Fortunes have been won and lost in silver before. And after a truly explosive, fortune-generating run to the upside for the shares of most silver producers in recent years, the latest dynamic has seen some fortunes lost once more as most silver stocks have retreated violently.
The underlying metal price, meanwhile, has shown considerable resilience above $30 per ounce as this lengthy consolidation phase has inserted a pause into the long-term secular bull market for precious metals. The following two-year chart depicts this mining equity value destruction in gory detail, contrasting a 10% advance for the iShares Silver Trust (NYSEMKT: SLV ) against losses of 40% or more by an array of miners featuring traditional industry stalwarts Pan American Silver (NASDAQ: PAAS ) and Hecla Mining (NYSE: HL ) .
As we've witnessed so many times before within the volatile mining industry, the greatest fortunes often await amid the rubble of unsettling declines. Of those mining stocks shown above, I have already communicated my strong expectation for a powerful turnaround in the shares of Alexco Resource (NYSEMKT: AXU ) by selecting that stock as my No. 2 pick among silver miners for 2013. But today I wish to draw your attention to another struggling stock in the silver space: Fortuna Silver Mines (NYSE: FSM ) .
After suffering some acute (and unexpected) cost escalation at its Caylloma mine in Peru last year, Fortuna's shares took a major tumble that caused this Fool to focus his attention elsewhere while the stock regained its footing. After taking a closer look recently, I think the time may be right to reconsider these shares near the $4 mark as one of the industry's potential outperformers going forward. At the company's San Jose mine near Oaxaca, Mexico -- which I visited first-hand in December of 2011 -- ongoing production growth has been facilitated by the completion of a water pipeline connecting the miner to the output from a company-operated municipal wastewater treatment facility 11 kilometers away. The company expects silver output from San Jose to grow by 23% in 2013, leading consolidated production growth of 10% to reach 5.7 silver-equivalent ounces (excluding base metals).
Over the medium term, Fortuna is targeting a major growth spurt to reach 14 million silver-equivalent ounces by 2016, and the company's recent deal with Pan American Silver to acquire concessions surrounding the San Jose mine provides an important strategic boost to the company's prospects for organic resource growth in the immediate vicinity of the mine. After slipping back to the $4 range amid this latest silver equity sell-off, I believe the battered shares of Fortuna Silver Mines offer investors some phenomenal upside potential.
If you are looking for a company whose success is determined by the metals market, but without involving itself in the risks of physically mining the metals, then Silver Wheaton provides a unique play on the future of silver. SLW chooses to finance the mining of silver; it has grown sales and net income every year since 2008, and also has increased competitive advantages over its limited peer group. More details about our outlook for Silver Wheaton can be found here in our Motley Fool analyst report.