The Gold-Silver Price Ratio is Closing and Turning Investor

|May 28|magazine28 min read

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NEW YORK, May 28, 2020 /PRNewswire/ -- The silver price is gaining traction, bringing the gold-silver price ratio down from historical highs and creating a ton of buzz around the silver market. It seems that silver is starting to catch up with rising gold prices and analysts expect the white precious metal to outperform gold for the next few years. The gold price has been rallying since the beginning of the year due to market volatility and economic slowdown, sending gold giants like Barrick Gold (NYSE:GOLD) (TSX:ABX) soaring along with it. During the first quarter, silver price lagged behind due to its perceived industrial demand. Luckily, thanks to the reopening of economies around the world, silver is expected to shine in Q2 and beyond, putting silver stocks like Endeavour Silver Corp. (NYSE:EXK) (TSX:EDR), Wheaton Precious Metals (NYSE:WPM) (TSX:WPM), Coeur Mining, Inc. (NYSE:CDE), and First Majestic Silver Corp. (NYSE:AG) (TSX:FR) in the spotlight.

Although the global pandemic has put a damper on the markets overall, the safe-haven status of gold and silver has injected new life into the precious metals market and these companies are ready for their time to shine.

Gold-Price Ratio Drops From Historical Highs

The gold-silver price ratio recently hit a historical peak of 124:1, marking a drastically higher margin than the average 87:1 ratio in 2019. The ratio is now floating around the 100:1 mark, which still reveals a wider-than-ever margin between the precious metals and signals a potential reset in the months to come.

After a tough first quarter which sent silver price below $12 an ounce, the white metal is making a comeback and is up 6.7% since the beginning of May. The uptick is encouraging for silver market enthusiasts, but it could only be the beginning for the undervalued metal. According to analysts at CIBC, silver will average around $18 an ounce in 2020 and $19 the following year. The sentiment is much the same for other financial institutions, including Bank of Montreal, CPM Group and Silver Institute, although some are suggesting prices as high as $22 this year.

Some of the key catalysts that could send silver prices soaring is the reopening of economies in the coming weeks and months, which is expected to boost industrial demand, and a supply crunch due to COVID-19 mine suspensions in prolific silver regions like Mexico. New applications like 5G infrastructure and solar energy are also expected to support rising silver prices, but it's investor interest that will likely be the biggest driver.

"People say silver has industrial uses and the demand isn't there," explained RJO Futures senior commodities broker Bob Haberkorn, who predicts silver to hit $20 in the coming weeks. "Of course, it has industrial use and it has always had industrial use. But it also has always been a flight-to-safety asset, and it has been throughout history."

Silver Producers Focus on Ramping Up Output Post-Pandemic

With the global pandemic causing temporary shutdowns in numerous key mining jurisdictions around the world, a large chunk of silver production was taken offline in the first quarter. The temporary setbacks may have hindered the supply in the first quarter, but operations are starting to come back online and silver producers have ambitious goals for the rest of the year.

Although the circumstances of COVID-19 shutdowns caused silver producers to withdraw their 2020 production guidance, many have reported strong numbers for Q1 2020.

In the first quarter of 2020, First Majestic Silver Corp. (AG) (FR.TO) reported a total production of 6.2 million equivalent ounces of silver, consisting of 3.2 million ounces of silver and 32,202 ounces of gold, which is inline with the previous quarter and 9% above guidance prior to suspension.

In terms of financial results, First Majestic Silver Corp. (AG) (FR.TO) came out of Q1 2020 mostly unscathed by COVID-19 with revenues of $86.1 million, which is only 1% lower than Q1 2019. The slight drop was primarily due to suspending sales in March in an attempt to maximize future profits due to metals market volatility.

The company decided to postpone the sale of 292,000 ounces of silver and 700 ounces of gold, worth approximately $5.3 million at the end of Q1 2020. As of May 2020, First Majestic Silver holds 1,045,342 ounces of silver and 1,459 ounces of gold in inventory.

During that period, however, First Majestic Silver Corp. (AG) (FR.TO) also managed to reduce cash costs by 19% to $5.16 per payable silver ounce, beating previously suspended cost guidance. The company came out with quarterly earnings of $0.04 per share, beating the Zacks Consensus Estimate of $0.03 per share.

Temporary Mining Suspensions in Mexico Begin to Lift

Moving into the second quarter, temporary suspensions at Mexico mining operations are expected to be lifted by May 30, a month longer than initially expected.

One company that has already been greatly affected by the temporary shutdowns is Coeur Mining, Inc. (NYSE:CDE), a gold and silver producer with projects in the US and Mexico. Although the company's three US-based mines remain in operation, the drop in production from its Mexico-based Palmarejo mine will likely have a significant impact on its second quarter 2020 results. The company estimated that a 30-day shutdown would reduce cash flow from the mine by around $10 million.

Luckily for Coeur Mining and other silver producers in Mexico, suspensions could be lifted sooner than the end of the month. On May 13, the Mexican government offered an exception to silver miners in jurisdictions that haven't had a high number of COVID-19 cases.

Coeur Mining announced last week that it has begun taking the necessary steps to reopen the Palmarejo mine, although an update has yet to be provided.

Endeavour Silver Corp. (NYSE:EXK) (TSX:EDR) also announced plans to restart operations at its three Mexico-based mines on May 18, all of which are located in municipalities with low or no transmission of the SARS-CoV2 virus.

In Q1 2020, Endeavour reported revenue of $21.9 million from the sale of 665,500 oz of silver and 7,454 oz gold at average realized prices of $15.33 per oz silver and $1,633 per oz gold. The company experienced a net loss of $15.9 million ($0.11 per share) for a number of reasons, including reduced sales, increased depreciation and depletion due to current short reserve lives and significant foreign exchange expenses as the depreciation of the Mexican peso impacts the value of VAT receivables and other working capital accounts.

First Majestic Silver Corp. (AG) (FR.TO) has also begun implementing restart procedures across each of its mine sites, while maintaining strict sanitary controls and supporting our local communities. The company said it expects full production rates will be reached in early July.

Indeed, although the silver industry has taken a hit in recent months, the supply deficit from mining closures to bode well for silver companies once the price of silver reflects the supply squeeze.

Investors who are interested in the precious metals market should definitely keep an eye on the gold-silver ratio in the coming weeks and pay attention to silver producers who are effectively weathering the post-pandemic storm.

Barrick Gold Corporation (GOLD) (ABX.TO) has settled the majority of the North Mara legacy land claims and has paid the first tranche of the $300 million settlement it agreed with the Tanzanian government to resolve the disputes it inherited from Acacia Mining.

President and chief executive Mark Bristow said these were landmark events that demonstrated the strength of the partnership the company forged earlier this year through the formation of the jointly owned Twiga Minerals Corporation, which oversees the management of Barrick's operations in the country.

In terms of its framework agreement with the government, the shipping of some 1,600 containers of concentrate stockpiled from Bulyanhulu and Buzwagi resumed in April and the first $100 million received from the sale has gone to the government. Barrick said all material issues had been dealt with or were being finalized. This initial payment will be followed by five annual payments of $40 million each.

Wheaton Precious Metals (NYSE:WPM) (TSX:WPM) had a strong start to 2020 with over $177 million generated in operating cash flow in the first quarter. Given our strong financial position and the immediate needs created by the COVID-19 pandemic, Wheaton launched a $5 million fund designed to support our local communities and those around the mines from which we receive precious metal, more than doubling our budget for community support. At this time, our top priority is the health and safety of our employees and the communities in which we and our partners operate." said Randy Smallwood, President and Chief Executive Officer of Wheaton Precious Metals.

"With one of the highest quality portfolios in the precious metals space, we remain confident in the strength and sustainability of our business model through this pandemic, and our ability to continue delivering shareholder value. We hope everyone stays safe and well."

To learn more about First Majestic Silver Corp. (NYSE:AG) (TSX:FR), click here for more information.

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