Following a violent correction in the Silver Miners Index (SIL) year-to-date, many investors are hunting for deals in the sector.
While the silver producers offer very nice leverage to the metal, given that their margins can increase rapidly as the price of silver increases, not all of them are created equal. This is why holding the best names when selecting which ones to purchase to complement one’s portfolio is essential.
Size & Jurisdictions
Regarding size, First Majestic is a much larger producer, on track to produce more than 33MM silver-equivalent ounces this year, making it one of the largest silver producers sector-wide. The company also benefits from diversification, owning three mines (San Dimas, Santa Elena, and La Encantada) in Mexico and a gold mine in the #1 mining jurisdiction: Nevada.
This compares favorably to SilverCrest Metals (“SilverCrest”), which owns just one mine in Mexico that is ramping up towards commercial production, and will produce just 12.0MM silver-equivalent ounces in 2023. So, with a lack of diversification (1 mine vs. 4), a slightly less attractive jurisdictional profile (no production from Tier-1 ranked jurisdictions), and a smaller production profile, First Majestic Silver wins by a wide margin in this category.
First Majestic - 1 / SilverCrest - 0
Grades & Reserve Life
If we take a look at grades and reserves, we see a completely different story. For those unfamiliar, grades refer to the grade of metal in a tonne of rock, measured in grams of silver/gold per tonne. Meanwhile, reserves are the ore that a company holds in a deposit that is considered the economically mineable part of its total resource.
In the case of SilverCrest, I estimate the company’s 2023 reserves support 10+ years of mine life, and these reserves are calculated at a very conservative silver price of $16.60/oz and a gold price of $1,410/oz.
In the case of First Majestic, I estimated its reserves at an average of fewer than five years across its portfolio. This is despite the company using much higher metals price assumptions of $1,750/oz gold and $22.50/oz silver to calculate its cut-off grades.
Meanwhile, from a grade standpoint, SilverCrest’s grades dwarf First Majestic’s grades, coming in at 880 grams per tonne silver-equivalent vs. 400 grams per tonne silver-equivalent for First Majestic.
However, I expect SilverCrest’s grades to climb closer to 1,000 grams per tonne silver-equivalent as it brings higher-grade ounces into its mine plan, and I expect First Majestic’s grades to remain flat to down next year.
Given the inflationary pressures we see sector-wide, higher-grade mines are much more valuable, given that it’s easier to keep costs down when a mine is producing twice as much silver/gold ounces per tonne of rock mined/processed. So, from a grade and reserve life standpoint, SilverCrest wins by a massive margin.
First Majestic - 1 / SilverCrest - 1
Costs & Margins
Finally, from a costs & margins standpoint, there is no comparison between the two companies. This is because First Majestic will likely see all-in sustaining costs average $18.00/oz to $19.00/oz silver-equivalent in 2023, and SilverCrest is projected to see costs come in below $7.00/oz.
While this not be a big deal at a silver price of $25.00/oz, given that both companies would have healthy margins, it is a crucial metric to consider with the silver price below $20.00/oz.
Some investors will argue that these higher costs and weaker margins make First Majestic much more attractive, given that if the silver price soars to $26.00/oz, its margins will more than quadruple ($6.00 vs. $1.00), while SILV’s margins will not even double ($19.00 vs. $13.00).
While a fair point, there is no guarantee that the silver price will increase by 30% in value. In the case that this doesn’t occur, a few things could happen:
- First Majestic’s mine plans could be disrupted.
- First Majestic could see deletions from its mineral reserves due to its high metals price assumptions.
- First Majestic may have to raise money through share dilution given that it will not generate steady free cash flow (its all-in costs are closer to $21.50/oz).
At the same time, SilverCrest will be enjoying 60% plus margins at $20.00/oz silver, it will continue to grow its reserves, and it will have no problem improving its balance sheet, easily able to pay down debt at these depressed silver prices.
So, if one has a crystal ball and is absolutely certain that the silver price will go back to $26.00/oz, First Majestic offers much more torque and is the better pick. However, for more conservative investors, the stock is un-investable at $20.00/oz to $21.50/oz with non-existent margins on an all-in cost basis.
First Majestic - 1 / SilverCrest - 2
Given that SilverCrest shines in two categories of three and arguably in the two most important categories, I see the stock as the much better pick for investors looking for silver exposure.
My view that these factors are more important is because while diversification is essential, all of the diversification in the world doesn’t help if a producer is not generating free cash flow and operating at a profit on an all-in cost basis.
To summarize, I would view sharp pullbacks in SILV below $5.80 as buying opportunities for investors anxious to add silver exposure. Meanwhile, I would pass on First Majestic unless it dips below $5.80 per share.
Disclosure: I have no position in either stock mentioned at this time.
Disclaimer: This article is the opinion of the contributor themselves. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information in this writing. Given the volatility in the precious metals sector, position sizing is critical, so when buying small-cap precious metals stocks, position sizes should be limited to 5% or less of one's portfolio.