Silver is enjoying a bullish run this year, rallying 10% on the back of an unstable stock market, global economic slowdown, and a weaker U.S. dollar. Last year, the metal which is considered a monetary asset as well as an important industrial metal, had tanked 12%.
 
The abysmal performance of the stock market has forced investors to flock to safe-haven metals such as gold and silver. U.S. gross domestic product expanded at a meager 0.7% in the fourth quarter of 2015. Weaker consumer spending, falling exports and a smaller build-up in business inventories led to the slowdown. The economy expanded at 2.4% in 2015, flat with 2014. The U.S. jobs market is starting to falter with the U.S. economy adding only 151,000 jobs in January, way down from the December number of 262,000 jobs.
 
Meanwhile, China’s manufacturing PMI (Purchasing Managers Index) has skidded to 49.4 in January, the weakest level seen since Aug 2012. This adds to the gloom of the world's second-largest economy.
 
Given the state of affairs, there’s widespread concern whether the Federal Reserve will be able to hike interest rates as per its earlier plans. This uncertainty has led to the surge in silver prices. Apart from this, let’s have a look at what else is in store for the metal, particularly the basic supply and demand fundamentals that drive prices.
 
Demand Poised for Growth
 
The International Monetary Fund's (IMF) latest World Economic Outlook projects growth at 3.4% for the global economy this year. Demand for silver will improve in tandem given its myriad applications. Industrial demand for silver is set to command a bigger proportion of total demand in 2016 from the 54% last year. Silver’s use in photovoltaics for solar energy is projected to rise, spurred by high single-digit growth in global solar panel installations and may account for more than 13% of total industrial demand in 2016.
 
The demand for silver from ethylene oxide producers is expected to jump more than 25% year over year to over 10 million ounces this year, with the major portion of demand coming from new plants and expansions at existing plants located in China. Demand in jewelry fabrication is expected to increase by 5% in 2016, an improvement from the modest contraction last year. Coin demand will be robust once again in 2016, following a record year. Increased interest in safe-haven assets will drive physical silver investment demand.
 
India will emerge as a major consumer driven by increased investor interest and growth in jewelry, decorative items and silverware fabrication.  Following a decline in scrap flows, India imported a record high 228 million ounces of silver bullion in 2015 to meet its annual fabrication requirements. The momentum is expected to continue unimpeded.
 
Supply Will Trickle Down
 
Global mine supply production is projected to fall 5% in 2016 – the first drop in global silver mine production since 2002. So far, the weak price environment provided little incentive for producers to invest in expanding capacity at existing operations. Thus, a dearth of new mines and drop in output from existing mines are expected to take a toll on supply. Moreover, silver scrap supply, which has been on the decline for several years, should further weaken in 2016.

This projected imbalance in the demand and supply scenario will provide a solid ground to silver prices this year. Price appreciation will also be supported by a flight to safety amid geopolitical tensions and weakening equity markets.
 
Performance in the Fourth Quarter So far
 
As per the Zacks classification, the silver-mining industry comes under the broader Basic Materials sector. 70% of the companies in the sector have reported their fourth-quarter numbers so far, with a 23.2% drop in earnings on the scoreboard. Taking into account all the companies that are yet to report, a 23% drop is projected for the fourth quarter.
 
The graph will pick up but will still linger in the negative territory with expected declines of 19.7% in the first and 12.4% in the second quarter. The situation is expected to improve in the second half with 3.2% growth projected for the third quarter and 17.3% in the fourth. (For a detailed look at the earnings outlook for this sector and others, please read our Earnings Trends report.)
 
Given the improving fundamentals over the course of the year, it makes sense to bet on a few silver miners in the midst of the fourth-quarter earnings season that have the potential to beat earnings in their upcoming releases. An earnings beat backed by the strong growth outlook for the sector would reinstate investor confidence in the stocks leading to immediate price appreciation.
 
How to Make a Choice?
 
With a number of players in the industry, picking the right stocks is a daunting task. However, the Zacks proprietary methodology makes it easier. One can narrow down the list with the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Earnings ESP, which is the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. It helps in picking stocks that have high chances of delivering earnings surprises in their next earnings announcement. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

Here are few silver mining stocks that have this compelling combination and are set to surprise this earnings season.
 
Pan American Silver Corp. (PAAS - Snapshot Report)

Headquartered in Vancouver, Pan American Silver, along with its subsidiaries, operates and develops, and explores silver. The company has seven operating mines in Mexico, Peru, Argentina and Bolivia as well as a portfolio of exploration and development projects in the Americas.
 
This Zacks Rank #3 stock has delivered a year-to-date return of 36.31%. The company with a market capitalization of $1.34 billion has a long-term expected earnings growth rate of 4%. The company has an Earnings ESP of +12.50%.
 
Pan American produced 6.79 million ounces of silver in the fourth quarter, creating a new annual record of 26.12 million ounces. Meanwhile, the company has effectively lowered its operating cash costs and expects annual silver production between 24 million and 25 million ounces in 2016. The company continues to invest in La Colorada and Dolores expansion that will boost its production profile and lower costs significantly.
 
- Pan American Silver is expected to report fourth-quarter results before the opening bell on Feb 18.
 
MAG Silver Corp. (MVG - Snapshot Report)
 
Vancouver, Canada based MAG Silver is focused on the acquisition, exploration and development of projects located within the Mexican silver belt. It explores copper, gold, silver, lead, and zinc. The company has a market capitalization of $541 million.
 
This Zacks Rank #3 stock has delivered a year-to-date return of 10.48%. The company has an Earnings ESP of +25.00%.
 
MAG Silver is on the verge of a construction decision at its flagship Juanicipio project. Juanicipio is a world class deposit with growth potential. Moreover, the discovery of Valdecanas Deeps could provide significant resource growth.
 
- MAG Silver is expected to report fourth-quarter results on Apr 4.
 
Hecla Mining Co. (HL - Snapshot Report)
 
Idaho based Hecla Mining is a low-cost U.S. silver producer with operating mines in Alaska, Idaho and Mexico, and is a growing gold producer with an operating mine in Quebec, Canada. The company with a market capitalization of $877 million also has exploration and pre-development properties in six world-class silver and gold mining districts in the U.S., Canada, and Mexico, and an exploration office and investments in early-stage silver exploration projects in Canada.
 
This Zacks Rank #3 stock has delivered a year-to-date return of 22.75%. The company has a long-term expected earnings growth rate of 1%. Its Earnings ESP is +100.00%.
 
Hecla Mining announced record 2015 silver production of 11.6 million ounces, outpacing its guidance of 10.5–11 million ounces. All three mines exceeded guidance and, late in the fourth quarter, the newly developed San Sebastian Mine in Mexico started commercial production. Investing in production growth, along with cost controls, has positioned Hecla well as metals prices rebound.
 
- Hecla Mining is expected to report fourth-quarter results before the market opens on Feb 23.
 
First Majestic Silver Corp. (AG - Snapshot Report)
 
Vancouver, Canada based First Majestic Silver Corp. engages in the acquisition, exploration, development, and production of mineral properties with a focus on silver projects in Mexico. The company owns and operates five producing mines. The company has a market capitalization of $637.7 million.
 
This Zacks Rank #3 stock has delivered a year-to-date return of 32.42%. The company has an Earnings ESP of +33.33%.
 
Total production reached a new record in 2015 of 16.09 million equivalent ounces of silver, representing a 5% increase over 2014. For 2016, the company anticipates silver production to range between 12.0 to 13.3 million ounces (17.8 to 19.8 million silver equivalent ounces). First Majestic’s transformational strategy for reducing costs and improving operational procedures is yielding results. The acquisition of Santa Elena will also add to its growth profile.
 
- First Majestic is expected to report fourth-quarter results before the market opens on Feb 25
 
Moving Forward
 
Declining output from existing mines, geopolitical tensions, a stock market rout, China worries and a possible delay in further rate hikes will work in favor of silver. A sneak peek at the space for some possible winners backed by a solid Zacks Rank and a positive Zacks Earnings ESP could be a great idea for investors to gain from this earnings season. The silver stocks appear to be finally set to reward investors with better returns.