Why Silver Mining Stocks Are Scorching Hot Right Now

By Markets Fool.com

That is one really precious metal right now. Image source: Getty Images.

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The price of silver is on fire, up more than 30% since the start of the year. This has ignited a massive rally in silver mining stocks, most of which are up triple digits this year:

New York Silver Price data by YCharts.

The reason these silver stocks are doing so well has to do with their strong silver-weighted production and falling production costs. That is enabling these miners to cash in on the surging price of silver.

What's going on in the silver market

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Silver bottomed out at a five-and-a-half-year low in December amid expectations for rising interest rates in the U.S. and a slowdown in China. However, it is up more than 50% since that time, recently touching a two-year high, after investors and speculators turned to the precious metal as a safe haven amid tumultuous economic times. The Brexit vote, in particular, left the market stunned and sent investors out of currencies like the British pound and into silver. In addition to that, Chinese buyers are scooping up silver futures contracts in droves, and in early July silver contracts traded at four times the normal daily transaction volume on the Chinese market.

Meanwhile, industrial demand for silver remains robust, with demand from the healthcare and technology sectors expected to surge from $700 million to $2.4 billion over the next seven years. In addition, because silver is a key ingredient in solar panels, robust growth in solar panel installation is driving additional demand for industrial silver. In fact, the solar industry is expected to consume 17% of the global industrial silver produced this year, up from just 2% a decade ago.

This one-two punch of increased speculation and rising industrial demand is driving up earnings at leading silver miners.

Digging into the top-performing silver stocks

Silver Mining Stock

Silver Production in the Second Quarter

Silver Production Costs (All-in Sustaining per Ounce)

Silver Production Costs (Cash Costs)

Silver Wheaton

7.6 million ounces

Not reported

$4.46

Pan American Silver

6.33 million ounces

$11.31

$5.57

Hecla Mining

4.2 million ounces

Not reported

$3.80

First Majestic Sliver

2.8 million ounces

$10.97

$6.41

Great Panther Silver

536,726 ounces

$7.19

$1.72

Data source: Company investor presentations.

Silver Wheaton (NYSE: SLW) is the world's largest precious metal streaming company, which is quite a different business model than a silver mining company. Instead of owning and operating mines, it invests an up-front fee for the right to purchase silver and gold at a low fixed cost. It currently has streaming agreements with 22 operating mines, which allowed it to buy silver for just $4.46 an ounce during the quarter. It subsequently sold that silver at $17.18 per ounce, enabling it to pocket a margin of $12.72 per ounce. Given its low fixed costs, that margin rises with the price of silver, which is why Silver Wheaton's stock has been red hot this year.

Pan American Silver (NASDAQ: PAAS) really cashed in on rising silver prices during the second quarter. While its silver production was down 4.8% year over year due to anticipated production declines at several mines, its consolidated cash costs sank 41% thanks to lower operating costs across its mines, as well as higher production of by-product metals like gold. As a result, Pan American Silver produced $66 million in operating cash flow during the quarter, which was its highest result since the fourth quarter of 2012. Its operating results could be even better later this year given that its cash costs are expected to be 30% lower than anticipated, which will be a real boon if silver continues to skyrocket.

Hecla Mining (NYSE: HL) widened its lead as the largest primary silver producer in the U.S. during the second quarter after its silver production was up a smoking 71% thanks to its organic growth strategy. That drove Hecla Mining's sales up to the highest level in the company's history, while its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) jumped an astounding 164%, to $77.8 million, which was its second-highest level ever. The company could smash that record later this year given that it recently boosted its production guidance for silver from 15 million ounces up to 15.75 million ounces, with that incremental production coming when silver's price is soaring.

First Majestic Silver (NYSE: AG) also delivered strong second-quarter silver production, which was up 5% year over year. Even better, its all-in sustaining costs were down 24%, which enabled First Majestic Silver's earnings to triple from last year's second quarter. Those buoyant results have the company so optimistic about its future that it boosted its capital budget to plant "the seeds for our next leg of growth," according to CEOKeith Neumeyer.

Great Panther Silver (NYSEMKT: GPL) is also cashing in on surging silver prices, evidenced by the 96% surge in its earnings from mine operations last quarter. While Great Panther's silver production slumped 17%, the company's cash cost plummeted 74%, to just $1.72 per ounce. That drop is due in large part to higher gold by-product credits as a result of rising gold production and gold prices, as well as a decline in mine development expenses. Looking ahead, Great Panther Silver expects its costs to come in below budget, which, when combined with its solid silver-equivalent production, should drive strong cash flow into the company's coffers as long as silver's price stays firm.

Investor takeaway

Silver's slumping price over the past few years forced silver miners to work hard to get costs down. Those cost-reduction initiatives are paying off now that the silver price is rebounding, which is catapulting silver miner earnings. As long as the silver market remains heated, these silver mining stocks should remain hot commodities.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of Silver Wheaton. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.