Where to Look for Valuation Upside in the Silver Space




The EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) valuation multiple is a good measure for capital-intensive industries. It helps investors compare companies with various capital structures.

The chart above compares silver miners’ EV to forward EBITDA to their EBITDA margins from 2017. EV is the total market value of a company’s debt, equity, preferred shares, and minority interests, net of cash and equivalents, and investments in associates. EBITDA is a fundamental measure for the company’s stakeholders. Based on an investor’s risk appetite and various silver price scenarios, investors could consider the following possibilities.

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Quality names

Companies with higher financial and operational leverages outperform companies with lower leverage in times of higher silver prices. But for fundamental investors, the best strategy might be to invest in miners with healthy balance sheets, increasing production profiles, low costs, and good cash flows.

Tahoe Resources (TAHO) can be a good consideration. Its valuation multiple is also not very steep, at 8.2x, with the highest EBITDA margin of 48.3%.

Leveraged names

Coeur Mining (CDE) is trading at a 2017 EV-to-EBITDA 7x. This is the lowest ratio among its peer group (SIL). Hecla Mining (HL), Tahoe Resources (TAHO), Pan American Silver (PAAS), and First Majestic Silver (AG) are trading at multiples of 10.5x, 10.6x, 11.3x, and 18.5x, respectively.

Coeur’s low EV-to-EBITDA multiple is probably due to its higher-than-average all-in sustaining costs and concerns regarding production falls in the medium term. As you can see in the graph above, Coeur’s EBITDA margin is only higher than PAAS. This difference is mainly due to higher costs, which results in a lower valuation multiple.

What’s your risk appetite?

Investors with a high risk appetite often invest in silver miners (SIL) and leveraged ETFs such as the ProShares Ultra Silver (AGQ) and the Direxion Daily Gold Miners Bull 3X ETF (NUGT). Investors who prefer a low-risk environment may want to invest in physical gold or ETFs that track gold prices, such as the SPDR Gold Shares (GLD) and the iShares Silver Trust (SLV).


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