Making Money From Precious Metal Drops

Ash is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Gold and silver are doing terrible this year. At the time of writing, gold is down more than 17% in 2013, and silver is off by an incredible 22%.

With the massive drops from these precious metals came the massive drops of those who mine them. Silver Wheaton (NYSE: SLW), Freeport-McMoRan (NYSE: FCX), and Barrick Gold (NYSE: ABX) have all been following the industry on the way down.

With all of these mining companies dropping like lead bricks, do we have a buying opportunity? Or should we refrain from catching a falling knife.

Demand for Precious Metals

Looking at the demand for these precious metals is incredibly difficult. They are mostly acquired as a hedge against inflation, or just to get away from fiat currencies. These metals are also used in manufacturing electrical components as well as other industries.

We haven’t really seen a world where these metals have been given up on by all industries that may use them, so their prices with that all stripped out is impossible to guess. Traditional methods of valuation that take into account the returns that assets are able to generate are also useless when it comes to these metals as they essentially do nothing. You’re not going to receive a dividend check from your Kugerrand, and I’m fairly certain your American Silver Eagle isn’t going to generate record profits.

Will They Rebound? Silver Wheaton

To figure out if these companies can rebound, it is best to explore the companies where they stand now. Silver Wheaton, at the time of writing, is down close to 25% over the month. Even with those drops, the company continues to trade with a modest P/E ratio of 13.9. The silver industry as a whole continues to hold a strong 18.1 P/E ratio.

The company outlines their targets for 2017 production on the homepage of their website. In that guidance, they call for 53 million ounces of silver and 180,000 ounces of gold production. Those numbers can be compared to 2013 estimates of 33.5 million for silver and 145,000 for gold.

Silver Wheaton has an advantage over most stocks in the sector in that they don’t explore themselves. The company instead acquires the rights to buy gold and silver from various mines around the world. Silver Wheaton then pays out an operating cost fee of $4 per silver ounce and $400 per gold ounce.

The business model may seem pretty good, and that’s because it is. The twelve months ending December 31, 2012 brought the company some $894 million in sales. $586 million in net earnings was generated from those sales.

I think if any of these companies in this article are able to make it back to steady ground, it will be Silver Wheaton. The company has a lot of upside potential and a decent supply of downside protection. They also happen to pay a dividend that’s yielding 2.45%.


Freeport-McMoRan is the world’s largest publicly traded copper producer. The company also mines for gold and molybdenum.

Over the past month this stock has been beaten up, although not as bad as Silver Wheaton. Total losses for stockholders are right around the 16% mark--that’s a pretty big chunk of change.

Copper is by far the biggest segment of this company. In 2012, it made up for approximately 52% of revenues, while gold made up for close to 8%. The exposure of this company to copper, a very popular industrial metal, is what makes it an attractive buy at these levels.

Freeport-McMoRan has a P/E ratio of 8.85 at the time of writing. That’s below the overall copper market, which has a P/E ratio of 11.4.

Margins on their production are well below those of Silver Wheaton, but they’re still pretty good in their own rights. Net profit margin over the last twelve months came out to 22.08%. Averaged over five years the net profit margin comes out to 9.1% per year.

Growth over the last five years in net income has been running at 2.15%, that’s outpacing the whole copper industry, which is showing negative growth.

Barrick Gold

Barrick Gold is what you get when you flip Freeport-McMoRan upside down. The company mines for both gold and copper but collects a majority of revenue from the former. Almost 87% of the company’s revenues in 2012 came from gold, and that’s worrying considering these turbulent markets.

While sales at this company have been growing year over year for the last decade, total net income has been bouncing around like a yo-yo. Net income in 2012 came out negative, down from $4.48 billion in the prior year.

The turbulent nature of this company and its overexposure to gold are likely the reasons that the stock is off some 34% over the past month. I’m pretty sure that I don’t need to point out how much of a loss that is.

With net income bouncing around the way it does, and the company being overexposed to the price of gold I would have to recommend that potential investors look elsewhere.

Investor Takeaway

If you want into this segment of the market then there is no doubt in my mind that Silver Wheaton is going to be the best place to put your money. The company is not spending money on exploration, one of the biggest expenses that mining companies end up facing to remain prominent. They’ll also continue making money on both metals, even while the market is down, but even more so if prices begin to pick up.

Stay well away from Barrick Gold. Obviously it is hard to trust the price of gold currently, and the only way this company will appreciate in value is if the price of gold gives them good enough margins.

Ash Anderson has no position in any stocks mentioned. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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