The
silver miners’ stocks have surged higher recently, starting to mean
revert out of deep capitulation lows. Those improving technicals
have started thawing the bearish sentiment that plagued this tiny
contrarian sector last summer. The silver stocks’ latest earnings
season wrapping up in mid-November revealed how these miners are
actually faring operationally and financially. Do fundamentals
justify more gains?
The
silver-stock world is really small, with primary silver
miners deriving over half their revenues from producing the white
metal increasingly-rare. Only a handful of exchange-traded funds
track this forgotten sector, led by the SIL Global X Silver Miners
ETF. While also miniscule with just $1.2b in net assets in
mid-November, SIL is the best-available sector benchmark. The
silver stocks have had a wild ride this year.
Their price action closely mirrors gold stocks’, as silver’s
dominant primary
driver has always been gold. So SIL’s swings this year closely
tracked those in the leading GDX gold-stock ETF like usual. Silver
stocks were enjoying a solid young upleg last spring, with SIL
surging 27.5% between late March to early June. But silver and thus
silver stocks were sucked into gold’s sharp mid-June selloff on
Fed-tightening fears.
Gold’s taper
tantrum for the Fed starting to slow its epic
quantitative-easing money printing unfolded in the months leading
into that actual announcement. Between mid-June to late
September, several bouts of heavy-to-extreme gold-futures selling
crushed the entire precious-metals complex. The resulting
silver-stock carnage hammered SIL 30.2% lower climaxing in an ugly
capitulation, fueling serious bearish psychology.
But
like gold stocks, silver stocks have recovered sharply out of those
deep lows. By mid-November SIL had rebounded 21.6% higher at best.
That solid mean-reversion rally coincided with their latest earnings
season covering Q3’21. For 22 quarters in a row now, I’ve
painstakingly analyzed the latest results from the top 15 SIL
component stocks. Mid-month they commanded fully 86.1% of this
ETF’s total weighting.
This
table summarizes the operational and financial highlights from the
SIL top 15 during Q3’21. 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 changing market caps, which reveal both
outperformers and underperformers since Q3’20. Those symbols are
followed by current SIL weightings.
Next
comes these miners’ Q3’21 silver and gold production in ounces,
along with their year-over-year changes from the comparable Q3’20.
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-November when Q3’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.
Silver had a rough Q3’21, plunging 15.1% on that big gold-futures
selling! Far worse than gold’s parallel 0.8% Q3 slump, that
reflected seriously-bearish silver sentiment. The silver miners’
results were mixed in that challenging quarter. While their
collective silver production slumped, that was offset by higher gold
output boosting revenues. But earnings still plunged on higher
costs with flat quarterly-average silver prices.
Primary silver stocks are becoming rarer, threatening to go extinct
entirely! That’s not because they are failing, but increasingly
diversifying into gold with its superior economics. This trend
of yellowing silver miners has been ongoing for many years, making
me wonder if each quarterly silver-stock-fundamentals essay I pen
will be my last. SIL has actually long-proven a gold miners ETF,
with mostly-byproduct silver output.
The
SIL-top-15 ranks include some of the world’s biggest and best silver
miners, yet still their collective production declined last
quarter. These elite companies mined 77,997k ounces of silver in
Q3’21, which shrunk 3.2% year-over-year. Declining silver mined was
fairly widespread too, with more of the SIL top 15 suffering waning
production than experiencing output growth. Traditional silver
miners are focusing on gold.
That
was super-obvious again in Q3, with the SIL top 15’s yellow-metal
output surging 11.8% higher YoY to 1,588k ounces! That proved a new
high-water mark in these major silver miners’ gold production in the
22 quarters I’ve been advancing this research thread. For better or
worse, this leading silver-stock ETF is becoming ever-more
gold-centric. Last quarter only 37.7% of SIL-top-15 revenues
were derived from silver!
That’s just 3/8ths, a disappointingly-light fraction for traders
looking to use SIL for silver-stock exposure to rising silver
prices. Last quarter only three of these SIL-top-15 silver miners
still generated over half their revenues from selling the white
metal. Their purity percentages are highlighted in blue above, and
this remaining handful of real silver companies only accounted for
28.9% of SIL’s total weightings in mid-November.
Over
3/4ths of that came from Wheaton Precious Metals alone, which has
long topped SIL as its largest holding. This company isn’t even a
silver miner, but a streamer. It purchases fractions of future
silver and gold outputs from other mines, for big upfront-capital
payments followed by low ongoing per-ounce fees. Selling
precious-metals streams to companies like Wheaton helps miners
finance expensive mine builds.
Silver streaming was Wheaton’s original focus, but as it
increasingly diversified into gold streaming it changed its name
from Silver Wheaton to Wheaton Precious Metals in May 2017. But
interestingly that silver-gold pendulum swung back the other way in
Q3’21. This company just changed its production mix for 2021
guidance, slashing gold a big 12.3% at the midpoint. That was
offset by silver’s midpoint rising 11.8%.
But
this gold-to-silver shift is temporary, fueled by higher production
at silver mines Wheaton purchased streams from and lower output from
a key gold mine undergoing a major expansion. WPM is also making
more streaming deals for other metals including palladium and
cobalt. Miners really like construction financing through streaming
contracts, since their terms are far-less-onerous than banks’
which require hedging.
Pan
American Silver and SSR Mining reported both growing silver and gold
production in Q3. Yet they overwhelmingly remained primary gold
miners, with only 25.5% and 16.4% of their Q3 revenues coming
from silver mining. PAAS will probably have to change its name
soon, and SSRM was previously known as Silver Standard Resources for
many years. Other traditional major silver miners are following in
their footsteps.
First Majestic Silver, which SIL includes under its Canadian stock
symbol FR, was long the purest major silver miner. Just a couple
quarters ago in Q1’21, nearly 76% of its sales were driven by silver
mining! But last spring it purchased its first pure gold mine to
add to its portfolio of three primary silver mines. Q3 was its
first full quarter of operations, catapulting First Majestic’s gold
output up 111.2% YoY to 55k ounces.
Meanwhile silver production only climbed 4.5% YoY to 3,302k.
Traditional major silver miners are pouring their capital and
expertise into developing gold mines. As First Majestic
focuses on optimizing this one, gold’s coming output growth will
likely continue to outpace silver’s. Thus depending on how average
silver and gold prices fare, even this stalwart silver pillar will
probably soon morph into a primary gold miner.
SIL
also holds Fortuna Silver under its Canadian symbol FVI. Its silver
purity collapsed from 62.2% a year ago in Q3’20 to just 25.5% last
quarter! Some years ago because of the challenging economics of
silver mining, Fortuna chose to diversify into gold. So it
developed and built its own gold mine, which started producing in
Q4’20. Then in Q2’21 Fortuna acquired Roxgold, adding another pure
gold mine to its stable.
As
Q3’21 ended, Fortuna made a go decision to build a third gold mine.
That is expected to go live by mid-2023. So one of the past purer
major silver miners will have two silver mines and three gold
ones going forward. Incidentally Fortuna’s stock price crashed
in mid-November after permitting problems at a Mexican silver mine
due to government corruption! If not resolved, Fortuna could be
down to a single silver mine.
While these traditional major silver miners mostly remain good
investments and trades, their leverage to silver-price moves is
really attenuated as they increasingly become primary gold
miners. There are some smaller up-and-coming dedicated silver
miners, but they are much-riskier running single mines without
established production track records. So gaining leveraged silver
exposure through miners is getting harder.
In
the past 22 quarters, only Q3’19 saw the SIL top 15’s average silver
purity exceed 50% at 52.0%. That metric was mostly
considerably-lower before and since, hitting a trough of just 34.3%
in Q2’20. While the mix of miners’ quarterly sales from gold and
silver changes with prevailing prices, silver purity has to keep
grinding lower on balance with silver miners’ investments
increasingly focused on building or buying gold mines.
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 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.
The SIL top 15’s lower silver output should’ve driven
modestly-higher costs in Q3, but they soared!
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.
Average cash costs reported by the SIL top 15 in Q3’21 blasted
50.2% higher YoY to $10.50 per ounce! That was just pennies shy
of a new 22-quarter high. That wasn’t skewed by a single outlier
either, with the majority of these silver miners disclosing cash
costs seeing massive 50%+ jumps. Lower-grade ores, raging
inflationary pressures from central-bank money printing, and various
mine-specific factors played roles.
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.
Ominously the SIL top 15’s AISCs skyrocketed 64.0% YoY in Q3’21
to $15.78 per ounce! That was an ugly major new high in the 22
quarters I’ve been furthering this research. Pan American Silver
reported a staggering 171.2%-YoY moonshot to $16.30, but the main
culprit was First Majestic Silver. Its AISCs last quarter doubled,
soaring 100.5% YoY to $19.93! Interestingly shifting into gold
caused that massive jump.
First Majestic still reports in silver-equivalent-ounce terms, where
gold production is translated into silver monetarily. That pure
gold mine this company just bought was wildly-expensive in
its initial quarter, as capital was poured in to start optimizing
it. Its cash costs and AISCs in Q3’21 were crazy-high at $1,735 and
$2,286 per ounce! For comparison the
GDX-top-25 gold
miners averaged just $746 and $1,085 in Q3.
First Majestic says those extreme gold-mining costs resulted from
capital projects, and will soon come down. But how fast and how
much remains to be seen. Another factor driving these soaring
SIL-top-15 AISCs was this ETF’s changing rankings. A year ago in
Q3’20, Chinese miner Silvercorp Metals was included with low $6.99
AISCs driven by huge lead and zinc byproducts. SVM fell to 16th
place this year.
Despite those sky-high all-in sustaining costs, the silver miners
remained quite profitable as an industry. While silver fell
sharply in Q3’21, it still averaged an excellent $24.25 which merely
edged 0.6% lower year-over-year. Subtracting out those $15.78
SIL-top-15 average AISCs still leaves a healthy sector-earnings
proxy of $8.47 per ounce. Though that plunged 42.7% YoY, it
still remained on the higher side historically.
That
broke an amazing seven-quarter streak where silver-mining profits
surged-to-soared year-over-year. They peaked at $14.77 per ounce in
Q3’20, thanks to the lowest average AISCs in the past 22 quarters of
just $9.62 per ounce. But Q3’21’s $8.47 profits were still the
fifth-highest seen during this research project. In fully 12
quarters ending in Q2’20 before profits exploded, this metric
averaged just $3.82 for the SIL top 15.
So
despite soaring AISCs, the major silver miners are still earning
good unit profits. Those should resume growing in coming
quarters. Miners’ reports generally expected AISCs to retreat back
towards more-normal levels, despite the inflationary pressures
driving up all kinds of mining costs. And higher prevailing silver
prices are likely as gold’s secular bull keeps marching higher
following the
Fed’s colossal money printing.
The
SIL top 15’s hard accounting results reported to securities
regulators were generally weaker in Q3’21. Total revenues surged
14.1% YoY to $6,341m, but that is heavily skewed by Korea Zinc. It
is a giant base-metals smelter in its namesake country, and
has no place in a “Silver Miners ETF”. I’ve been railing against
its inclusion for years, but it is likely hard to find a suitable
replacement with silver stocks so rarefied.
Just
19.5% of Korea Zinc’s Q3 revenues came from selling smelted silver,
and its sales soared 25.1%. Excluding that odd company from Q3’20
and Q3’21 totals, the rest of the SIL top 15 saw revenues grow 9.4%
YoY to $4,259m. That makes sense with gold production surging 11.8%
while silver’s fell 3.2%. Unfortunately the bottom-line net profits
looked far worse, reflecting Q3’s challenging operating environment.
The
SIL top 15 earned $283m last quarter, which plunged 45.2% YoY! Just
like that unit-earnings proxy based on average silver prices and
AISCs, those were the lowest accounting profits in five quarters.
If Korea Zinc is again pulled from both quarters, silver-mining
earnings looked even uglier plummeting 70.3% YoY to just $111m! I
didn’t see any major noncash losses flushed through income
statements skewing that.
The
silver miners’ operating cash flows generated last quarter looked
similar, collapsing 77.0% YoY to $334m among the SIL top 15. But
that was heavily distorted by one extreme charge. Peru’s
endlessly-struggling Buenaventura reported a colossal $544.2m cash
expense of “Payments for tax litigation” in its OCFs! Pulling out
BVN from Q3’20 and Q3’21 yields total OCFs of $798m, down 41.5% YoY
in line with profits.
But
despite much-lower operating cash flows generated, these silver
miners’ collective cash treasuries still soared 66.4% YoY to
$5,703m. So they are flush with cash if they want to buy new
projects, mines, or companies. Odds are any acquisitions will be
heavily gold-centric, further shifting these gold-and-silver
miners’ production mixes to the yellow side. Even at these high
silver prices the economics of gold are better.
On
the conventional-valuation front, these SIL-top-15 silver miners
averaged lofty 74.9x trailing-twelve-month price-to-earnings ratios
in Q3’21. Thankfully that crazy-expensiveness came from three of
these stocks with extreme 100x+ P/Es. Excluding them, the rest of
the SIL top 15 with earnings averaged cheap 18.8x TTM P/Es. So the
silver stocks are mostly-undervalued, with some real bargains
in their ranks.
Overall it was kind of a meh quarter for silver stocks, nothing
exciting. I own a third of these SIL-top-15 companies as trades
and/or investments, and am still enthusiastic about that subset.
But even the better major silver miners are mostly primary gold ones
now, trading more in line with gold stocks than silver
prices. That yellowing trend will likely persist unless silver
shoots stratospheric and stays there for years.
In
the decades I’ve been studying and trading silver stocks, their
allure came from being high-octane bets on higher silver prices.
But speculators looking for extreme upside potential are now
migrating into the crazy cryptocurrency realm, where gains dwarf
anything ever before witnessed. Crypto has cast such a long shadow
that silver will struggle to emerge from it as a preferred
speculation, especially among younger traders.
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The
bottom line is silver miners enjoyed a solid-but-not-great third
quarter. While prevailing silver prices remained high, mining costs
soared on lower ore grades and inflationary pressures. That really
pinched earnings, although they were still good compared to recent
years beyond this past one. Profits have a lot of potential to
surge as costs are reined back in and silver powers higher on
balance with gold’s secular bull.
But
the ranks of primary silver miners are still rarefying as they
continue diversifying into gold. Most of the traditional larger
silver stocks have already transitioned into primary gold ones.
While the economics of gold mining are superior, yellowing silver
stocks are much-less-responsive to silver price trends. They
increasingly trade just like gold miners. That along with crypto
competition is tarnishing their speculative allure. |