I have to start by confessing there is almost no one on earth with less understanding the precious metals markets than I have.
When I listen to my gold bug friends outline the catastrophic future that will make god and silver invaluable, all I can think is that canned food and bullets would be a much more desirable medium of exchange. When my hard-money friends talk about going back on the gold standard, my one overriding thought is about the endless arbitrage possibilities when one nation has a gold-backed currency and everyone else is using fiat.
I am convinced that our attraction to gold comes from our ancestors’ love of bright, shiny things and is almost entirely emotional in nature.
While I do not understand the attraction to metal, I do have a good calculator and a decent pencil and can evaluate the business value of the companies that mine the stuff. I don’t have to have gold and silver bars stacked in the closet to understand that metals miners are businesses and can be evaluated as such.
Right now, with a persistently weak global economy and the world more concerned about deflation than inflation, the metals themselves are cheap and the companies that mine them are trading at significant discounts to their asset value.
Consider Iamgold (IAG). The gold and silver miner has a total of six mines in Africa, South America and Canada. According to the most recent reports, production is up about 20% year-over-year, and net cash from operating activities was up 155% compared to last year. All-in costs are declining, so margins are widening a bit for the company.
Gold prices are still down, but the company is performing and making a profit. In spite of this, the unfavorable market conditions for the miners have pushed the stock down to just 50% of tangible book value. The debt-to-equity ratio is a reasonable 0.23 and the current ratio is 2.9, so the balance sheet is in decent condition. Those financials make IAG stock one of the best gold and silver miners to buy at the moment.
Hecla Mining (HL)
Hecla Mining (HL) is the largest primary silver producer in the U.S. and is one of the lowest-cost silver producers. The company also has growing gold production operation and is a low-cost gold producer as well. The company’s performance is pretty solid: Hecla has increased revenues and is projecting lowered cash costs of silver production again this year. In the last decade, silver production has increased by 277% and gold output is up 167%.
Hecla’s mines are located in politically safe, mining-friendly areas. With a current ratio of 2.4 and a debt-to-equity-ratio of 0.39 HL should be able to keep the lights on until metals pricing improves. In spite of those financials, the stock is trading at just 80% of book value. If you’re looking for great gold and silver miners, it’s tough to do better than HL stock.
I do not have to understand the case for owning metals as long as I understand the miners as business. And right now, the business is cheap. If I believe metals will rally at some point in the next five or 10 years — whether it’s due to a stronger economy, inflation or just increased consumer demand – then I should buy these mining stocks while they are cheap based on asset value. No matter what the cause, a rally in metals could see these stocks triple or more in value for patient investors.
As of this writing, Tim Melvin was long HL.