Thursday, February 26, 2009

UBS: Will Silver Outperform Gold?

Silver may have underperformed gold in 2008 because industrial uses remain its largest source of demand, but silver’s gold-like safe-haven quality isattracting more investors these days. As a result, silver has reverted to a stronger correlation with gold and a weaker link with copper.

UBS expects silver will undo some of last year’s underperformance and average $14.75 per ounce in 2009. With the gold price to silver price ratio at approximately 69x versus a three-year average of roughly 56x, UBS anticipates that the ratio could move to more normalized levels this year and lead to an outperformance of silver versus gold.

It said:

While also an industrial metal, silver is largely a play on investment and speculative demand, although with inferior supply and demand fundamentals compared with gold. If gold continues to attract strong safe-haven buying as we expect, then silver can continue to move higher in the first half of the 2009.

Analyst Chris Lichtenheldt also initiated coverage of Pan American Silver Corp. (PAAS) with a “buy” rating and $20 price target. The Vancouver-based company is one of the world’s largest primary silver producers, with roughly 18.7 million ounces of production. In 2008, Pan American also produced 25,000 ounces of gold, 40,000 tonnes of zinc, 6,000 tonnes of copper and 16,000 tonnes of lead.

He told clients:

With primary leverage to silver and secondary leverage to gold—coupled with a strong balance sheet—we believe Pan American is positioned well under UBS’s forecast strong silver and gold price environment.

Approximately 85% to 90% of his forecast revenue and net asset value (NAV) is derived from the miners’s silver and gold exposure, but when metal prices were higher, it derived roughly 35% to 40% of revenue from zinc, lead and copper. So if base metal prices recover meaningfully, there could be substantial value creation.

The analyst highlighted the company’s seven operating mines and large resource base as providing significant leverage to the price of silver of both an earnings per share and NAV basis.

“Additionally, the company has notable leverage to the price of gold, which we also view as positive given that silver and gold prices tend to move together,” Mr. Lichtenheldt said.

He also noted that Pan American has increased its silver production in each of the past 14 years and may again shift its focus to acqusitions. It has no debt and more than $100-million in cash.

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