Pan American Silver Is Just 1 Way to Invest in Silver

The recovery of silver raises the question of what are the options to invest in this precious metal. Let’s review three alternatives.

Lior Cohen
Lior Cohen
Jul 17, 2014 at 2:17PM
Energy, Materials, and Utilities

The silver market is slowly making a comeback after silver prices took a dive last year. The price of silver is now up by 11% this year. For investors thinking of entering the silver market, what are the main ways to invest in this precious metal? Let's review three main alternatives to go long on silver. 

1. Silver ETFs
The most straightforward way to invest in silver is with a silver ETF such as iShares Silver Trust (NYSEMKT:SLV). This ETF follows the price of silver and thus doesn't have any discrepancy between the movement of silver and the ETF's price. The downside for investing in such an asset is its lack of divided payment as opposed to silver companies. Moreover, holding this silver ETF includes a management fee of 0.5%.   

2. Silver producers
Investors, who don't want to pay a management fee and benefit from the potential growth of a company could consider a silver producer such as Pan American Silver (NASDAQ:PAAS). The company plans to expand its silver operations by over 5% year over year. This means the growth in production will be another added benefit as silver prices recover. Besides the potential growth in operations, Pan American Silver also offers a quarterly dividend, which allows its investors to take some profits off the table during the year. Pan American Silver's dividend yield is 3.2%. 

But this company also entails several risks that silver ETFs don't have, including rising production costs, uncertainty in reaching its annual production goals, potentially higher than anticipated capital expenditure, and delays in constructions of new mines. Further, the company's silver operations account for roughly 75% of its total sales. The rest is gold and other metals. Investors who want exposure only to silver should take this factor into account.

3. Silver streaming companies
The third option for investing in silver is a silver steaming company such as Silver Wheaton (NYSE:SLW). This company's business is to invest in precious metals producers and get in return a stream of silver and gold at a very low fixed price. This type of business reduces the risk associated with production listed above. Therefore, Silver Wheaton's operations have less risk than a silver producer has. 

Because of the low price it pays for silver, the company's profit margins are high: In the first quarter, its gross profitability was 55%. In comparison, Pan American Silver's profitability was only 15%. Despite this higher profit margin, Silver Wheaton's dividend yield is only 1.03% -- lower than Pan American Silver's yield. 

Last year, the company's attributed production grew to 35.8 million of silver equivalent ounces, which is nearly 22% higher than in 2012. This year, however, Silver Wheaton's operations are expected to reach 36 million ounces -- close to last year's attributed production. This means that unlike Pan American Silver, Silver Wheaton doesn't plan to expand its operations this year. 

Finally, Silver Wheaton, much like Pan American Silver, also has gold in its mix, so that silver accounts for nearly 74% of its total sales. This is among the reasons for the lower correlations these companies have with silver prices. 

Foolish takeaway
Investors who believe the recovery of silver will continue in the near term should consider either of the above alternatives and consider the advantages and disadvantages of each investment path. For those who wish to take some profits off the table along the way, and also be less exposed to productions risk, consider Silver Wheaton.