The stock market has had a fantastic year, with all three broader market indexes pushing to multiple all-time highs. However, since the beginning of 2016, you'd struggle to find industries that have performed better than precious metals. Leading that charge is the Global X Silver Miners ETF, which has risen by a cool 84%, which is more than quadruple the return of the S&P 500 over that same time frame.
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There have been plenty of reasons to be optimistic about silver stocks. The vast majority of silver mining companies have reduced their capital expenditures to rein in costs, and the projects they have focused on will yield to only high ore-grade precious-metal mines. In many cases, silver stocks are now profitable despite silver prices being 65% below their 2011 highs.
Spot silver is beginning to tarnish
Within the past three months, however, physical silver has begun to tarnish a bit. After hitting $18.52 an ounce in April, which had been a high-water mark since November 2016, it's retreated by nearly $2.50 an ounce, or 13%. At this point, a move to $15 silver, or lower, is a real possibility.
Why you ask? Look no further than rising interest rates and increasing global bonds yields. The Federal Reserve's monetary tightening policy is beginning to push interest rates higher, which is, in turn, helping to move Treasury yields and bond yields higher. Since precious metals have no dividend yield, the opportunity cost of passing up the near-guaranteed return offered by bonds in favor of yield-less precious metals is rising. That's potentially bad news for physical silver.
Smart silver stocks to buy if silver drops to (or below) $15
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So what are silver investors to do? The smartest strategy is to consider buying silver stocks that have a more diversified mine portfolio. Silver is known to be a more volatile precious metal than gold or even some base metals, meaning silver miners that offer a larger mix of gold and/or base metals could be the best way to play a drop in silver prices.
If physical silver does indeed continue to fall, these are the three silver stocks you should consider buying.
Silver Standard Resources
Among the major silver stocks (those with market caps in excess of $200 million), none bears less production weighting toward silver than Silver Standard Resources (NASDAQ: SSRI), which is exactly why the company has proposed a name change to SSR Mining.
Silver Standard Resources has two core gold-producing mines: Marigold and Seabee. The Marigold mine in Nevada is the company's crown jewel, with an expected output of 205,000-215,000 ounces of gold in 2017. With expansion opportunities still available, low- to mid-single-digit production growth at Marigold is possible in the years ahead. Meanwhile, Seabee was obtained last year with Silver Standard's acquisition of Claude Resources. The Santoy Gap within the Seabee mine has yielded much higher ore grade than expected, which has pushed output at Seabee higher than expected in the short time Silver Standard has owned Claude's assets.
At the same time, Silver Standard Resources' San Miguel open-pit mine has ceased operations, with the company merely recovering what remains of milled tonnage at the site. This mine was its source of silver production, meaning that in 2017 Silver Standard will only generate about 20% of its revenue from silver production. In fact, for a few quarters, it's quite possible the company will be entirely dependent on gold production -- and with gold being far less volatile than silver, that should be a stabilizing factor for Silver Standard Resources' stock.
It is worth pointing out that silver production is in the company's future thanks to the recently announced joint venture with Golden Arrow. The now-developing Chinchillas Project on Silver Standard's Pirquitas property in Argentina should be capable of 8.4 million ounces of silver annually over an eight-year mine life. It's expected to come online during the second half of 2018. Thus, while Silver Standard will somewhat stick to its roots of silver production, this is very much a gold-oriented company nowadays.
Of all the major silver stocks, none has a more blended production balance than Hecla Mining (NYSE: HL). According to estimates from Bank of Montreal, roughly a third of Hecla's 2017 revenue is expected to come from silver, another third from gold, and a final third from various base metals, such as lead and zinc.
Hecla has four producing mines -- Greens Creek, Lucky Friday, San Sebastian, and Casa Berardi -- each of which puts out a mixture of precious metals and aids Hecla in its efforts to diversify its production. Casa Berardi is the company's kingpin gold producer, with an estimated 150,000-165,000 ounces of gold production expected this year. By comparison, Greens Creek is expected to yield between 7.4 million and 8 million ounces of silver, placing it well ahead of the company's other silver-producing mines in terms of total yield. The first quarter also saw 8.6 million tons of lead produced and 15.5 million tons of zinc.
Hecla's balanced portfolio is a blessing in two ways. First, it helps cushion Hecla from a fall in any one precious metal. For instance, the 13% drop in spot silver prices since April won't hit Hecla's bottom line nearly as much as some of its peers. Comparatively, gold prices have dropped by only 5% in that time frame. Second, Hecla is able to use its lead and zinc byproducts to lower its all-in sustaining costs.
Considering that San Sebastian is still ramping up, and Greens Creek has ample opportunity for expansion still left, Hecla could be a smart way to play a drop in silver prices.
A final silver stock that could be worth a look if silver continues to fall is Coeur Mining (NYSE: CDE). Bank of Montreal's 2017 production forecast suggests that nearly 60% of Coeur's revenue will be derived from gold this year, placing it behind just Silver Standard Resources in terms of gold reliance.
Coeur Mining is an intriguing company in that it's completely transforming how it mines. The company had previously been an open-pit and underground mining company, but it has since invested heavily in moving its operations entirely underground. While costly up front, underground mining should result in significantly higher ore grades and considerably lower costs over the long run. In fact, a recent analysis of gold and silver stocks found Coeur Mining to be among the cheapest on a future cash flow per share basis, primarily as a result of an expected boost in production and lower all-in sustaining costs.
In the first quarter, we began to see some positive results from Coeur's ongoing transformation. Expansion at Palmarejo in Mexico produced a 50% increase in the tons milled, as well as a better than 20% improvement in average gold grade per ton. Mine expansion efforts are also underway in Kensington, Alaska, and its Rochester, Nevada, mines, which should result in increased production within the next couple of years.
Coeur's push to reduce debt, improve ore grades, and lower its long-term mining costs may not have come at a better time.
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