Last week, I told you to wait to get back into silver stocks… The entire silver stock complex is struggling to find a bottom.
But while a good resource investor waits, he also compiles a list of stocks he’d like to buy once the sector “firms up.” He builds a shopping list.
Today, I’ll give you a short shopping list of the best companies…
There are two different styles of silver stocks out there: explorers and producers. Explorers are riskier companies searching for untapped resources. Producers are what you’d expect – companies that are actually producing silver.
[ad#Google Adsense]Each type of company has a different level of risk. In general, producers are the safest group for regular investors. They have actual cash flows, rather than a dream and a drill rig.
Producers are what we’ll deal with today…
Producers range in size from Silvermex Resources, a $166 million market value junior that hasn’t turned a profit since 2006, to giant miners like Coeur d’Alene Mines, valued at more than $2 billion.
Actual silver production makes these companies relatively easy to understand. There are two kinds – profitable companies and science projects. If it costs more to mine the silver than you make selling it, the mine isn’t a business. It’s a science project. Investors should stay far away from those companies.
To sort out the profitable companies, I look at production costs. I like low-cost producers… the lower, the better.
That puts China-focused miner Silvercorp (SVM) at the top of my shopping list. Silvercorp is a $1.7 billion mining company that produced 5.3 million ounces of silver in the first three months of 2011.
Its Ying Mine in Henan Province China is so rich, every ton of ore contains 11 ounces of silver, 160 pounds of lead, and 24 pounds of zinc. For every ounce of silver the company produces, the other metals in the ore pay for all the mining costs AND generate an extra $7 per ounce of profit.
As you can see from the chart below, Silvercorp soared from mid-2010 to early 2011. It then fell 38% from its high in early April to its recent low. The bit of price strength at $10 per share could be the end of Silvercorp’s big fall. This stock is definitely on our shopping list.
Another low-cost producer is Hecla Mining (HL). This company produced silver 100 years ago, and it’s still going strong today.
Last year, it produced 2.5 million ounces of silver at a cost of just $1.03 per ounce. In the first quarter of 2011, its gross profit more than doubled from the same period in 2010…
Yet as you can see from this chart, the big silver correction has pushed the stock down 29% from its high in January. Once we see an uptrend in silver, this company should go in our portfolio.
Finally, we have Silver Wheaton (SLW). Silver Wheaton doesn’t operate mines. It invests in early-stage mining projects in return for a slice of future profits when a project starts producing.
While Silver Wheaton isn’t the lowest-price producer in the bunch, it is among the safest. Silver Wheaton has its fingers in lots of different pies, so it limits your risk. The company is steadily increasing its silver supply and its profit margins are soaring with the silver price.
However, the recent collapse in silver price dragged Silver Wheaton along with it. As you can see in the chart below, Silver Wheaton is 26% below its recent high.
Adding junior explorer Mirasol Resources from last week, we now have four silver companies on our shopping list.
Silver and silver stocks have been hammered in the past month. But the past few trading sessions have seen the sector stabilize. Should this strength prove to be the final bottom in this recent correction, these are the stocks you should consider buying.
Good investing,
— Matt Badiali
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Source: The Growth Stock Wire