As the U.S. government builds higher deficits, many investors
have sought the safe haven of precious metals - especially gold.
Rising government debt loads can trigger inflation and gold bugs
see the yellow metal as a safe haven. Silver has often been seen as
a "defense against inflation" play as well - with a key difference.
If the global economy posts a solid rebound but inflation remains
still, then silver should also rise in value, as it is used in a
wide range of industrial processes. Truly an offensive and
An up-and-coming name among silver producers is
Silver Standard Resources (Nasdaq: SSRI)
, which is about to morph from an owner of silver mines to a
producer of the precious metal. During the past five years, the
company has been steadily acquiring partial or full interests in
some of the most fertile mining regions. Now, with all of its
assets in place, the company is ramping up production. And that
should yield a robust spike in sales.
Silver Standard only began producing silver in December, and showed
just $5.4 million in sales for all of 2009. Yet by the end of this
year, two of the company's major mining operations should be
operating at full tilt. And that should yield revenues of more than
$100 million if silver prices stay at their current level. As a
pair of additional mines come on line during 2011, the company
should see sales approach $200 million. By the end of next year,
the annualized rate of production could approach $300 million.
How that translates into profits depends on the spread between
mining costs and the market price for silver. Right now, it costs
the company about $9 to dig up, refine and transport an ounce of
silver. On the open market, silver is fetching about $18 an ounce,
so if the company can meet its target of seven million ounces
produced this year, then it can make about $63 million in gross
Of course, if the global economy cools once again, and silver drops
in value, then the company's take will be reduced. Don't forget,
rising silver prices would yield even fatter profits. Roughly
speaking, for every $2 move in silver prices, the company can earn
an additional $0.15 per share. That means the current consensus
2011 earnings-per-share forecast of $0.59 implies that per-share
profits would fall to around $0.15 if silver fell to $12 an ounce.
Conversely, if silver prices rose to $24 an ounce, then per-share
profits would approach $1.00. It's too soon to forecast 2012
profits, but as production is expected to increase another +50%
that year from 2011 levels, gross profit would likely increase by a
Yet you don't want to buy this stock for its earnings power, but
instead for the value of its assets. As noted earlier, Silver
Standard has spent a considerable amount of time and money
acquiring interests in the most prolific mining regions --
especially in Argentina, Mexico, Peru and British Columbia. Based
on the most recent purchase prices, the company's stakes are worth
roughly $2.6 billion, or $30 a share. That's more than +50% above
the current value of the stock.
Whether the stock reaches that price will be a function of supply
and demand for silver. If demand builds, then the value of silver
mines will rise in value. Of course, a slackening economy would
make recent transactions in the sector look richly valued.
None of us holds a crystal ball as to the outlook for the global
economy. But silver's defensive and offensive characteristics make
this a name to own.
-- David Sterman
Disclosure: David Sterman does not own shares of any security
mentioned in this article.