Silver Miners: Will Share Repurchases Lead to Outperformance?
We recently learned that First Majestic Silver (NYSE:AG) has announced its intention to repurchase up to 5 percent of its outstanding shares (117 million). While the company has had a share repurchase program in place, management has not yet bought back a significant amount of stock — the March 2013 to March 2014 repurchase program saw very little buying — and the company bought just over 200,000 shares. I suspect that with the stock down 50 percent from its 2011-2012 highs that we will see the company begin to repurchase its own stock more aggressively.
Is this a good idea?
So far precious metals mining companies have had a lousy track record in repurchasing their own shares. While there weren’t many companies that did, those that I can cite – AuRico Gold (NYSE:AUQ) and Gold Resource Corp. (NYSEMKT:GORO) — did a lousy job in timing the market. AuRico Gold in particular was especially aggressive in its share repurchases in the first quarter of 2013, when the company was valued at close to $2 billion. It is now valued at slightly more than $1 billion and is having trouble turning a profit in this environment.
But despite the fact that we saw failed repurchases from AuRico Gold and Gold Resource Corp., and despite the fact that depressed meal prices might lead one to the conclusion that mining companies should be preserving their capital, I think now is a good time to consider companies in the precious metals space that have share repurchase plans in place. In addition to First Majestic Silver, the other company that has announced its intention to repurchase up to 5 percent of its shares is one of the largest silver miners: Pan American Silver (NASDAQ:PAAS).
Both companies are performing well in that they are keeping production costs low. First Majestic in particular is increasing its production, which makes it especially appealing, although keep in mind that it is a more expensive stock. Both companies’ stocks are well off of their highs high back in 2011-2012, which means that they are likely doing a good job in timing the market.
I especially appreciate that both companies had share repurchase agreements in place in 2013 that they didn’t really use. We already saw that First Majestic Silver repurchased just over 0.1 percent of its outstanding shares. Pan American Silver was equally as reluctant with its total repurchases, reaching just $6.7 million last year versus a market capitalization of more than $2.2 billion.
Ultimately, both companies have been excellent stewards of capital and I think it is very telling that both companies plan to repurchase their shares this year. First, I think it means that these companies believe that the silver price has found a bottom. Silver is trading more or less in a range between $18.50 per ounce and $22 per ounce. This level is the same level where silver found resistance in 2008 before falling, and once it broke above this level in 2010, the price soared.
The fact that it found support at this level indicates that there is a lot of buying at this level, and that the long-term bull market is still intact. I think both management teams are recognizing this and figure that by buying their own shares they are, in effect, buying silver.
Second, in the case of First Majestic in particular, I think the company is not finding any expansion opportunities for the time being. First Majestic Silver has very specific parameters that determine which mines it will invest in. It only invests in low-cost mines in Mexico that get the vast majority of their revenues from silver.
Such mines are few and far between, and if First Majestic cannot find any opportunities or any willing sellers (after all, this is a buyer’s market) then it might as well invest in such properties by buying its own shares. Pan American Silver doesn’t have this strict rule in choosing properties, although it is sitting on more than $400 million in cash and equivalents.
It is also waiting for approval to begin developing its large Navidad mine in Argentina. Therefore, management figures that while it waits it can return some capital to shareholders and buy some of its own stock at depressed prices.
By buying back their own shares, First Majestic Silver and Pan American Silver are going to create demand for their stocks, and I think that this is going to be very good for shareholders. This increased demand can lead to a short-term outperformance, and it can also lead to a longer-term outperformance from the perspective of a silver bull.
Silver bulls who see the price of silver going much higher will find that they own a greater percentage of either First Majestic Silver or Pan American Silver, and this should add leverage to the upside as the bull market continues.
Ultimately I think these share repurchases will wind up being excellent decisions with some hindsight.
Disclosure: Ben Kramer-Miller is long First Majestic Silver.