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What are we looking for?

Valuations for the 10 largest silver mining and exploration companies trading on the Toronto Stock Exchange or TSX Venture Exchange.

Between mid-January and early February, the price of silver jumped from US$25 an ounce to almost US$30, with social media fuelling speculation it was the result of Reddit users targeting the commodity as their next “short squeeze” after GameStop Corp. (A short squeeze happens when investors who are shorting a stock – betting the share price will fall – are forced by rising prices to cover their short positions prematurely by repurchasing stock, driving the share price up even higher.)

There are a number of moving parts to forecasting the price of silver, which is now back around US$25 an ounce. Demand for silver is expected to increase 11 per cent in calendar year 2021 over 2020, according to The Northern Miner, with more silver being consumed in electric vehicles, solar panels and other green technologies. Analyst consensus 12-month target for this year is US$30 an ounce, with some analysts calling for US$40.

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The screen

We used StockCalc’s screener to select the 10 largest silver mining and exploration companies on the TSX and TSX-V. We then used StockCalc’s valuation tools to calculate fundamental (or intrinsic) valuation for each stock to see whether it is undervalued or overvalued compared with its price.

Overview of the techniques used:

  • Discounted cash flow (DCF value) is a valuation technique in which cash flow projections are discounted back to the present to calculate value per share;
  • A price comparables (price comps) technique values the company on the basis of ratios from selected comparable companies;
  • An adjusted book value (ABV) is calculated by multiplying book value per share by its historical price-to-book ratio.

If we have analyst coverage, we look at the consensus target price.

More about StockCalc

StockCalc is a fundamental valuation platform with tools to calculate and report on value per share for thousands of public companies listed on major North American stock exchanges. StockCalc also contains numerous tools to understand what the stocks you are investing in are worth. Globe Unlimited subscribers can subscribe to StockCalc using the promo code Globe30, which offers a 30-day free trial and special pricing for the second month).

What we found

You can see in the accompanying table the percentage difference between each stock’s recent closing price and its intrinsic value. The StockCalc Valuation column, a weighted calculation derived from our models and analyst target data, indicates nine of the 10 stocks listed are undervalued.

Let’s look at two of these companies:

First Majestic Silver Corp. saw its stock price almost double during the silver rally between mid-January and early February. The company has three mines in Mexico producing a combined 15 million ounces of silver annually, which represents more than 60 per cent of its total revenue. To show the leverage in commodity stocks such as this, a US$5 increase in the price of silver would represent an additional US$125-million in revenue and between US$60-million and US$70-million in earnings before interest, taxes, depreciation and amortization (EBITDA). Long-term enterprise value-to-EBITDA for this industry is between 9 and 10, which means a US$5 bump in silver’s price would add US$650-million to First Majestic’s enterprise value, or US$3 a share.

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Kootenay Silver Inc. is a junior exploration company with projects in British Columbia and Mexico. Fundamental valuation for firms such as this rely more on comparables and balance sheet methods when projected mine costs are unknown or cannot be reasonably forecast well into the future. Kootenay’s flagship property, the Promontorio mine in Mexico’s Sonora state, has historically yielded more than 400 grams per tonne (gpt) of silver, with Kootenay’s other properties yielding in the range of 50 to 100 gpt. Again, companies such as this are very sensitive to future silver prices as lower grades can be mined with higher prices.

Investing involves risk. StockCalc accepts no liability whatsoever for any loss or damage arising from the use of this analysis.

Select Canadian-listed silver mining & exploration companies 

CompanyTickerMkt. Cap ($ Mil.)Recent Close ($)StockCalc Val. ($)Diff. (%)DCF Value ($)Price Comps ($)ABV ($)Analyst Tgt. ($)1Y Rtn. (%)Div. Yld. (%)
Pan American SilverPAAS-T8,219.239.0946.4518.837.7669.7326.0068.1031.50.8
First Majestic SilverFR-T4,513.720.2722.4510.86.0513.8910.5325.3684.9n/a
MAG SilverMAG-T2,004.821.1622.546.5-2.0025.2919.8035.1972.5n/a
Fortuna Silver MinesFVI-T1,560.18.479.127.77.1312.398.5713.8786.2n/a
Silvercorp MetalsSVM-T1,139.06.508.6432.98.888.085.3912.2337.00.5
Endeavour SilverEDR-T1,099.06.917.376.71.963.384.898.75200.4n/a
Aurcana SilverAUN-X206.50.760.60-21.1-0.600.600.59n/a204.0n/a
Avino Silver & GoldASM-T152.61.531.8319.6-1.072.051.17n/a163.8n/a
Silver One ResourcesSVE-X133.10.670.716.0-0.110.340.89n/a123.3n/a
Kootenay SilverKTN-X111.00.360.4216.7-0.160.410.210.9056.5n/a

Source: StockCalc 

Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.

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