While painful for existing stockholders, I believe what we are seeing today represents an amazing investment opportunity for value-oriented investors. Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family, is credited with saying, "The time to buy is when there's blood in the streets." And a somewhat more contemporary quote comes from billionaire oil baron J Paul Getty who said, “Buy when everyone else is selling and hold when everyone else is buying. This is not merely a catchy slogan. It is the very essence of successful investments.”
The point is, obviously, to invest in a stock or asset class when sentiment is terrible and everyone is selling. This is when fundamentals are ignored and decisions are emotionally driven. I believe we are now at this point with the precious metals miners.
The first metric I looked at was book value, which is defined as the net asset value of a company, calculated by total assets minus intangible assets (patents, goodwill) and liabilities. The reason I looked at book value is because this is the theoretical value investors would receive if the company were liquidated. It's a nice, quick calculation that gives insight as to whether a company is currently overvalued or undervalued by the market. Once you determine the book value of a company, you can divide it by the total number of diluted shares outstanding to arrive at a Book Value per Share.
The table above is sorted by Price / Book Value in ascending order. In other words, the companies most undervalued according to this metric have the lowest number and are at the top of the list. A number less than 1.0 indicates that a company's liquidation value is worth MORE than the market cap of the company. So, for example, Coeur Mining has a book value of $1.8 billion and a market cap of $453.2 million. Theoretically, if the company was liquidated, investors would receive four times more than the value of its market cap. If one were to only look at book value, then four of the six companies above represent screaming buys with Price / Book Values under 1.0. As is usually the case, however, you can't look at this metric in a vacuum as it ignores debt obligations. Since mining requires huge up-front investments, debt is often integral to a mining company's capital structure, therefore it cannot be ignored.
That brings us to the second metric in the table above: Net Cash. As the name suggests, net cash weighs the total cash and cash equivalents on a company's books against its total debt load. I'm classifying "finished inventory" as a cash equivalent because a miner's finished inventory is literally money - in this case silver. Net cash definitions can vary, but as stated in the footnote above, I'm calculating it as follows:
Net cash = Cash + cash equivalents + finished inventory - debt - convertible notes
A positive net cash figure is a good thing as it shows the company has good debt coverage and, therefore, can weather the rough times without necessarily having to raise additional capital to fund operations. A negative net cash position suggests a company is over-leveraged and less prepared to weather a sustained downturn in business.
Running the analysis on the six miners above reveals that two miners are in a negative net cash position while the rest are positive. From here, I divide the net cash by the total number of shares outstanding to arrive at Net Cash per Share. Again, the higher the positive number, the healthier the balance sheet.
Taking Price-to-Book Value and Net Cash per Share together, we can see two miners starting to stand out. Silver Standard Resources (SSRI) and Pan American Silver (PAAS) both sport Price-to-Book values under 1.0 suggesting that the market has discounted them both to the point that the shares are now worth less than the assets of the company. Second, SSRI and PAAS both have excellent Net Cash per share readings - far and away higher than the other miners on this list. While Coeur Mining has an impressive book value, it's carrying a significant debt load which should concern an investor in these difficult times.
If you believe, like me, that silver prices are poised to move (a lot) higher (I've posted numerous times on this including here, here, and here), then now is the perfect time to invest in silver miners who are well positioned to ride out the storm. Silver Standard and Pan American both stand out as excellent investment candidates when viewed from a value-oriented, fundamental lens.