Online Stock Trades: Silver Miners

When investing in mining companies, whether silver or gold or other precious metals, you have to decide whether you want to invest in production companies, meaning the company is actually mining and producing the metal, or exploration companies which are looking for the precious metal but don’t have any actual mines.  Production companies actually have revenue since they have a product and investment decisions based on cash flow and expenses, proven and probable reserves, ongoing exploration and expansion projects, and projected metal prices can be made.  Exploration companies, on the other hand, don’t have revenues and rely on finding a large deposit of the precious metal and either becoming a production company or being purchased by another company as a result of their successful find.  The investment is much more speculative.

Personally, I prefer to invest in the less speculative production companies.  It is largely personal preference since I prefer to be able to use analysis and reason to try to predict the future prices of the stocks and precious metals rather than rely on a lucky strike.  In this installment of Online Stock Trades, I will focus on silver miners that actually have working mines.  I prefer stocks that trade on the major exchanges, the NYSE and NASDAQ, and that trade over $5 per share which are typically marginable in your online stock trading account.

Pan American Silver (PAAS):  Pan American Silver operates 8 mines in Mexico, Bolivia, Peru and Argentina.  In 2008, they produced 18.7 million ounces of silver and 25,000 ounces of gold making it the second largest primary silver production company in the world.  In 2008, their total costs for silver production were $8.76 per ounce.  With the average silver price of $14.99 in 2008, you can see that the profit potential exists.

Commentary:  I am somewhat partial to PAAS since I have owned the stock in the past and made some profit on it in my retirement accounts.  I would certainly consider investing in the stock again.  I like the fact that they are a large silver miner.  I like that they have NO DEBT.  That is important in these times of financial crisis since it gives the company some flexibility.  I think the prospect of inflation will keep silver prices in the double digits for quite some time.  As long as PAAS can keep costs contained, they will do well with healthy margins.

Coeur D’Alene (CDE):  Coeur D’Alene is a major silver and gold producer with interests in mines throughout the world including the United States, Mexico, South America, and Australia.  In 2008, the company opened two new mines which are expected to lead to an increase in silver production of 66% and an increase in gold production of 85% for the year 2009 from 2008 numbers of 12 million ounces of silver and 46,115 ounces of gold produced.  The total production cost for silver was $7.71 per ounce.

Commentary:  CDE has never impressed me that much in the past, but I think it might be worth a look.  Price performance of CDE compared to PAAS has been good in 2009.  That’s because it has been a relative underperformer over the past several years.  Things may be turning around, however.  The company is reducing debt and increasing reserves.  My overall feeling is that CDE seems to be a little more volatile in relation to the silver price.  If silver drops, that might be the time to pounce on CDE.

Silver Wheaton Corp (SLW):  Silver Wheaton has a slightly different business model compared to the first two companies.  Silver Wheaton is actually a silver streaming company.  Since about 70% of the world’s mined silver is actually a by-product of other mined metals like zinc and copper, some miners are more than happy to just be rid of the silver.  Silver Wheaton will enter into long term purchasing agreements to buy the silver at a low per ounce cost and sell the silver at a higher price.  Think of them as a silver wholesaler.

Commentary:  This is actually a decent business model, and I actually didn’t realize that SLW was structured this way until I was reading the annual report to prepare this article.  I actually like this since it gives you great exposure to a rising silver price which I believe will be the case over the next several years.  I might wait for silver to fall back a little before investing or buy a little bit now and keep some cash on the sidelines to buy some more of the stock if the silver price falls.

Hecla Mining (HL):  Hecla Mining is the largest producer of silver in the United States and was established in 1891 making it 118 years old.  In 2008, Hecla Mining produced 8.7 million ounces of silver at a cash cost of $4.20 per ounce (this is different in accounting than total production cost).  The company also produced over 54,000 ounces of gold.  Hecla has interests in 3 mines in the U.S. and one in Mexico.

Commentary:  Personally, I would be hesitant to invest in HL at this time for 2 reasons.  First, the stock is currently trading at about $3 per share.  I tend to avoid stocks this low since they are not marginable, and they can tend to fall under the radar of analysts and institutions.  Second, and more importantly, HL just announced that they were deferring some preferred stock dividend payments on October 1, 2009 in order to preserve cash.  That doesn’t sound too good to me.  I would get my exposure to the silver price in another fashion than HL stock.

The recent financial turmoil in the fall of 2008 resulted in a great deleveraging of assets as investors sold precious metals to raise cash.  Silver is also an industrial metal, and the prospect of decreased demand and industrial production caused its price to decline significantly over the seven months from March to October 2008.  Now that conditions have stabilized, the price of silver has rebounded significantly.  Going forward, as the prospect of inflation and a return of industrial demand begins to materialize, demand for silver should increase creating a level of support under the price.  Now is the time to begin to invest in the stocks of silver production companies.