High debt isn’t always bad if a company has the capacity to pay back its debt with its earnings. The net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio indicates 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.
A company’s EBITDA is considered a core business profit because it’s not affected by capital structure, tax, and non-cash items. EBITDA is useful in comparing firms with different capital structures.
A lower ratio is generally better for a company. However, if a mining company consistently generates enough EBITDA to pay its debt liability, then higher leverage wouldn’t be considered bad until it consistently maintains its net debt-to-EBITDA ratio on par with its peers and historical averages.
Out of these five silver miners, three miners—First Majestic (AG), Tahoe Resources (TAHO), and Pan American Silver (PAAS)—are in net cash positions, while Coeur Mining (CDE) and Hecla Mining (HL), have comfortable net debt-to-forward-EBITDA positions at 0.7x and 1.3x, respectively.
Together, Coeur and Tahoe make up 26.5% of the Global X Silver Miners ETF (SIL). Investors can access the silver industry by investing in silver-backed ETFs like 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.
Now let’s move to an analysis of the free cash flow upsides for our five silver mining companies.