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The latest
quarterly (Q2, ended June 30, 2010) results from a number of silver producers
confirm that they are now entering a phase of sustainable profits. We will
look at several companies and try to make sense of the numbers as well as
make an EPS projection for the calendar year 2010. This particular selection
of companies was not meant to be a comprehensive overview of the entire group
of silver producers, yet our intention was to provide a meaningful
representation of it. Frankly, these companies are doing better than most of
the rest of the group in terms of absolute earnings and comparative rate of
growth versus prior years. Notable omissions include Fresnillo (LSE: FRES),
Hochschild Mining (LSE: HOC) and Polymetal (LSE: PMTL) mainly due to time
constraints and access to data. Companies in the table below are listed in alphabetical
order.
* For explanation of production
costs and other specifics related to a particular company see the
corresponding press release by clicking on company name. The information in
this table is obtained from the companies; earnings projections for the year
2010 are ours.
There are a few
wrinkles that (may) skew some of the numbers in either direction which always
makes these types of summaries tricky and diminish their potential utility,
but overall we tried to get as close to "apples-to-apples" basis as
possible. These "irregularities" have to do with the format in
which companies report their numbers. For instance, some companies report
equivalent ounces of production, while others report cost per ounce net of
by-product credits. Some companies expense their drilling costs while others
capitalize them, still others differentiate between exploration and
production drilling and split the costs accordingly. Silvercorp and Hecla
report negative cash cost per ounce of silver production. This, of course, is
impossible and is accounted for with by-product credits. Then again,
Silvercorp shows an "average cost per ounce of silver" at $3.00
elsewhere in the financials where they also report the unit cost of
production of gold, lead and zinc. We were not able to find this level of
detail from Hecla so we had to backtrack and resort to using the
"negative cost" number. That in turn forced us to ignore
by-products completely for the rest of the companies in order to arrive at a
semblance of a common denominator for the whole group. Incidentally,
Silvercorp also happens to have a financial year that does not match the
calendar year so we just used the latest 2 quarters reported. In other words,
this table is far from perfect, but we hope it is useful in getting across
the point we're trying to make. It was not designed to compare companies to
each other, but rather demonstrate the earnings proficiency of the group.
Coeur d'Alene
Mines (NYSE: CDE, TSX: CDM), www.coeur.com
At first glance
Coeur does not belong in this table as they lost a lot of money in the given
period. However this company has seen perhaps the most aggressive
transformation in its asset base in recent years and demonstrated a
remarkable turn-around in both production numbers and health of its balance
sheet. Losses shown here are necessitated by accounting standards related to
its hedge book, not actual loss of funds. Lastly, due to dramatic changes in
the operations Coeur has been on a roller-coaster ride in terms of its financials.
E.g. in the first 6 months of 2009, CDE reported EPS of $0.27. Overall, Coeur
has not answered all questions yet, but it has dug itself out of a hole it
was in just a few years ago with, so is worth keeping an eye on.
Endeavour
Silver (AMEX: EXK, TSX: EDR), www.edrsilver.com
Endeavour's
performance has been gaining steam and the numbers are looking very
impressive, especially this year. The company is well on its way to clear the
4 million ounces of annual silver production mark from its existing
operations next year. Endeavour also made no secret that it is on the hunt to
acquire another producing or near producing mine still this year. It should
also start posting better earnings since major capital expenditures on its
current operations have been made.
First
Majestic (TSX: FR), www.firstmajestic.com
Perhaps the
fastest growing mining company (Fortune Magazine, take note), it certainly is in
the silver space, particularly on profits basis. First Majestic just posted a
blockbuster $0.10 EPS in Q2. Short of any serious mishap FR is looking
capable of achieving earnings of $0.40/share or better in the next 12 months.
Combine that with its share price of around $4.0 as of this writing and you
can come up with a P/E ratio that compares very advantageously to that of
Eldorado Gold (50) and most other companies in its peer group. Better yet,
First Majestic has all the ingredients to double its production again from
projects it already owns in the next few years without further dilution.
Fortuna
Silver (TSX: FVI), www.fortunasilver.com
Fortuna is
another junior silver producer that is coming into its own as it gears up to
start production from its San Jose mine in Mexico later this year. Already
sporting a very attractive P/E, Fortuna is living up to its name and looks
poised to make a fortune for its shareholders in the near future. It should
record another significant bump up next year when San Jose starts
contributing to the bottom line. We reckon the reason why both FR and FVI are
overlooked by investors is their relatively small market cap, short
profitability track record and absence of listing on a major US exchange. But
that is changing before your eyes so don't expect these two companies to be
valued as they are presently beyond this year.
Great
Panther (TSX-V: GPR), www.greatpanther.com
Great Panther
Silver has also been clawing its way into profitability. While its production
currently is still under 2 Moz/year, GPR is already profitable and has made
tremendous progress from where it was a couple of years ago. The company is
putting a lot of money into development of its mines and has reported some
encouraging gold intercepts from recent drill programs. The company is also
attractively valued relative to its peer group and is looking to grow its
production. Inversely, if Great Panther continues to be valued at present
levels, it may become an acquisition target itself, which would spell good
news for shareholders.
Hecla
Mining (NYSE: HL), www.hecla-mining.com
In our opinion,
Hecla is the perennial under-achiever of the group (during this cycle). It
missed numerous opportunities to take leadership in the silver sector, that
we are aware of. That said, the company is doing fine, thank you very much.
The acquisition of the balance of Greens Creek from Rio Tinto - though costly
at the time - is now paying off handsomely for Hecla, its greater (over 50%)
exposure to base metals notwithstanding. The company has a solid balance
sheet, well established name and history, long time NYSE listing and is
profitable again. Despite losing some of its top brass in recent past, the company
still retains a deserved reputation of one of the best underground miners. In
this investment environment Hecla finds itself in an enviable position
relative to the rest of the market.
Pan
American Silver (NASDAQ: PAAS, TSX: PAA), www.panamericansilver.com
We have long
since christened Pan American Silver "the Cameco of silver sector".
That is more subtle than it may first appear. Cameco is the undisputed leader
of primary uranium producers and has been for years. While Pan American may
not have the same level of influence in the silver space, it has been the
leader of the group, especially in the current cycle. Pan American is likely
to emerge as the consolidator in the silver sector gobbling up smaller companies
along the way. It started to pay dividends to shareholders this year -
another sign of maturity and prosperity. For the moment we can't find many
faults with this PAAS and hope it will stay that way.
Silvercorp
(NYSE: SVM, TSX: SVM), www.silvercorpmetals.com
Silvercorp is a
story of remarkable success and another candidate for the fastest growing
mining company title at least with respect to previous five years. The
company makes loads of cash and pays one of the highest dividends among
precious metal companies. The only problem Silvercorp has is sustaining the
same growth rate as it enjoyed in the past, and that is a good one to have.
In the last couple of years the company has been actively working to
diversify its asset base geographically into North America and possibly South
America. Expect surprises on the upside from SVM.
Silver
Wheaton (NYSE: SLW, TSX: SLW), www.silverwheaton.com
Silver Wheaton is
an old favorite with the least well understood business model in mining. Why?
- Because they created it, literally devised it. In essence it's a royalty
company that, in addition to initial purchase of the royalty, was smart
enough to cover the cost of production of by-product silver at the time of
delivery, also known as COD. Thus greasing the wheels towards many deals that
would otherwise be closed to traditional royalty transactions, SLW has
amassed a substantial portfolio of - what it calls - royalty streams or
silver "streams", which is again, silver produced as by-product of
mining other metals, such as copper, gold, zinc, etc. We think the reason
Silver Wheaton has been so successful is because they made the transaction
easy for the seller to consummate and execute. They made the process clean
and simple in accounting terms AND they cover your expenses when you actually
pay up (deliver the silver). Silver Wheaton deserves more ink than we can
give it here, but at last count they had pre-paid for some 40 Million oz of annual
silver production for years to come, for which they will have to shell out an
additional US$4.00/oz COD. Not a bad gig considering that silver is trading
at $18 and is sooner going to $50 than $5. From here on it's an accounting
exercise, there is not much else to do, if they so chose. If they closed shop
(of a total of dozen people at last count) tomorrow and instructed their
banker to direct-deposit incoming checks SLW should reach 40 Million oz of
annual silver production (in the sense that they will receive it) by 2013.
And that is the "minimum" case scenario. After all, these chaps
didn't get there by sitting on their hands. They will find ways to add value.
Just in case we're not clear on this one, we're biased towards SLW. We started liking it when it was still Chap
Mercantile. We like it more today than we did back then. So what if Argentina is trying to pull the rug from under
Barrick's Pascua Lama project? Barrick is still on the hook to deliver
the silver.
To Sum It
Up
You probably
figured from this discussion that we're bullish on silver price in the longer
term, but we're even more bullish on silver stocks in the intermediate term.
That is to say, we're not sure when the next move up in silver will come
about, but we're on record forecasting that during the next leg up silver
should register a high somewhere between $30 and $50. Sure, it's laughable.
They also laughed when we called silver to get above $10 an ounce. The beauty
of this situation is that these days you don't need to be a silverbug to
invest in these companies. You don't need to convert, become a
"believer". Simply check those earnings and stick with the one(s)
that rub(s) you right. See where else in the market you can find profitable
companies and for how much longer. The silver party is just getting started.
P.S. This writer
is still uneasy about the general market at present. While we endorse the
silver sector, all else including strategy and market timing are beyond the
scope of this missive.
Sean Rakhimov
Editor, www.silverstrategies.com/
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