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Which Silver Miners Offer a Valuation Upside?

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Valuations

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

The chart above compares silver miners’ EV-to-forward-EBITDA ratios to their EBITDA margins for 2017. Remember, EV refers to the total market value of a company’s debt, equity, preferred shares, and minority interests (net of cash and equivalents and investments in associates).

To be sure, EBITDA is a fundamental measure for the company’s stakeholders. Based on an investor’s risk appetite and various silver price scenarios, investors can consider the following possibilities.

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Is Coeur d’Alene Mines expensive?

Coeur d’Alene Mines (CDE) is trading at a forward EV-to-EBITDA of 7.6x, which is lower than the average peer multiple of 8.3x. 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 closer look at Coeur d’Alene Mines’s fundamentals, please read Market Realist’s Coeur Mining Feeling Pressure after Making Moves to Reduce Debt.

Valuation catalysts

Hecla Mining (HL) is currently trading at the highest multiple of 10.0x, but First Majestic Silver (AG) is trading at a similar multiple of 9.8x. This represents a 20% 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 attractive mining jurisdictions with high grades. All these factors seem to justify the premium. Its higher-than-expected growth could also 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 future growth.

Positive catalysts

Moreover, there seem to be positive catalysts for the stock in 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 now trading at a multiple of 7.0x. The discount is most likely due to its higher geopolitical risk as compared to peers. Its growth profile, however, remains strong, and TAHO has been venturing into more of gold resources. Its strong fundamentals should command a higher premium if gold and silver prices remain on an uptrend.

Notably, investors with an appetite for high risk 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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