The consensus of market experts with regards to silver in 2011 goes something like this: silver prices are generally expected to stay hot in 2011 - though not without troughs - after dramatically outpacing gold prices in 2010.
According to Jefferies analyst Michael Dudas, silver prices should "achieve higher highs and greater lows in the next 12 to 18 months" driven by monetary, supply-demand and technical drivers. The prediction comes as BullionVault announces that its online gold and silver trading business grew nearly 29 per cent by volume to $1.33-billion (U.S.) in 2010, while customer numbers increased to 21,000 given the increased appetite for safe-haven and alternative investments.
In light of this, TheStreet sat down with numerous silver stock analysts and market watchers to arrive at six stocks the experts say they would buy during the expected silver price dips - in hopes of later benefiting from anticipated silver-price spikes in 2011.
Silver Wheaton is considered to be one of the most stable silver stocks due to its unique and stable business model.
"They don't have the risks of excavating and not finding anything," said Yu Dee Chang, Principal at ACE Investments. "Their costs are fixed. That's why their profit margin is also fixed. I like this as a more stable play."
Silver Wheaton's core approach lies in buying already-excavated ores from miners, then extracting silver from it. The company's portfolio includes silver streams from Goldcorp's Peñasquito mine in Mexico and Barrick's Pascua-Lama project spanning the border of Chile and Argentina.
The company says it currently has 15 silver purchase agreements and two precious metals agreements where it has the right to purchase all or a portion of the silver production at a low fixed cost from high-quality mines located in politically stable regions. Silver Wheaton estimates that it will have exposure to 40 million silver equivalent ounces of annual production by 2013, from about 23.5 million silver equivalent ounces in 2010.
David Christie of Scotia Capital has a sector outperform rating and one-year, $40 price target for the stock. "Silver Wheaton performed better than any other silver investment including the metal itself year-to-date," he told investors in late 2010, noting that few silver stocks have outperformed the metal. Christie praises the company for being the best-leveraged and safest operational growth story of the precious metals companies he covers.
Pan American Silver could gather upside momentum and outperform silver moving forward, according to numerous analysts, as management of this leading global silver producer reassures investors about its ability to conduct open pit mining in one of world's largest untapped silver deposits in the world.
This deposit, the Navidad project in Chubut, Argentina, that Pan American owns, is estimated to contain at least 632 million ounces of silver. "They've had some questions about production growth and it looks like there should be some resolution on that relating to the property in Argentina," observes TEAMX manager James Dailey.
Overall, Dailey is impressed by Pan American, particularly its "extremely" effective management team from both a profitability and cost standpoint, and its strong operating performance in 2010.
Dailey believes there's significant upside potential left for the stock; although it shot up more than 70 per cent in 2010, Pan American Silver still lagged behind the metal and peers due to uncertainty over whether the company could continue to grow its operations. As the company appears closer to a resolving the issue, analysts are growing more confident about the stock's ability to begin outperforming silver. Dailey says he's expecting short-term correction in silver owing to better-than-expected economic news and a stronger dollar, and that this correction could make way for a good buying opportunity in stocks such as Pan American, which are highly leveraged to the price of the commodity.
Jefferies analyst Michael Dudas has a "hold" rating on Pan American Silver, praising the company for its 14 straight years of silver production growth owing to strong management. Possible risks for the company include lower-than-expected gold and silver prices, regulatory and political issues surrounding its global operations and slower production ramp-up, he writes in an investor note. Overall, Dudas predicts a premium multiple for the company going forward.
Although its name does little to denote this, Goldcorp is a well-positioned silver play for 2011, according to the analysts we surveyed.
"The name is one that people tend to think of it as gold, but it's in the top 20 of silver producers globally with about 13 million ounces a year ," says Peter Sorrentino of Huntington Funds.
Morningstar analyst Min Tang-Varner recently raised her fair value estimate for Goldcorp by $12 a share to $48 after the company reported a 28 per cent rise in revenue for the third quarter ended Sept. 30 compared with the year before.
This, despite 4 per cent decline gold production, as revenue received a boost from $1,239/oz realized gold prices and $19.15/oz silver prices.
Tang-Varner tells investors that the reduction of Goldcorp's cash cost by $100/oz from the prior quarter to $260/oz due to higher silver, copper and zinc production and the run-up in their prices, was "rather extraordinary."
Sorrentino says Goldcorp is a stock that investors would be "wise to consider" if they were looking for a name that would be discovered suddenly as a major silver play, without feeling that they were overpaying for it.
Goldcorp also prices everything that it does in Canadian dollars, which should reduce currency risks for investors in Canada.
Silver Standard's transition to production from exploration has inevitably led to many challenges for the company; but its high-quality assets and new leadership are keeping the eyes of investors glued to the company.
For the third quarter ended September, Silver Standard reported loss of 10 cents a share vs. loss of 6 cents that Wall Street was expecting, as the company experienced lower-than-expected silver production and higher-than-expected interest expense, cash costs and income tax. Adjusting for foreign-exchange loss and stock-based compensation, Silver Standard reported loss of 4 cents a share vs. loss of 2 cents that industry observers such as BMO was expecting. The impact of the loss on BMO's view of the stock was "slightly negative," leading BMO analyst Andrew Kaip to maintain a market perform rating on the stock.
"They're in the bridge period where they're moving from having been a very successful exploration company finding silver to now trying to ramp up the mines into production," says TEAMX's Dailey; and with that comes with a natural set of challenges that can be political, environmental, weather-related and permitting related.
Still, Dailey believes that as long as silver prices continue to cooperate; and given Silver Standard's high-quality assets, the stock's relative underperformance "could be laying the groundwork for outperformance as we go forward." In his opinion, the company's logistical issues are short term.
In August, Silver Standard brought in new CEO John Smith. A veteran of the mining industry, Smith had spent the last 18 years of his career with mining giant BHP Billiton.
As a pure play, small cap stock, Minefinders could greatly benefit from a jump in silver prices, yet fall just as easily.
That said, MineFinders is more of speculative play.
ACE Investments' Chang says if silver jumps, Minefinders, currently trading at about $10.80, could hit $13 to $15 almost instantly. "This one could go up like crazy," he said.
"By the same token, I think there is a risk that the stock could be at about $7 to $7.50. So before you know it, it could have 30 per cent downside risk."
For the third-quarter ended Sept. 30, Minefinders reported loss of 7 cents a share; above BMO's estimate of 9 cents loss a share, but below the consensus estimate of loss of 2 cents a share, as sales of gold and silver fell due to ongoing production problems. But the negative production impact was offset by lower-than-expected cash expenses.
BMO analyst Andrew Kaip told clients that the company's weak production had a "slightly" negative impact on his view of the stock and maintained his market perform rating for Minefinders.
Minefinders, precious metals mining and exploration company, currently operates the multi-million ounce Dolores gold and silver mine in northern Mexico. In late 2010, Minefinders received credit approval from The Bank of Nova Scotia for the renewal of its existing US$50-million revolving credit facility.
Coeur d'Alene Mines has the potential for a strong rally in light of rising silver prices.
Over the last couple of years, Coeur d'Alene was a no show relative to the performance of its peers and silver. But the company started the perform in the second-half of last year, gaining more and more recognition for being one of the top producers in terms of silver output.
"As people dig more and more into rising silver prices - who benefits from silver prices, and who's been left behind, and who would play the biggest catch-up rally, Coeur d'Alene would be one I think people could easily buy and feel more confident that they were getting something that had not already run up," says Sorrentino of Huntington Funds.
For the third quarter ended Sept. 30, excluding special items, the company had operating earnings of 2 cents a share, which was better than RBC's estimate for loss of 2 cents a share, but below the consensus estimate of earnings of 7 cents a share.
In the longer-term, RBC Capital Markets analyst Michael Curran tell clients that he considers the company's balance sheet to be one of the weakest among its peers and predicts that it will have below-average production growth compared with its peers.
However, Curran still raises Coeur d'Alene stock to "sector perform" from "underperform" given the company's improving operations. "We now believe more consistent operating results can be achieved by Coeur," he said in a client note. "Adding in our view of increased investor interest in the silver equity space, CDE shares should better track the peer group of silver producers."