I recently acquired some shares of Pan America Silver Corp. (PAAS) indirectly; these were shares given to previous shareholders of Minefinders (MFN), a company which Pan American just acquired. I sold the shares and cashed them in for some graphite stocks (specifically Northern Graphite (NGPHF.PK) which fell below my target price of $2.60 in yesterday's sell off) as I believe graphite is the next bubble in the resource sector. The other reason I sold Pan American is because of my view of silver stocks, which I'll elaborate upon in this article.
First, I do not wish to have an excessively large position in silver (PSLV), and am much more of a gold bug (PHYS) than a silver bug. The reason for this is that I believe gold is a true monetary asset, while I regard silver as an industrial commodity -- and thus I believe it is more inclined to behave as such. Given that the global sovereign debt crisis -- meaning a world in which governments are awash in debt and the likelihood of them paying the debt back, barring massive debt cancellation, is extremely slim -- I believe investing in alternative monetary assets is the best and safest opportunity in the market today. And as I regard gold as a far superior monetary asset -- as I elaborated on previously -- I'm naturally more interested in gold than silver.
So, the primary reason I sold Pan American is that I simply do not have much of an appetite for silver and silver stocks beyond what I currently own. Pan American is, however, very appealing in many ways, and for those who do have a greater appetite for silver stocks, I think it may be worth including in your portfolio. Here's a rundown of some of the stock's impressive attributes:
- A P/E ratio of just 6.15 at the time of this writing, as well as a small dividend yield of 0.74%. The P/E alone should make it of great interest to value investors.
- Production and exploration in Peru, Bolivia, Argentina, and Mexico -- so there is sufficient jursidictional diversification.
- 2011 was a record year in terms of earnings and cash flow; production in 2012 should be even greater.
- Over $490 million in cash and short-term investments at the end of 2011, and no debt as well. The company is trading at a paltry 1.32X its book value, which also makes it a candidate for many value investors.
- Cash costs per ounce for silver is estimated to be between $12.50 and $13.50 for 2012.
- The management team is also experienced; the company's founder, Ross Beaty, sits on the board and brings over 37 years of experience to the industry. My preference is always to see the founder as the chief executive, though Beaty's position as Chairman of the Board of Directors provides some assurance that the founder's vision still touches the company.
For these reasons, I think the case for owning Pan American is strong. Still, though, there are three strong silver producers I like more, and because I don't have a huge appetite for silver like I do with gold to begin with, I'd rather focus on these three. They are:
Silvercorp (SVM). SVM trades at a P/E of 15.27 and a dividend yield of 1.53%. There are three main reasons I like it:
- It is a negative cost per ounce producer, meaning the minerals generated as a by-product of silver mining are profitable in and of themselves, and when applied to the cost of silver operations, the cost per ounce of silver goes below zero. This makes the stock extremely compelling, in my opinion, as the company should be able to operate profitably even if silver declines sharply.
- The company operates in China, where both demand and production of silver is strong. Given the importance of China to the global economy -- I view it as the smart money that is driving a variety of markets, everything from farm land to uranium to silver -- I personally wanted to have some exposure in my portfolio to companies well-positioned in China, and so I like Silvercorp in that regard. Of course, operating in China does perhaps present a greater than average risk of nationalization, but I think some exposure in the context of a larger portfolio is warranted.
- The stock has sold off sharply; it's currently trading at $6.60, and its 52 week range is $5.86 to $14.95. As such I think this stock is well-positioned to double from here if silver resumes its upward movement that many, including myself, consider probable.
Silver Wheaton (SLW). Silver Wheaton is a silver streaming firm; they purchase stakes in silver mines around the world, acting almost like a venture capital fund for silver. SLW has the highest market capitalization per employee of any US-listed stock, which illustrates the power of this model. As I noted previously, I believe royalty firms are an essential part of any mining portfolio, and as Silver Wheaton is the pioneer of this model in the silver industry, I think they are a great candidate for being a part of a precious metals royalty portfolio. It should also be noted that like many royalty players, SLW has outstanding jurisdictional diversification, as it owns a stake in mines in 8 different countries: USA, Canada, Mexico, Peru, Argentina, Portugal, Sweden, and Greece.
Two other points that I feel are especially worth noting: (1) SLW has more silver resources and reserves than any silver company in the world and (2) the company issues a dividend amounting to 1.17% at current prices. Given the strength of the royalty model and its ability to generate positive cash flows and substantial earnings, and SLW's unrivalled silver resources and reserves, I suspect the stock is in a great position to increase dividends as silver prices rise.
I recommend prospective investors take a look at their investor presentation.
McEwen Mining (MUX). Last but certainly not least is McEwen Mining. MUX will also focus more on gold as some of its future projects come on board, but right now, its operations in Argentina are primarily silver-oriented. The company has the best shareholder/management incentive alignment out there, as founder Rob McEwen owns over 20% of the company and does not take a salary. MUX has over $78 million in current assets, including gold and silver on its balance sheet waiting to be sold at higher prices. But rather than focus on the geology and property, I believe the reason to invest is McEwen -- a proven company builder in this sector, as the success of Goldcorp (GG) suggests. Executives of such a caliber are exceedingly rare and not to be missed. For this reason MUX is one of the larger positions in my portfolio, and satisfies much of my desire for exposure to silver stocks.
Of course the price and profitability of silver stocks is largely a function of the price of silver, both presently and in the future. Silver has spent all of April thus far consolidating just above $31. I believe this is a base forming, and that silver will not go back into the 20s but rather will proceed to re-visit its previous all-time highs above $49.
Additional disclosure: I am also long physical gold and silver, as well as silver derivative contracts.