The
silver miners’ stocks collapsed from mid-April to mid-May, suffering
heavy collateral damage from a serious stock-market selloff. The
big fear that spawned sucked in gold, hammering silver and therefore
its miners’ stocks sharply lower. That carnage left them battered
technically, looking like huge bargains. Silver stocks’ latest
earnings season wrapping up in mid-May revealed whether fundamentals
justify big upside.
Unfortunately silver and its miners’ stocks have long failed to
generate much excitement, which have left them deeply out of favor
with traders. In 2021, gold slumped a modest 3.6% while silver
amplified that to a considerably-worse 11.7% calendar-year loss.
The dominant GDX gold-stock ETF amplified gold’s grind lower falling
11.1%. But the leading SIL Global X Silver Miners ETF fared worse
like its metal, losing 19.6%.
That
relative underperformance has continued festering in 2022. Gold
blasted 12.1% higher year-to-date by early March, major gains
accelerated by Russia invading Ukraine. Silver only rallied 13.0%
in that same span, failing to show its historical upside leverage to
gold that made it so attractive. Since the world silver market is
vastly-smaller and easier to move, normally its gains tend to at
least double material gold rallies.
The
gold and silver stocks achieved their latest interim highs later in
mid-April. While GDX was up an impressive 27.6% YTD then, SIL had
merely achieved pathetic 7.8% parallel gains! Silver and its
stocks are exceedingly-dependent on herd sentiment. They can rocket
parabolic only when traders rarely wax super-bullish on gold’s
near-term upside potential, which drives the entire precious-metals
complex.
But
when gold enthusiasm is lacking, silver and its miners’ stocks bear
the brunt of resulting selling. From early March to mid-May, gold
dropped 11.7% mostly in response to the serious stock-market
selloff. That ignited major safe-haven capital flows into the US
dollar, and its monster surge spawned heavy selling by
gold-futures speculators. Despite silver well-underperforming on
the way up, it still plunged 21.6% in that span!
At
worst between mid-April to mid-May, that GDX gold-stock ETF
plummeted 26.2%. Yet even though the SIL silver stocks had only
enjoyed just over a quarter of the preceding upside of the GDX gold
stocks, SIL still cratered 30.0% during that selloff! Silver
stocks have been hard to love for a long time, leaving them
increasingly-less-appealing to analyze and trade. I wonder if each
essay I write on them will be my last.
Yet
silver and its miners’ stocks have seen stratospheric moonshots in
the past, and will likely again in the future. And the greatest
buying opportunities with real potential for generating
life-changing wealth only happen when sectors are despised,
which sure describes silver! And after 23 quarters in a row
analyzing the latest quarterly results from SIL’s 15-largest
component stocks, I hate to let this big research thread die.
So
somewhat grudgingly, I extended it to 24 consecutive quarters in
recent weeks. Silver and thus silver stocks still have great
prospects to outperform gold and gold stocks with the right
sentiment backdrop. And surprisingly quarterly results aren’t
always available indefinitely. When competitors acquire mining
companies, their websites are soon killed. Then their historical
results data mostly vanishes from the internet.
This
table summarizes the operational and financial highlights from the
SIL top 15 during Q1’22. These major silver miners’ stock symbols
aren’t all US listings, and are preceded by their rankings changes
within SIL over this past year. The shuffling in their ETF
weightings reflects shifting market caps, which reveal both
outperformers and underperformers since Q1’21. Those symbols are
followed by current SIL weightings.
Next
comes these miners’ Q1’22 silver and gold production in ounces,
along with their year-over-year changes from the comparable Q1’21.
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 national 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. The annual percentage
changes are excluded if they would prove misleading, like comparing
two negative numbers or data shifting from positive to negative or
vice versa.
Last
quarter the major silver miners’ latest fundamental read again
proved mixed. Both their silver and gold outputs declined
considerably, and their collective silver purity fell to the
lower-end of precedent. Yet they did mostly hold the line on costs
despite lower production. And their accounting results were
fairly-good considering the relatively-weak silver-price
environment. But that’s not enough to change traders’ minds.
Unfortunately the world silver market is very opaque. Comprehensive
global silver supply-and-demand data is only published once a year
by the Silver Institute in its excellent World Silver Surveys. The
newest covering 2021 was just released in late April. It continued
illuminating a major silver-mining peculiarity. Fully 72% of
worldwide silver mined last year came as byproducts from
lead-zinc, copper, and gold mines!
Geologically silver deposits large-enough with high-enough grades to
economically exploit are usually mixed in with other metals. That
makes primary silver mines generating over half their revenues from
silver relatively-rare. And for years silver miners have been
increasingly diversifying into gold, which has superior
economics. So the major silver miners dominating SIL are becoming
more-and-more gold-centric.
This
leading silver ETF’s 15-largest component stocks collectively
produced 72,120k ounces of silver last quarter. That fell a
sizable 9.7% year-over-year from Q1’21, which wasn’t
encouraging. And shockingly their aggregate gold output fared much
worse, plunging 31.4% YoY to just 1,075k ounces! That proved the
lowest by far in the 24 quarters I’ve been advancing this research.
The previous worst was 1,207k in Q4’21.
While that seems troubling, the SIL top 15’s declining output is
somewhat anomalous and exaggerated by a couple key factors. The
world’s largest silver-producing country is Mexico, which accounted
for 23.9% of global output last year. China and Peru came in second
and third at 13.7% and 13.1%. As I waded through the major silver
miners’ latest quarterly reports, a clear thread emerged on a shared
challenge.
Back
in January, the latest omicron variant of COVID-19 was big global
news with cases of this highly-infectious virus skyrocketing. Many
mining companies implemented extensive testing protocols back in
2020 during earlier COVID-19 waves. Those were attempts to stay
open while government officials were threatening to mandate
shutterings. While omicron is much-milder, its wide spread was
reflected in testing.
Those positive tests required mine employees to stay home,
particularly in Mexico which took a harder line on COVID-19. So the
world’s silver capital suffered flagging output in Q1’22.
Pan American Silver led off its results report with “our operations
experienced high levels of workforce absenteeism in January and
early February due to the Omicron variant of COVID-19.” Fewer
workers impaired operational efficiencies.
First Majestic Silver had a similar disclosure. “Worker
availability was limited by the Omicron COVID-19 variant in Q1 2022
as the Company’s screening processes identified a spike in cases in
January and February. Mine development rates were reduced in Mexico
which negatively impacted ore extraction rates and grade in the
quarter.” There were plenty of staffing shortfalls reported at
individual mines too.
Fortuna Silver Mines said in Q1 its gold mine in Argentina “lost
man-hours in January as a result of the sudden surge in COVID-19
cases causing a 14% shortfall in ore placed on the pad, compared to
plan for the quarter.” So both silver and gold production among
these SIL-top-15 silver miners would’ve been higher in Q1’22 had
COVID-19-omicron not involuntarily furloughed significant
fractions of their workforces.
The
good news is omicron flared fast then quickly passed. Right after
warning on COVID-19’s Q1 impact, PAAS reassured “Workforce
deployment is now back to more normal levels, and we are maintaining
our guidance for 2022 with production weighted to the second half of
the year.” AG, which is listed under its Canadian symbol in SIL,
declared “By March, all operations workforce levels had returned to
normal.”
So
Q1’22’s SIL-top-15 silver-output decline was somewhat similar to
those seen in the initial pandemic lockdowns during 2020’s first
couple of quarters. Production rebounded sharply when those ended.
The silver miners generally reaffirmed their full-year-2022
guidances despite slower Q1 production. Plenty of them had
previously forecast this year’s output would be back-half-weighted
anyway even before omicron hit.
The
other driver of last quarter’s big overall SIL-top-15 production
drop was geopolitical, an indirect result of Russia invading
Ukraine. For years SIL’s second-largest component had been the
Russian-owned UK-traded Polymetal International. As world outrage
mounted over the horrific devastation the Russian military has
cruelly inflicted on Ukrainian cities, Russian stocks were
universally dumped crushing their market caps.
Like
most ETFs, SIL is effectively market-capitalization-weighted. So
POLY quickly plummeted out of its upper rankings. And as Q1’22’s
earnings season wound down in mid-May, this company was no longer
an SIL component at all. Polymetal’s auditor Deloitte resigned
in early April, saying it couldn’t audit that company’s extensive
Russian operations. POLY now faces delisting in London if it can’t
soon find a new auditor!
In
the earlier Q1’21, Polymetal produced 4,600k and 337k ounces of
silver and gold. Those need to be excluded to make Q1’22 more
comparable. If POLY is replaced with SIL’s 16th-largest component a
year ago, Endeavour Silver which now ranks as 14th, the SIL top 15’s
total silver and gold production just fell a much-milder 5.5% and
13.4% YoY. And most of that is explainable by the omicron
employee shortages.
So
the major silver miners’ production is nowhere near as bad as it
looks. We should see big rebounds in the currently-underway Q2.
And Polymetal will roll off of SIL-top-15 comparable ranks in coming
quarters, eliminating that distortion. An interesting question is
how all that will affect these mining stocks’ silver-purity levels.
As those proved pretty-low last quarter, SIL effectively remains
just another smaller gold-stock ETF.
These miners’ percentages of Q1’22 revenues actually derived from
silver are implied two ways. For the great majority of SIL-top-15
components that reported total sales, their silver ounces produced
multiplied by quarterly-average silver prices are divided by those
revenues. This superior measure properly reflects gold and
base-metals byproducts. But a couple companies still hadn’t
reported their sales by mid-May.
Their silver-purity percentages are implied on their estimated total
sales based on silver and gold outputs at last quarter’s average
prices. But that inferior ratio ignores any base-metals
byproducts. Overall the SIL top 15 only averaged 37.1% of their
Q1’22 revenues coming from silver! That’s on the lower side of the
24-quarter range running from 51.4% to 34.2%. Traders must realize
SIL is more levered to gold than silver.
Over
the last six years, this SIL purity percentage has merely averaged
39.3%. So last quarter’s wasn’t substantially below that. Two main
variables will impact how that evolves in coming quarters. How
silver production recovers compared to gold after the omicron
slowdowns, and how silver prices fare compared to gold prices.
Silver’s performance last quarter was poor, which helped drive down
miners’ silver revenues.
In
Q1’22 average silver prices dropped a sizable 8.2% YoY to
$24.03 per ounce. Yet average gold prices climbed 4.8% YoY to
$1,879! Silver effectively acts like a gold sentiment gauge, it
usually only catches a material bid if traders are bullish on gold’s
fortunes. So in order to outperform gold again, silver probably
needs to see gold’s interrupted bull upleg resume. Silver gains
outpacing gold’s would improve silver purity.
Interestingly just three of SIL’s 15-largest component stocks
qualified as primary silver miners in Q1, their purity percentages
are highlighted in blue. Fresnillo is a Mexican silver behemoth
that trades in London, making it difficult for most American traders
to own. MAG Silver is a smaller miner with a minority stake in a
large new silver mine Fresnillo is ramping up in Mexico. And EXK is
an-even-littler silver and gold miner.
Long-term silver-stock price levels ultimately depend on miners’
profitability, which is directly driven by the difference between
prevailing silver prices and silver-mining costs. In unit terms
these are generally inversely proportional to silver
production. That’s because silver mines’ total operating costs are
largely fixed during planning stages, their designed throughputs
limit the amounts of silver-bearing ore they can process.
That
doesn’t change quarter-to-quarter, and requires about the same
levels of infrastructure, equipment, and employees. The only
real variable is the ore grades run through the fixed-capacity
mills. Richer ores yield more silver ounces to spread the big fixed
expenses of mining across, lowering unit costs which boosts
profitability. With SIL-top-15 silver output falling considerably
in Q1, unit costs should’ve risen proportionally.
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 required to keep
the mines running.
The
SIL top 15’s average cash costs only inched up 0.3% YoY, which was
much better than lower output implied they should’ve done. But
coming in at $10.55 per ounce, those were still narrowly the highest
on record. There were no wild outliers skewing this, it was
righteous. The mining companies are facing big inflationary
pressures forcing costs higher, fueled by central banks’
enormous money
printing in recent years.
Q1’22 results were full of warnings on inflation and
resulting uncertainties for cost guidances. PAAS advised “We are
currently experiencing higher than expected overall inflationary
pressures, particularly for diesel and certain consumables, as well
as disruptions in the supply chain.” AG blamed rising expenses on
“higher labour, consumables and energy costs primarily due to
inflationary pressures during the quarter”.
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.
The
SIL top 15’s average AISCs climbed a comparatively-tame 5.3% YoY,
but hit $15.08 which was the third-highest on record after
Q3’21’s $15.78 and Q3’18’s $15.36. There were no real skewing
outliers on that front either, those high all-in sustaining costs
were evenly-distributed. But high costs combined with lower average
silver prices weren’t good news for implied sector unit profits,
which weakened sharply last quarter.
The
best proxy for per-ounce silver-mining earnings simply subtracts the
SIL top 15’s average AISCs from a quarter’s average silver prices.
That resulted in implied unit profits of $8.95 per ounce in Q1’22,
which plunged 24.5% YoY. That is the second-lowest seen in the last
seven quarters, and way below the Q3’20 peak of $14.77 per ounce in
earnings. But these remain solid profits levels from a longer-term
perspective.
Before Q3’20, prevailing silver prices were much lower. So for
three years prior to that, this SIL-top-15 implied-unit-earnings
metric averaged just $3.82 per ounce. Last quarter’s $8.95 remained
more than double those pre-silver-surge levels. But the last
couple years or so have seen that average soar dramatically to
$11.17 per ounce. And Q1’22’s silver-mining profits were certainly
weaker by that better recent standard.
They
ought to improve as 2022 marches on though. Recovering
silver production with most of omicron’s disruptions passing will
yield more silver ounces to spread the big fixed costs of mining
across, hopefully lowering AISCs. But these mounting inflationary
cost pressures threaten to overcome benefits from better output.
And surprisingly silver itself wasn’t faring horribly as of mid-May
when earnings season ended.
About halfway through Q2’22, silver was still averaging $23.63
quarter-to-date. That was merely down 1.7% sequentially from
Q1’22’s levels! And when gold reverses hard to mean revert sharply
higher as heavy gold-futures selling yields to big proportional
buying, silver’s parallel surge should outpace gold’s gains. In
mid-May the silver-futures speculators had
even-more-bullish-for-silver positioning than the gold ones!
On
the hard-accounting front under Generally Accepted Accounting
Principles or their equivalents in other countries, the SIL top 15’s
Q1’22 results were fairly-good compared to their production
declines. Their total revenues fell 4.6% YoY to $5,739m, but that
was skewed by Polymetal. If that big falling-from-grace Russian
gold-and-silver miner is excluded from the comparable Q1’21,
SIL-top-15 sales actually rose 5.2%.
Since Polymetal just disclosed revenue a year ago, it didn’t distort
any other key accounting metrics. The SIL top 15 reported total
bottom-line profits of $1,190m last quarter, which skyrocketed
108.9% YoY! But that is heavily-distorted by a colossal $480m
one-time gain reported by Peru’s Buenaventura from selling
discontinued operations. Yet even excluding that, these major
silver miners’ earnings still surged 24.6%
YoY!
That
should help push down their lofty valuations in classic
trailing-twelve-month price-to-earnings-ratio terms, which averaged
71.8x in mid-May. But removing the 200ish P/Es of brand-new silver
miner MAG and GoGold Resources which just edged into the SIL top 15
for the first time last quarter, the rest of these major silver
miners averaged far-more-reasonable 32.7x P/Es. The silver stocks
certainly aren’t richly-valued.
The
SIL top 15’s cash flows generated from operations plunged 42.9% YoY
to $392m. But that sharp decline was exacerbated by all those
additional COVID-19-omicron costs and operational inefficiencies.
OCFs should rebound dramatically with that virus wave now long
passed. These silver miners still reported total cash treasuries up
12.3% YoY to $6,268m, plenty of capital to invest in expanding their
outputs.
There are likely still big gains to be won in silver stocks as their
metal powers higher with gold in coming years. This raging
inflation unleashed by epic Fed money printing is
wildly-bullish
for gold, and silver will likely ride its coattails higher. But
traders need to be selective, picking the best
fundamentally-superior silver miners to amplify silver’s upside.
Their performances should trounce that of silver ETFs like SIL.
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The
bottom line is silver miners reported a decent first quarter. While
their silver-and-gold production fell, that mostly resulted from
COVID-19-omicron disruptions to operations. Plenty of silver miners
expect to see improving outputs as 2022 marches on. More ounces to
bear the big fixed costs of mining ought to lower unit costs,
boosting profitability. But raging price inflation could dampen the
positive effects of that.
While the silver miners’ fundamentals are solid, traders have
avoided their underperforming stocks. That won’t change until gold
sentiment improves enough to fuel herd bullishness. Silver
investment demand surges when traders expect gold to continue
powering higher. That’s when big-and-fast buying can flare in
silver and its miners’ stocks catapulting up their prices. Buying
low before that can lead to colossal gains! |