The
silver miners’ stocks have had a roller-coaster ride of a year,
getting sucked into March’s stock panic before skyrocketing out in a
massive upleg. While much-higher prevailing silver prices radically
improve silver-stock fundamentals, Q2’s national economic lockdowns
to fight COVID-19 wreaked havoc on this sector. The silver miners’
latest quarterly results recently released revealed unprecedented
challenges.
The
silver-stock realm is tiny, as there aren’t many major silver miners
in the world. Only a handful are primary silver producers,
companies deriving over half their revenues from silver. So
in mid-August as silver miners finished reporting their latest Q2’20
operational and financial results, this sector’s leading benchmark
and trading vehicle only held $1.1b in net assets. It is the SIL
Global X Silver Miners ETF.
2020’s silver-stock price action has proven neck-snappingly
violent. In just several weeks into mid-March, SIL plummeted 43.8%
as silver got entangled in that government-lockdown-spawned stock
panic. That climaxed in a full-blown crash, with SIL
cratering 27.4% in the final couple trading days alone! Silver and
its miners’ stocks were extraordinarily out of favor, an exceptional
buying opportunity for contrarian traders.
Silver ferociously V-bounced out of those extreme stock-panic lows,
sending silver stocks stratospheric. Over the next 4.8 months into
early August, SIL skyrocketed 176.9% higher! While any sector
nearly tripling in such a short period of time is incredible, the
silver stocks were actually underperforming. The metal they
mine blasted 142.8% higher during that span, so SIL’s upside
leverage was quite weak at 1.2x.
In
late July, silver started shooting parabolic as stock traders
flooded into its
leading SLV ETF. That left silver
exceedingly
overbought, so a correction was necessary to bleed off the
euphoria and rebalance sentiment. That started with a bang, silver
cratering 15.2% in a single trading day! That hammered SIL 13.1%
lower by mid-August, silver stocks entered their own correction as
their Q2 results were being released.
And
they sure weren’t going to be pretty! Last quarter’s
national-economic-lockdown orders to slow the spread of COVID-19 hit
major silver-producing countries disproportionally hard. According
to the latest comprehensive data from the venerable Silver
Institute, the world’s top two silver-mining jurisdictions are
Mexico and Peru. In 2019 they accounted for 23% and 16% of the
total global mined silver output, 4/10ths!
Unlike the Silver Institute which only publishes global silver
supply-and-demand numbers annually, the World Gold Council updates
its best-available gold fundamental data quarterly. In its Q2 Gold
Demand Trends report, WGC analysts revealed the stunning magnitude
of the countrywide lockdowns officials imposed on Mexico and Peru.
Their gold production plummeted a catastrophic 62% and 45% YoY in
Q2!
Mining in Mexico was suspended for a jaw-dropping 60 days last
quarter! And with that leading silver-producing country being the
primary mining destination for American and Canadian silver miners,
their forced production hits were colossal. Adding to Q2’s
unprecedented operational challenges, silver prices were relatively
anemic. While silver did soar 30.7% in Q2 proper, its quarterly
average price merely rose 9.9% YoY.
That
way underperformed the enormous 30.9% gain in average gold prices
from Q2’19 to Q2’20! The recent parabolic fireworks in silver
didn’t start until mid-July after quarter-end. Of that gargantuan
142.8% silver upleg after the stock panic, only 1/4th
happened during Q2. With silver averaging just $16.36 last quarter,
I started my usual deep dive into the major silver miners’ latest
results with plenty of trepidation.
This
was my 17th quarter in a row analyzing how the world’s biggest and
best silver miners are faring fundamentally. While SIL included 27
component stocks in mid-August as Q2’s earnings season was wrapping
up, I limited my research to its top 15 holdings. They commanded a
dominant 90.8% of SIL’s total weighting. These silver giants mostly
trade on stock exchanges in the US, UK, Canada, and Mexico.
That
makes amassing their quarterly data somewhat challenging, with
reporting varying considerably in different countries and
companies. In cases where half-year data was all that was offered,
I split it in half to approximate Q2 results. The highlights of all
those quarterly reports are included in this table. Stock symbols
are listings from companies’ primary exchanges, with the majority of
the SIL top 15’s outside the US.
That’s preceded by their ranking changes in terms of SIL
weightings between Q2’19 to Q2’20. And it is followed by these
major silver miners’ current SIL weightings as the Q2 earnings
season concluded in mid-August. Then each company’s quarterly
silver and gold production in ounces is shown, followed by their
year-over-year changes from Q2’19. Their silver output can be used
to gauge relative silver purity.
The
higher their percentage of quarterly revenues derived from silver
production, the more responsive miners’ stock prices are to silver
price action. The next column shows this metric of silver-centricness.
It is mostly calculated by multiplying companies’ quarterly silver
outputs by silver’s average price in Q2, then dividing those results
by quarterly revenues. When sales aren’t reported, this can instead
be approximated.
For
half-year-reporting silver miners where Q2 was an interim quarter,
those implied silver revenues can be divided by implied
gold-plus-silver sales. But that method is inferior since it
excludes base-metals byproducts. According to the Silver Institute,
only 29% of all the silver mined worldwide in 2019 came from primary
silver mines. 32% was a byproduct from mining lead and zinc, with
another 23% from copper.
The
rare primary silver miners’ silver-purity percentages are
highlighted in blue. Their stock prices often show the highest
leverage to silver. That is followed by cash costs per ounce and
all-in sustaining costs per ounce, along with their year-over-year
changes. They reveal how much it costs the SIL-top-15 silver miners
to blast their metal loose from the earth and process it. Finally
comes quarterly revenues and profits.
Blank data fields mean a company hadn’t reported that particular
data by mid-August as Q2’s earnings season was ending. And
percentage changes aren’t included if they would either be
misleading or not meaningful. The main examples are comparing two
negative numbers and when data shifts from positive to negative or
vice versa over this past year. As feared given Q2’s lockdown
environment, operations were ugly!
 
Together the SIL-top-15 silver miners only produced 53.9m ounces of
silver last quarter. That was the lowest by far in the 17 quarters
I’ve been working on this research thread, collapsing 26.0% YoY!
The major silver miners naturally have big exposure in Mexico and
Peru, where governments forced national lockdowns to combat
COVID-19. Those sweeping orders included the usually-remote silver
miners.
Some
of these major silver miners pushed hard for exemptions, as their
operations are highly pandemic-resistant. Silver mines are usually
way out in the mountains, with access limited and tightly
controlled. The silver miners quickly implemented mitigation
efforts to detect any infected workers and quarantine them. Forcing
silver mines into care and maintenance made little sense
economically or epidemiologically.
First Majestic Silver, which SIL includes through its Canadian
listing FR, operates exclusively in Mexico where the lockdowns
persisted for 2/3rds of Q2. Early last quarter this company
had already “been working with local and state officials, industry
task force groups and other mining companies to make the case to the
Federal Government that mining, especially silver mining, is
essential and critical to the medical industry”.
But
those efforts to persuade the Mexican government to reopen the mines
mostly proved unsuccessful. First Majestic’s silver output
plummeted 42.6% YoY with its Mexican operations arbitrarily
mothballed! Other SIL-top-15 silver miners saw similar collapses in
their output from Mexico, including Pan American Silver. Its
overall Q2 silver production cratered 56.9% YoY, because of its
mining operations in Mexico and Peru.
31%
and 43% of this company’s 2019 sales came from those countries, so
their long national lockdowns slammed its production. In its Q2
report Pan American warned, “The global COVID-19 pandemic had a
significant impact on Q2 results, with all our Latin American
operations placed in care and maintenance mode for periods of time
during the quarter.” Buenaventura, Peru’s largest gold miner, fared
even worse.
Its
silver production crashed 63.9% YoY in Q2 due to its Peruvian mining
concentration! That country declared an extended State of
Emergency, crushing the miners operating there. There has been a
huge global silver-supply impact from governments’ draconian
overreactions to COVID-19. Those severe supply constraints imposed
by decree likely contributed to silver’s parabolic surge to extreme
overboughtness.
Rather troublingly in Mexico, some large politically-connected
miners appeared more equal than others in apparently being largely
exempted from the lockdowns. The Mexican Fresnillo is the world’s
largest silver miner, producing about 1/16th of the total global
output in 2019. Despite extensive operations in Mexico, somehow its
silver output only slipped 5.7% YoY! That seems impossible with
2/3rds of Q2 locked down.
That
company reported “Production at our underground mines was relatively
unaffected by COVID-19 in 2Q20” and “Production at our underground
mines remains broadly in line with plan, despite a reduction in the
number of workers on site. The impact on our open pit gold mines has
been greater, as mining activities had to cease for around six
weeks, although processing continued.” Did Fresnillo get a special
deal?
Mexico has long been notorious for rampant government corruption,
and such a giant mining company has to have high-level political
connections. Another Mexican mining giant, Industrias Penoles which
spun off Fresnillo back in May 2008, also reported a mere 4.6% YoY
decline in silver output last quarter. That stable production
through the lockdown orders sure seems suspicious given other
miners’ collapsing output.
The
SIL top 15’s gold output wasn’t slammed as hard as silver in Q2,
falling 17.8% YoY to hit 1.2m ounces. That was also a new low out
of the last 17 quarters. Gold production was more resilient than
silver output partially because these companies’ gold mines
generally aren’t quite as concentrated in Mexico and Peru as their
silver operations. But it also reflects the traditional silver
miners’ ongoing shift into gold.
Recent years’ prevailing gold and silver prices have made the former
much more profitable to mine, so the SIL top 15 have long been
shifting more resources into expanding gold production. I’ve
analyzed this in much detail in past essays on major silver miners’
quarterly results. The COVID-19 disruptions aren’t likely to
accelerate that strategic change, but they did drive the major
silver miners’ silver purity to new lows.
Last
quarter the SIL top 15 only averaged 34.5% of their quarterly
revenues from silver, the lowest levels in at least 17 quarters.
The only major primary silver miners left are First Majestic with
86.0% of its Q2 sales from silver and Silvercorp Metals at 65.6%.
The former’s silver purity is abnormally high because its gold
production plunged even more than silver in Q2. As output resumes,
that should return near Q1’s 61.5%.
While COVID-19 national lockdowns ravaged Q2 silver output,
thankfully those heavy-handed reactions to this pandemic have
largely ended. Governments started realizing the economic, social,
political, and health damage from garroting their economies is
vastly worse than anything COVID-19 could do. So they are unlikely
to order more blanket lockdowns in the future, instead narrowly
targeting any to outbreak areas.
A
common theme in the SIL top 15’s Q2 reports is that most of their
silver mines started ramping back up before Q2 ended. So that
staggering production hit is likely an isolated anomaly limited to
Q2. While Q3 output may be marginally weaker with some mines not
yet running full-speed for the entire quarter, odds are Q4 will be
back to normal. Thus major silver miners’ fundamentals should
radically improve going forward.
In
silver mining, output and costs are inversely proportional.
The more silver mined, the more ounces to spread this industry’s big
fixed costs across. Those generally don’t change much from quarter
to quarter regardless of prevailing silver prices. Quarter after
quarter individual mines require the same levels of infrastructure,
equipment, and employees to feed their fixed-capacity mills. So
lower outputs mean higher unit costs.
And
that doesn’t even include all the new costs for managing this
pandemic, something the silver miners have never had to do. Testing
for the virus, quarantining the afflicted, and relentlessly social
distancing and cleaning to limit its spread all require more
resources and people. So silver-mining operating costs had to
increase with these many new COVID-19 burdens, completely
independent from silver production.
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.
In
Q2’20 the SIL-top-15 major silver miners reported average cash costs
of $7.53, which merely climbed 9.5% YoY. That wasn’t even the top
of the 17-quarter range running from $5.67 to $7.97. So despite all
those government-imposed operating restrictions, cash costs didn’t
soar proportionally with the cratering silver output. And silver
miners face no existential threat with silver averaging an
impressive $23.44 so far in Q3!
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
keep silver mines as ongoing concerns, and reveal the major silver
miners’ true operating profitability.
Incredibly the elite silver miners did such a good job holding the
line on costs that Q2’s collapsing output didn’t lead to
proportionally-higher AISCs. The SIL top 15 reporting these
averaged only $12.21 last quarter, merely up 6.1% YoY! That was
amazingly in the lower half of their 17-quarter range running from
$10.63 to $15.36. With silver again averaging $16.36 in Q2, that
implies sector profitability of $4.15 per ounce.
Astoundingly that actually grew a healthy 23.1% YoY from
Q2’19’s earnings! That is certainly unexpected given the COVID-19
lockdowns gutting these miners’ silver and gold production. But
quarterly average silver and gold prices climbing about 10% and 31%
YoY really helped. And some companies shrewdly delayed selling some
of their silver mined in Q1, when the panic crushed silver to deep
10.9-year secular lows.
They
deferred those silver sales into Q2, when silver rebounded strongly
to much-higher prices. So the SIL top 15’s financial results were
nowhere near as bad as their cratering silver production suggested.
And that industry implied profitability should improve dramatically
in coming quarters. Silver production levels recovering,
stable-to-lower AISCs, and much-higher prevailing silver prices
should drive soaring earnings.
Again silver has averaged a lofty $23.44 so far in Q3. Assuming
SIL-top-15 AISCs retreat modestly this quarter back to their
past-year average of $11.90, that implies the major silver miners
could be earning an enormous $11.54 per ounce in this current
quarter. That would catapult Q3’20 profits a whopping 85.2%
higher YoY! The major silver miners’ fundamental trough hit and
passed last quarter with the lockdowns.
On
the hard financial-results front under Generally Accepted Accounting
Principles reported to securities regulators, or their foreign
equivalents, the major silver miners reported a much-better Q2
financially than their operating results implied. The SIL top 15’s
total revenues only fell 10.3% YoY to $3.2b, much better than
26%-lower silver and 18%-lower gold output indicated thanks to Q2’s
higher precious-metals prices.
Again last quarter’s $16.36 average silver prices were 9.9% better
than Q2’19’s, and gold’s record $1714 average soared a massive 30.9%
YoY. As the major silver miners’ silver and gold outputs rebound,
their revenues are going to blast higher. Last quarter’s collective
earnings from the SIL top 15 added up to a fairly-small $69m. But
that was still much better than the $120m total loss they reported a
year earlier in Q2’19.
Operating-cash-flow generation proved strong in Q2’20, bucking the
operational weakness to soar 46.4% YoY to $815m. That helped the
major silver miners grow their collective cash hoards by 32.0% to
$3.1b. With the unprecedented challenges plaguing this industry
last quarter, the SIL top 15’s financial results proved incredibly
resilient. That shows this sector has a strong fundamental
foundation for big future upside.
Given governments’ heavy-handed extended lockdowns in major
silver-producing countries, Q2’20 could’ve been a disaster for the
silver miners. Having a quarter to half of their output
shuttered was an unprecedented operational shock! Yet the SIL top
15 still reported solid financial results as higher silver prices
and much-higher gold prices helped offset some of the adverse
impacts of that shut-in production.
The
silver miners have huge earnings-growth potential at the
higher prevailing silver prices seen in Q3. As their silver
production normalizes with the universal lockdowns behind us, big
additional gains are sure fundamentally justified in the silver
stocks. Despite SIL skyrocketing 176.9% in its first post-panic
upleg, this bull’s next upleg is likely to prove big too. But
silver stocks first have to bleed off extreme overboughtness.
All
bull markets naturally flow then ebb, taking two steps forward
before retreating one step back. Their price action gradually
meanders around uptrends. This normal upleg-correction pattern
keeps sentiment balanced, extending bull markets’ longevity. And it
is a huge boon for traders, offering excellent mid-bull
opportunities to buy relatively low before later selling relatively
high. That greatly expands bulls’ potential gains!
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The bottom line is
major silver miners suffered an exceedingly-challenging Q2.
Extended national lockdown orders in major silver-producing
countries slashed many silver miners’ outputs by a quarter to a
half! Yet these companies still managed to keep production costs in
check. Higher prevailing silver and gold prices offset a big chunk
of that, driving surprisingly-solid Q2 financial results given these
crazy circumstances.
The silver miners
were quick to restart operations once the lockdowns passed, and are
ramping outputs back to full-speed. That should lower costs, which
along with much-higher silver prices should greatly amplify profits
going forward. So big additional silver-stock gains are fully
justified fundamentally. This sector just has to work off its
overboughtness first, through a healthy sentiment-rebalancing
correction. | 
