For the third year in a row, the silver market is expected to realize an annual deficit this year to the tune of 42.7 million ounces.
Part of the deficit can be attributed to a drop in silver supplies. The world’s 2015 silver supply is forecast to drop 3% from the previous year, driven by flat mine production, falling scrap supplies, and net de-hedging.
Meanwhile, the demand for silver continues to grow in places like China, where total imports in the first 10 months of the year exceed import levels from the whole of 2014.
Ole Hansen, head of commodity strategy at Saxo Bank, was quoted in the Wall Street Journal saying, “If the current trend of imports continues, China will import more than 3,000 tons [of silver] this year, which would be the best year since 2011.”
Elsewhere, the demand for silver bullion coins like the American Silver Eagle has become outrageous. The U.S. Mint is on track to exceed 47 million one-ounce Silver Eagle sales this year — a 6.8% increase over 2014.
Globally, the demand for silver bullion coins will see an increase of about 20% this year to a record total of around 130 million ounces. In total, coin demand will represent roughly 12% of total silver demand. That’s a significant bump from 10% last year and just 4% a decade ago.
I expect to see silver prices beginning a cyclical upswing in 2016 based on these (and other) supply/demand fundamentals. Two weeks ago, Steve St. Angelo, an independent researcher with the SRSrocco Report, published an article on SprottMoney.com, saying:
Don’t be confused. Gold and silver prices will skyrocket in the future based on the fundamentals, not technical analysis. Not only will fundamentals be the important factor in the future, they have also been the leading indicators over the past 50 years.
I couldn’t agree more.
But while I think owning physical precious metals is important for any investor, to really leverage rising silver prices and make those triple-digit gains, investors really need to be into equities.
With that in mind, I’ve spent the past three weeks looking at several mid-tier silver mining companies to find a few with good resources, low-cost operations, solid management, and geopolitical favorability.
And I’ve found two that fit the bill and look to be solid plays to leverage rising silver prices.
First Majestic Silver (NYSE: AG)
First Majestic is a mid-tier mining company with several silver-focused, low-cost operations in Mexico that has a goal to produce 20 million ounces of silver annually.
With a commanding land position, First Majestic has 100% interests in six silver-focused mines, as well as interests in five additional exploration and development projects (including two that are in the advanced stages of development), that are spread across eight Mexican states.
Together, First Majestic’s operating mines contain proven and probable reserves of 167 million silver-equivalent ounces. Additionally, the company’s projects hold a total of another 185 million silver-equivalent ounces of measured and indicated resources.
First Majestic’s six operating mines yielded 11.7 million ounces of silver last year, plus 3.5 million ounces of silver-equivalent for a total silver-equivalent production of 15.2 million ounces. This year, First Majestic expects to see similar production levels when all the beans are counted.
All-in sustaining costs for First Majestic last year were $17.71 per ounce of silver. However, the company has managed to lower production costs for 2015. For the first three quarters, First Majestic’s AISC averaged $14.25.
First Majestic has good ownership, with about 37% of the shares being institutionally owned, including positions held by Van Eck and Vanguard Group. The company currently has a reasonable $23 million in long-term debt. But it also has a little over $26 million in cash and cash equivalent. So First Majestic’s debt is not an issue right now.
First Majestic is a company on the move. With silver prices moving back toward $20 an ounce, I could easily see AG double in price.
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Avino Silver & Gold Mines (NYSE: ASM)
Avino is a smaller, little-known silver-focused mining and exploration firm with projects in Mexico and Canada. The company’s flagship project is the Avino Property, which currently has 35.5 million ounces of measured, indicated, and inferred silver resources, plus another 18.7 million silver-equivalent resources for a total of over 54.2 million ounces of silver-equivalent resources.
Through the first three quarters of the year, the main Avino mine produced nearly 800,000 silver-equivalent ounces. And while 800,000 silver-equivalent ounces isn’t a game-changing amount of material, the Avino Mine has good potential to increase production.
Between 1998 and 2001, the Avino mine produced an average of 1.6 million silver-equivalent ounces a year. The company hopes to ramp up production beyond that figure.
The Avino mine has a very low AISC. For the first three months of the year, Avino’s all-in sustaining costs were just over $12 an ounce.
Back in July, the company signed a prepayment agreement with Samsung. Under the agreement, Samsung advanced Avino $10 million for the exclusive rights to buy the company’s silver concentrates. Samsung will pay for the concentrates at prevailing metal prices for copper, silver, and gold, less treatment, refining, shipping, and insurance charges.
With a decently sized resource, increasing production, very low production costs, and a customer ready to buy its products, ASM looks like a great little stock to own to leverage rising silver prices.
Good Investing,
Luke Burgess
Energy and Capital
