With the price of silver hovering around $19/ounce most silver miners cannot make a profit, and many of those companies that can make a profit are making money because they are mining gold and copper on the side. On the one hand this makes the silver mining industry very unappealing from an investment standpoint—why would you want to invest in a company that isn’t making a profit, or one that is barely making a profit? On the other hand, this observation implies that the silver price is simply too low. Silver is an essential industrial element, and if mining companies cannot make money mining it, then they simply won’t do it.
We have already seen a couple of smaller companies shut down their silver mining operations. For instance last year Golden Minerals (AMEX:AUMN) shut down its Velardena silver mine last year because it was losing so much money. Another company—First Majestic’s (NYSE:AG)—recently decided to postpone its expansion plans at its newest producing silver mine—Del Toro—in order to preserve capital.
If less silver is being mined then then the risk increases that demand will not be met, and this could lead to a supply shock.
It is for this reason that I am extremely bullish on silver miners. But how do you pick the best ones to own? There are numerous factors to consider, but one in particular is the company’s current profitability. Since we don’t know how long silver prices will be depressed there is an added risk in owning shares in a silver miner that cannot make money at $19/ounce silver because if the price stays low long enough the company may need to issue more stock, and it may fall into bankruptcy. So now is probably a good time to look for silver miners that can earn money in the current environment. I have picked out three here that are worth considering.
1. First Majestic Silver
First Majestic Silver reported a small profit in the first quarter of about $6 million, and this means that it can turn a profit at the current silver price. First Majestic Silver may be somewhat overvalued on a price to earnings basis, but investors need to consider the fact that this company’s management has a decade-long track record of creating shareholder value. The company has five producing silver mines—all of which make money—and it has increased silver production every year since it first started in 2004. This is an incredible accomplishment. So going forward the company may have to slow down its expansion plans for while prices remain low, but we can be confident that production will increase in the long run, and that the company’s mines will remain profitable.
2. Tahoe Resources
Tahoe Resources (NYSE:TAHO) just started producing silver at its Guatemalan silver mine—Escobal. This is one of the largest silver mines in the world that can produce 20 million ounces annually. And costs are going to be low as well. In its first quarter of production the company earned $25 million, and in the second quarter this number should be higher even if the silver price is down, as it is the company’s first quarter of full production.
Ultimately I think Tahoe shares are somewhat expensive given the fact that it is going to produce silver at such a low cost—a lot of investors want to invest in a highly profitable silver miner. But given the fact that management brought the mine into production so quickly and on budget speaks to its acumen, and as the company accumulates cash it is going to move to acquire another silver mine. With prices so low, it will be able to do so inexpensively. In the long run this could be the largest silver miner in the world, and it has incredible growth potential. I would be a buyer on weakness.
3. Avino Gold and Silver Mines
Avino (NYSEMKT:ASM) is a tiny company with just a $53 million valuation, but it has been generating a lot of profits at its Avino Mine. Profits exceeded $1 million in the first quarter thanks to rising production and low costs. This means that it can make an annual profit of around $5 million , which makes the shares relatively inexpensive.
What is so compelling about this company is that it is making this money mining a secondary part of its Avino property. The main part stopped producing in 2000 because of low metal prices, and the company hopes to start up production later this year or early next year. This could mean a substantial increase in profits, and leverage to the silver price once the market turns around. Because it is such a small company Avino isn’t for everybody. However, I think it can make a lot of money for investors in the next few years.
Disclosure: Ben Kramer-Miller is long First Majestic Silver and Avino Gold and Silver Mines.