Could it be Time to Dump Gold Miners in Favor of These Silver Producers?

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Traditionally, gold is a safe haven asset, or it used to be. Currently, gold is anything but safe. Indeed, the SPDR Gold Trust has a beta of 0.19 indicating that the price of the fund and gold have a positive correlation to the general market. Additionally, the price of gold has hardly been steady in recent times as a combination of Federal Reserve comments and high frequency trading has thrown the price around.

Is it time for gold bugs to give up?

Well it might be, the volatile price of gold would be enough to discourage even the steadiest of investors and the shares of gold miners have been on a steady decline for almost a year now without any signs of staging a turnaround.

Furthermore, these declines could be about to get a lot worse. After the suspension of the development at its Pascua-Lama mine Barrick Gold (NYSE: ABX) has been forced to admit that it will have to take a write-down of $5.5 billion on this one mine alone. Moreover, the company still uses a gold price of $1,500 per ounce to value the price of gold in its mines, paving the way for further write-downs and re-valuations - the company's average cost of production from its Australia Pacific mines is expected to be between $1,200-$1,300 indicating that some of Barricks' production is already unprofitable.

Perhaps it is time to consider sliver?

Compared to gold silver appears to be relatively stable. Indeed, it would appear that silver miners have been much more sensible with the way that they spend their cash and reinvest their profits over the past few years when the times were good. In particular, Hecla mining (NYSE: HL), personally one of my favourite mining stocks on the market.

You see, during 2011 and 2012 when precious metal prices were high, both Barrick and Hecla were pulling in profits, however, closer look at company cash flows reveal a different story.

2011

<table> <thead> <tr><th> </th><th> <p>Barrick</p> </th><th> <p>Hecla</p> </th></tr> </thead> <tbody> <tr> <td> <p>Net operating Cash Flow</p> </td> <td> <p>$5,260</p> </td> <td> <p>$70</p> </td> </tr> <tr> <td> <p>Net Investing Cash Flow</p> </td> <td> <p>-$12,690</p> </td> <td> <p>-$80</p> </td> </tr> <tr> <td> <p>Issuance of debt/ Stock</p> </td> <td> <p>$6,140</p> </td> <td> <p>-$3</p> </td> </tr> <tr> <td> <p>Net Change in Cash</p> </td> <td> <p>-$1,210</p> </td> <td> <p>-$17</p> </td> </tr> </tbody> </table>

Figures in $US millions

Hecla's spending is almost matched with income, while Barrick is spending more than it can afford.

2012

<table> <thead> <tr><th> </th><th> <p>Barrick</p> </th><th> <p>Hecla</p> </th></tr> </thead> <tbody> <tr> <td> <p>Net operating Cash Flow</p> </td> <td> <p>$5,380</p> </td> <td> <p>$69</p> </td> </tr> <tr> <td> <p>Net Investing Cash Flow</p> </td> <td> <p>-$6,500</p> </td> <td> <p>-$116</p> </td> </tr> <tr> <td> <p>Issuance of debt/ Stock</p> </td> <td> <p>$600</p> </td> <td> <p>-$2</p> </td> </tr> <tr> <td> <p>Net Change in Cash</p> </td> <td> <p>-$700</p> </td> <td> <p>-$108</p> </td> </tr> </tbody> </table>

Figures in $US millions

Hecla had a positive cash inflow of $68 million during 2009 and $179 million in 2010, the operating cash flow was impacted during 2011 by a $160 million change in working capital.

Barrick had a positive cash inflow of $1.3 billion in 2009 and $1.45 billion in 2010,but compared to Hecla this was nowhere near as strong. In addition, Barrick has been spending almost double its net income on capital spending and investing activities, which has led to increasing borrowing. In comparison, Helca's spending has been kept under control and borrowing is negligible.

It's not just Barrick and Hecla

This trend continues across the industry and further comparison between gold and silver miners shows the trend continuing. For example, Pan American Silver (NASDAQ: PAAS) and Newmont Mining (NYSE: NEM):

2011

<table> <thead> <tr><th> </th><th> <p>Newmont</p> </th><th> <p>Pan American Silver</p> </th></tr> </thead> <tbody> <tr> <td> <p>Net operating Cash Flow</p> </td> <td> <p>$3,580</p> </td> <td> <p>$355</p> </td> </tr> <tr> <td> <p>Net Investing Cash Flow</p> </td> <td> <p>-$5,070</p> </td> <td> <p>-$175</p> </td> </tr> <tr> <td> <p>Issuance of debt/ Stock</p> </td> <td> <p>-</p> </td> <td> <p>-</p> </td> </tr> <tr> <td> <p>Net Change in Cash</p> </td> <td> <p>-$2,300</p> </td> <td> <p>$82</p> </td> </tr> </tbody> </table>

Figures in $US millions

Pan American had positive cash inflow during 2011 but Newmont spent much more than it could afford.

2012

<table> <thead> <tr><th> </th><th> <p>Newmont</p> </th><th> <p>Pan American Silver</p> </th></tr> </thead> <tbody> <tr> <td> <p>Net operating Cash Flow</p> </td> <td> <p>$2,370</p> </td> <td> <p>$193</p> </td> </tr> <tr> <td> <p>Net Investing Cash Flow</p> </td> <td> <p>-$3,260</p> </td> <td> <p>-$39</p> </td> </tr> <tr> <td> <p>Issuance of debt/ Stock</p> </td> <td> <p>$1,320</p> </td> <td> <p>-$38</p> </td> </tr> <tr> <td> <p>Net Change in Cash</p> </td> <td> <p>-$199</p> </td> <td> <p>$83</p> </td> </tr> </tbody> </table>

Figures in $US millions

For this example I have used Newmont, as the company is facing writedowns as the company uses a price of $1,400 per ounce to value its gold assets.

Like Helca, Pan American has been conservative with its finances and not overspent to rapidly increase output like Newmont. Indeed, Pan American has generated a positive cash flow for the last four years. What's more, for the most part, this change in cash has been stronger than net income signifying the quality of the company's earnings. Newmont on the other hand has not generated a positive cash flow, spending more than it can afford on CAPEX and investing activities - using debt to fill the gaps. 

Foolish Summary

The price of gold and gold mining companies has been volatile over the past year or so. However, in comparison the price of silver has not been subjected to the same kind of push-pull momentum. Additionally, it would appear that silver miners have been much more conservative with their cash, saving to spend on CAPEX rather than borrowing.

All in all, the sun could be setting on gold miners, but silver miners are starting to look attractive.


Fool contributor Rupert Hargreaves 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!

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