Top 10 Silver Stocks – Seeking Alpha

This post was originally published on this site

Stock Name

Symbol (US)

Share Price (US)

FD Shares

FD Mkt Cap 11/11/2017

Americas Silver Corp

USAS

$3.81

49M

$187M

Bear Creek Mining

BCEKF

$2.10

110M

$182M

Coeur Mining

CDE $7.22 181M

$1310

Endeavour Silver

EXK

$2.15

133M

$286M

First Majestic Silver

AG

$6.63

176M

$1166M

Fortuna Silver

FSM

$4.08

160M

$652M

Great Panther Silver

GPL

$1.17

185M

$216M

Hecla Mining

HL

$4.04

399M

$1611M

Pan American Silver

PAAS

$14.62

154M

$2251M

Silvercorp Mining

SVM

$2.46

175M

$432M

Above are my current Top 10 silver mining stocks. There are 9 producers, and 1 development stock. Most of these stocks have been falling in price and have become attractive. Now seems like a good time to take a position.

The HUI (mining stock index) has crashed from a high of 625 in 2011. Today the HUI is at 186 (see chart below). To reach a new high, it will need to gain 230%. That will be the average returns for Majors. For the stocks in the list below, the average returns will likely be much higher.

HUI Chart

What I like about this HUI chart is that it appears to have formed a reverse head and shoulders pattern (refer to the green lines). These patterns have a propensity to foretell breakouts. Also, in conjunction with this chart we have one of the longest bear markets ever in silver, as well as one of the longest bull markets in the stock market. A turn is coming, and perhaps soon.

Silver stocks have the advantage of the gold/silver ratio, which is currently 75 (1,275/16.86). That ratio is likely to contract, perhaps all the way down into the 30s. Thus, silver stocks have twice the leverage of gold stocks.

Most of the stocks in this list are proven producers. These are the stocks that will immediately benefit as silver prices rise. For this reason, you want to own producers. You don’t want to miss out on big moves in the silver price. When silver goes to $30, $40, $50, it will be the producers’ share prices that are consistently moving higher.

I remember the big run up from 2009 to 2011, the producers were flying. I don’t want to miss that the next time silver prices start trending.

In addition to the producers on this list, you might want to check out the two silver miner ETF’s: SIL & SILJ. Both of these should do extremely well in the next silver breakout.

It appears that the best time to buy producers was in January 2016, when the HUI was down to 100. However, it’s still early and today’s entry prices offer a lot of value. It’s always possible to catch a falling knife and valuations could go lower. That’s the risk you take with highly volatile stocks, such as silver miners.

However, if you want to ensure that you have a position before the next uptrend begins, these are the stocks you want to take a look at. Most of them are going to do extremely well.

Another advantage of the silver producers is that there are not that many of them. Investors will be confronted with a small number of choices. For that reason, these stocks offer the best value.

My investing style is to focus on potential future cash flow in conjunction with higher gold prices. For instance, what is the future value of XYZ silver stock if it develops a 50 million oz project and produces 2 million oz annually at $100 silver? If you do a quick and dirty analysis using potential future cash flow, you get the following:

2,000,000 oz x $75 (estimated cash flow per oz using all-in costs of $25 per oz) = $150 million in annual cash flow.

If you multiply that by 10, you get a $1.5 billion estimated valuation.

All of the stocks in the list above have higher (or close to it) annual future cash flow potential versus their current FD market cap.

Note that some companies were valued at 30x cash flow during the last mania in stocks in 1980 and a 10x cash flow valuation is quite common today for strong mining companies. A conservative method is to use 5x cash flow to value a company. However, my expectation is that we should see 10x cash flow valuations as gold prices rise and companies obtain much more healthy balance sheets.

It’s amazing how valuable a mining company could become at higher silver prices when it owns large profitable projects. There are many development stocks today with solid projects that are valued unbelievably cheap. Not all of them will be successful in building their mines, so it is a crapshoot picking the winners early. The smart play is to watch these stocks and see which ones are going to get financing. Of course, the longer you wait, the higher your entry price will be, and many will no longer be available at low valuations.

The most ideal risk/reward stock is an undervalued producer, or near-term producer that is both permitted and financed to build its first project.

The only way you can understand the risk of a stock is to do your own due diligence. Below, I will go step by step and show you what to look for when analyzing a mining stock. However, even with this data in hand, you should do your own due diligence to confirm what I have written.

Even if you think you know a stock intimately, the data will change. If there is one constant in the story of a stock, it is change. And for stocks with high risk, it seems like the data changes more frequently. Whereas a major or a strong mid-tier producer can survive a data change without much impact, a junior can drop in value a significant percentage on small changes. The volatility can be stunning, and sometimes juniors do not survive these changes.

Here are my two most important rules to limit your risk exposure:

1) Only invest in a company that has the goods. Make sure that your company has at least one very good project. In other words, do not chase drill results (and if you do, then do it rarely). Exploration should be the icing on the cake, and not the cake.

2) Do not invest more than 1% of your portfolio’s cost-basis into a single high-risk stock. Thus, if your total invested dollars is $100,000, then your max is $1,000 for a high-risk stock. You can break this 1% rule, but do it rarely.

This 1% rule may seem too low, but you have to stay humble and acknowledge the high risk with mining stocks. If you think the stock is low risk, then you can triple this total to a maximum of 3%. For any single stock, except mutual funds or ETFs, I would not exceed 3%. Remember, this rule only applies to your costs basis. If a stock that you own increases in value, that does not apply to this rule.

You may be thinking that you could end up with 50 or more stocks. Perhaps, but this won’t happen if you buy bullion and/or ETFs as a foundation. With bullion, mutual funds, and ETFs, you can go over the 3% limit.

Here are some of the criteria that I use when valuing silver mining stocks:

The 3 Ps

Properties

Do they have a flagship project?

Do they have a pipeline of projects for growth?

Do they have the exploration potential to expand resources?

What is the size in acres?

Is the location satisfactory?

Is there a nearby mine?

Has there been any mining resistance in this location?

Do they own it?

People

Do you consider it a strong management team?

Is it an exploration or production team?

Do they have experience?

Do they have a track record for building mines?

Are they investor friendly and not always diluting?

Is the team large enough to build a mine?

Have you listened to a CEO interview?

Are they cash-focused?

How much stock does management own?

Do the website and company presentation provide adequate guidance and details?

Projects

What are the resource amounts?

Is the grade and recovery rate satisfactory?

Is it dependent on base metal offsets?

Is it a long-life mine?

What are the current/estimated cash costs and all-in costs per oz?

What documentation has been released for first mine (Preliminary Economic Assessment, Pre-feasibility Study, Feasibility Study)?

What is the capex for its first mine?

What is the after-tax IRR for first mine?

Can its first mine be financed?

How will its first mine be financed (debt, equity, streaming)?

How long until production?

How much cash will be needed between now and completing the final feasibility/permitting?

Share Structure

Is it highly diluted?

Timeline Risk

Time frame until production?

Market Cap Size

What is the FD market cap?

Stock Chart

Is this a good entry point?

Balance Sheet

What is its cash/debt situation?

Insiders

Insider ownership percentage?

Valuation

What is its potential future market cap growth rate at $100 silver?

(see example below)

What is its potential future free cash flow at $100 silver?

(see example below)

What are its future reserves valued at today?

XYZ Silver example: 50 million oz / $30 million FD market cap = $1.66 per oz.

Future market cap growth calculation (Example for XYZ Silver)

Current Market Cap: $30 Million.

Potential Future Market Cap: 2,000,000 oz x $75 = $150 million annual free cash flow x 10 = $1.5 billion

Compare the two values and you get a 5,000% increase.

Is XYZ silver highly undervalued? Yes, with a potential increase of 5,000% and future reserves valued at $1.66 per oz, it is highly undervalued.

This valuation assumes they will reach 2,000,000 oz of annual production, all-in costs will be $25, and future silver prices will reach $100.

My website (www.goldstockdata.com) has future cash flow calculator that is easily configurable to estimate future cash flow for a company.

Disclosure: I am/we are long GPL, FSM, USAS, CDE, AG, PAAS, SVM, HL, EXK, BCEKF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.