Market Overview

How to Capitalize on Silver's Growth without Derivatives


Commodities like gold and silver have been rallying fairly consistently for the last couple months while equity markets were experiencing extreme volatility. Traders able to play with commodity derivative contracts had the opportunity to make plenty of money, but can investors do the same in the equity markets?'

Great Panther Silver (NYSE: GPL) is a small-cap silver mining company that operates two silver mining operations in Mexico. The company has been publicly trading since February 2011, seemingly bound to a $2-$5 range. Currently at $3, investors may be wondering if Great Panther will benefit from rising silver prices despite the equity market's downturn.

To learn more about Great Panther's operations and its prospects, Benzinga reached out to Jeff Wright of Global Hunter Securities. Wright recently upgraded Great Panther to a 'buy' rating with a price target of $4.25.

Although Great Panther Silver recently reported revenues lower than the previous quarter, Wright contends that operations were not hindered as badly as some investors may believe. “Logistical issues in the company's sales chain are what negatively impacted the top-line, not something related to production. It is not indicative of a long-term problem, and Great Panther has already begun alternative sales channels. The top-line numbers may very well be robust for the third and fourth quarters as Great Panther sells the inventory buildup.” Wright did inform Benzinga, however, that if the company reports impressive numbers in the upcoming quarters, the income statement numbers may be overstated, just as they were understated for the second quarter.

Global Hunter's Wright also explained the company's interesting stock movement since it was listed on the NYSE Amex. Debuting in February 2011 at around $2.50, the stock climbed to about $5 in March, and has gradually declined to a low of about $2.65. Wright stated that investors were very excited about the stock, resulting in strong demand for a short period. After, it declined from a peak of about $5.00 because "investors realized they got ahead of themselves when considering the company on a cash-flow basis." More recently, the company's equity losses "can be attributed to broader market behavior."

To understand the company's operational performance, it is helpful to consider the balance sheet first. The company's cash position has improved since 2008, when it was $1. It rose to $13 in 2009 and $14 in 2010. The primary reason for the minimal growth over the last two years is due to increased receivables, inventories, capital expenditures, and the lack of issuances, which contributed $12 million to Great Panther in 2009. PP&E assets also increased by $3 million in 2010.

The liabilities side of the balance sheet saw a contraction from $10.3 million to $10.0 million. Capital lease and asset retirement obligations declined, although payables increased. Convertible notes and long-term debt became $0 as the last of it was transferred to their respective short-term accounts. Shareholders' equity increased from $26.8 million to $25.5 million as a result of paid-in capital and a reduction in losses stemming from an offering of convertible notes. Revenues in 2010 climbed by about 31% to $42 million, leading to higher margins. Operating costs also increased, primarily because of a large increase in "mining property exploration expenditures." According to Wright, Great Panther acquired and began exploration of the San Ignacio project in the Guanajato state, which some investors believe will increase the company's resource base and ultimately revenues. Considering all costs, net income increased to $5 million from a loss of -$867,000.

Great Panther's cash flows increased from 2009 to 2010. Because of net income, cash flows from operations increased from $1 million to $4 million. Cash used up from investing activities increased as a result of increased capital expenditures. Cash flows from financing activities, however, dropped from $13 million to $4 million. A few reasons include an increased payment of capital lease obligations and promissory notes and the lack of stock issuances. In 2009, the company gained about $12.3 million from an equity offering, while no such activity occurred in 2010.

Investors can also consider financial metrics to determine Great Panther Silver's value. The stock is considered overvalued when considering its price/earnings and price/book ratio. When looking at price/sales, the stock looks cheaper than competitors' stock, only marginally; GPL trades at 7.4 times sales while competitors, on average, trade at 8 times.

Growth metrics show that Great Panther has had higher revenue growth for the past three years; it has grown at about 39.6% while competitors have grown at 25%. Most recently, Great Panther's operating and net margins have been smaller than others'. This may mean that Great Panther is not be progressing as quickly as its competitors, which would not be viewed favorably by the market. Great Panther does, however, have a higher return on equity, of about 16.3%, compared to competitors, who average 12.7%. Lastly, the company's debt/equity ratio is virtually 0.

Great Panther Silver is a small-cap company that has recently been listed on US equity markets. While the stock has not been doing well recently, equity researchers like Jeff Wright believe it has room to grow. Moreover, the financial statements have shown numbers that may appease Great Panther's investors. Financial metrics do not necessarily portray Great Panther as a good investment, however, so investors will have to seriously research the company to determine if it is a suitable candidate for investment.

Great Panther Silver at $3.04 per share. The stock has gained about 8.6% since its inception on the NYSE.

Posted-In: Analyst Color Long Ideas Specialty ETFs Small Cap Analysis Commodities Markets Trading Ideas Best of Benzinga


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