In February 2013, Silver Wheaton announced that it entered into a binding term sheet to acquire, from a subsidiary of Vale SA (ADR) (NYSE:VALE), an amount of gold equal to 25 percent of the life of mine gold production from their Salobo Mine, located in Brazil. They will also acquire 70 percent of the gold production, for a 20-year term, from certain of Vale’s Sudbury Mines located in Canada.
What should investors take from this? They should consider the positives of Silver Wheaton straight away increasing their production and cash flow profile. Greater cash flow is a wonderful thing for investors. It allows companies to put in place programs they desire that will grow their businesses further.
4. Record Production…or at Least Greater Production
A signal to investors of potential greater cash flows, revenue, and profits is a company’s production – recent numbers and future forecasts. Pan American Silver Corp. (USA) (NASDAQ:PAAS) recently announced that it produced a record 6.9 million ounces of silver during the fourth quarter of 2012. This thrust Pan American to a new annual production record of 25.1 million ounces for the full year, representing an increase of 15 percent from 2011.
To add to its trophy case, Pan American also produced a record 32,381 ounces of gold during the fourth quarter of 2012. This grew annual gold production to 112,283 ounces, which is also a new record for the Company, representing an increase of 43 percent from 2011. The company is forecasting increases in production as noted below.
5. Cash Costs
For investors researching companies such as the above, due diligence involves checking out their cash costs. Pan American Silver achieved their targets for silver production and cash costs during the fourth quarter and for the full year. This shows the company’s commitment to reining in expenses as they build production.
Geoff Burns, President and CEO of Pan American, commented, “We are expecting 2013 to be even better, as we are forecasting increases in both our silver and gold production while our cash costs per ounce remain basically unchanged.”
Silver Wheaton had average cash costs in the third quarter of 2012 of US$4.161 per silver equivalent ounce, compared to US$4.121 during the comparable period of 2011. This resulted in cash operating margins of US$27.201 per silver equivalent ounce. This represented a 15% decrease compared to the third quarter of 2011. This was mainly due to a 13% decrease in the realized price per silver equivalent ounce.
Silver certainly has the potential to be in mint condition for the next few years. However, for silver companies, controlling cash costs are a never-ending conundrum. Therefore, for investors, it’s wise to consider this insightful advice, as Mary Kay Ash (American businesswoman, 1918-2001) once said, “Every silver lining has a cloud.”
The article Is Silver in Mint Condition? originally appeared on Fool.com and is written by Michael Ugulini.
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