If you would like to gain an exposure to the silver market then buying shares in a silver mining company is often considered an effective way to do so. However, before you invest any money you should carry out some due diligence to identify which companies will benefit most from the recent surge in silver prices.
The first stage of your analysis will require you to study each company’s fundamentals to try to ascertain whether they have a sound business model on which to move forward. You can gather much of the information you need from press releases, company websites and investment forums. Here are some pointers to get you started:

 

1. Market Capitalisation: The market capitalisation of a silver mining company is simply the number of shares multiplied by the current share price. If you compare the value of proven reserves against the market cap, this should give you an idea of whether the company is undervalued or overvalued. However, for junior miners the market cap will often be substantially less that value of its reserves; this is often a reflection of the need for extra capital in order to extract the reserves. In terms of investing, you should look for companies that are undervalued relative to their peers.

 

2. Management: The quality of the management is extremely important when investing in any business as this will be the factor that drives the business forward. Ideally the management for a silver mining company should have a track record both in silver mining and in business. They also need to be extremely PR savvy as silver mining companies need to routinely raise capital in order to fund expansion and good PR skills can attract this capital at a lower price.

 

3. Cash in the bank: Silver mining is an extremely expensive business, especially for newly opened mines with little in the way of initial revenue. It may take many months or years for the mine to run at full capacity so there will need to be cash in order to support this stage. As an investor you should check the company’s fundamentals to see if they have capital available. Additional funds can be raised by issuing new shares into the market; these are often bought up by institutional investors at a discount. The effect of this will dilute your holding and reduce your earnings per share.

 

4. Geography: The location of any silver mine will play an important part in valuing its proven resources. Is the mine located in a politically stable country? What taxes will be levied on any revenue generated? Is there access to skilled labour locally? You should also consider climatic factors. For example, a mine in Greenland may work on a reduced output during the extremely cold winter months.

 

Investing in silver exploration companies is often riskier than investing in a company that is already producing silver. Many exploration companies simply lack the funds needed to become a producer and sell off the assets once the resources are proven. However where there is risk there is also potentially greater returns, an exploration company that reports good results can triple in value over night. As always, do your own research and only invest money that will not affect your lifestyle if you lose.