Cash-Rich Miners Below Book Value

Includes: HBM, PAAS, SSRI
by: Prudent Finances

By Ivan Y.

I am generally not a fan of mining stocks, but miners with plenty of cash that are priced below tangible book value are tempting.
We all know that cash is king. In times like today with depressed precious and base metals prices, having cash is so critical in order to continue exploration and development projects, or to use as working capital to cover operational expenses. Companies without cash are forced to raise it, and that often comes at the expense of shareholders through dilution. Issuing shares when the stock price is high is great, but issuing when the stock price is low is incredibly dilutive.

Another benefit of having cash is that it opens up the opportunity to acquire viable junior mining companies or specific projects at these companies at depressed prices. In the past year or so, the prices of many junior mining stocks with viable projects are down 50% or more. Of course, a lot of junior exploration companies have nothing but a pile of dirt and rocks, and deserve to be worthless, but some juniors have interesting projects that are already producing or can be developed. This is the opportunity for companies with cash to make dirt cheap acquisitions. Whenever there's a crisis there's an opportunity. I identified three mining stocks that fit the criteria of having a lot of cash and with a market cap below tangible book value.

HudBay Minerals

HudBay (NYSE:HBM) is a producer of copper, zinc, gold, and silver. They have four noteworthy projects that are in Canada and Peru. The "777" mine in Canada is in production and is expected to produce for at least eight more years. The Lalor mine has a 20-year mine life and is currently in development. They also have a 70% stake in the Reed project, but this mine has a shorter mine life. In 2011, HBM acquired Norsemont Mining and its Constancia project in Peru. This mine is currently 25% developed and is expected to begin commercial production at the beginning of 2015.

For 2013, HBM is expected to produce at least 33k tonnes of copper, 85k tonnes of zinc, and 85k ounces of gold equivalent. The company had $1.05 billion in cash as of the end of Q1 2013, but the stock currently has a market cap of only $1.1 billion. Essentially, they are trading at the cash level. However, the current cash is going to disappear very quickly because they are expecting to spend $960 million just in 2013 in order to develop Constancia. And they will have to spend more in 2014. Therefore, I think this stock is very risky, especially if you consider the potential of the development cost for Constancia being greater than what they expect now.

Silver Standard

A few weeks ago, I wrote about Silver Standard (NASDAQ:SSRI) so I'll try not to be too repetitive. Basically, what you need to know is that SSRI has a tangible book value of $1.12 billion and a market cap of about $497 million. The company has $462 million in cash and a large investment in Pretium worth over $120 million. There is $180 million of debt on the books, but that debt is not due until 2033. Unlike HBM, a large portion of SSRI's cash pile is not committed to be spent, so right now they can use that cash to take advantage of depressed prices and make acquisitions if they want to. They will need that cash in the future to fund the development of the Pitarrilla project in Mexico, but right now that cash is available.

Pan American Silver

Pan American Silver (NASDAQ:PAAS) is a dividend-paying silver producer with operations in Mexico and South America. The current yield is about 4.4%, but unless the silver price turns around soon, I think the dividend will need to be cut. There's a lot of political risk in South America, but fortunately more than half of their silver production is coming from their three mines in Mexico (La Colorada, Alamo Dorado, Dolores). The company is expected to produce 25-26 million ounces of silver this year at a cash cost of less than $13 per ounce and at least 140k ounces of gold. Looking at the balance sheet, they had $490 million in cash with only $45.6 million in debt (as of March 31). With a tangible book value of $2.52 billion, the market only gives PAAS a market cap of $1.73 billion. Management has made it a goal "to preserve our balance sheet strength" and has reduced operating expenses, exploration expenses, and overhead. Indeed, the balance sheet does look impressive, and like SSRI much of the cash on the balance sheet is not committed to be spent.

Final Thoughts

These are some cheap mining stocks that can be considered. HBM is definitely the riskiest of these three stocks because of the expected cash drain due to the Constancia development. I think SSRI and PAAS are the safer investments because of their strong balance sheets. Even if metal prices stay low for a few years, they have the cash to ride out the storm, and they will certainly be two of the survivors that emerge from the 2013 mining stock wreckage.

Disclosure: I am long SSRI. 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.

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