I follow quite a lot of companies, so the usefulness of a watchlist to me cannot be overstated. Without my watchlist, I'd be unable to keep up on my favorite sectors and see what's really moving the market. Even worse, I'd be lost when the time came to choose which stock I'm buying or shorting next.
Today is Watchlist Wednesday, so I'm discussing three companies that have crossed my radar in the past week -- and at what point I may consider taking action on these calls with my own money. Keep in mind that these aren't concrete buy or sell recommendations, nor do I guarantee I'll take action on the companies being discussed. What I can promise is that you can follow my real-life transactions through my profile and that I, like everyone else here at The Motley Fool, will continue to hold the integrity of our disclosure policy in the highest regard.
This week, with metals prices taking such a nasty tumble, I thought I'd focus on three metals play worth closely monitoring.
Silver Wheaton (NYSE: SLW )
My plan is actually to bring "beating the dead horse" to a whole new level. I'm fully aware that I've been pounding the table on Silver Wheaton for some time now, but there's very little denying the fact that it's one of the most strategically smart royalty interest companies in existence.
As a royalty interest company, Silver Wheaton supplies upfront cash to miners in order to help them facilitate the buildout of their mines. In return, Silver Wheaton locks in long-term contracts -- occasionally life-of-mine contracts -- that allows it to purchase silver and gold at rates that are significantly below the current market price. The best aspect of royalty interest companies like Silver Wheaton is that they are completely absolved of mine costs beyond the initial investment agreement. Thus, they are almost a pure play on metals prices and tend to make a profit even if metal prices drag.
In August, Silver Wheaton reached its most recent deal with HudBay Minerals (NYSE: HBM ) , securing the rights to its silver production at a low fixed-cost of $5.90 per ounce and 100% of its gold production at its 777 mine through at least 2016 for $400 an ounce In return, Silver Wheaton will fork over up to $750 million in cash for the buildout of HudBay's Constancia mine. Even with the tumble metal prices took this week, Silver Wheaton's margins will continue to remain fat with gold hovering near $1,400 an ounce and silver near $23 an ounce, and its dividend could still head even higher.
Golden Star Resources (NYSEMKT: GSS )
It's simple physics: The bigger they are, the harder they fall. When gold prices nosedived earlier this week, gold miners with historically higher operating costs took the brunt of the hit. For the most part, that meant that development-stage miners, and those operating in Africa, where labor and political costs make cost-effective mining a challenge, took it on the chin. Possibly no stock was hammered more than Golden Star Resources, a gold miner in Ghana, which lost about one-quarter of its value on Monday alone.
However, there are two sides to the Golden Star Resources story. On one handm you do have considerably higher costs than many other miners within the sector. For the fourth quarter, Golden Star reported an operating cash cost of $1,033 an ounce and relied heavily on higher realized selling prices and a 12% boost in annual gold production to push its cash flow from operations higher. That would indicate to some that spot gold prices are the sole determinant of its movements.
On the other hand, Golden Star's seemingly endless mine and permitting expansion looks as if it'll finally get under way. The immediate allure of Golden Star is its Prestea underground mine, which holds an indicated 660,000 ounces of gold, but has an indicated ore grade of 13.2 grams per ton. If those indicated measurements prove to be anywhere near accurate, gold recovery will be swift and Golden Star's bottom line boost will be sizable.
There are sizable hurdles Golden Star will have to overcome, such as labor and mine expansion costs, but its Bogoso/Prestea mine is producing enough cash that it should be able to cover those costs without too much trouble even at current gold prices.
Alcoa (NYSE: AA )
Just because gold and silver prices are dropping, that doesn't mean aluminum giant Alcoa got a reprieve. Earlier this month, Alcoa reported better-than-expected first-quarter results and stuck to its global forecast of 7% aluminum growth in 2013. However, this week's first-quarter GDP figures from China that showed 7.7% growth, a 20 basis-point sequential decrease from the fourth quarter, have investors concerned that emerging-market aluminum usage may not be as strong as originally expected.
Despite these concerns, I think Alcoa could represent an incredible value at these levels. Aluminum prices should stabilize this year and head higher moving forward as construction levels in the U.S. and China improve, and as automobile production overseas ramps up. Between Brazil and China, I'm not sure which car market looks more exciting right now.
Further, Alcoa has done an incredible job of controlling costs, even as some of its production capacity sits idle, with capital spending down $163 million over the sequential fourth quarter. It may not seem like a fantastic deal at 10 times forward earnings and with the company sporting negative free cash flow, but over the long run, this price could turn out to be a steal of a deal.
Is my bullishness or bearishness misplaced? Share your thoughts in the comments section below, and consider following my cue by using these links to add these companies to your free, personalized Watchlist to keep up on the latest news with each company:
- Add Silver Wheaton to My Watchlist.
- Add Golden Star Resources to My Watchlist.
- Add Alcoa to My Watchlist.
Can Silver Wheaton get its shine back?
If you're looking for a company whose success is determined by the metals market, but without involving itself in the risks of physically mining the metals, then Silver Wheaton provides a unique play on the future of silver. SLW chooses to finance the mining of silver; it has grown sales and net income every year since 2008 and also has increased competitive advantages over its limited peer group. To learn more about Silver Wheaton, click here now to access The Motley Fool's premium research report on the company.