For Immediate Release
Chicago, IL – December 14, 2021 – Today, Zacks Equity Research discusses Silver Mining, including First Majestic Silver Corp. AG, Hecla Mining Company HL and Endeavour Silver Corp. EXK.
The Zacks Mining – Silver industry had been affected by weak silver demand as the COVID-19 pandemic crippled the industrial sector last year. The pickup in industrial activity seen earlier this year had led to higher silver prices. However, silver prices have recently changed course amid mounting concerns that the Omicron variant might throw a spanner in the works.
We suggest keeping an eye on some companies like First Majestic Silver Corp, Hecla Mining and Endeavour Silver Corp, which are poised to benefit from efforts to increase efficiency and cost management as well as growth projects.
About the Industry
The Zacks Mining – Silver industry comprises companies that are engaged in exploration, development, and production of silver. These include big and small players operating mines of widely varying types and scale. Silver-bearing ores are mined by open-pit or underground methods and then are crushed and ground.
The miners continually search for opportunities to grow 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 revenues. The balance 80% 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 for other metals as well.
What’s Shaping the Future of Mining-Silver Industry
Omicron Variant Poses a Threat: 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, the pandemic-induced slowdown in the industrial sector last year severely impacted demand for silver.
Manufacturing activity has picked up globally this year, which fueled silver demand and supported prices. However, silver has lost steam lately amid growing concerns that the Omicron variant might hamper industrial activity again. Silver prices are currently at around $22 per ounce, having lost 15.7% of its value so far this year.
A strong dollar and expectations that the Fed will continue its tightening plans have been weighing on prices. With this performance, it seems likely that silver will post its worst annual loss since 2014, when it had sunk 19.6%.
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 Going Ahead: The ongoing revolution in green technologies, aided by exponential growth of new energy vehicles and investment in solar photovoltaic energy, will act as a major catalyst for silver going forward. Per the Silver Institute, silver consumption in the global automotive sector is expected to attain 88 million ounces by 2025.
Use of silver in electronics and electrical applications (excluding photovoltaics) will be around 246 million ounces in 2025, indicating a 10% increase from 2020 levels. The printed and flexible electronics sector particularly holds promise.
Jewelry fabrication, which accounts for approximately one-fifth of total silver demand, is expected to be a key catalyst. India is likely to 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.
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 10 stock group within the broader Zacks Basic Materials Sector, currently carries a Zacks Industry Rank #242, which places it at the bottom 5% 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 52%.
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 19.3% in the past year against the Zacks S&P 500’s growth of 29.8%. The Zacks Basic Material Sector has rallied 6.9% over the past year.
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 6.272X compared with the S&P 500’s 14.76X and the Basic Material sector’s forward 12-month EV/EBITDA of 5.42X.
Over the last five years, the industry has traded as high as 16.58X and as low as 6.16X, with the median being at 8.32X.
3 Mining-Silver Stocks to Keep an Eye On
First Majestic: The acquisition of the Jerritt Canyon Gold mine earlier this year enhanced its geographic operating platform, while adding a producing asset in a world-class jurisdiction as Nevada is considered one of the most attractive jurisdictions for mining operations. The company expects higher grades to drive production growth at San Dimas, Jerritt Canyon and Santa Elena in the fourth quarter of 2021 and into 2022. It has invested in two significant capital projects at Jerritt Canyon that will aid in cost reduction starting in the fourth quarter, driven by higher production, lowered capital costs and continued improvements in operating efficiencies.
The company recently announced the filing of the updated Technical Report for the Santa Elena mine and positive results of a Pre-Feasibility Study completed for the 100% owned Ermitaño Project, which is close to the Santa Elena processing plant. Including this project, Santa Elena mine’s proven and probable mineral reserves have increased 59% to 51 million silver equivalent ounces and increased its mine life. Backed by this, the company’s shares have appreciated 2.3% in a year’s time.
The Zacks Consensus Estimate for First Majestic’s fiscal 2021 earnings suggests year-over-year growth of 5.6%, while the same for 2022 indicates an improvement of 160%. AG currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Hecla Mining: Backed by its solid operational performance, the company has enhanced its silver-linked dividend for the second time this year and returned around 20% of its free cash flow to shareholders. Concurrently, the company executed the largest exploration program in its history.
Hecla Mining has a diverse asset portfolio in mining friendly jurisdictions. Its mines have the highest reserve grades, long mine lives and are low risk. The company is one of the lowest-cost U.S. silver producers and produces about 40% of the silver mined in the country. This is expected to grow as Lucky Friday Mine in Idaho ramps up.
Testing of a new drill and blast mining method at the Lucky Friday Mine is exhibiting good performance in controlling seismicity and improving safety with the potential to increase productivity. The stock has gained 1.2% in the past year.
The Zacks Consensus Estimate for Hecla Mining’s fiscal 2021 earnings suggests growth of 175% year over year. The consensus mark for 2022 indicates year-over-year growth of 120%. The company has a long-term estimated earnings growth rate of 1%. The Zacks Ranked #3 stock has a trailing four-quarter earnings surprise of 13%, on average.
Endeavour Silver: The company produced 2.1 million silver equivalent ounces in the third quarter of 2021, 22% higher than the year-ago quarter, courtesy of record production at the Guanacevi mine. The company raised consolidated production guidance for 2021 to 7.7-8.0 million silver equivalent ounces to reflect continued strong performance at Guanacevi due to higher-than-expected grades and tonnage milled.
Per the company, silver equivalent production at each mine is on track to meet, or exceed 2021 production plans. EXK recently acquired Bruner Gold Project in Nevada for $10 million, thus adding an advanced stage exploration project in a favorable jurisdiction to its portfolio.
The company recently announced that it is seeing exceptional drilling results within the El Curso and the Santa Cruz Sur systems at the Guanacevi silver mine, which are indicative of a longer mine life. Backed by these developments, its share price has surged 19.7% in the past year.
The Zacks Consensus Estimate for Endeavour Silver’s fiscal 2021 earnings suggests growth of 1,500% year over year. The consensus mark for 2022 indicates year-over-year growth of 54%. EXK currently carries Zacks Rank #3.
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