Why You Must Research Silver Miners Carefully

Source: http://www.flickr.com/photos/sirqitous/

Now is an excellent time to consider purchasing shares in quality silver mining companies. The price of silver is down nearly 60 percent from its 2011 peak of $48/ounce, and silver mining shares are down as much if not more. Many silver mining stocks are pricing in a disaster because these companies simply cannot turn a profit at $20/ounce silver. But because of this, the price of silver has to rise or else there will be no profit incentive to produce this vital commodity.

However, before buying shares in a company because it calls itself a silver miner or has the word “silver” in its name, do some research first — you may not be getting as much exposure to silver as you expect! The fact of the matter is that silver is, more often than not, mined as a by-product of other metals (e.g. copper, nickel, gold, zinc, and lead), and “primary” silver mines can often get just 60 percent to 70 percent of their revenues from silver.

This isn’t bad in itself, and these companies can do extremely well. But if you want exposure to the silver price you need to make sure you are getting it. Here are a few examples of so-called “silver miners” that have significant exposure to other metals.

SilverCrest Mines, SVLC

Despite the company’s name it’s one producing mine — Santa Elena — produces more gold than silver. Nevertheless, the company still reports its production in “silver-equivalent ounces.” Its next major project to go into production — La Joya — will get about 50 percent of its sales from silver assuming the gold/silver and copper/silver ratios remain where they are.

Silver Wheaton (NYSE:SLW)

Silver Wheaton is the only silver streaming company. It has been a favorite of silver investors because it has low fixed costs, high growth, and diversification. However, the company recently made a very large deal with Vale (NYSE:VALE) for a gold stream that will lower the company’s exposure to silver from 90 percent of revenues to about 75 percent of revenues.

Pan American Silver (NASDAQ:PAAS)

Pan American Silver gets only about 70 percent of its revenues from silver, despite the name of the company. The list can go on — but the point is made.

There are, however, a couple of companies that offer purer exposure to silver. The first is First Majestic Silver (NYSE:AG). First Majestic buys late-stage exploration and development stage mines that fit the following three criteria.

  • The mine has high exposure to silver.
  • The mine is located in Mexico.
  • The mine should have low production costs.

As a result, First Majestic gets more than 90 percent of its revenues from silver. Furthermore, it has remained profitable despite the downturn in the silver price. Unfortunately, investors appreciate First Majestic’s achievements and the stock is somewhat expensive relative to its peers, although it still offers good value at the current price, especially if you believe that the silver price will rise.

The second company is Tahoe Resources (or, TAHO). Tahoe Resources owns a huge silver project — Escobal — in Guatemala that is on the verge of production. It should have extremely low production costs and generate 85 percent of its revenues from silver. Several investors have expressed concern that the locals are against the project, and that they may be able to delay or prevent production. However, these fears have been over-exaggerated, and this has been evidenced by the strong performance in Tahoe’s share price as of late — Tahoe shares have substantially outperformed other silver miners.

Ultimately, investors who want exposure to silver should simply buy silver. But more aggressive investors will undoubtedly want the leverage offered by silver mining companies. For those who do a little research into the composition of a silver miner’s mineral resource base, it goes a long way.