Silver Wheaton Corp. (SLW), Pan American Silver Corp. (PAAS) & Hecla Mining Company (HL): Is There Some Silver Lining in Silver Companies?

Page 1 of 2

Silver Wheaton Corp. (USA) (NYSE:SLW)While gold has slipped 27% from its all-time high, many have failed to notice that the price of Silver Wheaton Corp. (NYSE:SLW) has also plummeted almost 50% from its all-time high of $49.5/oz, a level it reached in July of last year. As a result, companies industry-wide are reviewing their capex plans and operating budgets to maximize cash flows. Given the massive year-to-date declines in silver stocks, it is obvious that much of the decline in silver prices has already been priced into Silver Wheaton Corp. (NYSE:SLW) stocks.

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.

Page 1 of 2