Silver rose to a fresh 2016 high in the second quarter driven by stronger investor and speculative demand amid a supportive macro environment for precious metals. Overall, this year, silver has been a star performer. The white metal outshone the bullion as well, clocking a 37% gain compared to gold’s 22% rise.
Worries over the global economy, Brexit-induced equity market volatility, the Federal Reserve’s stance of keeping interest rates steady, and the introduction of negative interest rates by several central banks gave a boost to safe-haven assets like silver and gold. Silver might continue to outperform gold in the coming months due to heightened uncertainty over rate rises after the recent disappointing data from the U.S.
Demand-Supply Imbalance Favors Silver
Silver has varied industrial applications which drive its demand significantly. Industrial demand for silver is set to increase from 54% last year. Increased interest in safe-haven assets will also drive physical silver investment demand. Demand in jewelry fabrication will remain strong and India will emerge as a major consumer courtesy of increased investor interest and growth in jewelry, decorative items and silverware fabrication.
However, global mine supply production is projected to fall 5% in 2016 – the first drop in global silver mine production since 2002. The soft price environment in the prior years had deterred producers from investing in expanding capacity at existing operations. Global silver mine production is anticipated to decline through 2019 as primary silver production from more mature operations starts to wane.
Thus, we are looking at a potential silver deficit, which in turn provides a solid ground for silver price gains this year. Price appreciation will also be supported by a flight to safety amid volatile equity markets.
MINING-SILVER Industry Price Index
The uptrend in silver prices has ignited a massive rally in silver mining stocks this year, most of which have trebled. Among others, Alexco Resource Corp. AXU and Athena Silver Corp AHNR are the major movers year to date, gaining 477% and 327%, respectively.
Thus, it would be prudent to zero in on some momentum stocks in the silver space right now. All these stocks exhibit signs of good health.
How to Pick the Right Stocks?
Picking momentum stocks has now become a fairly simple task thanks to the Zacks Momentum Style Score which indicates the most favorable time to enter a stock to take advantage of the momentum with the highest probability of success. Our research shows that stocks with a Momentum Style Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 (Strong Buy) or #2 (Buy) offer the best upside potential. These stocks have rallied considerably year to date and have also undergone positive estimate revisions.
Hecla Mining Co. HL
Hecla Mining is a leading low-cost U.S. silver producer with operating mines in Alaska and Idaho. Hecla Mining sports a Zacks Rank #1 and a momentum score of A. The stock has outperformed the S&P 500 by 180.53% year to date. The company has an expected long-term earnings growth rate of 1%.
Last quarter, the company delivered a positive earnings surprise of 250%. Its average positive earnings surprise is 131.25% over the trailing four quarters. For 2016, the Zacks Consensus Estimate for earnings is pegged at 17 cents per share, a reversal from loss of 9 cents per share in the prior year. The estimates have moved north over the past 60 days.
With higher trending prices and continued strong performance at the Casa Berardi and San Sebastian mines, the company is poised well for the future. It increased the estimated 2016 silver production to 15.75 million ounces from 15 million at a cash cost of $4.75 per ounce. Hecla Mining recently acquired Mines Management which includes the Montanore Project that has the potential to be a major silver and copper producer.
Pan American Silver Corp. PAAS
Pan American Silver, along with its subsidiaries engages in the exploration, mine development, extraction, processing, refining, and reclamation of silver mines. The stock has outperformed the S&P 500 by 154.81% year to date. The company has an expected long-term earnings growth rate of 4% and an average positive earnings surprise of 54.04% over the trailing four quarters. Currently, Pan American Silver flaunts a Zacks Rank #1 and a momentum score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for 2016 is at earnings per share of 30 cents while the company had incurred a loss of 38 cents per share in the prior year. The estimate has moved up over the past 60 days.
Pan American is on track to achieve its production forecast for 2016 between 24 million and 25 million ounces of silver. Pan American Silver recently said that it has achieved significant milestones at two of its mine expansion projects that are currently underway in Mexico and anticipates these to lead to higher production rates and lower costs.
Endeavour Silver Corp. EXK
Vancouver, Canada-based Endeavour is a mid-tier precious metals mining company with three high-grade, underground, silver-gold mines in Mexico. The stock carries a Zacks Rank #2 and a momentum score of A. The stock has outperformed the S&P 500 by 237.18% year to date.
For 2016, the Zacks Consensus Estimate for earnings is at 4 cents per share in contrast with loss of 11 cents per share in the prior year. Estimates have moved north over the past 60 days.
Endeavour Silver recently entered into an agreement with Silver Standard Resources Inc. SSRI to acquire full interest in the latter’s Parral properties. Parral should be an accretive acquisition in sync with Endeavour Silver’s five-year strategic plan to become a premier senior producer, with potential for exploration discoveries, district acquisitions, near-term production, and organic growth.
Fortuna Silver Mines Inc. FSM
Headquartered in Lima, Peru, Fortuna Silver Mines Inc. engages in the exploration, extraction, and processing of mineral properties in Latin America.
This Zacks Rank #2 stock has a momentum score of A. The stock has outperformed the S&P 500 by 239.42% year to date.
For 2016, the Zacks Consensus Estimate has been revised upward over the past 60 days to 21 cents, almost fourfold the earnings of 5 cents per share in the prior year.
With the San Jose mine now in commercial operation at 3,000 tpd, and reduced capital requirements at existing mines, the company is poised to benefit from the recovery in metal prices. Fortuna Silver is now focused on advancing the recently acquired Lindero Gold Project into construction in 2017, with commercial production expected by the second half of 2018.
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