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3 Silver Mining Stocks to Watch Amid Industry Challenges

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The recent weakness in silver prices amid rising interest rates, a stronger dollar and slowing growth affected the Zacks Mining - Silver industry. Demand for the metal is expected to remain strong, aided by industrial fabrication and a continued post-pandemic recovery in jewelry and silverware. The impending demand-supply imbalance will help jack up prices.
 
We suggest keeping tabs on companies like Fresnillo plc (FNLPF - Free Report) , Buenaventura Mining Company (BVN - Free Report) and Avino Silver (ASM - Free Report) , which are poised to benefit from enhancement of operational efficiency and cost management, and solid projects.


About the Industry

The Zacks Mining - Silver industry comprises companies 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. 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 revenues. The balance comes from projects in which 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

Ongoing Weakness in Silver Prices:  Silver had made a solid start in 2022 and hit a high of $26.90 per ounce in March as the Russia-Ukraine turmoil fueled safe-haven demand. However, with the strengthening of the dollar, silver soon lost its sparkle. Prices dipped to as low as $18 an ounce in July and are currently trending at around the $19 mark. Rising interest rates, a stronger dollar and sluggish growth have induced the 16% drop in its value so far this year. However, all is not over for the widely-used industrial metal. Prices are expected to eventually pick up as the electronics and photovoltaics sectors support industrial consumption, and retail and jewelry demand also looks promising. Per the Silver Institute, while silver supply will be up 3% this year, aided by project ramp-ups, gains in established mines’ output and a rise in industrial recycling, nothing will be adequate to meet demand. Demand is expected to be 5% higher than the year-ago number on the back of gains in industrial fabrication and a constant post-pandemic rebound in jewelry and silverware.

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 spiked wages. With no control over silver prices, the industry must focus on improving its 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, indicating an 8% increase from the year-ago reported figure. Silver industrial fabrication is forecast to improve 5%, as silver’s usage expands in both traditional and critical green technologies. Jewelry demand is expected to rise 11% in 2022, backed by India, courtesy of improving consumer sentiment and a growing interest in silver jewelry. India is expected to be the main contributor to the 21% surge expected in silverware fabrication this year. India’s silver imports are expected to triple last year’s value in 2022. The outlook for silver demand in automotive and 5G-related applications, and the photovoltaic (PV) industry remains robust. Silver physical investment is likely to be up in double digits in 2022, led by the ongoing macroeconomic uncertainties and inflationary pressures.

 

Zacks Industry Rank Indicates Dull Prospects

The group's Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates gloomy prospects in the near term. The Zacks Mining - Silver industry, a 12-stock group within the broader Zacks Basic Materials Sector, currently carries a Zacks Industry Rank #241, which places it at the bottom 4% of 252 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 59%.

Despite bleak near-term prospects, we will present a few Mining-Silver stocks that one can retain, given their prospects. But it's worth looking at the industry's shareholder returns and its current valuation first.
 

Industry Versus Broader Market

The Mining-Silver Industry has underperformed both the S&P 500 and its sector over the past year. The stocks in this industry have collectively declined 28% in the past year compared with the Zacks S&P 500's dip of 3.2%. The Zacks Basic Material sector has fallen 7.5% over the same time frame.

One-Year Price Performance



 

Industry's Current Valuation

On the basis of the forward 12-month EV/EBITDA ratio, a commonly used multiple for valuing silver-mining companies, we see that the industry is currently trading at 6.20X compared with the S&P 500's 11.57X and the Basic Material sector's forward 12-month EV/EBITDA of 5.09X. 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 5.62X, with the median being at 8.39X.

3 Mining-Silver Stocks to Keep an Eye on

Fresnillo plc: FNLPF reported attributable silver production of 27.6 million ounces and gold production of 308,752 ounces in the first half of 2022. It remains on track to meet the full-year guidance of 50.5-56.5 million ounces of attributable silver and 600,000-650,000 ounces of attributable gold production. Management recently announced that it expects to complete the tie-in of the Juanicipio plant and Pyrites Plant at Fresnillo to the national electricity grid in the coming weeks. Backed by this development, its shares have gained 9% over the past month. Commissioning of the Juanicipio plant will follow soon with the ramp up of the plant beginning toward the end of the third quarter. The commissioning of Juanicipio will drive silver production and lower consolidated group costs. Fresnillo is investing in a number of projects to increase production and ensure steady growth in the future years. Focus on improving operational performance and enhancing efficiency is expected to reduce costs. Its high-quality assets, ample mineral resources, competitive margins and a disciplined approach to development will continue to drive growth.

The Zacks Consensus Estimate for this Mexico-based entity’s current-year earnings has moved up 14.9% in 30 days’ time. FNLPF currently carries a Zacks Rank #3 (Hold).

Price: FNLPF

Buenaventura Mining Company: In March, BVN received the Government of Peru's approval to all required permits for the San Gabriel Mine Project, an important milestone to advance such an important project. San Gabriel will almost double Buenaventura's current gold production starting in 2025 and contribute between 120,000 and 150,000 gold ounces, annually. This project is aligned with its strategy to deliver projects and strengthen its precious metals portfolio. BVN announced multiple transactions this year to enhance balance-sheet strength, reduce debt, invest in growth projects and focus on its portfolio. BVN has a solid pipeline of projects to deliver growth in the long haul. Its efforts to curtail costs at its mines led to significant cost savings in each of the mines, driving a solid EBITDA performance.

The Zacks Consensus Estimate for this Lima, Peru-based entity's current-year earnings has been stable over the past 30 days. The estimate indicates growth of 45.8% from the year-ago reported figure. BVN is currently Zacks #3 Ranked.

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Price: BVN

Avino Silver: ASM recently announced that its silver equivalent production was 649,569 ounces in the second quarter of 2022, which marked a solid 42% increase from the first-quarter level. Results were better than expected, primarily driven by higher grades from the Avino mine. This takes the total year-to-date silver equivalent production to 1.3 million ounces. Strong operational achievements at Avino Silver improved revenues and reported a mine operating income in the second quarter, having reaped a 12.7% gain in its share price over the past month. Earlier this year, ASM closed the acquisition of the La Preciosa silver project, a development stage mineral property,  one of Mexico’s largest undeveloped primary silver resources. The buyout represents a major milestone for ASM as it advances its growth strategy to become an intermediate silver producer with a large silver resource base. In sync with this strategy, ASM recently announced that it granted Endurance Gold Corp. the right to acquire full ownership of the former Minto Gold Mine, Olympic and Kelvin gold prospects. Management also announced promising drill results from the Oxide Tailings project and the Avino ET area below the Level 17 mining area.


The Zacks Consensus Estimate for this Vancouver, Canada–based player’s 2022 earnings has moved up 133% over the past 30 days. The estimate indicates growth of 250% from the year-ago reported figure. ASM currently carries a Zacks Rank of 3.

Price: ASM



 



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