Silver lining in weaker peso for Mexican miners

* Peso slid to record low vs the dollar in January

* Silver (Shenzhen: 300221.SZ - news) miners seen benefiting from lower costs

* Mexican silver mining equities vs peso: http://reut.rs/2kpRxZX

By Jan Harvey

LONDON, Feb 16 (Reuters) - Investors are picking up on the benefits for Mexican silver miners of one of the biggest foreign exchange stories since November's U.S. election, with the slide in the peso pushing costs lower while silver prices are ramping up.

The peso hit a record low last month at 22.03 to the dollar, pressured by concern over a potential trade war between the United States and Mexico in the wake of Donald Trump's U.S. election victory.

While some say the worst of the currency's slide may be over, the peso is expected to remain weak throughout this year, a Reuters poll showed this month.

Between 60 percent and 70 percent of silver miners' costs in Mexico -- from labour to power -- are priced in pesos, an industry analyst estimates. For a company that sells its output in dollars, that suggests a significant benefit to cost margins.

"The fall in the peso has improved costs not just for the silver producers, but for all miners in Mexico," said George Cheveley, portfolio manager at the Investec Global Natural Resources fund.

"That's against a background where we see silver itself as attractive."

Investec (LSE: INVP.L - news) has increased exposure to silver in recent months in both its Natural Resources fund, which has $300 million in assets under management, and its Global Gold Fund, he said.

Mexico is the world's biggest silver producer, with output of 192 million ounces in 2015.

According to metals markets research team GFMS, analysis on the five largest domestic Mexican silver mining companies suggests that the drop in the peso alone has led to an average 7 percent margin gain.

TWIN-PRONGED SUPPORT

Silver prices are also forecast to post their strongest year since 2014, benefiting from stronger industrial demand and its attraction as a haven from risk amid uncertainties surrounding the U.S. economy under Trump, Britain's decision to leave the EU and forthcoming European elections.

Shares (Berlin: DI6.BE - news) in Fresnillo (Frankfurt: A0MVZE - news) , the world's biggest primary silver producer, are up 27 percent this year. Among other Mexico-focused silver miners, First Majestic is up 34 percent, Endeavour Silver (Toronto: EDR.TO - news) 39 percent and Great Panther (Swiss: GPR.SW - news) Silver 24 percent.

Those have outstripped the 15 percent gain in the S&P/TSX Global Mining Index and a 12 percent rise in the silver price. And that is before the reduction in costs has been fully factored in, the GFMS analysis shows.

Keith Watson, of New City Investment Managers, said that his fund took on exposure to Toronto-listed Americas Silver , which recently started construction on the San Rafael project in Mexico, in the fourth quarter of last year and extended that position early this year. It also bought into First Majestic in the second half.

"(The falling peso) certainly has been a benefit," he said. "It may well be that we've had some of the best of it already, but I don't think it has yet been fully discounted."

Angelos Damaskos, of Sector Investment Managers, which has 20 percent of its Junior Gold fund invested in silver stocks, favours Toronto-listed mid-caps Endeavour and Fortuna, as well as small-cap player Avino Silver.

"We're extremely bullish on the Mexican silver miners, specifically as it pertains to their operational efficiencies with the drop in the peso, but also because silver tends to outperform gold in a rising market," Damaskos said.

"The silver miners that operate in Mexico benefit from both sides."

(Editing by David Goodman)