Silver is a wonder material - for sheer versatility, there's no competition in the precious metals.
They may call it the "poor man's gold," but it's critical to industry and beyond.
As the metal with the highest conductivity, silver has become indispensable to electronics and high-tech energy. Silver paste is used in 90% of crystalline silicon photovoltaic cells, the most common type of solar panels.
Everyday applications need more and more of the precious white metal, as it's now commonly found in water purification, solar panel production, and anti-bacterial applications, to name but a few.
Constant innovation is providing an unending source of ways to use silver, meaning its potential demand is immense.
Meanwhile, silver supply may have just peaked while all of this was happening.
So today, I'll show you why it's good for more than just coins and bullion. Then, most importantly, I'll show you my favorite play in the space that's going to have early movers sitting pretty...
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That's right. After years of rising world silver production, 2015 may have witnessed the highest output for this metal that we are likely to see for some time.
It should also be mentioned that the majority of silver is produced as a byproduct of base metal mining. That means lead and zinc production account for as much as 32% of silver supply, while copper mining represents 20% of silver output.
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The cyclical resources bear market, which began in 2011, intensified until early 2016. Lower base metals prices meant existing and new projects to mine lead, zinc, and copper got axed. This indirectly meant future silver output would suffer.
As I said last week, we're now starting to see the effects of that downturn with peaking silver supply.
Silver prices have already been up by 46% from their early 2016 lows. The silver bull is only just getting started, with much higher to climb.
Just one of every three silver ounces mined actually comes from a primary silver mine. The rest are byproduct, nearly an afterthought, of the production of other metals.
Gold mining contributes 15%, copper 20%, while zinc and lead generate 32% of the silver mined annually. But the producers of these other metals see silver as little more than a "bonus." In fact, many of them sell those future streams of silver production for a large, upfront cash payment.
That allows them to help finance their new mines or to fund expansions. Remember though, that they sell that silver at a discount to spot prices in order to receive cash up front.
But with so much silver output being pre-sold at a discounted price, those miners have little incentive to produce more of it.
Here's why that matters...
The implication is that, even when silver prices rise dramatically, supply may simply not respond, as those producers gain little benefit and are already limited by existing production capacities. In turn, that could help fuel even higher prices as demand dramatically outpaces supply.
Despite the fact that demand is expected to rise considerably in the next few years, silver production may have just peaked.
A report by Thomson Reuters' GFMS shows world silver production has been steadily climbing since 2007.
But in 2016, something shocking happened. For the first time in as many as 14 years, lower byproduct output and decreased scrap recycling affected global silver supply. It dropped from a peak in 2015 of 893 million ounces to 886 million ounces last year.
This drop in output is striking, having come as silver posted a remarkable 9.3% price gain in 2016, its first since 2011.
But what's even more noteworthy is the supply deficit the silver market has experienced. Over the past 13 consecutive years, silver supply has been in an annual shortage position.
Naturally, that begs the question of how such a situation could last for an extended period of time.
Well, in the two decades prior to 2000, silver experienced regular surpluses. So those large stockpiles were available to draw down. But as uses for silver - in addition to demand from silver ETFs and physical buying of coins and bars - continue to blossom, ongoing deficits appear to be the wave of the future.
And as the silver bull progresses, the most outstanding returns are going to come from junior silver companies, potentially handing you thousands-of-percent gains.
So here are my three favorite ways to play the massive upside potential of this underrated and underappreciated metal.
Fortuna Silver Mines Inc. (NYSE: FSM) is a precious metals mining company with growing silver and gold production in Peru and Mexico, including a gold development project in Argentina.
Thanks to top-tier management and a highly disciplined approach, Fortuna has managed to consistently cut production costs while increasing output over the past six years. That has meant that all-in sustaining costs (AISCs) of $25.50 per silver equivalent ounce in 2012 have fallen by more than half, to $11.90.
In the meantime, silver production has more than doubled, from 8.1 million silver equivalent ounces in 2012 to an estimated 16.6 million in 2018. The company's sales consist of 52% silver, 22% gold, 17% zinc, and 9% lead.
Fortuna's flagship is the San Jose Mine in Mexico. It should produce 7.5 million silver ounces and 48,300 gold ounces this year, and it has a five-year reserve mine life. The Caylloma Mine in Peru is expected to churn out 800,000 silver ounces this year along with some zinc and lead credits. In 2016, both of these mines had their mills upgraded to expand throughput, increasing production.
Future production is likely to come from organic growth, like from the Lindero gold project in Argentina, which received a positive construction decision in September and targets production by Q2 2019. Lindero looks promising, with a 26% internal rate of return (IRR), a $130 million after-tax net present value (NPV) at $1,250 gold, and a 5% discount rate. Lindero should produce 137,000 gold ounces in year one at an AISC of just $528 per oz gold.
Fortuna sports a $738 million market cap, holds $195 million in cash and only $40 million in debt. The trailing P/E is 19, while its forward P/E is just 14. By all accounts, this is a solid bet on higher silver prices. And remember, ongoing exploration on existing mines and projects could offer even more upside.
MAG Silver Corp. (NYSE: MAG) owns 44% of the flagship Juanicipio Property in Mexico along with Fresnillo Plc., which owns the remaining 56%. Juanicipio is somewhat of a freak of nature, with exceptionally high-grade ore at a whopping 600 grams of silver per ton, plus gold, lead, and zinc.
Juanicipio is being advanced toward production, which is targeted for H1 in 2019. MAG holds 44% of the over 225 million silver ounces currently outlined in all resource categories. It's expected that the all-in cash cost of producing silver from this project will run $5.02 per ounce of silver, providing fat profit margins at current silver prices around $16.75.
Here are some of the base-case highlights of the Preliminary Economic Assessment (PEA) on Juanicipio.
And Juanicipio, despite already holding so much silver, still remains largely unexplored. A 20,000 meter exploration drilling program in 2016 has already uncovered a new, deep discovery beneath the Valdecanas Bonanza Grade Vein System, which could lead to finding even more silver. With all this in mind, it's hard not to grasp the exciting potential MAG Silver offers in the context of a silver bull market.
MAG sports a $900 million market cap and holds $170 million in cash with no debt. The company has 13 analysts following the stock, with their average target price at $19.50, while shares currently trade around $10.63. That means a possible 80% upside without factoring in all the potential from exploration.
SilverCrest Metals Inc. (TSXV: SIL) bears the highest risk of the three silver companies I'm recommending. But by the same token, it also offers the biggest potential payoff.
By far, the big attraction at SilverCrest is its Las Chispas project. It is important to understand that despite historical production at Las Chispas, the project is still currently in the exploration stage. In SilverCrest's capable hands, however, it's very, very promising.
Despite being originally discovered in 1640, the only real exploration and production didn't come until the late 1800s. Between 1880 and 1930, several mines existed on the property and likely produced about 100 million silver ounces and 200,000 gold ounces. Since then, little has happened at Las Chispas. That is, until SilverCrest.
The company's exploration program is aimed at four of the 19 identified veins. Recent drill results have discovered a new, unmined high-grade vein. Overall, drill results have been impressive, with 293 drill intercepts showing greater than 150 grams per ton silver equivalent, including 54 core intercepts grading over 1,000 grams per ton silver equivalent. That's over one kilogram of silver equivalent per ton of rock!
SIL plans on providing a maiden resource estimate in Q1 this year based on its drilling results, and that could be a big turning point as the market gets some clarity on how many ounces the project may contain. What's more, management is also working toward a possible high-grade bulk sample to accomplish testing and provide cash flow.
Its Sonora properties are surrounded by established mining companies Premier Gold Mines Ltd. (TSX: PG), First Majestic Silver Corp. (NYSE: AG), and Grupo Mexico mining. Additionally, some of its major shareholders include heavyweights Donald Smith & Co., AGF Management, and Sprott Asset Management.
So although this company's flagship Las Chispas project is still in its early stages, its $122 million market cap and historical production, along with impressive drill results, make for a potentially gangbuster silver success in the not-too-distant future.
It's not very difficult to see why silver is the underrated wonder metal with these three picks, especially in the current silver bull market. If you play them right, you'll start seeing the precious metal doing wonders for your money in no time.
Put Peter's recommendations to work for you, and you'll be in great shape to make the most of the renewed silver bull.
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