Will Silver Miners’ Multiples Expand after a Long Dry Spell?



Lowest valuation multiple

Of all the major silver stocks (SIL), Pan American Silver Resources (PAAS) is trading at the lowest forward EV-to-EBITDA (enterprise value-to-EBITDA) multiple of 4.7x, implying a discount of 36% to its trailing-five-year average and a discount of 30% to the peer average.

On November 14, 2018, PAAS announced that it was buying Tahoe Resources (TAHO) in a $1.07 billion cash and stock deal. TAHO took a severe hit following the Guatemalan government’s decision to suspend its Escobal mine license in July 2017. The Escobal mine is a world-class silver operation, and its addition to PAAS’s portfolio could be very beneficial for the miner if it can get it to restart its operations. This is likely given the change in ownership, and PAAS’s experience working in the Latin American region should also come in handy. After the deal was announced, Tahoe’s multiple expanded 53%, and PAAS’s contracted 27%.

Hecla Mining (HL) has a multiple of 6.7x, representing a discount of 1.5% to its peers. The company is struggling with lower production and higher costs, as the workers at its Lucky Friday mine have been on strike for the last 22 months now.

Investors are also concerned about the slowing production profile of Hecla’s San Sebastian mine, which could lead to a significant reduction in cash flows as well.

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Coeur Mining

Coeur Mining (CDE) is trading at a forward multiple of 6.0x. Despite achieving a strong operational performance, CDE has been delivering poor cash flow results, thereby disappointing the markets. One positive catalyst for the stock could be the lowering of its per-unit costs. This reduction could happen in 2019 as its Wharf mine enters the high-grade area and Palmarejo’s production ramps up.

Valuation catalysts

First Majestic Silver (AG) is trading at the highest multiple of 10.6x among its peers, representing a premium of 56%. Its operational performance has been strong, and it reported record production in 2018. The company also provided higher production guidance for 2019. Moreover, the company is expected to produce a larger proportion of volumes from low-cost mines in 2019, which should drive its unit costs lower. First Majestic already has lower unit costs than its peers, resulting in one of the highest margins in its peer group. Since its recent investments have started to generate value, its valuation multiple has also risen.

Risk-tolerant investors may be interested in investing directly in silver miners or in leveraged funds such as the ProShares Ultra Silver ETF (AGQ) and the Direxion Daily Gold Miners Bull 3X ETF (NUGT).


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