Zacks Industry Outlook Highlights Buenaventura Mining, MAG Silver and Fortuna Silver Mines
For Immediate Release
Chicago, IL – April 20, 2022 – Today, Zacks Equity Research discusses Buenaventura Mining Co. BVN, MAG Silver MAG and Fortuna Silver Mines FSM.
Industry: Silver Mining
Link: https://www.zacks.com/commentary/1902154/3-silver-mining-stocks-to-watch-in-a-challenging-industry
The Zacks Mining - Silver industry has been seeing rising silver prices driven by mounting geopolitical tensions and inflationary pressures. This momentum might be cut short as these tensions subside and interest rates are hiked. However, strong demand for the metal from all key sectors will continue to support the industry.
We suggest keeping an eye on companies like Buenaventura Mining Co., MAG Silver and Fortuna Silver Mines, which are poised to benefit from their efforts to enhance efficiency and cost management, and solid growth projects.
About the Industry
The Zacks Mining - Silver industry comprises companies that are engaged in the exploration, development, and production of silver. These include big and small players operating mines of widely varying types and scales. Silver-bearing ores are mined by open-pit or underground methods and then are crushed and ground.
The miners continually search for opportunities to expand their reserves and resources through targeted near-mine exploration and business development. They strive to upgrade and improve the quality of their existing assets, internally and through acquisitions. Only 20% of silver comes from mining activities, where silver is the primary source of revenue.
The balance comes from projects where silver is a by-product of mining other metals, such as copper, lead and zinc. Thus, several companies in the silver mining industry are engaged in mining other metals as well.
What's Shaping the Future of Mining-Silver Industry
Silver Prices Might Lose Steam: Silver's unrivaled characteristics make it an indispensable component for several industrial products. With industrial applications accounting for roughly 60% of the global silver consumption, expansion in the manufacturing sector has supported prices so far this year. The Russia-Ukraine conflict and inflationary pressures fueled the safe-haven demand for the precious metal.
Silver prices are currently at around $26 per ounce, reflecting a 9.7% gain so far this year. While macroeconomic and geopolitical conditions have supported silver prices in the first half of the year, it would eventually come under pressure due to interest rate hikes and the easing of geopolitical tensions. The Silver Institute thus projects an annual average silver price of around $24.80 this year, 1% lower than 2021's average price.
Cost Control & Innovation to Increase Efficiency: The industry players are currently facing escalating production costs, including electricity, wages, water and materials. Mining companies are major consumers of energy, with around 50% of their production costs closely linked to energy prices. A shortage of skilled workforce has led to a spike in wages. With no control over silver prices, the industry has to focus on improving sales volumes while being cost-effective. The companies are investing heavily in R&D and resorting to technological innovations targeted at nearly every level of operation to increase efficiency, sustain growth and keep costs low.
Demand to Remain Strong: Silver demand in all key sectors is expected to remain strong this year. The Silver Institute projects global silver demand to hit a new record of 1.112 billion ounces in 2022, registering an 8% year-on-year increase. Industrial demand is expected to establish a new record in 2022.
Ongoing improvements in the global economy will support demand for the metal for industrial applications and mitigate near-term headwinds stemming from supply chain bottlenecks and the persisting COVID-19-related challenges. Jewelry demand is expected to rise 11% in 2022, backed by India, courtesy of improving consumer sentiment and growing interest in silver jewelry.
India is expected to be the main contributor to the 21% surge expected in silverware fabrication this year. The outlook for silver demand in automotive and 5G related applications and the photovoltaic (PV) industry remains robust this year. Silver physical investment is likely to be up in double-digit in 2022 aided by the ongoing macroeconomic uncertainties and inflationary pressure.
Zacks Industry Rank Indicates Dull 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 #226, which places it at the bottom 11% of 256 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group's earnings growth potential. So far this year, the industry's earnings estimate for the current year has plunged 38%.
Despite the bleak near-term prospects, 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 Versus Broader Market
The Mining-Silver Industry has underperformed the S&P 500 and its sector over the past year. The stocks in this industry have collectively declined 10.4% in the past year against the Zacks S&P 500's growth of 6.2%. The Zacks Basic Material Sector has rallied 10.2% over the same time frame.
Industry's Current 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 10.74X compared with the S&P 500's 14.10X and the Basic Material sector's forward 12-month EV/EBITDA of 5.30X.
Over the last five years, the industry has traded as high as 16.58X and as low as 5.68X, with the median being at 10.74X.
3 Mining-Silver Stocks to Keep an Eye On
Buenaventura Mining Co.: The company recently announced that it has received the government of Peru's approval of all required permits for the San Gabriel Mine Project — an important milestone that enables this important project to move forward. San Gabriel will almost double the company's current gold production starting in 2025 and will contribute between 120,000-150,000 gold ounces annually. This project is aligned with its strategy to deliver growth projects and strengthen its precious metals portfolio.
The company has announced multiple transactions this year to enhance balance sheet strength, reduce debt, invest in growth projects and focus on its portfolio. Backed by these efforts, the shares of the company have surged 51% so far this year. It has a solid pipeline of projects that will deliver growth in the long haul. The company's efforts to reduce costs at its direct operation mines have resulted in significant cost savings in each of its mines and led to higher EBITDA performance.
The Zacks Consensus Estimate for the Lima, Peru-based company's current-year earnings has moved up 40% over the past 30 days. The estimate indicates year-on-year growth of 65.3%. It currently carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Fortuna Silver: The company recently reported a 93% surge in gold production to 66,800 ounces in the first quarter of 2022. Total gold output benefited from contributions of 30,068 ounces from the Lindero mine and 28,235 ounces from the Yaramoko mine (acquired in July 2021). Silver production was 1,670,128 ounces, suggesting a 13% drop year on year as expected, primarily due to a decrease in head grade at the San Jose mine, which was in line with the Mineral Reserve average grade.
FSM stated that all of its mines remain on track to achieve the full-year guidance and maintain its silver production guidance at 6.2-6.9 million ounces. Its share price has appreciated 11.6% year to date. The company will continue to gain from its focus on maximizing production while simultaneously maintaining operational efficiencies to lower cash costs. Its disciplined strategy of locating new deposits or pursuing mergers and acquisitions will continue to drive growth.
The Zacks Consensus Estimate for Fortuna Silver's 2022 earnings has moved up 9.5% over the past 30 days. The company has a trailing four-quarter earnings surprise of 15%, on average. FSM currently carries a Zacks Rank #3 (Hold).
MAG Silver: It primarily holds 44% interest in the high-grade silver Juanicipio project located in the Fresnillo District, Zacatecas State, Mexico. It is a high-margin underground silver project with low development risks. Significant progress was achieved last year with the completion of construction of the 4,000 tons per day Juanicipio processing plant in the fourth quarter of 2021.
The plant commissioning timeline was extended by approximately six months until the regulatory approval to tie into the national power grid is obtained. MAG recently announced that the plant commissioning timeline is now anticipated to commence in the ongoing quarter. The project is expected to come in on budget, with the processing plant expected to be ramped up to 85% to 90% of plant capacity by the end of this year.
MAG recently announced that it has entered into an agreement to acquire Gatling Exploration Inc. in an all-share transaction. Gatling is a Canadian gold exploration company focused on advancing the Larder Gold Project, located in the prolific Abitibi greenstone belt in Northern Ontario, Canada. The Larder project hosts three high-grade gold deposits along the Cadillac-Larder Lake Break, 35 km east of Kirkland Lake. Backed by these developments, shares of the company have gained 14% year to date
The Zacks Consensus Estimate for MAG Silver's earnings for fiscal 2022 indicates a 1000% improvement from 2021. The consensus mark has been revised upward by 3% over the past 30 days. It currently carries a Zacks Rank #3.
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