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4 Silver Mining Stocks to Watch Despite COVID-19 Related Woes

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Madhurima Das
·9-min read
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The Zacks Mining - Silver industry had been impacted by weak silver demand as the COVID-19 pandemic hit the industrial sector. Miners were compelled to shut operations in adherence to government mandates. However, recent pickup in industrial activity and the consequent rally in silver prices hold promise. It remains to be seen whether this will sustain, considering the fact that the pandemic shows no sign of fading.

Silver miners including Hecla Mining Company (HL), Buenaventura Mining Company Inc. (BVN), Fortuna Silver Mines Inc. (FSM) and Great Panther Silver Limited (GPL) have been relying on cost management and efforts to increase efficiency.

About the Industry

The Zacks Mining - Silver industry 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.

What’s Shaping the Future of Mining-Silver industry

COVID-19 Poses a Threat to Industrial Demand: Silver’s unrivaled characteristics make it an indispensable component for several industrial products. In fact, industrial applications account for roughly 60% of the global silver consumption. The slowdown in industrial activity amid the pandemic severely impacted demand for the white metal. However, as businesses resumed operations, manufacturing activity picked up globally over the past few months and in turn fueled silver demand. Further, safe-haven demand worked in favor of the metal as well. Silver prices gained 47.5% in 2020. However, so far this year, silver prices have dropped 4.4% on growing concerns over surging coronavirus cases across Europe. Prices are currently trending around $25 per ounce. Resurgence of coronavirus cases might hinder economic recovery and impact silver prices again.

Supply at Risk: Global silver mine production is anticipated to have declined by 2.4% to 849.7 million ounces in 2020 — the fourth consecutive annual decrease, due to lockdowns and restrictions amid the pandemic. Even though the mining sector has resumed operations, resurgence of coronavirus cases might result in the closure of mines again, consequently putting supply at risk. On top of this, depleting ore reserves have been a major concern for the industry in the recent years.

Cost Control Efforts to Increase Efficiency: 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 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 in Years to Come: 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, by 2025, silver consumption in the global automotive sector is expected to be reach 90 million ounces. The white metal’s use in 5G-infrastructure and upcoming intelligent electronics is also likely to drive demand. Further, jewelry fabrication, which accounts for approximately one-fifth of total silver demand, is expected to be a growth driver. 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 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 an 11 stock group within the broader Zacks Basic Materials Sector, currently carries a Zacks Industry Rank #196, which places it at the bottom 23% 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. Over the past three months, the industry’s earnings estimate for the current year has plunged 17%.

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 outperformed the S&P 500 and its sector over the past year. The stocks in this industry have collectively gained 87% in the past year compared with the Zacks S&P 500’s growth of 50.7%. Meanwhile, the Zacks Basic Material Sector has rallied 76.1% over the past year.

One-Year Price Performance

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 9.41X compared with the S&P 500’s 15.58X and the Basic Material sector’s forward 12-month EV/EBITDA of 4.32X. 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 16.58X and as low as 6.16X, with the median being at 8.35X.

4 Mining-Silver Stocks to Keep an Eye On

Hecla Mining: This Coeur d'Alene, ID-based company, together with its subsidiaries discovers, acquires, develops, and produces precious and base metal properties in the United States and internationally.

The company has a diverse asset portfolio in mining friendly jurisdictions. It boasts two of the largest silver mines in the world and two highest-grade large silver mines. It is pursuing acquisition opportunities to complement existing portfolio. The company currently produces about one-third of the silver mined in the United States. This is expected to grow as Lucky Friday Mine in Idaho ramps up. The mine’s production is expected to double again in 2021 and 60% more within four years. The company is also one of the lowest-cost U.S. silver producers. Upbeat production, lower costs and higher metal prices will bolster the company’s margins.

The Zacks Consensus Estimate for earnings for fiscal 2021 indicates year-over-year improvement of 375%. The estimate has been revised upward by 15% over the past 30 days. Shares of the company have soared 152% over the past year. The Zacks Rank #3 (Hold) company has a long-term estimated earnings growth rate of 1%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price & Consensus: HL

Buenaventura Mining Company: Based in Lima, Peru, the company engages in the exploration, mining, and processing of gold, silver, lead, zinc, and copper metals in Peru, the United States, Europe, and Asia. It currently operates several mines in Peru — Orcopampa, Uchucchacua, Julcani, El Brocal, La Zanja and Coimolache, and is developing the Tambomayo project.

The company is well-poised for growth, backed by its solid capital structure with ample liquidity and a portfolio of base and precious metals. The company has embarked on a debottlenecking program to reduce costs at its direct operation mines. The program has driven impressive results in Tambomayo, where the company simplified the metallurgical process and optimized mine preparation. In Uchucchacua, the company has improved efficiency in the underground mine. At El Brocal, it has increased production driven by operational improvements. Overall, the program has resulted in significant cost savings in each of its mines.

The Zacks Consensus Estimate for the company’s current-year earnings indicates year-over-year growth of 242%. The estimates have remained stable over the past 30 days. The company’s shares have gained 25% in the past year. It currently carries a Zacks Rank #3.

Price & Consensus: BVN

Fortuna Silver Mines: Headquartered in Miraflores, Peru, the company engages in exploration, extraction, and processing of precious and base metal deposits in Latin America. Its main properties include the Caylloma mine in Peru; the San Jose mine in Mexico; and the Lindero gold project in Argentina.

The company will continue to gain from its focus on maximizing production while simultaneously maintaining operational efficiencies to lower cash costs. Such initiatives along with high metal prices will contribute to the company’s bottom line. Fortuna Silver’s disciplined strategy of locating new deposits or pursuing mergers and acquisitions will continue to drive growth. The first gold pour at Lindero in October 2020 is a significant achievement for the company. Lindero has reserves for a projected life of 13 years and is expected to act as a tailwind in the days ahead.

The Zacks Consensus Estimate for earnings for fiscal 2021 suggests year-over-year growth of 388%. The estimate has remained unchanged over the past 30 days. Shares of the company, which carries a Zacks Rank #3, has appreciated 137% over the past year.

Price & Consensus: FSM

Great Panther Silver: Headquartered in Vancouver, Canada, the company explores for gold, silver, copper, lead, and zinc ores.

The company is positioned well on its strong balance sheet and diversified portfolio of assets in Brazil, Mexico and Peru. It continues to successfully add reserves and resources through its result-driven exploration programs. Focus on continuous improvement in operations and cutting down costs will drive margins. The company remains focused on extending the Tucano open pit mine life. Building on 2020 exploration success in Mexico will also be a key area of focus for the company this year. In 2021, consolidated gold equivalent production from the Tucano, Topia and GMC mines expected to be 135,000 to 150,000 gold equivalent ounces.

The Zacks Consensus Estimate for earnings for fiscal 2021 is currently pegged at 14 cents per share compared to breakeven earnings per share in the prior fiscal. The estimate has been revised upward by 17.4% over the past 30 days. The company has a trailing four-quarter earnings surprise of 43.7%, on average. Shares of the company, which carries a Zacks Rank #3, has soared 116% over the past year.

Price & Consensus: GPL

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