While financial leverage is important in gauging a company’s long-term solvency, short-term liquidity profiles are also important. In a weaker commodity price environment, short-term liquidity might come under more pressure. A company could be forced to take drastic measures.
The higher the ratio, the better the company can service its short-term liabilities and vice versa. First Majestic Silver (AG) and Pan American Silver (PAAS) are doing the best in this parameter. Tahoe Resources (TAHO) is doing the worst. Unlike its leverage, Coeur Mining’s (CDE) liquidity is comfortable with a ratio of 2.3x.
Net debt to EBITDA
Having high debt isn’t always bad if a company has the capacity to pay it back with its earnings. The net-debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio tells you how many years it will take for a company to repay its debt if net debt and EBITDA stay constant. Net debt is calculated as total debt minus cash and cash equivalents.
Out of these five silver miners, three miners—First Majestic, Tahoe Resources, and Pan American Silver are in net cash positions. Even for Coeur and Hecla Mining (HL), the net-debt-to-forward EBITDA ratio is comfortable at less than 0.2x.
Combined, Coeur and Tahoe form 26.5% of the Global X Silver Miners ETF (SIL). Investors can access the silver industry by investing in silver-backed ETFs such as the iShares Silver Trust (GLD). Leveraged ETFs such as the ProShares Ultra Silver (AGQ) and the Direxion Daily Gold Miners Bull 3X ETF (NUGT) provide high leverage to changes in precious metals prices.
Next, let’s see which silver miners can provide free cash flow upsides in 2016.