Archive for May, 2010

The Reno Nevada based company, Tahoe Resources, Inc. when public the other day to help fund acquisitions of mines that will increase revenue and margins for the resource company.

They’ve gone through with the sale of 58 million shares at C$6 a share to raise enough money to purchase a silver mine in Guatemala for $330 million USD. The IPO represented selling on the open market a 56 percent stake in the company which now, with this IPO has a market cap of C$624.

The company will be traded on the Toronto Stock Exchange under the symbol THO. The purchase of the silver mine was made from Goldcorp, the world’s second-largest gold producer based on market cap.

Investing in precious metals has always been a way to hedge against the woes of the US economy and inflation, especially in turbulent economic times like these. Well many of you know, the iShares silver trust has been the easiest way to do this by buying into the ETF which holds silver reserves for the market cap it sits at.

Well, today and yesterday the price of NYSE:SLV broke through it’s 50 day moving average of 17.60 to sit right now in mid-day trading at just over 18. That’s a big move for the precious metals market which has been out of luck lately as some groups around the world are dumping their gold and silver reserves.

But don’t worry, just as much as those groups are dumping their reserves, groups like SLV trusts are buying up these reserves which has offered some resistance to huge price decreases, so we think.

The previous metal market is enjoying all the volatility in the equities markets around the world lately.  With all eyes on the Euro decline, what’s happening in Greece, and if Asian markets are to follow this world-wide downward trend, metals like gold and silver are enjoying the ride.

After large upswings in the price per ounce of silver early last year, the price of silver has cooled down, until recently.  Silver is now touching all-time highs again with the price per ounce nearing the $19 mark.  ETFs like NYSE:SLV are reaching new highs with volume on that fund seeing larger than normal spikes.

Mining stocks, which have been a bit boring as of late, have also seen upswings in their prices, although with no real reason for such a turn. Investors are looking to put their money in more traditionally safe vehicles like silver trusts and silver bars and that is just where things look like they’re headed.

Investors looking to get the most out of precious metals should look no further than high-cost mining stocks. While mining operations are traditionally leveraged to the change in price of the underlying commodity, high-cost mining stocks enjoy even more leverage due to the inner finances of the company. I’ll explain below.

High Cost Mining Stocks
High cost mining stocks are stocks that represent a company that pays nearly the full cost of a commodity to bring it to surface. An example of a high cost mining company would be one that spends $15 for every $17 ounce of silver it brings to the surface and refines. Because of the accounting, high cost mining stocks offer huge potential to the upside and are a favorite among investors looking to rev up their returns.

The Hypothetical
Let’s assume that there is a mining company known as XYZ Mining. XYZ Mining operates several silver mines and trades at a price to earnings ratio of 10. Also, the company is a high cost operation, meaning it spends $15 to produce just one ounce of silver. Let’s also assume that the company produces 1000 ounces of silver per year.

So, when silver is $16, XYZ Mining earns $1000 per year. ($16 per ounce X 1000 ounces – $15 cost per ounce = $1000 profit)

However, should silver rise by just 6% to $17 per ounce, XYZ would earn $2000 per year. ($17 per ounce X 1000 ounces – $15 cost= $2000 profit)

As you can see, a small change in the price of silver (6%) generated a profit increase of 100%. If the company were to continue to trade at the same Price to Earnings ratio, it would double in price with just a 6% change in silver prices. Now do you see the value in high cost miners?

Demand for physical silver has soared due in part to strong industry and a desire for physical metals for investment portfolios.  But not all physical silver is created equally.  Investors need be careful to buy only physical metals that are worthy of investment, not collection.

Numismatic Metals

New investors in physical metals often make the mistake of purchasing numismatics, or those coins, bars, medallions, and ingots that are meant for collection rather than investment.  Generally, numismatics earn their value from their rarity, perceived value, or from their appeal as art.  Numismatic coins can often sell for multiples of the worth of the metals themselves, making them poor investments.

Investment Grade Silver

Choices in investment grade silver are plenty.  From junk bags of pre-1964 coinage to rounds and coins both foreign and domestic, there are a myriad of opportunities for the silver investor.  These silver products are better suited for investment because their value is derived directly from the amount of silver in the product.  For example, a 10oz bar will sell for 10x the current silver price whereas a rare American silver coin can sell for hundreds of times the value of its silver content.

Mind the Premium

Unlike exchange-traded funds or futures, physical metals do carry a premium over the current spot price.  This premium, usually 2-3%, helps cover the cost of transport, storage, and marketing of the metals itself where the futures exchanges don’t have as much overhead.  The premium isn’t all a lost cause since you’ll be able to recoup the premium upon sale of the silver, as all physical metals carry a premium over spot.  They have for the last century, and they will for the next.