Three Silver Miners To Buy On Dips

While the price of silver (SLV) has held up relatively well in June, considering the sharp declines in global markets, the Silver Miners Index (SIL) has not been as fortunate. In fact, despite silver being down just 7% year-to-date and being a sanctuary from the selling pressure, the Silver Miners Index has been battered, sliding 23% year-to-date and matching the decline of the S&P-500.

While the underperformance might be a head-scratcher for some, it shouldn’t be all that surprising, given that SIL is full of low-quality producers who have dragged down the ETF. However, with the proverbial babies being thrown out with the bathwater, we’ll look at three names approaching low-risk buy zones.

While the gold producers had a tough year in 2021 after lapping all-time highs for the gold price (Q3 2020), the silver producers had a solid year, benefiting from an attempted silver squeeze that kept silver prices elevated for much of 2021.

However, after a brief honeymoon period in 2021, we’re now seeing the hangover. This is because silver producers must lap an average silver price of ~$26.00/oz from last year while contending with higher fuel, labor, and materials costs. Not surprisingly, this has put a severe dent in margins, exacerbated by silver spending most of Q2 below $23.00/oz.

Fortunately, while this has made most names un-investable as they lap insurmountable comps, three names stand out:

Wheaton Precious Metals (WPM - Get Trend Analysis Report)

SilverCrest Metals (SILV - Get Trend Analysis Report)

Hecla Mining (HL - Get Trend Analysis Report)


Wheaton Precious Metals (WPM)

Beginning with Wheaton Precious Metals, the company was raised to handle inflationary periods like we’ve found ourselves in, with a royalty/streaming business model that leaves it insulated from rising operating costs and increased capital expenditures. This is because the company provides upfront payments to producers and developers to help them finance the construction/expansion of their projects, receiving a portion of revenue from the mine in return.

The result is that WPM pays a fixed amount for a portion of metal produced from the mine (15% - 25% of the spot price), allowing it to maintain exceptional margins even when producers’ margins are pinched.

WPM Business Model

Source: WPM Business Model, Company Presentation

Given this superior business model, Wheaton has historically traded at a premium valuation, with a 5-year average earnings multiple of 37.7. Given the inflationary environment that favors exposure to royalty/streaming companies, and the fact that Wheaton has upgraded its 5-year growth outlook with the addition of several streams recently, I believe a more appropriate earnings multiple is 39.

If we multiply this figure with FY2023 annual EPS estimates of $1.46, this translates to a fair value for the stock of $56.95, translating to a 46% upside from current levels. Based on this, Wheaton is currently on a Buy rating, and I see this pullback below $39.00 as a gift.

WPM Price Correlated With Fundamentals

Source: FASTGraphs.com

SilverCrest Metals (SILV)

The second name worth keeping a close eye on is SilverCrest Metals (SILV), the newest company to join the producer ranks after commissioning its Las Chispas Project in Mexico last month.

While the mine may be relatively small, with a planned throughput rate of just 1,250 tonnes per day, it certainly packs a punch. This is because it has an estimated head grade of 900 grams per tonne silver-equivalent, a figure that is quadruple the average mined grade sector-wide.

This is expected to translate to an average annual production profile of 12.4MM silver-equivalent ounces per annum over the first seven years (2023-2029) at industry-leading all-in sustaining costs below $7.50/oz.

2021 Feasibility Study

Source: Las Chispas Feasibility Study, Company Presentation

Given that SilverCrest is a producer, it is not insulated from inflationary pressures like WPM, meaning that it will see pressure on wages, fuel, and materials costs when it comes to sustaining capital.

However, given that its grades are nearly 4x that of its peers, the company has significantly less labor and uses a fraction of the fuel of its peers, given that it’s a high-grade underground operation. For this reason, it should see less cost creep, and it already has 65% ($22.00/oz silver price), which assumes a 10% cost escalation vs. its most recent study.

So, with SILV being one of the only producers in the silver space relatively insulated from costs combined with industry-leading margins, I see the stock as one of the most attractive buy-the-dip candidates for investors looking for silver exposure.

Hecla Mining (HL)

The final name on the list is Hecla Mining (HL), a multi-asset producer with silver mines in Idaho and Alaska and a gold mine in Quebec, Canada. Like SilverCrest, Hecla ranks very high on grades, with an average silver grade north of 400 grams per tonne and a silver-equivalent grade above 600 grams per tonne.

It also operates two very high-grade underground silver mines and benefits from by-product credits (lead, zinc), allowing it to keep its costs below $10.00/oz. If we compare this to the industry average cost profile of $15.00/oz, this places Hecla in a great position to absorb any cost increases, given that even at a $16.00/oz silver price, its mines would be highly profitable.

Hecla Operations

Source: Hecla Operations, Company Presentation

Given the benefit of higher zinc prices and its high-grade, relatively low-volume operations, Hecla has skated past most of the inflation experienced sector-wide, except for labor. This means it’s seen much less margin contraction than peers, even with a declining silver price.

Just as importantly, Hecla is one of the only producers with all its operations in Tier-1 jurisdictions, which typically commands a premium multiple. Conversely, most silver producers are based in Peru, Mexico, and Chile, some of the top silver-producing nations.

Hence, not only is Hecla relatively insulated from an inflationary standpoint, but it’s insulated from a risk standpoint, with a low risk of excessive taxes, unfavorable royalties, and or nationalization in the United States/Canada.

HL Price Correlated With Fundamentals

Source: FASTGraphs.com

Given Hecla’s Tier-1 jurisdictional profile, long reserve life at its assets, and strong margins, the company has historically traded at 16x cash flow, a premium to its peer group. Based on what I believe to be a more conservative multiple of 14.0x cash flow and FY2023 cash flow estimates of $0.40, I see a fair value for the stock of $5.40.

This translates to a 25% upside from current levels ($4.30), and any pullbacks below $4.05 (25% discount to fair value) would present low-risk buying opportunities. So, while I am not long the stock yet, I would view further weakness as a buying opportunity.

Final Thoughts

While the silver miners are out of favor due to declining margins, they will be lapping their toughest comps next month (Q2 2021) and will have much easier comps ahead. This should take the weight off the index and allow for a recovery in the Silver Miners Index by year-end.

Combined with attractive valuations, I see HL, SILV, and WPM as three of the better ways to play a rebound in the silver price.

Disclosure: I am long WPM

Taylor Dart
INO.com Contributor

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.

Silver Update: $40 Then $81?

The title of this post is not clickbait; please keep reading until the end to see why silver can hit these levels.

The bullish pattern is shown in the dollar index chart in my December post with a question in the title "Is The Dollar Going To Steal The Santa Claus Rally?" played out as planned to destroy the rally of top metals.

Let us see the updated silver chart below.

Silver Chart

The previous bullish setup for silver has been annihilated by the ongoing strength of the dollar. The price has dropped in another leg down to retest the former valley of $21.43. It has failed to update the minimum price as it stopped right there, and then the price bounced to the upside. Continue reading "Silver Update: $40 Then $81?"

Gold, Silver, Gold/Silver Ratio & HUI

Precious metals are still locked down. With an understanding that there is always much more in play than nominal charts (the macro & sector fundamentals for example, which bounced of late but never did definitively flip positive), let’s review said nominal charts of gold, silver, and HUI along with an update of the Gold/Silver ratio for good measure.

Meanwhile, we will continue to update the full spectrum of considerations for a positive view of the precious metals complex, including gold’s standing vs. cyclical, risk-on markets/assets, the state of speculative vs. quality credit spreads, the inflationary backdrop (despite promotions to the contrary, cyclical inflation is not beneficial to the gold mining industry), the seasonal averages and the charts of the metals and miners over various time frames in NFTRH.

Gold

The daily chart shows the gold price (futures) below the moving averages but above short-term support after failing – amid much personally observed cheerleading to the contrary – to cross the bull gateway at 1920.

As a side note, the broken blue downtrend channel on this daily chart is actually the Handle to a large and bullish big picture Cup that only has one thing going against it that I can see; too much exposure by too many TAs, which of course means it may not be expressed until many of those TAs recant their stories (we have noted all along that the Handle can drop all the way to the 1500s without damaging the 2022 bullish Cup story. Indeed, if it were to happen (not predicting folks, but being prepared) it would be healthy. There is nothing healthier than a good running of the bugs before a major bull move. Continue reading "Gold, Silver, Gold/Silver Ratio & HUI"

Metals Ratios Continue To Indicate Inflation

And that is welcome for monetary and fiscal policymakers of course since inflation is the only trick they have up their sleeve to bail this mess out once again. And this is no comment on COVID-19. The economy was slowly decelerating last year well before COVID-19 showed up.

The yield curve bottomed and turned up in August of 2019 as manufacturing was slipping, long-term yields were tanking and other economic signals were fraying in the wake of the trade war. So please, no convenient COVID excuses.

See: Yield Curve Hits New 2019 Steepener Today

They were preparing to inflate because the Continuum told them to prepare. COVID-19 dropped the final hammer on the situation and brought the inflation on quicker and more intensely than might have otherwise been the case.

30 year yield

So anyway, on to the lovable Amigos. Continue reading "Metals Ratios Continue To Indicate Inflation"

Silver Begins Big Upside Rally Attempt

The move we saw in Silver early this week to new 6-year high price levels, above $22.60, is quite likely the biggest upside move in Silver since the bottom in March 2020 – after the US stock market collapsed because of the COVID-19 virus event. This new rally in Silver is likely the move we’ve been suggesting to our followers relating to a series of measured upside price moves totaling approximately $5.30 in each advance.

As traders, watching bonds accelerate moderately higher as the US Dollar falls and the stock market attempts new lofty levels, we are intrigued by the move in metals because it suggests a large segment of investors believe a bubble is nearing very peak valuation levels. The only reason metals, particularly Silver, would be accelerating as it has recently is that traders have suddenly adopted a stronger demand for second-stage hedging of risk.

Gold is the traditional hedge for many traders in times of risk. Silver, being the second-tier hedge, typically start to rally 4 to 6+ months after Gold begins to move substantially higher. Gold is currently trading near all-time highs – near $1820. Silver just recently bottomed in March 2020 near $11.65 and has rallied more than 70% to current levels – above $20.35. If our research is correct, Silver will rally to levels above $26 within this current upside rally.

The multiple measured moves in Gold and Silver suggest waves of price advances happen in a series of structured upside price moves. We believe this current upside move in Silver will push price levels above $26 per ounce. If Gold continues to rally as Silver rallies, then future measured moves should target $31.50 and $36.75 in Silver – possibly higher. Continue reading "Silver Begins Big Upside Rally Attempt"