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Near-Term Outlook for Silver Mining Industry Shines Bright

Madhurima Das

The Zacks Mining - Silver industry primarily 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.
 
Let's take a look at the three major themes in the industry:
 

  • 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 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. The industry has fared well so far this year, with silver prices up 15% thanks to uncertainty stemming from the ongoing U.S.-China trade dispute.
     
  • 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. The ongoing revolution in green technologies, aided by the exponential growth of new energy vehicles and investment in solar photovoltaic energy, will act as a major catalyst. Demand in jewelry fabrication, which accounts for approximately one-fifth of total silver demand, is also expected to increase. India will 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.
     
  • The prospects of a dwindling supply loom large on the industry. Silver mine production declined by 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.

 
Zacks Industry Rank Indicates Bright Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright prospects in the near term. The Zacks Mining - Silver Industry, which is an 11-stock group within the broader Zacks Basic Materials Sector, currently carries a Zacks Industry Rank #65, which places it at the top 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.
 
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Versus Broader Market

The Mining- Silver Industry has outperformed the S&P 500 over the past year. The stocks in this industry have collectively gained 14.2% in the past year against the Zacks S&P 500’s growth of 12.7%. Meanwhile, the Zacks Basic Material Sector declined 4.9% 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 silver-mining companies, we see that the industry is currently trading at 7.7X compared with the S&P 500’s 11.7X. However, the industry is trading above the Basic Material sector’s trailing 12-month EV/EBITDA of 5.4X. 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 16.4X and as low as 4.4X, with the median being at 8.1X.
 
Bottom Line
 
The fundamental image surrounding silver appears quite strong. Rising industrial demand and broader economic growth present solid prospects 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 platform for silver prices.
 
We are presenting one stock with a Zacks Rank #1 (Strong Buy) and three stocks with a Zacks Rank #2 (Buy) that investors may take a look at. 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 #1. The Zacks Consensus Estimate for fiscal 2019 has gone up 29% over the past 90 days. The company has an average positive earnings surprise history of 47.92% in the trailing four quarters.

Price and Consensus: FSM



Avino Silver & Gold Mines Ltd. (ASM): The Vancouver, Canada-based company has an average positive earnings surprise history of 133.33% in the preceding four quarters. The company carries a Zacks Rank #2.

Price and Consensus: ASM



Alexco Resource Corp. (AXU): This Vancouver, Canada-based company carries a Zacks Rank #2. The Zacks Consensus Estimate for earnings for fiscal 2019 earnings projects year-over-year growth of 67%. The company has an average positive earnings surprise of 25.0% over the past four quarters.

Price and Consensus: AXU



First Majestic Silver Corp. (AG): This Vancouver, Canada-based company carries a Zacks Rank #2. The Zacks Consensus Estimate for EPS for fiscal 2019 suggests year-over-year growth of 176.19%. The Zacks Consensus Estimate for fiscal 2019 has soared 700% over the past 60 days.

Price and Consensus: AG



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