Patient long-term investors have been rewarded with solid gains this year as the broad-based S&P 500 has advanced by more than 5% year-to-date. But these gains are chickenfeed compared to what investors in gold and silver minig stocks have seen this year.
What's behind gold's and silver's lustrous year
Among gold mining stocks with valuations above $300 million, half have doubled on a year-to-date basis, and all 22 are higher this year and beating the S&P 500's return. Similarly, eight out of nine silver miners with valuations north of $200 million are up by at least 110% year-to-date, with the worst performer, Silver Wheaton (WPM -1.90%), up by "just" 93%. If you listen closely, you can almost hear those Silver Wheaton shareholders complaining about their relative underperformance.
A number of factors have played into the ascent of gold and silver miners. First, low interest rates continue to make it relatively unattractive to own interest-bearing assets such as CDs and bonds. This means the opportunity cost of passing up interest-based assets in favor of gold or silver is low.
Secondly, supply and demand favor a continued rise in precious-metal prices. The World Gold Council and Silver Institute have both presented data this year showing improved investment demand for gold and silver, as well as expanding demand for both metals from certain industries. With the supply of gold and silver mostly constrained and demand growing, the foundation has been laid for prices to head higher.
Psychological factors, such as uncertainty, have also played a role. Investors tend to flock to gold and/or silver when there are concerns about growth, and at the moment there's plenty of uncertainty surrounding China's multi-year GDP growth slowdown, the imminent exit of Britain from the European Union, and the upcoming U.S. elections.
These small-cap gold and silver miners could triple
The future for physical gold and silver looks bright, which means there could still be some very big gains to come. These gains, and risks, could be exacerbated by small-cap gold and silver miners. Small-cap miners sometimes have long-term financing and profitability concerns that can weigh down their valuations. However, if their efforts to grow their mines are successful and they can manage their spending wisely, the returns can be huge for patient investors.
With this in mind, and taking into account the well-above-average risks of investing in small-cap gold and silver miners, here are two small-cap miners that have a chance at tripling in value by 2020.
Primero Mining Corp.
Primero Mining (PPP) has had nothing short of a miserable year. Physical gold may have had its best quarter in 30 years in Q1 2016, but Primero hasn't benefited one iota, with the company having to spend a lot to improve safety standards at its flagship underground San Dimas mine in Mexico. Primero is also struggling with an ongoing legal claim from Mexican tax authorities that are trying to invalidate a previously agreed upon advanced pricing agreement (APA). This APA is what determines how much income from Primero's silver mining operations in Mexico is taxable. Poor earnings results, higher costs, and uncertainty have sacked Primero in 2016.
Despite these woes, there's a longer-term story developing here that could be of interest to patient investors. Key to this thesis is the idea that both of Primero's recent issues are short-term in nature and not game-changing to its growth strategy. While increased costs to bring its San Dimas mine up to safety code might be frustrating for investors, they're now in the rearview mirror. As a positive, next year's comparisons will be extremely favorable. Furthermore, its APA should soon have a resolution, with the decline in Primero's share price more than likely reflective of any potential tax liability (should there be any).
In addition to Primero's bad news not really being as bad as Wall Street has made it appear, the company has, until its minor hiccup this year, consistently grown its production and reduced its all-in sustaining costs (AISC). After generating 102,000 gold-equivalent ounces (GEO) in 2011 at San Dimas, Primero estimated earlier this year that it would deliver approximately 205,000 GEO at its flagship mine in 2017. Meanwhile, it could push its AISC at its Black Fox Mine to less than $1,100 an ounce in 2017, and may be able to reduce its AISC at San Dimas to below $800 an ounce. Remember those disgruntled Silver Wheaton shareholders that I alluded to earlier? They should be pretty happy, too, considering that Silver Wheaton has an annual 6 million silver ounce purchase agreement with Primero at the San Dimas mine.
Looking even further out, its Cerro del Gallo mine in Mexico's Guanajuato region, an area known for its strong mining infrastructure, could wind up generating up to 95,000 GEO per year when fully ramped up. After producing 143,000 GEO in 2013, Primero could be on track to deliver double that amount by 2017. If Cerro del Gallo gets off the ground before the end of the decade, Primero could be capable of more than 400,000 GEO by 2020. Understandably this is a big if, because Primero still needs its permitting and financing in place before undertaking such a project. But if Primero does move ahead, it could really bolster the company's bottom line.
Wall Street currently projects that Primero could be capable of $0.70 in free cash flow per share by the end of the decade, which, with the company currently trading at just $1.55, would suggest it could have ample upside potential if it resolves its recent issues. Investors should probably expect a few more hiccups in 2016 (hint: its upcoming Q3 report could be a bit rough), but the long-term looks bright for this small-cap gold miner.
Great Panther Silver Ltd.
Among silver mining companies, Great Panther Silver (GPL 33.33%) offers some degree of intrigue for long-term, patient investors.
Unlike Primero, Great Panther Silver has had an incredibly good year, though the previous years before 2016 were duck-and-cover bad. Shares of Great Panther Silver are up 162% year-to-date, but over the trailing five years they're down by more than 50%. Silver's multi-year downtrend and ongoing losses were partly to blame for Great Panther Silver's ongoing downtrend, but dilution to keep the lights on has also been a culprit. Over the past decade Great Panther Silver's shares outstanding have more than doubled, and in July the company completed a $29.9 million bought deal where it sold nearly 18.7 million shares and accompanying warrants which are exercisable at $2.25 per share.
Being a shareholder when a company issues a potentially dilutive secondary is no fun, but Great Panther Silver has made significant progress with its two producing mines.
Great Panther's two key mines are its Guanajuato mine complex in Mexico (the same Guanajuato discussed above), which is primarily fueled by the San Ignacio Mine, and its Topia Mine, also located in Mexico. Topia is responsible for about a quarter of Great Panther Silver's production, while its Guanajuato complex comprises the remaining 75%.
A quick look at Great Panther Silver's production since 2011 tells you everything you'd need to know. Silver-equivalent ounce (SEO) production has nearly doubled from 2.2 million SEO in 2011 to almost 4.2 million SEO in 2015. Expansion opportunities in San Ignacio should lead to an extra 150 tons per day being mined by year's end, which, assuming its strong ore grades continue, could push Great Panther into the black.
Despite ramping up expansion opportunities at San Ignacio and Topia, Great Panther is also being mindful of its spending. The company is operating nine separate mines at Topia, which allows for added flexibility should one or more of its mines become unprofitable and need to be closed temporarily or permanently. Great Panther also has, including its aforementioned $29.9 million bought deal financing, nearly $59 million in cash with no debt as of the first week of July 2016, giving the company a lot of financial flexibility.
Considering that silver has bounced nicely off of its early year lows and Great Panther Silver has lowered its full-year AISC forecast by $1 per SEO to a midpoint of $13 an ounce in 2016, it's quite possible the company ends the year profitably and kisses its longtime quarterly losses goodbye in 2016. Though Wall Street has no cash flow per share estimates for Great Panther Silver, expansion opportunities at San Ignacio and Topia could potentially send its shares much higher by 2020.