The
major silver miners’ stocks have been largely abandoned this year,
spiraling to brutal multi-year lows. Such miserable technicals have
exacerbated the extreme bearishness plaguing this tiny contrarian
sector. While profitable silver mining is challenging at today’s
exceedingly-low silver prices, these miners are chugging along.
Their recently-reported Q3’18 results show their earnings are ready
to soar as silver recovers.
Four
times a year publicly-traded companies release treasure troves of
valuable information in the form of quarterly reports. Companies
trading in the States are required to file 10-Qs with the US
Securities and Exchange Commission by 40 calendar days after
quarter-ends. Canadian companies have similar requirements at 45
days. In other countries with half-year reporting, many companies
still partially report quarterly.
Unfortunately the universe of major silver miners to analyze and
invest in is pretty small. 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. Their value usually well outweighs silver’s,
relegating it to byproduct status.
The
Silver Institute has long been the authority on world silver
supply-and-demand trends. It published its latest annual World
Silver Survey covering 2017 in mid-April. Last year only 28%
of the silver mined around the globe came from primary silver
mines! 36% came from primary lead/zinc mines, 23% copper, and 12%
gold. That’s nothing new, the silver miners have long produced less
than a third of world mined supply.
It’s
very challenging to find and develop the scarce silver-heavy
deposits supporting primary silver mines. And it’s even harder
forging them into primary-silver-mining businesses. Since silver
isn’t very valuable, most silver miners need multiple mines in order
to generate sufficient cash flows. Traditional major silver miners
are increasingly diversifying into gold production at silver’s
expense, chasing its superior economics.
So
there aren’t many major silver miners left out there, 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. In mid-November at the end of
Q3’s earnings season, SIL’s net assets were running 6.6x greater
than its next-largest competitor’s. So SIL continues to dominate
this tiny niche contrarian sector.
While SIL has its flaws, it’s the closest thing we have to a
silver-stock index. As ETF investing continues to eclipse
individual-stock picking, SIL inclusion is very important for silver
miners. It grants them better access to the vast pools of
stock-market capital. Differential SIL-share buying by investors
requires this ETF’s managers to buy more shares in its underlying
component companies, bidding their stock prices higher.
In
mid-November as the silver miners were finishing reporting their
Q3’18 results, SIL included 23 “Silver Miners”. Unfortunately the
great majority aren’t primary silver miners, most generate well
under half their revenues from silver. That’s not necessarily
an indictment against SIL’s stock picking, but a reflection of the
state of this industry. There aren’t enough significant primary
silver miners left to fully flesh out an ETF.
This
disappointing reality makes SIL somewhat problematic. The only
reason investors would buy SIL is they want silver-stock exposure.
But if SIL’s underlying component companies generate just over a
third of their sales from silver mining, they aren’t going to be
very responsive to silver price moves. And most of that ETF capital
intended to go into primary silver miners is instead diverted into
byproduct silver miners.
So
silver-mining ETFs sucking in capital investors thought they were
allocating to real primary silver miners effectively starves them.
Their stock prices aren’t bid high enough to attract in more
investors, so they can’t issue sufficient new shares to finance big
silver-mining expansions. This is exacerbating the
silver-as-a-byproduct trend. Only sustained much-higher silver
prices for years to come could reverse this.
Silver miners’ woes are really exacerbated by silver’s worst
performance in decades. In mid-November silver sunk to a 2.8-year
low of $13.99. That naturally dragged down SIL to a similar
2.7-year low. But relative to gold
which usually
drives it, silver was faring far worse. The
Silver/Gold Ratio
sunk to 85.9x in mid-November, meaning it took almost 86
ounces of silver to equal the value of a single ounce of gold.
The
SGR hadn’t been lower, or silver hadn’t been more undervalued
relative to gold, since all the way back in March 1995!
That’s pretty much forever from a markets perspective. With silver
languishing at an exceedingly-extreme 23.7-year low relative to
gold, it’s hard to imagine it doing much worse. So the silver
miners are weathering one of the toughest environments they’ve ever
seen, which we have to keep in mind.
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
big 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’s a commanding
sample at 96.9% of SIL’s total weighting!
While most of these top 17 SIL components had reported on Q3’18 by
mid-November, 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
means that data wasn’t available by the end of Q3’s earnings
season. Some of SIL’s components also report in gold-centric terms,
excluding silver-specific data.
The
first couple columns of this table show each SIL component’s symbol
and weighting within this ETF as of mid-November. While most of
these stocks trade on US exchanges, some symbols are listings from
companies’ primary foreign stock exchanges. That’s followed by each
miner’s Q3’18 silver production in ounces, along with its absolute
year-over-year change. Next comes this same quarter’s gold
production.
Nearly all the major silver miners in SIL also produce
significant-to-large amounts of gold! That’s truly a double-edged
sword. While gold really stabilizes and boosts silver miners’ cash
flows, it also retards their stocks’ sensitivity to silver itself.
So the next column reveals how pure these elite silver miners
are, approximating their percentages of Q3’18 revenues actually
derived from silver. This is calculated two ways.
The
large majority of these top SIL silver miners reported total Q3
revenues. Quarterly silver production multiplied by silver’s
average price in Q3 can be divided by these sales to yield an
accurate relative-purity gauge. When Q3 sales weren’t reported, I
estimated them by adding silver sales to gold sales based on their
production and average quarterly prices. But that’s less optimal,
as it ignores any base-metals byproducts.
Next
comes the major silver miners’ most-important fundamental data for
investors, cash costs and all-in sustaining costs per ounce mined.
The latter directly drives profitability which ultimately determines
stock prices. These key costs are also followed by YoY changes.
Last but not least the annual changes are shown in operating cash
flows generated and hard GAAP earnings, with a couple exceptions
necessary.
Percentage changes aren’t relevant or meaningful if data shifted
from positive to negative or vice versa, or if derived from two
negative numbers. So in those cases I included raw underlying data
rather than weird or misleading percentage changes. This whole
dataset together offers a fantastic high-level read on how the major
silver miners are faring fundamentally as an industry. They are
hanging in there quite well.
Production is naturally the lifeblood of the silver-mining sector.
The more silver and increasingly gold that these elite miners can
wrest from the bowels of the earth, the stronger their fundamental
positions and outlooks. These top 17 SIL miners’ overall silver
production slipped 2.2% YoY to 75.5m ounces in Q3’18. But their
shift into more-profitable gold mining continued, with aggregate
production up 1.6% YoY to 1.4m ounces.
According to the Silver Institute’s latest WSS, total world silver
mine production averaged 213.0m ounces per quarter in 2017. So at
75.5m in Q3, these top 17 SIL components were responsible for 35.4%
of that rate. There is one unusual situation that slightly skewed
this result. SSR Mining, which used to be known as Silver Standard
Resources, saw its silver production plummet 57% YoY as its lone
silver mine is depleting.
The
winding down of SSRM’s old Pirquitas silver mine is proceeding as
forecast and has been going on for some time. This once major
silver miner is morphing into a primary gold miner, which
accounted for a record 94% of its revenue in Q3. Excluding SSRM,
the rest of these top SIL silver miners saw their silver production
retreat an immaterial 1.3% YoY. That’s pretty impressive given this
year’s collapse in silver prices.
Q3’s
average silver price was just $14.96, down a major 11.2% YoY.
That was far-worse performance than gold, with its quarterly average
merely sliding 5.3% lower between Q3’17 to Q3’18. Considering how
miserable this silver-price environment is with the worst relative
performance to gold in decades, the major silver miners are doing
well on production. They continue to hold out for silver mean
reverting higher.
Silver is likely so down in the dumps because it effectively acts
like a gold sentiment gauge. Generally big silver uplegs
only happen after gold has rallied long enough and high enough to
convince traders its gains are sustainable. Then the way-smaller
silver market tends to start leveraging and amplifying gold’s moves
by 2x to 3x. But gold sentiment was so insipid over this past year
that no excitement was sparked for silver.
Unfortunately at these bombed-out silver prices the economics of
silver mining are way inferior to gold mining. The traditional
major silver miners are painfully aware of this, and have spent
years actively diversifying into gold. In Q3’18, the average
percentage of revenues that these top 17 SIL miners derived from
silver was just 36.9%. That’s right in line with the prior 4
quarters’ 39.3%, 35.3%, 36.8%, and 36.3%.
Silver mining is every bit as capital-intensive as gold mining,
requiring similar large expenses for planning, permitting, and
constructing mines and mills. It needs similar heavy excavators and
haul trucks to dig and move the silver-bearing ore. Similar levels
of employees are necessary to run these mines. But silver generates
much lower cash flows due to its lower price. Consider
hypothetical mid-sized silver and gold mines.
They
might produce 10m and 300k ounces annually. At last quarter’s
average prices, these silver and gold mines would yield $150m and
$363m of yearly sales. Thus regrettably it is far easier to pay the
bills mining gold these days. So primary silver miners are
increasingly becoming a dying breed, which is sad. The traditional
major silver miners are adapting by ramping their gold production
often at silver’s expense.
With
major silver miners so rare, SIL’s managers are really struggling to
find components for their leading ETF. So in Q3’17 they added Korea
Zinc, which is now SIL’s largest component at over 1/7th of its
total weighting. In my decades of studying and trading this tiny
sector, I’d never heard of it. So I looked into Korea Zinc and
found it was merely a smelter, not even a miner. It really
needs to be kicked out of SIL.
Every quarter since I’ve tried to dig up information on Korea Zinc,
but its English-language disclosures are literally the worst I’ve
ever seen for any company. Its homepage gives an idea of what to
expect, declaring “We are Korea Zinc, the world’s one of the best
smelting company”. I’ve looked and looked and the latest production
data I can find in English remains 2015’s. I can’t find it from
third-party sources either.
That
year Korea Zinc “produced” 63.3m ozs of silver, which averages to
15.8m quarterly. That is largely a byproduct from its main
businesses of smelting zinc, lead, copper, and gold. Korea Zinc
certainly isn’t a major silver miner, and has no place in a “Silver
Miners ETF”. No silver-stock investor wants to own a base-metals
smelter! Korea Zinc should be removed, its overweighting
reallocated to the rest of SIL’s holdings.
SIL
investors ought to contact Global X to ask them to stop tainting
their ETF’s utility and desirability with Korea Zinc. If they want
it to be successful and grow, they need to stick with their mission
of owning the major silver miners exclusively. Silver-stock
exposure is the only reason investors would buy SIL. There is
another situation investors need to be aware of with Tahoe Resources
and its held-hostage Escobal mine.
Tahoe was originally spun off by Goldcorp to develop the incredible
high-grade Escobal silver mine in Guatemala, which went live in
Q4’13. Everything went well for its first few years. By Q1’17,
Escobal was a well-oiled machine producing 5700k ounces of silver.
That provided 1000+ great high-paying jobs to locals and contributed
big taxes to Guatemala’s economy. Escobal was a great economic boon
for this country.
But
a radical group of anti-mining activists managed to spoil
everything, cruelly casting their fellow countrymen out of work.
They filed a frivolous and baseless lawsuit against Guatemala’s
Ministry of Energy and Mines, Tahoe wasn’t even the target! It
alleged this regulator hadn’t sufficiently consulted with the
indigenous Xinca people before granting Escobal’s permits. They
don’t even live around this mine site.
Only
in a third-world country plagued with rampant government corruption
would a regulator apparently not holding enough meetings be a
company’s problem. Instead of resolving this, a high Guatemalan
court inexplicably actually suspended Escobal’s mining
license in early Q3’17! Tahoe was forced to temporarily mothball
its crown-jewel silver mine, and thus eventually lay off its
Guatemalan employees.
That
license was technically reinstated a couple months later, but the
activists appealed to a higher court. It required the regulator to
study the indigenous people in surrounding areas and report back,
and then needs to make a decision. The government also needs to
clear out an illegal roadblock to the mine site by violent anti-mine
militants, who have blockaded Escobal supplies and physically
attacked trucks and drivers!
So
Escobal has been dead in the water with zero production for 5
quarters now, an unthinkable outcome. This whole thing is a farce,
a gross miscarriage of justice. I hope this isn’t a stealth
expropriation, that Guatemalan bureaucrats will get their useless
paperwork done sooner or later and let Escobal come back online.
Within a year, Escobal’s silver production should return to
pre-fiasco levels of 5700k ounces a quarter.
At
that rate, Escobal would retake the throne of being the world’s
largest primary silver mine! It would boost overall SIL-top-17
production by a massive 7.6%. Last year no one expected this
unprecedented Escobal debacle to last very long, as the economic
damage to Guatemala was too great. But as it drags on and on, TAHO
stock has been decimated. It slumped to a brutal all-time record
low in mid-November.
Sadly for longsuffering TAHO shareholders, management capitulated.
In mid-November they agreed to sell the company to Pan American
Silver at rock-bottom prices despite a 55% premium over that
all-time low. That’s devastating for TAHO investors but a steal for
PAAS, which is SIL’s 4th-largest component at 11.9% of its total
weighting. That keeps Escobal’s huge production in SIL if PAAS can
finesse its reopening.
Unfortunately SIL’s mid-November composition was such that there
wasn’t a lot of Q3 cost data reported by its top component miners.
A half-dozen of these top SIL companies trade in South Korea, the
UK, Mexico, and Peru, where reporting only comes in half-year
increments. There are also primary gold miners that don’t report
silver costs, and a silver explorer with no production. So silver
cost data remains scarce.
Nevertheless it’s always useful to look at what 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 left-for-dead unpopularity 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 Q3’18, these top 17
SIL-component silver miners that reported cash costs averaged $6.58
per ounce. While that surged 35.3% YoY, it still remains far below
today’s anomalously-low silver prices.
There are a couple of extreme cash-cost outliers that are skewing
this average, but offsetting each other. SSRM’s depleting silver
mine is producing less with each passing quarter, forcing fewer
ounces to bear the fixed costs of mining. Its crazy-high $17.41 per
ounce in Q3 isn’t normal. But on the other side of this is
Silvercorp Metals, which produces silver in Chinese mines yielding
enormous base-metals byproducts.
Selling those and crediting their value across the silver ounces
mined dragged down SVM’s cash costs to an unbelievable negative
$3.37 in Q3! Excluding these extreme outliers, the rest of the
SIL top 17 saw average cash costs of $6.40. That’s not too far
above the past 4 quarters’ $4.86, $4.66, $5.05, and $3.95. As long
as silver prices remain over those low levels, the silver miners can
keep the lights on at their mines.
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 silver mines as ongoing concerns. AISCs
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
Q3’18 these top 17 SIL miners reporting AISCs averaged $13.53 per
ounce, which also surged 39.0% YoY. Again that was skewed in both
directions by SSRM’s extremely-high $22.39 on Pirquitas’ depletion
and SVM’s exceedingly-low $2.54 on those huge base-metals
byproducts. Without them, the rest of the top 17 averaged $13.96
AISCs. That was much higher than the past 4 quarters’ $9.73,
$10.16, $10.92, and $10.93.
The
lower production was definitely a factor, which is inversely
proportional to per-ounce costs. Silver-mining costs are largely
fixed quarter after quarter, with actual mining requiring roughly
the same levels of infrastructure, equipment, and employees. So the
lower production, the fewer ounces to spread mining’s big fixed
costs across. The major silver miners also reported lower ore
grades, exacerbating the decline.
Nevertheless, the top 17 SIL miners’ AISCs both with and without the
outliers still remained under silver’s weak average $14.96 price in
Q3. So even with silver faring its worst relative to gold in
decades thanks to devastated sentiment, the silver mines were
profitable. And interestingly the closer AISCs crowd the prevailing
silver prices, the more profits leverage the miners have to
silver mean reverting much higher.
In
mid-November silver and SIL slumped to their lowest levels since
back in January and March 2016. That was early in a
new silver bull
which emerged from conditions like today’s where silver was
despised. Over 7.6 months between December 2015 and August 2016,
silver soared 50.2% higher as gold surged in its own new bull. And
with silver moving again, investors eagerly started returning to the
battered silver stocks.
Thanks to that silver-bull upleg, SIL skyrocketed 247.8% higher
in just 6.9 months in essentially that first half of 2016! That
ought to give embattled silver-stock investors some hope. All it
will take to turn silver stocks around is a typical gold-driven
silver upleg, and then they will soar again. The reason that silver
miners’ stocks blast dramatically higher with silver is their high
inherent profits
leverage to silver prices.
Assume another 50% silver upleg, which is pathetically small by
historical standards, from silver’s recent secular low in
mid-November. That would catapult silver back up to $21 per ounce
for the first time since July 2014. At Q3’18’s top-17-SIL-stock
average AISCs of $13.53, profits were just $0.47 per ounce at $14
silver. But at $21 assuming stable AISCs, they would soar an
astounding 1489% higher to $7.47 per ounce!
You
better believe silver-stock prices would skyrocket with that kind of
earnings growth. The higher their AISCs, the greater their upside
profits leverage. Now consider this same 50% silver upleg using the
rolling-past-4-quarter top-17-SIL-stock average AISCs of $10.43 per
ounce. That implies the $3.57 profit seen at $14 silver would only
balloon 196% to $10.57 per ounce at $21 silver. So higher costs
aren’t necessarily bad.
As
long as AISCs are below prevailing silver prices, the major silver
miners can weather anything. The closer their AISCs creep to
silver, the greater their earnings growth when silver mean reverts
higher. So the major silver miners’ upside from here is truly
explosive as silver recovers, just like back in early 2016. And
silver will power much higher soon as the
record
silver-futures shorts of early September continue to be covered.
While all-in sustaining costs are the single-most-important
fundamental measure that investors need to keep an eye on, other
metrics offer peripheral reads on the major silver miners’
fundamental health. The more important ones include cash flows
generated from operations, GAAP accounting profits, revenues, and
cash on hand. As you’d expect given the miserably-low silver
prices, they were on the weak side in Q3.
Operating cash flows among these SIL top 17 reporting them fell
23.0% YoY to $830m, which is totally reasonable given the 2.2%-lower
silver production and 11.2%-lower average silver prices. Sales fell
9.5% YoY to $2717m, with some of the silver-side weakness offset by
the 1.6%-higher gold production. And cash on hand fell 9.8% YoY to
a still-hefty $2419m, giving these silver miners plenty of capital
to weather this storm.
The
hard GAAP accounting profits looked pretty ugly though, plunging to
a $243m loss from being $88m in the black in Q3’17. But most of
those losses didn’t reflect operations. TAHO alone wrote off a
massive $170m for the impairment of Escobal, which reflected an
estimated restart date of the end of 2019. Coeur Mining reported a
smaller $19m writedown for one of its mines. These two non-cash
charges alone were $189m.
Without them GAAP profits would’ve sunk from $88m in Q3’17 to a
milder $54m loss in Q3’18. That’s still poor, but not unexpected
given the lowest silver prices seen in almost several years. Again
silver-mining earnings will soar if not skyrocket as silver
inevitably mean reverts higher from here. All it takes for silver
to surge in major bull-market uplegs is for gold itself to power
higher, and huge
gold upleg fuel abounds now.
The
silver-mining stocks are doing way better fundamentally than
they’ve been given credit for. Their higher Q3’18 mining costs
still remained below the recent deep silver lows. And the
compressed gap between their AISCs and low prevailing silver prices
guarantees epic profits upside as silver recovers and mean reverts
higher. That will attract back investors fast, catapulting silver
stocks up sharply like in early 2016.
While traders can play that in SIL, this ETF has problems. Its
largest component is now a base-metals smelter of all things! And
the great majority of its stocks are primary gold miners with
byproduct silver production. The best gains by far will be won in
smaller purer mid-tier and junior silver miners with superior
fundamentals. A carefully-handpicked portfolio of these miners will
generate much-greater wealth creation.
The
key to riding any silver-stock bull to multiplying your fortune is
staying informed, both about broader markets and individual
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The
bottom line is the major silver miners’ fundamentals remain solid
based on their recently-reported Q3’18 results. They continue to
mine silver at all-in sustaining costs below even mid-November’s
deep silver lows. Their profits will multiply dramatically as
silver rebounds higher driven by gold’s own upleg and record
silver-futures short covering. Investment capital will flood back
in, catapulting silver stocks up violently.
So
traders need to look through the recent forsaken herd sentiment to
understand the silver miners’ hard fundamentals. These
left-for-dead stocks are seriously undervalued even at today’s low
silver prices, let alone where silver heads during the next major
gold upleg. Silver can’t languish at extreme anomalous multi-decade
lows relative to gold for long. And once it catches a bid, silver
stocks will really amplify its upside. |