Speculation is always an interesting discussion. Right now there are a lot of unanswered questions driving the price of precious metals this month. Will the Fed step in and initiate yet another round of quantitative easing? Will the European Central Bank really do all they can to save the euro? Will China organize a soft landing or will it come down hard? Will the Republicans truly fight for some sort of gold standard in the United States? Have we reached so called peak gold? Will silver return to its historic 16 to 1 price ratio relative to gold? All of these questions are being asked by precious metals traders and their subsequent answers will impact the short and mid-term price trajectory of the metals.
Regardless of the answers to all of these questions, one thing remains certain to this author; the long-term trajectory of the prices of precious metals is up, and thus speculation with a small portion of your portfolio in this space may not be a bad idea. I have suggested that silver could outperform gold in the next 12 months and thus recommended playing some of the larger players in that metal. My readers know that I have been adamant in my suggestion to own physical assets in these metals. For those investors that cannot or will not buy physical assets, I have pointed to the ETFs that track the price of metals as a second line approach. I recommend the (SLV) and (SIVR) for silver exposure second to physical coins and bullion.
After making recommendations to buy Silver Wheaton (SLW), Silvercorp mining (SVM) and Pan American Silver (PAAS) last week, I have subsequently received a lot of feedback. In response to reader demand and numerous inquiries for recommendations about smaller exploratory and speculative silver miners, in this article I wish to highlight two silver stocks that I think could be long-term winners should the companies be able to successfully execute long-term growth plans.
Great Panther Silver Limited (GPL): GPL is a highly speculative silver mining and exploration company. GPL's operational activities are focused on the mining of precious and base metals from its wholly owned properties in Mexico. GPL is also pursuing acquisition opportunities throughout Latin America to add a third mine to its portfolio of properties. GPL has two primary mining properties, the Topia mine and Guanajuato mine. GPL also owns a development stage property, San Ignacio, which is approximately 20 kilometers from its Guanajuato processing plant, and an exploration stage property, Santa Rosa, which is located approximately 15 kilometers northeast of Guanajuato.
One of the reasons I like this company long-term is the action it has taken to expand. On July 18, 2011, GPL announced the acquisition of four mining concessions in the Santa Rosa project. Last week, GPL also inked a deal to secure the purchase of the complete interest of certain surface rights on its wholly owned San Ignacio project in Guanajuato, Mexico, which will increase the company's revenue stream.
The most recent quarterly report showed the company is strengthening year over year. For the quarter ending June 30, 2012, the company had revenues of $14.5 million, which is a 70% increase compared to the revenues of $8.5 million reported in the comparable quarter in 2011. Due to increased mining and exploration costs, diluted EPS was $0.00 per share in this quarter compared with $0.02 per share in the comparable 2011 quarter. The company also produced about 3% less silver in the most recent quarter versus the comparable 2011 quarter, producing 374,000 ounces versus 386,000 ounces in the quarter the year before.
The important thing to note about these comparisons is that the price of silver starting declining significantly when the quarter began and did not start rebounding until the last few weeks of the quarter. In the comparable quarter in 2011 silver prices were about 25% higher, spiking significantly during that quarter. Thus, the weaker performance of the most recent quarter relative to the comparable 2011 quarter is partly to blame on the overall price of silver.
The increased investments being made by the company and the depressed price of silver were also addressed directly by GPL's CEO Robert Archer, who stated "gross profit was significantly impacted by lower silver prices and an increase in depreciation charges due to the substantial investments made in our mines, plant and equipment over the last year." He is however optimistic about the investments made by the company and believes the 2nd half of 2012 will be one of stronger growth. We will see if the company can start to deliver more robust growth with Q3 results that will be reported on or around November 16, 2012. A rising price of silver over the last month is a significant tailwind for the current quarter in my opinion.
With inflationary pressures mounting and central bank action seeming likely, I see silver and silver companies continuing to rise in price. I believe that long-term GPL could provide great returns should its future exploration activities reveal sizable mineral deposits and if it can keep related exploration costs down. It is a tall order but I like this stock long-term as I see silver continuing to rise. The stock currently trades at $1.90 and is up 19% in the last month, but only up 3.5% year to date. GPL has a 30 p/e multiple with average daily volume of about 450,000 shares. The stock has a 52 week trading range of $1.51-$3.59.
MAG Silver (MVG): MVG is another speculative exploration stage silver company that I think could be a long-term winner if it can execute successfully. MVG is engaged in the mineral acquisition, exploration and development business with properties located throughout Mexico.
Some of MVG's properties include the Juanicipio property, which covers approximately 19,000 acres and is located in Zacatecas State, Mexico. MVG's Cinco de Mayo property is located approximately 190 kilometers in northern Chihuahua State, Mexico. MVG's Mojina Property is located in northern Chihuahua State five kilometers from the town of Ricardo Flores Magon and 40 kilometers south of the Company's Cinco de Mayo property. MVG also has other smaller propertiessuch as the Lorena claims, the Nuevo Mundo claims, the Guigui claim options, and the San Ramone claims.
One positive sign for the company is that it recently had an inflow of private investment. Last week MVG announced an offering of 3,526,210 common shares at a price of $9.40. The offering led to proceeds of approximately $33.1 million. The company intends to use the net proceeds from this offering to fund its share of the recently announced permitting and underground development program for the Juanicipio property. MVG will also use some of the funds for advancement of the project at Cinco de Mayo, as well as for general corporate purposes. MVG recently announced a decent mineral find at its Cinco de Mayo site after drilling several holes approximately 60 meters deep. The company has confirmed deposits of silver, gold, copper, lead and zinc. Further, increased production at this site should be commencing later this year. While MVG has been in business for several years it is still in its exploration stages.
The most recent quarterly results indicate MVG is aggressively attempting to explore and expand. As of June 30, 2012, MVG had working capital of $13,039,336 including cash on hand of $14,653,919. Exploration and evaluation expenditures totaled $3.65 million in Q2. In light of these expenditures and labor costs the company reported a loss of $1.8 million.
For the year 2012, MVG is expected to post a loss of $0.14 per share as it continues its exploration and expansion endeavors. For 2013, the company is expected to also lose money ($0.15 per share), attributable to the exploration costs. Even though the company is losing money the potential returns that this company can deliver shareholders is high. Analysts agree, as the four analysts covering the company have one buy and three outperform ratings on the stock.
With inflow of capital and recent finds the company seems poised for growth over the next few years. This is likely the reason analysts have buy ratings on the stock. I like this company going forward until it is no longer finding mineral deposits or the price of silver plummets. I don't see either of those happening soon. As the price of silver climbs I expect MVG's stock to climb. The stock will soar if it continues reporting finds similar to the recent report from Cinco de Mayo. The stock currently trades at $10.12 on average volume of 86,000 shares daily. The stock has a 52 week range of $5.95-$11.67.
Take home message: While I still recommend owning a larger silver company such as SVM, SLW, or PAAS, these two speculative picks in the silver space have great potential. In general I believe that the silver companies could outperform the metal in the next 12 months, however it is important to note that I still prefer owning physical assets or an ETF such as SLV or SIVR. For those investors willing to speculate on the upward trajectory of silver prices, GPL and MVG represent bets that could deliver outsized returns long-term.
Disclosure: I am long SLW.