No running second

Silver is one of the biggest stories of 2023, as demand has skyrocketed, and a lack of supply continues to push prices up. In the United States, several investigations have been into silver manipulation, where a number of big banks were fined. 

Many believe silver prices are being held down and their value is significantly higher.

Considering that silver is scarce, durable, and is increasingly becoming an essential part of global supply chains, investors will look at silver prices and miners closely.

Silver Mines Limited (ASX: SVL) is one of Australia’s most prominent silver companies, with multiple sites located east of New South Wales.

Bowden Silver is one of the most significant pre-development projects in the world, and Silver Mines is expected to see a considerable ramp-up in production soon.

The project is considered one of the most cost-effective mining resources globally, which could prove lucrative for investors.

SILVER OUTLOOK 2023

 Current forecasts for global silver demand are 1.12 billion ounces, driven by several critical factors, including physical silver demand, ETFs, and industrial use, particularly for green technology.

Industrial demand currently accounts for over half of all silver market, with an increasing focus on spending to transition away from the use of fossil fuels.

Jewellery also contributes to a considerable portion of demand, projected to increase by 10-12% in 2022.

Beyond traditional uses, silver is a critical component in both photovoltaic energy and the EV industry, which are expected to witness significant growth in 2022.

The EV market is expected to grow by 30-40 per cent in 2022, and the PV market may increase by 17-20%, under the current projection rate.

These prospects suggest that the high demand for silver should remain throughout the next fiscal year.

The local Australian market is a crucial consumer of silver. Australian silver demand continues to increase rapidly, with The Perth Mint reporting sales of 2.47 million ounces of silver, up 89% from July 2021.

The demand from an inflationary environment continues to drive investor sentiment in Australia.

Many investors are seeking to hedge out their portfolios as global monetary uncertainty leads many to reconsider how they allocate their capital; Australian investors are no different.

Perth Mint General Manager of Minted Products, Neil Vance, says there is robust demand for physical silver.

“Even with a strong month for output, silver coins remain subject to allocation. Everything that mints produce are being sold, and we expect to continue to see robust demand for bars and coins in 2022”.

The total production of silver is expected to be around 898-900 million ounces, which will provide a tailwind for silver prices as we enter 2023.

Central banks forecast high inflation rates are unlikely to abate, which traditionally increases demand for precious metals.

Silver mines are unlikely to significantly increase production in the short term, and demand is outpacing supply.

If demand remains robust, silver could reach $30 an ounce in 2023, significantly improving silver miner cash flow.

PROJECTS

Silver Mines currently has gold, silver and zinc resources in the open pit.

The Bowden project has a proven reserve of around 28.5 Mt and 66 million ounces of silver.

The company currently expenses $13-15 million yearly and expects production to begin shortly.

The expected total resource is projected to be around 318 Mt, which indicates plenty of upside from these levels.

Due to the grade of the metal, the company anticipates high margins, with revenue expected to hit $60-70 million once production commences.

These margins would generate an EBITDA of around $12 million and 20x EBITDA.

According to these projections,  the C1 costs are expected to reach $11.64, and AISC means $13.15.

Production is expected to start in 2023-2024 and has a life expectancy of 16 years, and current revenue projections are $2.5 billion on USD 18 per ounce of silver.

Considering silver prices are expected to rise, the net present value could increase significantly.

The current market capitalization, which trades around $220 million, indicates the stock is moderately undervalued.

Silver Mines’ balance sheet holds 16.8 million USD cash and cash equivalents on its books, which should prevent liquidity issues shortly.

The company currently has nominal debt, which provides a favourable position entering the production phase.

Silver is susceptible to several risks and could face various liquidity and demand risks.

Interest rates are heading upward, and the auto market could cause a demand reduction.

On top of the falling or slowing, liquidity levels could affect the market negatively, too, as prices come under pressure.

The USD strength also presents complications; as interest rates head higher, we could see the dollar follow suit, leading to commodities coming under pressure.

Overall, prospects for silver are tremendous, and many investors will keep a close eye on the precious metal, hoping that the commodity’s fortunes will continue to soar.

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