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Silver is due a bounce - Hochschild will benefit

By Gary Newman | Thursday 6 July 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Silver has been incredibly volatile this year with large swings, but it is now back at a level where I can see a good chance of a bounce coming, and that in turn offers upside on producers of the precious metal.

Whilst FTSE100 listed Fresnillo (FRES) remains one of my favourite leveraged plays for taking advantage of the swings in commodity price, I can possibly see more upside potential in Hochschild Mining (HOC) given the rate of growth that it has shown in the past couple of years.

As well as silver, this exploration and mining company, with operations in South America, is also producing plenty of gold, a metal which has also reached a level where I would expect it to find some strong support and most likely a decent bounce from close to the current $1220.

But when it comes to silver I think that looks even cheaper, especially if you look at the current gold to silver price ratio - back up in the high 70s and at the highest level we’ve seen since early 2016 and not far off of the peak in recent times (it was higher in the early 1990s and peaked over 100 briefly) - and with silver back below $16/oz and close to the lowest level that it has seen since late 2016/early 2017.

Although silver is a precious metal it does also have plenty of other uses in manufacturing (especially in electronics) and therefore doesn’t always react in quite the same way as gold in terms of being a pure store of value. But with the amount of potential turmoil in the world at the moment I would expect gold to bounce soon and that will drag silver upwards with it, and I can certainly see a return to over $17/oz in the near future. I have personally been buying silver contracts in the 1590s this week.

In terms of Hochschild, there is little point going into too much depth on each of its operations, as barring any sort of disaster with the mines or countries that it operates in, the share price here will be largely dictated by commodity prices.

In 2016 the company put in a strong performance operationally, with silver production up around 17% at 17.3 million ounces, and gold was even more impressive, up 48% to 246,000oz.

Financially the company was also in a good position, having reduced its net debt by over $140 million during the year, down to $187 million, and with $140 million in the bank plus enough to pay a dividend, albeit just a token one. It had also been reducing overall production costs, with all in sustaining costs for silver averaging $12.1/oz across its operations.

The production report for Q1 2017 also showed that the strong operational performance was continuing, despite delays at a couple of its mines (they were fully operational again for Q2 so I’d expect even better production figures), and a further $25 million of debt was repaid during the three month period.

Silver prices in Q2 will have been lower on average, but that is already being reflected in the current share price of around 263p as compared to the highs of over 310p which we saw just a month ago – although CEO Ignacio Bustamante selling 130,000 shares didn’t help. Although Chairman Eduardo Hochschild also sold a few earlier this year (15.5 million to be exact) he still retains over 258 million of them and over 50% of the company!  

I believe that there is still plenty of growth potential here, even if that does happen more slowly than what we have seen recently, and any bounce in precious metals will see plenty of potential for a nice share price rise here, especially if you can get in around the 240-250p area where there has been support at various times when it has been tested.

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