Try This Silver Miner for Its Solid Balance Sheet

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

Silver prices have been in a free fall since the beginning of February. Shares of silver miners have been falling at an even faster rate. Silver is not an asset that can fall forever because the world needs silver for various reasons. Silver is widely used in technology, jewelry, tableware and for the production of coins and medals. You can use two main approaches when considering which silver miner to examine.

First, you can try to investigate the most punished stocks. If these stocks are fundamentally sound, chances are that they would rise at a faster pace when the rebound occurs. The alternate approach is to examine the least-punished stocks, considering them the safest and best ones.

Recent results

Pan American Silver (NASDAQ: PAAS) belongs in the second group. The stock is down “only” 35% year-to-date. The company has mining operations in Mexico, Peru, Argentina and Bolivia, and recently reported its first-quarter earnings. The report came in better than expected. Pan American Silver reported earnings of $0.26 per share versus analysts’ estimates of $0.25 per share. Silver production increased 14% while revenue rose 6%, all in comparison with the first quarter of 2012. Pan American Silver sold silver for the average price of $30.11 in the first quarter.

Solid position

Silver miners cannot influence the single most important variable in their business – the price of silver. In theory, they can curb production to reduce supply. In practice, such things do not happen because there are many players in the market. The thing that silver miners could do is to manage their costs and to maintain a strong fiscal position. Let’s examine the critical parts of Pan American Silver’s balance sheet.

The company has $490 million in cash and short-term investments. This is a 10% decrease from what the company had at the end of the fourth quarter of 2012. Is this sum big enough for the company? Yes--Pan American Silver’s immediate liquidity is twice as much as its quarterly revenue.

We can see the same situation in two other silver miners – Coeur d’Alene Mines (NYSE: CDE) and Hecla Mining (NYSE: HL). Coeur d’Alene has cash that is also twice the amount of its quarterly revenue. Hecla‘s cash is 2.2 times its quarterly revenue. Why is this important? The amount of liquidity allows a company to survive during the bad times. If a company produces quarterly losses, it can draw additional funds from its own reserves without the necessity to borrow money elsewhere.

Balance sheet

The next important thing to mention is that excess money could be used to purchase good assets at depressed prices. Companies with weak balance sheets must sell some of their assets during difficult times to boost their liquidity. Companies with strong balance sheets could enhance their portfolios at reasonable prices.

In fact, Hecla has boosted its portfolio with the acquisition of Aurizon Mines, a gold miner from Canada. Now Hecla's mining portfolio is equally diversified between gold and silver. I think this is a smart move, because gold prices have fallen at a slower pace compared to silver prices. 

Coeur d'Alene's management is more cautious about buying opportunities and is focused on current operations. Coeur d'Alene is more focused on the reduction of costs, which is a good bet given low silver prices. The company has updated its full-year cash operating cost guidance to between $9.50 and $10.50 per silver ounce. In comparison, Pan American Silver's cash costs were $11.33 in the first quarter, so Coeur d'Alene seems to be doing a good job. 

During the earnings call, Geoffrey A. Burns, CEO of Pan American Silver, said that the company would look aggressively for opportunities to strengthen its asset portfolio while asset valuations are depressed.

The next thing to look for is debt. Pan American Silver is almost debt-free. Its debt consists of $8.8 million in long-term capital lease obligations and $36.8 million in convertible notes. The debt-to-equity ratio, which indicates which proportion shareholders equity is financed with debt, is 0.02 for Pan American Silver. Hecla Mining has recently borrowed $500 million of debt in a very successful offering. Coeur d’Alene also has debt, with a debt-to equity ratio of 0.1.

Bottom line

Pan American Silver looks attractive at current levels. The stock trades at an 11.1 forward P/E. Hecla, which is down 40% year-to-date, trades at an 8.4 forward P/E, while Coeur d’Alene trades at a 10.18 forward P/E.

Don't forget that estimates change over time. Earnings estimates for Pan American Silver have dropped 43% during the last 90 days. We see the same picture in Hecla, whose estimates dropped 47%, and in Coeur d’Alene, whose estimates have declined 65%.

The sole reason for this was the drop in the silver prices. If prices rose, the estimates would rise, too. Pan American Silver has a very sound balance sheet that will allow the company to stay healthy during the hard times. I expect that the company will make use of the money that it has and purchase some assets.

Hecla and Coeur d’Alene are interesting, too. Pan American Silver is well positioned to prosper when silver prices recover. Silver is an asset that is volatile and subject to speculation. When there is more evidence of the world’s economy improving, silver prices will rise at the same pace at which they fell. And so will the prices of the silver miners.

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Vladimir Zernov 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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