This post is an example of the actionables available on my subscription site. It is distinct from the Daily Rant pieces seen on Winter Watch.
I was an active and successful mining shares investor in the early days of the precious metals bull market. I learned a lot about mining during that period.  I also learned that mining is very tough business subjected to extra risks and cost pressures.  To win in this sector output has to be increasing faster than costs (energy, labor, etc).  Additionally mining stocks have been ETFed to death, and trade too much as baskets not individual stocks. Accordingly I have only rarely used this sector in recent history. However, right now, certain mining stocks seem to present unusual levels of opportunity, even without any further moves higher in PM prices.  Further, I think we are at an inflection point where the value of the product produced will outrun the input costs.  I have given my view on silver here and here.
One stock I would bring to your attention is Pan American Silver (PAAS).  PAAS has been severely marked down by the recent Argentine energy nationalisations. There have also been operational difficulties in Argentina because of import restrictions.  Eyeballing the valuations it seems the market has assigned zero value to one top mine (Manantial Espejo) and a world class development deposit (Navidad) that are located in Argentina.  Repairs from problems at Manantial Espejo are complete and operations are normal. There are no indications that a nationalization of mines is a real threat. Company presentations can be gleaned here.Â
PAAS produces 22 million ounces of silver annually led by three excellent properties: Alamo Dorado, La Colorada in Mexico and the aforementioned Manantial Espejo.  The acquisition of Dolores (a fourth excellent property) brings this to 24.5 million. About two-thirds of PAAS production is very low cost (sub 7.50).  86% of revenues came from silver and the rest gold, zinc and copper. Late stage developments Navidad (there is some uncertainty here) , La Preciosa and the potential mill expansion at Dolores,  could double production by 2015 and the addition will be low cost cash costs.  Mine life for existing producers is estimated at nine years, but annual reserve brownfield replacement has been better than 100%.
PAAS recently bought out and merged with Minefinders, a company I followed from the early days.  PAAS bought this right, not overpaying, and will receive significant consolidated cost benefits in its northern Mexico operations.  MFN’s Dolores (already producing) is one of the largest silver deposits in the world and in the hands of the  larger, stronger mine, PAAS, has tremendous greenfield potential. MFN derisks PAAS, an aspect the market has failed to appreciate.
At 16. 25 the proforma market cap of the two companies is $2.55 billion,  but working capital after debt (none) is $0.6 bn, bringing enterprise value down to $1.95 billion.  Existing operating cash flow is estimated at $500 million a year (assumed price $25 silver) over 2012-2015. By 2015  output doubles, and PAAS can easily internally finance these expansions.  PAAS is an extraordinarily cheap call on silver prices. I am setting up this trade up for a 1.5% of my capital position by selling  June 17 naked puts (implied vol is 51).
