Issue 36 / Apr 15, 2013

Silver - The Super Conductor

Silver is the underdog of the precious metals and it has more bite, more beta than the others. It jumps higher and dives lower. Silver speculation somehow goes straight through the vein to the brain and lights up the gambling neurons like a pinball. Silver bugs can make gold bugs look like bankers.

American Silver Eagle Coin

But for all its speculative charm, in reality silver is an industrial metal. 52% of the world’s silver production is used in manufacturing electronic items – TV’s, fridges, cellphones, etc. There are more patents issued every year for products using silver, than for all the other metals combined.

The reason for this widespread use is conductivity. Silver has the best electrical and thermal conductivity of all metals. And that’s the reason that a really big use of silver these days is in solar panels – to conduct electricity produced by solar cells to where it needs to go.

According to The Silver Institute, worldwide use of silver in the production of solar panels will total 100 million ounces a year by 2015 – roughly equal to 13% of total current mine production. Solar panel manufacturers have actually cut down on the silver paste used in panels because of higher silver prices in recent years. The 100 million ounces a year is the silver being used at the reduced rate.

Silver is highly prized in coins and jewellery, valued for thousands of years around the world as a precious metal. It is also the king of useful industrial metals in our electronic age. And because of its necessity in making solar panels, silver is arguably the greenest of metals.

But despite its value and all of its uses, the stocks of companies that mine for silver have been demolished in recent months, culminating with a real pukefest on Friday. Silver speculators – more in the stocks than in the metal itself – have been feeling squeamish lately.

Now the stocks of silver producing companies are bargains.   Here are three examples of bargain silver stocks.

Endeavour Silver Corp.

Endeavour Silver is a mid-tier silver producer, that has been expanding mightily.  Endeavour has grown its silver production by almost 1000% in the past seven years. The company has three producing mines in Mexico and a number of good exploration projects.

In 2012, Endeavour’s three mines produced 4.48 million ounces of silver and 38.5 thousand ounces of gold. The company’s third mine in Mexico is just ramping up to full production, so 2013 will show bigger production numbers.

The first quarter production numbers released last week showed that the company produced 1.49 million ounces of silver and 15,000 ouonces of gold. Endeavour expects to produce over 5 million ounces of silver and over 46,000 ounces of gold this year, and is well on its way to meet those targets.

Endeavour Silver has a total in all of its current properties of 142.7 million ounces of silver reserves and resources in different categories. And 1.27 million ounces of gold for good measure.

Endeavour has just under 100 million shares out. So the reserve numbers represent  about 1.43 ounces of silver reserves in the ground per share plus a third of a gram of gold.

Endeavour Silver 52 Week Chart: Source - Bigcharts.com

Endeavour has the money to grow. – about $45 million US in working capital and only $9 million in debt. Operating cash flow last year was $82.9 million or 83 cents a share. In the first quarter of 2013, Endeavour's revenues were $70 million - a 42% increase over last year.

The stock closed at $5.57 in New York after Fiday's precious metal meltdown. Down from the 52 week high of $10.73. The company  is ambitious and opportunistic. Endeavour wants to get bigger - to grow from a mid-tier to a first tier silver producer. Endeavour has the money to expand, but it has been prudent in every step that it grows.

SilverCrest Mines Inc.

SilverCrest Mines is another Canadian mining company that has opened a silver mine in Mexico in recent years.  The company is operating the Santa Elena mine in the State of Sonora in northern Mexico. This 100% owned open pit silver and gold mine has been making good money for SilverCrest since it began operations early in 2011. Last year’s revenues were over $70 million US, which translated to cash flow of $40 million or 44 cents a share . The stock closed at $2.18 on the TSX on Friday.

Production at Santa Elena has exceeded expectations. In 2013 SilverCrest expects to produce 625,000 ounces of silver and 33,000 ounces of gold from the mine. The strong cash flow helped the company retire hedge positions put in place to finance the mine. SilverCrest is now a completely unhedged producer.

Besides the smooth operations and strong cash flow, there is positive exploration news at Santa Elena as well. This year, SilverCrest has drilled below and parallel to the pit and has found new high grade zones that are adding to the reserves of silver and gold at the mine. Production of silver and gold at Santa Elena will be extended and increased as a result of these exploration successes.

And the company is more than a one trick pony. SilverCrest has been exploring other properties in Mexico with good success.  The La Joya property in the state of Durango has been proven to contain big reserves of silver, gold and copper. The mineral deposit is amenable to open pit mining. SilverCrest will now start work on a preliminary economic assessment of a mine at La Joya.

SilverCrest has been able to raise funds and pay back loans ahead of schedule, bring in a healthy producing mine on budget, have strong cash flow, and find exciting  new properties to expand production in the future. Those are the keys to a great new mining company.

Fortuna Silver Mines Inc.

Fortuna Silver started mining in recent years in another traditional silver producing country – Peru . The company purchased and re-opened the Caylloma mine in 2006. The Caylloma mine is situated in a district that has seen silver production since Spanish colonial times – the district has produced over 200  million ounces of silver.

The Caylloma mine produced just over 2 million ounces of silver and 2,700 ounces of gold in 2012. As well, the mine produced lots of base metals – 17.9 million pounds of lead and 22.4 million pounds of zinc.

Fortuna is eager to expand, and in 2011 the company opened the San Jose mine in the state of Oaxaca in Mexico. Unlike giant mines being built by major producers around the world that cost $billions and have huge cost overruns, the San Jose mine came in on time and on budget.

San Jose produced just under 2 million ounces of silver and 17,900 ounces of gold in 2012. In 2012, Fortuna increased earnings and cash flow by 56% over 2011. Cash flow was 50 cents per share. The stock closed Friday at $3.57 in New York.

This year, Fortuna expects to produce 4.4 million ounces of silver and 23,300 ounces of gold plus base metals. Fortuna has high hopes for the future at San Jose and  Caylloma. The company has an ambitious exploration program at both its mine sites to find more silver and increase production in the future from these properties.

Like the other two companies mentioned above, Fortuna has a nice shiny balance sheet. The company had $65 million in cash and short term investments at the end of 2012, and no debt. Fortuna has the capital to expand and that is critical at a time when mine financing is hard to get.

Many silver producing stocks are cheap right now. First Majestic, Great Panther, Silver Wheaton are bargains. There are others.

What could go wrong with silver? We could have an even bigger recession or depression and that would reduce the industrial requirements for the metal, and possibly further hurt the prices of all precious metals.

On the other hand, worldwide competitive money printing could get completely out of hand and the price of silver could go through the roof. The price of the metal could go so high that eventually silver might be replaced by other, cheaper metals for some industrial uses.

Of course, silver bugs would happily live with that problem and it would mean that the stocks of silver miners will jump considerably higher. When the silver bug juices get cranked up – watch out.

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“Vamos a la playa, caliente el sol.” After a long winter, I’m off to the beach in Mexico for bit of global warming. The next issue of the Green Miner will be posted in early May.

 

These opinions and analysis are based on data available at the time of writing, obtained  from various sources believed to be reliable, complete and accurate. However, it may contain errors.  No guarantee is made by the author as to the reliability, and accuracy of the information.

David Zgodzinski's opinions are his own, and are not a recommendation or an offer to purchase or sell any securities. David Zgodzinski  is not a Registered Securities Advisor.  Investing in any financial markets may involve serious risks.  The author suggests you consult a qualified investment advisor and do your own due diligence and research when making any investment.

The author may from time to time buy or sell the stocks of companies mentioned in this publication.