For the past two years, investors in the precious metals complex have watched nearly every commodity race higher, with oil, coffee, orange juice and copper up significantly from their 2021 lows.
And for investors looking for leverage to the metals, the corrections were even more painful in the mining stocks, with the GDX sliding over 50% from its highs above $45.00 per share set in August 2020.
Fortunately, we’ve since seen a reversal to this trend. Not only is gold knocking on the door of a new all-time high, but silver is outperforming over the past month, up over 35% from its lows after making a new year-to-date high above $25.00/oz.
This has lit a fire under several silver miners, with their margins set to improve by over 50% based on AISC margins of ~$6.00/oz in FY2022, and the potential to enjoy margins closer to $9.00/oz if the silver price averages $25.00/oz this year.
In this update, we’ll look at two silver miners that are still trading well off their 2020/2021 highs and look to be solid buy-the-dip candidates:
Pan American Silver (PAAS)
Pan American Silver (PAAS) is a $7.0 billion gold and silver producer with a production profile of approximately ~1.5 million gold-equivalent ounces [GEOs] after acquiring Yamana’s South American assets last year.
This makes it one of the largest producers sector-wide and the acquisition solidifies its spot as a top silver producer, with the company expected to produce ~28 million ounces of silver in 2024, and this excludes the massive Escobal Mine which has the potential to produce ~20 million ounces of silver if it is restarted.
The major benefits of the acquisition were that Pan American improved its diversification by adding new assets in Brazil (Jacobina), Argentina (Cerro Moro), plus two assets in Chile (El Penon, Minera Florida).
Notably, these assets are lower-cost than Pan American’s current production profile, and the company also added a majority stake in the MARA Project in Argentina, a massive copper-gold-molybdenum project that is capable of producing 530 million copper-equivalent pounds on a 100% basis. This is equivalent to $1.2 billion in annual revenue or ~600,000 gold-equivalent ounces.
Despite this significant upgrade to the investment thesis following the acquisition of most of Yamana’s assets, Pan American Silver continues to trade at a lower valuation than it did at its peak in August 2020, yet it’s added over $4.0 billion in net asset value. This is a significant disconnect and Pan American Silver continues to be one of the cheapest ways to get silver exposure, with the company trading at barely 3x sales assuming we see no further upside in metals prices.
Plus, there are multiple projects not accounted for in FY2023 sales and cash flow estimates, including Escobal, MARA, La Arena Sulphides, and La Colorada Skarn, with a combined value for these projects of more than $3.0 billion [US$8.00 per share].
Based on what I believe to be a fair multiple of 11.0x cash flow and FY2024 cash flow per share estimates of $2.48, I see a fair value for PAAS of $27.30, pointing to 43% upside from current levels.
In addition, investors are getting an attractive ~2.0% dividend yield at current levels, pushing the total return closer to 45%.
So, with over 40% upside to fair value to its 18-month target price, and this not accounting for an impressive development portfolio (and or assets in care & maintenance), I see PAAS as one of the sector’s best buy-the-dip candidates, and I would view pullbacks below US$17.10 as buying opportunities.
Wheaton Precious Metals (WPM)
Wheaton Precious Metals (WPM) is a $23.0 billion company in the precious metals space and is arguably the premier way to play the silver sector.
This is because it boasts scale, capital discipline, and diversification, with its President and CEO, Randy Smallwood, being involved in the founding of WPM as its EVP of Corporate Development.
Since it was founded in 2007, Wheaton Precious Metals has seen its revenue increase from $160 million to ~$1.1 billion, and the company should see a record year in 2024 with the potential to generate revenue of $1.35 billion and over $700 million in free cash flow.
Looking at the FY2024 free cash flow estimates (~$700 million) and its current market cap, many investors may quickly jump to the conclusion that WPM is very expensive, with it trading at more than 30x free cash flow.
However, this is a superior business model to producers with considerable leverage in a rising metals price environment, and the company is sitting on one of the strongest balance sheets sector-wide with nearly $1.0 billion in cash.
The reason for its superiority vs. producers is that Wheaton Precious metals does not actually produce metals, it instead makes an upfront payment in exchange for the right to purchase a portion of production over the life of mine of its partner’s assets.
For example, WPM has the right to buy 50% of silver produced at Cozamin for a payment of just 10% of the spot price ($2.50/oz at a $25.00/oz silver price).
The benefits to this business model is that Wheaton Precious Metals is insulated from inflation on operating costs as well as capex inflation, and it is much more diversified than the average producer with streams on over thirty assets globally.
Based on what I believe to be a fair multiple of 28.0x cash flow and FY2024 cash flow per share estimates of $2.10, I see a fair value for WPM of $58.80, translating to over 17% upside from current levels.
However, this fair value could rise to north of $65.00 per share if metals prices continue their upward trajectory, and these cash flow per share estimates do not include new projects set to come online in 2025 with WPM being one of the better growth stories in the royalty/streaming space.
So, with a diversified portfolio, an experienced team and upwards of $2.5 billion in liquidity to scoop up new streams, I see WPM as one of the safest ways to play the sector.
That said, I see the ideal buy zone being $42.00 or lower, meaning that the best way to play the stock is to wait for a correction.
Several precious metals stocks have rallied sharply over the past few months, but the key is separating the wheat from the chaff.
And while many might seem to have solid growth stories, the track records in the sector are dismal at best and there are only a few names that are truly investable.
So, for investors looking for silver exposure, I see PAAS and WPM as two of the best names to buy on dips.
That said, both stocks have seen strong runs, so while they belong at the top of one’s watchlist, I would be waiting for a sharp pullback to start a new position.
Disclaimer: This article is the opinion of the contributor themselves. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information in this writing. Given the volatility in the precious metals sector, position sizing is critical, so when buying small-cap precious metals stocks, position sizes should be limited to 5% or less of one's portfolio.