It has been a rocky month of May in the markets so far. Although the market overall is only down some 5% for the month, certain sectors, such as energy and commodities, have suffered steep losses over the last three months as part of an overall sector rotation. The volatility has been particularly extreme in the mining stocks. The losses in mining equities have been much greater than the underlying metal or commodity prices. A good example of this is in the silver mining complex -- which includes Hecla (HL) and Silver Wheaton (SLW) -- vs. the underlying silver price represented by the silver ETF, iShares Silver Trust (SLV).
I believe this provides long-term opportunities in some of these mining shares. I would advise taking small positions initially as right now the sector is behaving like a "falling knife." Here are the two silver equities I would look at.
Silver Wheaton is a mining company that operates as a silver streaming company worldwide. The company has 14 long-term silver purchase agreements and 2 long-term precious metal purchase agreements whereby it acquires silver and gold production from counterparties.
Four reasons Silver Wheaton is a solid speculative long-term play at $23 a share:
- The stock has lost 30% of its value over the last three months, underperforming the price of silver by some 15%.
- The company ended the quarter with US$1-billion in cash and US$400-million in available credit. It should be able to acquire additional silver streams at lucrative prices as alternative financing starts to dry up in this area. It also plans to increase production from 27mm ounces in FY2012 to 45mm ounces in fiscal-year 2013.
- The stock is cheap, trading at just over 10x forward earnings and has a five-year projected PEG of under 1 0(.56). It also almost quadrupled operating cash flow from fiscal-year 2009 to fiscal-year 2011.
- The 11 analysts that cover the stock have a median price target of $45.50 on the stock. The stock sold north of $40 a share as recently as late February.
Hecla Mining acquires, develops and markets precious and base metals worldwide. It is the largest U.S. silver miner and about 50% of its revenue comes from silver, 19% from gold and the rest from zinc and lead.
Four reasons Hecla offers deep long-term value at under $4 a share:
- Its production comes from North America. This removes geopolitical risk, which is prevalent in many mining firms.
- The company has a robust balance sheet with over $265 million in net cash on its books (which accounts for about 25% of its current market capitalization).
- The stock is cheap, trading at just over 7x forward earnings and is priced at just 93% of book value.
- The company is investing record capital expenditures in fiscal-year 2012 and major new production is expected to come online in early 2013. The company expects to increase its silver production by 50% between 2013 and 2017.