I’ve been looking to expand my knowledge in the financial world, and I’ve stumbled upon precious metals. More specifically, silver. Where did I get the idea to look at silver? I listen to a lot of talk radio, not always voluntarily, and these shows are always advocating buying gold, mainly because they’re paid to do so. ‘Buy gold from this company, it’s the only gold company I trust.’ Hey, everyone’s got to make a living, but this isn’t where I get my financial advice. I’m sure these companies were paying them to advocate gold in 2011, when gold topped $1800. It’s now around $1130.
I recently heard a commercial from a local coin/silver dealer, talking about buying silver directly from his store, and I though ‘wow, what an inefficient way to invest’. I buy it from him, at a premium, of course. And when I want to sell it back to him, he buys it at a discount to the current price. Ok, everyone’s still got to make a living. But it got me thinking how I could invest in silver without having to store the actual metal. Although owning some metal would be kinda cool, and probably a good idea, I’m not really focused on that right now. I do have a couple of nice gold coins that I wanted to sell a few years ago when gold was much, much higher, but my wife (sorry ladies, I’m taken) wouldn’t let me. Oh well. So how to invest in silver via my trading account?
An exchange traded fund, of course! iShares Silver Trust (NYSEArca: SLV). This ETF buy’s silver and sits on it. They own nearly $6 billion in assets, namely over 10,000 tonnes of silver. It doesn’t pay a dividend, nothing is actively managed, it just holds silver and tracks its price. In fact, if silver does nothing, you’ll lose money slowly over time because of the 0.5% fee. Hey, nothing’s free. But if I buy in, I’ll want a good reason. Let’s talk about silver.
If you look at a 20 year chart of silver prices, you’ll see the first third of the chart was pretty boring: low $4’s to low $5’s, per ounce. The middle is a rocky climb to the high teens. The last third more or less starts with a high in the mid $40’s in 2011 and falls off to about $14 in late 2015. Over the past year it’s gone up to about $20, and back down to where it is now, around $16. People have made a big deal out of the rise to $20 this year, but on a long-term chart it doesn’t look like that big of a deal. Silver is in a long-term bear market.
So what is silver good for? Like gold, silver is used in jewelry, and as an investment vehicle (think coins and bars). But more so than gold, silver has a very wide range of industrial uses. I won’t go into too much detail here, but silver has some interesting electrical and antibiotic qualities that are in demand. For one thing, silver is used in solar panels, and anyone following along knows I love the solar industry. Over half of the global demand for silver is industrial. This might tie silver to the economy more so than gold, but demand is demand.
So how else to play silver? Miners of course! I have my eye on three companies. Pan American Silver Corp. (NASDAQ: PAAS) is headquartered in Canada, and has most of its operations in South America. First Majestic Silver Corp. (NYSE: AG) is also headquartered in Canada, but focuses on silver mining in Mexico. Hecla Mining Company (NYSE: HL) is headquartered in Idaho, and is the largest sliver producer in the US, but it also deals in gold, and is the third largest zinc producer in the country. It’s a little more diversified than the first two companies.
Why do I like these three over the many other publicly traded silver miners? Mining is a very capital intensive undertaking, and these companies have decent balance sheets. (There are a couple of others on my radar, but at the end of the day you can’t get too detailed about everything, all the time.) Mining companies are notorious for financial problems, and that makes sense considering that their revenue is so closely tied to commodity prices that they have almost no control over. And those problems are good for the last company I’ll be talking about in this article.
Silver Wheaton Corp. (SLW) is precious metals streaming company headquartered in Canada. Well what exactly is a ‘streaming company’. When we’re talking about precious metals and mines it’s a very intriguing concept. The first important fact is that most silver mined in a given year doesn’t come out of ‘silver mines’. Most silver ‘produced’ is a byproduct of mining copper, lead, zinc, etc… So say you have a copper miner that’s in financial trouble, or in need of funds to expand, or simply needs funds to open in the first place. That’s where Silver Wheaton comes in. SLW will provide money (or SLW stock) upfront, in exchange for the right to buy a percentage (sometimes 100%) of a mines silver production at a set price for a set time (usually the entire life of the mine).
The typical price they purchase silver at is $4 to $6 an ounce. Silver is about $16 at the moment. They also enter agreements with miners for gold, though to a slightly lesser extent, with a typical buy point at around $400 an ounce. They have agreements with 22 mines currently in operation and 8 that are in development. So basically they are paying upfront for future production at a set price that is WAY below the price most anyone believes precious metals will ever hit. This means that SLW is HIGHLY levered to the price of precious metals. Silver Wheaton has an excellent presentation of their business model, including more nuance than I have described here, at their website. Check it out.
Streaming companies have the advantage of being tied to precious metals, but are perceived to have less risk than miners. They aren’t out exploring for metal, and they aren’t hiring people to go down into dangerous holes in the ground. They aren’t taking all the risks that miners are. That said, there is risk involved. By paying out money upfront they are making an investment in each mine they are involved in, and investments can go sour. Workers can strike, mines can be depleted, and political volatility can hurt production, but in my view these issues aren’t so much of a problem. Their investments are spread out in multiple countries across three continents, as well as multiple mining companies. There is risk, but I believe the real risk is their overall average upfront costs vs. the future of precious metals, especially silver. On the surface the business sounds amazing: pay $5 for something you can turn around and sell for $16, but remember their upfront cost. They are competing with other streaming companies, as well as other sources of capital. Mining companies have other options. Any upside in SLW will be from an increase in precious metal prices AND smart deals made in the past. Another risk to touch on is an ongoing dispute with Canada’s version of the IRS over income generated from foreign mines. This issue has been around for years, but it deserves attention.
In the past 5 years, the SLV chart has been all over the place, from a high of over $40 to a recent low of around $10. It’s currently about $17.50. Last quarter’s results were released in early November. The market didn’t approve, even though year over year revenues were up over 50%. I’m thinking of starting a position soon on any significant weakness from here.
So what’s my overall silver strategy? I’m not looking to turn a quick profit here. While my recent performance has given me some much-needed confidence in my abilities and strategies, I understand that people have speculated in precious metals since way before there WAS a stock market, and a good deal of them lost their shirt. I’m seeing this as more of a long-term proposition. If I start to buy silver related stocks, and silver goes down, I’ll buy more and hold. Pretty much the same strategy I tend to use for stocks. But silver being what it is, it might take longer. There are people out there saying silver is dead because of the strong dollar, interest rate increases, low werewolf population, whatever. I like how the chart looks. And right now, it’s kind of a crazy world. (Ok it always is, and there are always people more than willing to shout it from the rooftops, but you get my point.) I think people will bid silver up once they start to worry about it more. Let silver go down to the more recent lows, and I think I’ll grab some, probably through SLV and SLW, though I may throw a pure miner in there as well.
As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Specific numbers I reference may not be completely accurate; different online financial sources often have somewhat conflicting information. Verify information via multiple sources you trust. Please READ MY DISCLAIMER. Make your own decisions, do your own research, and never rely on any single source for information. I am not a financial professional; do not rely on me as such.
Michael, the Stock Picking Bartender,