Which Miners Could Offer a Valuation Upside in the Silver Space?



Silver miners

Precious metal miners with substantial exposure to silver are usually classified as silver miners. Tahoe Resources (TAHO), Coeur d’Alene Mines (CDE), Hecla Mining (HL), Pan American Silver (PAAS), and First Majestic Silver (AG) make up 7.2% of the VanEck Vectors Gold Miners ETF (GDX).

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Is Coeur d’Alene Mines expensive?

Coeur d’Alene Mines (CDE) is trading at a 2017 EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] of 8.4x. The lower 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 chart above, Coeur d’Alene Mines’s EBITDA margin is only higher than Pan American Silver (PAAS). This difference is mainly due to higher costs, which results in a lower valuation multiple. In a weaker precious metal environment, this gap is likely to continue.

For a deeper dive into Coeur d’Alene Mines’s fundamentals, please read Coeur Mining Feeling Pressure after Making Moves to Reduce Debt.

Valuation catalysts

Hecla Mining (HL) is trading at the highest multiple of 11.4x, along with First Majestic Silver (AG). This represents a 55% premium to the group average multiple. Hecla Mining has brought down its financial leverage significantly in 2016. It’s also looking to start various growth projects, which should support its long-term growth.

Moreover, its asset base is mostly in the attractive mining jurisdictions with high grades. All these factors seem to justify the premium. Additionally, higher-than-expected growth could lead to a rerating as well, as silver continues to follow gold to the upside.

First Majestic Silver has mines mainly focused in Mexico. It has lowered its costs significantly and is on track to achieve its 2016 guidance of $11.50–$12.35 per ounce. It also has a strong balance sheet, which should support its future growth.

Moreover, there seem to be positive catalysts for the stock come 2017. These include the installation of a roasting circuit, which could add ~1.5 million ounces of silver to its annual production. This should also lead to a fall in costs. These positive catalysts most likely warrant the company’s premium valuation.

Tahoe Resources (TAHO) is trading at a multiple of 7.7x. The discount is most likely due to its higher geopolitical risk compared to its peers. Its growth profile, however, remains strong. TAHO is venturing into more of gold resources lately. Its strong fundamentals should command a higher premium if gold and silver prices remain on an uptrend.

Investors with a high risk appetite often invest in silver miners (SIL) and leveraged ETFs such as the ProShares Ultra Silver ETF (AGQ) and the Direxion Daily Gold Miners Bull 3X ETF (NUGT).


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