Silver prices have lost 16% in the past year, weighed down by trade war apprehensions and stronger U.S. dollar. Further, the possibility of the Fed raising interest rates has worked against the white metal. A strengthening economy gives the Federal Reserve reason to raise interest rates. It is a well-known fact that higher U.S. rates dent the appeal of silver as it does not offer interest. Consequently, an interest rate hike, which is likely at the FOMC meeting on Sep 25-26, is likely to drag down silver further.
Moreover, there’s no denying that companies operating in the silver-mining space have been reeling under lower silver prices. However, the silver-mining companies are focused on investments in R&D, underground development and exploration that are likely to result in higher production and lower costs. The companies are investing in more efficient extraction and processing. Lowering costs through better management seems to be the call of the hour that will help sustain margins even in the wake of lower silver prices.
So it seems too early to write-off silver and silver-mining stocks. Despite the abysmal price trends, silver’s fundamental image appears quite strong. Silver will eventually bounce back and following are the factors that can be instrumental in its turnaround.
Industrial Applications, Green Technology to Support Demand
Silver’s unrivaled characteristics serve many industrial products. Industrial demand primarily accounted for 60% of global silver consumption in 2017. The U.S. economy is expanding at its fastest pace in years and growing industrial activity will provide the much-needed boost for silver demand.
Further, demand in jewelry fabrication is expected to increase. Silver demand from the jewelry sector accounts for approximately one-fifth of total silver demand. For many fashion-conscious consumers, silver is more desirable than gold because of its color neutrality, which provides more versatility. Moreover, silver serves as a safe haven asset in times of uncertainty.
China will continue to be a major driver in the global silver market for years to come, fueled by continued industrial demand and silver mining activity. China is by far the largest consumer of silver globally, accounting for around 18% of global fabrication demand. In fact, China’s robust demand for the metal makes it a major destination for imported silver products fabricated in the United States, Japan and other countries. Moreover, China is also the third largest silver producing country worldwide and is a key nation for processing primary raw materials globally.
Further, India’s cultural affinity for silver underscores the country’s importance as a leading source of demand in the global silver marketplace. India will emerge as a major consumer driven by increased investor interest and growth in silver jewelry, decorative items and silverware fabrication.
The demand for silver continues to increase, especially with expanding uses in technology as the world develops more electric cars and robotics. The ongoing revolution in green technologies, aided by the exponential growth of new energy vehicles and investment in solar photovoltaic energy, will be a major catalyst. To curb pollution, governments globally are providing financial incentives and imposing regulations that favor the development of electric and hybrid vehicles. Additionally, rising investment in solar energy applications will boost silver demand in the years to come.
Demand-Supply Imbalance Favors Silver
Global silver mine production suffered a dip of 4.1% to 852.1 million ounces in 2017 – its second consecutive annual decline. There has also been a downward trend in silver scrap supply since 2011. The prospects of a dwindling supply loom large on the industry. This is due to the absence of a development of new projects, declining ore grades and depleting reserves. A potential silver deficit will provide a strong ground for silver prices.
Valuation is Cheap
Stocks in the
Zacks Mining – Silver Industry
have collectively declined 17.8% in the past year, against the S&P 500 rise of 16.8%. However, the valuation looks really cheap now. One might get a good sense of the industry’s relative valuation by looking at its Enterprise Value to Earnings before Interest Depreciation and Amortization (EV/EBITDA). This valuation is a good measure for the industry given its complicated and capital-intensive nature and gives a more accurate feel of the financial health of a miner as well as whether it is undervalued in comparison with its peers.
The industry currently has a trailing 12-month EV/EBITDA ratio of 10.5, which looks inexpensive when compared with the market at large, as the trailing 12-month EV/EBITDA ratio for the S&P 500 is 11.9.
Potential Gainers & Losers
We suggest investors interested in the silver-mining space to add stocks which are backed by a favorable Zacks Rank and have positive growth estimates.
The Zacks Consensus Estimate for the current fiscal EPS projects year-over-year-growth of 20% and year-over-year improvement of 122% for the next fiscal.
Americas Silver Corporation
USAS - Free Report
) : This Toronto, Canada based company carries a Zacks Rank #3. The Zacks Consensus Estimate for earnings for the current fiscal projects year-over-year-growth of 322% and improvement of 44% for the next fiscal.
MAG Silver Corporation
MAG - Free Report
) : This Vancouver-based company carries a Zacks Rank #3. The Zacks Consensus Estimate for the current fiscal EPS projects a year-over-year-growth of 50%.
However, we suggest steering clear of stocks such as Great Panther Silver Limited (
GPL - Free Report
) and Tahoe Resources Inc. . Both carry a Zacks Rank #5 (Strong Sell) and have negative growth projections for this year. These stocks have also been witnessing negative revisions in their earnings estimates lately.
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