The recent past has not been too kind to investors seeking gains from the price of silver. As the chart below shows, the price of the precious metal has done nothing but fall since hitting its peak in 2011.
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Clearly, the momentum is gone, but there is a case to be made that the price could be bottoming and that a recovery is at hand. That case is largely driven by industrial demand for silver, which is expected to grow 27% by 2018, according to the Silver Institute. That demand growth should lead to a higher silver price and improve the profits of silver miners.
Three companies that I think are best positioned to capture this growth are Silver Wheaton , First Majestic Silver , and Pan American Silver , which, in my opinion, make them the three best silver mining stocks.
Why Silver Wheaton?Silver Wheaton isn't a mining company, but a silver streaming company. That means the company invests in silver mine developments, and as a result, it locks in future silver production at a fixed cost. It's that business model that makes the company, in my opinion, the best way to invest in silver. That said, the company is also by far the biggest player in the silver market, as it has the largest silver reserves in the industry, as noted on the slide below.
Source: Silver Wheaton Investor Presentation.
Those large reserves are expected to drive 40% production growth from 2014 to 2019 as new mines operated by Silver Wheaton's partners come online. Further, that production is expected to only cost Silver Wheaton $4.55 per ounce, meaning it will earnvery robust margins from future silver production. That low-cost growth really puts the company in a prime position to create value, even if the price of silver doesn't budge, which is why it's a top silver mining stock.
Why Pan American Silver?Pan American Silver is one of the largest publicly traded silver producers in the world. It holds the fourth largest proved and probable silver reserves and is the sixth largest producer. The company is also in the process of developing several economically compelling organic growth projects that are expected to boost production over the next few years.
While its production costs aren't anywhere near as low as Silver Wheaton's, the company has focused on getting its costs down in order to increase its cash flow from silver production. As the slide below notes, Pan American Silver's all-in sustaining cost per silver ounce sold, or AISCOSOS, is expected to fall by upwards of $2 per ounce this year from its costs in 2014.
Source: Pan American Silver Investor Presentation.
As a result, the company is positioned to see its cash flow grow even if silver prices don't head higher from here. Further, the company boasts of a strong balance sheet with $227 million in net cash to fully fund its growth. That strong balance sheet, when combined with its falling costs, make it one of the best silver mining stocks.
Why First Majestic Silver?While its reserves are much smaller, First Majestic Silver is a growth-oriented silver producer. The company currently has two mines in development, as well as expansion projects across several of its other mines, that should significantly boost its silver production over the next 3- to 5-year period, as seen on the following slide.
Source: First Majestic Silver Investor Presentation.
Typically, growth that robust would come at a premium price tag, but First Majestic Silver is one of the cheapest silver stocks on the market. The company's valuation, based on 2016 estimates, puts it at a price-to-cash flow multiple of just 5.7 times, which is the cheapest among silver producers. Meanwhile, its enterprise value-to-EBITDA multiple of 5.4 times is the second lowest in the group. That combination of strong growth and a compelling valuation make it one of the best silver mining stocks.
Investor takeawayWhat's worth noting about this group is that each miner offers something different to investors. Silver Wheaton is a low-cost silver streaming company with lots of built-in growth. Meanwhile, First Majestic is a high-growth company with a compelling valuation. Finally, there's Pan American, which is a solid silver company with a top-notch balance sheet.
Because of these compelling qualities, all three should drive profitable growth even if the price of silver doesn't budge, while offering leveraged upside if silver prices begin to meaningfully recover.
The article The 3 Best Stocks to Invest in Silver Mining originally appeared on Fool.com.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of Silver Wheaton (USA). 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.
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