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Silver Miners: The Good, The Bad, and the Ugly

In my opinion, buying and holding physical silver is not a good way to invest in the precious metal. Silver costs money to store, and if the price falls then you receive no income and no guarantee that the price will go back up.

However, silver miners offer a much better profile. The best miners can mine for a fraction of the selling price of silver, leaving profits for dividends. Share prices also follow the price of silver.

That said, investing in silver miners can be complicated as many of them are currently making losses. Here is the low-down on three miners: one good play on the industry, one risky play, and one company that you should avoid.

A solid pick
Silver Wheaton Corp (NYSE: SLW  ) is a company that I believe is a risk-off play on the silver market. Why? Well, Silver Wheaton is not strictly a silver miner; the company is the largest precious metal streaming company in the world. What this means is that Silver Wheaton has a number of agreements where it has the right to purchase all or a portion of the silver and/or gold production at a low, fixed cost from high-quality mines located in politically stable regions around the globe, in exchange for an up-front payment.

This business model means that Silver Wheaton can remain highly profitable while other miners struggle. This is largely because it has no mine running costs, which can be volatile. That said, the company's profit margin has declined in line with the price of silver. Its operating margin dropped from 75.5% in the first quarter of 2012 to 49.5% as reported for the third fiscal quarter of 2013. This is still significantly better than many other miners, though.

What's more, Silver Wheaton reported an average silver equivalent cash cost of $4.73 per ounce for the third quarter. As you may be aware, cash costs are usually lower than the all-in-sustaining-cash-cost, or AISC, which includes other expenses such as depreciation, interest costs, and other corporate expenses. With a net profit margin of nearly 50%, I estimate that Silver Wheaton's AISC could be in the region of $10 per ounce. This is low enough for the company to remain profitable even with silver trading at current levels .

High risk, high reward
My risky bet is Hecla Mining (NYSE: HL  ) . I'm ranking Hecla as risky because the company is undergoing somewhat of a transition, and it recently made a move into gold mining -- an industry I'm not particularly a fan of.

Hecla has been around for 122 years, so the company has plenty of experience riding out both the peaks and troughs of the precious metals market. Furthermore, Hecla plans to more than double its silver production by 2017 and quadruple its gold output by 2014; both are impressive targets. During 2012, the company shut its low-cost Lucky Friday mine for rehabilitation, expanding the mine's life for 25 years. Closing Lucky Friday caused the company's total cash cost, net of by-product credits, per silver ounce produced to more than double during the year, from $1.15 to $2.70. Then, while the mine ramped up production during the first quarter of this year, the company's overall cash cost per ounce hit $7.02.

Unfortunately, Lucky Friday's production cost per ounce hit $33.75 as it ramped up production during the first quarter of this year. This is expected to decline to $9.50 over the rest of this year, though. The company's overall total cash cost, after by-product credits, per silver ounce is expected to be approximately $6.50 for the full-year 2013; this is similar to that of Silver Wheaton above. Remember that AISC's are usually higher than cash costs, so Hecla's ASIC could be almost double the cash cost supplied by the company.  Still, when Hecla gets back to full production it could be a great play on the silver market but until then its risky.

You should avoid this company
Coeur d'Alene Mines
  (NYSE: CDE  ) is the company that I would recommend staying away from. Coeur is one of the few silver producers that provides the total production cost per ounce of silver in its quarterly reports, and it's not pretty. During the three months ending on Sep. 30, the company's total production cost of silver per ounce stood at $21.92. In addition, the total production cost per ounce of gold sold stood at $1,614 for the period. Both figures significantly are above the current prices of the precious metals. At the risk of stating the obvious, these two figures indicate that Coeur is currently producing both gold and silver at a loss based on current prices. This is not good.

Still, management has scaled back capital spending by 20% for the year. This has not stopped Coeur from spending 80% more cash on capital projects -- including its Orko Silver Corp acquisition -- than it generated during the first nine months of this year, though. All in all, these figures indicate to me that Coeur is not a good investment. Negative profit margins and more cash going out than coming in are two very concerning factors .

Going long term
Investing in precious metals is a long-term strategy and as every savvy investor knows, Warren Buffett didn't make billions by betting short-term ideas. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 


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  • Report this Comment On December 12, 2013, at 6:07 PM, allthatglisters wrote:

    Average Joe is not buying physical silver as a trading opportunity, he's not an investor. He's buying it as alternative "money" for when the wheels finally fall off the runaway dollar train.

    Miners stocks, paper silver (certificates) or silver allegedly stored in the bank won't help someone who has zero confidence that the current unsecured debt based system will last out the decade.

    With so much effort going into silver price suppression and "paper silver" short selling. Why is no one asking about physical bullion sales to the guy on the street is taking off?

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Related Tickers

9/26/2016 4:00 PM
CDE $12.27 Down -0.29 -2.31%
Coeur Mining CAPS Rating: **
HL $5.82 Down -0.18 -3.00%
Hecla Mining CAPS Rating: **
SLW $27.54 Down -0.28 -1.01%
Silver Wheaton CAPS Rating: ****