Gold and silver prices have been soaring in 2016; so, too, have the top mining stocks.
With fears of a recession in the U.S. and continued global economic weakness, gold and silver mining companies continue to be a popular choice for investors looking to diversify their portfolio and hedge against uncertainty.
While many were expecting the Federal Reserve to raise rates in the coming months, it looks like that might be on hold, making the top mining stocks a great short-term opportunity for astute investors.
This Could Be Big for the Top Mining Stocks
Gold and silver has been one of the top investments in 2016, with gold prices up roughly 20% at $1,265 per ounce and silver advancing 23% to $17.10 per ounce. And it’s been bullish for good reason.
This could be just the beginning.
Several catalysts could send gold and silver prices soaring even higher. I call it the “triple threat”—the three big catalysts that could send precious metal prices and the top mining stocks soaring in 2016.
First, the state of the U.S. and global economies are not exactly stellar. In response, as a hedge against economic uncertainty and portfolio diversity, gold and silver has cycled back into fashion. As I’ve said before, I’m not a precious metal bull per se; I’m an opportunist. And gold and silver prices have been coiled up tight like a spring waiting to pop.
But prices have been suppressed by the Federal Reserve’s artificially low interest rates, aggressive corporate stock repurchase programs, and investor apathy about once stalwart corporate indicators like revenue and earnings growth.
Or rather, they had been suppressed. Investors woke up January 1, 2016 with the realization that the global economy was in the pits, the U.S. economy wasn’t doing that much better, and maybe the Fed’s decision to raise rates for the first time in nearly a decade wasn’t such a good idea.
Since then, gold and silver prices have soared. Admittedly, stocks rebounded after the worst start to the year ever, but stocks have stalled with nothing encouraging to lift them higher. Again, by that I mean actual earnings and revenue growth.
The S&P 500 reported a first-quarter blended earnings decline of 6.7%. It was the first time the index has reported four consecutive quarters of year-over-year declines in earnings since the financial crisis. (Source: “Earnings Insight,” FactSet, May 27, 2016.)
The second quarter is still underway, but the estimated earnings decline (for now) is 4.8%. Chances are good that number will get worse. After all, predictions for the last four quarters all started out optimistically. (Source: “Earnings Insight,” FactSet, June 3, 2016.)
Likelihood of an Interest Rate Hike Tumbles
Granted, that’s just Wall Street.
The Federal Reserve, even though it has supported Wall Street with three generous rounds of quantitative easing, is more concerned with how Main Street is doing. Until recently, the Fed has hinted that the U.S. economy isn’t doing so poorly after all and chances are good it will resume raising rates again as soon as this summer.
That optimism was quashed when it was announced that the U.S. added just 38,000 jobs in May. That’s the weakest pace since 2010. Unemployment fell from five percent to 4.7%, but that was because more and more people are quitting the labor force. (Source: “The Employment Situation – May 2016,” Bureau of Labor Statistics, June 3, 2016.)
Federal Reserve Chair Janet Yellen responded in her signature cagey way by saying there was “considerable uncertainty about the economic outlook.” While she maintained that “further gradual increases in the federal funds rate are likely to be appropriate,” it’s what came next that caught everyone’s attention—or rather what was missing. Yellen removed the phrase “in the coming months” from her speech. (Source: “Speech by Federal Reserve Chair Janet L. Yellen at the World Affairs Council of Philadelphia,” MondoVisione.com, June 6, 2016.)
That’s a phrase she used just a week before, a phrase many took to mean that the Fed was going to raise rates soon. Oh yeah…there’s also considerable concern about the Chinese economy and the Brexit vote on June 23. Will the U.K. stay or leave the European Union? (Source: “Fed chief Janet Yellen says interest rates will rise ‘in coming months’,” The Guardian, May 27, 2016.)
So, while a rate hike is inevitable, it’s not likely in the immediate future—maybe not until after the U.S. presidential election. For now, that puts precious metals like silver and gold back into the spotlight, along with mining stocks. For example, while gold is up 20% year-to-date, gold mining stocks are up 85%.
Again, you don’t need to be long on precious metals. You just have to acknowledge that there is an opportunity out there right now for gold and silver mining stocks. You might have missed out on the 85% gain on gold mining stocks so far this year, but there is a lot more upside potential for gold and silver in the coming months and quarters.
The Top Mining Stocks to Watch
First Majestic Silver Corp (NYSE:AG)
First Majestic Silver Corp has been one of the best-performing silver stocks in 2016, up roughly 280% at around $12.90 per share.
One of the best pure-play silver companies out there, Canadian-based First Majestic has six operating mines in Mexico with proven and probable mineral reserves of approximately 119.86 million ounces of silver, or 166.77 million silver equivalent ounces. It is also the only mining company offering its own production in the form of silver bullion (0.999-fine silver rounds, ingots, bars, and medallion sets) on its web site.
In 2015, First Majestic produced a record 16.1 million ounces of silver equivalent. All-in sustaining costs (AISC) improved by 24% to $13.43 per payable silver ounce. (Source: “First Majestic Announces Financial Results for Q4 and Year End 2015,” First Majestic Silver Corp, February 25, 2016.)
In the first quarter of 2016, First Majestic produced a record 5.1 million silver equivalent ounces, a 30% increase over the same prior-year period. Total production consisted of 3.1 million ounces of silver, 16,870 ounces of gold, 8.6 million pounds of lead, and four million pounds of zinc. AISC of $8.97 per payable silver ounce represented a significant 35% reduction compared to the first quarter of 2015 and a 20% reduction compared to the fourth quarter of 2015. (Source: “First Majestic Reports First Quarter Financial Results,” First Majestic Silver Corp, May 10, 2016.)
Pan American Silver Corp. (USA) (NASDAQ:PAAS)
Pan American Silver Corp. is one of the largest silver producers in the world and is diversify into gold. The company currently has seven operating mines in Mexico, Peru, Bolivia, and Argentina. It also has six projects in various stages of development and exploration.
According to the most recent data, Pan American Silver has 299.9 million ounces of silver and 2.32 million ounces of gold in proven and probable reserves. (Source: Pan American Silver, last accessed June 9, 2016.)
In January, Pan American Silver announced a new annual record for silver and gold production with 26.12 million ounces of silver and 183,700 ounces of gold. The company also reduced its consolidated AISC 17% year-over-year to $14.92. (Source: “Pan American Silver Sets New Annual Records for Silver and Gold Production,” Pan American Silver Corp., January 19, 2016.)
On May 11, the company announced that first-quarter silver production increased six percent to 6.42 million ounces, while gold production was up 10% at 41,200 ounces. It also reduced consolidated AISC by eight percent to $13.12. Net income was $1.9 million compared to a loss of $19.8 million in the first quarter of 2015. (Source: “Pan American Silver Announces its Unaudited 2016 First Quarter Results,” Pan American Silver Corp., May 11, 2016.)
Thanks to the company’s strong balance sheet, its two expansion projects at La Colorada and Dolores are expected to be operational by the end of 2017. After completion, annual silver production at Dolores will increase approximately 40% to 6.3 million ounces with gold production rising 52% to 205,700 ounces. The La Colorada expansion is expected to increase the mine’s annual silver production by roughly 67% to 7.7 million ounces. (Source: “Operations and Projects,” Pan American Silver Corp., last accessed June 9, 2016.)
Fortuna Silver Mines Inc (NYSE:FSM)
Fortuna Silver Mines Inc is a growing silver producer with two low-cost underground mines: the San Jose Mine in Mexico and the Caylloma Mine in Peru. It also has a strong balance sheet, zero net debt, and strong free cash flow. (Source: “Corporate Profile,” Fortuna Silver Mines Inc, last accessed June 9, 2016.)
In 2015, silver and gold production increased for the ninth consecutive year, reaching 6.6 million ounces of silver and 39,689 ounces of gold (plus base metal by-products). The company’s production forecast for 2016 is 7.0 million ounces of silver and 42,800 ounces of gold at a consolidated AISC of $11.10 per ounce of silver. (Source: “Overview,” Fortuna Silver Mines Inc, last accessed June 9, 2016.)
In early May, Fortuna announced that it produced 1.61 million ounces of silver and 9,264 ounces of gold in the first quarter. A slight decrease over the first quarter of 2015 but on schedule to produce 7.0 million ounces of silver and 42,800 ounces of gold. AISC came in at $9.39 per ounce, a 20% improvement over $11.79 in the first quarter of 2015 and below annual guidance of $11.10. (Source: “Fortuna reports consolidated financial results for the first quarter 2016,” Fortuna Silver Mines Inc, May 9, 2016.)
On June 7, Fortuna announced it entered into an agreement to acquire all of the outstanding shares of Goldrock Mines Corp (TSX.V:GRM) for approximately $101 million. The company’s Lindero Project is an open pit gold mine with a completed 2016 feasibility study that has been granted the environmental permit needed for developing the project. (Source: “Fortuna to acquire Goldrock Mines Corp. Sourcing continued low cost precious metals production growth,” Fortuna Silver Mines Inc, June 7, 2016.)
The acquisition increases Fortuna’s precious metals equivalent reserve base by +200%. Fortuna plans on bringing the project into production by 2018 with hopes of producing 26.5 million ounces of silver equivalent annually.
Avino Silver & Gold Mines Ltd (NYSEMKT:ASM)
Avino Silver & Gold Mines Ltd is a junior mining company and one of the industry’s purest silver producers. Avino holds two producing precious metals projects plus another in trial production. The company also maintains a diversified pipeline of gold, silver, and base metal exploration properties.
The Avino property in Mexico has total measured and indicated silver resources of 13.63 million ounces and 90,758 ounces of gold. It also has total inferred reserves of 21.88 million ounces of silver and 164,937 ounces of gold. Avino’s current operation consists of the Avino and San Gonzalo mines. The San Gonzalo mine entered commercial production in October 2012, followed by the Avino mine in April 2016. (Source: “Avino Property,” Avino Silver & Gold Mines Ltd, last accessed April 2, 2015)
In Canada, Avino’s holdings are centered on the newly acquired Bralorne Gold Mine in southwestern British Columbia. Despite steady (although limited) gold production, including an estimated 3,482 ounces in fiscal 2014, Bralorne remains in the exploration and evaluation stage. (Source: “Bralorne Gold Mine,” Avino Silver & Gold Mines Ltd, last accessed June 9, 2016.)
On June 6, the company announced that commercial production at its second mine on the Avino mine property in Durango, Mexico began on April 1, 2016. The company will disclose the financial results from production at the Avino mine when it releases its second-quarter consolidated interim financial statements in August. (Source: “Avino Declares Commercial Production at its Second Mine on the Avino Property in Mexico,” Avino Silver & Gold Mines Ltd, June 6, 2016.)
Tahoe Resources Inc (NYSE:TAHO)
Tahoe Resources Inc mines for gold, silver, lead, and zinc from its mines in North and South America. It currently operates the Escobal silver mine in Guatemala, the La Arena and Shahuindo gold mines in Peru, and the recently acquired Timmins West and Bell Creek gold mines in Canada.
In May, Tahoe announced strong financial results for the first quarter. From its Guatemalan and Peruvian mines, the company produced 5.7 million ounces of silver and 54,000 ounces of gold. First-quarter revenue was up 54% at $132.1 million. Mine operating earnings increased by roughly 20% to $54.6 million. Net income increased 18% to $37.8 million, or $0.17 per share. (Source: “Tahoe Resources Reports Strong Earnings in First Quarter 2016,” Tahoe Resources Inc, May 4, 2016.)
Tahoe Resources also provides an annual dividend of 1.75%, or $0.24 per share, which is paid monthly.
In April, the company closed on its $745-million acquisition of Lake Shore Gold; as a result, those production results (Timmins West and Bell Creek) are not included in the first-quarter results—but they will be soon. (Source: “Tahoe Resources Inc. And Lake Shore Gold Corp. Complete Business Combination,” Tahoe Resources Inc, April 1, 2016.)
Lake Shore Gold had a long track record of meeting or beating guidance, increasing its cash and bullion position, and consistently lowering its cash operating costs and all-in sustaining costs. The Timmins West complex has probable reserves of 509,700 ounces of gold, while the Bell Creek complex has proven and probable reserves of 263,300 ounces of gold. (Source: “Review of Properties,” Lake Shore Gold, last accessed June 9, 2016.)