Wouldn’t it be nice to have a list of high quality exploration or mining companies at the fingertips so that it is easy to construct long-term portfolios or do some short-term trading when the right opportunity comes along? With all the silver producers, gold explorers, copper developers, etc. out there, how is one to keep track of the ones that potentially deserve investor attention? An incomplete list or partial view of a given group of resource stocks can easily leave the best ones out of a portfolio. It can even lead to poor investment decisions in a worst-case scenario. Our solution: find the companies that are different from their peers in a good way and put our effort into studying and following this elite group, the “Peerless” companies.
The Peerless Concept
What is a Peerless company?
Peerless companies have an important advantage –whether management or project — over the others in their peer group, thereby improving the odds of success while providing a greater margin of safety for investors.
For example, let’s assume there are ten generic juniors exploring for gold in Peru and none of them have made a major discovery or have defined a resource. How would we pick a Peerless company, if any, from this group? Well, one way would be to consider management strength — especially prior experience in Peruvian gold exploration. Another could be a project that lies on strike to a major gold deposit and appears to have a similar geology. The “Peerless” factors would be different for each peer group but would still be based on objective considerations.
Depending on what the Peerless considerations are, a particular Peerless company may interest one type of investor but not necessarily another. For example, one investor might be looking for near-term buyout candidates just entering production whereas another is willing to take on the risk of a long-term holding associated with an early stage development story. Our Peerless company universe will ideally contain companies that would satisfy all but the most exotic investor demands. It is in this adaptability where the true advantage of the Peerless approach lies compared to having a “model portfolio” or “basket” of stocks … of which we do have several for Metal Augmentor subscribers.
Please note that Peerless status is not eternal, and Metal Augmentor will not be the final arbiter of the Peerless universe. Therefore we will be encouraging subscribers to provide us with feedback on our selections as well as submit their own Peerless candidates for consideration.
It’s also important to understand that we will not own every Peerless company — or even most of them — in our model portfolios or personal accounts. Peerless is not equivalent to favorite, undervalued or “most likely to double in a year”: it is an attempt to pick and stay focused on a subset of the resource company universe on the basis of quality (however that is defined). Although tempting, nobody can own every company that has something interesting or prospective in the offing — that would still be a majority of the companies and their performance over the long term would not look very different from the index.
One particular problem we face at Metal Augmentor is to easily trade in and out of positions as opportunities emerge or fade since this usually involves a detailed explanation of our investment or trading thesis. This can be time-consuming and counterproductive. There’s also the unfortunate fact that selling a stock is interpreted as no longer liking the company. These issues will largely go away when we concentrate our efforts and trading primarily on the Peerless companies — our thinking and observations will already be documented in advance and that means we can get down to the business of making money buying, holding or selling the stock.
The Peerless Silver Producers
Since we have been focused on updating our valuation model of the silver producers, it was natural to create the Peerless Silver Producers list first. Although we have approached the selection process using qualitative factors, it is always useful to have some quantitative measures as well. Therefore you will find below a valuation range chart of the silver companies currently in our proprietary model. An important disclaimer is that our valuation model is not fully updated and thus for several projects and companies the data may be a bit out of date (not updated since our early 2011 silver producers report and subsequent qualitative analysis.) For the most part the data is substantially correct but the chart is for illustrative purposes only and not to be taken as a highly accurate reflection of silver producer valuations.
Note that several silver producers are not included in our model. These are primarily companies that are producing less than 1 million ounces per year (on a pure silver, not silver-equivalent, basis) as well as a few companies we have yet to model: Impact Silver (TSX-V: IPT), Silvermex Resources (TSX: SLX), Silvercrest Mines (TSX-V: SVL), Dia Bras Exploration (TSX-V: DIB), Mandalay Resources (TSX: MND), etc.
Not all the companies included in the above valuation chart qualify as Peerless in our opinion … and for now we are not going to consider any that we have not yet modeled (mainly Dia Bras). This shortcoming will be rectified soon. In the meantime, the Silver Producers that made our Peerless group are listed below in alphabetical order along with a brief “Peerless” description. These descriptions along with various company and project-specific factors will be detailed as we document and keep track of the companies in the Peerless groups.
Peerless Silver Producers
Aurcana (TSX-V: AUN; Pink Sheets: AUNFF)
Endeavour Silver (AMEX: EXK; TSX: EDR)
First Majestic Silver (NYSE: AG; TSX: FR)
Fortuna Silver (NYSE: FSM; TSX: FVI)
Fresnillo PLC (LSE: FRES; Pink Sheets: FNLPF)
Hochschild Mining (LSE: HOC; Pink Sheets: HCHDF)
Pan American Silver (NASDAQ: PAAS; TSX: PAA)
Silver Wheaton (NYSE/TSX: SLW)
Silvercorp (NYSE/TSX: SVM)
Aurcana (TSX-V: AUN; Pink Sheets: AUNFF) – An emerging mid-tier silver producer with low jurisdictional risk (US/Mexico) and good potential for both resource and mine life expansion. The appointment of Dr. Peter Megaw as exploration consultant increases the odds for new discoveries in Aurcana’s carbonate replacement deposits (CRDs) given Dr. Megaw is the preeminent CRD expert. There is still execution risk at the Shafter project (Aurcana’s key valuation driver), and we plan to conduct a site visit soon to better evaluate the likelihood of a smooth transition from development to production during 2012. Disclosure: Aurcana is an institutional client of Metal Augmentor.
Endeavour Silver (AMEX: EXK; TSX: EDR) – One of the lowest cost silver producers with 8 years of consistent growth and apparently more to come. This outfit knows how to exude quality and has done a great job keeping a tight share structure. The silver-gold production profile is also quite attractive.
First Majestic Silver (NYSE: AG; TSX: FR) – An emerging top-tier silver producer in Mexico with exceptional properties and growth plans, low operating costs and one of the purest silver production profiles. Well followed by institutions with the company trading on the NYSE since 2010.
Fortuna Silver (NYSE: FSM; TSX: FVI) – A well-managed, growing silver producer with consistently profitable operations and broader investor exposure than most through its listing on the NYSE.
Fresnillo (LSE: FRES; Pink Sheets: FNLPF) – The world’s premier silver producer with significant gold by-product production — on track to produce ~50 million ounces of silver (plus gold and base metals) per year by 2015! It’s a well-oiled cash flow machine, sporting cash costs on par with Silver Wheaton thanks to fat by-product credits and ready access to smelting and refining facilities.
Hochschild (LSE: HOC; Pink Sheets: HCHDF) – The operator of several world-class silver assets including most notably its Arcata mine in Peru (8 million ounces of silver per annum) with “deep” expertise in underground mining. Struggling a bit with rising costs, but still ranks among the lowest cost producers not named Fresnillo or Silver Wheaton. Hochschild is also on the hunt for heap leachable gold deposits to develop (isn’t everybody though?) and we would not be surprised if they announced a number of deals in the near future considering their roughly $1 billion war chest* and what is an otherwise somewhat limited growth profile. *consists of cash + shares of Gold Resource Corp (AMEX: GORO). We believe the biggest upside for the share price could be simply accomplished by dual-listing in the U.S.
Pan American Silver (NASDAQ: PAAS; TSX: PAA) — Even before accounting for the Minefinders (AMEX/TSX: MFN) acquisition Pan American is on track to be producing well over 40 million ounces of silver per year when the massive Navidad project comes on line (est. 2015). Unfortunately there’s currently a ban on both open pit mining and cyanide use within the Chubut province of Argentina where Navidad is located, which adds some binary risk to the investment (although Navidad is being given minimal valuation by the market at present). The move to acquire Minefinders may even be a sort of signal that the Navidad timeline will need to be stretched … however, Pan American still makes our cut for having operating prowess, a diversified mining profile, strong current cash flows, and a high proportion of silver to base metal production.
Silver Wheaton (NYSE/TSX: SLW) – The purest, lowest-cost silver “producer” with almost non-existent overhead, a nearly zero percent income tax rate, and exposure to several long-lived, world-class mining operations. Silver Wheaton is a cash flow powerhouse at anywhere near current silver prices and its royalty streaming business model is capable of growth even in a weak commodities market (since mine developers would be struggling to obtain traditional financing).
Silvercorp (NYSE/TSX: SVM) – A silver-lead-zinc producer with a strong foothold in China that should translate into future growth as it is given preference to acquire, modernize and expand existing small-scale operations throughout the country. Also looking to expand into high-grade silver production outside China in order to utilize its development expertise and diversify the production profile — but the world-class Ying mine is the reason this low-cost silver producer makes the Peerless list.
The Non-Peerless Silver Producers
Here are a few words about some of the companies that didn’t make it into our Silver Producers Peerless universe at this stage:
Alexco Resource (AMEX: AXU; TSX: AXR) — Production is humming along, but there’s still plenty of questions about what happens when the current ore body is exhausted and mining shifts to other areas. This is a mining district that was made by grade and grade is what will make Alexco fly (or sink as the case might be). Future production estimates seem little more than guesswork based on sparse drilling and the plans rely on quickly blocking out and bringing small, high-grade ore bodies into production. From the company’s most recent February 2012 presentation we’re told the goal is 5 million ounces annual silver production in 3 years (from est. 2.2-2.5 million ounces in 2012) and then 7-10 million ounces in 5 years. Maybe, but we would need to see specific plans for getting from Point A to Point B … if achievable then Alexco should easily make the Peerless list.
This is straying a bit from what qualifies or disqualifies something as Peerless, but we think investors are being done a disservice when charts like the following are prominently displayed in a company’s presentation:
The red arrows and circles were added by us to illustrate where some of those bubbles should roughly lie in the chart when using correct data. We only annotated the 3 most extreme errors, but plenty of the other bubbles need adjusting as well. Even if you assume Alexco meant market cap instead of enterprise value, some of these data points are still way off base. Yes there is some correlation between enterprise value and silver production, but it’s not nearly as neat as is being illustrated and that’s exactly what we would expect. After all it’s obvious that a company with more production should trade at a higher EV, all else equal … but things aren’t equal! Charts like these make zero attempt to account for differences in production cost, by-product credits, mine life, or production growth/decline. Taken together these other variables can in most cases adequately explain the outliers.
Coeur d’Alene Mines (NYSE: CDE; TSX: CDM) – Coeur boasts a history of underwhelming performance and questionable decision-making. The financial and operating results are somewhat misleading: San Bartolome is by far the most valuable (if not quantitatively then qualitatively) of Coeur’s mines, but it is located in Bolivia.
Excellon Resources (TSX: EXN; Pink Sheets: EXLLF) – On and off troubles at its Platosa mine have led to inconsistent and high cost production. The modeled mine life is short and dependent upon additional exploration success. Although there’s always the potential they discover a larger system, for now Platosa is too small an operation to provide much positive cash flow beyond covering exploration and overhead costs.
Great Panther Silver (AMEX: GPL; TSX: GPR) – Production declined at both of Great Panther’s mines during 2011 compared with forecasts for significant growth. It’s a high cost producer and grades are creeping lower. The company desperately needs to increase its teeny tiny reserve base and make a more convincing case that it will be capable of significantly increasing production … much less maintain it.
Hecla Mining (NYSE: HL) – Hecla didn’t make the Peerless cut due to its troubles at Lucky Friday and the related stigma that’s likely to linger during 2012 and perhaps beyond, even though the current valuation is arguably fully supported by Greens Creek. Once the path to resolution at Lucky Friday is visible, we would consider Hecla for the Peerless list again especially since it is one of the longest continually listed companies on the New York Stock Exchange. Most silver companies don’t make it to a decade much less a century!
International Minerals Corp. (TSX: IMZ) – International Minerals has too much exposure to Ecuador and most of its silver-related valuation comes from joint ventures with Hochschild … which does not have exposure to Ecuador and is therefore the obvious Peerless choice.
Revett Minerals (TSX: RVM; OTCBB: RVMID) – With Revett there’s simply too much riding on the eventual development of environmentally-challenged Rock Creek where forward progress has been very slow.
Scorpio Mining (TSX: SPM; Pink Sheets: SMNPF) – A newly-invigorated silver-zinc-lead producer with room to grow production meaningfully under the direction of ex-Vale hotshot Parviz Farsangi. Despite the new operational competence and good financial performance, some of the company’s disclosures (in particular the silver-equivalent metrics) are deceptive. They need not be so since mine expansion has not been built into the models but could arguably make Scorpio one of the more attractive silver-base metal district plays in the years ahead. Future production guidance supported by technical studies will be the way to unlock value, and to that end we are looking for the following developments: (1) completing all of the optimization and updating the mine plan for Nuestra Senora; (2) developing and disclosing production metrics for the plant expansion; (3) progress on leveraging the regional (Platte River, etc.) silver assets; and (4) aggressive exploration to prove up district-wide resources that could further boost production in the medium term. A focus on operational excellence and developing the regional assets while maintaining a pipeline of expansion projects should deliver the growth that the company’s valuation upside is predicated upon. Given the base of operational competence, Scorpio Mining could easily adopt and deliver upon a similar regional strategy along with insistence on excellence in all aspects of corporate operations that have made First Majestic so successful. Disclosure: Scorpio Mining is an institutional client of Metal Augmentor.
Silver Standard Resources (NASDAQ: SSRI; TSX: SSO) – Silver Standard has so badly bungled Pirquitas that it is unlikely to be called Peerless anytime soon, despite having over $700 million in cash + investments (Pretium shares) versus a $1.3 billion market cap. Other projects add to the apparent value but development plans are less than crystal clear and therefore the company’s valuation in our model should be taken with a grain of salt.
U.S. Silver (TSX: USA; Pink Sheets: USSIF) – U.S. Silver does not publish detailed operating statistics and it is not possible to build a proper mine model of their Silver Valley project. Ore bodies are generally small and spread out, requiring a substantial portion of mining profits to be put back into the ground in the form of drift development.
We are still developing the Peerless concept and so the above Peerless Silver Producers list — or any future one — is not set in stone. We have probably considered more subjective vs. objective factors in this first installment than we’d like and we’ll eventually want to organize our selection process into a more standardized format. Do you have a quibble or substantial point to make about the list? Are we missing any company? Did we fail to consider some critical factor pro or con? Let’s discuss these and other issues constructively in the Comments section below (Metal Augmentor subscribers only) so this Peerless list as well as others in the future will have the benefit of a rigorous review and evaluation.