Reduce Investment Risk by Avoiding Primary Silver Miners

The poor outlook for silver makes First Majestic Silver Corp. (TSX:FR)(NYSE:AG) a stock to avoid.

| More on:

It has been a tough time for silver miners and investors. While gold has rebounded to be trading at over U$1,285 per ounce since falling to under US$1,200 in late-2018 silver continues to languish as the stagnant outlook for the white metal weighs on its value. Silver is stuck below US$16 an ounce and there are signs that it will be some time before the white metal rallies. That negative outlook and the declining profitability of many primary silver miners makes any investment in a silver miner a risky play.

Even with the gold-to-silver ratio hovering at around a historically high, 85 ounces of silver being required to buy an ounce of gold, there are signs that silver will remain flat and is not undervalued relative to gold. This is because there is growing evidence that the close relationship between gold and silver is breaking down because of faltering popularity among investors for the white metal and weaker than anticipated industrial demand.

Stagnant outlook for silver

The latest slump in silver has sparked speculation that many primary silver miners will struggle to be profitable and generate enough capital to invest in adequate mine maintenance and development. This is especially the case for those miners operating aging silver mine that are past their peak.

A key reason for this is the negative fundamentals impacting silver. This includes growing mine supply that precipitated a 35.3-million-ounce surplus during 2018, which was 7% greater than a year earlier. While some pundits are claiming that silver production will decline during 2019, this is unlikely to alleviate that significant supply overhang.

The sharp impact this is having on prices is being magnified by contracting demand for the white metal. During 2018, physical demand for silver plunged by 3% year over year. This was triggered primary by a growing lack of investor interest in silver bars and coins as well weak industrial demand for the precious metal.

Surprisingly, preliminary data indicates that the consumption of silver by the photovoltaic industry contracted during 2018. It was the supposed importance of silver in the fabrication of photovoltaic cells and growing demand for solar energy, which many analysts asserted would be a powerful tailwind for the white metal. This hasn’t occurred because of technological advances and the implementation of efficiencies in the manufacturing process for solar arrays reducing the volume of silver required. Manufacturers are also actively seeking cheaper substitutes for the precious metal has led to less silver being used in their production.

Declining profitability and mine quality

That makes many primary silver miners, especially those with high cost operations like First Majestic Silver (TSX:FR)(NYSE:AG), which reported 2018 all-in sustaining costs of US$14.95 per silver ounce produced, unattractive investments. In the case of First Majestic, such high AISCs indicate that it will struggle to be profitable in the current operating environment. In many cases those high costs and the resultant poor profitability can be attributed to aging silver mines, which require the investment of significant amounts of capital to improve their operations.

You only need to look at First Majestic’s La Parilla mine, which has been in operation since 2004 to see evidence of these issues. The average silver grade for 2018 was 120 grams of precious metal per ton of ore (g/t), which was 13% lower than 2017 and significantly lower than the 158 g/t reported for 2014. A similar phenomenon is occurring at First Majestic’s San Marin mine, which commenced production in 1983 and was acquired by the miner in 2006. The average 2018 ore grade of 218 g/t was 9% lower than the 239 g/t reported a year earlier.

In such circumstances it is difficult to understand how First Majestic can operate profitability with many of its aging mines experiencing sharp declines in ore grades and recovery rates. This trend isn’t only confined to First Majestic it is industry wide and highlights why many of the major primary silver miners are risky unattractive investments.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any of the stocks mentioned.

More on Metals and Mining Stocks

Tractor spraying a field of wheat
Metals and Mining Stocks

Where Will Nutrien Stock Be in 1 Year?

Nutrien stock has had a rough few years, and this next year may not be easy. But long-term investors may…

Read more »

nugget gold
Metals and Mining Stocks

Gold Stocks vs Silver Stocks: Which Have the Shinier Outlook?

Gold and silver are on a roll in 2024.

Read more »

Safety helmets and gloves hang from a rack on a mining site.
Metals and Mining Stocks

Is Kinross Gold Stock a Good Buy?

Kinross (TSX:K) stock has certainly been showing strength lately, but is it enough to bring investors on board?

Read more »

nugget gold
Metals and Mining Stocks

China Hits Gold: What Mining Investors Need to Know

China Gold International Resources (TSX:CGG) stock and other great gold plays look enticing as the recent China find looks to…

Read more »

nugget gold
Metals and Mining Stocks

Bullish on Precious Metals? These Are Promising Gold Investments

Consider Agnico Eagle Mines (TSX:AEM) and another top mining stock to play the run in gold into 2025.

Read more »

Paper Canadian currency of various denominations
Metals and Mining Stocks

This Billionaire Is Selling Micron and Picking up This TSX Stock

Prem Watsa may have sold some Micron, but he's putting the funds towards something with even more growth potential.

Read more »

nugget gold
Metals and Mining Stocks

Must-Watch Gold Stocks Before Year-End

Gold prices have been going up for the better part of the year, and it is highly probable that this…

Read more »

construction workers talk on the job site
Metals and Mining Stocks

2 No-Brainer Mining Stocks to Buy With $200 Right Now

You can buy these top Canadian mining stocks with just a $200 investment right now to start your long-term wealth…

Read more »