These Windfall Profits for Silver Miners Are Just Warming Up

I took a moment last month to reflect upon the explosive profit growth that investors can anticipate from silver miners now that silver has promptly doubled in price from year-ago levels. I used First Majestic Silver (NYSE: AG  ) as a convenient case study, but every last operator in the industry is carving itself a slice of this dramatic windfall.

Watching the shares of silver miners plunge lower in the recent equity sell-off that has roiled financial markets worldwide, it seems the investment world has yet to come to grips with the notion that these elevated silver prices are here to stay. In fact, once silver and gold have a chance to catch their breath at these higher elevations, I expect both metals to deliver remarkable upside price momentum as their immutable safe-haven properties become more universally recognized.

On a broader scale, I join precious-metals commentator Lawrence Williams in anticipating a "quantum shift in the gold and silver stock sentiment to match that in the metals themselves." Because silver stocks have been particularly hard-hit to the downside, that is where I perceive some of the greatest upside potential. As a result, I take this opportunity to reiterate my prediction that the Global X Silver Miners ETF (NYSE: SIL  ) will have outperformed the S&P 500 by at least 200% before I close my active selection of the ETF within my silverminer CAPS portfolio.

The price of silver averaged $38 per ounce during the second quarter of 2011, hurdling small-cap producer Endeavour Silver (AMEX: EXK  ) to a 553% surge in operating cash flow. Popular favorite (and deservedly so!) Silver Wheaton (NYSE: SLW  ) steered its winning business model into a dazzling 181% increase in profit. Major producer Pan American Silver (Nasdaq: PAAS  ) saw its adjusted earnings skyrocket nearly 17-fold to $76 million, while the miner's cash position climbed 94% year over year to $461 million. Incredibly, after a tumultuous rise and fall, Pan American shares have dipped to about 9% beneath where they stood when I highlighted the company as a compelling bargain last October. At that time, it's worth noting, silver stood more than 35% beneath its current price!

Meanwhile, shares of Hecla Mining (NYSE: HL  ) have underperformed the entire group so far this year. And yet, sharply higher metal prices salvaged a decline in production to yield a 95% increase in net profit over the prior-year period. Hecla built its cash hoard to $377 million, permitting investors to look past the company's disappointing litigation settlement liability and focus instead on the stock's valuation and powerful future prospects. Extracting silver at an incredibly low cost of just $0.52 per ounce, Hecla continues to command one of the industry's elite operating margins. Looking ahead, Hecla intends to expand production by at least 50% over the next five years.

With a battered share price, a buried treasure in silver reserves, and an outlook for rapidly expanding low-cost production as the bull market for silver matures, I consider Hecla Mining a heavy favorite to produce one of the industry's more noteworthy advances over the years 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, 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.


Read/Post Comments (7) | Recommend This Article (25)

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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 August 11, 2011, at 3:24 PM, Jbay76 wrote:

    I second your assessment of HL, though I recall from their 2nd Q report that by the end of 2011, they expect cash costs to be $1/oz., still stinking cheap

  • Report this Comment On August 11, 2011, at 6:24 PM, incolumis wrote:

    Can anybody explain why SLW is not at least $5 higher? Are we seeing manipulation of SLW as well as silver? Thoughts, welcomed.

  • Report this Comment On August 12, 2011, at 9:05 AM, XMFSinchiruna wrote:

    Explaining why a given stock trades where it does is largely a fool's errand. Assuming it must be manipulation because it's not where you'd expect it to be represents an unconstructive line of thinking.

    The stock is a bargain. More I cannot say.

  • Report this Comment On August 12, 2011, at 5:22 PM, ellenfix1 wrote:

    I am a novice at stock market stuff so forgive me if I sound a bit naive, but I think HECLA MINING IS SET TO SOAR. I mean, they lolligag around at the bottom of the barrel in terms of cost per share among other high-priced silver stocks, and it appears they are just a cheap, low-end company. But I see that as presenting a HUGE potential to purchase lots of shares at a rock-bottom price, and then watch it slowly ... I mean SLOWLY ... but steadily rise in value, just as they did before the big crash last Friday. I mean, they have so much farther to go up, up up compared to their 'competitors', they are bound to start selling higher and higher as the demand for silver (as an alternative and addition to gold) starts to see more light. I see it as an opportunity; plus if you read about their plans I think they are getting ready to dig into huge new silver reserves and I think if you are willing to hold Hecla -- yes, HOLD HECLA -- and buy a bunch of shares now, you are going to be rich in a year or two.

  • Report this Comment On August 14, 2011, at 11:05 PM, skypilot2005 wrote:

    ellenfix1,

    Because you are a self-described “novice” I’ll refer you to an assortment of Sinch’s articles:

    Right now I like but, that’s just me:

    http://www.fool.com/investing/general/2011/07/14/the-greates...

    Relative to your question:

    http://www.fool.com/author/1632/index.aspx?source=iapsitlnk0...

    http://www.fool.com/investing/general/2011/05/10/its-time-to...

    Share price was around $8.60, then.

    I hope this helps.

    Fool on

    Sky Pilot

  • Report this Comment On August 14, 2011, at 11:18 PM, skypilot2005 wrote:

    ellenfix1,

    Full disclosure:

    I've been stacking NXG up for sometime now, thanks to Sinch.

    I've owned Primero for sometime now, thanks to Sinch but, have stopped adding to my position.

    I've owned and sold HL. Looking to buy HL, again. But I am not sure about the how external events are affecting the market, now.

    I am thinking I may be able to get in at a lower price. But I can be wrong and probably are.

    :)

    Sky Pilot

  • Report this Comment On August 16, 2011, at 7:05 AM, skypilot2005 wrote:

    http://finance.yahoo.com/news/Record-Results-for-Aurcana-Q2-...

    Record Results for Aurcana Q2, 2011

    Sky Pilot

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