At this silver mine it apparently pays to get the lead out. Investor’s Digest of Canada columnist Mike Kachanovsky has found a silver mining stock with enough revenue from its byproduct zinc and lead production to entirely offset all mining costs, so that the company is expected to achieve ‘negative’ costs on a per-ounce basis for its silver production.
Most investors look through the wrong end of the telescope when making decisions. For example, even though a quarterly report amounts to a mere snapshot in time of any company’s performance, there is often a huge market reaction.
I believe this is exactly the wrong approach to take, especially for mining stocks during a difficult metals regime, when even the best-run companies have encountered challenges. Consider that in August, both Endeavour Silver Corp. (TSX—EDR; NYSE—EXK) and First Majestic Silver Corp. (TSX—FR; NYSE—AG) reported results that missed expectations. They were punished with share price losses of more than 20 per cent in the aftermath.
In hindsight, one can view this as a ridiculous overreaction by an irrational market, especially when both companies had already reported lower production numbers in July. Rather than hit the sell button, a more shrewd approach would be to consider the factors that led to the less-than-ideal performance and then calculate the future recovery prospects for these superbly run mining companies.
Momentum investors were quick to unload positions, but I believe the value investors that step up to buy now will eventually be vindicated. Value investing is not confined to buying oversold dips after a disappointment. The objective is to find the stronger companies that offer bargain basement stock valuations.
Base metals pay the freight in this silver mine
For the junior miners at the moment, this boils down to finding the ones that have leverage to base metals output.
Toronto-headquartered Americas Silver Corp. (TSX—USA; NYSEMKT—USAS) is one such company that investors should consider. The company’s recent quarterly earnings indicate that it is generating steady profits and efficiently managing operations at its two producing mines.
Revenue, cash flow, and earnings were all significantly higher during the quarter than in 2016. This represents a welcome contrast to the disappointing numbers that most of the mining stocks reported.
The improved operating performance at Americas Silver demonstrates that management has done an excellent job of optimizing output and squeezing costs to continue profitable operations even during this interval, when the price of silver is low.
Note that all-in sustaining costs were still well below the $10 per ounce price of silver (excluding any byproduct credits). Why is this company performing so much better than its peers, which struggle to break even?
At Americas Silver’s Galena mine in Idaho, a large chunk of the total mine output is made up of lead that is recovered in tandem with the silver. Its Nuestra Señora mining complex, near Cosalá, Mexico, also produces lead, zinc and copper, as part of the recovery circuit for the silver ore that is mined.
These base metals are priced at multi-year highs, so the byproduct leverage has contributed a hefty windfall to revenues.
Strong operating results have padded the balance sheet, too. As of the most recent quarter, Americas Silver holds more than $18 million in working capital.
Looking ahead, the company has issued guidance for steady production output through the rest of the year with continued cost control to sustain profitable earnings.
New mine also combines zinc and lead with silver
Perhaps the most important factor for the company in the near term is development of a new mine in Mexico. The San Rafael mine is expected to commence production this fall. This project has the potential to boost revenues and earnings even higher.
Once again, the ore at this mine is poly-metallic, endowed with significant zinc and lead content, and has positive metallurgical characteristics suggesting high efficiency in the recovery circuit may be achieved with low operating costs overall.
The project is expected to have an internal rate of return greater than 100 per cent, which is very rare for a mine development.
Americas Silver management has updated San Rafael guidance, stating that mine development is progressing on schedule and may come in below budget. Capital spending for this new project has been funded by cash on hand and internally generated cash flow, another indication of this junior miner’s strength.
Meanwhile, zinc and lead prices have risen sharply during the year. Therefore, the financial performance for this mine may be even stronger than was originally projected.
San Rafael will offer a leap forward in Americas Silver’s total production. The mine is expected to produce more than one million ounces of silver per year, along with 50 million pounds of zinc, and 20 million pounds of lead.
The revenue from the byproduct zinc and lead production will entirely offset all mining costs, so the company is expected to achieve ‘negative’ costs on a per-ounce basis for silver production. This is also very unusual for a significant mine and will likely set the stage for several years of extremely attractive operating performance.
Very safe stock to own right now
With fewer than 40 million shares issued, Americas Silver is treading water at a low market capitalization in the range of about $170 million. Like most mining stocks, it has been largely ignored within the confines of the general sector’s bearishness as the overall markets surge to new high after new high.
My opinion is that many investors have completely given up on mining stocks and are chasing dangerously overvalued stories in other sectors.
The resource sector is notoriously volatile at the best of times, and cyclical extremes are usually the best moment to take action. When the opportunity to buy an established, well-run and profitable mining stock at the bottom of the market is at hand, with prospects for many years of growth in the pipeline, I think the decision to accumulate shares is pretty easy.
The kicker will be if my optimism for higher future silver prices indeed comes to pass. A rebound off the extreme bear market lows for the entire sector could furnish very attractive gains for shareholders of Americas Silver as the company forges ahead with its growth plans.
One need not sit on the sidelines and wait. Bearing in mind its base metals leverage, I believe this is a very safe stock to own right now, and it could become a huge winner when the next bull market for silver commences.
Mike Kachanovsky is a freelance writer who specializes in junior mining stocks and also covers technology companies.
This is an edited version of an article that was originally published for subscribers in the September 8, 2017, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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