Can Silver Miners Rebound in 2018 after a Long Dry Spell?



Silver miners

In 2017 and 2018 year-to-date, silver miners considerably underperformed silver. Miners are usually a leveraged play on metals, rising by a higher proportion when metal prices rise and falling harder when metal prices weaken. This trend hasn’t been visible lately as company-specific factors exerted more influence on stock prices.

In 2018, the iShares Silver Funds ETF (SLV), which tracks spot silver prices, has fallen 2.8%. The Silver Miners’ Index (SIL) has fallen 5.5% in 2018.

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Coeur Mining has the highest multiple

Among the five silver miners in this category, Coeur Mining (CDE) has the highest forward EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] multiple of 8.3x. This multiple reflects a premium of 19.0% to its close peers. Its current multiple is also at a premium of 15.8% to its five-year average multiple. 

CDE’s multiple has seen an expansion of 47.0% since the end of December 2017. Its operating results for 4Q17, as well as its production and cost results for 1Q18, have been strong. Its recently acquired Silvertip mine started production ahead of schedule. Further cost improvements in its mines could lead to a further rerating of the stock.

First Majestic Silver (AG) comes next with a forward multiple of 7.6x. While Coeur Mining’s multiple has risen since the end of December 2017, AG’s multiple has fallen 16.0% in the same period. The company had a challenging year in 2017 due to work stoppages at its mines. 

First Majestic Silver’s operational performance in 2018 has been improving but is still not on par with expectations. AG recently acquired Primero Mining, and solid execution of its integration could help in the higher rerating of its valuation multiple.

Hecla Mining and Pan American Silver

Hecla Mining (HL) and Pan American Silver (PAAS) are trading at similar valuation multiples of 7.2x. Each stock is trading at a discount to the last five-year average multiples. Hecla Mining’s woes in 2017 and year-to-date are due to the ongoing strike at its Lucky Friday mine in Idaho. 

In a significant recent development, Hecla Mining acquired the Klondex mine in March for $462.0 million. Its stock was down 10.0% for the day after the acquisition news, as investors were concerned about dilution for the funding of the acquisition. Until these uncertainties regarding Lucky Friday mine and the funding of the acquisition are resolved, Hecla Mining may not see a noticeable upward revision of its earnings estimates.

Investors with higher risk appetites can also invest in silver miners (SIL) as well as leveraged ETFs such as the ProShares Ultra Silver ETF (AGQ) and the Direxion Daily Gold Miners Bull 3X ETF (NUGT).

You can also read Analysts’ Views on Silver Miners as Silver Underperforms Gold for details on analysts’ views of these miners.


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