Saturday, April 23, 2011

Silver Mining Stocks Undervalued

We have tried to give readers the most clear and direct opinion possible on silver throughout this bull market.  In 2009 the fundamentals for the metal made a price rise unavoidable.  August of 2010 marked the actual beginning of the strongest part of the move.  Most people still have no idea how much an ounce of silver costs, where to buy it or why you would want it.

Our last silver post recommended allocating capital to physical metal, exchange traded metal, mid/large cap stocks and small junior miners/explorers.  If your broker has no decent silver stock advice for you we offer a report on how to own the sector.

Owning physical metal is great but more capital appreciation is available in the mining shares if selected properly.  A small silver miner producing 2 million ounces annually at a cost of $5/oz probably cleared $20 million last year selling product at an average price of $15/oz.  Energy related expenses can be estimated at 25% of mining cost and to be conservative let's say that input has doubled making their per ounce cost of extraction $6.25/oz.  Silver has more than doubled so we could conservatively assume that they will sell production for $30/oz this year.  The current spot price is $47/oz so we have left plenty of cushion in that number.  This same company would clear $47.5 million selling silver at $30/oz.

As you can see in this chart silver miners have lagged the metal.  This divergence became more pronounced in early March.
Chart forGlobal X Silver Miners ETF (SIL)

When building a silver portfolio investors should know that there was major weakness in the space during the 4th quarter of 2008.  One company stepped in and provided bridge financing to many small miners.  They were smart enough to attach warrants to purchase silver from the mines they financed at an average cost of $4/oz.  These production warrants stay in situ throughout the life of the mine.  In our report on how to invest in the silver space we recommended that this company be the foundation of a strong portfolio.  We predict that it will turn into a dividend behemoth and a favorite of many trust department managers.  This stock should be purchased now.  We also recommend staying away from miners that are counter-parties to these production warrant contracts as they will not fully benefit from higher silver prices while bearing 100% of higher extraction costs.

Silver portfolios need to be at least 50% positioned now.  The balance of capital can be put to work before July 7th of this year.  All resource or mining related sectors stand to see huge capital inflows in the 3rd and 4th quarters of 2011.  There is no reason to try and outsmart the market by trading and skimming pennies.  Picking the best companies, allocating capital properly and leaving the portfolio alone is the key to making money and sleeping well at night.  Just a quick note on sleeping well at night.  Most people spend 1/3rd of their life sleeping (we spend no more than 20%) and they never want to spend any money on a new mattress.  Take some trading profits this year and purchase the most luxurious mattress available, preferably a Serta.  This is a purchase that will enhance all parts of your life.

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