The
silver miners’ stocks have been slowly grinding higher this year,
but it’s been a volatile ride. This sector’s alternating surges and
plunges have spawned outsized swings in sentiment, really distorting
investors’ perceptions of the major silver miners. But once a
quarter earnings season arrives, revealing their hard fundamental
realities which dispel the obscuring sentiment fogs. The silver
miners reported a solid Q1.
Four
times a year publicly-traded companies release treasure troves of
valuable information in the form of quarterly reports. These are
generally due by 45 days after quarter-ends in the US and Canada.
They offer true and clear snapshots of what’s really going on
operationally, shattering the misconceptions bred by the
ever-shifting winds of sentiment. There’s no silver-miner data that
is more highly anticipated than quarterlies.
Silver mining is a tough business both geologically and
economically. Primary silver deposits, those with enough silver to
generate over half their revenues when mined, are quite
rare. Most of the world’s silver ore formed alongside base metals
or gold, and their value usually well outweighs silver’s. So
typically in any given year, less than a third of the global mined
silver supply actually comes from primary silver mines!
The
world authority on silver supply-and-demand fundamentals is the
Silver Institute. It recently released its highly-anticipated World
Silver Survey 2017, which covers 2016. Last year only 30% of
silver mined came from primary silver mines, a slight increase. The
remaining 70% of silver produced was simply a byproduct. 35% of the
total mined supply came from lead/zinc mines, 23% from copper, and
12% from gold.
As
scarce as silver-heavy deposits supporting primary silver mines are,
primary silver miners are even rarer. Since silver is so
much less valuable than gold, most silver miners need multiple mines
in order to generate sufficient cash flows. These often include
non-primary-silver ones, usually gold. More and more traditional
elite silver miners are aggressively bolstering their gold
production, often at silver’s expense.
So
the universe of major silver miners is pretty small, and
their purity is shrinking. The definitive list of these companies
to analyze comes from the most-popular silver-stock investment
vehicle, the SIL Global X Silver Miners ETF. This week its net
assets are running 5.5x greater than its next-largest competitor’s,
so SIL really dominates this space. With ETF investing now the
norm, SIL is a boon for its component miners.
While there aren’t many silver miners to pick from, major-ETF
inclusion shows silver stocks have been vetted by elite analysts.
Due to fund flows into top sector ETFs, being included in SIL is one
of the important considerations for
picking great
silver stocks. When the vast pools of fund capital seek
silver-stock exposure, their SIL inflows force it to buy shares in
its underlying companies bidding their prices higher.
Back
in mid-May as the major silver miners finished reporting their Q1’17
results, SIL included 29 “silver miners”. This term is used rather
loosely, as SIL includes plenty of companies which can’t be
described as primary silver miners. Most generate well under
half their revenues from silver, which greatly limits their
stock prices’ leverage to silver rallies. Nevertheless, SIL is
today’s leading silver-stock ETF and benchmark.
The
higher the percentage of sales any miner derives from silver,
naturally the greater its exposure to silver-price moves. If a
company only earns 20%, 30%, or even 40% of its revenues from
silver, it’s not a primary silver miner and its stock price won’t be
very responsive to silver itself. But as silver miners are
increasingly actively diversifying into gold, there aren’t
enough big primary silver miners left to build an ETF alone.
Every quarter I dig into the latest results from the major silver
miners of SIL to get a better understanding of how they and this
industry are faring fundamentally. I feed a bunch of data into a
spreadsheet, some of which made it into the table below. It
includes key data for the top 17 SIL component companies, an
arbitrary number that fits in this table. That is a commanding
sample at 93.8% of SIL’s total weighting.
While most of these top 17 SIL components had reported on Q1’17 by
mid-May, not all had. Some of these major silver miners trade in
the UK or Mexico, where financial results are only required in
half-year increments. If a field is left blank in this table, it
usually means that data wasn’t available by the end of Q1’s earnings
season. Some percentage changes are also blank if their data went
from positive to negative.
In
these tables the first couple columns show each SIL component’s
symbol and weighting within this ETF as of mid-May. Just under a
third of these stocks don’t trade normally in the States. So if you
can’t find a symbol, it’s a listing from a company’s primary foreign
stock exchange. That’s followed by each SIL component’s Q1’17
silver production in ounces, along with its absolute percentage
change from Q4’16.
Quarter-on-quarter
changes offer a more-granular read on companies’ ongoing operating
and financial performance trends than year-over-year comparisons.
QoQ changes are also included for the key data in this table’s right
half of cash costs per ounce of silver mined, all-in sustaining
costs per ounce, and operating cash flows generated. Together costs
and cash flows reveal the financial health of silver miners.
The
Q1’17 silver production is followed by this same quarter’s gold
production. Almost every major silver miner in SIL also produces
significant-if-not-large amounts of gold! While gold stabilizes and
augments the silver miners’ cash flows, it also retards their
stocks’ sensitivity to silver itself. Naturally investors and
speculators buy silver stocks and their ETFs because they want
leveraged exposure to silver’s price, not gold’s.
So a
final column reveals how pure the elite SIL silver miners
are. This is mostly calculated by taking a company’s Q1 silver
production, multiplying it by the average silver price in Q1, and
dividing that by the company’s total quarterly sales. If miners
didn’t report Q1 revenues, I approximated them by adding the silver
sales to gold sales based on their quarterly production and these
metals’ average first-quarter prices.
After spending lots of time digesting these elite silver miners’
latest quarterly results, it’s fully apparent their stocks’ sharp
selloff from mid-April to early May wasn’t
fundamentally-righteous at all! The major silver miners remain
fundamentally strong, which isn’t reflected in their fear-battered
stock prices these days. The silver miners are poised to see
exploding profits as silver
mean reverts
higher with gold this year.
Production is the lifeblood of mining companies, and thus the best
place to start fundamental analysis. In Q1’17, these top 17 SIL
components collectively produced an impressive 75.9m ozs of silver.
If 2016’s world-silver-mining run rate is applied to this year’s
first quarter, that implies 221.5m ozs of silver mined. Thus these
top SIL silver miners would account for over 34% of that total, so
they truly are major silver players.
This
big Q1’17 silver production was nearly perfectly stable with
Q4’16’s, off a trivial 0.6%. This is rather remarkable considering
the example of gold miners. As discussed a couple weeks ago in my
analysis of the
first-quarter results of the major gold miners, gold production
has long contracted sharply from Q4s to Q1s. The silver miners
bucked this seasonal trend, and unfortunately I don’t know if this
is unusual or typical.
Unlike gold’s quarterly frequency, comprehensive silver fundamental
data from the Silver Institute is only published once a year. That
resolution is obviously insufficient to discern quarter-to-quarter
production trends for this industry. But these silver miners’ Q1
gold production did follow the gold miners’, with a collective
plunge of 15.9% QoQ to 1.4m ounces. That was well beyond the top
GDX gold miners’ -8.5% average.
Many
of these elite major silver miners don’t just mine gold as a silver
byproduct, but actually operate at least one primary gold mine.
The silver miners have collectively decided to diversify into gold
due to its superior economics. Consider hypothetical mid-sized
silver and gold miners, which might produce 10m and 300k ounces
annually. What would those cash flows look like at last quarter’s
average metals’ prices?
In
Q1’17, silver and gold averaged $17.44 and $1220. Those were up a
slight 1.9% and 0.2% QoQ. At 10m ounces, that silver miner would
generate $174m in sales. But the similar-sized gold miner’s sales
of $366m more than doubles that. At recent years’ prevailing
prices, the cash flows from gold mining are much more robust than
those from silver mining. That makes it much easier to pay the
bills and expand.
Silver mining is often as capital-intensive as gold mining,
requiring similar large expenses for planning, permitting, and
constructing mines and mills to process ore. Similar heavy
excavators and haul trucks are necessary to dig and haul the ore,
along with similar staffing levels to run mines. So silver’s lower
cash flows to support all this activity make silver mining harder
than gold mining, which isn’t lost on silver miners.
Silver-mining profits do skyrocket when silver soars occasionally in
one of its massive bull markets. But during silver’s long
intervening drifts at relatively-low price levels, the silver miners
often can’t generate sufficient cash flows to finance expansions.
So the top silver miners are increasingly looking to gold, a trend
that isn’t likely to reverse given the relative economics of silver
and gold. Primary silver miners are getting rarer.
The
silver-streaming giant formerly known as Silver Wheaton is a great
example of this. It was started as a pure-play silver streamer,
which silver-stock investors loved. But in recent years it has
brought more and more gold online, and was on the verge of becoming
a primary gold play in Q4. So it just changed its name to Wheaton
Precious Metals to reflect its big shift in focus! The best silver
miners are chasing gold.
Technically a company isn’t a primary silver miner unless it derives
over half its revenues from silver. In Q1’17, the average sales
percentage from silver of these top SIL components was just 38.5%!
That is right on trend over this past year, with
Q1’16,
Q2’16,
Q3’16, and
Q4’16
weighing in at 44.9%, 45.3%, 42.8%, and 40.6%. In Q1’17, only 4 of
the top SIL component companies qualified as primary silver miners!
While I understand this, as a long-time silver-stock investor it
saddens me primary silver miners have apparently become a dying
breed. When silver starts powering higher in one of its massive
uplegs and well outperforms gold again, this industry’s silver
percentage will rise. But unless silver not only shoots way ahead
but stays there while gold lags, it’s hard to see
major-silver-mining purity significantly reverse.
Unfortunately SIL’s mid-May composition was such that there wasn’t a
lot of Q1 cost data reported by its top component miners. 3 of its
top 4 companies trade in the UK and Mexico, where reporting only
comes in half-year increments. Lower down the list there were more
half-year reporters, an explorer with no production, primary gold
miners that don’t report silver costs, and a company forced to delay
its Q1 results.
Nevertheless, it’s always useful to look at the data we have.
Industrywide silver-mining costs are one of the most-critical
fundamental data points for silver-stock investors. As long as the
miners can produce silver for well under prevailing silver prices,
they remain fundamentally sound. Cost knowledge helps traders
weather this sector’s fear-driven plunges without succumbing to
selling low like the rest of the herd.
There are two major ways to measure silver-mining costs, classic
cash costs per ounce and the superior all-in sustaining costs. Both
are useful metrics. Cash costs are the acid test of silver-miner
survivability in lower-silver-price environments, revealing the
worst-case silver levels necessary to keep the mines running.
All-in sustaining costs show where silver needs to trade to maintain
current mining tempos indefinitely.
Cash
costs naturally encompass all cash expenses necessary to
produce each ounce of silver, including all direct production costs,
mine-level administration, smelting, refining, transport,
regulatory, royalty, and tax expenses. In Q1’17, these top 17
SIL-component silver miners that reported cash costs averaged $6.75
per ounce. That was a colossal 28.0% QoQ jump from Q4’s $5.28,
which seems like a troubling omen.
But
it’s not. Flighty silver-stock investors are always on the verge of
panicking, fleeing this volatile and psychologically-challenging
sector. But the only event worthy of such extreme bearishness would
be prevailing silver prices falling near cash costs. And even at
$6.75-per-ounce cash costs and today’s low silver, a vast buffer
exists. There’s no way silver is going to plunge down under $7 in
any conceivable scenario.
These high cash costs are actually an anomaly driven by two
individual companies. First Silver Standard is now winding down its
rapidly-depleting silver mine as planned. It produced 10.4m
ounces of silver in 2016, but only 5.0m is forecast this year! As
silver throughput drops each quarter, the per-ounce costs are
rising. Without SSRI’s outlying super-high cash costs, the rest of
these top SIL miners averaged just $5.77.
Another company Silvercorp Metals had slid out of SIL’s top 17
components as of mid-May. It was the 18th one, removing it from
this particular calculation. Due to SVM’s massive lead and zinc
byproducts, its costs are the lowest in the industry. In Q4’16, it
reported cash costs of negative $5.48 per ounce! That really
dragged down the average. So the major silver miners’ collective
cash costs were just fine in Q1.
Way
more important than cash costs are the far-superior all-in
sustaining costs. They were introduced by the World Gold Council in
June 2013 to give investors a much-better understanding of what it
really costs to maintain a silver mine as an ongoing concern. AISC
include all direct cash costs, but then add on everything else that
is necessary to maintain and replenish operations at current
silver-production levels.
These additional expenses include exploration for new silver to mine
to replace depleting deposits, mine-development and construction
expenses, remediation, and mine reclamation. They also include the
corporate-level administration expenses necessary to oversee silver
mines. All-in sustaining costs are the most-important silver-mining
cost metric by far for investors, revealing silver miners’ true
operating profitability.
In
Q1’17, these top 17 SIL components reporting AISC averaged $11.50
per ounce. That was up 8.9% QoQ from Q4’s $10.56. But again SSRI’s
collapsing depletion production and surging costs were the dominant
reason. Ex-SSRI, this average ran $10.84 which was much closer to
Q4’s levels. And that Q4 number was artificially low since it
included SVM’s incredible $1.87 AISC due to its huge base-metals
byproducts.
At
$11.50 AISC, the major silver miners still earned big profits in the
first quarter. Silver again averaged $17.44 per ounce, implying fat
profit margins of $5.94 per ounce or 34%! Most industries would
kill for such margins, yet silver-stock investors are always worried
silver prices are too low for miners to thrive. That’s why it’s so
important to study fundamentals, because technical price
action fuels misleading sentiment!
Today’s silver price is indeed really low relative to prevailing
gold levels, which portends huge upside as it mean reverts higher.
The long-term average
Silver/Gold Ratio
runs around 56, which means it takes 56 ounces of silver to equal
the value of one ounce of gold. Silver is really underperforming
gold so far in 2017, with the SGR averaging just 71 year-to-date as
of mid-May. So silver is overdue to catch up with gold.
At a
56 SGR and $1250 gold, silver is easily heading over $22.25. That’s
28% above its Q1 average. Assuming the major silver miners’ all-in
sustaining costs hold, that implies profits per ounce soaring 82%
higher! Plug in a higher gold price or the typical
mean-reversion overshoot after an SGR extreme, and the
silver-mining profits upside is far greater. Silver miners’
inherent profits leverage to rising silver is incredible.
The
silver miners’ strong fundamentals even in Q1 are evident in their
collective cash flows generated from operations. They surged 29%
QoQ to $712m despite slightly-lower silver production and average
silver prices only up 1.9% from Q4. Operating cash flows will
skyrocket too as silver regains lost ground relative to its
dominating
primary driver gold. That will finance mine expansions leading
to higher production.
Silver-mining was actually quite profitable in Q1, despite
all investors’ worries about prevailing silver price levels. These
top 17 SIL components reporting hard GAAP quarterly profits actually
earned a collective $346m in the first quarter, a whopping 131%
higher than Q4’s levels! The popular idea that silver-mining
fundamentals just aren’t favorable near $17.50 silver is flat-out
wrong. The silver miners are already thriving.
And
their earnings power and thus stock-price potential will only grow
as silver mean reverts higher. In silver mining, costs are largely
fixed during the mine-planning stages. That’s when engineers decide
which ore bodies to mine, how to dig to them, and how to process
that ore. Quarter after quarter, the same numbers of employees,
haul trucks, excavators, and mills are generally used regardless of
silver prices.
So
as silver powers higher in coming quarters, silver-mining profits
will really leverage its advance. And that will fundamentally
support far-higher silver-stock prices. The investors who will make
out like bandits on this are the early contrarians willing to buy in
low, before everyone else realizes what is coming. By the time
silver surges higher with gold so silver stocks regain favor again,
the big gains will have already been won.
While investors
and speculators alike can certainly play the silver miners’ ongoing
mean-reversion bull with this leading SIL ETF, individual silver
stocks with superior fundamentals will enjoy the best gains by far.
Their upside will trounce the ETFs’, which are burdened by companies
that don’t generate much of their sales from silver. A handpicked
portfolio of purer elite silver miners will yield much-greater
wealth creation.
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The
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The
bottom line is the major silver miners were fundamentally strong in
Q1’17, despite investors fretting about silver prices languishing.
The miners were actually still earning fat profits, thanks to
industry cost levels remaining well under prevailing silver prices.
And silver miners’ operating cash flows have been really augmented
by their increasing diversification into gold, which now has
superior economics to silver.
With silver-stock
sentiment remaining excessively bearish, this sector is primed to
soar as silver itself continues mean reverting higher to catch up
with gold’s new upleg. The silver miners’ profits leverage to
rising silver prices remains outstanding. After fleeing silver
stocks so aggressively in Q4, investors and speculators alike will
have to do big buying to reestablish silver-mining positions. These
inflows will fuel major upside. | 
