Note: This article was originally published June 15, 2015 and updated April 5, 2016.
The recent past has not been too kind to investors seeking gains from the price of silver. As the chart below shows, the price of the precious metal has done nothing but fall since hitting its peak in 2011.
Clearly, the momentum is gone, but there is a case to be made that the price could be bottoming and that a recovery is around the corner. Driving that case is industrial demand for silver, which is expected to grow 27% by 2018, according to the Silver Institute. That demand growth should lead to a higher silver price and improve the profits of silver miners.
Three companies that I think are best positioned to capture this growth are Silver Wheaton (NYSE:SLW), First Majestic Silver (NYSE:AG), and Pan American Silver (NASDAQ:PAAS) -- which, in my opinion, makes them the three best silver mining stocks.
Why Silver Wheaton?
Silver Wheaton is not a mining company but a silver streaming company. That means it invests in silver mine developments, and as a result, it locks in future silver production at a fixed cost. It is a business model that makes the company, in my opinion, the best way to invest in silver. It is also by far the biggest player in the silver market, having the largest reserves in the industry, as noted on the slide below.
Those vast reserves are expected to drive 24% production growth from 2015 to 2019 as new mines operated by Silver Wheaton's partners come on line. Furthermore, that production is projected to cost Silver Wheaton $4.55 per ounce, meaning it will earn very robust margins from future silver production. That low-cost growth puts the company in a prime position to create value, even if the price of silver does not budge, which is why it is a top silver mining stock.
Why Pan American Silver?
Pan American Silver is one of the largest publicly traded silver producers in the world. It holds the fourth largest proved and probable silver reserves and is the sixth largest producer. The company is also in the process of developing several economically compelling organic growth projects that are expected to boost production over the next few years.
While its production costs are nowhere near as low as Silver Wheaton's, the company has focused on getting its costs down to increase its cash flow from silver production. As the slide below notes, Pan American Silver's cash costs are expected to fall sharply at the same time its production is expected to head higher:
As a result, the company is positioned to see its cash flow grow even if silver prices do not head higher. Furthermore, the company boasts a strong balance sheet with $227 million in net cash to fully fund its growth. That strong balance sheet, when combined with its falling costs, make it one of the best silver mining stocks.
Why First Majestic Silver?
While its reserves are much smaller, First Majestic Silver is a growth-oriented silver producer. The company currently has two mines in development, as well as expansion projects across several of its other mines; that should significantly boost its silver production over the next three to five years:
The company has a really simple story. Its focus is on one metal (silver) and one country (Mexico). Overall, 69% of its revenue comes from silver, making it the purest-play silver producer in the world. Furthermore, its goal is to grow its silver production up to 20 million ounces over the next few years. In other words, investors who are looking for a pure-play silver growth company should consider First Majestic.
What's worth noting about this group is that each miner offers something different to investors. Silver Wheaton is a low-cost silver streaming company with lots of built-in growth. Meanwhile, First Majestic is a high-growth company with the purest exposure to silver. Finally, there's Pan American, which is a solid silver company with a top-notch balance sheet.
Because of these compelling qualities, all three should drive profitable growth even if the price of silver does not budge, while offering leveraged upside if it rebounds.