Silver is trading at more than $28 an ounce and the momentum looks strong even after a big recent upward swing. It’s likely that the bullish momentum for silver will sustain beyond the current year. Bank of America suggests that silver can hit $35 per ounce next year. If this holds true, the rally has just commenced for silver stocks.
Silver at $30 to $35 an ounce would imply significant EBITDA margin expansion and free cash flow upside for companies. Fundamentally strong silver stocks are therefore likely to trend higher.
Additionally, as the novel coronavirus pandemic continues to impact the economy, expansionary monetary policies will support the precious metal bull run.
Here are four silver stocks that are worth adding to the portfolio with a medium to long-term investment horizon.
- Hecla Mining (NYSE:HL)
- Pan American Silver (NASDAQ:PAAS)
- Fortuna Silver Mines (NYSE:FSM)
- Endeavour Silver (NYSE:EXK)
Silver Stocks to Buy: Hecla Mining (HL)
Among silver stocks, Hecla Mining is a must-have in the portfolio. With a bullish momentum for silver, HL stock has surged by 219% in the last year. I believe that there is more upside due as the precious metal continues to trend higher.
Hecla Mining recently reported second-quarter results for 2020. Even with the pandemic headwind, the company reported highest quarterly silver production since 2016. This translated into strong top-line growth coupled with healthy operating cash flows.
For the quarter, the company reported realized silver price of $18.44 an ounce. With silver currently trading around $28 an ounce, the coming quarters are likely to be strong in terms of cash flow upside.
Hecla Mining has low cost mines and that makes HL stock even more attractive. Further, the company has a strong balance sheet and as cash flows swell, leverage will decline in the coming quarters. This positions HL stock for value creation through dividend upside.
In addition, the company also stands to benefit from higher gold prices with gold being a bigger contributor to margins than silver. With these positive triggers, HL stock is worth holding for the medium to long term.
Pan American Silver (PAAS)
PAAS stock has also gone ballistic with the surge in precious metal prices. In the last six months, the stock has moved higher by 75%. With visibility for further upside and dividend growth, the stock is worth considering.
The company recently reported second-quarter results with revenue declining due to the Covid-19 pandemic impacting production. However, with steady increase in realized gold and silver prices, the company stands to benefit in the coming quarters.
Currently, the company has proven and probably mineral reserve of 550 million ounces of silver and 5.2 million ounces of gold. This provides the company with a multi-year production inventory. Further, once the pandemic headwind is navigated, production growth is likely to be robust.
From a balance sheet perspective, Pan American reported cash and equivalents of $239.2 million. With debt of just $299.2 million, there is ample financial headroom for aggressive capital investment.
PAAS stock also offers a dividend of 20 cents per share. I believe that dividend growth is likely to be robust in the next few quarters. This is another reason to hold the stock.
Overall, the stock is worth holding to benefit from higher gold and silver prices. As EBITDA margin expands and cash flows swell, the stock will continue to trend higher.
Fortuna Silver Mines (FSM)
Fortune Silver Mines is another interesting name in the industry with FSM stock having the potential to outperform in the long term. The company is relatively small with a market capitalization of $1.3 billion. However, considering the assets and industry tailwinds, there is scope for sustained growth and value creation.
In the first quarter, the company delivered free cash flow of $14.1 million. With gold and silver surging in the second quarter and with the rally sustaining, I believe that the company is well positioned to deliver an annual FCF in excess of $100 million.
As a part of the growth strategy, the company is already scouting for potential acquisition opportunities in Mexico and Argentina. In addition, the company sees scope for new discoveries around land positions in Peru, Mexico and Argentina. With a liquidity buffer of $88.5 million for the first quarter coupled with visibility for higher FCF, the company has the headroom to grow aggressively.
The company’s Q2 2020 silver production slumped by 47% on the back of Covid-19 related mining disruptions. However, investors need to look beyond this temporary headwind as precious metal prices surge.
Endeavour Silver (EXK)
EXK stock is a small-cap stock that can deliver robust returns. EXK stock has delivered 95% returns in the last one month. Some profit booking can be expected after this ballistic move. However, the positive momentum is likely to sustain.
B.Riley/FBR analyst Vernon Bernardino recently initiated coverage with a “buy” rating and a price target of $4.75. Considering the current stock price of $4.19, there is an upside potential of 13%. Furthermore, silver has surged since that coverage and it’s likely that the price target will be revised higher.
As an overview, the company has core assets in Mexico and Chile. Currently, Endeavour Silver has three operational projects, one under development and six exploration projects. As development and exploration projects progress, there is ample scope for production growth.
The company recently reported second-quarter results and there were several positives. The key ones include a robust cash buffer and a decline in all-in sustaining cost. Higher silver prices will help in accelerating cash flows and allow the company to invest in growth.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.