In my commentary on Seeking Alpha going back several months, I noted that I was not a fan of silver stocks. I viewed them as primarily a bet on the industrial demand for silver, and that it was not time yet to make such a speculation.
My fondness for silver has waned greatly since it crashed for the second time in 2011, though I still think it may have tremendous upside potential in the event it becomes re-monetized or if there is a default on silver in the futures market in which purchasers stand for delivery and the supply cannot be ascertained. However, my focus is increasingly on gold for all matters pertaining to the global sovereign debt crisis, and my view is that silver is more of a lottery-type play, or better-suited for active trading.
If silver is going to go to tremendous new highs - which I would define as involving gold going at least 100% higher and the gold/silver ratio going to less than half of what it currently is (now at approximately 55), events that would put silver at a minimum of $118 - I feel better holding silver stocks than silver. I'm not terribly interested in daytrading, and if I have to stomach the volatility with a small position, I'd rather get paid dividends and take a shot on an even greater upside that stocks can afford.
And so, I embarked on the quest to find a silver mining stock I really liked that I felt I could buy and hold for the duration.
Which leads me to Silvercorp (NYSE:SVM).
Here are the reasons why I recently accumulated some of SVM:
1. It is already producing, reporting positive earnings, and issuing dividends - so it meets the basic criteria of being a key holding. At its current price, SVM has a P/E ratio of 12.79, which suits my fondness of finding multi-year, buy and hold value plays with P/E ratios below 20. Its dividend yield is 1.59% - not enough to be deeply enticing, but if silver appreciates significantly, the potential is there for greater dividends as well.
2. SVM's operations are primarily in China. As one who views China as the emerging economy to watch with an abundance of opportunities in terms of mineral resources, I like SVM having operations here. According to the Silver Institute, China is the third largest silver producer in the world, and SVM is the largest primary silver producer in China. There is always the risk of nationalization in China, perhaps greater than in many other countries, though I consider it a risk worth taking.
3. Of course, most noteworthy is SVM's ability to have a silver cost per ounce that is actually negative. While silver is the primary metal SVM is focused on, the firm is able to mine significant lead and zinc as by-products. The firm is able to sell this lead and zinc at a profit that covers the entire cost of its operations, and so lead and zinc actually pay for SVM's silver mining efforts. In this way SVM can report a cost per ounce of silver of negative $4.55 USD. This leaves the company very well-positioned to tolerate wild swings in silver's price.
4. As for its balance sheet, SVM has $124 million in cash and no long-term debt. In other words, the balance sheet is comforting to investors.
5. In terms of price action, SVM has a 52-week range of 5.86 to 16.32. It is currently at 6.14, very close to the bottom of its range. The lows were reached in September of this past year, and I believe the price is well-positioned to bounce off any re-tests here to form a textbook double bottom technical formation. I'm more interested in the long-term prospects.
For these reasons, SVM will be on my list of stocks to purchase when there are major sell offs, provided the company continues to operate in a healthy fashion and the underlying fundamental factors to drive silver higher are still in place.
Disclosure: I am long SVM.