Your Sneak Preview of the Next Silver Bonanza

As silver continues to dazzle audiences worldwide with its seemingly tireless ascent, one can scarcely fault a Fool for getting a bit excited about the earnings that silver miners will soon begin to report.

With another 22.5% climb in silver prices recorded during the first quarter of 2011, quality silver miners are poised to enjoy still more of that epic margin expansion that has fueled the sector's truly epic outperformance of the market. Although Silver Wheaton (NYSE: SLW  ) already approached the pinnacle of corporate profitability in the fourth quarter of 2010 -- with an astonishing 82% net profit margin -- the company's unique, fixed-cost business model could yield a further 25% sequential expansion of its cash operating margin for the first quarter of 2011.

Fellow growth machine Endeavour Silver (NYSE: EXK  ) posted operating results for the first quarter this week, and reported a gorgeous average realized silver price of $33.18 for the period. Following a 20% production expansion that yielded 1.1 million silver equivalent ounces (SEOs) for the period, Endeavour remains on target to produce 4.7 million enormously profitable SEOs for the full year 2011. Endeavour expects full-year 2011 costs to trend just beneath its 2010 average cost of $5.71 per ounce, which translates to margin expansion that substantially resembles that of even Silver Wheaton.

Of course, the widest per-ounce profit margins in the industry will continue to belong to ultralow-cost sensations Hecla Mining (NYSE: HL  ) and Silvercorp Metals (NYSE: SVM  ) . Sporting negative cash costs of production (after factoring in revenue from byproduct metals like gold, lead, and zinc), these miners are the cat's meow for margin-hungry investors.

But negative cash costs are certainly not required for a silver mining stock to yield phenomenal investment gains. A well-timed production growth spurt, combined with exciting potential for continued exploration success, is capable of propelling a silver stock with even greater force. In the case of my favorite silver miner -- Great Panther Silver (AMEX: GPL  ) -- issued guidance for 2011 production costs between $6.50 and $8 per ounce is not likely to interrupt a growth trajectory that has seen the shares quadruple in value over the past year. Moreover, with major producer Pan American Silver (Nasdaq: PAAS  ) forecasting 2011 cash costs between $7 and $7.50 per ounce, Great Panther's cost structure remains an impressive achievement given that its production scale is about 10% that of Pan American.

With silver prices now spending a significant portion of the second quarter above $40 per ounce -- and a number of factors suggesting continued strength on the horizon -- the difference of a couple of bucks between miners' operating cost structures seems scarcely perceptible. Fools with exposure to silver miners are bound to enjoy another spectacular set of earnings results for the first quarter of 2011, and it would require a massive reversal to prevent the second quarter from looking better still.

If the never-boring silver mining industry piques your Foolish curiosity, be sure to add these stocks to your free, personalized watchlist and follow all the precious news to come.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Endeavour Silver, Great Panther Silver, Hecla Mining, Pan American Silver, Silvercorp Metals, and Silver Wheaton. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (17) | Recommend This Article (39)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 14, 2011, at 8:27 PM, geoflying wrote:

    don't forget folks buy on the rumor and sell on the news to avoid holding the bag which the shills well hand to you in exchange for your money.

  • Report this Comment On April 14, 2011, at 9:34 PM, bullsnbeers wrote:

    Are we talking about 2010 or 2011?

    "Fools with exposure to silver miners are bound to enjoy another spectacular set of earnings results for the first quarter of 2010, and it would require a massive reversal to prevent the second quarter from looking better still"

  • Report this Comment On April 14, 2011, at 10:08 PM, hank2800 wrote:

    careful on Pan american silver, Bolivia is/maybe restructuring it's silver miners, PAAS along with others may dive hard(already have today), Silver will continue it's run tho.

  • Report this Comment On April 15, 2011, at 12:34 AM, bruinjoe93 wrote:

    How can you leave out Fortuna Silver's negative cash cost?

  • Report this Comment On April 15, 2011, at 1:45 AM, silvermind wrote:

    Chris,

    Do you think HL will fully recover this year from the dive the stock took after discouraging stockholders by surprising us with a $250M+- settlement loss of a environmental damage lawsuit (a lawsuit which had gone on for years but which the company failed to make stockholders aware of until the huge loss was taken by HL)?

  • Report this Comment On April 15, 2011, at 8:40 AM, Jbay76 wrote:

    Silvermind,

    According to their most recent 10-k filing, the settlement that HL is in is not settled yet, it could much worse for them. I think they need to have several stellar years to recoup the loss from the settlement, regardless of producing silver at a cash negative

  • Report this Comment On April 15, 2011, at 8:47 AM, silverminer wrote:

    bullsandbeers,

    Thank you. That typo will be fixed shortly. :)

    hank2800,

    Those events in Bolivia do warrant careful attention from mining investors, while presenting an opportunity for those not directly impacted to reassess their own notions of jurisdictional risk.

    bruinjoe,

    I'm a big Fortuna fan, and I hope they will follow the lead of several peers by listing on a U.S. exchange so that Fools like me can initiate the coverage they deserve.

    silvermind,

    Let's keep the facts clear. Hecla did indeed disclose the existence of that lawsuit in countless filings over the years. The surprise came in when the proposed settlement surpassed prior estimates of liability by a significant margin. As to your question, my answer is Yes, I do think the stock will recover nicely since operationally the company continues to perform admirably.

    TMFSinchiruna (aka silverminer)

  • Report this Comment On April 15, 2011, at 11:04 AM, Margret2 wrote:

    Minera Andes also has negative cash cost for silver with gold as byproduct.

    Alexco Resources likely will have negative cash cost.

  • Report this Comment On April 15, 2011, at 11:28 AM, jesusfreakinco wrote:

    Good stuff Chris! Keep it up. Can't wait for the next jr miner article...

    JFC

  • Report this Comment On April 15, 2011, at 2:43 PM, Jbay76 wrote:

    Alexco just started production at their bellekeno mine this year and does not have cash cost value yet. But, they will have most likely have one by years end. SLW will be making a killing off their deal with Alexco though. But then again, it seems like SLW makes killing with all their deals.

  • Report this Comment On April 15, 2011, at 8:30 PM, tommylad wrote:

    I bought my first silver mining stocks this week.

    I hope I am not "late to the party"

  • Report this Comment On April 16, 2011, at 2:25 AM, silvermind wrote:

    Silverminer,

    Thanks for the clarification on the facts of the HL lawsuit/settlement. Much appreciated.

    JBay76 - I believe HL is saying this is settled. HL also took about 80% of the loss on their 2010 books - so 2011 will be very profitable for HL. I have some experience in settlements and it appears that it is at a stage where it's really a done deal. When the attorneys let the company announce the settlement it is about 100%. BTW - what is the 76 for in your Foolish name?

  • Report this Comment On April 16, 2011, at 2:30 AM, silvermind wrote:

    tommylad,

    Not even close to being late! Eric Sprott says this is the decade for silver! Welcome aboard the silvertrain!

    May I suggest reading all of TMFSinchiruna's blog posts. About the best education around. Check out the recent section on MicroCaps. Very exciting.

  • Report this Comment On April 16, 2011, at 11:59 PM, SilverDoctors wrote:

    SLW and AG are the best silver plays. I like AUY on the gold side. AUY is a low cost producer with a ton of growth....and the stocks barely budged!

  • Report this Comment On April 17, 2011, at 10:11 AM, tommylad wrote:

    silvermind,

    I am encouraged by reading TMFSinch's

    blog posts. I am glad to have found a group

    of likeminded investors, Thanks for the

    tip.

  • Report this Comment On April 18, 2011, at 7:49 AM, jdiscreet9 wrote:

    If there is production that surpasses demand for Silver, why do we ssume it will rise? I think we are in a bubble.

  • Report this Comment On April 18, 2011, at 11:06 AM, goldminingXpert wrote:
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