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Silver Mining Stocks Outlook: Near-Term Prospects Dim

Zacks Equity Research

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 prospecting, development, 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 have been affected by a plethora of factors lately, including a stronger U.S. dollar, interest rate hikes and U.S-China trade war apprehensions. These factors have led to a decline of 4.6% in silver prices over the past year. On top of this, the industry has to contend with escalating production costs including the cost of electricity, wages, water and materials. With no control over silver prices, the industry has to focus on improving sales volumes while being cost-effective at the same time. 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, create safer working environments, keep costs low and sustain growth.
     
  • Given its unrivaled characteristics, silver serves 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 continued industrial demand and silver mining activity. The demand for silver continues to increase, especially with expanding uses in technology as the world develops more electric cars and robotics. 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. This is due to the absence of a 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 13-stock group within the broader Zacks Basic Materials Sector, currently carries a Zacks Industry Rank #154, which places it at the bottom 41% 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. Over the past year, the industry’s earnings estimate for the current year has gone down 55%.

 

Our proprietary Heat Map shows that the industry’s rank has remained in the bottom half over majority of the past seven weeks.

 

 

 

Despite bleak near-term prospects of the industry, we will present a few mining-gold 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 on Shareholder Returns 

 

The Mining- Silver Industry has underperformed the S&P 500 over the past year. The stocks in this industry have collectively declined 9% in the past year against the Zacks S&P 500’s growth of 4%. The Zacks Basic Material Sector meanwhile plunged 12% 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 7.2X compared with the S&P 500’s 9.8X. However, the industry is trading above the Basic Material sector’s forward 12-month EV/EBITDA of 5.1X. This is shown in the charts below.

 

Enterprise Value/EBITDA (EV/EBITDA) Ratio (F12M)

 

  

Enterprise Value/EBITDA (EV/EBITDA) Ratio (F12M)

 

 

Over the last five years, the industry has traded as high as 15.1X, as low as 4.8X and at the median of 7.6X.

 

Bottom Line

 

Lower silver prices and weak margins stemming from high costs of operations are likely to weigh on the near-term results of the companies in this space. Lowering costs through better management seems to be the call of the hour.  Nevertheless, 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, the demand for silver continues to increase. Moreover, a potential silver deficit will provide a strong ground for silver prices.

 

None of the stocks in the Zacks silver space currently sport a Zacks Rank #1 (Strong Buy). However, we are presenting two stocks with a Zacks Rank #2 (Buy) and two Zacks Ranked #3 (Hold) stocks that are well positioned to combat the challenges. You can see the complete list of today’s Zacks #1 Rank stocks here.

 

Americas Silver Corp. (USAS): The Zacks Consensus Estimate for fiscal 2019 for this Toronto, Canada company has gone up 6% over the past 90 days. The Zacks Consensus Estimate for EPS for fiscal 2019 reflects year-over-year growth of 808%. The stock flaunts a Zacks Rank #2.

 

Price and Consensus: USAS

 

 

MAG Silver Corp. (MAG): This Vancouver, Canada company also sports a Zacks Rank #2. The Zacks Consensus EPS estimate for fiscal 2019 reflects year-over-year growth of 50%.

 

Price and Consensus: MAG

 

 

Fortuna Silver Mines Inc. (FSM): This Vancouver, Canada based company recorded average earnings surprise history of 2.38% over the trailing four quarters. The Zacks Consensus Estimate for fiscal 2019 has gone up 4% over the past 90 days. The Zacks Consensus Estimate for EPS for fiscal 2019 reflects year-over-year growth of 14%. The stock carries a Zacks Rank #3.

 

Price and Consensus: FSM

 

 

Pan American Silver Corp. (PAAS): This Vancouver, Canada-based company’s Zacks Consensus Estimate for EPS for fiscal 2019 reflects year-over-year growth of 17%. The stock currently has a Zacks Rank #3.

 

Price and Consensus: PAAS

 

 

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