Tag: Wheaton Precious Metals (WPM)

Buy-The-Dip Stocks For Silver Exposure

Posted on by Taylor Dart

For the past two years, investors in the precious metals complex have watched nearly every commodity race higher, with oil, coffee, orange juice and copper up significantly from their 2021 lows.

Unfortunately, gold (GLD) and silver (SLV) were both left in the dust after topping in August 2020 and February 2021, respectively.

And for investors looking for leverage to the metals, the corrections were even more painful in the mining stocks, with the GDX sliding over 50% from its highs above $45.00 per share set in August 2020.

Fortunately, we’ve since seen a reversal to this trend. Not only is gold knocking on the door of a new all-time high, but silver is outperforming over the past month, up over 35% from its lows after making a new year-to-date high above $25.00/oz.

This has lit a fire under several silver miners, with their margins set to improve by over 50% based on AISC margins of ~$6.00/oz in FY2022, and the potential to enjoy margins closer to $9.00/oz if the silver price averages $25.00/oz this year.

In this update, we’ll look at two silver miners that are still trading well off their 2020/2021 highs and look to be solid buy-the-dip candidates:

Pan American Silver (PAAS)

Pan American Silver (PAAS) is a $7.0 billion gold and silver producer with a production profile of approximately ~1.5 million gold-equivalent ounces [GEOs] after acquiring Yamana’s South American assets last year.

This makes it one of the largest producers sector-wide and the acquisition solidifies its spot as a top silver producer, with the company expected to produce ~28 million ounces of silver in 2024, and this excludes the massive Escobal Mine which has the potential to produce ~20 million ounces of silver if it is restarted. Continue reading "Buy-The-Dip Stocks For Silver Exposure" →

WPM vs HL: Which Silver Stock is a Buy?

Posted on by Taylor Dart

It’s been a volatile year thus far for the Silver Miners Index (SIL), with the ETF starting the year out by outperforming the S&P-500 (SPY), up 9% as of April.

Unfortunately, this 1500 basis point outperformance has since reversed to a massive underperformance, with the SIL finding itself down 35% year-to-date. The sharp reversal can be attributed to the plunging silver price, combined with inflationary pressures, which have severely impacted margins for the group.

In fact, some of the worst producers, like Endeavour Silver (EXK), now operate at negative all-in-sustaining cost margins.

While Endeavour Silver is an obvious name to avoid from an investment standpoint, given that it’s producing at $21.00/oz and selling its ounces below $20.00/oz, a few names have been dragged down unjustifiably by the terrible sentiment sector-wide.

Two of these names are Wheaton Precious Metals (WPM) and Hecla Mining (HL), and they’re sitting at 45% off sales despite being much lower risk than their peers.

In this update, we’ll look at which is best suited for one’s portfolio:

Business Model

Hecla Mining and Wheaton Precious Metals (“Wheaton”) have two very different business models. While they both sell a significant amount of silver, Wheaton is a streaming company, while Hecla is a producer.

This means that Hecla actually operates its four mines in Canada and the United States, a business model that carries higher risk and makes Hecla more sensitive to inflationary pressures.

In Wheaton’s case, the company receives deliveries from several operating partners and is immune from inflationary pressures.

The reason is that Wheaton provides an upfront payment and, in exchange, gets a portion of metal produced over the mine’s life without worrying about rising labor/fuel costs or growth/sustaining capital. The result is that WPM has a much higher margin business, enjoying 76% gross margins and 63% operating margins on a trailing twelve-month basis. Continue reading "WPM vs HL: Which Silver Stock is a Buy?" →

Three Silver Miners To Buy On Dips

Posted on by Taylor Dart

While the price of silver (SLV) has held up relatively well in June, considering the sharp declines in global markets, the Silver Miners Index (SIL) has not been as fortunate. In fact, despite silver being down just 7% year-to-date and being a sanctuary from the selling pressure, the Silver Miners Index has been battered, sliding 23% year-to-date and matching the decline of the S&P-500.

While the underperformance might be a head-scratcher for some, it shouldn’t be all that surprising, given that SIL is full of low-quality producers who have dragged down the ETF. However, with the proverbial babies being thrown out with the bathwater, we’ll look at three names approaching low-risk buy zones.

While the gold producers had a tough year in 2021 after lapping all-time highs for the gold price (Q3 2020), the silver producers had a solid year, benefiting from an attempted silver squeeze that kept silver prices elevated for much of 2021.

However, after a brief honeymoon period in 2021, we’re now seeing the hangover. This is because silver producers must lap an average silver price of ~$26.00/oz from last year while contending with higher fuel, labor, and materials costs. Not surprisingly, this has put a severe dent in margins, exacerbated by silver spending most of Q2 below $23.00/oz.

Fortunately, while this has made most names un-investable as they lap insurmountable comps, three names stand out:

Wheaton Precious Metals (WPM - Get Trend Analysis Report)

SilverCrest Metals (SILV - Get Trend Analysis Report)

Hecla Mining (HL - Get Trend Analysis Report)

Wheaton Precious Metals (WPM)

Beginning with Wheaton Precious Metals, the company was raised to handle inflationary periods like we’ve found ourselves in, with a royalty/streaming business model that leaves it insulated from rising operating costs and increased capital expenditures. This is because the company provides upfront payments to producers and developers to help them finance the construction/expansion of their projects, receiving a portion of revenue from the mine in return.

The result is that WPM pays a fixed amount for a portion of metal produced from the mine (15% - 25% of the spot price), allowing it to maintain exceptional margins even when producers’ margins are pinched.

WPM Business Model

Source: WPM Business Model, Company Presentation

Given this superior business model, Wheaton has historically traded at a premium valuation, with a 5-year average earnings multiple of 37.7. Given the inflationary environment that favors exposure to royalty/streaming companies, and the fact that Wheaton has upgraded its 5-year growth outlook with the addition of several streams recently, I believe a more appropriate earnings multiple is 39.

If we multiply this figure with FY2023 annual EPS estimates of $1.46, this translates to a fair value for the stock of $56.95, translating to a 46% upside from current levels. Based on this, Wheaton is currently on a Buy rating, and I see this pullback below $39.00 as a gift.

WPM Price Correlated With Fundamentals

Source: FASTGraphs.com

SilverCrest Metals (SILV)

The second name worth keeping a close eye on is SilverCrest Metals (SILV), the newest company to join the producer ranks after commissioning its Las Chispas Project in Mexico last month.

While the mine may be relatively small, with a planned throughput rate of just 1,250 tonnes per day, it certainly packs a punch. This is because it has an estimated head grade of 900 grams per tonne silver-equivalent, a figure that is quadruple the average mined grade sector-wide.

This is expected to translate to an average annual production profile of 12.4MM silver-equivalent ounces per annum over the first seven years (2023-2029) at industry-leading all-in sustaining costs below $7.50/oz.

2021 Feasibility Study

Source: Las Chispas Feasibility Study, Company Presentation

Given that SilverCrest is a producer, it is not insulated from inflationary pressures like WPM, meaning that it will see pressure on wages, fuel, and materials costs when it comes to sustaining capital.

However, given that its grades are nearly 4x that of its peers, the company has significantly less labor and uses a fraction of the fuel of its peers, given that it’s a high-grade underground operation. For this reason, it should see less cost creep, and it already has 65% ($22.00/oz silver price), which assumes a 10% cost escalation vs. its most recent study.

So, with SILV being one of the only producers in the silver space relatively insulated from costs combined with industry-leading margins, I see the stock as one of the most attractive buy-the-dip candidates for investors looking for silver exposure.

Hecla Mining (HL)

The final name on the list is Hecla Mining (HL), a multi-asset producer with silver mines in Idaho and Alaska and a gold mine in Quebec, Canada. Like SilverCrest, Hecla ranks very high on grades, with an average silver grade north of 400 grams per tonne and a silver-equivalent grade above 600 grams per tonne.

It also operates two very high-grade underground silver mines and benefits from by-product credits (lead, zinc), allowing it to keep its costs below $10.00/oz. If we compare this to the industry average cost profile of $15.00/oz, this places Hecla in a great position to absorb any cost increases, given that even at a $16.00/oz silver price, its mines would be highly profitable.

Hecla Operations

Source: Hecla Operations, Company Presentation

Given the benefit of higher zinc prices and its high-grade, relatively low-volume operations, Hecla has skated past most of the inflation experienced sector-wide, except for labor. This means it’s seen much less margin contraction than peers, even with a declining silver price.

Just as importantly, Hecla is one of the only producers with all its operations in Tier-1 jurisdictions, which typically commands a premium multiple. Conversely, most silver producers are based in Peru, Mexico, and Chile, some of the top silver-producing nations.

Hence, not only is Hecla relatively insulated from an inflationary standpoint, but it’s insulated from a risk standpoint, with a low risk of excessive taxes, unfavorable royalties, and or nationalization in the United States/Canada.

HL Price Correlated With Fundamentals

Source: FASTGraphs.com

Given Hecla’s Tier-1 jurisdictional profile, long reserve life at its assets, and strong margins, the company has historically traded at 16x cash flow, a premium to its peer group. Based on what I believe to be a more conservative multiple of 14.0x cash flow and FY2023 cash flow estimates of $0.40, I see a fair value for the stock of $5.40.

This translates to a 25% upside from current levels ($4.30), and any pullbacks below $4.05 (25% discount to fair value) would present low-risk buying opportunities. So, while I am not long the stock yet, I would view further weakness as a buying opportunity.

Final Thoughts

While the silver miners are out of favor due to declining margins, they will be lapping their toughest comps next month (Q2 2021) and will have much easier comps ahead. This should take the weight off the index and allow for a recovery in the Silver Miners Index by year-end.

Combined with attractive valuations, I see HL, SILV, and WPM as three of the better ways to play a rebound in the silver price.

Disclosure: I am long WPM

Taylor Dart
INO.com Contributor

Disclaimer: This article is the opinion of the contributor themselves. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information in this writing. Given the volatility in the precious metals sector, position sizing is critical, so when buying small-cap precious metals stocks, position sizes should be limited to 5% or less of one's portfolio.

3 High Quality Silver Miners To Consider

Posted on by Taylor Dart

While the Gold Miners Index (GDX) has been a sanctuary in the turbulent market environment, the Silver Miners Index (SIL) has not fared as well. This is evidenced by its 2000 basis point underperformance vs. the GDX, partially explained by the weaker margin profile for silver producers. The good news is that this underperformance is setting up a buying opportunity, with a few names trading at more reasonable valuations.

The Silver Miners Index is made up of several silver miners, but like the GDX, 70% of the miners in the index have short mine lives based on reserves and slim margins. This makes owning the SIL ETF difficult, given that companies within the index need to acquire other companies to replace reserves vs. accomplishing it organically, which often leads to share dilution. One of the ways to reduce exposure to the sector laggards is by owning the highest-quality names, and in this update, we’ll look at three names that stand out that do make for worthy investments: Hecla Mining (HL), SilverCrest Metals (SILV), and Wheaton Precious Metals (WPM).

The first name on the list is Hecla Mining (HL), a silver producer with operations in Idaho, Alaska, and Quebec (Canada). The company also has organic growth potential in Montana and Nevada, and it expects to produce over 43MM ounces of silver this year from its three operating assets. While there are a few producers with larger production profiles than Hecla, its key differentiator is that it’s focused on high-grade assets in safe jurisdictions, as the chart below displays.

Silver Miners

Source: Company Presentation

In addition, Hecla has some of the highest margins among its peer group, expecting to produce silver at less than $12.00/oz, with the potential to beat this cost guidance due to higher zinc prices which will help with by-product credits. Given this mix of high-grade reserves, steady reserve replacement at its assets, and safe jurisdictions, it is one of the sector’s better buy-the-dip candidates. It would become very interesting below $4.80 per share, near its multi-year support level.

Silver- Hecla Mining Chart

Source: TC2000.com

The second name on the list is Wheaton Precious Metals (WPM), a royalty/streaming company. For those unfamiliar, royalty/streaming companies provide an upfront payment to gold/silver producers and or gold/silver developers to help finance their project's initial construction or future expansions. In exchange, royalty/streaming companies receive a portion of production over the asset’s life.

In WPM’s case, the company’s business model is focused on streams, which entitle the company to purchase a portion of metals over the mine life, but it must make a small payment for each ounce delivered. In the example of its recent stream with Sabina Gold & Silver (SGSVF), it paid $125MM to receive 4.15% of gold production from the Goose Mine for the first 130,000 ounces for 18% of the spot gold price ($324/oz at $1,850/oz gold).

In addition to the stream on the Goose Mine in Nunavut, which is under construction, Wheaton has made several other bets over the past year, including the Curipamba Copper-Gold Project and the Marathon Platinum Group Metals Project. These acquisitions have improved the company’s 10-year outlook to 910,000 gold-equivalent ounces [GEOs] per annum, a massive improvement from its previous guidance of 830,000 GEOs and FY2022 guidance of ~730,000 GEOs.

Silver - Wheaton Precious Metals Chart

Source: FASTGraphs.com

Since the end of the 2015 secular bear market, WPM has traded at ~35x earnings and currently trades at ~30x earnings at a share price of $44.00. However, with gold and silver in the upper portion of their 8-year ranges, I would argue that WPM could easily command an earnings multiple of 38, translating to a fair value of $55.10 based on FY2022 earnings estimates ($1.45). So, if the company were to trade 25% below this level ($41.30), where investors have an adequate margin of safety, this would present a buying opportunity.

The final name on the list is SilverCrest Metals (SILV), a silver company ready to graduate to producer status at its Las Chispas Project in Mexico. The company has a strong track record of success, having been acquired just seven years earlier for its Santa Elena Mine in Sonora State, and to date, it’s done an excellent job at Las Chispas. This includes uncovering one of the highest-grade projects globally with an average grade that’s just shy of 1 kilogram per tonne silver equivalent, with higher-grade pockets of the resource that come in above 1,300 grams per tonne silver equivalent.

As it stands, SilverCrest has a 130MM ounce resource base, and its high grades contribute to the company being on track to have some of the lowest costs sector-wide at ~$8.00/oz or less. It’s worth noting that this resource does not include its El Picacho Project, which could potentially boost the mine life and production profile down the road (material could be trucked to Las Chispas). This 130MM ounce resource is based on only one-third of the known veins on the Las Chispas Property.

Silver - SilverCrest Metals

Source: Company Presentation

Typically, we see an upside re-rating when silver developers graduate to producer status, and I would be shocked if this wasn’t the case for SilverCrest. In fact, I would not be surprised to see the stock head above $11.00 per share once the asset ramps up to full production by Q1 2022, given that it should receive a premium valuation for being one of the highest-margin producers in the sector. Hence, I see this pullback below $7.50 as a low-risk area to start an initial position in the stock.

While the silver sector can be a minefield due to the large number of low-quality producers that cannot execute successfully, WPM, SILV, and HL are exceptions. Therefore, I believe these are three names worth keeping at the top of one’s watchlist for investors looking for exposure to the space.

Taylor Dart
INO.com Contributor

Disclosure: This contributor held a long positions in SILV at the time this blog post was published. This article is the opinion of the contributor themselves. Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information in this writing. Given the volatility in the precious metals sector, position sizing is critical, so when buying small-cap precious metals stocks, position sizes should be limited to 5% or less of one's portfolio.