BAY STREET-Silver's down but don't count mining stocks out

Sun Jun 19, 2011 10:30am EDT

* Silver's price is likely to rebound after recent swoon

* Demand seen growing as investment, industrial metal

* Analysts recommend selective buying of silver miners (In U.S. dollars unless noted)

By Julie Gordon

TORONTO, June 19 (Reuters) - Silver's recent 30 percent tumble presents an opportunity for bargain-hunters to buy shares of mining companies that produce the precious metal.

While spot silver has fallen from a record $49.51 to the mid-$30 range, it is still well above last year's price, when it was hovering around $18 an ounce.

Better still, demand for silver is rising -- it trades both as a safe-haven investment and as an industrial metal -- driving prices up 16 percent so far this year.

At the same time, top silver equities such as Pan American Silver (PAA.TO), Fresnillo (FRES.MX) and Silver Wheaton (SLW.TO) are down on the year, analysts say.

"Investors might want to hold off buying equities except for the fact that many of the silver producers are trading at attractive valuations considering silver in the mid-$30s," said BMO Capital Markets analyst Andrew Kaip.

"We recommend investors be selective and look at silver equities with attractive valuations and favorable near-term catalysts," he added. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For Table on silver miners: link.reuters.com/qex22s ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

Take Pan American. The company is set to produce about 23.5 million ounces of silver this year, at cash costs below $7.50, and plans to nearly double production by 2014.

Despite this growth, and the much higher spot price, its shares are up just 4 percent in the last 12 months, weighed down by political risk in Peru and worries over the development of the company's massive Navidad project in Argentina.

The silver miner closed at C$27.35 on Friday well below the average analyst target price of C$48.24, according to Thomson Reuters I/B/E/S.

Shares of Hecla Mining (HL.N) and Silver Wheaton have also fallen since the beginning of the year, even though both more than doubled their first quarter profit.

Indeed, one of the only producers to rise so far this year is First Majestic Silver (FR.TO), which is up 9 percent in 2011 and has almost quadrupled in the past 12 months.

"It's not like on a financial basis the stocks are performing worse, worse and worse," said Dahlman Rose analyst Adam Graf. "Most of them are earning lots of profits and they are accumulating cash on the balance sheets."

Graf speculated that investors might be selling off silver equities in anticipation of another drop in the spot price, adding that the pullback was not limited to silver.

"Gold has held right around $1,500 and yet the equities keep going down," he said. "It seems to me like the market is really rotating out of the sector or losing faith in the equities."

UP OR DOWN?

But with debt worries mounting in Europe and consumer sentiment in the United States floundering, most analysts say a long-term selloff is unwarranted.

While the spot price is not expected to soar back up to record levels this summer, Kaip is confident that fundamental demand will keep silver in the $35 to $37 range.

"My expectation is that it is not really going to move away from that too much," he said. "We'll continue to see the kind of volatility that we're seeing, but it should trade in that range through the remainder of the summer."

Silver is unique in that it acts both as a precious metal, moving up with gold when the economy sours and down when paper currencies improve, as well as an industrial metal.

Industrial applications account for about 55 percent of the overall fabrication demand for silver, according to metal consultancy group GFMS, and that demand is growing.

Silver is a good conductor of electricity, so it is used in televisions, computers, mobile phones and other essential electronics.

"As we become more reliant on technology as a human race, we become more reliant on silver," said First Majestic Chief Executive Keith Neumeyer in a telephone interview from Mexico. "We couldn't be talking on the telephone right now if it wasn't for silver."

Demand is also growing in the green energy sector, with the amount of silver used in solar panels set to double to over 100 million ounces by 2015, according to The Silver Institute, an industry advocacy group.

Still, if economic growth slows, demand could fall off, driving down the spot price.

That doesn't worry Randy Smallwood, the head of Canada's largest silver equity, Silver Wheaton, which is down 22 percent so far this year.

"From the industrial side, I'm pretty comfortable with some of the core growth areas in silver in terms of being sustainable through a weakened economy," he said.

"You've got a metal that trades as a store of value," said Smallwood. "If half of it is consumed, what that does is it just increases the demand for that metal, which is only healthy for silver investors."

($1=$0.98 Canadian) (Reporting by Julie Gordon; editing by Frank McGurty and Rob Wilson)