Do you like the feel of silver, smooth and lustrous in your hand as you scoop up the last of the pâté de foie gras at the office Christmas party? The precious metal bespeaks wealth and elegance, but somebody has to dig it out of the ground.
With the price of silver in heady territory, I looked at five silver mining stocks and found one I liked because it doesn’t get its hands dirty while forking over cash to investors – Silver Wheaton Corp (SLW). The Vancouver-based outfit bills itself as a metals streaming company. For an upfront payment, it buys the right to purchase all or a portion of silver production at a low fixed cost from silver mines.
This unconventional or 'weird' business model isn’t all that makes the company shine, though. Its unique dividend policy lets investors capture a good chunk of cash as the good times roll.
In November, the Silver Wheaton board approved awarding a quarterly dividend equal to 20% of the cash generated by operating activities in the previous quarter. That action tripled the dividend to $0.09, which was paid earlier this month.
Silver Wheaton's revenues are primarily derived from the sale of silver, with its operating cash costs essentially fixed at approximately $4 for every ounce of silver sold, meaning greater predictability in cash generated from operating activities compared with traditional mining companies.
Based on its current agreements, Silver Wheaton estimates 2011 production of 25 to 26 million silver equivalent ounces, including 15,000 ounces of gold. By 2015, it expects production to increase to about 43 million silver equivalent ounces, including 35,000 ounces of gold. Beyond the initial upfront payment, no ongoing capital expenditures are required to generate this growth, Silver Wheaton says, and it does not hedge its silver production. Silver Wheaton’s portfolio includes silver streams on Goldcorp’s (GG) Peñasquito mine in Mexico and Barrick’s (ABX) Pascua-Lama project on the border of Chile and Argentina.
Thus, Silver Wheaton is almost a pure play on the price of silver, which has ranged between $27.00 and $49.50 per ounce this year. March silver on the Comex traded at $29.25 recently. Then why not own the stuff itself through a vehicle such as the exchange-traded fund iShares Silver Trust (SLV)? The answer: SLW’s dividend policy provides a buffer of safety as long as cash flow stays positive. SLW recently traded at about $29 per share, with a P/E of 38 and a dividend yield of 1.22%.
Of course, all is dependent on the price of silver. In any event, industrial demand should put a floor on the price as world economies post positive growth. Obviously, the instability in Europe, slower Chinese growth and the possibility of a double-dip recession in the U.S. are risks.
That said, Silver Wheaton’s business model creates value by providing leverage to increases in the silver price while sidestepping many of the pitfalls faced by traditional mining companies.
What about those traditional silver mining companies? I looked at small-cap names MAG Silver (MVG), Pan American Silver (PAAS), Great Panther Silver (GPL) and Hecla Mining (HL), using trailing 12 months’ enterprise value to EBITDA as a gauge. From cheapest to costliest:
MAG Silver – an exploration stage company in the Mexican silver belt with little to show yet. Trading at negative 31.9 EV/EBITDA.
Hecla – operates mines in southeast Alaska and Idaho’s Silver Valley, with exploration ongoing in northern Idaho, Colorado and Durango, Mexico. Trading at 3.7 EV/EBITDA.
Pan American– has producing mines in Mexico, Peru, Argentina and Bolivia. Trading at a 4.23 EV/EBITDA multiple.
Great Panther– two producing mines in Guanajuato and Durango states in Mexico. Sports a 15.67 EV/EBITDA and is poised to generate positive net income this year and next.
I recommend a barbell approach in this group, going long MAG Silver and Great Panther with the tolerance for risk dictating weights.