Two Silver Stocks to Watch

RBC Capital Markets last week maintained its outlook of global silver demand outpacing new mine supply this year. RBC analysts forecast average silver price at $15 per ounce for 2010 and beyond, compared to $14.65 per ounce during 2009. Some analysts estimate silver prices to average as high as $20 per ounce during 2010.

Over the past month, silver prices have increased by around 16% on speculation of escalating sovereign-debt concerns boosting demand for the metal as an alternative to currencies. In addition, continuing record-low U.S. interest rates and government spending weighed heavily on the dollar, prompting purchases of precious metals.

Over the past year, stocks of silver producers have been performing well on the back of investment inflows into silver and other precious metals. Total one-year returns from Hecla Mining(HL), Endeavour Silver(EXK) and Alexco Resource(AXU) stand at 344%, 187%, and 154%, respectively.

Total silver supply is expected to increase only fractionally year on year during 2010, with the increase in mine production likely to be offset by lower scrap and government sales. On the other hand, higher demand from industrial and investment segments is forecast to more than offset a continuing decline in photographic demand. The industrial segment accounts for around half of the world's total silver demand. In addition to the supply-demand deficit, a weak dollar will likely boost prices for precious metals.

Based on the current outlook, we expect Silver Wheaton(SLW) and Pan American Silver(PAAS) to outperform their mining peers during 2010.

Silver Wheaton

Silver Wheaton, which was established in 2004, aggressively expanded its mining capacity and produced around 16.2 million ounces of silver during 2009. The company expects to increase annual production at a CAGR of 23.7% to produce 38 million ounces of silver by 2013.

During a conference call with analysts Thursday, CEO Peter Barnes mentioned that the acquisition of Silverstone Resources and production from Barrick Gold(ABX) will help the company produce 22.2 million ounces of silver during 2010, an increase of more than 35% compared to the output during 2009.

Since the beginning of 2010, the company has acquired the Rosemount project in Arizona and 12.5% of the life of silver production from the Navidad project. Following the announcement of the Navidad deal, the stock gained 2.5% on Feb. 25.