Silver prices have been in a free fall since the beginning of February. Shares of silver miners have been falling at an even faster rate. Silver is not an asset that can fall forever because the world needs silver for various reasons. Silver is widely used in technology, jewelry, tableware and for the production of coins and medals. You can use two main approaches when considering which silver miner to examine.
First, you can try to investigate the most punished stocks. If these stocks are fundamentally sound, chances are that they would rise at a faster pace when the rebound occurs. The alternate approach is to examine the least-punished stocks, considering them the safest and best ones.
Pan American Silver Corp. (USA) (NASDAQ:PAAS) belongs in the second group. The stock is down “only” 35% year-to-date. The company has mining operations in Mexico, Peru, Argentina and Bolivia, and recently reported its first-quarter earnings. The report came in better than expected. Pan American Silver Corp. (USA) (NASDAQ:PAAS) reported earnings of $0.26 per share versus analysts’ estimates of $0.25 per share. Silver production increased 14% while revenue rose 6%, all in comparison with the first quarter of 2012. Pan American Silver sold silver for the average price of $30.11 in the first quarter.
Silver miners cannot influence the single most important variable in their business – the price of silver. In theory, they can curb production to reduce supply. In practice, such things do not happen because there are many players in the market. The thing that silver miners could do is to manage their costs and to maintain a strong fiscal position. Let’s examine the critical parts of Pan American Silver Corp. (USA) (NASDAQ:PAAS)’s balance sheet.
The company has $490 million in cash and short-term investments. This is a 10% decrease from what the company had at the end of the fourth quarter of 2012. Is this sum big enough for the company? Yes–Pan American Silver Corp. (USA) (NASDAQ:PAAS)’s immediate liquidity is twice as much as its quarterly revenue.
We can see the same situation in two other silver miners – Coeur d’Alene Mines Corporation (NYSE:CDE) and Hecla Mining Company (NYSE:HL). Coeur d’Alene Mines Corporation (NYSE:CDE) has cash that is also twice the amount of its quarterly revenue. Hecla Mining Company (NYSE:HL)‘s cash is 2.2 times its quarterly revenue. Why is this important? The amount of liquidity allows a company to survive during the bad times. If a company produces quarterly losses, it can draw additional funds from its own reserves without the necessity to borrow money elsewhere.
The next important thing to mention is that excess money could be used to purchase good assets at depressed prices. Companies with weak balance sheets must sell some of their assets during difficult times to boost their liquidity. Companies with strong balance sheets could enhance their portfolios at reasonable prices.
In fact, Hecla has boosted its portfolio with the acquisition of Aurizon Mines, a gold miner from Canada. Now Hecla Mining Company (NYSE:HL)’s mining portfolio is equally diversified between gold and silver. I think this is a smart move, because gold prices have fallen at a slower pace compared to silver prices.