Silver prices have been in steady decline since 2011. But as the market bottoms out, these three silver miners are poised for a comeback. China’s stock market crash effectively guaranteed resurgence in commodity prices. And since silver is the most undervalued precious metal, it’s also likely to see the biggest gains.
The commodity fell substantially after its peak in mid-2011, losing over 67% of its value. Since then, prices have edged slightly higher during times of global turmoil, but the overall trend is negative.
Chart courtesy of www.StockCharts.com
However, there are some optimistic signs in the data. A report from the Commodity Futures Trading Commission (CFTC) reveals that more and more traders are getting bullish on silver.
The Commitment of Traders report, or CoT, is a summary of derivatives trading in the commodities market. It includes positions taken for both speculative and actual hedging activities. Market participants who physically collect silver (or use derivative instruments to hedge their business activities) reduced their short positions by 15.9% over the last month. (Source: CFTC Commitment of Traders, July 7, 2015.)
In other words, they stopped thinking the price of silver was going to go down. This development was supported by swaps dealers who increased their bet on higher silver prices by seven percent.
By these numbers, it seems like we know where the big fish are headed. But what can an average investor do with that information? One way of catching the upside is through silver mining stocks. Here are three potential buys:
Hecla Mining Co. (NYSE/HL)
Supposedly America’s largest silver producer, Hecla Mining Co. (NYSE/HL) produced 11.09 million ounces of the precious metal in 2014, and expects 10.5 million ounces in 2015. (Source: Hecla Mining 10-K Filing, February 18, 2015.)
Shrinking margins forced this company to trim its cost base by 30%, yet production grew by 25% between 2013 and 2014. Despite a reduction in operating expenses, the firm kept expanding during the industry downturn.
This year, it absorbed smaller mining firm Revett Mining Company for $19.0 million. Hecla’s upper management hopes this purchase will secure future earnings. On Tuesday, July14th, the share price was down 4.14%.
Pan American Silver Corp. (NASDAQ/PAAS)
At $1.21 billion in market capitalization, Pan American Silver Corp. (NASDAQ/PAAS) is slightly bigger than Hecla, despite its relatively recent entry into the market. The company produced 26 million ounces of silver in 2014, an impressive number it looks to match in 2015.
Pan American’s share price dropped 45.9% in the last 12 months. A big part of the fall is due to lower silver prices, but the fall was exaggerated by the firm’s inefficiencies. Despite outproducing its competitors, the company spends more than twice as much to extract each ounce of silver.
Moving forward, investors should watch for a cutback in Pan American’s fixed expenses. The company has had an impressive growth run, but it needs to divest non-core assets in order to maximize its value to shareholders.
Silver Wheaton Corp. (NYSE/SLW)
Unlike its competition, Silver Wheaton Corp. (NYSE/SLW) isn’t exactly a miner. The company is in the streaming business, meaning it finances the operations of actual miners in return for a portion of production.
While 60% of the company’s revenues come from selling physical amounts of silver, it’s important to note that Silver Wheaton doesn’t own any mines.
The lack of physical property helped insulate the company during times of low prices. While Hecla and Pan American declined by 48.5% and 65.6% respectively, Silver Wheaton’s share price only shrank 20.9%. However, if silver prices surge in the near future, all three companies will reap the rewards.