Sterling Opportunities in the “Other” Metal

03/01/2010 1:00 pm EST


Jack Adamo

Editor, Jack Adamo's Insiders Plus

Jack Adamo, editor of Jack Adamo's Insiders Plus, finds some of the market's most shining opportunities in the silver-mining industry.

[Because of] the higher price of metals lately, along with restrained prices for energy (a big part of mining expense), I believe fourth-quarter earnings reports on [two silver] companies have a good chance of surprising strongly to the up side. [They] have corrected more than the market lately, in line with their normal volatility.

Pan American Silver Corp. (Nasdaq: PAAS) has more than tripled its silver production in the last eight years. Its stock has trounced the Standard & Poor’s 500 over the last five, ten, and 20 years. The company operates in Mexico, Peru, Bolivia, and Argentina, all reasonably stable countries.

Last quarter the company earned 31¢ a share, compared to a loss of 41¢ in 2008, a rough quarter for everyone. Silver output rose 30%, cash costs declined 35%, and cash flow was a robust 59¢ a share. Full-year earnings were 71¢, up 137% from last year’s 30¢. 2010 earnings are expected to jump to $1.27, giving the company a reasonable [price/earnings ratio] of 17x. The company has no long-term debt and $193 million in cash and short-term investments.

If we get the rise in metal prices I expect, the company will produce surprisingly strong earnings. Last year’s average price was just $14.67 [an ounce]; spot silver is $16.44 at the moment and should go higher.

Wall Street has a wide range of one-year price targets for this stock, from $22 to nearly $26, or 19% above today’s price. I don’t know which, if any, will be right, but I expect the company to continue to deliver positive returns and beat the market for years to come. Buy Pan American Silver up to $24.50. (It closed Friday at $21.50—Editor.)

Silver Wheaton (NYSE: SLW) has 17 silver purchase agreements, with 14 operating mines and three development stage projects, whereby it acquires silver production for a per-ounce cash payment [about] equal to the lesser of approximately $4 or the then prevailing market price. It also has one agreement to buy gold production at a per-ounce cash payment of the lesser of $300 or the then prevailing market price.

The actual costs are higher, but [they] are still low. For example, the most recent deal should end up costing the company about $7.57 per ounce of silver, all in. These are very low risk [deals], since they are largely insulated from rising fuel or labor costs—the biggest expenses in mining. That leaves a lot of the market price left for pure profit with the current spot price of $16.44 in a long-term up trend.

The company is expected to earn 80¢ this year, compared to 39¢ last year, more than doubling its profit, yet it sells at a P/E of 20x, which is still lower than the industry average. The company's silver and gold interests are located in [more stable regions], like Pan Am, avoiding the most unstable regions. Brokerage firms have price targets for Silver Wheaton from $19 to $22.

Buy Silver Wheaton up to $17.25. (It closed Friday just above $15—Editor.)

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