Silver mining stocks failed to shine in 2017. Low silver prices proved to be a major growth hurdle -- unlike gold's double-digit rally, silver's gains are only about 3.3% so far this year -- giving miners a hard time growing their top and bottom lines. The struggles were evident in stocks across the board: From the largest silver mining stock by market capitalization, Pan American Silver (NASDAQ:PAAS), to its closer rivals Hecla Mining (NYSE:HL) and Coeur Mining (NYSE:CDE) to the smaller players First Majestic Silver (NYSE:AG) and SSR Mining, silver stocks have shed double-digit percentages in the past year.
The only silver stock that has made investors any money so far this year is Wheaton Precious Metals (NYSE: WPM) -- and only because Wheaton Precious isn't a miner but a streaming and royalty company, and can thus earn strong margins even at low silver price points (thanks to its offbeat business model).
The price disparity between silver and gold can be linked to the strikingly different factors driving demand for the two metals. While geopolitical uncertainty, especially in the U.S. and Europe, fueled emotional investing in gold thanks to the yellow metal's safe-haven appeal against inflation and economic uncertainty, silver -- a metal primarily used for industrial purposes -- failed to capture investor attention. 2018, however, could be a turnaround year for silver mining stocks for three reasons:
- Demand for silver from key end-user markets such as electronics and photovoltaics (solar) has picked up.
- Investor sentiment in the U.S. and the eurozone is improving, which could dilute interest in gold and shift focus to silver.
- The gold-to-silver ratio, which is hovering at historical highs of 78.95-to-1, as of this writing (meaning one ounce of gold is worth 78.95 times the value of an ounce of silver), encouraging bullion analysts to expect a strong recovery in silver prices in 2018.
With most factors pointing to firmer silver prices ahead, this could be a great time to scoop up some silver mining stocks while they're still trading low. Of course, not all stocks are worth your money. Case in point: You might be better off avoiding Hecla Mining right now. Instead, try First Majestic Silver and Pan American Silver.
Hecla Mining: A silver stock that's losing luster
Hecla has been hitting the headlines for all the wrong reasons of late. Operations at one of the company's three currently operational mines, Lucky Friday, have stalled because of a labor strike that's lasted several quarters now. Silver production from Lucky Friday slumped 72% year over year during the nine months ended Sept. 30, 2017, hitting Hecla's profits hard.
In another unlucky development, Hecla's San Sebastian mine, which has been a major contributor to its profits and cash flows in the past couple of years, is nearing the end of its initially forecast two-year life. Hecla is confident it can keep the mine running through 2020, but the level of production it can hit remains a question mark.
None of Hecla's future-oriented initiatives, such as automation, matters now as much as the resumption of operations at Lucky Friday. Until that happens, Hecla remains a risky silver play, no matter what.
First Majestic Silver: The best silver pure play
First Majestic's appeal as a silver stock lies in its solid exposure to the precious metal: The miner derives 70% of its revenue from silver. That share could go up to 75% in another year's time, as the company's La Encantada mine is expected to add 1.5 million ounces annually starting next year. La Encantada is currently First Majestic's largest silver mine, with an estimated 2017 production of 2.3 million to 2.5 million ounces. Here's an interesting fact: Natural gas now powers 90% of the mine's operations, helping the company cut down on fuel costs.
First Majestic's exposure to silver is also the highest among its peer group, which makes it the best pure-play stock to own in the silver industry. In fact, closest rival Coeur Mining is rapidly drifting away from silver to gold, so much so that silver is expected to be only around 36% of its total metal production this year. And First Majestic's leading silver position extends beyond the mining sector: The largest silver streaming and royalty company, Wheaton Precious Metals, gets less than 60% of its revenue from silver.
On the operational front, First Majestic is firing on all cylinders. Between 2014 and 2016, the miner grew its silver equivalent production by 22% to 18.3 million ounces and slashed its all-in sustaining cost by a whopping 40% to $10.79 per ounce. In the next two to four years, the company aims to nearly double its silver production to 20 million ounces, backed by production ramp-ups at existing mines and the start of commercial production at its Plomosas and La Luz mines.
As I touched upon earlier, lower silver prices proved a hurdle for First Majestic in 2017, as did higher cash costs because of a strike at one of its mines. I expect the miner to get back on the growth track in 2018 and beyond as it scales up production and brings down costs, which should also mean a brighter year for the silver mining stock.
Pan American Silver: Incredible growth potential
2017 is turning out to be a muted year for Pan American on an operational front, what with its silver production estimated to be between 24.5 million and 26 million ounces, reflecting a range of 3% decline to 2% growth from 2016 levels. But this silver mining stock's growth story lies in what's to come.
|Metric||2017 Outlook||2018 Outlook||2019 Outlook|
|Silver production (in ounces)||24.50 million-26 million||26 million-28 million||26.5 million-29.5 million|
|Gold production (in ounces)||155,000-165,000||170,000-185,000||175,000-200,000|
|Sustaining capital expenditure||$82 million-$88 million||$75 million-$85 million||$75 million-$90 million|
The above table points to two key anticipated trends: a rise in production and a reduction in costs. Pan American is handling costs fantastically, with its 2017 estimated AISCSOS range of $10.50 to $11.50 reflecting a dramatic improvement over its 2016 all-in sustaining costs per silver ounce sold of $14.92, which itself was a 32% improvement over 2015.
There's another great reason to like Pan American Silver: its financial standing. Having paid down nearly all of its debt this year, the company now boasts one of the cleanest balance sheets in the industry, with only around $7.5 million in debt related to its financing leases and $136 million in cash and equivalents as of Sept. 30, 2017. The company is also free-cash-flow-positive. Not surprisingly, Pan American's operating margin came in a solid 18% during the trailing months, easily crushing Hecla's 10% and Coeur Mining's 3% margins.
There's little not to like in a silver mining stock that's on such solid financial footing and is rightly focused on the two core areas of growth: production and costs.