However, in this situation, what opinion should we have on silver companies? Let’s take a look and find out.
Silver companies and the earnings season
In the recently concluded earnings season, with the exception of Pan American Silver Corp. (NASDAQ:PAAS), most silver companies blamed delays with concentrate shipments for under-performance. Pan American reported a strong start to the year, as the silver-mining company reported an EPS that topped the Street’s estimates.
During the 2000s, Pan American Silver Corp. (NASDAQ:PAAS) was a market favorite as it developed its rich portfolio of silver-mining projects. Interestingly, this history seems to repeat itself as the company is expecting the next phase of growth (of the same magnitude as in 2000) from projects that came with the recent Minefinders (MFL) acquisition. For those who don’t know, last year, Pan American Silver Corp. (NASDAQ:PAAS) bought Minefinders, a Canadian silver and gold exploration company, for $1.5 billion.
In December of last year, the company shelved work on its mining operations in Navidad, south of Argentina, as local authorities failed to pass a regulatory plan for a mine. The Navidad project remains stalled since it requires legislative changes to provincial mining regulations to allow open-pit mining. Sadly the recently proposed mining code is expensive, with new royalties and other costs. Pan American has said it believes that the suggested new code makes the Navidad project uneconomic.
JPMorgan Chase & Co. (NYSE:JPM) has set a price target of $18 assuming a more normal tax structure. However, the Street remains concerned about further delays and higher costs in Argentina.
This company is expecting a better second half
Although Hecla Mining Company (NYSE:HL) reported a weak Q1 (lower-than-expected production level and higher-than-expected costs), the fact that it reiterated its 2013 guidance means that the company is confident that it will perform better in the second half of 2013.
Hecla has been reporting success with exploration at its Greens Creek mine in Alaska, and is preparing to access higher-grade ores at its Lucky Friday mine (in Mullan, Idaho) later this decade.
Also, in a recent press release the company announced that it will soon complete its acquisition of Aurizon Mines, which will give it the control of its flagship gold mine Casa Berardi gold mine in Quebec. However, the Casa Berardi gold mine might face a “fallow period” while it waits for its new shaft access to the better ores at the bottom of the mine.
The new $500 million in debt issued to finance the deal is large for a company like Hecla with a ~$900 million market capitalization, and the Street is a little wary of this level of financial leverage, given that it could be exacerbated this year by the dollar’s strength.
All this said, assuming the debt load is manageable, Hecla’s profile could become very attractive in a rising gold/silver price environment. The hedge required by the mine’s creditors will only affect 21% to 23% of precious metal revenue.
This company looks good
Silver Wheaton Corp. (NYSE:SLW) has been one of the Street’s favorite silver companies given that it is the least exposed to cost inflation in this weak market. The financial structure of the company is attractive given that it has only about 1% exposure to industry cost inflation as compared to 10% exposure on average. This protection is due to the unique contracts it holds with its partner mining companies.
Additionally, Silver Wheaton Corp. (NYSE:SLW) has begun to benefit from the ramp-up of production at its various silver-streaming partner companies, and it should receive sales growth from the large Pascua Lama mine, though a new timeline must be developed.
It is interesting to note that Silver Wheaton’s large capitalization has made it the “go to” company to convert byproduct silver into fully valued pure silver exposure. The company’s large capitalization has made the company an attractive partner for mine operators looking for new financing. Silver Wheaton is expected to continue to outperform its peers with gold and silver operations.
Final word
Despite a weak outlook on silver as a commodity, I am bullish on all these three stocks given their individual growth stories and given an indication that they might be witnessing some overselling on the basis of the recent decline in silver prices.
I recommend Pan American Silver Corp. (NASDAQ:PAAS) as a buy given its interesting M&A story. Hecla has a bright future as it diversifies through acquisitions into other metal operations. Silver Wheaton Corp. (NYSE:SLW) is a good company in which to invest given its minimal exposure to industry cost inflation.
The article Is There Some Silver Lining in Silver Companies? originally appeared on Fool.com.
Zain is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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