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Dull Near-Term Outlook for Silver Mining Industry

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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.
 
Let's take a look at the three major themes in the industry:
 

  • Silver’s unrivaled characteristics make it an indispensable component for many industrial products. In fact, industrial applications account for roughly 60% of the global silver consumption. Consequently, the slowdown in industrial activity amid the COVID-19 pandemic severely impacted demand for the white metal. However, silver has rebounded of late, courtesy of optimism over financial stimulus and pickup in industrial activity with economies gradually opening or easing restrictions. Silver prices are currently trending above $18 per ounce and have gained 2.5% so far this year. However, the likelihood of increasing COVID-19 infection rates in various locations and apprehensions of a second wave as different countries ease restrictions might thwart the economic recovery, thereby impacting silver.
     
  • 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 more than ever in R&D and resorting to technological innovations targeted at nearly every level of operation to increase efficiency, sustain growth and keep costs low.
     
  • 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 going forward. Silver’s use in 5G-infrastructure and upcoming intelligent electronics is also likely to drive demand. Jewelry fabrication, which accounts for approximately one-fifth of total silver demand, is also expected to be a growth driver. India will emerge as a major consumer on account 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 a 10-stock group within the broader Zacks Basic Materials Sector, currently carries a Zacks Industry Rank #164, which places it at the bottom 35% of 256 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. Since the beginning of this year, the industry’s earnings estimate for the current year has gone down 58%.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Versus Broader Market

The Mining- Silver Industry has outperformed the S&P 500 over the past year. The stocks in this industry have collectively gained 32.6% in the past year compared with the Zacks S&P 500’s growth of 7.4%. Meanwhile, the Zacks Basic Material Sector declined 3.3% over the past year.

One-Year Price Performance



Mining- Silver Industry’s 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 11.09X compared with the S&P 500’s 12.16X and the Basic Material sector’s forward 12-month EV/EBITDA of 5.85X. 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 16.35X and as low as 4.35X, with the median being at 8.05X.

Bottom Line

While the impact of the coronavirus outbreak remains an overhang, demand for silver will rebound once the situation stabilizes. Rising industrial demand and broader economic growth present solid prospects in the silver mining space. With expanding uses in technology, demand for the white metal continues to rise.

None of the stocks in the industry currently carry a Zacks Rank #1 (Strong Buy). We are presenting two stocks with a Zacks Rank #2 (Buy) and two stocks with a Zacks Rank #3 (Hold) that investors may take a look at. You can see the complete list of today’s Zacks #1 Rank stocks here.

Alexco Resource Corp (AXU - Free Report) : Based in Vancouver, Canada, the company currently carries a Zacks Rank #2. The Zacks Consensus Estimate for earnings for fiscal 2020 indicates year-over-year growth of 167%. The estimates have also been revised upward from an expectation of a loss of 5 cents to earnings of 4 cents per share in the past 60 days.

Price and Consensus: AXU



Avino Silver (ASM - Free Report) : Based in Vancouver, Canada, the company carries a Zacks Rank #2. The Zacks Consensus Estimate for earnings for fiscal 2020 suggests year-over-year growth of 233%. The estimate has been revised upward by 33% over the past 60 days.

Price and Consensus: ASM



Pan American Silver Corp. (PAAS - Free Report) : This Vancouver, Canada-based company has an estimated long-term earnings growth rate of 2.4%. The stock has a Zacks Rank #3. The Zacks Consensus Estimate for earnings for fiscal 2020 indicates year-over-year improvement of 3.9%. The company has a trailing four-quarter positive earnings surprise of 32.2%, on average.

Price and Consensus: PAAS



First Majestic Silver Corp. (AG - Free Report) : Based in Vancouver, Canada, the company carries a Zacks Rank #3. The Zacks Consensus Estimate for earnings for fiscal 2020 suggests year-over-year growth of 175%. The estimate has north by 10% over the past 60 days.

Price and Consensus: AG



5 Stocks to Soar Past the Pandemic: In addition to the companies you learned about above, we invite you to learn about 5 cutting-edge stocks that could skyrocket from the exponential increase in demand for “stay at home” technologies. This could be one of the biggest buying opportunities of the decade. See the 5 high-tech stocks now>>

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