10 Most Interesting Silver Stocks – Part 1

In the early 1970s two brothers from Texas, William Herbert and Nelson Bunker Hunt, began accumulating silver. By 1979, the pair had effectively cornered the silver market. From September, 1979 to January, 1980 the price of an ounce of silver leapt from $11 to $54. Before the collapse a few months later, it is estimated the brothers were up almost $4 billion.

The Hunt brothers, William Herbert and Nelson Bunker, testifying before the U.S. Congress in 1981 in the aftermath of cornering the silver market.

For the Hunt brothers, the silver market’s unraveling hit its nadir on March 27th, 1980, a day that came to be known as Silver Thursday. On that day, the Hunt brothers received a $100 million margin call on futures contracts that they were unable to meet. Facing a potential $1.7 billion loss, the ensuing panic rocked commodities and futures markets and the financial markets in general. The price of silver experienced a 50% one day decline, from $21.62 to $10.80.

Government officials feared that if the Hunts were unable to meet their debts some of the large Wall Street brokerage firms they dealt with might collapse. To save the situation, a consortium of US banks provided a $1.1 billion line of credit to the brothers secured against the majority of their remaining assets.

In late April, with silver approaching the historical record highs attributed to the Hunt brothers, investors and money managers alike were enthusiastically debating the value of an ounce of silver. Silver, it seems, is developing a cultish following similar to gold. “Silver bugs” worldwide are quick to point out that investment and consumption demand is increasing while supply is constrained. Moreover, they advocate that the silver to gold price ratio is forty to one, far from its historical 16 to 1 ratio, so a realignment, by some, is thought to be inevitable. With silver in the headlines on a daily basis we focused our efforts this month on the volatile precious metal and the Canadian listed companies that are exploring, developing and mining silver around the world. We present, in no particular order, 10 companies that we found interesting for various reasons.

1. Silver Wheaton Corp. (TSX:SLW)

Silver Wheaton was established in 2004. It was previously controlled by Goldcorp until December 7, 2006 when the gold miner reduced its ownership to 48%. On February 14, 2008 Goldcorp divested itself completely of Silver Wheaton, selling 108 million shares to net a healthy $1.566 billion.

Today, Silver Wheaton is reportedly the largest silver streaming company in the world. Silver streaming, the process of securing silver from mining companies through long term price contacts, exists because silver is often produced as a by-product of gold and base metals. It is estimated that roughly 70% of the world’s annual supply of silver is produced from secondary sources. The primary benefits associated with silver streaming is that acquiring silver through contracts, as opposed to mining the element, means that growth doesn’t require significant capital expenditure.

Silver Wheaton sells over 19 million ounces of silver annually – silver that’s mined by other companies including Barrick Gold and Goldcorp. In all, the company has 14 silver purchase agreements and expects attributable production to reach 27 million ounces in 2011. As a silver streamer Silver Wheaton enjoys another benefit, its sales are routed through a tax advantageous Cayman Islands subsidiary. In 2010, the company reported revenue of $423.4 million and earnings of $0.83 per share.

Because a large percentage of the company’s revenue is derived from low-cost, long-life mining operations and it does not sell forward its silver sales the rise in the price of silver has been beneficial to Silver Wheaton. In an interview with CNBC, Silver Wheaton’s CEO, Peter Barnes said he believes silver prices could go through $50 in the next two to three years, and that hedging the company’s silver is not on the horizon.

2. First Majestic Silver Corp. (TSX:FR)

Mexico is a country rich in history and in silver. During the European conquest of the Americas, silver was discovered in Mexico in 1546 in what is now the state of Zacatecas. Vast amounts of the shiny white metal were brought into the possession of the crowns of Europe from the area. The Fresnillo mine in Zacatecas, owned by the Mexican silver producer that bares its name, is considered to be one of the world’s largest primary silver mines and it has been in near continuous operation since 1550. And today, Mexico is one of the world’s biggest producers of silver.

Zacatecas, known in Mexico as The Silver State, has a long history of silver production dating back to the 1500s.

An early mover into silver-rich Mexico has proven to be a good strategy for First Majestic Silver. The company has three producing mines in three different states including Durango, Jalisco and Coahulia. First Majestic’s soon-to-be fourth producing asset, the Del Toro Silver Mine, is located in the state of Zacatecas. But the company faced some challenges along the way. In late 2008, during the height of the financial crisis, the company’s shares traded down to a low of $0.88. But since then First Majestic’s comeback has been nothing short of amazing. The company now trades on the NYSE, and its shares are being exchanged of late for $20.00. Today, the  company has a market capitalization of over $2 billion.

On May 13th, 2011 First Majestic Silver reported revenue of $55.3 million for the first quarter of 2011, an increase of 211% compared to $17.7 million in the first quarter of 2010 and an increase of 38% or $15.2 million compared to the fourth quarter of 2010. These results were spurred on by a 95% increase in the average realized price of silver, combined with a 13% increase in production. The appreciation in the price of silver went straight to the company’s bottom line. The company, which is considered to be the purist mid-tier silver producer, generated net earnings of $23.9 million for the first quarter of 2011 compared to net earnings of $0.4 million in the first quarter of 2010 and net earnings of $13.7 million in the fourth quarter of 2010. First Majestic Silver currently reports a cash balance of $97.1 million and the company doesn’t carry any long term debt.

With an income statement that might make the most conservative accountant crack a smile and a balance sheet that could even make Jim Flaherty blush we connected with the President & CEO of First Majestic Silver, Keith Neumeyer, to find out what’s on the horizon for the company – CLICK HERE – for the interview.

For 10 Most Interesting Silver Stocks – Part 2CLICK HERE.

Mike Luft

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