This week we review the corporate fundamentals and technical market data of eight silver-focused mining companies. Of the 19 stocks we currently hold in our Natural Resources portfolio, only one is a primary silver miner. We’ll show readers why we picked the one we did.
We selected this week’s topic because we believe that it is time to be focusing on precious metals as the major drivers of this industry’s stocks are indicating higher prices are coming.
The strong US Dollar from mid-April to the beginning of June has kept any rally in the precious metal stocks in check, but that strong Dollar environment may now be changing.
Moreover, US interest rates are on the rise with this week’s FOMC decision and forecast, and US economic data reports now indicate rising prices overall as well as for commodities.
When precious metal prices appear to be in an accumulation zone, with the probability of a technical bull phase increasing by the day, we expect to see the lead-lag relationship to favour silver over gold, and that has been happening since mid-April. Most silver miner prices, however, have not yet out-performed gold miner prices, and we believe that is likely to be the case in the months ahead. So, this is a good time for a review of major silver miners.
The eight primary silver miners with prices shown as at the close on June 13 that we reviewed for this article are:
Note that we only keep Canadian data for MAG Silver. MAG is a company that owns a large 44% piece of the Fresnillo PLC Juanicipio asset located in the Fresnillo Silver Trend in Mexico, possibly the world’s premier silver mining camp, but this is a company whose relative fundamental scores have been very low.
We had considered adding McEwen Mining (MUX), SSR Mining (SSRM), and Tahoe Mining (TAHO), which are all substantial producers of silver but can also be considered gold miners. Moreover, we excluded Wheaton Precious Metals (WPM), although it used to be named Silver Wheaton, on the grounds it is a royalty interests company and not a miner plus the fact its business has been extended into other metals than just silver.
Portfolio management requires a few essential decisions. Once we have decided on an industry, i.e., a peer group, to include in our portfolio, we need to select the best quality company based on corporate fundamentals, which we can only do through direct comparison within that peer group. Then, having decided on the company, we look for optimal entry and exit timing, i.e., when to buy and sell the stock.
Based on our strength in quantifiable analytics, and a database of (currently) 4,128 investible companies which includes 284 in Natural Resources, each week we rank each company for Growth, Value and Yield criteria based on up-to-date corporate filings of fundamental data.
The factors we study include Revenue and Earnings Growth, Revenue and EPS Revisions, P/E Ratio, P/E to Growth Ratio, Dividends, Financial Strength, Profitability, Return on Equity, and Analyst Consensus, among others. From this data, which is reported quarterly by each company, we calculate a proprietary composite score for Growth, Value and Yield. Each company’s composite score is then ranked from 1 to 4128 for the full database and 1 to 284 for the Natural Resources database.
Using June 8 data, here is the Summary Ranking Table of the eight primary silver miners:
Fortuna Silver Mines (FSM $5.54) (FVI.TO CAD$7.20) has the second-best Growth rank and second-best Value rank of the eight primary silver miners; but has the best combined Growth+Value rank. This is the silver miner we have held almost from inception in the Natural Resources portfolio. Presently there is a 7.105% weighting.
In the past, this portfolio has held Coeur Mining (CDE), First Majestic (AG) and Hecla (HL). Then as their fundamental rankings dropped or we made decisions to improve the overall fundamental scores of the entire portfolio, we sold these.
In terms of deciding when to buy and sell the stocks in the portfolio, we turn to our database of daily market price and volume data series including Technical Indicators of all the stocks in the tradable universe, which we review by peer group.
Here is some of the price and volume data for the eight primary silver miners as at the close on June 13. Our proprietary analytics of this data includes multiple computer algorithms that we use for decision support; but all decisions are made by ourselves.
Note that the data for MAG Silver is in Canadian Dollars.
Except for a few weeks in January this year when we were devoting much time to developing new trading algorithms and missed the rapid sell-off in Natural Resource stocks, we believe that our use of quantitative analytics has greatly helped us in managing portfolios to where we are out-performing the benchmark indexes.
To this point in the month, the Natural Resources portfolio has gained +3.76% versus +0.46% for the IGE benchmark. The focus is on both (i) superior companies, and on (ii) optimal execution timing where we buy (more) into weakness and sell (some) into strength.
This week we added Centennial Resources (CDEV), a Denver-based unconventional oil exploration and production company that operates in the Permian Basin. The Growth and Value scores for CDEV last weekend were, respectively, 32 and 1417 out 4128 total companies and 16 and 158 out of 284 Natural Resource companies in our database. Obviously, we made the decision on the extremely high relative Growth score. After three days the 3.35% weighted entry position is up about +3.0%, so we are pleased.
As regular readers of the Posts and Comments are aware, we recently added to our Wesdome Gold Mines position (WDOFF $2.02) (WDO.TO CAD$2.63), now holding a 8.21% weighted position. Last weekend the Growth and Value scores for WDOFF last weekend were, respectively, 682 and 145 out 4128 total companies and 137 and 33 out of 284 Natural Resource companies in our database. Obviously, we made that decision on the very high relative Valuation score. This position is up +40.5% now.
While Fortuna Silver is a solid performer among its peer group, we purchased the Wesdome as a take-over candidate.
Each month we strive to make improvements to the database and the analytics. By late July, this work will be available as a premium service to the public whereby, for a small price, subscribers will be able to continuously assess their portfolios.