Seeking Alpha

10 Best Silver Mining Stocks For 2020

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Includes: AG, AUNFF, AXU, BCEKF, EXK, FSM, HCHDF, HL, MAG, SLVRF
by: Don Durrett
Don Durrett
Growth, contrarian, newsletter provider, research analyst
Summary

My favorite risk/reward silver mining stocks for 2020.

Low valuations versus their upside potential.

Quality properties with long-life mines.

Exceptional leverage to higher silver prices.

One trend that I have noticed while analyzing silver mining stocks for the past 15 years is that they are increasingly disappearing. Silver prices have been low (sub $18) for an extended period of time, making it very difficult to build and operate silver mines. What has become a trend is that silver miners have had no choice but to diversify into gold mining, which has been more profitable.

There are so few pure silver miners left that it is easy to name them. In fact, there are currently only about twenty in the entire world. There are so few pure silver producers, that only five made this list, even though I prefer producers and would like to have listed ten.

This list includes five producers, one near-term producer, and four development projects. What they all have in common are quality properties with long-life mines. Also, I have not included any in high-risk locations or management teams that are sketchy.

I consider these the cream of the crop and all have outstanding upside potential if silver prices blast off. Some of these can be considered pricey, if you are looking for large gains if silver prices double. But if you are expecting the potential for extremely high silver prices, then these are excellent stocks to own.

It's not super early to be buying most of these stocks, so you are not going to have "to the moon" returns. In fact, buying the SIL silver miner ETF will probably do as well with less risk. Or, buying physical silver, could do better than some of these stocks with far less risk (I personally consider owning physical silver a must own asset).

Why I Like Silver

The reason to buy these stocks is to get in the game and get exposure to silver. I personally am not satisfied owning only SIL and physical silver. I also want to own several silver mining stocks. I want exposure just in case silver blasts off to the moon and for the possibility that some of these stocks sell at 30x free cash flow.

There are several reasons why I like silver and the silver miners. Here are a few:

1. Silver is extremely undervalued and unloved. The current GSR (gold/silver ratio) is 84, whereas when silver was considered money, it was 16.

2. Silver is rare. Most of the silver that is mined goes from the mine to some type of fabrication facility. Very little silver goes into a warehouse where inventory stacks up. The amount of silver bullion inventory available for sale is tiny compared to gold bullion (about 1%).

3. Silver is perhaps the most important commodity in the industrial world after copper. About 80% of the silver produced today is used in some form of fabrication. Very little of the silver produced is available for investors on a dollar basis (around $3 to $4 billion).

4. The potential for a silver shortage is very high. What has happened with palladium (a shortage) is likely to also occur with silver. Palladium used to be valued around $300 per oz. Today it is worth more than gold.

5. There are very few pure silver miners. This creates an opportunity as investors will be forced to buy the only ones left.

Potential Risk

While silver appears to be trending higher based on its chart, there is always a chance that this is a false breakout. If silver prices drop, the silver miners will be pounded lower. Investors have shown very little patience to hold their positions if silver prices drop. Thus, there is extreme volatility in this sector, and with big upside potential comes big downside risk.

The Bear Market in Silver Could be Ending

I think we are still in a bear market for silver, and it's not yet time to break out the champagne. Until we break out of the 6-year channel, I will not be confident that a new bull market in silver has begun. So, while many of the silver miners have been breaking out and trending upward (First Majestic, Alexco Resource, Pan American Silver, Silvercorp Metals, Hecla Mining, etc.), the silver price has not yet joined the party.

If you look at the gold chart, it has broken out of its 6-year channel. However, looking at the silver chart below, you can see that we are still in the channel. We need a close above $20 to confirm the breakout, although a weekly close above $18.50 will give me a lot of confidence. Once we get above $18.50, I would say it's game on.

Stocks Excluded

I excluded stocks that I consider pricey, such as Pan American Silver, SilverCrest Metals, Silvercorp Metals, Fresnillo Plc, Buenaventura Mining, New Pacific Metals, and Industrias Penoles. If you want lower returns, consider looking at these for opportunities.

I excluded the smaller producers, such as Impact Silver, Excellon Resources, and Santa Cruz Silver. All three of these could do well if silver prices trend higher.

I excluded certain stocks because of issues that reduce their risk/reward profile. These include Avino Silver & Gold, Americas Gold & Silver, Golden Minerals, Almaden Minerals, Minco Silver, Silver Bear Resources, Prophecy Development, and Discovery Metals. I expect several of these stocks to do well if silver prices trend. They each have issues that prevented them from making the top 10.

MAG Silver

Stock Name

Symbol (US)

Type

Category

Share Price (US)

FD Shares

FD Mkt Cap (1/1/2020)

MAG Silver

MAG

Silver

Development

$11.87

85M

$1044M

MAG Silver has a large development project (Juanicipio) in Mexico. It will be one of the largest silver mines in the world. They own 44% and are not the operator (Fresnillo is building the mine). The mine will begin production at 11 million oz. of annual silver production. MAG will get 5 million oz. of annual production with no very little costs. I estimate free cash flow to be around $200 million at $50 silver. It's a huge mine, yet the capex is only $300 million and its almost built (completion in 2020). MAG will end up with very little debt.

It's a high-grade mine (10 to 15 opt) with very low costs. Plus, they have been finding more silver and the mine is going to grow in size. The only red flag is they might do a spin-out of Juanicipio and create a dividend stock. If that happens then the upside will be somewhat constrained (although the dividends could be huge). I would prefer if they find a way to add a second and third mine and create a very large company. They do have a pipeline of properties to explore. My worry is that they might want to remain an exploration company.

First Majestic Silver

Stock Name

Symbol (US)

Type

Category

Share Price (US)

FD Shares

FD Mkt Cap (1/1/2020)

First Majestic Silver

AG

Silver

Producer

$12.42

212M

$2639M

First Majestic Silver is one of the few large pure silver miners. Most of their revenue (93%) comes from silver and gold, with most of that being silver. They will produce about 25 million oz. of silver equivalent in 2020. They do not have low costs (about $16 to $17 per oz. all-in) and have benefited significantly from the recent rise in silver prices.

It was recently a cheap stock, trading below $5 because of their costs. At its current valuation, the upside is somewhat constrained, but it has leverage to the silver price. Each dollar rise in silver will go to their bottom line (an additional $25 million in free cash flow). And with their free cash flow, they will be able to acquire more production. The red flags are high costs and a small pipeline for growth. Also, Mexico (where First Majestic has all of their mines) may raise their mining taxes to offset their lack of oil revenue (Mexico used to be a large oil exporter).

Fortuna Silver Mines

Stock Name

Symbol (US)

Type

Category

Share Price (US)

FD Shares

FD Mkt Cap (1/1/2020)

Fortuna Silver Mines

FSM

Silver

Producer

$4.09

164M

$669M

Fortuna Silver Mines produces silver in Mexico. It is not an elite silver miner such as First Majestic or Pan American Silver. However, they are a solid mid-tier producer and have always executed well. Like many silver miners, they have acquired a gold project (Lindero). Thus, they are no longer a pure silver miner. Also, they do not have large resources (45 million oz. of silver reserves). But they do have a good pipeline of properties for exploration.

They mined about 18 million oz. of silver equivalent in 2019. And their all-in costs are pretty good around $14 per oz. They are not super cheap, but they do have significant upside potential. Lindero will add 90,000 oz. of gold production in 2020 (construction is almost complete in Argentina). Their red flags are low resources for growth and a bit pricey.

Endeavour Silver

Stock Name

Symbol (US)

Type

Category

Share Price (US)

FD Shares

FD Mkt Cap (1/1/2020)

Endeavour Silver

EXK

Silver

Producer

$2.40

140M

$336M

Endeavour Silver is a solid mid-tier producer. They hit a speed bump recently and had to close a mine due to low resources. Shutting down mines always costs money, plus they now have lower production, so their share price took a hit. This also impacted their reputation to a certain extent because management did not provide guidance that the mine would close in 2019.

I personally like their management team and properties. They still have three high-grade silver mines in production (Mexico). Plus, they are developing two other silver project for production growth. They get 100% of their revenue from silver and gold, with 55% from silver and 45% from gold. They do have high costs, with all-in costs around $17 to $18 per oz. but they currently have no debt. Also, they also have large resources with about 120 million oz. silver equivalent (including gold). They are targeting 10 million oz. of silver equivalent (including gold) for the near future. Their only red flags are high costs and potentially higher Mexico taxes.

Hecla Mining

Stock Name

Symbol (US)

Type

Category

Share Price (US)

FD Shares

FD Mkt Cap (1/1/2020

Hecla Mining

HL

Silver

Producer

$3.38

482M

$1629M

Hecla Mining is both a silver and gold producer (about 50/50). They have been having cost issues the past two years and have been losing money. In fact, their share price crashed to $1.30 in 2019 and they came close to trending to zero. Also, they have very high debt of $584 million and only $33 million in cash. For this reason, they have the highest risk on this top 10 list.

Because of their debt issues, you have to give this stock a short leash. If it drops below $2, then the risk changes to extreme. However, as long as silver prices remain over $17, they should be okay. One thing to be aware of is they have a large amount of debt due in 2021 and will need to roll it over this year. Also, expect some share dilution soon because of their low cash balance.

They have had labor issues at their Lucky Friday mine (6 million oz. of annual silver production) in Idaho for a few years now and the stock has struggled. They currently have a tentative deal to end the labor strike with the union, but union members have not signed the contract. Consider this to be an ongoing labor issue for 2020, but it appears close to being resolved.

They currently have all-in high costs (they claim to have low costs and high margins, but lost a lot of money in 2019). Higher gold/silver prices will help them cleanup their balance sheet.

They have large resources and a nice pipeline of projects (450 million oz. of silver and 10 million oz. of gold). This could become a very large company. The key will be higher gold/silver prices and good execution. A lot of investors question the quality of their management team. I have to admit that they have not executed well over an extended period of time. Their strategy seems to be more focused on growth than shareholder returns.

They have three development projects that could add a lot of revenue. They are currently trying to permit two large silver projects in Montana. Plus, they are trying to re-start a gold mine in Nevada that they acquired from Klondex Mines. They might be a bit pricey, but the upside potential is there. Their red flags are high all-in costs (free cash flow), a poor balance sheet, and a questionable management team that needs to prove itself.

Alexco Resource

Stock Name

Symbol (US)

Type

Category

Share Price (US)

FD Shares

FD Mkt Cap (1/1/2020)

Alexco Resource

AXU

Silver

Near-Term Producer

$2.34

128M

$299M

Alexco Resource is close to restarting production in Canada (Yukon). They have an excellent property (Keno Hill) with 100 million oz. and 30 million oz. of reserves (800 gpt). It's high grade and a long mine life. They are projecting all-in costs (free cash flow) at around $13 to $14 per oz. That's not low cost, but it has a lot of leverage to higher silver prices. They will begin production at around 4 million oz. of annual production. I would expect that to increase over time.

Since this is an existing mine, the capex to restart it is very low. It is a 7-month build with a capex of around $23 million. They plan to borrow $15 million, which is nothing. They will pay that back the first year of production. They are giving guidance for production to resume in Q4 2020.

The one red flag is their streaming deal with Wheaton Precious Metals. They are obligated to give 25% of their Keno Hill production to Wheaton for the life of the mine. Wheaton pays them a calculated amount until silver prices reach $25, then they pay them nothing. Alexco gets more money if silver is cheaper. Basically, Alexco is protected for silver prices under $17. However, after silver gets above $20, they get very little money from Wheaton, and zero after silver reaches $25.

I would consider Alexco pricey, but they have a good property and could easily expand production. Plus, there simply are not very many pure silver plays in Canada. I would not be surprised if Alexco gets valued at over 10x free cash flow if silver prices blast off.

Aurcana Corp

Stock Name

Symbol (US)

Type

Category

Share Price (US)

FD Shares

FD Mkt Cap (1/1/2020)

Aurcana Corp

OTCPK:AUNFF

Silver

Development

$0.23

201M

$46M

Aurcana Corp. is developing a silver project (Ouray) in Colorado. Plus, they have another silver mine (Shafter) on care and maintenance in Texas. Ouray looks very promising. It is a past producing mine that is permitted with 30 million oz. and very high grade (700 gpt). They need to raise about $35 million to restart the mine at about 2 million oz. annual production.

The risk is that they can't raise the capex. But they the Shafter mine, which they could sell or use as collateral for a loan. I think Ouray will get built and soon. Shafter could also be restarted and has 18 million oz. (240 gpt). The capex to resume Shafter is about $20 million to produce about 1 to 1.5 million oz. annually.

I'm not sure why Aurcana is so cheap. Usually, when a stock is cheaper than it should be, there is a reason. But it has been trending in recent months. As a speculation stock, it looks pretty good.

Silver One Resources

Stock Name

Symbol (US)

Type

Category

Share Price (US)

FD Shares

FD Mkt Cap (1/1/2020)

Silver One Resources

OTCPK:SLVRF

Silver

Development

$0.28

187M

$52M

Silver One Resources is developing a large silver project (Candalaria) in Nevada. It is a past producing mine and permitting should not be difficult. It has a large historical resource of 46 million oz. (105 gpt) M&I and 84 million oz. Inferred (45 gpt). Plus, it has excellent exploration potential.

The stock is trending and has almost tripled in value since May. They seem to be making slow progress and have a lot of work to do. I would consider this a long-term investment. If they can become a 3 million oz. producer, these stocks should do really well.

There are numerous red flags. First, we don't have an official resource estimate or a PEA. We don't know at what price it is economic or how much they plan to mine. There are a lot of unknowns. Plus, they will have to dilute shares to advance the project. Even with this high-risk, I like the upside potential if they can get Candalaria into production.

Eric Sprott owns 10%, SSR Mining owns 6.5%, First Mining Gold owns 3%, and management owns 5.5%. That's probably enough insiders to prevent a cheap takeover.

Bear Creek Mining

Stock Name

Symbol (US)

Type

Category

Share Price (US)

FD Shares

FD Mkt Cap (1/1/2020)

Bear Creek Mining

OTCPK:BCEKF

Silver

Development

$2.18

110M

$240M

Bear Creek Mining has been advancing a large silver project (Corani) in Peru for several years. It is finally close to construction. It is very large with 300 million oz. (50 gpt). The problem is that the low grade has made it marginally economic at $17 silver, with an after-tax IRR of 15%. I prefer an IRR above 25%, but the large potential cash flow at higher silver prices makes it compelling.

The first 5 years will produce 13 million oz. of silver, dropping to 8 to 10 million oz. for the next 17 years. That's a lot of silver production and I'm sure they will be an acquisition target at higher silver prices. I just hope they don't sellout shareholders and accept a low-premium offer.

The project is permitted and shovel ready. All they need is financing, which won't be easy to obtain at $17 silver. They might have to wait until $19 or $20 silver. They don't have any debt, so they can wait.

There are a few red flags besides the low-grade and financing issues. The IRR relies on base metals (lead and zinc), so there is a dependence on base metals at lower silver prices. Also, once this project is financed and under construction, the vultures will circle for a takeover attempt.

Hochschild Mining

Stock Name

Symbol (US)

Type

Category

Share Price (US)

FD Shares

FD Mkt Cap (1/1/2020)

Hochschild Mining

OTCPK:HCHDF

Silver

Producer

$2.33

515M

$1203M

Hochschild Mining is a large silver and gold producer in South America. They have 4 operating mines and produce about 16 million oz. of silver, and 38 million oz. of silver equivalent (including gold). That is a lot of production for their market cap, making them attractive.

There all-in costs for silver equivalent are not super cheap at about $15 per oz., and one of the reasons it has a low valuation. Another reason is they have about $150 million in debt. But they also have plenty of cash at around $100 million. Plus, one family control 54% of the shares and will make sure debt does not become a big issue.

Another reason I like them is they have a large gold project (Volcan) in Chile that is worth more than their current market cap at higher gold prices. Volcan has 9 million oz., although it is low grade. Hochschild has a very competent management team and can easily build Volcan once gold prices rise.

Another reason to like them is they pay dividends. This could easily be a growth stock with dividends. Those are the best kinds of stocks to own because your dividend yield rises as the stock rises.

Conclusion

These are the ten best silver miners for 2020. I'm sure they won't all perform well, but hopefully, most of them will. The key will be the silver price and how management teams execute. Hopefully, silver will remain above $17 and trend above $20 in 2020. Once we get above $20, the silver miners will be healthy and producing significant cash flow.

Disclosure: I am/we are long AG, AUNFF, AXU, BCEKF, EXK, FSM, SLVRF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.