Silver Platter: Industry Outlook

Overview:

• We expect ongoing growth in demand of silver driven by manufacturing and investments.
• Much of silver holdings may not be liquid, meaning readily available supply could deplete faster than the market anticipates.
• Despite a higher price for silver since 2018, equities may be positioned to generate robust free cash flow (FCF).
• Existing silver producers could anticipate M&A activity given a lack of scalable production throughout the industry.
• Daniel Ghali, Commodities Strategist provides outlook on near term pricing.

The TD Cowen Insight

We have a favourable outlook for silver equities with strong fundamentals backed by growing demand and stagnant production. Our Commodity Strategy team also highlights depleting inventories and liquidity tightness, which could place upward pressure on near-term pricing. We anticipate robust FCF ahead with investor focus on growth and new project development given scarcity of primary silver assets.

Robust industry fundamentals support our constructive view

We view a constructive backdrop in silver fundamentals with solid demand outpacing relatively flat mine-site supply leading to deficits seen in each of the past four years. We anticipate continued consumption growth driven by photovoltaics and electric vehicles, along with strong retail and investment demand. Coupled with constrained production given dearth of new mines and recent permitting delays particularly in Mexico, which accounts for a large proportion of primary silver production, we view strong fundamentals in support of a sustained higher silver price.

Highlighting near-term supply tightness and strong pricing dynamics

As highlighted by our Commodity Strategy team, continued silver demand growth and depleting above-ground inventories could result in near-term liquidity tightness, demanding higher prices to attract inventories from unconventional sources. In our view, this dynamic has been overlooked by investors despite an approximately 13% increase in spot silver year to date. While global inventories may be sizable relative to continued supply deficits, we argue that a substantial portion of reported holdings are overstated and not actually readily available given inclusion of metal within physical ETFs. As such, we view available inventories being more quickly depleted than anticipated by the market, which could lead to near-term tightening helping to push silver prices higher.

Equities remain discounted with robust FCF ahead

In our view, equity valuations remain discounted versus historical levels since 2018 at an approximately 20% discount on both NAV and EBITDA despite a near doubling in the silver price. While silver companies have historically traded at a significant premium to gold, this spread has also narrowed by approximately 70% over this time period, and the traditional gold/silver ratio has persisted at approximately 85x. We view silver equities as strengthening fundamentally with robust FCF generation backed by strong margin expansion, which in our view, creates a compelling investment case for silver producers in the year ahead.

M&A reflecting scarcity of primary silver assets

In our view, recent M&A premiums for single asset producers has illustrated the scarcity of producing silver assets. We see this being further reflected within silver company portfolios, with weighted average silver revenue exposure of just 35%. As such, we anticipate potential for further consolidation given lack of scalable production, coupled with shortage of advanced stage development assets.