I remain quite bullish on the prospects for silver over the remainder of 2016, with it offering investors upside of 20% or more. As a result of my last articles explaining why I remain bullish on the white metal, I have been asked by investors what stocks represent the best way to gain exposure to silver.
Clearly, investors can opt for physical bullion, but this has a number of drawbacks - the primary one being its lack of liquidity. Then, there is the option of a silver ETF, with the largest being the iShares Silver Trust ETF (NYSEARCA:SLV). This gives investors considerable liquidity, but it comes at a cost, with an annual expense ratio of 0.5% payable for the privilege of investing.
Another option for investors to consider are silver mining and streaming stocks. These provide investors with the ability to obtain leveraged exposure to the price of silver, which means that as silver rises, the returns they are able to generate will be far higher - but the same also happens in reverse.
I believe they are superior to any of the silver miner ETFs, such as the Global X Silver Miners ETF (NYSEARCA:SIL), the iShares MSCI Global Silver Miners ETF (NYSEARCA:SLVP) and the PureFunds ISE Junior Silver ETF (NYSEARCA:SILJ), because of the additional cost or expense ratio of those ETFs, which, at this time, is 0.65%, 0.39% and 0.69% respectively. This, over time, eats into the returns that investors are able to generate and makes them unattractive investments.
Furthermore, by holding one or all three of the stocks, listed investors will receive a superior return to those ETFs. It is worth noting that for a range of reasons, including the fact that silver is more volatile than gold and the large volume of paper silver, it is almost impossible to predict where silver will go over the short term.
Regardless, here my three long-term picks to take advantage of the rally in silver and its strong long-term growth prospects.
#3 - Silver Wheaton (NYSE:SLW)
Silver Wheaton continues to perform strongly despite the slump in silver, and this can be attributed to its low-cost operating structure and the fact that it doesn't have the same degree of risks as a miner. Silver Wheaton essentially makes an upfront payment to a miner in return for the right to purchase a fixed percentage of future production from the mine of the silver and gold that it produces at a predetermined price.
Typically, this price is far lower than the spot price, and the market values precious metals held by a streaming company higher than that produced by a miner, because there is a far lower degree of risk attached to its operations. This also creates an arbitrage opportunity for Silver Wheaton.
Over the last year, the company's share price is down by 4%, and this has created a buying opportunity for investors.
Source: Yahoo Finance
One of the pleasing aspects of Silver Wheaton's business is its high-quality diversified asset base, with the company having streaming interests in both gold and silver across North and South America as well as Europe.
The company's proven and probable reserves are comprised of 773 million ounces of silver and 8.74 million ounces of gold, giving it a long production life.
Silver Wheaton is well positioned to take advantage of any rally in silver, with it focused on boosting 2016 production to 54 million ounces, or a 13% increase over 2015.
Its low-cost structure, with 2015 cash costs of $4.58 per ounce, makes it a superior play on silver when compared to many of the miners, which have cash costs of roughly double that amount. This means Silver Wheaton can remain profitable at silver prices that see it reporting a loss and allow it to generate a considerably higher margin as the price of silver appreciates.
The only caveat is the investigation by the Canada Revenue Agency, or CRA, which originally was reassessing the taxes payable for the years 2005-2010. It then issued a further notice to assess the taxable income and taxes paid for the years 2011-2013.
A negative finding by the CRA for 2011-2013 would see Silver Wheaton liable for additional taxes and penalties of $310 million, while for 2005-2010, the CRA is seeking additional taxes and penalties of $265 million. This gives a total quantum of $565 million, should the CRA have an adverse finding on both counts.
Silver Wheaton has filed a notice of appeal and lodged a letter of guarantee for 50% of the amount with the CRA. The outcome is difficult to predict, but I believe it has been baked into Silver Wheaton's stock price.
It should be noted that the company retains a solid balance sheet with net debt of $1.4 billion, or three times operating cash flow. Silver Wheaton is also highly liquid, with $103 million in cash and $534 million undrawn from its revolving credit facility. This will allow it to continue funding further acquisitions as well as any payments required as part of the CRA investigation.
#2 - Hecla Mining (NYSE:HL)
Hecla Mining, which operates gold and silver mines in Mexico, the U.S. and Canada, has performed strongly over the last year, with its price up by 22%.
Source: Yahoo Finance
The location of its mines primarily in the U.S. and Canada means there is very little political risk, and it boasts considerable proven and probable reserves, with 175 million ounces of silver and 2 million ounces of gold.
Hecla is well positioned to take advantage of the rally in silver, with the company forecasting 2016 production of 39-40 million ounces, or almost 7% higher than 2015.
Furthermore, it ended 2015 with impressive cash costs of just $5.85 per ounce, well below those reported by the larger primary silver miners. With Hecla focusing on cutting expenses, including plans to reduce non-payroll costs by $25 million, its cash costs should continue to fall throughout 2016, allowing the company to generate a solid profit margin as silver appreciates.
Then there is its solid balance sheet, with $240 million in debt which is only 2.5 times its operating cash flow. Hecla is also highly liquid, with almost $270 million in cash and cash equivalents, as well as $142 million in working capital.
Accordingly, with Hecla boasting long-life reserves, mines in politically stable jurisdictions, low cash costs and solid production growth for 2016, I expect the stock to perform strongly over the course of the year.
#1 - Great Panther Silver (NYSEMKT:GPL)
My top pick is Canadian small-cap miner Great Panther Silver, which has soared by 162% over the last year.
Source: Yahoo Finance
Surprisingly, even after such a substantial gain, I expect Great Panther to continue providing investors with solid returns and leverage to the price of silver, despite 2016 production forecast to be relatively flat in comparison to 2015.
This is because of the company's low-cost operating structure, which saw it report cash costs of $7.50 per ounce in 2015, with plans to further reduce them during to 2016 by up as much as 33% to $5-7 per ounce. Then, there is its solid balance sheet, with the company having no debt, holding $14 million in cash and $26 million in working capital. This leaves it well positioned to take advantage of the rally in silver and generate solid margins as the price of silver appreciates.
All of these attributes, along with the price of silver appreciating over the course of the year will give Great Panther's bottom line a healthy bump, translating into a higher share price.
Silver miners and precious metals streaming companies may not be for every investors, but with silver poised to rally strongly over the long term, all three companies will benefit and deliver solid value for investors. Each has a low-cost operating structure, solid long-life reserves and little-to-no debt, leaving them poised to generate solid margins as silver appreciates.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in GPL, HL over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I/we have extensive investments in physical silver bullion and antique silver coins.