Silver Penny Stocks Set to Soar if Prices Follow Suit
With silver stocks being among the top-performing commodity assets in 2017 (with silver prices up 11.1% year-to-date), many precious metals investors are optimistic that a new bull cycle is underway. If so, silver penny stocks could be set to soar in 2017.
There are certainly reasons to be optimistic.
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For one, the shortfall in silver supply-and-demand dynamics looks to be in solid deficit for the foreseeable future. In 2015 alone, global silver demand topped available production by a whopping 129 ounces, or 11% of overall demand.
The forces of favorable supply-and-demand dynamics continued in late 2016. Using estimates from 2016, BullionVault puts 2017’s total global silver demand at more than 37,000 tonnes, which would be a jump of 2.8% from last year. Meanwhile, mine supply lagged that total by over 9,500 tonnes, slipping 0.7% from 2015’s record high, the first drop since 2001. (Source: “Total 2016 Silver Demand Hits Record High,” BullionVault, November 18, 2016.)
One of the top demand drivers is investor demand for physical silver. Supply has not kept up with investors looking to diversify their investments away from paper assets. Deliveries have been frequently delayed, and even the United States Mint reported that it was unable to keep up with demand for silver in the latter half of 2015.
The Silver Institute estimates that, in 2015 alone, 25% of demand for new silver came from the physical coin and bar sector as investors increased private holdings. (Source: “World Silver Survey,” The Silver Institute, last accessed February 10, 2017.)
Piggybacking on my private investor demand theme, more recent evidence shows continued robust growth. In the first 10 days of 2017, the U.S. Mint sold 3.7 million ounces of silver American Eagle coins versus a 2016 monthly average of 3.15 million ounces. If similar strength of investor buying continues throughout the year, this will pressure stockpiles and put upwards pressure on prices.
The fact that investor demand is driving silver prices is a good thing. As silver is used in many industrial applications, such as electronics, aerospace, medical equipment, industrial demand generally grows at trend levels or better with world economic growth. Silver’s diversified usage profile dictates this fact.
With the International Monetary Fund (IMF) projecting economic activity to pick up pace in 2017 and 2018, investors need not be looking over their shoulders, worrying about industrial demand fundamentals over-influencing prices. Over the next two years anyway, they should be solid.
However, perhaps the best reason to own silver stocks is the continued decrease in production costs.
Production costs have been on the steep decline over the past four years. Unbelievably, the cost of production dropped over the past four years, starting at US$22.26 in 2012 and falling to an amazingly low US$10.10 as of the end of September 2016.
Big silver producers like Endeavor Silver Corp (NYSE:EXK) and First Majestic Silver Corp (NYSE:AG) saw all-in sustaining costs decrease 24% and 27% respectively. This allowed First Majestic an average silver price increase of 30%, to $19.72 per ounce. (Source: “Silver Outlook and Stocks to Watch in 2017,” Wolf Street, January 3, 2017.)
This has allowed silver miners to maintain net profitability, even during the cyclical bear market lows encountered in early 2016. While overall year-over-year production cost declines may be over, just maintenance of these levels and a boost in silver prices should send profits soaring.
So, without further ado, here are my candidates for top silver penny stocks in 2017.
Pick #1 — AuRico Metals Inc. (TSE:AMI)
If you like royalty trust investments, AuRico Metals Inc. (TSE:AMI) could be for you. The company was originally formed as a spinoff from the merger between AuRico Gold Inc (NYSE:AUQ) and Alamos Gold Inc (NYSE:AGI). The intent was to create a holding company for AuRico’s Kemess Mine projects, a 1.5% net smelter return on the Young-Davidson Mine, and several other royalty projects.
The company has a diversified portfolio of royalty streams, which smooths out the cyclical ups and downs seen with other junior miners. In its latest press release, AuRico announced that royalty revenue would be coming in at the high end of the guidance range of $7.7 million–$8.1 million.
The kicker here is that AuRico isn’t just a boring royalty holding with single-digit upside. The firm’s Kemess Mine projects offer real potential for secular growth.
AuRico owns 100% of the Kemess underground gold-copper project in British Columbia, Canada. If the mine’s latest feasibility study is any indication, it could be significant. Based on a gold price of $1,250 per ounce, and a copper price of $2.50 per pound, the net present value (NPV) of the property is CA$289.0 million. This bumps up to CA$421.0 million based on $3.00-per-pound copper.
This works out to about $2.60 in earnings per undiluted share over the life of the mine.
And yes, it does seem a good bet that production at Kemess could eventually materialize. Much of the necessary infrastructure is already on site. A processing plant and other facilities and equipment that are required to support an underground mining operation at the Kemess deposit are currently under care and maintenance. These are legacy facilities supporting the former Kemess South mine, which operated between 1998–2011.
In the end, AuRico Metals offers a little bit of everything for conservative and growth-oriented mining investors alike. It has an existing royalty stream generating $8.0 million annually, yet is sitting on the wholly-owned property (Kemess) with a CA$300.0 million mine life potential at very reasonable metal price assumptions. With zero debt and CA$20.0 million in cash, a valuation of CA$170.0 million looks quite reasonable.
Should you choose to engage, a buy-the-dip approach may be your best friend.
Pick #2 — Americas Silver Corporation (NYSEMKT:USAS)
Americas Silver Corporation (NYSEMKT:USAS) is a silver mining company with two producing mines in North America. Its Galena Complex produced 1.4 million ounces of silver in 2006, while the Cosala mine produced one million ounces of silver, plus 10 million pounds of lead and four million pounds of copper.
America Silver also has another interesting venture called the San Rafael Project, which is expected to start producing one million ounces of silver per year, starting in the third quarter of 2017. All in, these three projects could churn out upwards of six million ounces of silver and equivalents, plus significant other base metal byproducts, with sizable mine life remaining.
This sounds great, but you may be asking what makes Americas Silver stand out. In a word: valuation. By several metrics, this company is quite undervalued compared to its peers.
One of my favorite tools to use in valuing producing mining companies is a metric called enterprise value/measured and indicated (EV/M&I) resources. This essentially tells us how much the market is valuing the company based on proven mineral assets, usually measured in U.S. dollars per ounce.
On this key metric, Americas Silver lags well behind most of its competitors. The company’s current EV/M&I is ridiculously low, less than $1.50. Compare this to a direct competitor like Endeavour Silver Corp (NYSE:EXK), and Americas Silver resources are valued at less than a third, despite the fact that it has more EV/M&I resources.
For those looking for a solid silver mining play at a great valuation, USAS may be worth a second look.
Pick #3 — PureFunds ISE Junior Silver ETF (NYSEARCA:SILJ)
The PureFunds ISE Junior Silver ETF (NYSEARCA:SILJ) is not a silver penny stock based on price, nor is it even a standalone company. However, it’s a great way for investors to leverage exposure in the junior mining space without taking on individual company risk.
The PureFunds ISE Junior Silver ETF has a portfolio of 26 stocks, which brings silver exploration and mining exposure of small-cap companies to investors in one convenient fund.
Net assets of the fund are just $67.59 million, so volume is fairly illiquid (average three-month volume is 137,370 shares). As such, this ETF trades similarly to many less liquid silver penny stocks. But I like the type of reasonably levered exposure that SILJ provides to both the price of silver and to the big find potential of the explorers.
Expense ratios are very reasonable as well: 0.69 annually, which is mostly offset with a dividend yield of 0.42%.
The fund’s top holdings are major silver producers, not explorers, so this is more a pure play on the silver price than on potential. The fund is up more than $4.00, or 39%, from December 2016 lows, correlating heavily with the run-up in silver prices during this time. So again, pullback is your friend.
PureFunds ISE Junior Silver ETF Top 10 Holdings
| Company Name | % of holdings | Stock Ticker | Shares | Market Value (USD) |
| Pan American Silver Corp. | 14.37 | NASDAQ:PAAS | 536,455 | $11,141,789 |
| First Majestic Silver Corp | 13.48 | NYSE:AG | 1,012,380 | $10,457,885 |
| Coeur Mining Inc | 11.05 | NYSE:CDE | 913,646 | $8,569,999 |
| Silvercorp Metals Inc | 5.47 | OTCMKTS:SVM | 1,094,301 | $4,242,644 |
| MAG Silver Corp | 5.43 | NYSEMKT:MAG | 260,624 | $4,211,199 |
| Endeavour Silver Corp | 5.00 | NYSE:EXK | 826,550 | $3,876,520 |
| Excellon Resources Inc. | 4.76 | TSE:EXN | 2,697,367 | $3,692,198 |
| Silver Standard Resources Inc. | 4.60 | NASDAQ:SSRI | 307,005 | $3,566,113 |
| Hochschild Mining Plc | 4.57 | LON:HOC | 1,045,857 | $3,547,587 |
| Fortuna Silver Mines Inc | 4.48 | TSE:FVI | 535,934 | $3,471,256 |
(Source: “Top 10 Holdings,” Pure Funds, last accessed February 13, 2017)
Ultimately, if you’re bullish on silver and have trouble sleeping at night worrying about individual companies in a stock portfolio, the PureFunds ISE Junior Silver ETF may be a solid way to lever your exposure to the price of silver.
Bottom Line on Silver Penny Stocks
Many of the best penny stocks currently reside in the silver mining space. If you’re looking for top penny stocks with proven revenues, and not just a fancy story, some of the stocks listed above may appeal to you.
