Silver lining in weaker peso for Mexican miners

Avino Silver & Gold Mines

16/02/2017 07:00

* Peso slid to record low vs the dollar in January 
    * Silver miners seen benefiting from lower costs 
    * Mexican silver mining equities vs peso: http://reut.rs/2kpRxZX 
 
    By Jan Harvey 
    LONDON, Feb 16 (Reuters) - Investors are picking up on the 
benefits for Mexican silver miners of one of the biggest foreign 
exchange stories since November's U.S. election, with the slide 
in the peso pushing costs lower while silver prices are ramping 
up.  
    The peso  MXN=  hit a record low last month at 22.03 to the 
dollar, pressured by concern over a potential trade war between 
the United States and Mexico in the wake of Donald Trump's U.S. 
election victory.  
    While some say the worst of the currency's slide may be 
over, the peso is expected to remain weak throughout this year, 
a Reuters poll showed this month.  urn:newsml:reuters.com:*:nL1N1FO0XA 
    Between 60 percent and 70 percent of silver miners' costs in 
Mexico -- from labour to power -- are priced in pesos, an 
industry analyst estimates. For a company that sells its output 
in dollars, that suggests a significant benefit to cost margins. 
    "The fall in the peso has improved costs not just for the 
silver producers, but for all miners in Mexico," said George 
Cheveley, portfolio manager at the Investec Global Natural 
Resources fund. 
    "That's against a background where we see silver itself as 
attractive."  
    Investec has increased exposure to silver in recent months 
in both its Natural Resources fund, which has $300 million in 
assets under management, and its Global Gold Fund, he said.  
    Mexico is the world's biggest silver producer, with output 
of 192 million ounces in 2015. 
    According to metals markets research team GFMS, analysis on 
the five largest domestic Mexican silver mining companies 
suggests that the drop in the peso alone has led to an average 7 
percent margin gain.  
     
    TWIN-PRONGED SUPPORT 
    Silver prices  XAG=  are also forecast to post their 
strongest year since 2014, benefiting from stronger industrial 
demand and its attraction as a haven from risk amid 
uncertainties surrounding the U.S. economy under Trump, 
Britain's decision to leave the EU and forthcoming European 
elections.  PREC/POLL  
    Shares in Fresnillo  FRES.L , the world's biggest primary 
silver producer, are up 27 percent this year. Among other 
Mexico-focused silver miners, First Majestic  FR.TO  is up 34 
percent, Endeavour Silver  EDR.TO  39 percent and Great Panther 
Silver  GPR.TO  24 percent.  
    Those have outstripped the 15 percent gain in the S&P/TSX 
Global Mining Index  .GSPTXGM  and a 12 percent rise in the 
silver price  XAG= . And that is before the reduction in costs 
has been fully factored in, the GFMS analysis shows. 
    Keith Watson, of New City Investment Managers, said that his 
fund took on exposure to Toronto-listed Americas Silver 
 USA.TO , which recently started construction on the San Rafael 
project in Mexico, in the fourth quarter of last year and 
extended that position early this year. It also bought into 
First Majestic in the second half. 
    "(The falling peso) certainly has been a benefit," he said. 
"It may well be that we've had some of the best of it already, 
but I don't think it has yet been fully discounted."  
    Angelos Damaskos, of Sector Investment Managers, which has 
20 percent of its Junior Gold fund invested in silver stocks, 
favours Toronto-listed mid-caps Endeavour and Fortuna  FVI.TO , 
as well as small-cap player Avino Silver  ASM.V . 
    "We're extremely bullish on the Mexican silver miners, 
specifically as it pertains to their operational efficiencies 
with the drop in the peso, but also because silver tends to 
outperform gold in a rising market," Damaskos said. 
    "The silver miners that operate in Mexico benefit from both 
sides." 
 
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Mexican silver mining equities vs peso    http://reut.rs/2kpRxZX 
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 (Editing by David Goodman) 
 ((jan.harvey@thomsonreuters.com; +44 0 207 542 7744; Reuters 
Messaging: jan.harvey.thomsonreuters.com@reuters.net; Twitter: http://twitter.com/Jan_ReutersGold)) 
 
Keywords: SILVER MEXICO/PESO