The Best Way to Invest in Silver

Before you go, we thought you'd like these...
Before you go close icon

Mining is highly cyclical, with commodity prices rising and falling in long-term trends. For Foolish investors, these cyclical industries allow for classic value investing, with the market offering great companies at deep discounts that can yield market-crushing long-term total returns. This article highlights silver and explains the long-term bullish case for the precious metal. More importantly, it offers a low-risk way for long-term investors to profit immensely should silver prices soar. 

New York Silver Price Chart

New York Silver Price data by YCharts.

Silver has many important uses other than jewelry or a store of value that can justify long-term price appreciation.

  • Electronics
  • Solar panels
  • Nuclear reactors
  • Metallurgy
  • Chemical production
  • Medicine
  • Water/food purification
  • Engines

Typically, investors who want to invest in silver either purchase coins or invest in silver miners such as Pan American Silver . However, silver streamers such as Silver Wheaton are far superior investments to traditional miners or collecting coins.

Pan American Silver: Good as far as silver miners go

PAAS Total Return Price Chart

PAAS Total Return Price data by YCharts.

As seen in this chart, even adjusting for dividend reinvestment, Pan American Silver has lost investors money over the last 12 years despite silver prices almost tripling. Meanwhile, Silver Wheaton has crushed the market by 222% annually, with 24.4% annual total returns vs the market's 7.7%. Yet, I call Pan American Silver a good silver miner. I have several good reasons for this.

First, compared to its peers, it has the highest yield at 3.3% vs 1.1% for the industry average. Similarly, its valuation in terms of price/sales (3) and price/book (1.1) compares favorably to the industry average's 5.1 and 1.7, respectively. 

Second, I'm impressed with Pan American Silver's ability to cut costs while increasing production. Specifically, in the first quarter, it increased production of silver and gold by 5% and 43% while cutting its production costs for those metals by 20% and 27%, respectively. 

Finally, Pan American Silver's Dolores mine expansion project, which will increase silver production by 38% and gold production 33%, along with its 348% increase in silver reserves at its La Calorada mine, might serve as a good growth catalyst should silver prices recover. 

However, Pan American Silver, like most silver miners, is terrible when it comes to profitability and operating efficiencies. 

CompanyNet MarginGross MarginReturn on AssetsReturn on Equity
Pan American Silver-58%-58.50%-15.10%-18.80%
Silver Wheaton48.32%49.18%4.61%9.67%
Industry Average-38.10%-39.20%-8.30%-11.8%

Sources:, Yahoo! Finance.

CompanyYield10-Year Projected Annual EPS Growth Rate10-Year Projected Annual Dividend Growth Rate10-Year Projected Annual Total Return
Pan American Silver3.40%4%2.34%1.60%
Silver Wheaton1.10%35%26.36%27.50%

Sources: S&P Capital IQ, Yahoo! Finance.

When it comes to profitability, operating efficiency, and long-term growth prospects, Pan American Silver is trounced by Silver Wheaton. What makes Silver Wheaton so special? 

Silver Wheaton: a superior business model
Silver Wheaton's metrics are so much better than Pan American Silver -- and the average silver miner -- because it's actually not a miner at all, but the largest precious metal streamer in the world. Rather than owning and operating its own mines, Silver Wheaton pays an upfront fee to 24 mines and development projects in North America, Europe, and South America in exchange for 25%-30% of their by-product silver production. Since 70% of all silver is created as a by-product of other precious metals production, this creates a win-win situation.

The miner gets paid cash up front, which helps fund expansion or operating costs, while Silver Wheaton gains very cheap and reliable sources of silver and gold. In the first quarter, Silver Wheaton's average cost for silver was $4.12/oz. and $386/oz. for gold. Compare that to Pan American Silver's $15.45/oz. silver cost, silver's commodity price of $19.89/oz., or gold's $1,273/oz., and one can see why Silver Wheaton is so profitable. 

Because it doesn't own or operate the mines, Silver Wheaton doesn't face expensive capital expenditures or exploration risk. Rather it lets its partners, including Pan American Silver and Vale, expand production, and then it makes its arrangements to stream from them. With silver prices now at three-year lows, Silver Wheaton can actually make better deals and lower its costs of silver and gold. Since 100% of production is unhedged and with minimal overhead costs, any upturn in silver and gold prices drops straight to the company's bottom line.

A major growth catalyst for Silver Wheaton and the reason its long-term growth prospects are so bright is its plan to increase its silver and gold production by 35% and 61.3%, respectively, from 2013 through 2018.

Foolish takeaway
Investing in precious metals can be fraught with risk, but silver has more industrial uses than most and stands a decent chance of recovering over the long term as global economic growth increases demand for those uses.

Silver miners such as Pan American Silver are poor ways to invest in precious metals as their shares prices sometimes fail to track rising silver prices. Silver Wheaton offers a far better pure play for profiting from rising silver and gold prices. Its substantially lower costs allow it to remain profitable even when miners are hemorrhaging cash, and its ability to lock in better prices during cyclical downturns means higher profitability when prices eventually recover.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

The article The Best Way to Invest in Silver originally appeared on

Adam Galas has no position in any stocks mentioned. The Motley Fool owns shares of Silver Wheaton. (USA). 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.

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners

Cops Catch Up To A Suspicious Speeding Vehicle - And Make An Appalling Discovery Inside Cops Catch Up To A Suspicious Speeding Vehicle - And Make An Appalling Discovery Inside
Don't Get Too Close To a Newborn Giraffe Unless You Want to Get Kicked in the Nuts Don't Get Too Close To a Newborn Giraffe Unless You Want to Get Kicked in the Nuts
If You Find One Of These In Your Yard, Don't Touch It - And Try Not To Panic If You Find One Of These In Your Yard, Don't Touch It - And Try Not To Panic