More of those gold “Supercharger” Plays

By Travis Johnson, Stock Gumshoe, June 21, 2016

Late last week I started digging into a teaser from Sean Brodrick at Oxford Resource Explorer that promised “three supercharger plays” for the bull market in precious metals that he expects — and though I only “solved” the first teased stock that day I promised to follow up and catch up on the other two.

I got a bit distracted because of the furor over Michael Robinson’s “Little Black Box” pitch that got everyone excited last Thursday, but now we’re back on track — two more “Supercharger Plays” to be unearthed, tout de suite. And yes, gold is likely to be on a bit of a rollercoaster this week, just like US and European stocks, because speculators are trying to game the odds of the “Brexit” and figure out where they want their portfolio going into Thursday and Friday (there’s an interesting summary article here that repeats projections I’ve seen elsewhere, that gold could quickly hit $1,400 if the Brits vote to leave and fall back to about $1,200 if they vote to stay… for individual investors, I think this falls in the category of “things you can’t help thinking about or having a strong opinion about, but rolling the dice with a big bet either way is foolish.”)

The first stock we’ll seek out today is not really a gold “supercharger” … but silver is gold’s crazy younger brother, tending to follow the same path but with much wilder volatility. So what does Sean think you’ll be interested in when it comes to the silver shiny stuff? Here are some clues:

“Supercharger Play #2: Turn $5,000 in to $10,000

“My second pick is a metals play in the world’s largest silver producing country.

“The company was cash-flow-positive throughout silver’s downturn.

“It ended last year with $51 million in cash on the books. And it had $17.6 million worth of cash flow in the quarter.

“I recently visited one of its six producing mines….

“There I discovered the mine was ahead of schedule and under budget.

“Plus, I saw it also has two advanced-stage projects nearing completion.

“It is sitting on $2.2 billion in silver. Yet its market cap is $1.5 billion.

“So you are buying this silver stock at a 30% discount… in a market that’s going to rise as fear spreads….

“In fact, they expect to double production soon.

“On this one, I expect… at minimum… you could get the chance to double your money too.”

That one, sez the Thinkolator, is First Majestic Silver (AG, FR in Toronto). The market cap has gone up a bit since the article was composed (probably a few weeks ago) — it’s up to about $1.9 billion now, from a low of below $400 million in January. This latest bull market surge has really changed stock valuations dramatically, but you can see that over the long run AG has been a pretty solidly levered play on, well, Ag (using the silver bullion ETF, SLV, for comparison):

AG_SLV_chart5yr

It’s frightening to see the wild breakout leverage that so many mining stocks have had so far this year, though, and it seems to really represent the kind of wild enthusiasm that creates crazy bubble valuations — though we should keep in mind that valuations got so horribly depressed that much of this may just be a snap back to something more “normal.”

Still, it scares me when a 25% move in silver causes a 270% move in a silver miner… and this kind of wild leverage has been common across the board in the mining sector. First Majestic has been around for a while, so we can draw a little comparison to past strong markets for silver — back in the third quarter of 2012 silver had a nice 25% run in pretty short order, and this is what the shares of AG did compared with the price of silver (represented by the SLV ETF):
AG_SLV_chart20163qtr
And now, in the first six months of this year, silver is again up about 25%, and you can see what happened to silver compared to what happened to this big silver miner:
AG_SLV_chart20166mo

Th