One of the most explosive bull markets in history peaked in 2011, and then precious metals were brutally slammed.
This is what happens in a commodities cycle.
Demand snowballs and suppliers overproduce, trying to make as much money as they can. The resulting oversupply overwhelms the market, and prices crater.
We see this not just with gold and silver but also oil. Indeed, oil prices have tumbled as low as $30 twice in the past eight years. Each time they rebounded rather quickly, delivering gains of 100%, 200%, and even 300%.
The precious metals slump has been more persistent. But like oil, silver and gold are bouncing back.
Gold is up 20% in the past six months. Silver is doing even better, up 27.5%.
The reasons are familiar.
Mining projects have been shuttered or postponed, production is falling, and demand has been rekindled by lower prices.
Total mine output rose for six straight years through 2014, as producers ramped up to take advantage of high prices. But it plateaued in 2015, and in 2016, it has suffered its first annual decline in nearly a decade.
This, ultimately, is good thing.
The bear market has weeded out bad actors — those with high debt burdens, low-grade resources, unsustainable costs, etc...
What remains is a cadre of more capable miners — low-cost producers with high-quality assets. These companies have emerged with higher margins, toned balance sheets, and less competition than before.
As a result, they stand to do quite well when a new bull market gains traction.
That's why we've compiled this list of the very best gold and silver mining companies, based on their costs, production, and potential profit.
Just continue reading to discover why investors are so excited about these opportunities — projects and companies most mainstream investors haven't caught onto yet...
Agnico Eagle (NYSE: AEM)
Agnico Eagle peaked at $85 per share in 2010, but at its lowest point in 2015 it was trading around $22 per share. That means Agnico Eagle lost three-quarters of its value in just five years.
Still, the company proved resilient.
It survived the worst of the bear market and has rebounded nicely since.
When we first recommended buying Agnico Eagle in December 2015, it was trading at just $26. Since then, it's nearly doubled to its current level of $50.
Today, company has a market cap of more than $10 billion.
Its durability is on full display.
The key, of course, is Agnico's low-cost production.
The all-in sustaining cost (AISC) for Agnico is roughly $800 per ounce. That kept the company profitable and allowed it to pay down its debt, even as gold prices plunged.
Better still, Agnico took advantage of low gold prices by acquiring new assets.
In 2014, Agnico purchased a 50% stake in what was Osisko Mining's Malartic mine. This contributed to an 18% increase in reserves in 2015.
The end result: Agnico Eagle achieved a new record in production last year.
Payable production in 2015 was 1,671,340 ounces of gold at total cash costs per ounce of $567. That compares to guidance of 1,650,000 ounces at total cash costs per ounce of $600. AISC for 2015 was $810, compared to guidance of $850 per ounce.
This was the fourth year in a row that operations exceeded their production targets, giving the company room to boost its guidance and lower its costs.
Furthermore, Agnico has also been one of the few mining companies increasing its exploration, doubling its budget. This resulted in the discovery of the new parallel Sisar Zone at its Kittila mine in Finland. This new find is expected to be a significant contributor to future output.
Looking ahead, average annual production from 2016 to 2018 is forecast to be approximately 1.53 million ounces of gold per year.
You don't have to be an expert to figure out what higher production and lower costs mean (though it doesn't hurt if you are). It means higher cash flow.
Agnico figures to have free cash flow yield of about 4% over the next two years, which is great compared to its peers.
It's also reduced its debt. The miner now boasts a debt-to-market cap ratio of less than 10%. That, too, is well below its competitors.
The company currently has $168 million in cash and cash equivalents and $990 million in unused credit facilities. That gives Agnico more than $1 billion in available liquidity.
As a result, the miner is well capitalized should gold and silver retrench. It also has the flexibility to acquire new mining stakes should the opportunity arise.
Agnico Eagle also has an $0.08 dividend that yields 0.63%. That could go up, too.
Low costs. Low debt. Strong reserves.
Agnico has been and will continue to be one of the stronger mining investments in the game.
OceanaGold Corp. (TSX: OGC)(OTC: OCANF)
Oceana is an Australia-based miner that's much smaller than Agnico Eagle. But then again, so are its costs.
Oceana's AISC was a sector-low $709 per ounce in 2015, and that's expected to fall even further to just over $600 per ounce in 2017. Gold is currently trading at twice that.
Its gold output was 419,153 ounces last year compared to 307,463 in 2014. This year, production is expected to be between 385,000 and 425,000 ounces, with AISC of $700–$750 per ounce.
Indeed, 2016 is shaping up to be another banner year for Oceana.
The company reported in April that it had hit record production in the first quarter. Total gold production came in at 122,782 ounces, with record quarterly gold production of 46,811 ounces from its Didipio mine in the Philippines.
The Waihi mine in New Zealand has performed well, too. However, it should be noted that while the gold produced at Waihi is cheap (AISC of $650 to $680), the mine is going to reach the end of its life in a couple years.
Oceana, of course, is aware of that and has taken steps to replenish its reserves. Like Agnico Eagle, Oceana took advantage of the gold price slump to absorb new assets.
The company acquired Romarco Minerals Inc. in 2015. This increased Ocean's debt burden, but not overwhelmingly so. And the takeover is expected to add attributable production of 540,000 ounces gold in 2017 at an AISC of just $533 per ounce.
In short, OceanaGold is looking at a couple years of very strong profits, with the potential to improve long-term production at very low all-in costs through exploration and new mines.
The company is valued at about $2.5 billion, and that's with a 67% increase over the past six months.
The stock also pays a $0.05 dividend, which yields 1.24%. That's pretty good for an industry that doesn't have a lot of cash to kick back to investors at the moment.
Newcrest Mining Corp. (ASX: NCM)(OTC: NCMGY)
Newcrest Mining is Australia’s biggest gold miner, with operations in the Asia Pacific and West Africa. It's just one of four companies that holds more than one mine in the world's top-30 producers list.
Its group AISC is $761 per ounce, with its best-performing mine, Cadia, producing at just $227 per ounce. Cadia also has a reserve life of approximately 41 years, with 26 million ounces of gold reserves. The mine is the top-producing gold mine in Australia.
Another mine, Lihir, has an estimated 35 years of reserve life, with AISC of $804 per ounce. It has gold reserves of 28 million ounces and resources of 57 million ounces.
In all, the average reserve life of Newcrest's mines is about 28 years.
Newcrest also recently restarted mining at the Kencana mine, part of its Gosowong gold operation in Indonesia. Production there had been suspended since an unexplained “geotechnical event” in February.
Sustaining cost per ounce of gold for current operations is at $770, giving the mine a margin of 31%.
Newcrest has shed $1.33 billion in debt over the last two years. That's brought the company's Net Debt/EBITDA ratio down to 2.1. That's not ideal, but manageable.
In its most recent quarter, Newcrest reported a 2.6% increase in gold production and a 4.5% drop in AISC. Cadia was the best-performing mine in all of Australia in that period.
The stock is up 67% so far this year. It will keep moving higher so long as gold prices do.
Alamos Gold, Inc. (NYSE: AGI)
At $975 per ounce, Alamos Gold's AISC is a little bit higher than the other miners we've discussed.
However, the good news is that it's on a downward trajectory, falling 11% from 2015 to 2016. Capital spending is on the way down, too. Production is edging up, albeit slightly.
Alamos is also in a strong fiscal position, with about $283 million in cash and just $112 million in debt.
The company's flagship mine is the Young-Davidson mine in Ontario, Canada. Production from that mine was penciled in at 170,000–180,000 ounces for 2016 at an AISC of $825 per ounce.
It has 3.9 million ounces of proven and probable reserves and another 1.2 million ounces measured, indicated, and inferred. Young-Davidson has a 15-year reserve life.
Alamos Gold's Mulatos mine has proven and probable reserves of 1.5 million ounces of gold and more than 3 million measured, indicated, and inferred. It's poised to contribute as much as 150,000 ounces in 2016.
Beyond that, the Kirazli, Agi Dagi, and Camyurt projects are under development in Turkey.
The company is smaller than Newcrest, Oceana, and Agnico Eagle, with a $2 billion market cap. However, that's more than double what it was six months ago.
Alamos got off to a strong start in 2016, with quarterly net earnings of $9.7 million, or $0.04 per share.
That figures to continue, as costs are trending down and production is climbing upwards.
Pan American Silver Corp (NYSE: PAAS)
Pan American Silver is the world’s largest primary silver miner. It has a portfolio of quality assets throughout North and South America.
It's similar to Alamos Gold in that it has a $2.35 billion market cap and has posted a 130% gain over the past six months. (Alamos is up 137% in that time.)
The company produced 26.12 million ounces of silver and 183,600 ounces of gold in 2015. AISC was $14.92 per ounce, compared to a recent close of $17.50 per ounce for silver.
It should be noted that Pan American's reserves declined in 2015. At the start of the year, the company's silver reserves totaled 300 million ounces. They've since fallen to 280 million ounces.
That's no cause for alarm, however.
Broadly speaking, Pan American has been extremely successful in its exploration efforts. Over the past 12 years, it's added approximately 293 million ounces of silver reserves, fully replacing the 291 million ounces of silver depleted through mining activities in that same period.
Most recently, Pan American reported a 5% increase in proven and probable silver reserves at La Colorada. The mine now holds approximately one-third of the company’s reserve book. La Colorada added 5.2 million ounces of silver to its proven and probable mineral reserves. And in 2016, exploration activities will focus on upgrading the approximately 23 million ounces of inferred silver resources.
Manantial Espejo and San Vicente had exploration success as well, adding 4 million ounces of silver. That completely replaced the 3.9 million ounces depleted over the course of the year. San Vicente added 3.2 million ounces of silver, replacing 80% of silver ounces mined last year.
Going forward, what's most important is boosting production and cutting costs, which is exactly what Pan American is poised to do.
The company cut cash costs by 15% in 2015, and AISC was slashed by 17%.
It ended the year with cash and short-term investments of $423 million, working capital of $689 million, and long-term debt of only $40 million.
Silver Wheaton (NYSE: SLW)
Silver Wheaton is the largest pure precious metals streaming company in the world. That is, it's not a miner.
Rather than spend billions on tools and labor, streaming or royalty companies offer upfront payments to miners for the right to purchase silver and gold at cheap prices in the future.
That's a good business to be in during a bear market because there are so many distressed miners looking for cash. Silver Wheaton is especially good at that. It's been in this industry for a very long time. Its management knows how to take advantage of industry slumps.
On March 31, Silver Wheaton announced that it'd increased its bought-deal financing to $550 million.
Most recently, the company agreed to pay Panoro $140 million in upfront cash for 25% of its gold production and 100% of its silver production from the Cotabambas Project in Peru. Additionally, Silver Wheaton will make production payments to Panoro of the lesser of the market price and $450 per ounce of gold and $5.90 per ounce of silver delivered over the life of the mine.
Silver recently closed at around $17 per ounce, and gold came in at $1,250 per ounce. So you can see how Silver Wheaton makes its money.
Overall, Silver Wheaton pays an average of $4 per ounce for silver and $400 per ounce for gold. The higher precious metals prices go, the more money streamers like Silver Wheaton make.
The stock is up more than 70% year-to-date.
It also pays a $0.05 dividend that currently yields about 1%. That may not sound like much, but it's pretty good considering most miners have been forced to slash what paltry dividends they offer to conserve cash. Barrick Gold (NYSE: ABX) and Goldcorp (NYSE: GG) yield just 0.4%, for example.
Franco-Nevada (NYSE: FNV)
Like Silver Wheaton, Franco-Nevada is a streaming company.
Also like Silver Wheaton, the company has a proven track record of delivering gains for investors.
Since Franco-Nevada's initial public offering in 2007, the stock has quadrupled in value. It's managed to absorb the shocks from lower gold prices, rising 124% since 2011. It's up 56% this year.
In February, Franco-Nevada paid $500 million to Glencore for the right to receive 70,000–80,000 gold equivalent ounces annually until production runs out at the Antapaccay mine in Peru. That's slated to be around 2030.
Even if gold fell below $1,000 per ounce, the deal would still be profitable. And if it shoots up to $1,500, shareholders will be very happy.
Franco-Nevada has more than $136 million in cash sitting on its balance sheet, no debt, and access to $1.3 billion of capital through a credit facility. This gives the company leverage to expand its asset portfolio and sustain its aggressive dividend policy.
Indeed, Franco-Nevada has increased its dividend in each of the past nine years. Its current payout of $0.29 per share is good for a 1.23% yield.
Franco-Nevada reported earnings results on May 4th. The company achieved revenues of $132 million — a 21% year-over-year increase — despite gold prices being 3% lower than they were in 2015. Its gold equivalent ounces jumped by 25% to 106,621.
Currently trading at $71 per share, Franco Nevada has a high of $81 and an average of $63 among 12 analysts covering the stock.
Given the choice between the two, Silver Wheaton is probably the better value right now. It ranks lower than competitors in terms of price/earnings, price/cash flow, and price/NAV.
Ultimately, though, all of these are strong companies and solid bets. If the precious metals rally continues, they'll enjoy a nice revenue boost. But their margins are high enough that they can withstand a drop in prices should gold and silver regress.
Better still, they'd have yet another opportunity to collect producing assets at a steep discount.
Outsider Club Research Team