Windfall Profits Loom From Silver's Spike

Silver mining has grown fantastically lucrative as this precious metals bull market charges onward. But due in part to the momentous short squeeze that in April sent silver prices soaring toward $50 per ounce, I anticipate windfall second-quarter profits that will give silver investors a taste of the earnings growth still to come.

First Majestic Silver (NYSE: AG  ) produced another 1.8 million ounces of silver during the second quarter of 2011, sauntering one step closer to its impressive 2011 target of 7.5 million ounces. The output yielded a precise match to those regal production numbers from the first quarter, although the company's powerful underlying growth momentum continues unabated.

While we wait for earnings results to trickle in from the sector over the coming weeks, a little fun with numbers (using First Majestic as a case study) can help Fools to anticipate the kind of quarter we can expect from the group. First Majestic's first-quarter net profit margin of 43% would qualify as an astonishing degree of profitability in many other industries, but for silver miners such feats have become commonplace. Silver Wheaton (NYSE: SLW  ) , as a result of its unique business model, dominates in that category with a stunning first-quarter net margin of 82%.

As attractive as First Majestic's profitability was in the first quarter, it's about to get even better. You see, notwithstanding silver's headline-grabbing retreat from the April high, silver averaged more than $38 over the course of the second quarter. That's a 20% sequential increase and a harbinger of dramatic margin expansion for silver miners. We can use that price increase to forecast First Majestic's revenue at about $68 million and, so long as costs remained stable, an enhanced net profit margin that I suspect could yield net earnings of $31 million or better. That would mean a sequential earnings bump of nearly 30% between two quarters with identical production volume!

Now, I encourage Fools to apply the prospects for a 20% sequential increase in realized silver prices to their own favorite silver miners and adjust their own profitability expectations for the second quarter accordingly. Shares of silver miners suffered noteworthy weakness during the quarter, as indicated by a 16% decline for the Global X Silver Miners ETF (NYSE: SIL  ) over the period. With silver averaging 20% higher while the stocks drifted 16% lower, one is left to marvel at the potential opportunity presented by this unusual market divergence.

I consider First Majestic an excellent choice for investors as the company seeks to double output from its La Parilla mine starting next year. I believe Hecla Mining's (NYSE: HL  ) downturn has overshot by a wide margin, and Coeur d'Alene Mines (NYSE: CDE  ) is severely underpriced for a miner that's targeting 2011 production of 20 million ounces of silver and 250,000 ounces of gold! Alexco Resource (AMEX: AXU  ) picked a terrific time to enter commercial production, and junior miner Aurcana (OTC: AUNFF) expects to add a second silver mine by mid-2012. For each of them, and many more, I expect second-quarter earnings to reveal a powerful silver windfall.

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 Alexco Resource, Aurcana, Coeur d'Alene Mines, Hecla Mining, 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.


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  • Report this Comment On July 11, 2011, at 12:21 PM, jesusfreakinco wrote:

    Chris,

    Since the spike through 40 to 50 was short-lived, do you base this windfall on some of the producers selling hedges into that rally or just the fact that a the price was in that range for part of the quarter?

    TIA,

    JFC

  • Report this Comment On July 11, 2011, at 1:41 PM, jargonific wrote:

    What if the White House were to announce a deal on the debt limit, and, stocks were to recover plus the dollar were to strengthen? Wouldn't that be a cue for silver investors that the price would be vulnerable? It seems to me we have seen a big rise in silver because of the big rise in gold precipitated by China's decision to back their currency with gold as a hedge against inflation. The problem is, the US has been unclear as to a similar policy and so what appears to be happening is that silver prices are getting see sawed. They go up in Asia, down in America, to the big disadvantage of US investors. Are these not problems for the future?

  • Report this Comment On July 11, 2011, at 2:24 PM, XMFSinchiruna wrote:

    jesusfreakinco,

    Nothing to do with hedges, and everything to do with silver sold into that spike, and the resulting 3-month average price increase over Q1. Any miners who had leftover Q1 production available for sale in April will be able to compound the positive impact accordingly.

    jargonific,

    China is not backing its currency with gold. The US has been crystal clear regarding its monetary policy. I don't not share your characterization of recent price dynamics, nor your assessment of their cause. I respectfully suggest you go back to the drawing board for a more comprehensive understanding of the silver market.

  • Report this Comment On July 23, 2011, at 6:49 AM, skypilot2005 wrote:

    http://www.aurcana.com/s/NewsReleases.asp?ReportID=468072

    Aurcana Reports Record 2nd Quarter Silver Production

    Aurcana Corporation (TSX VENTURE:AUN)(OTCQX:AUNFF) ("Aurcana" or the "Company") is pleased to report record silver production for Q2 of 2011 of 257,508 contained silver ounces. This is a 7% increase over the 240,275 silver ounces produced in Q1 of 2011, and a 41% increase over Q2 of 2010.

    Sky Pilot

    Official Web Link Assistant to Sinch

  • Report this Comment On July 23, 2011, at 7:33 AM, skypilot2005 wrote:

    Recent Silver Mining Industry development:

    ECU Silver Finds New High Grade Mineralization in Upper Levels of the San Juanes Mine

    TORONTO, ONTARIO – July 20, 2011

    http://www.ecu.ca/index.php?option=com_content&view=arti...

    http://www.ecu.ca/index.php?option=com_content&view=arti...

    July 18, 2011 - On June 24, 2011, ECU Silver Mining Inc. (“ECU”) and Golden Minerals Company ("Golden") announced that they had entered into an agreement to effect a “merger of equals”

    http://www.ecu.ca/index.php?option=com_content&view=arti...

    Golden Minerals Company and ECU Silver Mining Inc.

    Announce Merger of Equals

    Creating a New Growing Silver Mining Company

    Disclosure: I own shares of ECU

    Sky Pilot

    Official Web Link Assistant to Sinch

  • Report this Comment On August 12, 2011, at 9:37 PM, speedybure wrote:

    Aurcana was my top silver pick for 2011 - hasn't played out as I would like despite the fact I first bought at 42 cents. Glad to see you on board.

    http://caps.fool.com/Blogs/my-top-silver-miner-for-2011/5149...

  • Report this Comment On September 03, 2011, at 8:29 PM, maxbentley wrote:

    I contacted AUN IR rep lately and he reiterated that AUN would try to begin limited production at Shafter in 2011.AUN CEO/Pres Lenic R. also hinted at this in the AUN 2nd Quarter news teleconference.

    "Accelerated start up being explored and considered."

    La Negra on track for a second expansion to 2,000-2,100 tpd completion in early Q1 2012.

    AUN is on track to near rival FR.TO production in early 2012.

    8/15/2011 Conference call notes:

    TSX listing by end of 2011.

    American Exchange listing to follow.

    Reverse split-no decision made.

    Sprott lawsuit-Sept 09 application for dismissal befored judges.Hopeful.

    Shafter Cap ex is $45 million as per the feasibility.

    Fully funded.If there is a slight shortfall the cash flow from LN will assist-one million dollars per month cash flow.

    Permitted for 900 tpd -1,500 tpd permits on hand shortly.

    Shafter on budget and on schedule.

    Accelerated start up being explored and considered.

    Under one year packback for Shafter.

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