U.S. Markets open in 5 hrs 34 mins

Near-Term Outlook for Silver Mining Industry Looks Grim

Madhurima Das

The Zacks Mining - Silver industry primarily comprises companies that are engaged in silver mining. These companies include big and small players that extract silver from 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.
 
Let's take a look at the three major themes in the industry:
 

  • The Mining - Silver industry is subject to fluctuations in silver prices which had been affected by a plethora of factors in 2018, including a stronger U.S. dollar, interest rate hikes and U.S-China trade war apprehensions. These resulted in a decline of 9.5% in silver prices in 2018. On top of this, the industry had to contend with 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 more than ever in R&D and resorting to technological innovations targeted at nearly every level of operation to increase efficiency of operations, sustain growth and keep costs low. However this year, silver prices have gained on aggressive buying by China which is buying the metal for industrial usage and expectations of a rate cut by the U.S Fed.
     
  • Silver’s unrivaled characteristics make it indispensable for many industrial products. In fact, industrial applications account for roughly 60% of the global silver consumption. Growing industrial activity will continue to sustain silver demand. China will continue to be a major driver in the global silver market for years to come, fueled by sustained industrial demand and silver mining activity. With expanding uses in technology as a result of development of more electric cars and robotics is fueling demand for silver. The ongoing revolution in green technologies, aided by the exponential growth of new energy vehicles and investment in solar photovoltaic energy, will be a major catalyst. To curb pollution, governments globally are providing financial incentives and imposing regulations that favor the development of electric and hybrid vehicles.
     
  • Demand in jewelry fabrication, which accounts for approximately one-fifth of total silver demand, is also expected to increase. For many fashion-conscious consumers, silver is more desirable than gold because of its color neutrality, which provides more versatility. India will emerge as a major consumer courtesy of increased investor interest and growth in jewelry, decorative items and silverware fabrication. Moreover, silver serves as a safe haven asset in times of uncertainty. However, the prospects of a dwindling supply loom large on the industry. Silver mine production fell 2% in 2018, the third consecutive year-on-year drop. This can be attributed to the absence of development of new projects, declining ore grades and depleting reserves. Consequently, a potential silver deficit is imminent, which in turn sets the stage for higher silver prices in the long haul.
     

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 12-stock group within the broader Zacks Basic Materials Sector, currently carries a Zacks Industry Rank #192, which places it at the bottom 25% of 256 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
 
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. 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 the year, the industry’s earnings estimate for the current year has gone down 54%.
 
Despite bleak near-term prospects of the industry, 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 Lags S&P 500 & Sector on Shareholder Returns
 
The Mining- Silver Industry has underperformed the S&P 500 over the past year. The stocks in this industry have collectively slumped 25.5% in the past year against the Zacks S&P 500’s growth of 3%. Meanwhile the Zacks Basic Material Sector declined 14% over the past year.

One-Year Price Performance
 

 

Mining- Silver Industry’s Valuation
 
On the basis of forward 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing gold-mining companies, we see that the industry is currently trading at 21.1X compared with the S&P 500’s 11.0X. However, the industry is trading above the Basic Material sector’s trailing 12-month EV/EBITDA of 8.4X. This is shown in the charts below.

Enterprise Value/EBITDA (EV/EBITDA) TTM Ratio 
 

 
Enterprise Value/EBITDA (EV/EBITDA) TTM Ratio
 

 

Over the last five years, the industry has traded as high as 23.8X and as low as 4.6X, with the median being at 13.2X.
 
Bottom Line
 
The fundamental image surrounding silver appears quite strong. Rising industrial demand and broader economic growth present solid growth opportunities in the silver mining space. With expanding uses in technology, demand for silver continues to increase. Moreover, a potential silver deficit will provide a strong ground for silver prices.
 
None of the stocks in Zacks Mining- Silver Industry currently sport a Zacks Rank #1 (Strong Buy). However, we are presenting one stock with a Zacks Rank #2 (Buy) and three carrying a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
 
Fortuna Silver Mines Inc. (FSM): This Vancouver, Canada-based company carries a Zacks Rank #2. The Zacks Consensus Estimate for fiscal 2019 has gone up 9% over the past 60 days. The company has an average positive earnings surprise history of 33.34% over the past four quarters.

Price and Consensus: FSM



 

Avino Silver & Gold Mines Ltd. (ASM): The Zacks Consensus Estimate for fiscal 2019 earnings for this Toronto, Canada-based company indicates an improvement of 33.33% year over year. The company has an average positive earnings surprise history of 100.00% over the trailing four quarters. The company carries a Zacks Rank #3.

Price and Consensus: ASM



 

Alexco Resource Corp. (AXU): This Vancouver, Canada-based company carries a Zacks Rank #3. The Zacks Consensus Estimate for earnings for fiscal 2019 earnings projects year-over-year growth of 50%. The company has an average positive earnings surprise history of 12.5% over the past four quarters.

 

Price and Consensus: AXU



 

First Majestic Silver Corp. (AG): This Vancouver, Canada-based carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for EPS for fiscal 2019 suggests year-over-year growth of 104.76%. The Zacks Consensus Estimate for fiscal 2019 has also moved up over the past 60 days.

Price and Consensus: AG


 

The Could Be the Fastest Way to Grow Wealth in 2019

Research indicates one sector is poised to deliver a crop of the best-performing stocks you'll find anywhere in the market. Breaking news in this space frequently creates quick double- and triple-digit profit opportunities.

These companies are changing the world – and owning their stocks could transform your portfolio in 2019 and beyond. Recent trades from this sector have generated +98%, +119% and +164% gains in as little as 1 month.

Click here to see these breakthrough stocks now >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Fortuna Silver Mines Inc. (FSM) : Free Stock Analysis Report
 
Alexco Resource Corp (AXU) : Free Stock Analysis Report
 
Avino Silver (ASM) : Free Stock Analysis Report
 
First Majestic Silver Corp. (AG) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research