Investing in silver miners hasn't been as profitable as betting on the white metal itself – but that's changing.
Actually, as a group, precious metals miners have been in a mutli-year downtrend. Take the case of the Global X Silver Miners (NYSE: SIL), the marquee ETF that tracks silver miners. Not only is that fund down about 21% year-to-date, it has tumbled more than 31% over the past two years.
That means with silver prices slated to rise, these silver miners are trading at a discount right now – very good news for anyone investing in silver stocks.
Here are three miners anyone investing in silver stocks should consider.
Investing in Silver Stocks: Cream of the Crop
For many industry followers, Silver Wheaton Corp. (NYSE: SLW) represents the top choice among silver miners.
Part of the reason for that is the company is not a miner in the traditional sense. Silver Wheaton provides financing to companies looking to expand or initiate mining projects. In return, Silver Wheaton gets a cut of the production at a fixed cost.
That means Silver Wheaton operates as a royalty-driven business, but still has more proven silver reserves than any other silver miner in the world. That is certainly an advantageous spot to be in, particularly if demand rises.
And that's exactly what has been happening in the silver mining industry this year.
"The mining industry is very, very hungry for capital right now and there are not a lot of sources out there," Silver Wheaton CEO Randy Smallwood told Bloomberg News.
In years' past it was the smaller miners that traditionally turned to Silver Wheaton when they were unable to gets funds from debt and equity markets. Now Smallwood says his company sees interest from the biggest producers in the industry.
"Companies more and more are looking to companies like Silver Wheaton to access funds to build their mines," David West, an analyst at Salman Partners Inc. who rates Silver Wheaton a "top pick," told Bloomberg earlier this year. "They have a great model."
Perhaps the best point regarding why silver investors should consider Silver Wheaton is the cost issue…
As we noted earlier, production costs vary from miner to miner and that underscores the attractiveness of Silver Wheaton, as explained on their Website:
"The predetermined price that Silver Wheaton pays for future silver production is approximately US$4 per ounce, with a small inflationary adjustment, ensuring that costs are fixed. This allows the company to stabilize operating costs and reduce downside risk, while providing the upside of significant leverage to the price of silver. Other than the initial up-front payment, no additional capital expenditures or exploration costs are required. Yet, Silver Wheaton benefits from the production and exploration growth of its operating partners."
Investing in Silver Stocks: A Cheap Buy
Some companies have a dubious track record of announcing share repurchase, committing the same mistake that some investors do – buying at the top.
Not First Majestic Silver Corp. (NYSE: AG). The company recently announced a plan to buyback more than 5.84 million, or 5%, of its nearly 117 million shares outstanding. With the shares down more than 19% this year, it can be said management sees value in its stock.
Actually, the shares are a decent value, trading at 7.7 times forward earnings with a long-term debt-to-equity ratio of 0.3, which is decent in the capital-intensive mining industry. This year, First Majestic expects to produce 12.3 million to 13 million ounces of silver.
The company focuses his production in Mexico, where it has five mines, and also has one retail market segment in Canada and a silver trading segment in Europe.
More importantly, it is the only major silver miner to outperform Silver Wheaton's share price over the past year.
Not to mention, the company has almost $111.2 million, or almost 10% of its market cap, in cash. The combination of the stock's recent tumble, sturdy cash position and potential for the Del Toro mine to be a game-changer increase the allure of First Majestic shares.
Investing in Silver Stocks: Hi-Ho Hecla
Hecla Mining Co. (NYSE: HL) is not for the faint of heart.
Currently trading below $5, the stock is hard to own for some institutions that cannot purchase sub-$5 or $10 stocks. Then there is the fact that the stock has a beta of 2.15, meaning it is more than twice as volatile as the S&P 500.
The shares have fallen on hard times recently not only because of the fall in silver and other miners, but also because of Hecla's bid for rival Aurizon Mines Ltd. (NYSE: AZK). Investors did not like the fact that Hecla offered about $775 million for Aurizon, when the company has almost $600 million in assets and $200 million in cash.
But Hecla's share-price decline has created a great spot for investors to buy in.
Speaking of cash, Hecla is better off than some competitors with $175 million of it, but a market cap of just $1.2 billion.
Then there is the matter of costs. Straight from the company:
"For the full year, the Company produced 6.4 million ounces of silver at a cash cost of $2.70 per ounce, still among the lowest costs and highest margins of the major primary silver producers. In 2013, we are expecting silver production levels to increase more than 25% to approximately 8 to 9 million ounces."
Combine Hecla's cash position and paltry production costs and it is fair to say the stock is undervalued.
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Related Articles and News:
- Bloomberg News:
Silver Wheaton Streams Luring Largest Miners
- PwC Report:
2013 Global Gold Price Report