A FTSE Miner For Silver Bulls

The price of silver has been trading at multi-year highs. It is approximately $27 an ounce at the time of writing. Market volatility over the past year initially catapulted gold, an asset regarded as a safe haven. Before long, silver also joined the race higher and put the limelight on both the commodity and silver miners.

Silver Weekly Chart.

Yet, recently, silver is getting even more attention than gold as the term “short squeeze” has become the topic of conversation. Most of our readers will know that it refers to a situation where a short-seller has to close out the open position by buying back the underlying asset—such as a stock or an exchange-traded fund (ETF).

If the price of the underlying asset moves (rapidly) higher, the short-seller might be forced to close out the trade. In this case, buying back the asset exacerbates the move higher, leading to short-term erratic price volatility.

For instance, earlier in the year, both GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC) reached significant highs in a matter of trading sessions with many analysts pinning this on the Reddit community and short squeezing. But these were not the only stocks to see a surge in price.

One of the next targets for a short squeeze became silver. As traders moved from AMC and GME to the shiny commodity, the price of silver initially jumped from $25 to just shy of $30, the highest it has been in nearly eight years.

Hochschild Mining Weekly Chart.

With the price of silver on the rise, stocks like Fresnillo (LON:FRES) (OTC:FNLPF) and Hochschild Mining (LON:HOCM) (OTC:HCHDF) began to rise as well. Both of these companies mine silver and gold.

We recently covered FTSE 100 member Fresnillo, one of the best performers on the UK's leading equity index in 2020. Over the past year FRES shares have returned about 57%. However, year-to-date (YTD), the stock is down about 8%.

Today, we’ll introduce FTSE 250 member Hochschild Mining to see whether the company deserves to be on investors’ radar.

Hochschild Mining

With corporate headquarters in London, HOCM has mining operations in Peru, Chile and Argentina. Hochschild has been in the metal industry for about a century. It went public in 2006.

In the past 12 months, HOCM stock returned about 45%. However, YTD, it is down around 1.7%. On Feb. 11, the stock closed at 221p ($3 for U.S.-based shares). Its dividend yield is about 1.3%.

Most of the group’s revenue comes from silver. But it also mines and sells some gold, too. According to the interim results released in August, revenue was $232 million. Profit before tax stood at $6.5 million. Cash and equivalents were $162.1 million. Management highlighted that the balance sheet remains robust.

Fresnillo Weekly Chart.

In November, as a result of COVID-19 infections, the miner had to temporarily stop operations at the San Jose mine in Argentina. According to a recent update, other mines are on track with operations.

HOCM stock’s forward P/E and P/S ratios stand at 13.23 and 2.32, respectively. We like the shares around these levels. But Hochschild is expected to release earnings on Feb. 17. We, therefore, wait to analyze the metrics before hitting the “buy” button.

Bottom Line

We believe there is more to the silver story than retail investors taking a sudden interest. Rising industrial demand and its importance as a store-of-value could mean the run-up in the price of silver has legs.

The tech sector has a large demand for silver in a majority of products, such as smartphones and computers. It is used in the medical industry, as well as in jet engines and solar panels. We expect “green-recovery” stimulus packages could provide further tailwinds for the metal. The other main demand for silver is in jewelry. Jewelry and investor buying make up 50% of the demand for all silver.

Short-squeeze may not necessarily be what sends silver to reach new highs. But the momentum seems to be with the commodity. Buy-and-hold investors could buy the dips either in the metal or silver miners. However, short-term traders should remember that both can be choppy.

Investors who are not ready to commit capital in a single mining stock might also consider buying an ETF. Examples include:

• Aberdeen Standard Physical Silver Shares ETF (NYSE:SIVR) - up 3.0% YTD;
• ETFMG Prime Junior Silver Miners ETF (NYSE:SILJ) - down 2.0% YTD;
• Global X Silver Miners ETF (NYSE:SIL) - down 1.9% YTD;
• Invesco DB Silver Fund (NYSE:DBS) - up 2.1% YTD:
• iShares MSCI Global Silver and Metals Miners ETF (NYSE:SLVP) - down 2.7% YTD:
• iShares Silver Trust (NYSE:SLV) - up 2.9% YTD.