Yesterday we had another huge gain in the precious metals and the precious metal miners. This was due primarily to the release of the July 31-August 1 FOMC minutes, where we learned that support is billowing for additional stimulus "fairly soon" unless there is evidence of a strengthening of the economic recovery. Whether a third round of quantitative easing and/or European central bank bond buying actually happens is still in question, but both are becoming ever more likely as both high unemployment in the United States and the eurozone crisis persist.
Gold and silver prices are up again today and have crossed the 200 day moving average. Gold and silver are currently trading at $1671 and $30.50 an ounce, respectively. The gold ETFs (GLD) and (IAU) are now up 5.9% and 5.7% in just one month. The silver ETFS (SLV) and (SIVR) are performing even better in the last month as they are both up 13.2% each. The miners of gold and silver have been outperforming both metals in the same time period. The gold miner ETFS (GDX), (GDXJ) and (NUGT) are up 17.2%, 23.9% and 57.7% respectively, whereas the silver miner ETF (SIL) is up 23.2%. I see central bank action and inflationary pressures over time as tailwinds for the continued rise in the price of gold and silver. In the next 12 months I expect silver to outperform gold. I also expect the silver companies to outperform the physical metal. Although I believe physical bullion and coins are the best way to invest in silver long term, I want to highlight three silver companies that could outperform in the next few days as well as provide outsized returns over the next 12 months, relative to the price of silver.
Silver Wheaton (SLW): SLW operates as a worldwide silver streaming company. Silver streaming is basically a process by which the company purchases a mining firm's silver production in order to distribute that silver in the market. SLW has contracts to purchase silver in bulk at prices well below market value and then proceeds to sell the silver at higher prices. The company has "14 long-term silver purchase agreements and two long-term precious metal purchase agreements whereby it acquires silver and gold production from companies located in Mexico, the United States, Greece, Sweden, Peru, Chile, Argentina, and Portugal."
According to the company, "the predetermined price that SLW pays for future silver production is approximately $4.00 per ounce, with a small inflationary adjustment, ensuring that costs are fixed". At such low fixed costs, this allows SLW to stabilize operating costs and reduce downside risk, while providing leverage to the price of silver. Besides the initial payments to secure the rights to the silver no additional capital expenditures or exploration costs are required. At the same time SLW benefits from the production and exploration growth of its operating partners. This low risk business model creates long-term shareholder value. Central to creating shareholder value are multi-year agreements to purchase at low fixed costs all or a portion of the silver production from mines in Mexico, Chile, Argentina, Peru, Sweden, Greece, Portugal, Canada and the United States. In addition a large percentage of the company's revenue is derived from low cost and long life mining operations.
SLW currently trades at $34.00 and has a 52 week trading range of $22.94-$42.50. On average about 4.2 million shares exchange hands daily. The company trades at a 21 multiple but only a 0.84 PEG ratio and currently yields 1.1%. This company is my personal favorite in the space.
Pan American Silver Corp (PAAS): PAAS explores, develops, and "operates silver producing properties and assets. The company engages in silver mining and related activities, including exploration, mine development, extraction, processing, refining, and reclamation. It produces and sells silver, gold, copper, lead, and zinc. The company has seven mining operations in Mexico, Peru, Argentina, and Bolivia; the Navidad silver development project in Chubut, Argentina; and the La Preciosa joint-venture project in Durango, Mexico."
After 16 years of production and financial growth PAAS is the second largest primary silver mining company in the world. In 2011 they produced 21.85 million ounces of silver along with 78,426 ounces of gold earning $2.37 a share. They have nearly 500 million in cash and short term investments and no long term debt. In another sign that PAAS is a strong investment, their board of directors approved the third quarterly cash dividend of 2012 and has increased the dividend by 33% to $0.05 per common share. This represents an increase from $0.15 to $0.20 per common share on an annualized basis.
PAAS currently trades at $17.50 a share with a 52 week range of $13.49-$34.39. Shares are up 28% in just one month. PAAS now trades at an 8.3 multiple with a 1.5 PEG ratio and yields 1.1% annually.
Silvercorp Metals (SVM): SVM engages "in the acquisition, exploration, development, and mining of precious and base metal properties in China and Canada. It operates four silver, lead and zinc mines comprising the Ying, TLP, HPG, and LM mines located in the Ying Mining District in the Henan Province of China. The company also holds interests in the XBG silver, gold, lead and zinc mine with a mining permit covering 26.36 square kilometers; and the XHP silver-gold, lead and zinc mine comprising a 14 square kilometer mining permit located in the Ying Mining District in Henan Province of China. In addition it engages in operating the BYP gold, lead and zinc project in Hunan Province, as well as mining at the GC silver, lead and zinc project in Guangdong Province in China."
According to the company, "in the quarter ended December 31, 2011, SVM produced silver at a cash cost of negative $4.56 per ounce, upholding the company's status as the lowest cost primary silver producer among its global industry peers since operations began in 2006." Besides being the lowest cost silver producer among its industry peers they also have over 168 million in cash and short-term investments, as well as no long term debt. Moving forward into 2012, SVM aims to continue growing production every year through mine capacity expansion at its Ying Mining District in China. SVM recently acquired the nearby X Mine Projects in China further consolidating the region. SVM has commenced gold production at its BYP mine in Hunan province, China and plans to commence silver production at its GC project in southern China by fall 2012. Further, they are advancing their Silvertip project in British Columbia, Canada towards mine development and first production for late 2012.
SVM currently trades at $5.99 with a 52 week trading range of $4.89-$10.08, on average volume of 1.2 million shares exchanging hands daily. The stock is up 19.4% in one month. It has a multiple of 14 yet a high PEG of 4.3. SVM does pay a decent dividend that yields 1.8% annually.
Bottom line: Precious metals stand to gain significantly from balance sheet expansion at central banks. While gold and silver are certainly an excellent play off of possible stimulus, I believe that the miners may outperform metals in the next few months. The three companies highlighted in this article represent my preferred ways to gain exposure to silver for those not willing to invest in physical assets or in an ETF that tracks silver prices. At current levels I believe silver and silver companies are strong buys.