Since slipping to a multi-year low of just over US$14 an ounce last month, silver remains weak. Even after rallying 3% over the last month, silver is still down by 15% for the last year. This is weighing heavily on the performance of many silver miners, dragging the Global X Silver Miners ETF down by a whopping 26%.
Even primary silver miners with high-quality assets and strong balance sheets are suffering, but the marked decline in their value has left some such miners attractively valued, creating an opportunity for contrarian investors. One is Silvercorp Metals (TSX: SVM)(NYSE:SVM) — China’s premier primary silver producer. Over the last year, its value has fallen by roughly 10%, making it a tempting buy for investors seeking exposure to silver, even in an operating environment weighed down by weaker silver.
Now what?
Silvercorp operates mines in China and has considerable reserves of 106 million silver ounces, 512 tonnes of lead, and 265 tonnes of zinc. After making some rough calculations using an assumed silver price of US$14.50 per ounce, deducting production costs without including by-product credits, deducting debt, and applying a 5% discount, Silvercorp’s silver reserves have a value of around US$5.27 per share. This is more than double the miner’s share price, illustrating the considerable upside that exists, particularly if silver appreciates for a sustained period.
Silvercorp’s substantial base metals reserves also make it an especially appealing investment. While silver continues to languish, base metals have performed strongly because of the global economic upswing underway and a significant uptick in U.S. economic growth. This has triggered a significant lift in demand for metals such as lead and zinc, which are widely used in a variety of industrial, construction, and manufacturing applications. That highlights the importance of Silvercorp’s considerable lead and zinc reserves as well as their contribution to its earnings.
Even if Trump’s trade war with China escalates and impacts global economic growth, the decline in value of base metals will be more than offset by higher silver. While silver is an industrial metal, it is also a precious metal and appreciates in value when geopolitical or financial crises emerge. During such crises, which typically cause gold to firm, silver usually follows the yellow metal’s lead.
What makes Silvercorp an exceptionally appealing investment is that it is one of the lowest-cost operators in the silver mining industry. For the second quarter 2018, it reported all-in sustaining costs (AISCs) of US$0.41 per silver ounce produced, which were less than a 10th of the US$4.70 per ounce recorded a year earlier. Those remarkably low AISCs can be attributed to higher lead and zinc prices, which surged by 34% and 23% year over year, respectively, causing by-product credits to soar in value. This emphasizes that even in an operating environment where silver remains weak, Silvercorp’s operations are highly profitable, especially when it is considered that cash costs per silver ounce produced were even lower.
The miner has also been steadily growing its metals production. For the fiscal year 2019, Silvercorp expects to produce 6.1 million ounces of silver as well as 84 million pounds of lead and zinc, which is around 2% and 3% higher than 2018, respectively. The expansion in its metals output will assist with offsetting weaker silver, particularly when it is considered that zinc and lead prices remain firm.
It should be noted that Silvercorp has a rock-solid balance sheet and no long-term debt. This endows it with considerable financial flexibility, which is especially important in an environment where the outlook for silver remains poor.
So what?
The quality of Silvercorp’s assets and its considerable silver and base metals reserves make it an attractive investment, particularly when it is considered that the value of those reserves will rise when silver prices firm. Not only does the value of those reserves indicate that Silvercorp is attractively valued, even in an environment where the outlook for silver is poor, it also appears undervalued in comparison to its peers. Silvercorp’s enterprise value is a modest 3.6 times its reserves, which is one of the lowest ratios among its peers.
The miner is also trading with a price-to-book multiple of 1.1, which indicates that it is undervalued by the market, especially when it is considered that ratio is also significantly lower than those of many other primary silver miners.
