Thus far in 2008, gold and gold stocks have gotten their fair share of attention here at the Fool. From Sham Gad's argument that investing with Buffett will beat gold investing over the long term, to my selection of Yamana Gold (NYSE: AUY ) as a top stock idea for 2008, gold hasn't been left out in the cold.
The same cannot be said for silver, however. As the Garfunkel to gold's Simon, silver just doesn't get as much play. But there are plenty of interesting things happening in this part of the precious metal playpen, so it's about time we took another look at a few of the leading silver companies.
Wheaton and dealin'
Silver Wheaton (NYSE: SLW ) may be the best-known silver stock, but it's not a silver producer at all. The company is more of a silver financier.
One example of how this business works can be seen in its recent deal with Augusta Resource (AMEX: AZC ) . The latter company has a copper/molybdenum/silver property in Arizona that it's looking to develop. With more than 5 billion pounds of measured and indicated copper resources at its Rosemont property, Augusta is a copper story.
For Augusta, moving Rosemont into production is more critical than retaining the by-product silver production, and that's where Silver Wheaton steps in. In exchange for a large up-front payment, which will vary depending on what percentage of silver production the company wants to secure, Silver Wheaton will be guaranteed a steady stream of silver for the entire life of Augusta's mine.
This is a bit of a departure from deals with Goldcorp (NYSE: GG ) and others, in which Wheaton has contracted to pay a fixed per-ounce fee beyond the initial single lump sum. But in either case, the benefit of such an arrangement is immediately clear -- Silver Wheaton dodges the cost escalation bullet.
A 70% rise in the initial cost estimate for Goldcorp's Penasquito project is one recent example of the ever-increasing cost of extraction. But even that is nowhere near as bad as the cost crunch that put Teck Cominco (NYSE: TCK ) up Galore Creek without a paddle. Such a project cancellation would derail Silver Wheaton's business model, because it uses a fair amount of debt financing. This is why the company smartly secures completion guarantees, as well as minimum production criteria.
Pan American gangster
While I'm not sure I find much value in being the biggest primary silver miner, that's the goal of Pan American Silver (Nasdaq: PAAS ) . The company started out much like Silver Standard Resources (Nasdaq: SSRI ) , buying up uneconomic silver deposits in the '90s. The key difference is that Pan American chose to move much more rapidly into production. Silver Standard, which I've written about previously, is still largely a call option on the price of its ounces in the ground. Pan American is instead playing the production growth game.
We got an operational update last week, when the company reported its fourth-quarter results. On the upside, Pan American slightly exceeded its annual production target of 17 million ounces. Any celebration on that front has to be tempered by the fact that in its 2003 Annual Report, the company was projecting 20 million ounces of production by 2006. Production guidance is as much art as science, particularly when operating outside of North America. Permitting delays are par for the course, and it's the rare mining company that fails to overpromise on production at some point.
Pan American has and will continue to ramp up silver output at an impressive rate. The more acute issue is -- you guessed it -- cost inflation. In the previous quarter, the firm's cash costs came in above expectations because of equipment failure. There were maintenance issues this time around, as well. Issues like currency appreciation, tight labor markets, and falling by-product prices don't leave a whole lot of room for production gaffes.
That's not to say the company is careless with its cash, however. While chairman Ross Beaty has had a remarkable string of successes with smaller Canadian-listed companies, Pan American is his baby. Beaty retains a significant stake -- only the investment funds of Royce & Associates and Bill Gates hold larger positions. I've read interviews with Beaty, and he strikes me as extremely entrepreneurial, ethical, and shareholder-friendly. To cherry-pick but one Buffett-esque quote: "I just love creating wealth for shareholders through building resource companies from the ground up. It's what gets me out of bed in the morning."
If I ever cast my lot with a silver producer, Pan American would most likely be the one.