Silver Short Squeeze and Growing Demand Creates a Winning Co
FN Media Group Presents Microsmallcap.com Market Commentary
NEW YORK, June 2, 2020 /PRNewswire/ -- Silver prices are surging, making the metal one of the best-performing assets in the markets in the Q2, and could continue rising as supply constraints put further pressure on the market. Global metal production has been severely disrupted due to government-mandated mining suspensions in response to the COVID-19 pandemic, with silver experiencing the hardest hit. As of April 27, the equivalent of 65.8% of annual global silver production was put on hold and put a serious dent in silver output. Luckily, silver producers Pan American Silver (NASDAQ:PAAS) (TSX:PAAS), Silvercorp Metals (NYSE:SVM) (TSX:SVM), Fortuna Silver Mines (NASDAQ:FSM) (TSX:FVI), and First Majestic Silver Corp. (NYSE:AG) (TSX:FR) are bringing projects back online and ramping up production to meet growing demand, while near-term producers like Alexco Resource Corp. (TSX:AXU) (NYSE:AXU) are getting ready to join the booming silver market.
Although these companies faced minor setbacks in the beginning of the year, now that economies are beginning to reopen and suspensions are being lifted, they're gearing up to cash in on the rising silver price.
Silver Supply Crunch Expected to Worsen and Boost Silver Price Further
Prior to the global health crisis, silver mining production was already experiencing setbacks as a result of declining grades at several large primary silver mines and disruption-related losses at some major silver producers. In 2019, global mine production fell for the fourth consecutive year by 1.3% to 836.5 Moz and is expected to continue dropping due to coronavirus closures.
Supply constraints are boding well for silver price, pushing the price of silver to a three-month high of $17.51 an ounce earlier this month. Although the silver price has since retreated slightly, many analysts are predicting it to go higher in the coming months due to ongoing suspensions.
CIBC analysts are predicting that the silver price will hit $18 in 2020 and go up to $19 in 2021, while the Silver Institute expects silver to reach $19 this year. Although CIBC warned investors that Q1 earnings would be messy as the current health crisis brought the global economy to a halt, the bank added that higher gold and silver prices make mining companies too "attractive to ignore."
When it comes to choosing silver stocks for your portfolio, CIBC analysts suggest that instead of looking at the pandemic complications, investors should pay attention to a company's free cash-flow and balance sheet health.
One company that exceeds this criteria is First Majestic Silver Corp. (NYSE:AG) (TSX:FR), the purest silver producer in the world. The company ended the first quarter with $145.2 million in cash and cash equivalents, a strong working capital position of $139.8 million and total available liquidity of $204.9 million, including $65 million of undrawn revolving credit facilities.
First Majestic Silver Corp. (AG) (FR.TO) also reported $0.04 earnings per share for the quarter, which topped the Zacks' consensus estimate of $0.02, and reduced its cash costs by 19% to $5.16 per payable silver ounce in Q1 2020.
First Majestic Silver Corp. also managed to keep up with silver output during the first quarter despite the health crisis setbacks at its Mexico-based operations. In Q1, the company reported a total production of 6.2 million equivalent ounces of silver, consisting of 3.2 million ounces of silver and 32,202 ounces of gold, which is inline with the previous quarter and 9% above guidance despite temporary suspensions.
For Pan American Silver (NASDAQ:PAAS) (TSX:PAAS), mining closures significantly hindered production in the first quarter. In March 2020, the company was forced to suspend normal operations at its mines in Mexico, Peru, Argentina and Bolivia to comply with mandatory national quarantines.
Pan American's silver production in Q1 was impacted largely by the suspension of the polymetallic silver mines in Peru, Huaron and Morococha. Meanwhile, silver production at its La Colorada mine was affected by lower-than-planned ore grades related to the ventilation issue and reduced throughput from the COVID-19 physical distancing measures. Luckily, the decreased output didn't have a negative effect on Pan American Silver's cash flow in the first quarter. The company generated cash flow of $114.1 million, maintained quarterly dividends and ended Q1 with approximately $479 million of total available liquidity.
Another company that fared well financially in the first quarter is Silvercorp Metals (NYSE:SVM) (TSX:SVM). Although the company's quarterly revenue fell 46% to $18.9 million compared to $35.0 million in fiscal Q4 2019, its quarterly earnings of $0.02 per share significantly beat the Zacks Consensus Estimate of a loss of $0.01 per share. The company also boasted of a strong balance sheet with $142.5 million in cash and cash equivalents for the year ended March 2020, which is up 24% from $115.3 million at the end of fiscal 2019.
Across the water in Canada, near-term producer Alexco Resource Corp. (NYSEAMERICAN:AXU) (TSX: AXU) was also forced to slow down its exploration efforts during pandemic shutdowns. Luckily, the setback won't hinder the company from beginning initial concentrate production at Keno Hill in 2020.
Silver Demand Continues to Grow
As silver supply dwindles, the demand for the white metal continues to grow. In 2019, global physical silver demand rose to 991.8 million ounces from 988.3 million ounces the previous year, with higher net-physical investment offsetting lower jewelry and silverware demand.
Investor demand also recorded its highest jump since 2015, climbing 12% to 186.1 million ounces. Meanwhile, exchange-traded products boosted their holdings by 13%, soaring to 728.9 million ounces, which marks the largest annual growth since 2010. Although key areas of silver demand, including industrial, jewelry and silverware, are expected to fall due to the global pandemic, the Silver Institute still expects silver physical investment to extend its gains this year, with a projected 16% rise to a five-year high as investors turn to safe-haven vehicles.
Investors interest has definitely heated up for Fortuna Silver Mines (NASDAQ:FSM) (TSX:FVI), which just closed a $69 million bought deal financing, including the exercise of the over-allotment option of an additional 3,000,000 shares. The financing was conducted through a syndicate of underwriters led by Scotiabank and BMO Capital Markets, and including PI Financial, CIBC Capital Markets and National Bank Financial.
Fortuna Silver Mines plans to use the proceeds to fund remaining construction and pre-production related expenditures at its Lindero gold project in Argentina, which is expected to enter commercial production in 2021.
First Majestic Silver Corp. (AG) (FR.TO) has also experienced an increase in investor interest as of late. In the last two quarters, several large investors including TD Bank, Sigma Planning Corp, Raymond James & Associates and Koshinski Asset Management Inc. have increased their stake in the company. Raymond James & Associates boosted its stake in First Majestic Silver by 78.9% in Q4, while Sigma Planning Corp increased its stake by 82.4% in the first quarter.
What truly sets First Majestic Silver Corp. apart from other silver producers is that not only is the company one of the few primary silver miners, but it is also the purest silver producer in the world.
To learn more about First Majestic Silver Corp. (NYSE:AG) (TSX:FR), click here for more information.
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