GUEST POST - Silver Producers Enter Profitable Phase

Wednesday, June 29, 2011

--- by Sean Rakhimov ---
Over the past nine months or so silver has finally garnered the attention it deserves in the financial headlines after virtually tripling in price in that period and challenging its all-time high of US$50/ounce, well in time for it to be helpful to those paying attention.
No sooner it did that as commentators of all walks called it another "bubble" as they never fail to do in things they don't like to see going up. We're yet to see those same talking heads call a bubble in paper money, bonds or their own bloated salaries, but don't hold your breath for that.
As is often the case, the most significant aspect was again left out of the conversation, namely, what are the investment implications and how can one take advantage of them. We're here to correct that by adding some substance to the discussion. It's all great of course, that silver has finally broken out of the decades long resistance level in the $22-25 area and the race is on towards bigger and better numbers. As of this writing silver is still trading around $36/oz, which is about $20 over the price it was at when we penned the prequel to this piece. That's a lot of dough that should be landing on the bottom line of silver producers' balance sheets. So we thought an update was in order to provide a context to all the moaning out there that silver has "crashed" from $50 to mid $30ies presently.

Click table to enlarge
* Under IFRS rules outstanding warrants have to expensed
** Silvercorp's Financial Year End for the period in question is March 31, 2011
*** Silvercorp's latest quarter of record ended March 31, 2011 which is part of the annual results which is not the case for the rest of the companies
**** Alexco, Hecla, Coeur, PanAm, Silver Standard report net income per share rather than earnings
***** Alexco has only reported results for the quarter ended March 31, 2011 , which is Q3, of FY 2011

The projections are ours, while the rest of the numbers have been obtained from corresponding press releases by the companies announcing results for the full year 2010 and Q1, 2011. Again, to make the most the table summarizing 2010 EPS(earnings per share) as well as EPS for Q1, 2011, and finally an EPS projection for the full year 2011 we advise reviewing the earlier article on the subject. The numbers are for silver production only and do not take into account production of other metals, irrespective of the fact that some companies offset such by-product production towards the cost of silver production, while others do not. So don't take it as a gospel as it's a very tedious and time-consuming exercise to bring numbers to apples-to-apples basis, rather this is a rough and incomplete, yet representative guide to what you have to choose from and expect from in the silver producers sector.
Silver Producers As a Group Appear Cheap 
We can't get past the fact that with few exceptions no discussion has been put forth or consideration given as to what will the recent run-up in silver price will mean to earnings of these companies. The conversation doesn't seem to get past the run-up (where present) in the share price of the companies themselves. Just think for a moment what it would take to double the price of Coke and if it were possible, how it would reflect in the share price of Coca Cola? Do you think the share price would double? Triple? The answer is – we won't know till we crunch the numbers, but one thing is clear: the bulk of that increase would end up on the bottom line. That is exactly the situation at hand with silver (and gold) producers and, the 'old' share price, perhaps, only retains meaning in terms of a technical chart pattern, but beyond that we'll have to construct a 'new normal' price for shares based on the new price of silver.
Of course, skeptics will be quick to point out that silver price can as easily go down as it went up and will be correct... in theory. Sure, anything is possible, but the reasons WHY silver went up in the first place are still intact and have been thoroughly examined by this and other writers over the years. Instead, let us just note that we expect a new high in silver some time in 2011. Aside from a bullish market sentiment that may or may not accompany a new high in silver, in the context of earnings it should mean that current silver price is sustainable and can serve as a basis for projections which would help us arrive at "new normal" prices for stocks.
That is a long winded way of saying that based on the above table and the assumption that the average silver price will stay above 20.8€/oz level this year, producers as a group look cheap, the recent rally notwithstanding.
When was the last time you saw a silver stock post a dollar/share in earnings? Brace yourself, it's about to hit you. And if you're not watching, Wall Street is. Not yet, but they will be when these earnings hit the tape. We know, we met many of them personally.
Miners Begin Paying Dividends
Another novel concepts we'd like to throw at you is dividends. Yes, silver companies paying dividends. Already three of them pay dividends (annual numbers): Silvercorp Metals (8c/share), Pan American Silver (10c/share), Silver Wheaton (12c/share) with SLW being the last one to join the list. This development is also taking place in the gold sector, but we'll stick to our knitting. We're here to tell you that: a) in many of the boardrooms of silver producers this has been a topic of discussion as they rack up the cash in the bank, and b) it will take most investors by surprise.
As the street becomes more attuned to the realities of mining companies, it will favor dividend payers for obvious reasons which in turn will increase the pressure on the companies that can afford to but have not yet made the leap to paying dividends. So the dividends are here to stay. Moreover, as the price of silver rises and corporate bank accounts swell, there will be a sort of a race among companies to post the greater annual rate of growth in dividends paid. This may not happen as soon as next year, but it is coming.
In conclusion we'd like to remind you of the old notion of a "gold mine". Their product is ubiquitous, universally desired and is better than cash. Unlike their central banker counterparts that are printing money, these companies - let's call them "peripheral bankers" - are minting money.
We Are Far From a Silver Over-Supply
Commodity producers are about the only ones in the marketplace that can sit and watch the price of their end product go up in price through no doing of their own. For most other sectors it works the opposite way, they usually have to lower the price over time or improve the product to maintain margins. Of course, over time commodity producers will try to produce as much as possible and thus bring the price down (supply & demand) and that's how the cycles come about, but for the time being we're long ways away from over-supply and we'll share our ideas on why this time it could be different at least for gold and silver in the future.
Lastly in the next few years we won't be surprised with the return of physical metal positions. Longer time precious metal bugs will remember that several years ago when the champions among gold (Goldcorp) and silver (Silver Standard) companies held back a portion of their production or held bullion instead of cash. As inflation accelerates, which it undoubtedly will in the coming years, we may see it happen again.
Sean Rakhimov is editor and publisher of Vancouver based


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