increasing oil prices have driven the cost of silver production upwards. Several reports claim that current silver prices will not be sustainable, and the price may increase in the near future. Furthermore, as the sector rotates into favor, it is worthwhile to consider some of these silver miners given they offer value, as well as dividends.
Silver Wheaton Corp. (SLW)
Silver Wheaton Corp., an $11 billion dollar market value company, is the "largest precious metals streaming company in the world." Recently the company acquired the Salobo and Sudbury gold mines from Vale S.A. (VALE), which should increase its yellow metal production in the interim. In addition, the miner reported that 19.87 million of silver ounces were produced in the first nine months of 2012. Its production has improved nicely, with the company seeing production growth by 8% year over year. However, net earnings decreased to $408 million (for the first nine months of 2012) from $550 million (for the full-year of 2011) due to a decrease in commodity prices. However, since the company has increased its silver output, compared to the previous year, Silver Wheaton Corp. should see an increment in its net income as silver prices rise in the future.
From the fundamental side, the company is trading with a P/E of 19.00, and a forward P/E of 13.93. It is the second cheapest miner after AG. The company's sales on a quarter-over-quarter basis increased by 49.71%, and its balance sheet shows no debt. According to the most recent earnings report, its profit margin is 68.98%. Moreover, it has the highest return-of-equity when compared to the rest of the silver miners, with a return-on-equity of 20.34%. Furthermore, it is distributing a near 0.9% dividend to its shareholders, which accounts for a 20% payout ratio. Due to solid fundamentals, the company has fared better when compared to the rest of the miners. It has seen a decrease in its price-per-share of 13% year-to-date while others have shed almost 30%.
Pan American Silver Corp. (PAAS)
Pan American Silver Corp., a Canadian-based mining company, is the second-largest primary silver mining company in the world. It operates seven silver mines in Peru, Mexico, Argentina and Bolivia. According to its most recent report, the miner has 316.9 proven and probable million metric tonnes of silver material. Although its silver production has been increasing, the declining prices of silver led to a net earnings contraction. Its net earnings were reduced to $87.5 million in 2012 from $354.1 million in 2011.
On the valuation side, the company is trading with a P/E of 24.84, and a forward P/E of 9.93. Its sales on a quarter-over-quarter basis increased 25.13%, and it carries no sizable debt. Dividend-seeking investors may find a near 3% dividend yield attractive, which accounts for a 28% payout ratio. Based on a solid business model, it operates with a profit margin of 9.42%. Its price-per-share is trading near 20% above its 52-week low. Further, its book-per-share is $17.91 while its trading price is $16.38. Due to sound fundamentals, the company has also fared better than other miners with its price declining only 11% year-to-date.
Coeur d'Alene Mines Corporation (CDE)
CDE, a $1.71 billion market value company, is a miner operating in Mexico, Bolivia, Australia, and the United States. Its silver production decreased from 19.1 million ounces in 2011 to 18 million ounces in 2012. However, gold production increased from 220.4 thousand ounces in 2011 to 226.5 thousand ounces. Because of a general decrease in commodity prices in 2012, the company observed a decline in operating cash flow from $454.4 million in 2011 to $338.7 million in 2012. Provided that metal prices increase, the company's net income should increase due to proven reserves of 70 million silver ounces, and 757 thousand gold ounces.
Valuation wise, the company is trading with a P/E of 34.93, and a forward P/E of 8.53. Although it may sound expensive, its high P/E suggests the potential for capital appreciation in the long term. The company also carries no sizable debt. However, the company does not distribute a dividend to its shareholders. It is trading below its book-per-share value by 25%. Its sales on a quarter-over-quarter basis decreased by 16.60%, which has helped lead to a price-per-share decline of 23% year-to-date.
First Majestic Silver Corp. (AG)
First Majestic Silver Corp. operates six silver mines in Northern and Central Mexico. Also, it has six exploration and development projects in its pipeline. Its proven and probable reserves account for nearly 80 million silver ounces. According to its most recent earnings report, the company increased its silver-equivalent production by 20% from 7.5 million ounces in 2011 to 9.1 million in 2012. However, due to a decrease in silver price, the net income decreased by 15% from $103.6 million in 2011 to $88.9 million in 2012.
From the valuation side, the company is trading at a P/E of 4.21, and a forward P/E of 7.59, with a PEG of 0.18. The company appears extremely undervalued based on both the price-to-earnings and PEG ratio. However, its sales decreased 11% on a quarter-over-quarter basis. The company does not distribute a dividend to its shareholders. It is trading 33% above its 52-week low, and it currently has a small amount of debt, with a debt ratio of 0.30. However, as silver prices increase, the debt should be easy to repay. Furthermore, a rise in silver prices may prompt the distribution of a dividend due to the 20% increment in silver production.
Hecla Mining Co. (HL)
Hecla Mining Co. is a miner operating in Canada, Mexico, and the United States. Its mine "Greens Creek" has proven reserves of 111 thousand silver ounces, while the probable reserves reach 94.4 million. Personally, I do not like the disparity between proven and probable for this mine. Moreover, the company produced only 6.3 million of silver ounces in 2012, a deep cut from the 9.5 million in 2011. The reason for the decrease was that "Lucky Friday," Hecla's second mine, underwent rehabilitation work. The production in the mine "Lucky Friday" resumed in the first quarter 2013. It is expected to produce 2 million silver ounces in 2013, and 3 million silver ounces in 2014. In addition, the company's production expenses for an ounce of silver increased by 234%, from $1.15 in 2011 to $2.70 in 2012..
Financially, the company is not appealing. Its operation and related expenses increased, while the total silver output decreased. This was reflected in a decrease of 32% in its price-per-share on a year-to-date basis. It is currently trading at a P/E of 79.00, with a forward P/E of 8.23. Although it carries a negligible amount of debt, with a debt ratio of 0.01, its sales on a quarter-over-quarter basis decreased by 21%.
The decline in silver prices since the second half of 2011 has hurt silver miners' net income, and it has reduced their profit margins because of an increasing production cost. As more reports suggest that prices of silver might increase, it is imperative to look at silver miners for profit potential. Further, the miners have increased their productivity. Some of them have great fundamentals, and sizable material reserves. As silver demand increases, the metal prices should rise, resulting in an increment of miners' net income. Since most of these companies are trading "somewhat" cheap on a valuation basis, they provide potential for capital appreciation. In my opinion, besides Hecla Mining Co., these companies provide an excellent opportunity to increase your exposure to silver.
Marshall Hargrave is gratefully acknowledged for providing guidance and copy-editing to enhance my writing skills.