Commodities have been on a tear in the second half of 2010. Measured by the venerable CCI, the commodities patch has posted record highs in just this last week. In this impressive run the usual suspects have all performed well. From wheat, to oil, to copper, to gold, the gains have been stellar. But one commodity in particular has outshined the rest, silver.
From its July low of $17.51, silver has blasted through its 2008 bull high of $20.77 to recently breach the $30 level for the first time in 30 years. This 73% gain in just five months has been simply amazing. And it sure has captured the markets’ attention.
Even though silver has a tiny capital market relative to other commodities, its staggering gains have warranted face time in the mainstream financial media and have captivated investors. Gun-slinging futures traders, institutional investors, and retail investors alike have taken notice of this shiny-white metal.
Many investors have acted on silver’s newfound notoriety by jumping onboard the SLV Silver ETF. Backed by a physical trust and designed to track silver’s real-time price, SLV gives stock investors an easy way to obtain exposure to this hot commodity. And silver’s recent run has boosted SLV’s holdings to exceed 350m ounces, a 55m-ounce bump over July levels!
But for stock investors willing to take on a bit more risk, with the potential to reap huge rewards, silver-mining stocks are the way to go. And this sector has also captured a lot of interest in recent months. This interest has transpired into some impressive gains thus far, and if silver prices stay high there should be more big gains to come.
But while investors have been clamoring to own silver stocks, unfortunately most don’t know where to look. In fact, the average investor probably can’t even name a single silver company. Only a small fringe of contrarian investors who have been attuned to the silver-stock scene throughout silver’s secular bull are familiar with these companies.
At Zeal we are among this small fringe, and have been successfully trading these companies since this bull’s beginning. And in this last decade or so we’ve seen a lot of growth in this small sector. Back in 2001 when we first started buying silver stocks there were only a handful to choose from, and now there are about 100 listed in the US and Canada.
But while the choices are more expansive, there is still only a select minority that I would consider high-caliber companies. And this was confirmed upon the completion of our latest round of research that feeds the profiling of our favorite dozen silver stocks.
In performing this research we dig into the fundamentals of each company and scrub them against their peers. We look at such areas as the geological quality of assets, operational efficiency, geopolitics, management, financials, and more. And when all is said and done the crème-de-la-crème emerge.
While we are super-excited about the future potential of our latest favorites, after this latest round of research I was again left wondering why there aren’t more quality silver stocks. Silver still has awesome strategic fundamentals, and the mining of this metal can be very profitable. But out of the 100 or so stocks in our pool less than a quarter are producers, with a large contingent of the explorers pure rubbish. And measured by market capitalization, this entire group is still nothing but a speck in the giant stock world.
Of all the silver stocks listed in the US and Canada, the simple-average market capitalization is only about $300m. And when you take out the top seven major producers, this average drops to about $100m. Stocks this small don’t even show up on most traders’ radars.
Aside from the obvious deduction surrounding the smaller size of the silver market (2010 mine production is valued at approximately $14b), I’ve observed a couple of other major reasons for the lack in number and quality of silver exploration and mining companies. First is the general nature of silver’s geology. And second, feeding off the first, is what I refer to as “going for the gold”.
As for geology, you’ll notice the use of the word “primary” when looking at the industry as a whole and also sifting through individual silver stocks. Believe it or not, it is actually quite uncommon to find a mineral deposit where silver is the primary source of revenue. The majority of mined silver supply comes from operations where other metals generate greater revenue. High concentrations of lead, zinc, copper, and/or gold mineralization are often found in the ore that contains silver.
It is estimated that only about a quarter of mined silver actually comes from primary silver mines. And even in many of the mines where silver is the primary metal, they are far from pure. Many silver mines have very strong byproducts of the metals mentioned above (the silver miners definitely don’t mind this since these byproduct revenues act as credits towards silver’s operating costs).
As a result of silver’s geological characteristics, the development path of a primary silver company is quite different than most mining companies. All too often a company in search of silver finds a deposit that has a higher concentration of other metals. It thus ends up being a primary explorer and/or producer of a metal other than silver.
On the flip side of the coin, many of the silver companies we see today actually started out in search of other metals and happened to stumble upon a primary silver deposit. You’ll also find that several of today’s silver companies procured their projects via divestitures from larger non-silver companies that happened upon a primary silver deposit.
These various development paths mixed with unfavorable primary-silver geology lead to what I believe is the next major reason for a lack of quality silver companies, the “go for the gold” mentality. Simply put, if you are an entrepreneurial geologist looking to make a discovery and grow a mining company, why not go after the metals that will generate higher revenue streams?
And this is exactly what we are seeing when it comes to the major precious metals. You wouldn’t think this to be the case with annual gold production volume only about a tenth that of silver (75m ounces versus 710m ounces). But at Zeal our gold-stock database now tops 600 companies, with new ones hitting the scene almost daily.
For a variety of reasons there are indeed vastly more gold stocks than there are silver stocks. Fundamental and geological differentiations are of course a major reason, but another big reason is emerging miners simply can’t resist gold’s larger revenue potential. Based on price, gold dominates with a single ounce of this metal equivalent in value to about 47 ounces of silver.
To put it in a different perspective, let’s say a company develops a 100k-ounce-per-year gold mine. In the gold-mining industry this is considered a very small-scale operation, but at $1200 gold it would generate annual revenue of an impressive $120m. What would it take to get this kind of revenue in silver terms? At $20 silver a primary silver mine would need to generate annual volume of 6m ounces to achieve this same revenue.
A lot more silver is produced each year than gold, so this shouldn’t be a problem, right? Well, circling back around to geology you’ll find that primary silver mines producing at this volume are extremely rare. In fact, they are so rare that only 10 exist in the entire world. And provocatively if lead prices hadn’t fallen so sharply in recent years, some of these mines would fall off this list.
This example only offers a gold perspective, whereas many of today’s best geologists and their emerging mining companies target other non-silver metals as well. So what are we to make of this? The simple answer is in reality most mining companies just don’t target silver as their primary revenue generator. The geology doesn’t make it a high-probability play and the money isn’t as lucrative as the more popular precious metal. Most emerging miners go for the gold.
But those companies that can make a living focused on silver, the elite bunch that own the handful of current and future primary silver mines, are in excellent position considering the fortunes of their underlying metal. You see, revenues shouldn’t actually matter when it comes to shareholder returns. When the price of its primary metal shoots markedly higher, even a small silver company will see the value of its deposit and/or margins on its production greatly improve, thus greatly boosting its stock price.
And speaking of margins, silver miners have been blowing the other metals out of the water lately. With industry average cash operating costs at about $500 for gold and $6 for silver, at today’s prices the average gold miner is seeing a gross margin of about 64% whereas the average silver miner is seeing a gross margin of 80%. This is a major difference!
So even though the value of your average primary-silver deposit is less than your average gold deposit, the revenue streams of your average silver mine are less than your average gold mine, there are fewer stocks to choose from, and these stocks tend to be smaller measured by market cap, silver stocks still hold awesome growth potential. And this potential is starting to be recognized, with this sector currently among the hottest in all the markets.
Investors are hungry for silver stocks capable of positively leveraging the performance of their underlying metal. And if they diligently research this arena they’ll find several good stocks that hold huge potential going forward. But this is the hang-up for most investors, the tedious and painstaking research front. Where does one look to find these elusive silver stocks?
Thankfully some world-class research is easily obtainable in our brand-new hot-off-the-presses Favorite Silver Stocks Research Report. After completing a successful series of reports profiling our favorite junior gold stocks, our updated silver-stocks report comes with much fanfare. With all 12 stocks in our previous silver-stocks report (June 2009) currently showing positive gains, averaging +238% through this week, our faithful report customers have been pleading for an update. And we are incredibly excited about the future potential of our latest favorites.
These favorites range from small juniors to large producers, and they own some of the world’s finest primary silver deposits. These stocks are well-positioned to thrive over the course of silver’s ongoing secular bull. Buy your report today, and you can have the detailed fundamental profiles of each of these elite stocks right at your fingertips.
And if you need help with the timing of your silver-stock trades, I would encourage you to consider subscriptions to our acclaimed weekly and monthly newsletters. The average annualized gains of our realized 2010 silver-stock trades are a mind-blowing +103%. With results like these, how could you afford not to subscribe? Join us today for cutting-edge market analysis and high-probability-for-success trade recommendations.
The bottom line is silver sure has been one hot commodity. Its staggering gains in just the last five months have sent it roaring through its bull highs, to a level not seen in 30 years. And investors are finally starting to take notice of this white metal. Stock investors looking to ride the silver train have consequently been clamoring to own silver stocks.
And investors who are able to find the elite quality stocks that hold the currently-producing and next-generation primary silver deposits have and will be greatly rewarded. These intrepid mining companies have prevailed over the geological challenges inherent in the ore that holds their silver, and are well-positioned to cash in on this ongoing bull.
December 31, 2010
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