Oversold, Undervalued Silver Miners Have Started to Rally

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 |  Includes: BVN, CDE, HL, PAAS, SLW, SPY
by: David White

Silver stocks are still mostly valued on silver’s value of two or more years ago. Yet the price of the silver commodity itself has gone up considerably since then. The total global production of silver was only735.9M ounces in 2010. Total fabrication demand grew by 12.8% in 2010 to a 10-year high of 878.8M ounces. This demand by itself exceeded total world production last year by 142.9M ounces. The amount demanded for use in industrial applications alone increased 20.7% in 2010 to 487.4M ounces. This is predicted to keep growing to 665.9M ounces in 2015. Industrial applications will become an increasingly important part of overall silver demand. The amount demanded for ETF investments increased 120M ounces in 2010 to approximately 547M ounces. When you add the 120M extra ounces demanded by the ETF industry, the demand for silver exceeded the silver mining production in 2010 by 262.9M ounces.

This means more and more silver will have to come from recycling/scrap. It means the price of silver is almost certain to go up for many years. It means the silver miners are likely to make increasing profits until this situation changes. The current futures price of silver is $36.19 (at the time of this writing). It is trending strongly upward. See the silver futures chart below.

The 1 year silver futures chart:

 

The above chart shows an approximate rise in silver price of $18/ounce since last August. Given the above data, that rise rate seems likely to continue in the near term until substitutions begin to occur for industrial uses. Even then silver use may still increase due to substitution of silver for gold and platinum in jewelry.

Silver use as an alternative for investment in gold (as a hedge against inflation) is likely to increase too. Do you think all Chinese and Indians are filthy rich? They aren’t. The growing middle classes in Russia, India, China, Brazil, and other countries will want to hedge against inflation even if they can’t afford gold. Many of these people will buy silver. Recent inflation rates in these countries are China (+5.5%), India (+9.06), Russia (+9.6), and Brazil (+6.55). The many other countries with high growth rates generally have inflation problems too. There are 44 Asian countries with a growth rate of +8% or more. Plus some slower growing or even shrinking economies may have significant inflation. Inflation is often determined largely by import prices in smaller countries. We have all heard about the myriad of countries having trouble affording food with the much higher food prices in the last year. With the rise in silver, food prices probably have not gone up (or may have gone down) relative to silver.

This all means that the future is bright for silver miners. Some of these are Pan American Silver Corp. (NASDAQ:PAAS), Couer d'Alene Mines (NYSE:CDE), Hecla Mining (NYSE:HL), Compaia de Minas Buenaventura (NYSE:BVN) and Silver Wheaton (NYSE:SLW). These are oversold at the moment. If the overall market goes down, they could become further oversold.

However, even in that worst case scenario they will probably recover quickly. The fundamentals are that strong. Now is likely a good time to start legging in. Some of the fundamental financial data for the above miners is in the table below. The data is from TDameritrade and Yahoo Finance.

Stock

PAAS

CDE

SLW

BVN

HL

Price

$30.45

$24.47

$32.79

$37.26

$7.39

1yr. Analysts’ Price Target

$47.84

$40.17

$53.50

$49.90

$11.81

PE

18.35

--

31.47

13.05

33.59

FPE

9.89

7.74

14.38

9.68

10.56

Avg. Analysts’ Recommendation

2.1

2.0

1.9

2.8

2.4

5yr EPS Growth Estimate per annum

56.00%

25.00%

2.00%

13.10%

5.00%

Price/Book

2.16

1.06

4.84

3.90

2.04

Price/Cash Flow

16.34

21.77

27.36

12.13

17.74

Beta

1.33

1.90

1.59

0.73

2.47

Short Interest as a % of Float

1.79%

6.69%

1.30%

1.11%

8.97%

Cash per Share

$3.68

$0.72

$1.60

$2.81

$1.15

Market Cap

$3.28B

$2.19B

$11.58B

$9.46B

$2.06B

Enterprise Value

$2.95B

$2.33B

$11.20B

$8.81B

$1.76B

Net Insider Shares Purchased in last 6 months

--

(29,035)

--

--

(423,130)

Net Institutional Shares Purchased in last 6 months

--

(5,333,850)

--

--

914,971

%Held by Institutions

55.24%

65.18%

51.60%

59.70%

56.42%

Total Debt/Total Capital (mrq)

0%

9.07%

12.99%

1.58%

0.66%

Quick Ratio (mrq)

3.84

0.69

--

3.81

1.87

Interest Coverage (mrq)

--

2.61

--

--

36.52

Return on Equity (ttm)

7.86%

-3.17%

17.63%

30.09%

6.34%

EPS Growth (mrq)

37.36%

213.13%

168.75%

16.93%

106.73%

EPS Growth (ttm)

47.93%

-0.37%

135.38%

72.60%

-22.04%

Revenue Growth (mrq)

23.76%

126.10%

84.07%

21.24%

70.72%

Revenue Growth (ttm)

38.96%

81.53%

72.29%

23.21%

40.75%

Annual Dividend Rate

$0.10

--

$0.12

$0.49

--

Gross Profit Margin (ttm)

51.63%

26.25%

83.35%

47.68%

51.94%

Operating Profit Margin (ttm)

30.14%

16.18%

70.93%

32.31%

0.17%

Net Profit Margin (ttm)

18.10/%

-10.45%

74.18%

73.95%

14.83%

Click to enlarge

Overall, the data above is generally good. An important point is that four of the five stocks above are trading at FPE’s of 7 to 10. One, Couer d'Alene, is trading at just 1.06 times its book value. Given the book value is likely understated, you are getting great value for your money on this stock. It is also trading at the lowest FPE -- 7.74. A brief summary of some important points about each is below:

Pan American Silver Corp. is the world's second largest silver producer with seven silver mines in Mexico, Peru, Argentina, and Bolivia. There is some risk that the Bolivian mines could be nationalized. However, there has been no overt action to do this yet. Such an action would be a blow to Pan American Silver. Otherwise Pan American Silver looks like a great growth stock.

Coeur d'Alene Mines Corp. has mostly completed its major investments in its new mines. It is now in a position for its EPS numbers to benefit from its now lower costs. Coeur d'Alene also has a Bolivian mine, San Bartolome, which runs the same risk of nationalization as Pan American Silver's Bolivian mines. Notably Coeur d'Alene's Price/Book is only 1.06. That's great for a miner. Its other mines are geographically diversified in South America, Mexico, the U.S., and Australia.

Silver Wheaton Corp. acquires long term silver purchase agreements. It has 14 long term silver purchase agreements and two long term precious metal agreements. It acquires silver and gold production from counterparties in Mexico, the U.S., Greece, Sweden, Peru, Chile, Argentina, and Portugal. Its fundamentals look good for the near term. It has a long history of successfully signing lucrative purchase agreements.

Compania des Minas Buenaventura, S.A. is a precious metals (primarily gold and silver) company. It is headquartered and operates in Peru and owns or owns an interest in many mines in Peru. It is perhaps riskier being headquartered and operating in Peru. The newly elected President, Ollanta Humala, is a leftist. Although he has yet to be inaugurated, he has talked of a windfall profit tax on miners. This tax might amount to as much as a 50% increase on the current tax. The current tax is 30%. A 50% increase would mean a 45% tax on profits. Still, Compania des Minas Buenaventura has some of the best fundamental numbers among the silver miners. Humala has said he is open to talks on this subject, but it seems almost a certainty that the tax rate on miners in Peru will go up soon. Humala's inauguration is on July 28, 2011.

Hecla Mining Company mines silver, gold, zinc, and lead. It owns a mine in northern Idaho and one near Juneau, Alaska. It is perhaps safer in that sense. It has two promising development projects. One is the San Juan Silver JV in Colorado, and one is San Sebastian near Durango, Mexico. Hecla is the lowest cost silver producer in the U.S. This indicates good management. Given the current worries about government policies in Bolivia and Peru, it may be worth it to pay up for safety. Hecla’s FPE is an attractive 10.56. Of course, there is the possibility that U.S. President Obama will try to impose a windfall profits tax on U.S. miners. He has already been trying to impose "windfall profit taxes" on the oil companies. A mining "windfall profits tax" from him would not be surprising. In sum, his rhetoric sounds amazingly similar to Humala's. One should perhaps not overreact to Humala, especially when 30% of Peruvians live in poverty.

Technical analysis

The charts below give some technical data for each stock. (Click on charts to enlarge)

The 2 year chart of PAAS:

Click to enlarge 

The 2 year chart of CDE:

Click to enlarge 

The 2 year char of SLW:

Click to enlarge

The 2 year chart of BVN:

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The 2 year chart of HL:

Click to enlarge 

These charts show the silver miners as oversold. They show an up-trending 200-day SMA for each stock. On each chart, each time in the last two years one of these stocks went below its 200-day SMA, it quickly reversed to rise above it. If history repeats itself, each of these stocks is due for a significant rise soon. The fundamentals of silver described at the beginning of this article would argue for just that happening.

If the Greek credit crisis (or other PIIGS credit crisis) suddenly deteriorates appreciably, the overall market and these stocks will likely experience further down movement. As things stand, it would appear the Greek credit crisis will be kicked down the road again. This should allow stocks to rise. The SPY (see the 1 year chart below) looks like it has bottomed (or is very near bottoming). It seems likely that now is a good time to start legging into one or more of the above described stocks. The SPY shows up as oversold on the Slow Stochastic subchart.

The 1 year SPY chart:

Click to enlarge 

Good Luck Trading.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PAAS, CDE, SLW, BVN, HL over the next 72 hours.