As an investor who likes to safeguard his capital, the last thing I want to do right now is buy into precious metal mining companies.
This is especially true for gold miners, which have been rapidly sliding since the beginning of the year. Indeed, the Market Vectors Gold Miners ETF is down 49.8% since the beginning of January alone and no one is more aware of this than John Paulson
That said, should silver miners be avoided in the same way? The price of silver has been falling like gold, but unlike gold, silver has more industrial uses and is cheaper to mine. Silver miners have also exhibited more fiscal prudence than their gold mining peers.
For example, Pan American Silver Corp. (USA) (NASDAQ:PAAS) has $500 million cash on hand and very little long-term debt, the company also has some of the lowest costs-per-ounce of silver mined giving in an edge over its peers. Then there is Hecla Mining Company (NYSE:HL), which has been around since 1891 and is well versed in volatile silver prices. Hecla is taking advantage of weak industry conditions and recently purchased a third mine, boosting production. Elsewhere, Coeur d’Alene Mines Corporation (NYSE:CDE) has been acting ahead of the curve, cutting costs to save cash and boost profitability before the declining price of silver forces it to. The company is still profitable and is using cash to buy back stock, which is trading below the company’s book value (a strategy that is almost never seen as the majority of companies buy back stock when it is expensive).
All of these companies are trading below book and have strong balance sheets, unlike their larger gold mining peers:
|Company||Book value per share||P/B||Debt/equity||Quick ratio|
|Coeur d’Alene Mines Corporation (NYSE:CDE)||$24.40||0.5||14%||2.7|
|Pan American Silver Corp. (USA) (NASDAQ:PAAS)||$17.80||0.6||2%||3.5|
|Hecla Mining Company (NYSE:HL)||$4||0.7||2%||2.5|
One of the striking differences between these three companies, and their gold mining peers, is the fact that these companies are almost debt free and have quick ratios greater than two times.
But what about the outlook for silver?
The sliver industry has been facing a crisis in recent years as mining yields have declined on average about 5.4% per annum in the last 7 years. As yields decline, miners have to raise production to fill the gap. On average, the average yield from ore was 13.0 ounce per ton (oz/t) during 2005 falling to 8.1 oz/t in 2012.
Over the same period, the amount of processed ore increased 67%. If the ore increase was removed, the amount of silver produced by the top six silver miners in the world would have declined by 76 million oz, or 60% of 2012 production. As new sliver deposits become harder to mine, yields continue to decrease at 5.4% per annum and silver production becomes more and more expensive, the price of silver should rise. It’s basic supply and demand.
Silver is running out
It is estimated that 7,500 tons of silver is thrown away each year in electronic devices. That is not much considering global production, but it is still being thrown away and this waste will increase as the world becomes richer and demand for electronic devices grows. Lower yield and more waste lead to higher profits for miners.
Isn’t there the same argument for gold?
Yes there is, but companies that mine gold have not been very clever with their cash recently and the huge writedowns incurred by Barrick and others recently, are a good indicator of how these companies have been spending on huge mega-projects, with no consideration to what happens if the price gold falls. Meanwhile, companies like Hecla Mining Company (NYSE:HL) and Coeur d’Alene Mines Corporation (NYSE:CDE) have been saving their money for the opportune moment and it appears that they believe the time is now right to start splashing their cash as Coeur buys back undervalued stock and Hecla buys up competitors mines at rock-bottom prices.