Raymond James’ top silver picks

Underground workers at Fortuna Silver Mines' San Jose silver mine in Mexico. Credit: Fortuna Silver MinesUnderground workers at Fortuna Silver Mines' San Jose silver mine in Mexico. Credit: Fortuna Silver Mines

Given the plunge in silver and gold prices, Raymond James analysts are urging investors to stick with quality names, in terms of assets, balance sheets and management.

While many miners are lowering costs and effectively running their operations, Chris Thompson and David Sadowski highlight four precious metals companies that stand out in their coverage universe. They are Tahoe Resources (TSX: THO; NYSE: TAHO), Fortuna Silver Mines (TSX: FVI; NYSE: FSM), Mandalay Resources (TSX: MND) and MAG Silver (TSX: MAG; NYSE-MKT: MVG). 

“When we begin to see a recovery in metal prices — which we believe we will — these companies will reaffirm themselves as the sector’s ‘go to’ stories, in our opinion,” the analysts write. 

With the decline in precious metal prices, the analysts have reassessed their coverage universe using spot prices of US$16 per oz. silver and US$1,165 per oz. gold to identify the best and worst performing assets. 

They expect an average all-in sustaining cash cost of US$15.15 per oz. in the second half of 2014 and US$13.22 per oz. in 2015 across their coverage universe, which contains 11 companies, including 10 producers and 27 primary silver mines. 

Tahoe’s Escobal mine in Guatemala and Fortuna’s San Jose mine  in Mexico are two of the industry’s lowest-cost silver mines, Thompson and Sadowski note. 

High-cost mines include Endeavour Silver’s (TSX: EDR; NYSE: EXK) El Cubo and Guanacevi assets, Coeur Mining’s (TSX: CDM; NYSE: CDE) Palmarejo mine and Pan American Silver’s (TSX: PAA; NASDAQ: PAAS) Dolores mine. All four are in Mexico. 

On a consolidated basis, the analysts note the highest-cost producers under coverage are Endeavour Silver and Coeur. The lowest-cost producers are Tahoe, SilverCrest Mines (TSXV: SVL; NYSE-MKT: SVLC) and Fortuna. All three are expected to deliver all-in sustaining cash costs of less than US$12 per equivalent oz. silver in 2015. 

Fortuna can achieve this by lowering operating costs at the Del Toro mine in Mexico. SilverCrest could rank lower if it transitions the Santa Elena heap-leach mine to an underground milling operation, the analysts write.  

Top four

Tahoe posted third-quarter revenue of US$90.3 million and earnings of US$20 million, or US13¢ per share, missing expectations on lower realized prices. 

Production amounted to 5.2 million oz. silver at all-in sustaining cost of US$9.62 per oz., net of by-product credits. With 15.1 million oz. silver produced to date, the miner is on track to reach its full-year target of 18 million to 21 million oz. at all-in sustaining costs of US$8.85 to US$9.85 per oz., net of by-product credits. 

Tahoe will start paying a monthly dividend of US2¢ a share in December, a year after the Escobal mine started commercial production. It exited the quarter with US$79 million in cash and equivalents.

Raymond James has an “outperform 2” rating and $26 price target on Tahoe. The stock closed Nov.11 at $19.32, after reaching a year high of $30.15 in August.

Fortuna reported quarterly earnings of US$7.8 million, or US6¢ per share. This was in line with analysts’ predictions and above the US$300,000 loss in the same period last year, as it sold more silver at higher margins. Revenue increased 54% to US$46.4 million. Fortuna churned out 1.8 million oz. silver and 9,751 oz. gold from its two underground mines: San Jose in Mexico and Caylloma in Peru. All-in sustaining costs dropped 39% year-over-year to US$11.85 per oz. silver, net of by-products. 

Fortuna expects to surpass its annual guidance of 6 million oz. silver and 32,300 oz. gold. It ended September with a US$72.3-million cash position. Raymond James has a “strong buy” recommendation and a $6.50 target. The stock recently jumped 15% to $5. It has a 52-week range of $2.71 to $6.59.

Mandalay posted a net loss of US$700,000, or zero per share in the third quarter, beating expectations of negative US2¢ per share, but coming in below the US3¢ a share earned last year. The decline resulted from lower sales due to delayed shipments at its Cerro Bayo silver-gold mine in Chile. 

Its three mines produced 39,021 equivalent oz. gold, while sales were 29,572 equivalent oz. gold. Mandalay has boosted its full-year production forecast to 141,000 to 156,000 equivalent oz. gold on the back of stronger output. It ended September with US$45 million in cash and equivalents. 

Raymond James has a “strong buy” and a $1.50 target. Mandalay recently closed at 90¢, within a 52-week trading range of 73¢ to $1.22. 

MAG Silver hasn’t released any news since closing a $7.2 million over-allotment option in August related to its $79-million bought-deal financing. The proceeds will go towards advancing its 44% held Juanicipio project in Mexico. Fresnillo (LSE: FRES) holds the rest of the property. 

At the end of August, the junior had a US$90-million cash position with no debt. Raymond James has an “outperform 2” rating on the stock. MAG recently closed at $7.79, down from its year high of $11.42 in June. 

Silver outlook

Tracking gold prices, silver has fallen to a 4.5-year low on the back of a soaring U.S. dollar, which led to a frenzy of retail silver buying. 

On Nov. 5 the U.S. Mint said it ran out of American Eagle silver bullion coins, and later reported it would resume selling the coins on Nov. 17. 

Earlier this month, silver futures dipped to US$15.41 per oz. — their lowest level since February 2010 — before moving up slightly. Gold futures closed at US$1,142.60 per oz., the cheapest since April 2010, before tracking upwards.

The U.S. dollar recently rose to a seven-year high against the Japanese yen after the Republicans won control of the U.S. Senate in mid-term elections.

At press time gold and silver spot prices were US$1,164.30 and US$15.68 per oz. 

CPM Group managing partner Jeffrey Christian expects the silver price will exit the year at US$19 per oz. and average US$20 per oz. in 2015. 

Driving the price increase will largely be investment demand and the metal’s safe-haven appeal against growing global uncertainty. 


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