Is Silver in Mint Condition?

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

Every cloud has its silver lining, but it is sometimes a little difficult to get it to the mint.

Don Marquis (Author, 1878-1937)

What's up with silver and silver companies for 2013 and beyond? A look at past performance, as well as forecasts already made, is giving investors some indication. Is silver in mint condition, or are there caveats to consider before taking a shine to a major silver company?

5 things for investors to consider concerning silver companies include:

1. Forecast Demand

According to a recent article on The Wall Street Journal's Market Watch page (Feb. 13, 2013, by Sara Sjolin), HSBC sees demand for silver rising in 2013 and 2014. HSBC'S chief precious metals analyst James Steel believes silver prices will go up in the years ahead due to higher industrial demand, steady investor desire for hard assets, strong coin and bar purchases, and a bottoming out of demand for jewelry.

Good old supply and demand and the benefits for investors when they see silver prices rise. Moreover, David Morgan of goldsilverworlds.com noted in an article on the site (Dec. 12, 2012) that he expects this year to be a bullish one for silver prices. He also noted, "Paper currencies are losing value over time, and today even more significantly than ever before."

2. New Silver Production

Investors may want to research companies who have new silver production, or production soon coming on line. First Majestic Silver (NYSE: AG) announced in January 2013 that its Del Toro Silver Mine, located in the state of Zacatecas, Mexico, achieved initial silver production.

Keith Neumeyer, President and CEO of First Majestic Silver, stated; "The start-up of the Del Toro Silver Mine marks a very important milestone for First Majestic. This year, the Company will celebrate its 10 year anniversary by breaking through 10 million ounces of silver production as a result of Del Toro coming on stream."

Of note for investors is the company's aggressive growth policy. First Majestic is insistently pursuing their business plan of becoming a senior silver producer. They are working to accomplish this objective via the development of their existing mineral properties and the pursuit of additional mineral assets through acquisition.

3. Other Revenue Streams for Silver Companies

Silver Wheaton  (NYSE: SLW), the largest metals streaming company in the world, garners more than 90% of its revenue from the sale of silver. The Company has a portfolio of low-cost and long-life assets, which include silver and precious metal streams on Barrick's Pascua-Lama project and Hudbay's flagship 777 mine and Constancia project.

In February 2013, Silver Wheaton announced that it entered into a binding term sheet to acquire, from a subsidiary of Vale S.A., an amount of gold equal to 25 percent of the life of mine gold production from their Salobo Mine, located in Brazil. They will also acquire 70 percent of the gold production, for a 20-year term, from certain of Vale's Sudbury Mines located in Canada.

What should investors take from this? They should consider the positives of Silver Wheaton straight away increasing their production and cash flow profile. Greater cash flow is a wonderful thing for investors. It allows companies to put in place programs they desire that will grow their businesses further.

4. Record Production…or at Least Greater Production

A signal to investors of potential greater cash flows, revenue, and profits is a company's production – recent numbers and future forecasts. Pan American Silver (NASDAQ: PAAS) recently announced that it produced a record 6.9 million ounces of silver during the fourth quarter of 2012. This thrust Pan American to a new annual production record of 25.1 million ounces for the full year, representing an increase of 15 percent from 2011.

To add to its trophy case, Pan American also produced a record 32,381 ounces of gold during the fourth quarter of 2012. This grew annual gold production to 112,283 ounces, which is also a new record for the Company, representing an increase of 43 percent from 2011. The company is forecasting increases in production as noted below.

5. Cash Costs

For investors researching companies such as the above, due diligence involves checking out their cash costs. Pan American Silver achieved their targets for silver production and cash costs during the fourth quarter and for the full year. This shows the company's commitment to reining in expenses as they build production.

Geoff Burns, President and CEO of Pan American, commented, "We are expecting 2013 to be even better, as we are forecasting increases in both our silver and gold production while our cash costs per ounce remain basically unchanged."

Silver Wheaton had average cash costs in the third quarter of 2012 of US$4.161 per silver equivalent ounce, compared to US$4.121 during the comparable period of 2011. This resulted in cash operating margins of US$27.201 per silver equivalent ounce. This represented a 15% decrease compared to the third quarter of 2011. This was mainly due to a 13% decrease in the realized price per silver equivalent ounce.

Silver certainly has the potential to be in mint condition for the next few years. However, for silver companies, controlling cash costs are a never-ending conundrum. Therefore, for investors, it's wise to consider this insightful advice, as Mary Kay Ash (American businesswoman, 1918-2001) once said, "Every silver lining has a cloud."


MichaelONTARIO has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!

blog comments powered by Disqus