Silver prices have been volatile since last year amid rising interest rates, a stronger dollar and slowing growth, in turn, weighing on the Zacks
Mining - Silver industry’s performance. Industrial demand for the metal is expected to be strong, mainly driven by the ongoing vehicle electrification and the intensifying global focus on green infrastructure. The impending demand-supply imbalance is expected to help elevate prices. We suggest companies like Fresnillo plc ( FNLPF Quick Quote FNLPF - Free Report) , Buenaventura Mining Company ( BVN Quick Quote BVN - Free Report) and Vizsla Silver Corp. ( VZLA Quick Quote VZLA - Free Report) , which are poised to benefit from enhanced operational efficiency, disciplined 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 crushed and ground. Miners continually look 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 as well as through acquisitions. Only 20% of silver comes from mining activities, wherein silver is the primary revenue source. The balance comes from projects wherein 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 the Mining-Silver Industry
: Silver had a lackluster 2022 and gained a meager 2.9% amid rising interest rates, a stronger dollar, inflation and sluggish growth. Further, the contraction in the industrial sector due to muted customer spending and supply-chain constraints weighed on silver. Earlier this year, silver prices had shown an upward trend, benefitting from China loosening its zero-Covid policy and market expectations of smaller U.S interest-rate hikes. However, silver prices have again lost momentum recently, as several Federal Reserve policymakers called for more interest rate hikes to combat high inflation. Also, recession concerns have added pressure on silver prices. So far this year, silver has lost 8.6% of its value. Ongoing Weakness in Silver Prices a Woe : Industry players are 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 research and development, and resorting to technological innovations required at almost every level of operation to increase efficiency, sustain growth and rein in costs. Inflationary Costs Strain Margins : Per the Silver Institute, the global silver demand rose 17% to a record 1.24 billion ounces in 2022. This year, the demand is anticipated to dip to 1.15 billion ounces. Nevertheless, if this level is achieved, it will be the second-highest global silver demand on record. Industrial demand is expected to grow to 550 million ounces, backed by the ongoing vehicle electrification trend and increasing government focus across the world on green infrastructure that will offset weakness in other areas. Meanwhile, jewelry and silverware demand is expected to drop 10% and 20%, respectively, in 2023. This is likely to occur as demand in the top consumer, India, is expected to come down to normal levels after witnessing a record 2022. Silver physical investment is likely to be down 16% to 1.15 billion ounces, expected to be the second-highest number on record. Mined silver production is expected to rise 5% from the year-ago reported figure to 873 million ounces on higher output from Mexico and Chile. The global silver market will likely close 2023 with a deficit of 119 million ounces. This will somewhat help boost prices. Industrial Demand for Silver to Offset Weakness in Other Areas Zacks Industry Rank Indicates Lackluster 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 ten-stock group within the broader Zacks Basic Materials sector, currently carries a Zacks Industry Rank #164, which places it in the bottom 35% of 251 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms 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 six months, the industry's earnings estimates for the current year have plunged 41%. Despite bleak near-term prospects, we will present a few Mining-Silver stocks that one can add to their portfolio, given their prospects. But it is worth looking 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 lost 20.9% in the past year compared with the Zacks S&P 500's drop of 8.7% and the Zacks Basic Material sector’s fall of 1.2%.
One-Year Price Performance
Industry's Current Valuation
Based on 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 8.90X compared with the S&P 500's 10.25X and the Basic Material sector's forward 12-month EV/EBITDA of 6.39X. This is shown in the charts below.
Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio
Over the past five years, the industry has traded as high as 16.58X and as low as 5.34X, with the median being at 8.37X.
3 Mining-Silver Stocks to Bet on
Fresnillo: FNLPF reported attributable silver production of 53.7 million ounces and gold production of 635,926 ounces in 2022, both in line with the guidance. Silver output was up 1.2% year over year, aided by a strong performance of the Fresnillo mine, which has been showing consistent improvement. The continued contribution of the new Juanicipio project is also helping offset the impacts of lower grades at San Julián. In the fourth quarter, the company completed the tie-in of the Juanicipio plant to the national electricity grid. Commissioning of the Juanicipio plant is underway, with the ramp-up of the plant expected in the coming months. Juanicipio is expected to boost the company’s 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. The company’s focus on improving operational performance and efficiency is expected to reduce costs. Its high-quality assets, ample mineral resources, competitive margins and disciplined approach to development will continue to drive growth. Its shares have declined 8% over the past three months mainly due to the volatility in silver prices. The Zacks Consensus Estimate for this Mexico-based entity’s current-year earnings has moved up 11% in 60 days’ time. FNLPF currently carries a Zacks Rank #2 (Buy). Price: FNLPF
Buenaventura Mining Company: Last year, BVN received the government of Peru's approval of all required permits for the San Gabriel Mine project, a milestone in advancing such an important project. Construction-related activities at San Gabriel are underway. San Gabriel will almost double Buenaventura's current gold production starting from 2025 and contribute 120,000-150,000 gold ounces annually. This project will strengthen its precious metals portfolio. BVN announced multiple transactions 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 pit, thereby driving a solid EBITDA performance. BVN has also deepened its focus on exploration to extend the life of mines. BVN shares have declined 8.7% over the past three months. The Zacks Consensus Estimate for this Lima, Peru-based entity's current-year earnings has moved up 4% over the past 60 days. BVN’s shares have gained 17% in the past year. BVN currently carries a Zacks Rank #2. Price: BVN Vizsla Silver: VZLA is focused on advancing its flagship, 100%-owned high-grade Panuco silver-gold project in Sinaloa, Mexico, one of the highest-grade silver primary discoveries in the world. The project benefits from power, water and road access. The company recently announced an updated mineral resource estimate for the project, which shows a 71% increase in indicated mineral resources to 104.8 million ounces of silver equivalent from the estimate released in March 2022. The report also suggests a 150% increase in inferred mineral resources from the prior stated 45.6 million ounces of silver equivalent to 114.1 million ounces. About 93% value of the updated mineral resource estimate comprises precious metals, including 59% from silver. So far, Vizsla Silver has executed around 202,709 meters of drilling at Panuco, leading to the discovery of several high-grade veins. At the precious-metal-rich Copala structure, successful drilling throughout 2022 has led to a 701% increase in indicated mineral resources to 51.1 million ounces of silver equivalent and a 198% increase in inferred mineral resources to 55.4 Moz silver equivalent. Additionally, the inclusion of the high-grade Cristiano structure, which can be developed alongside Copala, represents a near-surface high-grade feed source. The development has led to an 8% increase in its share price in the past three months.
The Zacks Consensus Estimate for this Vancouver, Canada-based player’s 2023 earnings moved up from a loss of 7 cents per share to a loss of 6 cents per share over the last 60 days. VZLA has a trailing four-quarter earnings surprise of 33%, on average. VZLA currently carries a Zacks Rank of 3 (Hold).