3 Ways to Play Silver
The precious metals mining sector in general is down in the dumps right now. Rising costs and falling commodity prices are the two main factors that are pressuring margins and reducing profitability.
However, there are still some gems out there, and although it may take some searching, there are companies that are better positioned than the rest of the group to ride out the storm and reward investors when the prices of precious metals finally return to a level that allows abnormal levels of profit generation.
So, where can these deals be found? Well, I recently put together an article attempting to undercover the all-in sustaining cash cost per ounce of silver produced by each silver miner. Silver Wheaton Corp came out on top with an AISC of $9.57.
However, Silver Wheaton is not strictly a silver miner; the company is the largest precious metal streaming company in the world. What this means is that Silver Wheaton has a number of agreements where, in exchange for an upfront payment, it has the right to purchase all or a portion of the silver and/or gold production, at a low fixed cost, from high-quality mines located in politically stable regions around the globe.
This business model means that Silver Wheaton remains highly profitable while other miners struggle as it has no mine running costs, which can be high. That said, the company's profit margin has declined in line with the price of silver. Specifically, the company's operating margin hit a high of 70% during 2012, but has now declined to 44%, reported during the second fiscal quarter. Still, this is significantly better than many other miners. To me, this indicates that Silver Wheaton should be able to ride out the downturn in silver price without too much trouble.
From streaming to mining
Hecla Mining is somewhat of a misunderstood company -- well, right now it is anyway. Hecla has been around for 122 years, so the company has plenty of experience riding out both the peaks and troughs of the precious metals market.
In addition, Hecla plans to more than double its silver production by 2017 and quadruple gold output by 2014; these are both impressive targets. So, why is Hecla misunderstood? Well, during 2012 the company shut its low-cost Lucky Friday mine for rehabilitation, expanding the mine's life for 25 years. Closing Lucky Friday caused the company's total cash cost, net of by-product credits, per silver ounce produced to more than double during 2012, from $1.15 to $2.70. Then, while the mine ramped up production during the first quarter of this year, the company's overall cash cost per ounce hit $7.02, as bringing the mine back into production was expensive. However, during the second quarter this cost dropped to $5.56 and this figure is expected to drop further in the second half of the year, as the Lucky Friday mine ramps up production from 0.34 million ounces, to 1.3 million ounces. On an individual basis, the Lucky Friday mines cash cost per ounce produced is expected to fall from $33.75 to $9.50 over the rest of this year.
This low cost of production and rapid ramping up of output puts Hecla in a great position to ride out the declining silver price.
The last company that I'm interested in is somewhat of a gamble. Silvercorp Metals is China's largest primary silver producer. Unfortunately, the company has been embroiled in lawsuits and allegations in the past, which accused Silvercorp of scamming investors and misrepresenting results. However, it recently turned out that the company itself was being scammed by its own contractors. Silvercorp immediately changed the way that it paid contractors, confronting the issue of scamming for shareholders head-on.
Still, as a Chinese company some investors could be hesitant about investing, and that's why I'm ranking the company as speculative. Silvercorp does currently offer investors a 3% dividend yield, though, which is easily covered by operating cash flow. Indeed, during the company's most recent fiscal quarter, the cumulative payout was $4 million and cash from operating activities was $17.5 million, more than enough.
As China's largest primary silver producer Silvercorp could be a good recovery play as the company recovers from scamming allocations. In addition the company will benefit from a rise in demand for silver within the world's second largest economy.
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The article 3 Ways to Play Silver originally appeared on Fool.com.Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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