Priced to Perfection: The $3 Precious Metal Play

The silver market is primed for a breakout move. And as you’ll see, there’s a $3 way to play it.

Last year we saw a general downtrend in precious metal prices. From a high last January around $32 an ounce, the price of silver marked a downward trail to its current perch at $20/oz.

That’s the bad news.

The good news is that over the past two months the price of silver has formed a solid base. Said another way, silver’s chart is consolidating for a potential move to the upside…

Call it what you will — an ascending triangle, consolidation, coiling or sideways trade – but the recent trend for silver is the most positive action we’ve seen in months. From where I stand the price has formed a substantial base around $20 — which makes for a great upside opportunity.

There are several fundamental reasons to like silver right now, too.

Sure, we’re talking about a precious metal and similar to gold the price of silver will rise with the threat of inflation. And even though the fed has unveiled the first step in its taper plan, it’s been well-digested by traders and baked into the pie, so to speak, for the price silver. In that sense, I think we’re also seeing some positive bottoming action.

If silver heads towards $25 an ounce, the right mining play will pay off handsomely.

But silver is also much more than just a precious metal, it’s also a vastly-used industrial metal. It’s a great conductor for electricity and is used extensively in the developed world. So as economies the world-over continue to recover and grow, the demand for industrial silver is set to soar.

This is a key distinction between gold and silver. Unlike gold, silver prices are much more affected by mine output. So as mine output flattens and demand continues to rise we could see a very positive trend emerge for silver. (This is very similar to what we’ve seen in platinum and palladium – only this time around it’s silver’s turn!)

Add it all up and there’s a lot of reason to like silver right now.

But while the price of silver may rise some 25%, on its way back to $25/oz, the price of a well-run silver miner could more than double those gains.

If silver heads towards $25 an ounce, the right mining play will pay off handsomely.

My favorite company for this short-term upswing is Hecla Mining (HL.)

Hecla Mining is a pure play silver miner with a manageable market cap shy of $1 billion — that’s about 1/20th the size of, say, a mining giant like Goldcorp.

From a production standpoint Hecla runs two silver mining operations.

Greens Creek, in mining friendly Alaska, is their main silver operation. The mine is wholly owned by Hecla and in 2013 production rang the register at seven million ounces of silver.

When you add in the cost of byproduct metals (like gold and zinc) Hecla’s cash cost per ounce at Greens Creek is $2.70 an ounce – making it one of the lowest cost silver mines in the world. The expected mine life at current production is nine years, so there will be more production to come for this workhorse of an asset.

Hecla’s other silver operation is the Lucky Friday mine in Idaho — the mine went offline in 2012 for rehab work, but resumed production (on schedule) in Q1 2013. Since then, the mine produced 1.6 million ounces.

At full speed this mine is expected to produce over five million ounces per year (expected by 2017.) With 25 years of mine life expected this mine will also continue to provide reliable cash-flow and ounces for years to come.

In regards to silver production, a good year for Hecla should be above 10 million ounces of silver — plus the associated gold, lead and zinc production (which helps offset mining costs.)

In perspective, Hecla is one of the lowest cost pure play silver miners on the market. And even though all in costs are around $20 an ounce there’s still upside in this play. After all, just a slight increase in silver prices (a rise to $25?), an increase in zinc or gold prices, or a decrease in costs (down to $15?), could lead to substantial upside.

As a little icing on the cake, last June Hecla acquired a producing gold mine from Aurizon Mines. The Casa Berardi mine in Quebec has expected 2013 production of 62,000 ounces of gold. With a mine life of approximately 9 years this gold mine will add to Hecla’s producing assets – and keep the cash spinning.

Besides being straightforward, Hecla is cheap. Shares recently dropped close to the $3 threshold, which is why this player is back on my radar.

Looking at Hecla’s chart, since mid-December prices are up 18%. This could be the beginning to a nice leg higher for Hecla. Add in the fact that silver prices look poised for a rally and you’ll see that this $3 silver miner is worth a good hard look.

Keep your boots muddy,

Matt Insley
for The Daily Reckoning

Ed. Note: As the silver market starts to heat up, you’ll want to make sure you’ve got Matt on your side telling you what he sees and how best to play it. He spends countless hours researching trends and finding the hidden investment plays that make the most of these kinds of moves. And he shares everything he knows with his FREE Daily Resource Hunter readers every single trading day. It’s a perfect way to stay informed on the resource and energy markets, and you might just make a bit of money in the process. So what do you have to loose? Sign up for the FREE Daily Resource Hunter email edition, right here.

The article originally appeared in the Daily Resource Hunter

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