It’s been a tough start to the year for the Silver Miners (SIL), with the ETF sliding 13% to start the year, even though real rates remain well in negative territory, a bullish backdrop for the precious metals. Fortunately, this violent sell-off seems to be continuing well past its expiry date has left several miners on the sale rack, with three names currently trading at deep discounts. While discounted valuations alone does not preclude these stocks from going lower, this looks to be a low-risk buying opportunity, especially given that a few of the names are getting quite oversold short-term as well. In this article, we’ll look at three of the safest stocks in the space and dig into their recent valuations:

(Source: YCharts.com)

As shown above, Wheaton Precious Metals (WPM), Hecla Mining (HL), and Pan American Silver (PAAS) are currently trading at 23x, 15x, and 19x forward earnings, respectively, despite these companies set to grow annual earnings per share [EPS] by over 40% next year. This is because these companies are all enjoying production growth and benefiting from higher silver (SLV) prices vs. last year’s average closer to $21.00/oz~, and this should lead to significant margin expansion and material growth in annual EPS. This added cash-flow should also help to boost their dividends, with their dividend yields sitting at 1.13%, 0.33%, and 0.78%, respectively. Let’s take a closer look at the three stocks below:

Beginning with Hecla Mining, the company had a solid quarter in Q4 with silver production of 3.35~ million ounces and gold production of 49,000~ ounces. While this translated to a minor decrease in production year-over-year, FY2021 is projected to be a significant year for Hecla, with its Lucky Friday Mine in Idaho ramping up from a nearly 2-year shutdown due to a strike. During Q4, the mine produced 800,000~ ounces of silver, which was up 31% sequentially. However, it’s expected that the mine will produce over 3.50~ million ounces of silver next year and up to 4.0 million ounces in FY2022 as the mine heads towards higher grades deeper in the mine. This combination of increased production from Lucky Friday and higher silver prices should lead to significant revenue growth for Hecla, and the higher production is also contributing to lower unit costs or a material increase in margins. As shown below, trailing-twelve-month revenue hit a new multi-year high last quarter of $728 million, and this is without Lucky Friday at full capacity.

(Source: Author’s Chart)

If we look at annual earnings per share below, we can see that Hecla is set to report $0.03 in annual EPS in FY2020, but this is expected to grow to $0.31 in FY2021, with the benefit of higher silver prices, much lower interest expense due to debt paydown, higher metals production, and lower unit costs. This translates to more than 800% growth in annual EPS year-over-year, yet the stock is trading at barely 15x earnings at a share price of $4.80. Generally, buying silver miners under 15x earnings represents a great value proposition, especially if we might be in the early innings of a new bull market, so I would view any pullbacks below $4.50 on HL as low-risk buying opportunities. This would translate to the stock trading at closer 14x earnings.

(Source: YCharts.com, Author’s Chart)

The next name on the list is Pan American Silver (PAAS). This company has enjoyed massive growth in annual gold (GLD) production from its acquisition of Tahoe Resources a few years ago. Unfortunately, FY2020 was a tough year for the company for silver production due to its South American mines that had struggled with positive case counts of COVID-19, but FY2021 is expected to be a much better year, with cases finally beginning to drop in Peru and Argentina. As shown below, FY2021 guidance is set at 20 million ounces of silver despite the company purposely guiding conservatively and assuming COVID-19 related headwinds continue for most of FY2020.

(Source: Author’s Chart)

As shown below, Pan American Silver enjoyed a breakout year for earnings in FY2019 at $0.78, which translated to a new multi-year high in annual EPS. Despite COVID-19 related disruptions and lower production, annual EPS is expected to grow by double-digits this year and is expected to soar to $2.15 in FY2021 based on estimates. This is due to significant margin expansion, much lower interest expense due to accelerate debt repayments, and increased production relative to FY2020, which was hit with COVID-19 related disruptions.

At a current share price of $29.00, this translates to PAAS at less than 14x FY2021 estimates, even though the company is expected to post triple-digit earnings growth. While it’s certainly possible that PAAS could miss estimates if silver stays below $25.00/oz, the reward to risk here is looking very compelling below $30.00.

(Source: YCharts.com, Author’s Chart)

The last name on the list is Wheaton Precious Metals (WPM), with the stock being the least risky of the bunch, given that it’s a royalty/streamer. WPM’s business model consists of helping to finance miners to build or expand their mines, with the company them receiving a royalty or stream in return over the mine’s life. During the most recent quarter, the company reported attributable production of 171,400~ gold-equivalent ounces [GEOs], which was down over 7% from the year-ago period.

However, this was mostly due to disruptions at mines that WPM is partnered with, and these disruptions are since behind us, with COVID-19 cases beginning to trend down in most regions. If we look ahead to FY2021, the company should be able to return to 185,000~ GEOs per quarter with operations back to normal, and this should translate to material revenue growth, given that revenue hit a new 2-year high in the most recent quarter despite lower production. This was because of the sharp rise in metal prices, with Wheaton enjoying a roughly 50% split between gold and silver in its production. 

(Source: Author’s Chart)

While WPM looks quite expensive at first glance at 25x FY2021 earnings estimates of $1.56, it’s worth noting that the company should trade at well over 30x earnings and typically has traded at these levels. This is because the company enjoys 75% margins due to its streaming model, so it should trade in line with earnings multiples of software companies, though with a discount due to its cyclical business model. Currently, at 25x earnings, the stock is significantly undervalued and belongs at over $55.00 per share on fair value. Therefore, I see this dip as a rare buying opportunity.

(Source: YCharts.com, Author’s Chart)

While it’s possible that sentiment could stay negative in the sector for a little longer, the valuations presented from this sell-off are becoming quite compelling. Therefore, I have continued to add exposure in the sector, and may look to continue buying if this weakness continues. Currently, I see the best value in the precious metals sector as Pan American Silver and Kirkland Lake Gold (KL), but I may look to add WPM as well if we see further weakness.

Disclosure: I am long KL, PAAS, GLD

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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SLV shares were trading at $24.81 per share on Thursday morning, up $1.39 (+5.94%). Year-to-date, SLV has gained 0.98%, versus a 0.89% rise in the benchmark S&P 500 index during the same period.

About the Author: Taylor Dart

Taylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles. More...

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