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Published: April 22, 2010
As the U.S. government builds higher
deficits, many investors have sought the safe haven of precious
metals - especially gold. Rising government debt loads can
trigger
inflation and gold bugs see the yellow metal as a safe
haven. Silver has often been seen as a "defense against
inflation" play as well - with a key difference. If the global
economy posts a solid rebound but inflation remains still, then
silver should also rise in value, as it is used in a wide range
of industrial processes. Truly an offensive and defensive play.
An up-and-coming name among silver producers is Silver
Standard Resources (Nasdaq: SSRI), which is about to morph
from an owner of silver mines to a producer of the precious
metal. During the past five years, the company has been steadily
acquiring partial or full interests in some of the most fertile
mining regions. Now, with all of its assets in place, the
company is ramping up production. And that should yield a robust
spike in sales.
Silver Standard only began producing silver in December, and
showed just $5.4 million in sales for all of 2009. Yet by the
end of this year, two of the company's major mining operations
should be operating at full tilt. And that should yield revenues
of more than $100 million if silver prices stay at their current
level. As a pair of additional mines come on line during 2011,
the company should see sales approach $200 million. By the end
of next year, the annualized rate of production could approach
$300 million.
How that translates into profits depends on
the spread between mining costs and the market price for silver.
Right now, it costs the company about $9 to dig up, refine and
transport an ounce of silver. On the open market, silver is
fetching about $18 an ounce, so if the company can meet its
target of seven million ounces produced this year, then it can
make about $63 million in gross profit.
Of course, if the global economy cools once again, and silver
drops in value, then the company’s take will be reduced. Don't
forget, rising silver prices would yield even fatter profits.
Roughly speaking, for every $2 move in silver prices, the
company can earn an additional $0.15 per share. That means the
current consensus 2011 earnings-per-share forecast of $0.59
implies that per-share profits would fall to around $0.15 if
silver fell to $12 an ounce. Conversely, if silver prices rose
to $24 an ounce, then per-share profits would approach $1.00.
It’s too soon to forecast 2012 profits, but as production is
expected to increase another +50% that year from 2011 levels,
gross profit would likely increase by a commensurate amount.
Yet you don’t want to buy this stock for its earnings power, but
instead for the value of its assets. As noted earlier, Silver
Standard has spent a considerable amount of time and money
acquiring interests in the most prolific mining regions --
especially in Argentina, Mexico, Peru and British Columbia.
Based on the most recent purchase prices, the company’s stakes
are worth roughly $2.6 billion, or $30 a share. That’s more than
+50% above the current value of the stock.
Whether the stock reaches that price will be a function of
supply and demand for silver. If demand builds, then the value
of silver mines will rise in value. Of course, a slackening
economy would make recent transactions in the sector look richly
valued.
None of us holds a crystal ball as to the outlook for the global
economy. But silver’s defensive and offensive characteristics
make this a name to own.
-- David Sterman
Contributor
StreetAuthority |
