Silver mining stocks, especially the best silver stocks, have been a stellar area of investment for several years because of the increase in the price of silver. Stocks such as EXN have seen their shares rise up from as little as $.13 to over $1.16 in the span of less than 10 months. This rate of growth is not always the case, especially when there has also been a collapse in the price of silver, leading to a collapse in silver stocks.
Silver Stocks with Production for Cash Flow and Profit
The best silver stocks among silver mining stocks have production. If one is only investing in silver mining stocks that are not yet producing then there is tremendous risk that these can turn out to be busts. Anyone in the mining investment arena can well recall the trouble that a scam called Bre-x inflicted upon the entire industry. Bre-X was representative of a frequent form of fraud, where the age old maxim from Mark Twain and that "a mine is simply a hole in the ground with a liar on top" appeared to come true.
Silver mining stocks that are producing, however, can provide both tremendous profit from cash flow supplying dividends and an increase in capital gains from the stock price. As early as 2000, certain companies such as Silver Standard were buying up mining rights for silver because they foresaw that silver would become a much more valuable commodity in the near future.
Silver has become a much more valuable commodity increasing from the price of approximately $4 per ounce around 2000 to the recent price highs of approximately $19 per ounce. In fact, if one were to attempt to sell a 1 ounce silver eagle coin from the U.S. mint, the actual price received would be far higher than the price quoted on the COMEX. An example of this price premium for U.S. Silver Eagle coins can be seen at ebay.com
Silver mining stocks not only produce profit from the cash flow that they can then turn into dividends, but because of the increase in the value of silver, they can often be expected to deliver tremendous capital gain increases. The challenge then is to determine which stocks will both offer cash flow in the form of dividends as well as an increase in the capital gains by virtue of the value of the stock.
Silver Stocks Valued on Cost of Production
There are several methods of evaluating mining companies and they are significantly different than evaluating most other companies. The key value metric of a mining company is how much does it cost them to produce the metal relative to the stock price. A good example of this is a company where the silver that they have in the ground based on their stock price is their silver is valued at approximately four dollars per ounce.
What this means is that the companies 43-101 resource statement of ounces that they have in the ground converted in to production would be valued at approximately four dollars per ounce based on how much their stock valuation. This represents a solid value for investor because the current value of silver sold on the market is approximately $19 per ounce. As the value of the stock rises relative to the resources the company has, the stock becomes less attractive on a per ounce basis.
All of the numbers necessary for assessing good silver mining stock investments from bad ones come down to the cost of the ounces they produce currently, or can produce, relative to their stock price. Once this simple metric is calculated, finding outstanding silver mining stocks becomes a simple matter. The lower the cost per ounce of production relative to stock price, the better the opportunity for profit.
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