5 Silver Stocks to Watch in 2012

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The fundamentals of silver are uncertain as analysts and speculators tend to exert great influence on the price of the metal. On the one hand, silver is used for a broad range of purposes such as jewelry, dentistry, photography, medical equipment, optics and commercial alloys. While the demand for such products will not likely to diminish, silver prices can be heavily influenced by macroeconomic events and the actions of speculators.

Silver, like gold, typically provides safety against market risks. Although the actual commodity is often touted as a hedge against systematic uncertainty, silver companies' stocks are strongly correlated with silver prices and provide an enhanced level of liquidity. Canadian-based silver producers offer great insight into the fundamentals of this market and are an ideal investment for silver bulls.

Silver Wheaton

Silver Wheaton (NYSE: SLW) has a unique business model whereby it purchases the rights to a specified quantity of silver production from a mine. Subsequently, Silver Wheaton partners with a mining company such as Goldcorp or Barrick, which actually operates the mine. Therefore, upfront costs for heavy-duty equipment are minimal. Currently, the corporation has more silver reserves than any other company in the world at approximately 1,800 million ounces. With such high reserves, Silver Wheaton expects 2015 production to reach 43 million ounces.

Silver Standard Resources

Silver Standard Resources (NASDAQ: SSRI) derives 94% of its revenue from silver production, making this company, like Silver Wheaton, almost a pure play on silver. Although the company only produces around 8.2 million ounces per year, it has more reserves than many of its larger competitors. In its third fiscal quarter Silver Standard Resources disappointed investors when it announced that total cash mining costs including royalties and taxes amount to $20.00. However, with increased industry experience in the Pirquitas mine, Silver Standard should see its operations become more efficient in subsequent quarters.  

Pan American Silver

Pan American Silver (NASDAQ: PAAS) produced 5.6 million ounces in its last reported quarter at an average cash cost of $9.58 per ounce. Although operations in the Quircuvilca mine were cash heavy, production here only accounted for 200,000 ounces. Pan American Silver has a strong balance sheet with $485 million in cash, a net working surplus of $626 million and does not hold any outstanding debt. The firm has been actively involved in share repurchase programs and offers investors a small dividend. Only 76% of the firm's revenue is leveraged to silver; gold accounts for 12% of the portfolio, with the remainder in zinc, lead and copper.

Silvercorp Metals

Unlike many other silver producers, which tend to focus their operations on Canada and South America, Silvercorp Metals (NYSE: SVM) has an established business in China. Among its industry peers, this producer has the lowest cash costs of production and the highest gross profit margins in the space at 75%. For comparison, Silver Wheaton has the second best margins of only 68%. China presents numerous advantages such as low capital costs and proximity to market, thus reducing transportation fees. This low-cost operator also has no debt and pays an annual dividend of 10 cents.

First Majestic Silver Corp

First Majestic Silver Corp. (NYSE: AG) has appreciated by 37% within the last year, following a collapse in its stock price during the financial crisis.  2011 silver production, however, reached record levels of 7.6 million ounces and also set a quarterly record of 1.96 million ounces in Q4. Total quarterly production surged by 17%, with a 15% jump in silver, which makes up the majority of the firm's asset mix. Gold, zinc, iron ore, diamonds, and lead make up a smaller portion of First Majestic's operations. Silver production has consistently been setting record highs over the past eight years as new mines are discovered and First Majestic rides along the learning curve.

Conclusions

Investors looking to capitalize from the silver trend should investigate these stocks.


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