Is a long overdue recovery in silver prices finally coming to fruition in 2016? Of course, it seems as though every year since 2011 — when both gold and silver prices surged to record highs — there’s tremendous hype regarding the metals, only to leave a wake of disappointed buyers.
This time around, however, there are important clues to suggest that we could see a very bullish year for both the bullion markets and silver stocks.
For the first time in quite a while, silver prices are definitively leading the benchmark indices. For the month of January, silver gained 3%. It’s not the most earth-shattering of results but it is a far cry from the 5% loss in the S&P 500 index.
In fact, one would have to go back to March of 2015 to see an instance where silver prices were positive for the month while the broader equity markets went underwater.
The positive momentum in the underlying asset has also carried over to the mining complex. Although exchange-traded funds covering the performance of silver stocks are still in the red for the year, they have surged hard in the past two weeks. Between January 19 until the end of the month, the Global X Silver Miners (SIL) jumped 17%. It’s the biggest two-week performance in the silver stocks ETF since mid-October of last year, when the SIL moved up over 17%.
Of course, no discussion for the precious metal markets would be complete without a very serious disclaimer. Because of the inherent volatility in commodities, mining companies are definitely speculative investments. But for those willing to tolerate the risks, the following three silver stocks could make very impressive comebacks.
Silver Stocks: Silver Wheaton Corp. (SLW)
Unlike the vast majority of silver stocks, industry titan Silver Wheaton Corp. (SLW) is a metals streaming company. What exactly does that entail? Rather than going through the extensive troubles of digging for precious metals, SLW finds promising mining projects and negotiates long-term procurement contracts with project owners. What the target mining company receives is upfront cash influx to fund the project in question. In return, SLW is guaranteed the right to acquire mined resources at a fixed cost.
This type of arrangement has significant advantages for SLW. First, the company can do away with the overhead expenditures that can quickly eat away at profits, particularly during down years for silver prices. Second, while the upfront payment is an immediate hit to the balance sheet, streaming contracts typically do not involve recurring costs for maintenance or exploration. Finally, precious metals streaming allows SLW to have a more diverse portfolio than it normally would have if it were to operate the mining projects themselves.
No arrangement is fail-proof, and streaming does have its disadvantages. The main risk for SLW is the trajectory of silver prices. Should the white metal continue to fall further into a bear market, the spread between the fixed contractual cost and the spot price of silver will be squeezed. Theoretically, silver prices could fall to a point where the initial streaming contract no longer makes economic sense.
Looking at the markets, Silver Wheaton shares are up 15% over the past two weeks — perhaps suggesting that most investors are optimistic about silver prices going forward. Should the positive momentum in silver prices keep pace, SLW may be in a position to become one of the hottest stocks of 2016.
Silver Stocks: Pan American Silver Corp. (PAAS)
The website of exploration and mining company Pan American Silver Corp. (PAAS) boldly states the company’s vision to be the “world’s pre-eminent silver producer.” Surely, the last few years in the commodity markets weren’t part of that forecast. As it stands, PAAS is trying to find stable ground and convince investors to keep the faith.
So far, Wall Street hasn’t been particularly impressed, with analyst opinions decidedly leaning on the neutral-to-bearish side. Still, there are a few reasons why you will want to keep a close eye on PAAS.
When silver prices first started to tumble, the priority for many silver stocks turned to profitability. While the ensuing collapse was overwhelming, PAAS managed to weather the storm by trimming its operational expenses. The company increased the profitability of each ounce of precious metal mined, placing PAAS in a better position to advantage the markets should silver prices move higher.
Additionally, PAAS has one of the higher dividend yields among silver stocks, which currently stands just below 3%.
The bonus of passive income is a nice touch, but make no mistake about it — PAAS buyers are looking for growth potential. And they’ve certainly come to the right place.
On a year-to-date basis, PAAS is easily the leader among the featured silver stocks, having jumped nearly 6%. The fact that it cleared its 50-day moving average so decisively crystallizes the possibility of a sustained run throughout the new year.
Silver Stocks: First Majestic Silver Corp. (AG)
A cursory look at the stats for First Majestic Silver Corp. (AG) will lead one to the (correct) conclusion that it’s the most speculative company among the featured silver stocks. SLW and PAAS have market capitalization and total asset figures that exceed $1 billion each. AG, on the other hand, falls well short on both counts. It also doesn’t provide passive income to help justify the risks inherent in volatile markets.
What people do love about AG stock is the enormous profitability potential that would result from a recovery after a good ol’ fashioned whooping.
True, silver could be the investment of the century if the global markets collapsed. But on a more realistic assessment, AG’s management has been focused on trimming business costs, with selling, general, and administrative expenses all down in the first three quarters of fiscal year 2015. Quite likely, the worst of the metals collapse is behind us, which implies that AG is leaner and meaner than ever.
From a technical perspective, First Majestic stock is down 5% YTD in the markets. While it’s not trading at the absolute bottom, AG is nowhere near an overbought condition. But this is more than just a discount diving opportunity. Slowly and cautiously, Wall Street analysts are pushing a more optimistic tone for AG, with one hedge fund recently initiating a position with the mining stock.
It’s all highly speculative, but if silver prices point in a favorable direction, AG could potentially tear up the markets.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.