EXCELLENT PRESSPLEASE NOTE THE PRICE TARGETS QUOTED IN THE ARTICLE ARE FOR THE US listed SLW.
UBS joins the congregation of the silver faithful
By: Dorothy Kosich
Posted: '26-JUL-06 04:00' GMT © Mineweb 1997-2006
RENO--(Mineweb.com) UBS began coverage of four primary silver companies this week, citing the positive outlook for the silver price and predicting an upward trend prices to continue in the medium term with continuing high volatility.
In an analysis written by analyst Craig West, UBS forecasts that silver prices will average $15 an ounce in 2007
West predicted that investment demand, driven by the weakness of the U.S. dollar and the strength of gold, "will continue to support higher prices." While silver prices are usually 10-15% more volatile than gold prices, West suggested that the small silver market and shrinking global silver bullion stocks "create the potential for high returns."
While investors could cautiously opt to invest in a silver ETF, West stated that "investment in equities can provide similar exposure to the metal with increased leverage, as well as added optionality from growth, and the potential for new discoveries."
UBS rated Silver Wheaton (SLW), Pan American Silver (PAAS) and Silver Standard (SSRI) as a "Buy 2" and Coeur d'Alene Mines (CDE) as a "Neutral 2."
PRICE TARGETS
Launching its coverage of Silver Wheaton, UBS set a price target of US$12.50, "given the growth expected from current contracts, the potential for new contracts, and its full exposure to higher silver prices (with some downside protection through its existing contract structure." West cited the company's 100% silver exposure, non-operator silver production, potential stock overhang from Goldcorp's 57% equity stake, and unhedged position as positive attributes.
West said he expected Silver Wheaton's contracts to produce 15 million ounces of silver this year. Meanwhile, planned expansions under current contracts could increase production to 20 million by 2009.
West said Silver Wheaton's "unique operating structure offers both substantial benefits and some drawbacks." UBS believes that "the potential for additional silver contracts will be the main driver of growth for Silver Wheaton." However, new contracts will require financing that will be funded primarily with debt. West said the greatest operating benefit is the company's fixed cost per ounce structure. However, that same structure also limits the company's operational control.
UBS set a price target of US$5.25 per share for Idaho silver producer Coeur d'Alene Mines. Nevertheless, West gave the company a "Neutral 2" rating because older U.S. operations are winding down, "which is expected to lower production in 2007." But, West also noted that "Coeur d'Alene is a company in the heart of change," adding that Coeur's long-term growth depends on two development assets: the Kensington gold project in Alaska and the San Bartolome silver project in Bolivia. West explained that the Bolivian project is crucial to long-term growth, but also faces higher political risk, while Kensington is facing potential litigation from NGO opponents. However, he feels that Kensington could increase the company's gold exposure from its current 37% to greater than 50%, which could provide "re-rating potential."
Finally, West concluded that "give our expectation for a decline in production from 2006 to 2007, higher development risk, and increasing political risk," Coeur's P/NAV rating is "slightly below that of its peers."
Vancouver-based silver miner Pan American was given a US$24.75 price target. "Our positive view is predicated on the potential for significant production growth and decreasing political risk," West stated. He noted that the company is expected to bring new Mexican mine Alamo Dorado online by year's end, and has expansion plans for its Peruvian operations. "With six operations assets, and another by year-end, the company has good operating diversity and improving political diversity," according to UBS.
West called Pan American a "great value at current price," adding that its exposure to by-product zinc, lead and copper "could result in significantly lower costs in this high-price environment." He asserted that the market has "misunderstood and overestimated" the political risk of PanAm's three-nation operations. Nonetheless, West declared "we remain wary" of Bolivia's political situation and have been conservative in its modeling of the future of the San Vincente mine in Bolivia.
However, UBS positively responded to "the magnitude of the company's growth plans over the next few years, the potential to realize significantly lower net unit costs this year due to high by-product credits, and good diversification of production from a great number of producing mines in silver different countries."
Vancouver-based silver explorationist Silver Standard was given a $24 per share price target by UBS, which noted the company "has one of the largest in-ground silver resources of any publicly traded silver company." West cited the large portfolio as providing support for Silver Standard's plan to become a silver producer.
UBS explained that Silver Standard expects a "significant number of catalysts" during the second half of this year, including the first drill results from the San Luis project in Peru, the anticipated completion of project studies for the Bowdens project in New South Wales, Australia, and the Diablillos silver-gold project in Argentina this year, and updated resource estimate from the Pitarilla project in the Mexican State of Durango. West also noted the company was non-hedged with no debt.
QUALITY RATING
In terms of overall total quality rating, UBS gave its highest ranking to Pan American, followed by Silver Wheaton, Silver Standard and Coeur.
West predicted that silver equities "should continue to trade at premium to net asset value (NAV) given the scarcity of investment vehicles and the optionality of new discoveries." At a $15/oz silver, UBS calculated a NAV/sh operating value of $17 for Pan American, $8.75 for Silver Standard, $8.55 for Silver Wheaton, and $3.47 for Coeur.
In its commodity discussion, UBS suggested that "silver is expected to remain largely a plan on investment and speculative demand rather than a pure commodity supply/demand story." Their analysis expects "speculative demand to lift silver in late 2006 and 2007." West suggested that "high price volatility, combined with more limited physical liquidity, and the recent successful launch of the silver ETF, make silver a cheaper, higher-risk, potentally higher-return version of gold."
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