Time To Consider Investing In Silver

Includes: AGQ, CDE, HL, PAAS, SLV, WPM
by: Harlan Kessler

Investors in silver have not had a great experience this year, seeing a decline of over $5 billion in the value of their holdings. A survey by Bloomberg in December showed that investors expected silver to be one of the star investments of 2013 with a return of 33 %. However, the 28% decline in prices to approximately $21.80 per ounce is the worst performance on record since 1984 and, though analysts expect a rebound by December 2013, the decline for the year would still be in excess of 20%. As a matter of interest, the decline in silver prices is more than the 18% decline in gold prices (the worst performance since 2000).

Earlier, analysts had expected silver prices to rise because of the inflation protection it provides during times of global uncertainty as well as increasing economic growth leading to a pickup in industrial demand. However, the slump in gold prices and low inflation has taken much of the shine off silver. Silver is now caught up in no man's land between being an industrial metal and a precious metal and only global economic growth can strengthen its position as an industrial metal.

Investment in silver ETFs

iShares Silver Trust (NYSEARCA:SLV) tries to accurately mirror the price movements of physical silver and the price is pretty accurately correlated. In fact the ETF price is down this year by approximately the exact same as the decline in silver prices. The only asset that the fund invests in is physical silver bullion.

On the other hand, ProShares Ultra Silver (NYSEARCA:AGQ) uses forward contracts and derivatives to magnify the impact of price movements and aims at a 2:1 ratio between the price of the ETF and the price of silver. It does not always achieve this ratio and, because the investment is more speculative, it should appeal to investors with a higher appetite for risk. If you are less risk averse but still believe in the investment potential of silver, stay with ETFs that hold physical silver bullion.

Some silver mining stocks

Pan American Silver (NASDAQ:PAAS) has operations in South America including Mexico, Peru, Bolivia and Argentina. The first-quarter results were better than expected with earnings of $0.26 per share against the consensus estimate of $0.25 per share. Silver production grew by 14% while revenues grew by 6% year over year and the average price realization was $30.11 per ounce. With silver prices declining, the only thing that silver mining companies can do is to build a strong balance sheet and cut costs to the bone. Pan American has $490 million in cash and equivalents and though this is 10% down over the preceding quarter, it is still double the quarterly revenues. The company has a very low level of debt at $45.6 million and the debt/equity ratio is 0.02. The stock trades at around $12.13 compared to the median analyst target price of $18.66 and the mean analyst target price of $17.15.

Hecla Mining (NYSE:HL) holds cash and cash equivalents amounting to more than twice its quarterly revenue which is an acceptable liquidity cushion. The company has adopted a different approach and taken advantage of the fact that the fall in gold and silver prices has led to a fall in the price of related assets. It is buying Aurizon Mines which is primarily a gold producer as a result of which gold is expected to generate 39% of its revenues while silver will decline to 38 %. This diversification makes further sense because gold prices have performed better than silver prices year to date. Hecla has also protected its financial position by raising long-term debt in the form of $500 million of senior notes redeemable in 2021 while retaining a cash balance of around $300 million. The company is currently trading at a price of around $3.41 against the median analyst target price of $4.63 and the mean analyst target price of $4.92.

Coeur Mining (NYSE:CDE) is the largest U.S. silver producer. Due to tightening margins due to declining silver prices, the company has taken steps such as complete reviews of operations, replacing the CEO and rationalizing staff levels, relocated its corporate headquarters, accomplishing buybacks worth $32 million and shored up its finances by arranging outside financing as well as achieving record levels of cash generation from operations partly by slashing costs. With $332.8 million in cash and cash equivalents as well as almost $13 million in cash flow for the first quarter, currently 25% of the company's market capitalization is made up of cash. The company recently reported a tripling of its first-quarter net income assisted by an accounting adjustment and increased gold production. The company earned $12.3 million ($0.14 per share) for the quarter compared to $4 million ($0.04 per share) for the same quarter of the previous year. The results included an adjustment which contributed $17.8 million to earnings based on prevailing gold prices. The company has concentrated on managing its geopolitical risk by increasing its focus on domestic US production particularly in its flagship Rochester mine in Nevada. It operates 2 of the 10 largest silver mines in the world and has concentrated its presence in 5 of the top silver mining countries

Silver streaming

I recently wrote an article about silver streaming company Silver Wheaton (SLW). The company itself does not mine or produce any silver itself. Alternatively, it holds a number agreements in which, in return for upfront payments, it has the right to buy all or some of the silver and gold production at low fixed prices from high-quality mines. For 2013, the company's production is expected to be approximately 33.5 million silver equivalent ounces, including 145,000 ounces of gold, making it one of the largest silver producers in the world. SLW's silver production is expected to grow by nearly 60% to 53 million silver equivalent ounces including 180,000 ounces of gold. The company provides investors with leverage to increasing silver and gold prices due to its unhedged exposure to the metals and its fixed payment structure for the metals.

The bottom line

The slump in silver prices has resulted in enhanced demand for the physical metal and the U.S. Mint expects to see record sales of gold and silver coins in 2013 with other institutions also reporting increased sales of physical silver. Hedge funds and other investors have also become bullish on silver and you should always remember that 50% of silver is used in industrial uses compared to 10% for gold. There is reason for optimism that price growth will be back by the end of 2013 and any form of silver investment should appreciate thereafter.

Disclosure: I am long SLW. 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.