Silver was hardly the only casualty: Investors pulled money from stocks and metals in favor of cash, U.S. Treasuries and the U.S. dollar.
But here's the key point: This silver pullback won't last forever, and fleeing silver – or top silver stocks like Coeur d'Alene Mines Corp. (NYSE: CDE) – will prove to be a costly mistake.
As ugly as this week has been – and even if it carries over into this week, or even beyond – this will prove to be just a temporary reversal.
And once it's over, silver prices will "break out" and head for much higher highs.
Europe's Banking Crisis and Silver Prices
Weak European banks are driving the current metals price pull back. The European Union (EU) reported Thursday that 16 "fragile" European banks need more capital. They're facing margin calls, much like the U.S. banks were in the fall of 2008.
But someone will come to the banks' rescue.
They'll be fixed when the European Central Bank (ECB) prints fresh batches of money and pushes them into the weakest institutions.
When that money is released into the system and the extra liquidity is sloshing around, silver will soar to new all-time highs – just like when the U.S. government bailed out banks in 2008, and the "white metal" started a tear that's led to gains of 200% to date.
If you avoid the silver market now, you'll miss out on these significant gains, like the ones headed for Coeur d'Alene Mines Corp., the largest U.S.-based silver producer.
You see, this mining giant is about to bring online some of the largest silver mines in the world. The higher silver prices soar, the more money this miner rakes in.
Simply put: Coeur d'Alene Mines shows all the signs of becoming a future silver king, and is a "Buy" before silver prices take off again. (**)
Coeur d'Alene Mines Corp.: Massive Growth, Massive Profits
Idaho-based Coeur d'Alene Mines Corp., founded in 1928, engages in the ownership, operation, exploration, and development of silver and gold-mining properties located primarily in the United States, South America, Mexico and Australia.
What's key about this silver play compared to others is that Coeur d'Alene Mines Corp.'s development expectations are a great example of massive organic growth, or "M.O.G."
I love to look for M.O.G. – that magic sweet spot in a company lifecycle where you believe the investment is growing its assets quicker internally than the rate at which the market values it.
And that's where Coeur d'Alene stands.
You see, Coeur d'Alene Mines:
- Boasts record silver and gold production,
- Is increasing its cash and cash equivalents,
- Is reducing capital expenditures,
- And is keeping the number of shares outstanding steady.
Coeur d'Alene Mines Corp. expects to produce a record 19.5 million to 20.5 million ounces of silver this year, and 240,000 to 250,000 ounces of gold. This would generate a company record $1 billion in metal sales with $500 million in operating cash flow.
Increased production has boosted cash and cash equivalents. The company reported a total of $106.8 million by the end of 2011's second quarter, up 159% from $41.2 million in 2010's second quarter.
What's even better about this revenue and cash holdings growth is it's paired with the benefit of reduced expenses. The company's capital expenditures fell 40% from $365 million in 2008 to $218 million in 2009, then another 28% to $156 million in 2010 – and are estimated to decline another 13.5% this year to $130 million to $140 million.
This means Coeur d'Alene Mines has already spent most of the money it needs to investment in increasing production, and we are only waiting on the results.
Another sign of a great investment is a company issuing shares at a low rate. There's nothing worse than being in an investment and watching your ownership become diluted by a print-happy management.
In the case of Coeur d'Alene Mines, the total number of shares has stayed nearly constant with a total of 89.3 million in the second quarter of 2010 and 89.5 million in the second quarter of 2011.
The company has a market capitalization of $2.6 billion with an enterprise value of $2.7 billion once you take into consideration net cash and debt levels.
Coeur d'Alene Mines closed Friday at $22.62.
I love to find a company that offers a double whammy of record demand for its product and record cash flows, with expectations that the company is going to continue ramping up its production.
That's Coeur d'Alene Mines Corp.
Coeur d'Alene and other mining stocks are going to be extremely volatile in these market conditions. Lets use that volatility to our advantage and use patience to get the best average price.
Let's use a ladder approach to placing our entry. If you are going to expose 3% of your portfolio, let's put in limit orders for 1% (or 33% of your total expected position) at 5% below the current market price. We will want to put in two additional buy orders for the same amount at 15% and 25% current market prices.
This approach will allow us to average down, while at the same time limiting our overall near-term losses.
The company also has a liquid options market, which will allow investors a nice chance to generate cash flow from the position by writing covered calls or naked puts at different times.
(**) Special Note of Disclosure: Jack Barnes has no interest in Coeur d'Alene Mines Corp. (NYSE: CDE).
Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.
Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning twice a week. In his previous BSH column last week, Barnes analyzed Monsanto Co. (NYSE: MON).
News and Related Story Links:
- Money Morning:
Buy, Sell or Hold: Endeavour Silver Corp. (NYSE: EXK) is the Perfect Way to Play the Precious Metals Bull
- The Wall Street Journal:
EU: 16 'Fragile' European Banks Need Additional Capital
- Coeur d'Alene:
2nd Quarter Financial Results
- Money Morning Archive:
Previous "Buy, Sell or Hold" Features
Confessions of a Macro Contrarian