Critical industrial commodities also will soar provided we at least get off the ground in creating renewable infrastructure, asserts Stephen Leeb, global expert and editor of Real World Investing.
Silver is a commodity essential in solar cells. Without silver, solar would become far less efficient and far more expensive. So far technology-based “thrifting” has kept total silver usage in the growing number solar cells at a stable level. But research suggests we’re close to the limits of that particular fix. If so, demand for silver for solar cells will be rising sharply in coming years.
Our own research suggests that even if thrifting could further reduce silver needs by 75%, there would not be enough silver available to make solar a major player in the world’s energy supply. We could make comparable points about the various issues with wind energy.
Producers who have the capability to significantly increase production are particularly intriguing because output growth in an environment of increasing prices boosts revenue both from higher pricing and higher sales volume. In this light, we see a buying opportunity for a struggling silver stock.
Although its shares have languished lately, Fresnillo (FNLPF) is one such silver producer that investors shouldn’t sleep on. A major reason for the underperformance of Fresnillo stock is the delay at its 56%-owned Juanicipio mine in Mexico.
Before the Covid outbreak, the mine was supposed to have started producing by the middle of 2020, but Covid cost delays in construction and commercial production now seems unlikely before the year’s second half. Covid-related labor shortages also negatively impacted its producing gold and silver mines.
Once it starts operating, though, Juanicipio is expected to produce about 9 million ounces of silver each year in the first six years. Since it’s a partially-owned mine, Fresnillo will own about 5 million ounces of the annual production. The rest belongs to Fresnillo’s partner, MAG Silver (MAG).
The mine could also add more than 20,000 ounces of gold production a year for Fresnillo. Jaunicipio’s cost profile is terrific, with AISC (all in sustaining cost) for its silver production projected to be only about $5 per ounce, well below today’s silver price. Thus, the delay is quite a disappointment.
However, while the 2021 second-half financial results aren’t out yet, as of the latest semi-annual report, Fresnillo was still profitable and cash flow-positive — the company reports twice a year. Its balance sheet is also good with almost no debt.
It has two Mexican gold properties (Orisyvo and Rodeo) expected to come online by 2026. In five years Fresnillo could surpass 900,000 ounces in annual gold production (growth of around 25%) while producing around 60 million ounces of silver.
There is definitely some uncertainty due to the Covid-related delays, but once things get back to normal, Fresnillo should be able to dramatically improve its production profile, leaving it in an enviable position to grow in the years ahead if gold and silver rally as we expect.