You May Want To Take A Look At These Two Silver Miners

March 27, 2018

You May Want To Take A Look At These Two Silver Miners

I recently discussed how silver looks good from a risk reward perspective, so it’s appropriate to discuss some silver miners to see if there are good investing opportunities or if it’s better to accumulate physical silver or exchange traded silver products.

In today’s article, I’ll discuss the top 2 holdings of the iShares MSCI Global Silver Miners ETF.

Wheaton Precious Metals (NYSE: WPM)

Once called Silver Wheaton, this precious metal streaming company invests in various mining projects where it earns royalties for as long as the mine is operating.

WPM gets a bit more than 50% of its revenue from gold and around 48% from silver, so it’s a diversified play. There is an interesting dividend yield of 1.82% which is always nice when holding such hedges and future production is expected to grow.

Figure 1: WPM’s future expected production. Source: WPM.

A royalty streaming company is much less risky due to lots of projects, and also much more expensive than other miners. The price to operating cash flow is usually above 15.

Figure 2: Valuation ratios of major streaming companies makes WPM undervalued. Source: WPM.

If silver prices increase, WPM will do extremely well and they will do well even if prices remain low due to their average cost of $4.71 per silver ounce and $401 per gold ounce. However, there is some leverage to higher metal prices but don’t jump right into it as there is a significant issue with the Canadian Revenue Agency which will hopefully be resolved in 2018, and some problems at two of their mines.

If it doesn’t pay to produce at a mine and it stops working, the royalty streamer doesn’t get anything. Therefore, the cheapness is relative as we don’t know the magnitude hit of the tax issue and what will happen to the San Dimas mine and its stream in the future. More about that when we talk about First Majestic who Bought Primero, the bankrupt owner of San Dimas.

Canada Revenue Agency Issue

The total bill for WPM could be up to $1.7 billion for non paid taxes up to 2017, with higher taxation in the future. A big hit on the $8.5 billion company and also a big hit to future income.

The story is that the Canada Revenue Agency thinks that the gold and silver WPM gets as a stream should be taxed in Canada while the company CEO says they are taxed abroad. In my view, they aren’t because they are a cost to the actual miner so there is no profit tax. So the question is should WPM pay taxes on the profits it makes outside Canada? We will know more toward the end of 2018 or in 2019, but that is another risk plaguing the company.

Fresnillo Plc  (LSE: FRES, OTC: FNLPF)

Fresnillo is a Mexican miner producing gold (50% revenue), silver (38%), and some zinc and lead, with continually increasing production and cash flows.

Figure 3: FRES current and past production. Source: Fresnillo.

The company has a huge pipeline of potential projects that are going to keep it producing for a long time.

Figure 4: Fresnillo’s organic pipeline growth. Source: Fresnillo.

The company is profitable, but 66% of the operating cash flows are used for CAPEX as all those mines have to be maintained and developed.

Figure 5: Fresnillo’s financial data. Source: Fresnillo.

The PE ratio is around 23, but the dividend yield is at 1.3% and that is exactly what is left after the investments have been made. All-in sustaining costs are relatively low at $10.34 as a silver miner and at $765 as a gold miner, and depends what you prefer. Fresnillo is a good company, and fairly priced so you can’t expect anything spectacular here but you can also hope for no big negative surprises. The dividend will likely be maintained and even increased in a few years when the CAPEX drops and the new projects come online.

Industria Penoles (OTCPK: IPOAF)

Penoles is another Mexican miner, and owns 75% of the previously mentioned Fresnillo. Its sales are a little bit more diversified with 41% gold, 25% silver, and 11.3% zinc and other metals. The PE ratio is 13, the dividend yields is at 1.46%, the price to book value is 2.35, and from a quick view, it isn’t much different than Fresnillo.

Figure 6: Revenue segmentation. Source: Penoles.

Seems like Fresnillo, nothing special to deserve in-depth research on its segment other than the Fresnillo ownership.


The two miners discussed here are extremely interesting because they are so different but are similarly priced. One has two big risks hanging above its head, while the other seems like a well run company. The first is a valuation play, the second is a safety play.

More about a third kind of miner when we discuss Coeur Mining in an upcoming article which is a high risk high reward play.

By Sven Carlin Commodities Investiv Daily Mining Silver Share: