By Andrew Mickey,
Two weeks ago precious metals were as hot as ever. Gold prices were climbing. Gold stocks were doing even better. And silver prices were leading the way.

The old adage, “when gold climbs, silver soars” was playing out perfectly. Gold booked its biggest monthly gain since November. Silver, however, climbed past $15 per ounce and had its biggest monthly climb in 22 years according to MarketWatch. Silver was showing its value as a dual-purpose commodity.

As an industrial metal, silver’s uses in healthcare, photography, and as a chemical catalyst (just to name a few) has made it more attractive as the economy shows signs of recovery.

As a precious metal, silver has been getting a lot of attention as the U.S. dollar shows continued weakness. Also, when the big money rotated around into gold and John Paulson’s big bet on gold were making headlines, gold was the hot sector. Silver was getting a lot more attention as an undervalued corollary.

Of course, sectors fall in and out of favor. Momentum traders have proven their willingness to quickly move onto something new. But if you’re looking for a long-term investment in silver, aside from silver ETF’s like the iShares Silver Trust (NYSE:SLV), silver mining stocks are the way to go.

The Cheaper the Better
As with all mining stocks, each of the major silver mining stocks offer many different qualities. Some of the higher cost producers offer greater leverage. Others offer greater value and a bit more downside protection. Still others offer very large silver reserves compared to the others.

The key factor we look at first at the Prosperity Dispatch though when comparing sector specific mining stocks is costs. With my investment research I’m looking for value and limited downside risk. In mining stocks that means low costs. Low cost operators provide downside protection because if commodity prices fall, they’re the last ones to close down. Depending on their costs, the other mix of metals produced, the low-cost producers can usually survive extended downturns.

Below is a chart of the cash costs of silver produced. The cash costs are calculated by subtracting the revenues generated from the sale of byproducts like copper, zinc, and other base metals. In one case, after the base metal revenues are added into the mix, the costs are actually negative. (note: Silver Standard – SSRI – is not shown because not enough data exists because its production is much more recent) 

As you can see, the cash costs for all the most actively traded silver miners vary widely. This is a result of different types of deposits and mixes of byproduct metal production. In this case, Silvercorp is the only one with a negative cash cost. In a way it gets paid to mine silver.

The costs will contribute directly to earnings, margins, and impact of any increases in production. So when it comes to valuation time, the costs will go a long way to determining premium valuations.

Lower isn’t necessarily better though. When it comes to safety, the lower the cost the better. When it comes to leverage, the higher costs the better. The basic rationale goes if something is barely or not profitable, it is worthless now. But if silver prices rise, it will be valuable. So it might not be as valuable, the jump from next to nothing to something is very big.

It’s not just costs though, we also have to look at relative performance to see how well these stocks have done during the last time silver prices went on a decent run.

Good Things Come to Those Who Wait
That’s why I’ve broken down where these silver mining stocks were trading when silver started to make its first big run past $15 per ounce back in late 2007.

The date I took for comparison purposes was November 7, 2007. This is the first real breakout above $15 for silver and eventually led to a relatively long and stable period when silver was trading for more than $15 an ounce. The chart below shows what the major silver companies were trading for then, now, and the decline they’ve all experienced.

As you can see, silver stocks have been hit pretty hard over the past year and a half. There are plenty of explanations for the decline.

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