There are not many pure silver stocks out there. Silver is often mined only as a by-product of gold, platinum, or similar more valuable metals or minerals. Silver had a rough ride. After trading at about $50 per ounce early in the year, it trended lower throughout the last eight months of the year, closing at about $30 per ounce toward the close of the year. The reason for this is an obvious imbalance between production and demand for the metal. Being a commodity, stocks specializing in silver also had a rough ride. I am going to analyze a few silver dominant stocks. Fluctuating prices are the banes of all these companies, but one of them at least has fixed low costs, and gives me comfort in recommending it.
Silver Wheaton Corp. (NYSE:SLW)
SLW is among the largest silver companies in the world, but it is not a mining company. It is the world's leading silver broker, for lack of a better term. It engages in contracts with mining companies to buy all or a certain percentage of their silver production as "streaming rights." Many of those contracts are with leading gold mining companies like Barrick Gold Corporation (NYSE:ABX) and Goldcorp, Inc. (NYSE:GG). This means, other than upfront payments pursuant to the contracts, SLW has no real capital costs. SLW's stock was trading recently at about $31 per share. Its 52 week range is from $47.60 to $25.84, and it is trading at a P/E of about 18.3. It has a market capitalization of about $11 billion, and pays a quarterly dividend of $0.09, for an annual yield of 1.2%. The dividend payment effective with the third quarter payment floats, and is determined by calculating 20% of the company's operating cash flow, from the previous quarter.
SLW gets about 90% of its annual revenues from silver, with the balance from gold. Its stock hit the skids in 2008, bottoming out at just $2.50 per share, before a fairly steady climb to its all time high early in 2011. Its stock price reflected the swing in profitability of the company. In the third quarters of 2009 - 2011, it reported per share profits of 11 cents, 16 cents and 38 cents, respectively. All through these times, its overhead and capital spending were roughly the same. The average cost to SLW for its silver purchases is roughly $4 per ounce, and fixed, allowing tremendous operating cash flows. Its operating profit margin of almost 76% is by far the highest in the industry. However, SLW is completely leveraged, for better or worse, to the price of silver. Unlike many who believe silver will spike in 2012, I do not have the foresight to be able to predict that, but my guess is that supply gluts will not allow price appreciation. I like the company's model, and view it as having ample long term growth potential when and if silver prices do rise.
Pan American Silver (NASDAQ:PAAS)
Pan Am is a Vancouver based miner that primarily engages in silver mining. The company owns and/or manages several silver properties in Peru, Argentina, Bolivia and Mexico. Its stock was trading recently at about $24 per share, near the low end of its 52 week range of from $43.06 to $19.93. It is trading at a P/E of 7.5, has a market capitalization of $2.55 billion, and pays a dividend of $0.10 annually, for a yield of 0.4%.
Pan Am had a mostly successful third quarter to 2011. Revenue increased 34% from the 2010 third quarter, to $220.6 million. Profits were up 66% from the year earlier period, to $45.6 million, or $0.42 per share. Yet, is the precipitous decrease in the stock price since April shows, the Street was expecting more. Pan Am is a healthy company, with zero long term debt and nearly ½ billion in cash. Yet, as long as the price of silver is mired where it is, so too will Pan Am's stock.
Hecla Mines, Inc. (NYSE:HL)
Hecla is among the largest silver producers based in the United States. It also produces lead, zinc and gold. Its stock was trading recently at a little under $5 per share, near the low end of its 52 week range of from $11.08 to $4.25. It trades at a P/E of 11.5, and has a market capitalization of about $1.3 billion.
It pays a dividend of 8 cents per year, for an annual yield of 1.7%.
Hecla is suffering from the same pricing issues that has befallen all silver based companies since April, 2011. But Hecla also has a production problem. Due to safety concerns and numerous accidents, Hecla announced the closure of its largest producing mine, the Lucky Friday mine in Idaho, perhaps for all of 2012. In late December, 2011, Hecla estimated 2012 production at 9 million silver equivalent ounces. Following the closure, Hecla is now estimated at 7 million ounces. The date of this announcement, stock in Hecla fell over 20%. It is not the only issue Hecla has dealt with of late. In September, 2011 it settled a long run Superfund site case for $283 million. A leading law firm is contemplating a class action suit against the company on behalf of its shareholders.
I can think of no good reason to invest in Hecla. Most analysts agree, as the company has a mean analysts rating of 3.0. I am down on the silver industry in general, and this is the worst of the group.
Couer d'Alene Mines Corporation (NYSE:CDE)
CDE is also among this nation's leading mining companies. It specializes in silver, but also mines gold and other metals. Its stock was trading recently at about $26 per share. Its 52 week range is from $37.59 to $19.30, and it trades at a P/E of 29.8. It has a market capitalization of $2.3 billion, and does not pay a dividend.
CDE is based in Idaho, and has properties in the United States, Mexico, Argentina, Bolivia and Australia. It owns six mines, though a third party actually operates one of them. CDE had a solid third quarter. Silver and gold production in the third quarter of 2011 were up 13% and 20% respectively. Average realized prices for silver and gold were up a whopping 103% and 37%, respectively. These led to revenues for the quarter nearly tripling from the year earlier, to $344 million. Profits rose in turn to $31.1 million, or $0.35 per share, reversing a third quarter of 2010 loss of $22.6 million, or $0.25 per share.
CDE has a profitability problem. Its operating margin the last twelve months was 17.2%, or less than half other metal miners such Pan Am (44.4%) and Newmont Mining Corp (NYSE:NEM) (41.8%). All the sales increases in the world don't matter if margins collapse.
David Dreman owns almost 1.5 million shares of CDE, and the mean analyst rating is a modestly positive 2.4. I do not see as much upside here as in Silver Wheaton and other silver ideas like Majestic, and do not recommend CDE.There are not many pure silver stocks out there. Silver is often mined only as a bi product of gold, platinum, or similar more valuable metals or minerals. Silver had a rough ride. After trading at about $50 per ounce early in the year, it trended lower throughout the last eight months of the year, closing at about $30 per ounce toward the close of the year. The reason for this is an obvious imbalance between production and demand for the metal. Being a commodity, stocks specializing in silver also had a rough ride. I am going to analyze a few silver dominant stocks. Fluctuating prices are the banes of all these companies, but one of them at least has fixed low costs, and gives me comfort in recommending it.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.