The
silver miners’ stocks have mostly been consolidating high since last
summer. While they’ve enjoyed some sharp rallies, those have been
within that sideways-grind trend. That lack of overall upside
progress has left this tiny contrarian sector out of favor, with
apathy reigning. But as their recently-reported Q1’21 operating and
financial results revealed, silver stocks’ fundamentals and upside
potential remain good.
There aren’t many major silver miners in the world, and only a
handful are primary silver producers that derive over half their
revenues from silver. With such a small population, there are
only a few silver-stock ETFs. The leading one is still the SIL
Global X Silver Miners ETF, which is also this tiny sector’s best
benchmark. But nearing the end of Q1’21’s earnings season in
mid-May, it only held $1.3b in net assets.
Following a mighty upleg that peaked in early August at SIL $51.53,
the silver stocks have largely drifted laterally since. But their
high trading range has been wide, encompassing both corrections and
attempts at new uplegs. Plenty of speculators and investors are
still interested in this obscure sector, as evidenced by an amazing
episode in late January. That catapulted SIL a blistering 23.9%
higher in just three trading days!
That
was when Reddit’s famous wallstreetbets forum appeared to be
starting to discuss engineering a silver short squeeze with
massive retail buying. At the time I wrote
a whole essay
analyzing that. For our purposes today, that fascinating event
proved that the right catalyst can still ignite big inflows into
silver and its miners’ stocks. Unfortunately SIL resumed correcting
after that, slumping on balance into late March.
But
since then it has recovered, mirroring
gold stocks’
march higher in a young upleg. By mid-May as last quarter’s
earnings season was wrapping up, SIL had rebounded 18.7% in six
weeks to $45.97. While that lagged gold stocks, it still made for a
technically-sound upleg carving series of higher lows and higher
highs. But back in Q1 SIL actually fell 12.5% despite that Reddit
spike, fueling much bearish sentiment.
How
were the major silver miners actually faring fundamentally while
their stocks corrected with silver? Their weak stock-price
performance was reasonable, as silver was dragged 7.4% lower that
quarter by gold’s own 10.0% slide. The silver stocks normally
amplify material gold and silver moves due to their inherent profits
leverage to those precious metals. But SIL’s Q1 slide wasn’t
fundamentally-justified.
For
20 quarters in a row now, soon after earnings seasons I’ve
painstakingly analyzed the latest operating and financial results
from the top 15 SIL component companies. These rarefied ranks
include some of the biggest silver miners on the planet, and command
fully 87.0% of SIL’s total weightings. While it takes a lot of
time, effort, and expertise to digest these quarterly reports, the
fundamental insights are well worth it.
This
table summarizes the operational and financial highlights from the
SIL top 15 during Q1’21. These major silver miners’ stock symbols
aren’t all US listings, and are preceded by their rankings changes
within SIL over the past year. The shuffling in their ETF
weightings reflect changing market caps, which reveal both
outperformers and underperformers since Q1’20. The symbols are
followed by current SIL weightings.
Next
comes these miners’ Q1’21 silver and gold production in ounces,
along with their year-over-year changes from the comparable Q1’20.
Output is the lifeblood of this industry, with investors generally
prizing production growth above everything else. After that is a
measure of silver miners’ relative purity, their percentage
of quarterly sales actually derived from silver. Most silver miners
also produce gold or base metals.
Generally the more silver-centric a miner, the more responsive its
stock price is to changing silver prices. So traders looking for
leveraged silver exposure via its miners’ stocks should stick to
the purer producers. Then the costs of wresting that silver from
the bowels of the earth are shown in per-ounce terms, both cash
costs and all-in sustaining costs. The latter subtracted from
silver prices help illuminate profitability.
That
is followed by these miners’ hard quarterly revenues and earnings
reported to securities regulators. Blank data fields mean companies
hadn’t reported that particular data as of mid-May when Q1’s
earnings season was winding down. And annual percentage changes are
also excluded if they would prove misleading, like comparing two
negative numbers or data shifting from positive to negative or vice
versa.
With
the average silver price in Q1’21 rocketing up 55.8% year-over-year
to $26.18, the silver miners should have reported excellent
results. They delivered for the most part, although their silver
production continued to wane. For many years now, the major silver
miners have been increasingly shifting their capital into gold
mining. Primary silver miners are slowly going extinct since
gold is more profitable to produce.
Overall the SIL-top-15 silver miners produced 61,471k ounces in
Q1’21. That slumped a modest 2.0% YoY, which was the slowest rate
of declining silver output since Q2’19. Out of those latest 20
quarters where I’ve been advancing this research thread, Q1’s
SIL-top-15 production ranked near the bottom at 18th. The major
silver miners’ collective output of their namesake metal
continues to trend lower on balance.
The
SIL top 15’s collective output peaked at 77,432k ounces way back in
Q2’17. The last quarter where these major silver miners grew their
silver production year-over-year was a slight positive blip in
Q2’19. For the last seven quarters in a row, their silver mined has
relentlessly shrunk. Relatively-pure silver deposits supporting
primary silver mines are getting rarer, and they are challenging to
operate profitably.
The
best-available fundamental data on global silver supply and demand
is published once a year by the venerable Silver Institute. The
latest World Silver Survey covering 2020 was just released about a
month ago. It revealed that only 27% of all the silver mined
worldwide last year came from primary silver mines. Nearly
3/4ths of all the silver produced was merely the byproduct of
lead/zinc, copper, and gold mines!
The
major silver miners continued turning yellow last quarter,
increasingly diversifying into gold with its superior economics.
The SIL top 15’s total gold production surged 8.3% higher YoY to
1,454k ounces! That is on the higher side, ranking as 6th out of
the last 20 quarters. Most of the production growth these major
silver miners saw in Q1 came on the gold side. A couple
traditional silver miners led that charge.
For
decades SSR Mining was called Silver Standard Resources. While its
silver production was flat last quarter, its gold output rocketed up
93.5% YoY to 170k ounces! That mostly resulted from SSRM acquiring
the gold miner Alacer Gold last summer. Now this company operates
three gold mines to just a single silver one. And that was an old
mine winding down, although a new deposit nearby will extend its
life.
Fortuna Silver, which is included in SIL under its Canadian symbol
FVI, reported decent silver-production growth of 5.2% YoY. Yet its
gold output soared a colossal 242.6% YoY to 35k ounces! This
company is ramping up its new third mine which recently finished
construction, a gold operation. Instead of buying or building more
silver mines, SSR Mining and Fortuna Silver both chose to buy or
build gold ones instead.
They
certainly aren’t alone. First Majestic Silver, also under its
Canadian FR listing in this leading silver-stock ETF, has long been
the purest major silver miner in the world. But it just bought a
company to acquire a gold mine which yielded 113k ounces last
year. Once that deal is finished and that gold attributed to First
Majestic, it too will overwhelmingly be a primary gold miner. The
major silver miners are investing in gold.
After watching this ongoing shift away from the white metal for
years now by its traditional major producers, every quarter I wonder
if I should keep analyzing silver stocks. As primary gold miners,
the larger ones are also included in the
big gold-stock
ETFs. As that Reddit-silver-short-squeeze episode proved, there
is still plenty of investment demand for silver miners. But their
leverage to silver wanes with their purity.
In
Q1’21, the SIL top 15 averaged 47.8% of their quarterly sales coming
from silver. This was mostly figured by multiplying silver
production by silver’s average price, then dividing that by
revenues. In some cases where companies didn’t report Q1 sales,
they were approximated using gold and silver outputs and their
average prices. Interestingly that relative silver purity was a
considerable improvement, 4.6% better.
But
a couple factors skewed it higher. First silver way outperformed
gold in Q1 in average-price terms, as the white metal soared 55.8%
YoY compared to the yellow one’s 13.4%. Thus silver’s contribution
to total revenues surged. Maybe this silver-outperformance trend
will continue, but it is unusual compared to recent-years
precedent. Second, a long-time explorer MAG Silver is transitioning
into a new silver miner.
It
owns a minority stake in a big new silver mine under construction by
silver behemoth Fresnillo. Even though that development ore only
yielded 203k ounces of silver last quarter, that was 90.8% of MAG’s
implied sales. Without that high purity read, the rest of the SIL
top 15 averaged a much-lower 44.2% of their revenues from silver.
That is more in line with preceding quarters’ trend of 43.7% and
44.0% purity.
Out
of those 20 quarters I’ve been analyzing the SIL top 15’s latest
results, only a single one clocked in over 50% in
primary-silver-miner territory! The overall average was just 40.1%
during that span. The lower the major silver miners’ silver purity
falls, the less responsive their stock prices will be to silver’s
action. Silver stocks’ leverage to silver continuing to wane will
likely erode investors’ interest in this sector.
Silver-mining production trends are usually inversely
proportional to unit mining costs, lower outputs lead to higher
costs. That’s because silver mines’ operating costs are largely
fixed. They can only process so much silver-bearing ore each
quarter, which requires about the same levels of infrastructure,
equipment, and employees. So less silver run through their
fixed-capacity mills leaves fewer ounces to spread costs across.
Cash
costs are the classic measure of silver-mining costs, including all
cash expenses necessary to mine each ounce of silver. But they are
misleading as a true cost measure, excluding the big capital needed
to explore for silver deposits and build mines. So cash costs are
best viewed as survivability acid-test levels for the major silver
miners. They illuminate the minimum silver prices necessary to keep
the mines running.
The
SIL top 15’s average cash costs blasted 16.8% higher YoY to $10.52
per ounce in Q1’21. That was way faster than waning output would
imply, and the highest cash costs by far in the last 20 quarters.
That dwarfed the previous record high of $9.01 in Q1’20. But this
sector cost read was skewed high by Peru’s perpetually-struggling
Buenaventura. Excluding its extreme outlying $19.39, that average
retreats to $9.26.
All-in sustaining costs are far superior than cash costs, and were
introduced by the World Gold Council in June 2013. They add on to
cash costs everything else that is necessary to maintain and
replenish silver-mining operations at current output tempos.
AISCs give a much-better understanding of what it really costs to
maintain silver mines as ongoing concerns, and reveal the major
silver miners’ true operating profitability.
These major silver miners’ AISCs climbed 6.6% YoY to an average of
$14.33 per ounce in Q1’21. That was still well under the peak of
$15.36 in Q3’18, and was skewed higher by First Majestic Silver. It
reported $19.35 AISCs, which were blamed on lower production to
spread fixed costs across. The SIL top 15’s average AISCs are
generally volatile though, as the sample size of companies reporting
them is small.
But
with major silver miners morphing into gold producers, we have to
take whatever data we can get. At last quarter’s high average
$26.18 silver prices, $14.33 AISCs are still very profitable. That
implies these elite silver miners as an industry were earning
$11.85 per ounce, which is the second-highest in the last 20
quarters after Q3’20’s $14.77. This profitability proxy skyrocketed
253.4% higher YoY from Q1’20’s $3.35!
That
furthers a five-consecutive-quarter trend where the major silver
miners’ implied earnings climbed at impressive double-digit rates.
That streak achieved 18.2%, 23.1%, 137.2%, 65.6%, and 253.4% YoY
growth in quarterly average silver prices less SIL-top-15 average
all-in sustaining costs! And those big numbers will continue in the
current Q2, as silver was averaging a strong $26.12 quarter-to-date
in mid-May.
That
was in line with Q1’s high prevailing prices, which will lead to
more big unit profits. While the major silver miners’ AISCs are
something of a crapshoot since so few are reported, over the last
four quarters they averaged $12.62. If Q2’21’s come in anywhere
close to that, the SIL top 15 will enjoy huge earnings growth
for another quarter. The comparable earnings proxy a year earlier
in Q2’20 was just $4.15 per ounce.
The
SIL top 15’s hard financial results reported to their securities
regulators under Generally Accepted Accounting Principles or other
countries’ equivalents confirmed their strong performances last
quarter. These major silver miners’ collective revenues soared
40.8% YoY to $4,039m. That was the second-highest seen in the last
20 quarters, only trailing Q4’20’s $5,044m. Higher silver and gold
prices are a big boon.
The
major silver miners’ actual total bottom-line accounting earnings
were good too, improving radically from the comparable quarter. The
SIL top 15 reporting those numbers by mid-May had total profits of
$379m. That was on the higher side of recent years’ precedent, and
a colossal improvement from the $274m loss these companies suffered
in Q1’20. Their increasing focus on gold is likely a major driver
of this.
Better precious-metals prices also really boosted operating cash
flows generated by the SIL top 15. In Q1’21 they blasted up 33.2%
YoY to $687m. That fed into the silver miners’ cash treasuries
soaring 45.9% YoY to $3,968m. Operations spinning off so much cash
will certainly drive more buying of mines and entire companies.
Based on recent-years precedent though, most acquisitions will
likely be gold-centric.
So
the dwindling major silver miners are faring well, as they certainly
should be with such high prevailing metals prices. Their latest
quarterly results were strong in some ways, but lackluster in
others. Looking at this table, it is surprising how many of the SIL
top 15 reported lower silver and/or gold output compared to Q1’20.
That should’ve been an easy comp, as the COVID-19 lockdowns were
starting late in that quarter.
While we own a few of these better major silver miners in our
trading books, it is hard to get excited about this sector. The
long-time traditional major silver miners are increasingly primary
gold miners, giving their stocks more affinity to the yellow
metal than the white one. Maybe that doesn’t matter, as
silver’s primary
driver is gold’s fortunes. But it is getting more challenging
to find pure silver-stock exposure for portfolios.
The
SIL ETF itself remains problematic too. Without many major silver
miners to pick from, there’s not a lot of options for this ETF’s
managers. Yet some of SIL’s bigger positions are confounding.
Russia’s Polymetal was this ETF’s second-largest holding at 11.5% in
mid-May. Yet silver accounted for just 20.3% of its sales last
quarter. And that’s high for this company, as POLY’s silver purity
ran just 13.6% in Q4’20.
And
Korea Zinc at 5.1% should be booted from this silver-stock ETF
posthaste. It is a large base-metals smelter that has
nothing to do with mining silver! While it does smelt silver, that
is still a relatively-small fraction of its business. Global X
named their ETF the “Silver Miners ETF”, so having a non-miner like
Korea Zinc in it with a high weighting really hurts its
credibility. SIL is really another gold miners’ ETF in disguise.
So
despite excellent silver prices, silver-stock investing is a lot
harder than it used to be. The major silver miners are pouring most
of their growth capital into boosting their gold outputs.
The opportunity costs for that are much less allocated to adding
more silver production. The more gold traditional silver miners
sell, the less silver drives their revenues. That leaves their
stock prices much less sensitive to silver action.
Straddling gold’s extended-correction bottom in recent months, we
gradually filled up the trading books of our newsletters with
fundamentally-superior precious-metals miners. But for the major
silver miners that made that cut, I was more excited about their
surging gold production from mine expansions, builds, and buys than
their silver output. Silver is increasingly a byproduct even in
this realm, fueling apathy among traders.
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The
bottom line is the major silver miners of the leading silver-stock
ETF generally reported good results in Q1. Continuing their
years-old diversification trend, their silver production waned as
their gold output surged. This ongoing shift continued to dilute
the purity of the traditional silver miners, leaving their stock
prices more dependent on gold than silver. While more profitable,
these silver stocks trade more like gold stocks.
The
high prevailing silver prices did help drive big year-over-year
surges in revenues, earnings, operating cash flows generated, and
cash treasuries. Those good fundamentals should attract capital,
especially as silver powers higher with gold. As that
Reddit-silver-short-squeeze episode showed, traders still flock back
to major silver miners when silver runs. While that lasts, these
stocks should still amplify silver’s gains. |