There are various valuation measures used to assess a company’s price relative to its peers as well as its historical performance. The EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) valuation multiple is a good measure for capital-intensive industries since it helps us compare companies with different capital structures.
The chart below compares silver miners’ EV-to-forward-EBITDA multiples to their EBITDA margins in 2017.
Coeur Mining has the lowest valuation multiple
Coeur Mining (CDE) is trading at a forward EV-to-EBITDA multiple of 6.9x, the lowest multiple in the peer group (SIL). The higher-than-average all-in sustaining costs and higher financial leverage are probably the reasons for its lower relative multiple.
Coeur Mining’s EBITDA margin is also the lowest among its peers, as you can see in the above graph. That’s mostly due to its higher-than-average costs. While Coeur’s operating leverage helps it outperform its peers during a higher precious metal price environment, in a weaker price environment, that gap is likely to persist.
Highest multiple: First Majestic Silver
First Majestic Silver (AG) is trading at 11.6x, the highest multiple in the peer group. That multiple represents a 22.4% premium to the group average. It’s not a coincidence that the company also has the highest margin in the peer group. It has a strong balance sheet, which can support its future growth. It has also lowered its costs significantly, which differentiates it from its peers.
Hecla Mining’s (HL) multiple is also higher than average, at 11.1x. One reason for its higher multiple could be its lower financial leverage, which it reduced significantly in 2016. HL’s long-term growth outlook also looks strong since it has started several growth projects in the last few years.
Most of its assets are also located in attractive geographical locations, which works as a big differentiator for the company. Collectively, these factors seem to warrant its premium valuation. However, you should note that the strike at its Lucky Friday mine has led to the company’s suspending its operation guidance for the year. This year, there could be a downside to production and costs, which could lead to a lower valuation multiple.
Tahoe Resources (TAHO) is trading at a multiple of 7.5x. This discount, despite having the second-highest margin, is mainly due to its recent disappointing guidance related to production as well as its higher capex (capital expenditure). The company is currently in a growth phase, which should drive its multiple higher going forward.