The Zacks Mining - Silver industry has been bearing the brunt of weak silver demand due to COVID-19 pandemic hit industrial sector. Miners were compelled to shut operations as per government mandates. However, recent pickup in industrial activity and rally in silver prices hold promise. It remains to be seen whether this will sustain, considering the fact that the pandemic shows no sign of abating.
Silver miners including Fresnillo plc (FNLPF), Pan American Silver Corp. (PAAS), First Majestic Silver Corp. (AG) and Fortuna Silver Mines Inc. (FSM) have been relying on cost management and investment in technology to increase efficiency.
About the Industry
The Zacks Mining - Silver industry comprises companies that are engaged in silver mining, which include big and small players operating mines of widely varying types and scale. The mining, processing, development and mineral exploration activities are subject to several laws governing development, prospecting, production, taxes, labor standards and environmental regulation in various jurisdictions in which these companies operate.
What’s Shaping the Future of Mining-Silver industry
COVID-19 Poses a Threat to Industrial Demand: Silver’s unrivaled characteristics make it an indispensable component for several industrial products. In fact, industrial applications account for roughly 60% of the global silver consumption. The slowdown in industrial activity amid the pandemic severely impacted demand for the white metal. Per the Institute for Supply Management, the U.S Manufacturing Purchasing Managers’ Index had slumped to a low of 41.5% in April 2020. However, as businesses gradually resumed operations, the index has peaked to 59.3% in September — maintaining a reading above 50 for five straight months, which denotes expansion. This bodes well for silver prices, which are currently trending above $25 per ounce and have gained 38.4% so far this year. However, apprehensions regarding a second wave of coronavirus hindering economic recovery have cast a pall on silver.
Supply at Risk: Notably, global mine production in 2019 fell for the fourth consecutive year. This can be attributed to the absence of development of new projects, declining ore grades and depleting reserves. On top of this, in the earlier part of 2020, miners had to curtail or stop production as per the government mandates to stem the spread of the coronavirus. The Silver Institute anticipates global silver mine production to decline 4% in 2020 due to these shutdowns. Even though these countries have allowed the mining sector to resume operations, resurgence of coronavirus cases might result in the closure of mines again, consequently putting supply at risk.
Cost Control Efforts to Increase Efficiency: The Mining - Silver industry faces escalating production costs including electricity, wages, water and materials. With no control over silver prices, the industry has to focus on improving sales volumes while being cost-effective. The companies are investing heavily in R&D and resorting to technological innovations targeted at nearly every level of operation to increase efficiency, sustain growth and keep costs low.
Demand to Remain Strong in Years to Come: The ongoing revolution in green technologies, aided by exponential growth of new energy vehicles and investment in solar photovoltaic energy, will act as a major catalyst for silver going forward. The white metal’s use in 5G-infrastructure and upcoming intelligent electronics is also likely to drive demand. Jewelry fabrication, which accounts for approximately one-fifth of total silver demand, is also expected to be a growth driver. India is likely to emerge as a major consumer courtesy of increasing investor interest and growth in jewelry, decorative items and silverware fabrication. Silver also serves as a safe haven asset in times of uncertainty.
Zacks Industry Rank Indicates Dismal Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy prospects in the near term. The Zacks Mining - Silver industry, which is a nine stock group within the broader Zacks Basic Materials Sector, currently carries a Zacks Industry Rank #220, which places it at the bottom 13% of 256 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since the beginning of this year, the industry’s earnings estimate for the current year has plunged 61%.
Despite the bleak near-term prospects, we will present a few Mining-Silver stocks that one can retain given their growth prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Versus Broader Market
The Mining- Silver Industry has outperformed the S&P 500 and its sector over the past year. The stocks in this industry have collectively gained 30.6% in the past year compared with the Zacks S&P 500’s growth of 15.4%. Meanwhile, the Zacks Basic Material Sector has rallied 11.4% over the past year.
One-Year Price Performance
Industry’s Current Valuation
On the basis of forward 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing silver-mining companies, we see that the industry is currently trading at 9.47X compared with the S&P 500’s 14.39X and the Basic Material sector’s forward 12-month EV/EBITDA of 5.11X. This is shown in the charts below.
Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio
Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio
Over the last five years, the industry has traded as high as 16.38X and as low as 4.35X, with the median being at 8.34X.
4 Mining-Silver Stocks to Keep an Eye On
First Majestic Silver: Headquartered in Vancouver, Canada, the company is focused on silver production in Mexico. It owns and operates the San Dimas Silver/Gold Mine, the Santa Elena Silver/Gold Mine and the La Encantada Silver Mine.
The company’s ongoing focus on technological innovation has driven efficiencies and lowered cost of production. Since the acquisition of the San Dimas mine in 2018, the company has transformed it into its lowest cost and largest producing mine. First Majestic successfully installed a new (High Intensity Grinding) HIG mill at the Santa Elena mine, which has resulted in record silver/gold recoveries. This HIG mill is the first of its kind operating in Latin America, and will be installed throughout its business. This, in turn, will drive the bottom line. Higher metal prices, improved production rates and effective cost control management will also continue to aid its results.
Over the past 90 days, the Zacks Consensus Estimate has been revised from a loss of 4 cents per share to an earnings of 7 cents per share. The estimate indicates year-over-year growth of 75%. The stock has appreciated 19% in the past six months. The company currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Fortuna Silver Mines: Headquartered in Miraflores, Peru, the company engages in exploration, extraction, and processing of precious and base metal deposits in Latin America. Its main properties include the Caylloma mine in Peru; the San Jose mine in Mexico; and the Lindero gold project in Argentina.
The company will continue to gain from its focus on maximizing production while simultaneously maintaining operational efficiencies to lower cash costs. Such initiatives along with high metal prices will drive the company’s bottom line. Fortuna Silver’s disciplined strategy of locating new deposits or pursuing mergers and acquisitions will continue to drive growth. The first gold pour at Lindero in October 2020 is a significant achievement for the company. The mine is on track start commercial production in first-quarter 2021. Lindero has reserves for a projected life of 13 years and is expected to act as a tailwind going forward.
The Zacks Consensus Estimate for earnings for fiscal 2020 indicates year-over-year improvement of 6%. The estimate has been revised upward by 125% over the past 90 days. Shares of the company, which carries a Zacks Rank #3 (Hold), has gained 67% over the past six months.
Pan American Silver (PAAS): This Vancouver, Canada-based company owns and operates silver and gold mines located in Mexico, Peru, Canada, Argentina and Bolivia.
The company is the world's second largest primary silver producer with the largest silver reserve base globally. It is also an industry leader in high margin low cost production. Last year, the company closed the acquisition of Tahoe Resources. The company has been realizing annual general and administrative synergies of $25 million to $30 million, and the acquired mines are performing better than expected. The Escobal mine, though currently not in operation, has silver reserves of 264 million ounces. It has the potential to increase the company’s silver production by about 78% from 2019 levels.
The La Colorada mine in Mexico is expected to act as a catalyst. Recently, the company announced that exploration drilling led to an increased inferred mineral resource estimate for the skarn deposit of 100.4 million tons, containing an estimated 141.0 million ounces of silver. This marks a 38% increase from its previous estimate. The Navidad project in Argentina is also anticipated to be a growth driver going forward. It is one of the largest undeveloped primary silver deposits globally. The company is aiming to have no bank debt by the end of the year, which is commendable.
The Zacks Consensus Estimate for the company’s current-year earnings suggests year-over-year growth of 23%. The estimates have also moved up 19% in 90 days’ time. The stock has a trailing four-quarter earnings surprise of 3.51%, on average. The company’s shares have gained 32% in the past six months. The company has a Zacks Rank #3 and a long-term projected earnings growth rate of 12.8%.
Fresnillo: The Mexico-based company primarily explores for silver, gold, lead, and zinc concentrates. Its flagship project is Fresnillo silver mine located in the state of Zacatecas.
The company is investing in a number of projects to increase production and ensure steady growth in future years. Focus on improving operational performance and enhancing efficiency is expected to result in lower costs. Its high quality assets, ample mineral resources, competitive margins and disciplined approach to development will continue to drive growth. Recently, the Juanicipio project, in which Fresnillo has a 56% stake, reached a major milestone with development material from the project being processed at the Fresnillo beneficiation plant. It has the potential be an exceptionally high grade mine and drive growth in the days ahead.
The Zacks Consensus Estimate for the company’s current-year earnings indicates year-over-year growth of 109%. The estimates have also moved up 37% in 90 days’ time. The company’s shares have gained 52% in the past six months. It currently carries a Zacks Rank #3.
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Pan American Silver Corp. (PAAS) : Free Stock Analysis Report
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