The
silver miners’ stocks have been pounded lower this summer,
collateral damage from gold’s selloff on
distant-future-Fed-rate-hikes fears. That has devastated this tiny
contrarian sector’s psychology, leaving it mired in deep
bearishness. But that dark sentiment pall certainly isn’t justified
fundamentally based on these companies’ recently-reported Q2’21
operational and financial results, which proved outstanding.
Primary silver miners that derive over half their revenues from
producing the white metal are increasingly rare. Most major silver
miners have diversified into gold with its superior economics. With
such a small population, there are only a handful of silver-stock
ETFs. The SIL Global X Silver Miners ETF remains the leader, and
this tiny sector’s best benchmark. Its net assets were still just a
trivial $1.1b in late August.
The
silver stocks were enjoying a nice young upleg from late March to
early June, with SIL rallying 27.5%. That would’ve continued
powering higher if not for an anomalous event slamming gold. The
mid-June FOMC meeting unleashed frenzied gold-futures selling.
The Fed didn’t start slowing its massive $120b per month of
quantitative-easing money printing, nor did it start hiking rates
from their zero-lower-bound.
Neither QE tapering nor rate hikes were even hinted at in the FOMC
statement or the Fed chair’s press conference. But he did warn to
dismiss the accompanying dot plot, where individual Fed officials’
future rate projections are collated. Just a third of those guys
expected to see two quarter-point rate hikes way out into
year-end 2023! That ridiculous distant-future-rate-hikes scare
spawned a huge
gold-futures puking.
Silver is slaved to gold’s fortunes, usually acting like a sentiment
gauge for its dominant metal. So gold’s sharp plunge in the wake of
the FOMC spilled into silver, which amplified it. That selling and
the resulting bearish psychology has festered since, hammering
silver 18.5% lower between mid-May to late August. That blasted the
silver stocks per SIL down 28.1% in recent months, as they leverage
material silver moves.
So
naturally the silver miners are really out of favor now,
plagued with serious fear and apathy. But once a quarter these
companies report their latest operational and financial results,
hard fundamental data that burns through obscuring sentiment fogs.
For 21 quarters in a row now, I’ve painstakingly analyzed all this
released from each of the top 15 SIL holdings to better understand
how silver miners are actually faring.
This
table summarizes the operational and financial highlights from the
SIL top 15 during Q2’21. 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 reflects changing market caps, which reveal both
outperformers and underperformers since Q2’20. The symbols are
followed by current SIL weightings.
Next
comes these miners’ Q2’21 silver and gold production in ounces,
along with their year-over-year changes from the comparable Q2’20.
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-August when Q2’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.
The
silver miners should have reported fantastic results last quarter,
and they truly did. Silver’s average price skyrocketed 63.1% YoY
to $26.68 in Q2’21! And the year-earlier comparable Q2’20 was
plagued with extensive mine shutterings from governments’ pandemic
lockdowns. That combined to make last quarter one of the strongest
and most-profitable ever for the silver miners, despite their
battered stock prices.
 
Since there aren’t many major silver miners, their relative rankings
within SIL usually only see minor shuffling. This ETF is
heavily-concentrated, as Wheaton Precious Metals, Polymetal, and
Pan American Silver commanded a staggering 47.0% of its total
weighting in mid-August! While SIL has 40 holdings, its top 15
components account for 88.3% of it. Interestingly that is on the
lower end of the last 21 quarters’ range.
The
largest changes over this past year were big advancements from Korea
Zinc and SSR Mining. The former is a giant South Korean smelter,
which has no place in a “Silver Miners ETF”. I don’t follow that
country’s stock markets, but assume they soared like the rest of the
world’s on epic central-bank money printing to stave off
pandemic-lockdown depressions. That’s likely why Korea Zinc’s
market cap blasted higher.
Touting itself as “THE WORLD’S ONE OF THE BEST SMELTING COMPANY”,
surprisingly Korea Zinc finally started reporting results in English
for the first time. So both Q2’21 and Q2’20 results now include
this smelter, keeping this particular year-over-year comparison
comparable. But Korea Zinc still hasn’t released numbers for the
other 19 quarters of this research thread, muddying longer-term
comparisons.
SSR
Mining, which was a primary silver miner called Silver Standard
Resources for most of its life, is the other hard charger higher in
SIL’s rankings. Like most of its peers SSRM is increasingly
diversifying into gold. In mid-2020 it acquired the gold miner
Alacer Gold, dramatically growing SSR Mining’s gold production.
That greatly boosted SSRM’s market capitalization, but left it as
the least-pure major silver miner.
Overall these SIL-top-15 silver miners enjoyed super-strong
production growth last quarter, with their total silver output
surging 16.9% YoY to 84,962k ounces! That is the highest by far in
the last 21 quarters, but only because of the 18,165k ounces Korea
Zinc smelted. But output growth was still strong excluding Korea
Zinc from both Q2’21 and Q2’20, soaring 23.8% YoY to 66,797k. Yet
that remains on the lower side.
Without that smelter that sure doesn’t belong in this ETF, last
quarter’s SIL-top-15 silver output was only about a third up into
its range over the past 21 quarters. Global silver mining has
been waning for years, mainly for a couple key reasons. Large
economically-viable silver-centric deposits are increasingly harder
to find in this picked-over world. And lower silver prices often
left silver much less economical to mine than gold.
Definitive global silver supply-and-demand data is only published
once a year by the Silver Institute in its awesome World Silver
Surveys. They are released around early May, covering the prior
calendar year. Worldwide silver mined plunged 5.9% YoY in 2020 to
just 784.4m ounces. That decline was anomalously-large due to
pandemic lockdowns, which slammed leading silver-producing
countries disproportionally hard.
Some
of the most heavy-handed business restrictions to slow COVID-19’s
spread came in Mexico and Peru, shuttering many silver mines. These
countries led the world in silver output in 2019, accounting for
22.5% and 16.3% of the global mined supply! But 2020’s troubles
just exacerbated a secular trend of lower silver production. After
peaking at 899.4m ounces in 2016, silver mined has been declining
ever since.
The
world’s silver mined fell 4.1% YoY in 2017, another 1.7% in 2018,
and still another 1.8% in 2019. So peak silver may very well be
upon us. While 2021 will likely enjoy a strong rebound from the
lockdown-suppressed 2020, the overall trend should remain lower.
For years traditional major silver miners have allocated much of
their exploration and development capital to gold instead, and that
shift isn’t slowing at all.
The
SIL top 15’s gold output surged 20.2% YoY to 1,536k ounces in Q2’21,
outpacing the growth in silver production. But excluding Korea
Zinc’s gold smelting, gold production only grew 17.3% YoY to 1,415k
ounces lagging silver’s 23.8%. That’s mostly the result of the
pandemic-lockdown rebound though, as the gold mines these companies
operate aren’t as heavily concentrated in Mexico and Peru as their
silver operations.
With
silver miners back online, as well as silver-price gains far
outpacing gold ones, the SIL top 15’s silver purity improved
averaging 38.8% in Q2’21. This was mostly calculated by multiplying
companies’ silver production by silver’s average price, then
dividing that by their quarterly revenues. In cases where Q2 sales
weren’t reported, they were approximated using gold and silver
outputs and their average prices.
But
38.8% of their sales from silver still remained on the lower end of
the SIL-top-15’s 21-quarter range from 34.4% to 56.8%. That peak
came way back in Q3’19. Since last quarter’s average silver price
soared by 63.1% YoY compared to gold’s mere 5.8%, it is surprising
silver purity wasn’t higher. Korea Zinc’s new data was one reason,
as silver smelting’s small percentage of its business dragged down
the average.
Ex-Korea Zinc, that SIL-top-15 number ran a better 40.1%. Just four
of these miners derived over half their Q2’21 sales from silver, and
their purities are boldfaced in blue above. And they themselves
merely averaged 58.0%, still far from being pure silver plays. And
together they accounted for just 34.4% of this ETF’s entire
weighting, of which nearly 3/4ths came from WPM alone. So
SIL’s leverage to silver is fairly weak.
This
leading silver-stock ETF is more gold-centric, more dependent
on gold prices than silver ones. That isn’t an indictment on SIL’s
managers, as there simply aren’t enough primary silver miners left
to build an ETF out of. Some big silver mines in development
including a joint venture between Fresnillo and MAG Silver should
improve that. But they won’t overcome the yellowing trend of silver
miners diversifying into gold.
Long-term silver-stock price levels ultimately depend on miners’
profitability, which is directly driven by the difference between
prevailing silver prices and mining costs. In per-ounce terms these
are generally inversely proportional to silver production.
That’s because silver mines’ 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 costs
of mining across, lowering unit costs which boosts profitability.
With their production surging, the SIL top 15 should’ve reported
sharply-lower unit costs in Q2’21.
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.
Despite much-higher silver production last quarter, the SIL-top-15
silver miners still saw their average cash costs blast 15.2% higher
YoY to $8.67. But that was skewed high by a couple big outliers.
Peru’s Buenaventura reported staggering $19.93 cash costs, after
long struggling with all kinds of operational issues. First
Majestic Silver, which trades under its Canadian symbol FR in this
ETF, also saw soaring costs.
For
many years First Majestic was the go-to silver stock with the
highest silver purity. In Q2’20 that ran a fantastic 86.0%! But
for better or worse, this company heavily diversified into gold by
buying a dedicated mine last quarter. Unfortunately it is
unoptimized and super-high-cost. Those are feeding into
overall costs, which this company still reports in
silver-equivalent-ounce terms. So its cash costs more than doubled.
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 AISCs climbed a far-more-moderate 1.8% YoY in Q2’21 to
$12.42 per ounce. And First Majestic’s expensive new gold mine
contributed. Its AISCs last quarter ran a terrible $1,679, compared
to the mid-tier
gold miners’ average of $1,125. Without this company, the
SIL-top-15 average last quarter would’ve retreated to $11.26. But
mining silver at $12.42 is still wildly-profitable at these
prevailing prices.
A
great proxy for silver miners’ collective profitability is found by
subtracting quarterly SIL-top-15 average AISCs from average silver
prices, showing unit earnings. Silver again averaged an excellent
$26.68 in Q2’21 despite June’s distant-future-Fed-rate-hikes-scare
selloff. That less those $12.42 average AISCs yields fat profits
of $14.26 per ounce! That is the second-highest in the last 21
quarters, trailing Q3’20’s $14.77.
Those sector unit earnings skyrocketed an immense 243.3% YoY! And
that just extended a long trend of big-to-enormous profits growth to
seven consecutive quarters. The SIL top 15’s unit earnings
rocketed up 1,191.0%, 18.2%, 23.1%, 137.2%, 65.6%, 253.4%, and
243.3% YoY between Q4’19 to Q2’21! That is one heck of a streak.
The bearishness and apathy plaguing silver stocks certainly isn’t
fundamentally-justified.
And
silver-mining profitability should continue marching higher on
balance as gold’s secular bull continues driving silver’s parallel
one. Gold and silver are riding a tidal wave of money printing.
Since March 2020’s pandemic-lockdown stock panic, the Fed has
expanded its balance sheet by an absurd 93.5% or $4,031b in just
17.3 months! And the FOMC continues to conjure up another $120b
monthly to directly monetize debt.
The
Fed nearly doubling the US-dollar supply in such a short span
of time is wildly-unprecedented. This monetary hyper-inflation is
directly driving the spiraling price inflation Americans are facing
everywhere. As investors increasingly realize the Fed can’t unwind
that extreme monetary excess without collapsing the stock markets it
artificially inflated, they will increasingly flock back to gold,
silver, and their miners’ stocks.
The
SIL top 15’s hard financial results just reported to securities
regulators under Generally Accepted Accounting Principles or other
countries’ equivalents confirmed their awesome fundamental strength
last quarter. Production rebounding from Q2’20’s forced mine
shutterings, much-higher average silver prices, and diversifying
into gold radically improved the silver miners’ financial results.
They reported an amazing Q2’21!
Korea Zinc finally starting to report in English isn’t a factor, as
its results are now included in both Q2’21 and comparable Q2’20
totals. Overall SIL-top-15 revenues soared 58.5% YoY to $7,229m.
That was the highest in the last 21 quarters by far, but again the
other 19 of those don’t include Korea Zinc. Backing it out, sales
blasted up virtually the same 58.2% YoY to $5,110m. Big revenues
growth drives huge profits growth.
The
SIL top 15’s hard accounting earnings reported to securities
regulators skyrocketed an immense 472.9% YoY to $918m last quarter!
Ex-Korea Zinc it was even more extreme up 975.1% YoY to $745m. And
while wading through these miners’ income statements, there weren’t
big one-off non-cash gains or losses that caught my eye. These fat
profits look like normal operating ones not skewed by unusual
items.
Such
incredibly-strong earnings in the face of sentiment-battered stock
prices have fueled extraordinarily-cheap valuations in some
of these silver miners. Out of the 12 companies in the SIL top 15
that have cumulative earnings over this past year, 5 now have
trailing-twelve-month price-to-earnings ratios way down in the teens
or even single-digits! High-flying silver stocks almost never get
this undervalued, it is amazing.
The
SIL top 15’s cashflows generated from operations also soared 62.0%
YoY to $1,320m in Q2’21, also reflecting this incredibly-strong
environment for silver mining. That helped catapult these
companies’ cash treasuries up 124.4% YoY to a staggering $7,031m!
This is a huge warchest that will help finance higher future
production through existing-mine expansions, new-mine builds, and
buying operating mines.
So
contrary to the ubiquitous bearish sentiment dogging this tiny
contrarian sector today, the silver miners are thriving. They are
enjoying some of their best fundamental performances ever,
and their stocks have rarely been cheaper! And despite silver’s
recent weakness spawned by gold-futures selling on
distant-future-Fed-rate-hikes fears, prevailing silver prices are
still quite high in Q3 averaging $24.88 quarter-to-date.
So
the silver stocks are poised to soar as gold and silver soon reverse
and mean revert sharply higher. Both metals have suffered
outsized highly-leveraged futures selling since mid-June,
leaving those traders’ positioning with massive room to buy to
normalize their positions. The silver miners will amplify silver’s
gains like usual, with upside concentrated in the purer ones. They
are better to own individually than SIL.
While we’ve taken our lumps in stoppings with these anomalous
rate-hike-scare gold and silver selloffs, the trading books in our
newsletters remain full of fundamentally-superior smaller gold and
silver miners. That includes a rare new pure silver miner spinning
up its maiden operation. So there are still awesome silver-stock
opportunities for those who do their homework, despite most silver
miners diversifying into gold.
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willing before later selling high when few others can. We overcome
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The
bottom line is the major silver miners of the leading silver-stock
ETF reported fantastic results in Q2. Their silver production
rebounded dramatically from year-earlier pandemic lockdowns. That
combined with much-higher prevailing silver prices to drive
explosive earnings growth. That extended a long streak of massive
profits increases, forcing silver-stock valuations even deeper into
incredibly-undervalued territory.
Yet
sentiment-blinded traders are ignoring silver miners’ outstanding
fundamentals, pretending their herd bearishness is righteous. The
resulting anomalous disconnect between poor stock prices and awesome
corporate performances can’t last long. As gold and silver rebound
from recent months’ heavy futures selling, the battered silver
stocks should really amplify their gains. Their setup here is
super-bullish. | 
