Pan American Silver (PAAS) Q3 2021 Earnings Call Transcript
PAAS earnings call for the period ending September 30, 2021.
Silver is a unique precious metal. It’s essential for many industrial applications. Silver is the best electrical and thermal conductor of all metals, making it highly valued for electrical applications. Because of that, more than half of silver’s demand comes from the industrial sector.
Silver is also highly valued by investors because it shares many of the same investment characteristics as gold. A safe-haven metal, silver can help investors to hedge against inflation and weather an economic downturn.
Many companies in the metals sector mine silver. However, most mining companies focus on producing industrial metals such as iron ore, copper, and aluminum. They often produce silver as a byproduct of those primary products. Meanwhile, companies that mine precious metals tend to focus on gold. Consequently, even though many companies mine some silver, it often generates a relatively minor portion of their revenues.
While these factors limit the available silver investment options, a few top silver stocks stand out:
|First Majestic Silver: (NYSE:AG)||A precious metals mining company that gets the majority of its revenue from silver.|
|iShares Silver Trust: (NYSE:SLV)||An exchange-traded fund (ETF) that seeks to track the price of silver.|
|Wheaton Precious Metals: (NYSE:WPM)||A precious metals streaming company with significant silver exposure.|
Source: Company investor relations websites
First Majestic expects silver to contribute about 55% of its revenue in 2021, making this Canada-based company one of the purest plays on silver in the mining sector. Most other companies that focus on mining silver only expect the metal to account for 27% to 45% of their revenues in 2021.
Although it’s a Canadian company, First Majestic focuses on Mexico because it produces more silver than any country in the world. The company currently operates three mines in Mexico and has several other silver mines under development.
First Majestic also operates the Jerritt Canyon Gold Mine in Nevada. It purchased the mine in 2021 to diversify its operations. However, even after adding a primary gold mine, First Majestic has more exposure to silver than any other mining company.
Silver stocks such as First Majestic have opportunities to outperform the price of silver by expanding production and reducing costs. But they are also vulnerable to operational problems and cost overruns. Mining issues, management missteps, and exposure to other commodities can weigh on the performance of a silver mining company's stock.
First Majestic believes it can be a long-term outperformer. It aims to become the world’s largest primary silver producer and is investing millions of dollars each year toward that goal by exploring for and developing new silver mines.
Wheaton Precious Metals is a precious metals streaming company. Instead of operating physical mines, Wheaton provides mining companies with cash up front to cover portions of their mining costs. In exchange, the company receives rights to buy some of the metal produced by the mines at fixed prices.
Wheaton expects its silver streams to generate 41% of its revenue mix between 2021 and 2025. The company's exposure to silver is the highest among its streaming and royalty competitors.
Wheaton has the contractual right through 2025 to purchase the precious metal for an average price of $5.81 per ounce. That means any silver price above that level generates profit for the company.
The company's focus on streaming enables it to generate lots of cash. Wheaton uses this money to invest in new streams and pay dividends to shareholders. Wheaton's business model enables it to profit from rising silver prices in the same way as a mining company. However, it assumes fewer of the risks and potential cost overruns associated with physical mining.
The iShares Silver Trust is an exchange-traded fund (ETF) that focuses on physical silver. The ETF aims to track the performance of the price of silver by owning silver bars, which are stored in bank vaults in London and New York City.
Because the ETF holds physical silver, it tracks the precious metal's price relatively closely. The chart below demonstrates how the price of iShares Silver Trust shares have changed with the price of silver:
While the ETF has slightly underperformed silver over the long term, that’s entirely due to the fund's annual expense ratio of 0.5%. That’s a good ETF expense ratio overall and a small price to pay to invest in silver without having to own the precious metal.
The price of silver can be volatile. While it soared in 2020, silver gave back some of those gains in 2021. The primary driver of these price fluctuations was inflationary fears arising from the COVID-19 pandemic, which ebbed and flowed. They affected the price of precious metals and cryptocurrencies.
However, silver’s inflation-protection investment properties are only part of the story. As mentioned earlier, silver is an important industrial metal. In particular, it’s essential for clean energy. The fast-growing solar energy and electric vehicle (EV) industries are two notable industrial demand drivers.
Because of that, demand for silver should grow in the coming years, which could continue pushing its price higher. That makes silver a potential way to play the growth in clean energy.
Most investors choose to own silver stocks over the physical metal such as coins and bars. When the demand for silver is rising, silver companies can often pursue profitable growth opportunities that enable them to produce profits above the price increase of silver itself. Not owning the physical metal also enables investors to avoid the hassles and risks of acquiring, storing, and insuring a physical asset.
As a unique precious metal with industrial, consumer, and investor demand, silver is playing an increasingly important role in the economy. As a result, silver mining stocks and silver-focused ETFs could be attractive additions to many portfolios.
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