2023-11-14 13:30:48 ET
Summary
- SilverCrest Metals Inc. is recommended as a Buy due to the expected rally in gold and silver prices as well as the company's robust operating and financial performance.
- Silver demand is expected to increase due to China's investment in photovoltaic technology, but demand for silver and gold for investment purposes will also be robust amid recession fears.
- Analysts predict higher gold and silver prices in the next 12 months.
- If the Fed raises interest rates again, SilverCrest Metals shares could fetch more attractive prices.
SilverCrest Metals Inc. Deserves a Buy Rating
This article makes a Buy recommendation for the shares of Vancouver, Canada-based SilverCrest Metals Inc. ( SILV ) ( SIL:CA ), a gold and silver explorer and producer, through its 100% indirect interest in the Las Chispas mine in Sonora, Mexico, as the stock is poised for a sharp rise in the stock market driven by an expected rally in the prices of the precious metals.
The Outlook for Silver and Gold Prices
Silver demand, on which SilverCrest Metals' revenue depends for approximately 45%, will benefit from the Chinese economy's massive investment in photovoltaic technology to convert sunlight into energy, with this arm of the energy transition from fossil fuels to clean sources already delivering significant results. China is one of the countries in the world with the most confidence that tackling CO2 emissions and greenhouse gases responsible for the extreme impacts of climate change due to global warming can be achieved mainly through increasing adoption of electrification and clean technologies. Silver solar panel capacity in the Chinese economy has increased seven-fold over the past eight years, the Energy International Agency ((EIA)) notes in this report, and further growth will take place in the coming years as the economy emerges from the crisis and returns to expand.
The world's second-largest economy, which aspires to one day be first, appears determined to continue leading the way and lay a solid foundation for replacing fossil fuels and coal with solar panels and other renewable sources of clean energy. Therefore, it can be assumed that there will be robust industrial demand for silver in the coming years.
In the medium to long term, silver prices will benefit greatly from this expected solid development in industrial demand for the gray metal. In the short term, however, the precious metal is likely to get a boost from another catalyst of rapidly rising prices. This is the strong renewed market interest in the precious metal's safe-haven properties as a result of looming macroeconomic headwinds. With the U.S. economy on its way to entering a recession, which economists usually think is necessary to bring US core consumer prices back down to the 2 percent annual target rate, investors will flock to the metal to protect their assets against the negative consequences of the new cycle. Silver is considered an effective hedging tool in such a scenario.
However, this does not only apply to silver, as demand for gold will also benefit from renewed interest in hedging strategies. In this context, it must be said that gold is the ultimate safe haven and a sustained price recovery for both silver and gold is therefore quite possible.
The Upside Catalyst for Higher Gold and Silver: Analysts’ 12-Month Price Targets
Analysts quoted by Trading Economics predict silver will trade at $22.72 per ounce by the end of 2023, and $24.21 in 12 months' time, while gold is expected to trade at $1,959.22/oz. by the end of 2023 and at $2,023.95/oz. in 12 months. At the time of writing, silver was at $22.027/ounce, while gold was at $1,936.12/ounce.
The economic recession will result from a deterioration in consumption, which accounts for most of the U.S. gross domestic product, and also in business investment, as “persistently higher” Federal Reserve interest rates coupled with increased core inflation place an incredible strain on U.S. household finances and companies' growth prospects. This article describes several trends that support the idea that U.S. consumer demand and business investment are weakening. On top of this, two other recent findings suggest that consumers are abandoning home-buying plans in the face of record-high mortgage interest rates and trimming their discretionary spending budgets. Consistent with these trends, U.S. consumers have less positive expectations about the prospects for their financial situation and about the short- and long-term prospects for the economy.
As far as corporate investment is concerned, the lack of momentum in Initial Purchase Offers ((IPO)) initiatives can currently be seen as a signal from the economy that companies may want to put investments on hold for the time being given the less encouraging demand outlook.
Analysts at Goldman Sachs Group, Inc. ( GS ) expect IPOs to have a greater chance of rebounding in 2024 when the Fed begins cutting interest rates on federal funds. But before the top monetary authority does so, its policymakers must be convinced that the inflation situation is on track to return to the 2 percent target, and this does not appear to be the case, as Chairman Jerome Powell hinted at the possibility of a further rate hike in his speech last week.
This group of economists, which recently welcomed the opinion of Luke Tilley , chief economist of the Wilmington Trust, implicitly point to a sharp deterioration in the US economy, supports the outcome of the economic indicator in the following chart.
Source: GuruFocus.com
The spread between one-year and 10-year US Treasury bonds is currently inverted, suggesting that an economic recession is likely to occur in the coming weeks. When, as is the case now (the 1-year yield of 5.412% is above the 10-year yield of 4.658%), the US Treasury yield curve is inverted, it means that the outlook is considered much riskier than previously thought: Lenders prefer to lend money for a shorter period of time and charge a higher fee to compensate for the risk that the borrower will default.
The inverted yield curve is an excellent indicator of a sharp economic downturn, as it has correctly predicted the cycle in seven of the eight recessions of the past sixty years.
To benefit from the rise in gold and silver prices, retail investors can make direct investments in physical commodities. However, since he usually has very limited capital to invest compared to large/institutional investors, investing directly in the metal is not the easiest option. If the retail investor is seeking to gain exposure to the market, he may hope to achieve a similar goal by taking positions in publicly traded stocks of silver/gold producers.
SilverCrest Metals Inc. Appears to Offer Good Exposure to Silver and Gold
This analysis assumes that SilverCrest Metals Inc. is a good way to start or strengthen a position ahead of a predicted bull market for silver and gold, as this company's shares reflect strong operating activity and continued improvement in the financials, making it easier for investments in SILV and SIL:CA stocks to gain when the price of the precious metal rises.
In fact, the stocks have a strong positive correlation with the metals and also have high gold/silver beta coefficients.
The chart shows the strong positive correlation between SILV and silver/gold futures as a benchmark for silver/gold prices:
Source: Investing.com
The chart shows the strong positive correlation between SILV:CA and silver/gold futures as a benchmark for silver/gold prices:
Source: Investing.com
The correlation is positive and strong because as can be seen from the areas below the main charts, over the last three years the yellow area for gold and the gray area for silver have always been in the positive part of the chart and have often been just a touch away from that upper limit of the range from -1 to +1 of the correlation coefficients.
Furthermore, analysis of a linear model where the weekly returns of SILV or SIL:CA stocks were the outputs, and the weekly returns of silver or gold were the inputs showed that SILV had a gold beta coefficient of 2.2x and a silver beta coefficient of 0.88x. The coefficient of determination for the SILV model was between 31 and 42%, which is acceptable for the reliability of the model as it means that 31 to 42% of the stock price changes are influenced by the metal price change.
On average, SILV increases the change in the price of gold by 2.2x, while when silver doubles it increases by almost 90%.
The SIL:CA model instead showed a gold beta coefficient of 2.1x and a silver beta coefficient of 0.81x. The coefficient of determination for the SILV:CA model was between 29 and 40%, which is acceptable for the reliability of the model as it means that 29 to 40% of the stock price changes are influenced by the metal price change.
About SilverCrest Metals Inc. in the Third Quarter of 2023: Operating and Financial Trends May Continue to Improve
SilverCrest Metals is benefiting from good development of the business activity and is showing encouraging trends in several key operational metrics, including ore tonnage milled, metal grades, and recoveries.
As of Q3 of the year 2023 , mining rates appear to benefit from hole stopes being available longer in the cycle than originally planned and a larger volume of material entering the mill for processing.
Source of data: SilverCrest Metals Inc. Quarterly Earnings Reports
Consistent with the ramp-up as outlined in the Las Chispas Mine Underground deposit mineral project, these mining metrics are projected to improve in the future and support gold and silver production and sales volumes.
Gold activity is witnessing positive trends in the average grade of material processed and mined, resulting in higher volumes of gold sold, and gold prices are on track to reach higher levels.
Source of data: SilverCrest Metals Inc. Quarterly Earnings Reports
Silver production has almost tripled compared to the previous year:
Source of data: SilverCrest Metals Inc. Quarterly Earnings Reports
The company's total production in ounces of silver equivalent is also well above the previous year's level.
Source of data: SilverCrest Metals Inc. Quarterly Earnings Reports
Primarily due to higher ounces of precious metal produced and sold, cash costs and all-in sustaining costs are trending downward as they stood at $6.53 and $12.23/oz silver equivalent, respectively, in Q3 2023, compared to $7.39 or $12.70/oz AgEq in the second quarter of 2023.
Year-to-date cash costs are below the level of $6.83 for the Year-to-Date period, while AISC has been around the level of $12.13 for the YTD period.
One metric that is particularly seen in the market as driving the prices of SILV and SIL:CA shares is the mine operating margin, which is expressed as gross profit (or mine operating income) on total sales.
Although higher sales volumes mean higher costs of sales, the mine's quarterly and twelve-month operating margins remain close to 60%.
SilverCrest Metals' quarterly mine operating margins for the last five quarters:
Source of data: SilverCrest Metals Inc. Quarterly Earnings Reports
SilverCrest Metals' 12-month mine operating margins as of the last five quarters:
Source of data: SilverCrest Metals Inc. Quarterly Earnings Reports
The average realized price per ounce of metal sold is fundamental to the mine's operating margin. Assuming operating metrics continue to support higher sales volumes, the expectation of a bull market in gold and silver prices means the mine's operating margin is poised to trade above 60%.
Because higher operating margins at the mine are associated with robust free cash flow generation, net free cash flow of $33.4 million in the third quarter of 2023 was actually lower than $40.7 million in the second quarter of 2023, as the margin was almost 62% in Q2-2023, compared to 58.8% in Q3-2023.
However, free cash flow was still able to support exploration activity, which is a harbinger of future production trends, and the financing of investment activities. So, the higher the operating margin due to rising metal prices, the greater the upside potential for shares.
Looking ahead to the full year of 2023, SilverCrest expects to mine between 9.8 million and 10.2 million silver equivalent ounces, while AISC per silver equivalent ounce sold should be between $12.75 and $13.75.
The Balance Sheet Looks Robust
Financial position is robust in the third quarter of 2023, with cash on hand of $70.0 million (up 38% year-over-year) and silver and gold bullion investments of $11.7 million (up from $5.6 million in the second quarter of 2023). The balance sheet is debt-free, but the company has the ability to use $70 million from a line of credit, which was undrawn as of the third quarter of 2023.
The balance sheet has an Altman Z-Score of 15.81 (scroll down to the “Risk” section of this page on Seeking Alpha), meaning that there is currently no likelihood that SilverCrest Metals Inc.'s company is at risk of bankruptcy for the next few years.
The stock Valuation: There is a Good Chance that Stocks Will Be Offered at More Attractive Entry Points Compared to the Growth Prospects
As of this writing, shares of SILV stock were trading at $5.17 apiece, giving it a market cap of $753.47 million. Shares were well below the longer trend 200-day simple moving average of $5.71 but still above the 50-day simple moving average of $4.76. The stock price is below the midpoint of $5.86 in the 52-week range of $4.16 to $7.56.
The 14-day relative strength indicator shows a reading of 59, meaning shares are neither oversold nor overbought. There is still plenty of downside room for shares to reach lower levels, and with no shortage of headwinds, this analysis assumes that retail investors should wait for these lower prices to form before purchasing SILV shares.
Source: Investing.com
If the Fed does indeed raise interest rates again, this company's shares could trade well below current levels as they will feel the impact of the higher opportunity cost of holding gold/silver instead of bonds.
The key reason why the Fed could decide to raise interest rates again is stubborn core inflation. The likelihood of policymakers doing this is moderate to high, as another shock may be needed to accelerate the deflationary process, probably after the December shopping season when consumption may temporarily pick up somewhat.
Since the central bank began raising rates in March 2022, its policymakers, including the chairman, have reiterated the importance of fighting inflation with higher interest rates: they say the negative effects of expensive borrowing will never be as severe as they would be for the economy if prices were to rise unabated.
As of this writing, shares of SIL:CA stock were trading at CA$ 7.13 apiece, giving it a market cap of CA$ 1.04 billion. Shares were well below the longer trend 200-day simple moving average of CA$ 7.73 but still above the 50-day simple moving average of CA$ 6.51. The stock price is below the midpoint of CA$ 7.865 in the 52-week range of CA$ 5.54 to CA$ 10.19.
Source: Investing.com
The 14-day relative strength indicator shows a reading of 60.273, meaning shares are neither oversold nor overbought. Retail investors should wait for lower prices before buying shares.
Conclusion
Retail investors should consider shares of SilverCrest Metals Inc. as the company will deliver robust ounces of the precious metal and this production is likely to be mixed with an increase in silver and gold prices.
The company is expected to increase their operating margin and help generate consistent free cash flow. This allows the company to support exploration activities to continue operations at the Las Chispas mine, about 150 km northeast of Hermosillo, Sonora, Mexico and strengthens the financial health of the balance sheet. These are important factors for the share price.
Since this analysis glimpses a high probability that stock prices will be lower than current levels amid the Fed’s hawkish stance on rates, retail investors should wait for this to happen before acting on the buy recommendation and benefit from projected higher gold and silver prices.
For further details see:
SilverCrest Metals Is Well-Positioned To Take Off With Bullish Silver/Gold