Seeking Alpha: Silver Wheaton Still Looks Like A Quality Option

Investors have plenty of options for investing in silver, including silver miners like Fortuna Silver Mines (NYSE:FSM), Pan American Silver (NASDAQ:PAAS), and Coeur Mining (NYSE:CDE), bullion ETFs (as well as mining ETFs), physical bullion, numismatic silver, and so on. Amidst those options, I think streaming specialist Silver Wheaton (NYSE:SLW) remains a strong candidate, given its low fixed cost structure, attractive balance sheet/liquidity, and disciplined approach. Although weaker silver prices and producer missteps are both threats, weaker prices would at least potentially create more streaming opportunities to generate long-term value.

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Silver Wheaton Still Looks Like A Quality Option

Seeking Alpha: Should Investors Press Their Luck With Fortuna Silver?

Eight months ago I thought Fortuna Silver (NYSE:FSM) was one of the best plays on silver out there in the market, and the performance of the shares has backed up on that idea. Even with a recent pullback of more than 10%, these shares are up almost 90% from late December of 2013 and the comparisons with the likes of Silver Wheaton (NYSE:SLW), Pan American Silver (NASDAQ:PAAS), First Majestic (NYSE:AG), and Fresnillo (OTCPK:FNLPF) aren't even all that close.

So what now? I do like the significant improvements that the company has made in reducing costs - where I thought 20% reductions in cash operating costs were possible, management has delivered 30%. Better still, the company's drilling program at Trinidad North continues to suggest significant reserve expansion and mining potential here. I openly acknowledge that I underestimated management's cost-cutting abilities and may be doing so again, but I think valuation is less compelling today. If you believe that mining stocks can still support historical NAV premiums of 1.5x or more, the shares still offer upside (and on EV/EBITDA as well), but I take a more conservative approach and don't see nearly as much value remaining in these shares today.

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Should Investors Press Their Luck With Fortuna Silver?

Seeking Alpha: Quality Doesn't Come Dirt-Cheap With Franco-Nevada

I'm not a gold bug by any stretch, but I do like the basic business model pursued by precious metal royalty companies like Franco-Nevada (FNV), Royal Gold (RGLD), and Silver Wheaton (SLW). By providing financing to mining companies and getting a low-cost cut of their metal production in exchange, these companies offer leverage to precious metal prices and better diversification of operating risks. They're also something of a "heads I win, tails I don't really lose" proposition, as periods of weaker metal prices limit miners' financing options and allow royalty companies to set up new agreements on better terms.

The long and short of it is that I believe Franco-Nevada offers a pretty efficient way to gain exposure to precious metals. The company has generally outperformed gold in good times and bad and also offers a dividend stream - addressing one of the major complaints with precious metal investments. These shares are not exactly cheap at around 1.9x NAV, but that's a little below the middle of the historical range for a company with a good operating history and solid production growth prospects in the future.

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Quality Doesn't Come Dirt-Cheap With Franco-Nevada

Seeking Alpha: Delays And Soft Guidance Dent HudBay, But There's Still Value Here

I wrote about HudBay (HBM) as an Alpha-Rich investment candidate back in July of this year, and with the stock up more than 20% (against 8% for the S&P 500), it has been a decent call. To be fair, though, picking a beaten-down mining stock in the summer of this year was a good move in general and investors in companies like Teck (TCK), Freeport McMoRan (FCX), and Rio Tinto (RIO) have also done pretty well over that same period.

I continue to believe that HudBay is a well-run and substantially undervalued mining company with high-value assets like Constancia (CP) and Lalor Lake (Lalor) likely to significantly increase production, revenue, and profits in the coming years. Unfortunately, while the stock has worked reasonably well, the company has seen some of the construction and development setbacks that are common to the industry. Higher costs at Lalor, cost overruns at CP, and some shuffling around of capex priorities do lead me to trim my NAV estimate for the stock, but I still believe this is a significantly undervalued stock.

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Delays And Soft Guidance Dent HudBay, But There's Still Value Here

Investopedia: Can Alexco Pick Up The Pace?

The universe of mining stocks has certainly changed over the past decade. The popularity of pure bullion ETFs, such as the SPDR Gold Shares (ARCA:GLD) and iShares Silver Trust (ARCA:SLV), has given investors the option of bypassing the agonies and ecstasies of individual companies in achieving exposure to precious metals. That said, well-run mining companies can still offer alpha to investors. The question, however, is whether Alexco Resource Corp (AMEX:AXU) deserves to be called "well-run" and whether it can achieve its production and cost efficiency goals.

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Heavy Metal

I'm wondering if this little mini-meltdown in commodity names has any real legs to it. One of my bigger regrets from 2010 is that I couldn't manage to part with any of my current holdings and make room for some quality "stuff" companies. If we could get a nice little correction in materials stocks, though, I'd be happy to do some cherry-picking. After all, I do happen to believe that there is a general link that goes something like "higher global growth = higher commodity prices" - at least for the next few years, at any rate, and before a lot of major new capacity/supply comes on line.

I am not all that interested in gold at this point. There are just too many nuts still beating the "you'll all be sorry when the dollar goes to zero" drum for me to be comfortable with it. I prefer to swim alone and there are just too many other people in the gold pool these days.

Silver and platinum are different stories, though, and I might be interested in Silver Wheaton (NYSE: SLW) or Impala (Nasdaq: IMPUY). I need to do more work on SLW, particularly with respect to what sort of future silver price is baked into the stock today. As for Impala ... well, this may be a name where I just have to swallow hard and hope for the best.

A lot of Impala's future value is predicated on resources in Zimbabwe and that looks like a dangerous bet to me. Zimbabwe's dictator Robert Mugabe (who is theoretically part of a "power sharing" arrangement so not technically a dictator) is a pretty awful fellow even by the low standards of Africa and I don't see how any investor can ever be completely comfortable with a thesis that rests on Mugabe respecting law and honoring contracts. Then again, maybe Mugabe would think twice about messing with a South African company; alienating the West is one thing as they are not likely to interfere directly in Zimbabwe's affairs. South Africa can, and given the right provocation, probably would.

Beyond this, though, there is a short list of names I'm following closely.

Freeport-McMoRan (NYSE: FCX) - owner of one of the best mines in the world, and a major player in copper and gold (as well as molybdenum).

OM Group (NYSE: OMG) - traditionally a player in cobalt, but trying to move into more advanced materials as well.

Vale (Nasdaq: VALE) - a huge Brazilian mining company with interests in iron ore, nickel, potash, and many other resources. I'm not sure any company in the world has a more aggressive expansion plan over the next five years than Vale.

Xstrata (XTA.L) - a global miner of copper, coal, nickel, lead, and alloys.

Thompson Creek (NYSE: TC) - long a player in molybdenum, the company is expanding into gold and copper.

Teck Resources (NYSE: TCK) - met coal, copper, zinc - Teck is leveraged to some of the best commodities for ongoing industrial growth in the developing world.

These are the major names I'm circling right now and hoping that the stocks fall to me. I'm also looking at a host of junior miners in a variety of metals (gold, zinc, potash, etc), but this post is already running on the longish side. When I come up with some actionable ideas there, I'll write a separate post.

OM Group is cheap enough to interest me today and Freeport McMoRan is oh-so-close. I'd need to see about a 10% pullback in the other names to get really excited, though, and maybe actually a bit more with Thompson Creek. Of course, trying to really get a firm sense of fair value on these companies is almost fatuous - I just generally try to pay less than 7x forward EBITDA and pay attention to the underlying commodity charts (as well as the growth in emerging economies and general investor sentiment). After all, why waste my time trying to be precisely wrong instead of vaguely right?

So maybe I get lucky and get to add some quality materials names at attractive prices. Time will tell...

2010 - The Year Silver Caught Up

Gold has a special hold on the minds of some investors; so much so that sometimes other precious metals are left behind in the rush to buy the yellow metal. While silver spent much of the recession rally lagging gold, 2010 was a little different and silver dramatically outperformed gold. Just how well has silver done? Within Morningstar's industry lists, only one industry has done better than silver, and the one-year appreciation is better than 90%. 

ETF Bullion
As has been true in gold, investors have flocked to the convenience of a bullion-supported ETF. The iShares Silver Trust (NYSE:SLV) now boasts over $10 billion in assets and holds 350 million ounces of silver in trust - enough to meet the industrial demands of the world for about a year. As it tracks the price of silver (minus a management fee and some ephemeral premium/discount from day to day trading), it is no surprise to see this ETF up more than 60% for 2010, trouncing the better-than 25% performance of SPDR Gold Shares (NYSE: GLD) as of late December. (For related reading, check out Commodities: Silver.)

Market Digs the Miners
As miners are clearly leveraged to the underlying prices of the metals they mine, it is no great surprise to see that the miners did even better than the metal in 2009. Not only is this relatively typical within the industry (again, since miners are leveraged to the metal), but it may be even more so in silver as there are relatively few investable silver companies listed on U.S. exchanges. Even at the end of 2010, a phenomenally strong year for the sector, there are just eight stocks labeled as silver miners with market capitalizations in excess of $250 million.

Among the larger players, Silvercorp (NYSE:SVM), MAG Silver (NYSE:MVG) and Endeavor Silver (NYSE:EXK) led the charge. Even the worst-performing stock in the group, Silver Standard (Nasdaq:SSRI) handily beat the market for the year.


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