The
silver miners’ stocks have been grinding lower on balance since
early August in a healthy correction. This necessary rebalancing is
achieving its mission of dampening enthusiasm, paving the way for
this sector’s next bull upleg. Rebounding from governments’
COVID-19 lockdowns, operating and financial results improved
dramatically in the recently-reported Q3. Better fundamentals
justify more stock-price gains.
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 and dominant one is the
SIL Global X Silver Miners ETF, which is this tiny sector’s best
benchmark. But it only held $1.0b in net assets in mid-November at
the end of Q3’20’s earnings season.
SIL’s super-volatile price action this year reflects the wild ride
silver stocks have had. Over 4.8 months into early August, this ETF
skyrocketed 176.9% higher out of mid-March’s stock panic! That left
silver stocks extremely overbought, thus due for a correction
to rebalance sentiment. And that is exactly what has happened
since, with SIL’s total selloff extending to 23.5% at worst over 3.6
months so far by late November.
The
silver miners’ stock prices naturally mirror and amplify the
underlying moves in the metal they mine, which overwhelmingly drives
their profitability. And silver in turn leverages gold’s fortunes,
which is the white metal’s
dominant primary
driver. So silver’s ongoing correction won’t give up its ghost
until gold’s does, and silver stocks’ next bull-market upleg is
waiting on silver’s own. Silver miners are at the mercy of gold.
This
yellow metal’s rebalancing selloff has matured, after making great
strides in rebalancing sentiment since gold shot parabolic last
summer. American stock traders’ heavy
gold-ETF-share
buying that fueled that powerful upleg has rolled over into
serious selling in November. And the positioning of gold-futures
speculators has been excessively-bullish, leaving a risky selling
overhang for the
oversold US
dollar to trigger.
But
even if these gold-driven silver and silver-stock corrections
haven’t fully run their courses yet, traders need to stay abreast of
the silver miners’ fundamentals. The stronger they are, the greater
this sector’s upside potential in its next bull-market upleg. The
silver miners’ recently-reported Q3’20 results showed huge
fundamental improvements from the prior quarter, which suffered
widespread national lockdowns.
This
was my 18th quarter in a row analyzing how the world’s biggest and
best silver miners are faring fundamentally. While SIL included 40
component stocks in mid-November as Q3’s earnings season was
wrapping up, I limited my research to its top 15 holdings. They
commanded a dominant 89.8% 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.
Half-year reporting is common outside the US, and Q3s are off-cycle
quarters seeing shorter updates. The highlights of all those
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 Q3’19 to Q3’20. And it is followed by these
major silver miners’ current SIL weightings as the Q3 earnings
season concluded in mid-November. Then each company’s quarterly
silver and gold production in ounces is shown, followed by their
year-over-year changes from Q3’19. Their silver output can be used
to gauge relative silver purity.
The
higher miners’ percentage of quarterly revenues derived from silver
production, the more responsive their 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 Q3, then dividing those results
by quarterly revenues. When sales aren’t reported, this can instead
be approximated.
For
half-year-reporting silver miners where Q3 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 usually show the highest
leverage to silver. That is followed by cash costs 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 hard GAAP profits.
Blank data fields mean a company hadn’t reported that particular
data by mid-November as Q3’s earnings season was ending. And
percentage changes aren’t included if they would be either
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. These elite silver miners showed
major improvements last quarter.
Production is the lifeblood of the silver-mining industry, and the
SIL top 15’s collective output in Q3 was mixed. Together these
major silver miners produced 61.4m ounces last quarter.
Sequentially from the lockdown-plagued Q2’20, that was outstanding
13.7% quarter-on-quarter growth. When governments authorized
shut-down silver mines to resume operations again, these companies
were quick to spin back up.
Nevertheless, the national lockdowns’ serious impacts on global
silver output lingered in Q3. That 61.4m ounces the SIL top 15
produced were still down a sharp 13.9% year-over-year from Q3’19!
Outside of the preceding peak-lockdown quarter’s 26.0% YoY
plummeting, that was the worst seen in all the years I’ve been
working on this research thread. But that output was skewed low by
the endless shuffling in SIL’s ranks.
A
year ago in Q3’19, a British gold-and-silver miner called Hochschild
Mining was this ETF’s 14th-biggest component stock. SIL essentially
weights its holdings by silver stocks’ market capitalizations. But
in mid-November, this company had slipped to 16th place. Replacing
it was the non-producing Canadian silver explorer SilverCrest
Metals. That pushed Hochschild’s 3,085k ounces produced in Q3’20
out of the SIL top 15.
Adding that back in yields total major-silver-miner output of 64.4m
ounces last quarter, which is down a still-big-but-less-extreme 9.5%
YoY. The elite silver miners are heavily concentrated in countries
that suffered the longest lockdowns, which spilled into Q3. Those
are Mexico and Peru, which accounted for 23% and 16% of 2019’s total
global silver output per silver’s leading fundamental authority the
Silver Institute.
The
SIL-top-15 silver miners also continued to contend with COVID-19
beyond the lingering lockdowns. That includes implementing costly
and disruptive measures to slow this virus’s spread, identify
workers infected, and quarantine them. This led to widespread
labor shortages, forcing many silver mines to operate with
reduced staffing which is less efficient. Major silver miners’
quarterlies detailed some of the challenges...
“During Q3 2020, seven of Pan American’s nine operations were
operating with limited workforce levels in order to accommodate
COVID-19 related protocols. Two of the Company’s operations, Huaron
and Morococha in Peru, were suspended for most of Q3 2020, having
previously been returned to care and maintenance on July 20, 2020,
because of an increase in workers testing positive for COVID-19.”
Pan
American Silver’s Q3 report continued “The Company began gradually
redeploying its workforce at these mines over the last two weeks of
September after intensive health screenings and testing. Huaron and
Morococha resumed operations at the end of Q3 2020.” In Q1’20
before the pandemic lockdowns, these two mines accounted for 22% of
PAAS’s silver output. Mines being stuck offline really slams
production.
First Majestic Silver, which SIL holds under its Canadian stock
listing, had ongoing COVID-19 struggles last quarter too. “Worker
availability is a challenge amidst the COVID-19 pandemic but has
been gradually improving and is being mitigated by increasing the
use of temporary workers and contractors to replace vulnerable
workers.” That company said those employees accounted for 1/9th of
its mine workforce.
Mexico’s Ministry of Health defines these as people at least 60
years old, or suffering from either pre-existing health conditions
or compromised immune systems. First Majestic believes COVID-19
infections are such an ongoing threat to operations that it is “also
in the process of constructing Polymerase Chain Reaction (“PCR”)
laboratory test facilities on site at San Dimas and partnering with
test labs at Santa Elena”!
So
it is certainly not business as usual for the major silver miners,
which are again concentrated in Mexico and Peru since they host the
biggest silver deposits. In mid-November as Q3’s earnings season
wrapped up, these two countries ranked 11th and 12th in the world in
terms of cumulative cases of COVID-19 since testing started. In
terms of COVID-19-attributed deaths they fared even worse, at 4th
and 10th globally!
These major silver miners’ gold operations, some standalone mines
and some byproducts from silver mines, are also largely located in
these same countries. So it isn’t surprising that the SIL top 15’s
total gold output in Q3’20 mirrored silver’s. The 1,355k ounces
these miners produced surged 12.3% QoQ from Q2’20’s lockdown nadir,
in line with silver’s 13.7%. But it fell 14.4% YoY from Q3’19,
pacing silver’s 13.9%.
Again Hochschild Mining being edged out of the SIL top 15 played a
role in this, as it produced 47.8k ounces of gold last quarter.
Including it, the major silver miners’ overall gold output drop
moderated a bit to 11.4% YoY. The silver miners’ operational
struggles in Q3’20 were much worse than the major gold miners
of their leading GDX ETF. The
GDX top 25
actually saw their overall gold output grow 0.6% YoY in Q3!
Despite the major silver miners’ aggregate silver and gold
production falling proportionally last quarter, their overall
silver purity plunged considerably. The SIL top 15 averaged
just 40.8% of their Q3 revenues from silver, down 11.3% from Q3’19’s
52.1%. That comparable quarter was a high-water mark though, the
highest seen in the 18 quarters I’ve been doing this research. That
entire span only averaged 38.8%.
Last
quarter a relatively-high three silver miners out of the SIL top 15
qualified as primary ones deriving over half their sales from
the white metal. They were First Majestic Silver at 61.2%, Fortuna
Silver Mines at 62.2%, and Silvercorp Metals at 75.2%. These remain
the most-leveraged stocks to silver uplegs, with the best potential
to amplify their gains. Fundamentally-superior stocks far
outperform deadweight-laden ETFs!
Remember that SIL soared 176.9% in its last mighty upleg between
mid-March to early August. In this same short span, First Majestic,
Fortuna, and Silvercorp saw their stock prices skyrocket 176.2%,
291.7%, and 278.8% higher! That averages out to 248.9% upleg gains,
1.4x better than SIL’s which these stocks also helped boost. These
purest silver stocks far outperformed the other 12 major
silver miners in the SIL top 15.
With
the SIL top 15’s COVID-19-vexed silver output staying much lower
than Q3’19’s levels, unit mining costs should’ve climbed. 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. That gives
silver mining big leverage to silver.
Individual mines require the same levels of infrastructure,
equipment, and employees to feed their fixed-capacity mills quarter
after quarter. So lower outputs directly translate into higher unit
costs. In Q3’19 in the idyllic pre-pandemic world, the SIL top 15’s
cash costs and all-in sustaining costs had been running $6.61 and
$10.74 per ounce. In Q3’20 those should’ve risen in proportion to
the 13.9% shrinkage in silver output.
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 reported cash costs averaged $6.99 per ounce last
quarter, indeed rising but only by 5.7% YoY. And those were
actually skewed high by Peru’s Buenaventura, which suffered
COVID-19-related disruptions to many of its operations. Its
resulting brutal 40.4% YoY silver-output plunge caused cash costs to
skyrocket 58.9% YoY to $18.69! Excluding that crazy-extreme
outlier, the average drops to $5.53.
The
negative cash costs reported by Silvercorp are righteous, resulting
from huge byproduct credits from its major lead and zinc
production. Those aren’t an anomaly, this company has reported
negative cash costs for years. Its market capitalization usually
leaves it around the cutoff for the SIL top 15 after any given
earnings season. So whether or not SVM is included really affects
the major silver miners’ overall average.
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
run silver mines as ongoing concerns, and reveal the major silver
miners’ true operating profitability.
Amazingly given their falling silver output, the SIL top 15 reported
a big surprise last quarter on that front. Their average AISCs of
just $9.62 per ounce not only shockingly fell 10.4% YoY, but
were the lowest seen out of the last 18 quarters! The major silver
miners did fantastic controlling costs, despite all the additional
COVID-19-related expenses they are facing. Plunging AISCs at two
companies were mostly responsible.
Pan
American Silver saw its AISCs collapse 31.7% YoY, while SSR Mining’s
dropped an even-greater 39.7%! These sharply-lower costs moved
hugely counter to these miners’ serious 38.7% and 23.1% craterings
in silver outputs last quarter. Buried deep in PAAS’s report, its
sharp AISC plunge was attributed to inventory adjustments.
Unfortunately that was a one-off anomaly related to COVID-19
production swings.
Pan
American’s full-year-2020 guidance is forecasting AISCs at a
midpoint or $11.50, almost double that super-low Q3 read!
SSRM explained its own lower AISCs paradoxically arose from reduced
costs due to lockdowns, not elaborating much. But it too warned
that these low AISCs won’t last, guiding to this year’s averaging a
much-higher $16.00. So overall SIL-top-15 AISCs are likely to climb
back up near $12 or so.
But
regardless of prevailing AISCs, far-higher silver prices radically
improved the profitability of this small sector. Q3’20’s average
silver price of $24.39 rocketed up 43.7% YoY, way outpacing
gold’s own 29.8% gain! That was the highest quarter for silver
since Q1’13, after which silver collapsed with gold on the Fed’s
extreme QE3
levitating the stock markets. Silver languished for long years
after that brutal thrashing.
Looking at the major silver miners’ average AISCs compared to
average prevailing silver prices is a great proxy for industry
profitability. And with impressively-high silver prices and
super-low AISCs last quarter, unit earnings naturally exploded. The
SIL top 15 enjoyed enormous profits of $14.77 per ounce, which
soared a stupendous 137.2% YoY! Both metrics proved the best by far
in the 18 quarters I’ve been doing this.
Over
the previous 17 quarters before Q3’20, silver-mining profitability
per this proxy averaged just $4.46. And the silver miners are
almost certain to continue generating huge earnings in this
currently underway Q4’20. By mid-November as Q3’s earnings season
wrapped up, silver was still averaging $24.26 quarter-to-date.
That’s right in line with Q3’s $24.39! And even if silver keeps
correcting, prices should remain high.
While gold governs the extent of silver corrections, silver’s
200-day moving average is strong support for major bottomings.
Mid-month that was running $20.17 and rising. If silver challenges
that at some point before Q4 ends, it would still be hard to imagine
this quarter’s average silver price falling under $22 or so. And if
SIL-top-15 AISCs climb back up near $12, that implies major silver
miners still earning $10 per ounce.
If
these mid-quarter estimates are in the ballpark, these elite silver
miners’ unit earnings would soar yet another 63.7% YoY in
this current quarter! Unless silver craters which is incredibly
unlikely, we shouldn’t see any scenarios where silver-mining
earnings don’t remain really strong. The higher this sector’s
profits and the more sustainable they are, the greater silver
stocks’ upside potential during silver’s next upleg.
On
the hard-financial-results front under Generally Accepted Accounting
Principles reported to securities regulators, or their foreign
equivalents, the major silver miners achieved a great quarter
financially in Q3’20. The SIL top 15’s total revenues surged
18.6% YoY to $3.9b! The much-higher prevailing silver and gold
prices easily overcame the COVID-19-hobbled lower production of
these two precious metals.
In
actual bottom-line accounting-earnings terms, these major silver
miners collectively reported earning a very-strong $374m in
profits! That skyrocketed 182.9% YoY from Q3’19’s total, confirming
that silver mining is very lucrative at these relatively-high
price levels. Both quarters’ earnings numbers came from normal
ordinary operating results too, with no big non-cash charges or
gains distorting these sector totals.
Naturally the high silver prices also fueled massive
operating-cash-flow-generation growth. Q3’20’s total OCFs reported
by the SIL-top-15 silver miners soared 82.0% YoY to almost $1.5b!
That helped these companies grow their treasuries by 35.7% YoY to
$3.4b. They will likely deploy a large fraction of this big
windfall to help expand existing mines, upping their future
production. That’s really bullish for silver-stock prices.
With
the major silver stocks sporting such strong fundamentals in Q3 and
almost certainly again in Q4, their next bull-market upleg has
strong potential to balloon to more outsized gains. But
first this sector has to weather this necessary and healthy
in-progress correction, which is
controlled by
gold’s own. This is the time to do your silver-stock homework,
crafting a buy list for the bargains to come as this selloff
climaxes.
At
Zeal we started aggressively buying and recommending
fundamentally-superior gold and silver miners in our
weekly and
monthly
subscription newsletters back in mid-March right after the
stock-panic lows. We layered into dozens of new positions before
silver stocks grew too overbought, which were stopped out later at
huge realized gains running as high as +199%! Our subscribers
multiplied their wealth within months.
To
profitably trade high-potential gold and silver stocks, you need to
stay informed about what’s driving gold. Our popular newsletters
are a great way, easy to read and affordable. They draw on my vast
experience, knowledge, wisdom, and ongoing research to explain
what’s going on in the markets, why, and how to trade them with
specific stocks. Subscribe
today and take advantage of our 20%-off sale! We’ll
redeploy aggressively in fundamentally-superior gold and silver
stocks as this correction passes.
The
bottom line is the major silver miners reported strong Q3 results.
Their collective gold and silver outputs rebounded sharply from Q2’s
lockdowns. But lingering COVID-19 impacts still left production
considerably lower than the comparable prior-year quarter. Yet
somehow the miners still managed to cut costs in that challenging
environment, contributing to outstanding earnings in both unit and
bottom-line terms.
The
highest prevailing silver prices in the better part of a decade
fueled big growth in profits, sales, and operating cash flows. And
with silver remaining high despite being in a healthy correction,
silver miners’ super-bullish trend of fast-improving fundamentals is
likely to continue. That portends much-higher silver-stock prices
as their metal’s next bull-market upleg gets underway. This
silver-stock bull has lots of room to run. |