Choosing a Silver Company

The silver market hasn’t done well in recent months as the price of silver remained between $19 and $22. Nonetheless, investors, who believe the silver market is bound to recover in the near future, could consider silver oriented companies. Two leading companies in the silver market are Silver Wheaton (NYSE: SLW) and Pan American Silver (NASDAQ:PAAS). Let’s take a closer look at these companies and examine their relative strong points and weakness.

First of all, even though Silver Wheaton and Pan American Silverare in the silver business, they are very different companies: Silver Wheaton is the world’s leading silver streaming company. Conversely, Pan American Silver is a precious metals producer (mostly silver). Nonetheless, both companies offer a good opportunity for investors, who wish to increase their exposure to silver related investments. Moreover, according to these companies’ 2014 guidance, their respective silver production account for roughly 73% to 74% of their total precious metals production. This means both companies have a similar exposure to silver. Let’s start by examine these companies expected growth in operating in 2014.


In 2014 Silver Wheaton doesn’t expect to increase its gold and silver sales (in ounces). According to the company’s annual guidance its silver equivalent ounces are projected to rise by only 0.5% and reach 36 million ounces.

Pan American Silver doesn’t expect to show a much higher growth in its operations in 2014; its silver and gold production is expected to increase by only 2.5%, year over year. Therefore, both companies don’t offer much growth in their respective operations. Let’s turn to their balance sheet and their financial risk. 

Good balance

The balance sheet of Pan American Silver is one of the company’s advantages with close to $400 million in cash and short term investments, total debt of $65 million and a debt-to-equity ratio of only 3%. The financial risk of the company is relatively low. Moreover, the company was able to reach an operating cash flow of $36 — 12% higher than in the first quarter in 2013.

Silver Wheaton is also doing well, but the company is a bit riskier than Pan American Silver from the balance sheet perspective: Its cash and short term investments are low at $82 million, its debt is around $1 billion and the company’s debt-to-equity ratio is 30%. Further, its operating cash flow dropped by 30% mainly due to low precious metals prices. Nevertheless, Silver Wheaton’s financial situation isn’t dire and its financial risk isn’t high.

Profitability and dividend

The profitability of Silver Wheaton is much higher than Pan American Silver’s, because the former is a silver streaming company while the latter is a silver producer. In the first quarter of 2014, Silver Wheaton’s operating profitability was 49%. Moreover, its operating cash flow to net sales ratio was 69%. In comparison, Pan American Silver’s first quarter profitability was only 15% and its operating cash flow to net sales ratio was 17%. Despite the higher profitability of Silver Wheaton, Pan American Silver pays a hefty annual dividend yield of 3.75%; Silver Wheaton’s dividend yield is only 1.3%. The reason for this difference is because Silver Wheaton tied its quarterly dividend pay to its operating cash flow — as the operating cash flow drops the company’s dividend diminishes. Conversely, Pan American Silver doesn’t link its dividend pay to its cash flow operating, which allows the company to maintain its high dividend.

Over the long term, however, Silver Wheaton’s policy is a better one for the company as it doesn’t have to take a loan, reduce its cash on hand, or cut down its capex in order to maintain its dividend payment.

Bottom line

Silver Wheaton and Pan American Silver are both strong companies and have their own relative advantages. Pan American Silver pays a higher dividend yield and has a stronger balance sheet. Silver Wheaton is much more profitable and is more able to turn its sales to cash due to its type of business. I think that over the long run Silver Wheaton has a better business plan, which is less risky and offers higher returns.

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Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.