Silver Price Expectations of Silver Stock Investors
Jason Hommel
Somebody asked me a very good question: "What level
does the price of Silver or Gold have to rise to, to justify the
current stock price in the market?"
I have seen writers attempt to summarize the entire
industry in gold stocks by saying, "The gold shares are pricing in a
gold price of $350 right now." But such a blanket opinion is too
general to be of any good use, and wrongly assumes there is no
significant differences between different metals stocks. But we can
calculate an answer for individual stocks, and I will show you how you
can do this.
Some silver stocks won't be significantly profitable
until silver reaches a significantly higher price, but that is also
hard to quantify in advance, and it is actually illegal for a company
to do such pricing projections for you. When doing a bankable
feasibility study, a mining company has to use trailing price averages,
and has to also assume metals prices will go down; they cannot, by law,
assume and predict for price inflation. Crazy, I know.
This is also why I calculate a price in silver for
the silver stocks. It removes the dollar from consideration, and is
equally useful for investors around the world.
For example, if a silver stock like Mines Management
(MNMM.OB) gives you 40 oz. of silver in the ground for one oz. of
silver's worth of stock, that's just a great deal, period. I expect
their profits will be significantly greater than 1/40th of an oz. of
silver for each ounce they eventually mine, and that's how I figure I'm
getting a really great deal, even though I don't yet know or even care
what their ultimate profits may be.
Now, what will the profits be for a silver miner
when the dollar is destroyed and has no value? I have no idea whether
the margins of a silver miner will be 30% or 50% or 300% or 1000% or
more. For example, they might be able to mine an ounce of silver for a
"cash cost" of 1/10th of an oz. of silver, or for 6/10ths of an oz of
silver, but I don't yet know a possible historical range for that.
Costs will depend on future labor and future energy costs, and whether
people are using silver for money again, which makes silver much more
valuable.
Mining will be much more profitable if miners are
paid only about 7/10ths of an ounce of silver for a day's wage, (a
silver dollar) which was the norm in the early 1900's before the Fed
was created and distorted prices by printing paper money.
Stock prices must always reflect expectations for
earnings, and go down or up to reflect changes in earnings, and/or
earnings expectations.
The reason I feel that I have found so many silver
stocks so cheap today is that the vast majority of mainstream investors
believe we will have silver prices in a range of about $5.00 long into
the future. And at this price, most silver stocks will never have any
significant profit. But I believe the silver story is not well
understood by the market, and I believe that silver stocks are even
less well understood, which creates the opportunity that currently
exists. The entire silver stock market is simply too small for
professional Wall Street types to even look at seriously like I'm
taking the time to do in my weekly report.
Nevertheless, as a significant number of people have
begun to understand and anticipate the bull market in metals, they have
bought stocks like HL, and pushed the price up for that stock.
So, let's look at Hecla Mining. I believe their
stock price is anticipating a silver price much higher, and let's
calculate that. To "value" HL, and to see what silver price the stock
price is projecting, you also have to have a "rational" P/E ratio,
which is not the kind of number that everyone can agree on.
For example, a P/E of 10 might be rational for an
expectation of a 10% return on your money, but such a P/E might be too
low if there is serious inflation. (So, I'll use two numbers below, a
PE of 10 and 20.)
Price information as of the market close Tuesday, October 28, 2003:
HL
http://hecla-mining.com
Phone: (208) 769-4100
109 mil shares @ $5.90 share
$647 million Market Cap (MC)
near zero debt, cash: $113 mil
(est. 2003 production 9 mil oz. silver)
Total silver = 53.7 million oz.
Plus 412,000 oz. gold x 10 = 4.1 mil oz silver equiv.
Total silver equiv. reserves = 57.8 mil oz.
Total production costs are $3.68/oz./silver.
HL produces 9 mil oz of silver a year, at a "cash cost" of $3.68/oz.
Total cost = $3.68/oz. x 9 mil oz. = $33.12 million.
First, if we assume a rational P/E ratio of 10,
then, with a market cap of $647 million, they need $64.7 million in
profit, so that the price (market cap) is ten times the earnings.
To get $64.7 million in profit, with $33.12 million
in cost, they need a total realized price of $64.7 + $33.12 for the 9
mil oz. That's $97.82 million for 9 million oz. of silver, or $10.86
dollars per ounce.
In other words, HL investors who are expecting a P/E
of 10, are expecting HL to produce at least 9 million ounces of silver
for the next ten years, and have an average realized sale price for
their silver of $10.93/oz.
Or second, if HL investors expect only a 5% annual
return on their investment, or a P/E of 20, then they would expect only
half the earnings. This would be $32.35 million + $33.12 million "cash
cost" = $65.47 million / 9 mil oz. which is $7.24/oz. This means that
HL investors might only be anticipating a silver price of $7.24/oz. if
they think a PE of 20, and 5% annual returns are a good investment.
Expected earnings for HL right now can be found by
subtracting the "cash cost" from the current silver price, multiplied
by their annual production. This would be: $5.10/oz. - $3.68/oz "cash
cost" = $1.42 x 9 million oz. annual production = $12.78 million annual
earnings.
Earnings estimates for HL can also be found at the
company website from
http://phx.corporate-ir.net/phoenix.zhtml?c=63202&p=irol-Estimates
which give an annual earnings estimate of $.13 per share for 2003. With
109 million shares, that works out to $14.17 million, close to the $12
million number calculated by the current "cash cost" for the silver.
Let's compare HL now with Canadian Zinc. In a
previous article at
http://www.gold-eagle.com/editorials_03/hommel102303.html I inferred
from company statements a few different earnings estimates for Canadian
Zinc of between US $13.3 million/year and US $28.75 million/year.
CZN's expected earnings are about the same, or about
double, HL's earnings. And yet, now compare the current market cap
(cost to the investor to buy the stock) between the two companies:
HL Market Cap: $647 million US (at 109 mil shares outstanding and $4.90/share)
CZN.TO Market Cap: $47.5 million US (at 65 mil shares fully diluted and $.95/share CAN x .77)
$647/47.5 = 14
Based on comparable expected earnings alone, CZN
looks like it might rise by a factor of 14 compared to HL, or more. But
I think HL is overvalued, so please don't mistake me here, I don't
think CZN's stock price will rise not even ten fold any time soon with
the silver price where it is today. But CZN's share price may go up
from US $.73/share to between US $2.04/share and US $4.42/share, or up
279% to 605% from here if a P/E ratio of 10 is expected. And, of
course, if the silver price really moves up, then I'd have to
re-calculate everything.
But the key point is this: If the market cap for CZN
and HL are equal about six months to a year from now, at about
$250-$300 million each, then for the investor of HL stock who sells it
for CZN now, his decision will be a 14-fold gain for him.
(Investors will also be forced to think this way
when considering selling the overvalued dollar to buy undervalued
silver.)
Note, since September 22, 2003, when I wrote my
first weekly report, "Silver Stock--comparative valuations," the price
of HL has declined from $6.82 down to $5.90, while the price of CZN has
gone up from $.41 to $.95 as of the close October 28th.
With Canadian Zinc, the current share price is NOT
yet factoring in or reflecting an expectation for higher silver prices,
because the share price is still well below the earnings estimate with
current silver prices.
You can only do calculations like this if you know
the market cap, the cash cost, and the annual production numbers. In
the case of non-producers, or explorers, you have to trust their
pre-feasibility studies, which I'm doing in this case for Canadian Zinc.
Also, the cash cost number is not a perfectly
reliable number, since you never can estimate true profits (and
dividends) for a company based on it alone, because there are always
other things they spend their profits on, such as exploration or other
non-fixed one-time expenses.
To get a copy of my free weekly silver stock report, email me at jasonhommel@yahoo.com
30 October 2003
Other essays by Jason Hommel:
25 Reasons To Support The Sound Money Bill - 08 July 2004
I'm Insanely Bullish On Silver - 19 June 2004
Silver Stock Evaluations - 22 May 2004
The Silver Bull Is Back - 04 May 2004
Late April Silver Update - 22 April 2004
Silver Juniors With Cash Flow - 04 March 2004
Major Frauds of the U.S. Monetary System - 26 February 2004
Market Perspective & Cabo Mining - 12 February 2004
Usury Enslaves - 19 January 2004
Sterling Mining - 29 December 2003
The U.S. Trade Advantage With China - 17 December 2003
Rising Gold Prices Will Help The Economy - 02 December 2003
Miners to Use Silver as Cash - 27 November 2003
Private Placements in Silver Companies - 20 November 2003
Is the Silver Market Too Small to Buy? - 13 November 2003
Inflation & Deflation During Hyperinflation - 06 November 2003
Silver Price Expectations of Silver Stock Investors - 30 October 2003
Buying & Tracking Canadian Silver Stocks - 29 October 2003
Canadian Zinc--Silver Potential - 23 October 2003
Silver Stocks--Comparative Valuations - 4 - 13 October 2003
Silver Stocks--Comparative Valuations - 3 - 06 October 2003
Silver Stocks--Comparative Valuations - 2 - 29 September 2003
Silver Stocks--Comparative Valuations - 1 - 22 September 2003
Silver and Cardero Resource - 08 February 2003
The Moral Failures of the Paper Longs - 22 January 2003
CFTC Response to Silver Problem - 14 January 2003
People Talking About $32,567/oz - 10 January 2003
Letter To Authorities of Silver Markets - 06 January 2003
Why no talk of $32,567/oz ? - 02 January 2003
Refuting Myths about Gold - 28 October 2002
Controlling Gold with Paper - 10 June 2002
Impending Gold Futures Default - 29 May 2002
Certain gold stocks are still cheap - 07 May 2002
A Few Supply and Demand Fundamentals of the Dollar and Gold - 06 May 2002
New DROOY Institutional Holdings - 21 February 2002
Hommels View of Gold - 23 March 2001
Gold Price Under Differing Scenarios - 24 June 2000
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