Silver and its miners’ stocks have had a tough year. They plunged
with gold in spring and summer as extreme Fed tightening catapulted
the US dollar parabolic. The resulting deep lows left this tiny
fringe contrarian sector deeply out of favor, but it has started
recovering in recent months. The major silver miners’ upside
potential is partially dependent on their fundamentals, which were
just detailed in new quarterlies.
The
silver-stock universe is vanishingly small by stock-market
standards, with the leading sector ETF only commanding a trifling
$969m in net assets this week. That remains the SIL Global X Silver
Miners ETF. After launching way back in April 2010, it has grown
into silver stocks’ main benchmark. SIL’s dreadful price action
this year certainly explains why silver stocks have been mostly
abandoned by traders, left for dead.
Early on SIL actually got off to a solid start, rallying 23.4%
between late January to mid-April. But then the bottom fell out,
with the major silver stocks cratering a catastrophic 45.5% by late
September! While SIL has rebounded 34.1% at best since then as of
Thanksgiving eve, it was still down 21.3% year-to-date. All that
selling was fueled by silver breaking down with gold on the
Fed’s
most-extreme tightening ever.
The
white metal itself rallied 20% from mid-December to early March,
plunged 30.4% into late September, and then mean reverted 19.8%
higher into mid-November. Those moves amplified parallel gold
swings by 1.3x, 1.5x, and 2.2x. The far-smaller silver market
usually depends on the way-bigger gold market to set the
psychological tone. With gold and silver plunging
as the US dollar
soared, silver stocks were scorned.
That’s understandable since price action drives sentiment, but
unfortunate given silver’s super-bullish backdrop. Traders flock
back to silver after gold powers high enough for long enough to
convince them a decisive sustainable upleg is underway. Also
temporarily derailed by that red-hot wildly overcrowded long-dollar
trade, gold’s
upside potential is massive with the first inflation super-spike
since the 1970s now raging.
Gold
nearly tripled in monthly-average-price terms during the 1970s’
first inflation super-spike, then more than quadrupled during the
second! Monthly-average silver prices from those same
trough-to-peak CPI months enjoyed colossal 184.4% and 448.5%
gains! Silver ought to multiply again before this current
inflation super-spike runs its course. Silver investment demand
will skyrocket as gold mean reverts way higher.
That
will catapult silver prices sharply higher. Interestingly the white
metal’s own fundamentals are very strong. The Silver Institute
collects and publishes the best-available data on silver’s global
supply and demand. While the resulting reports are only published
annually, SI just gave a mid-November update on 2022’s silver
demand. It reported total global demand is tracking to hit a
record 1,210m ounces this year!
That
would make for outstanding 15.7% year-over-year growth even while
silver prices languish sapping investors’ interest. Physical silver
investment is faring even better, with SI now estimating it is
going to surge 18.3% YoY to a record 329m ounces in 2022! If
that is already happening now despite miserable silver price action,
imagine how demand will explode when silver soars attracting in far
more investors.
Silver’s huge upside potential amplifying gold during this inflation
super-spike is incredibly bullish for the silver miners’ stocks.
Their earnings really leverage material silver-price moves. The
question now is how are they faring fundamentally before silver
shoots stratospheric again? Their latest Q3’22 earnings season
wrapping up in mid-November revealed the major silver miners are
actually doing surprisingly well!
For
26 quarters in a row now, I’ve painstakingly analyzed the latest
results released by SIL’s 15-largest component stocks. These
include the world’s biggest silver miners, now accounting for a
commanding 88.1% of this ETF’s entire weighting. Digesting hard
fundamental results as they are released is essential for cutting
through obscuring sentiment fogs. It helps traders rationally
understand silver stocks’ real outlook.
This
table summarizes the operational and financial highlights from the
SIL top 15 during Q3’22. 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 shifting market caps, which reveal both
outperformers and underperformers since Q3’21. Those symbols are
followed by current SIL weightings.
Next
comes these miners’ Q3’22 silver and gold production in ounces,
along with their year-over-year changes from the comparable Q3’21.
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
overweight 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
average silver prices help illuminate profitability.
That
is followed by these miners’ hard quarterly revenues and earnings
reported to national 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. Annual percentage
changes are excluded if they would prove misleading, like comparing
two negative numbers or data shifting from positive to negative or
vice versa.
With
weaker silver prices last quarter, it was a challenging time for
silver miners. Yet their Q3 results still proved considerably
better than I expected. While raging inflation forced mining costs
higher to strangle profitability, the SIL-top-15 silver miners
largely held the line. Their mining costs rose much slower
than the major gold miners’ costs last quarter, which I discussed
last week with
similar analysis on GDX gold stocks.
 
Production is always of paramount importance for silver miners, but
even more so when silver prices are weak. That was certainly the
case in Q3’22, when quarterly-average silver prices plunged 20.7%
YoY to just $19.23. Those were the worst silver prices by far
in nine quarters! Silver fared way worse than gold, which saw its
quarterly-average prices slump just 3.5% YoY to $1,727. That really
pressured silver miners.
The
top 25 GDX gold miners suffered an outsized 4.1% YoY decline in
their aggregate Q3’22 gold output. Yet the SIL top 15 somehow
managed to merely see their total silver production slip a small
0.9% YoY to 77,309k ounces! That was even more impressive
considering a major composition change with one of this ETF’s top
holdings. SIL booted the Russian-owned UK-listed Polymetal
International earlier this year.
For
years Polymetal had been SIL’s second-largest component, a
larger producer yielding 399k ounces of gold and 4,500k of silver in
the comparable Q3’21. But after Russia invaded Ukraine and started
inflicting cruel destruction on its people and cities, global
investors dumped Russian stocks in protest. So Polymetal’s market
capitalization cratered, which alone would’ve bludgeoned it out of
these elite SIL-top-15 ranks.
That
wasn’t the end of Polymetal’s woes, as its Big Four accounting firm
resigned as its auditor back in early April. Deloitte warned it was
no longer safe to audit Polymetal’s extensive Russian operations.
It faced delisting in London without an auditor, and extensive
international sanctions against Russia also threatened to impact its
mines. Polymetal was effectively replaced in the SIL top 15 by a
small explorer.
While Adriatic Metals is currently constructing its maiden silver
mine in Bosnia, it won’t start producing until Q3’23 at best. So
the SIL-top-15 results really aren’t comparable between Q3’21 to
Q3’22 with a big producer exchanged for an explorer. Excluding
Polymetal from those year-ago totals, the SIL top 15’s total silver
production actually surged a big 5.2% higher YoY! That is
radically better than the major gold miners.
A
majority of the SIL-top-15 silver miners actually grew their silver
output last quarter, a higher proportion than among GDX-top-25 gold
miners. And this growth wasn’t trivial, averaging hefty 15.1%
YoY gains excluding MAG Silver which is ramping up a big new
mine. So the silver miners greatly outperformed on the critical
production front in Q3’22, at least with silver. Yet their gold
production still shrunk considerably.
These elite major silver miners saw their collective gold output
plunge 34.2% YoY to 1,045k ozs. But that too is heavily distorted
by Polymetal getting kicked out of this ETF. Exclude its gold
output from Q3’21, and that slashed last quarter’s year-over-year
decline to a more-reasonable 12.1%. And even that was skewed by
another anomalous event, SSR Mining’s gold production crashing
51.5% YoY to just 77k ounces!
That
sounds apocalyptic, but thankfully it was only temporary. In late
June SSRM discovered a small cyanide leak at its primary gold mine
in Turkey, from a pipeline running to its leach pad. This was
quickly cleaned up and fixed, but local regulators didn’t authorize
mining to resume until late September. So that mine’s gold output
was almost totally lost in Q3’22! It is back online now and
ramping up in this current Q4.
Had
that run at Q3’21 levels last quarter, the SIL top 15 excluding
Polymetal would’ve only seen their total gold production retreat
5.5% YoY. That’s still considerable, but a far cry from that
unadjusted 34.2% shocker! The major silver miners generally
boosting their silver production as gold output slumps has improved
their silver purity a bit. They averaged 39.4% of their Q3’22 sales
from silver, 1.6% better than Q3’21.
Four
of these elite silver miners qualified as primary silver ones,
deriving over half their revenues from silver. Their purity
percentages are boldfaced in blue in this table. But the SIL-top-15
average will likely resume slipping in coming quarters. SSRM’s full
gold output bouncing back will be one key driver, as its purity
percentage soared from 11.8% in Q2’22 to 31.6% in Q3’22 with its
primary gold mine briefly suspended.
That
mine coming back online will drag the overall SIL-top-15 purity
average about 1.3% lower. But silver outperforming gold in coming
quarters could more than offset that. Silver prices are more beaten
down than gold ones, and silver tends to amplify major gold
advances by roughly 2x. So if silver rallies faster than gold
on their coming mean reversions with the Fed-fueled parabolic US
dollar surge dying, purity could rise.
Like
their major-gold-miner peers, the silver miners faced mounting
inflationary pressures on their mining costs last quarter. In
normal times, silver-mining unit costs are generally
inversely-proportional to silver-production levels. That’s
because silver mines’ total operating costs are largely fixed during
pre-construction planning stages, when designed throughputs are
determined for plants processing silver-bearing ores.
Their nameplate capacities don’t change quarter-to-quarter,
requiring similar levels of infrastructure, equipment, and employees
to keep running at full-speed. So the only real variable driving
quarterly silver production is ore grades fed into these plants.
Those vary widely even within individual silver deposits. Richer
ores yield more ounces to spread mining’s big fixed costs across,
lowering unit costs and boosting profitability.
But
while fixed costs are the lion’s share of silver mining, there are
also sizable variable costs. Energy is the biggest category,
including electricity to power ore-processing plants like mills and
diesel fuel to run excavators and dump trucks hauling raw ores to
those facilities. Other smaller consumables range from explosives
to blast out ores to chemical reagents necessary to process various
ores to recover their silver.
Many
of the SIL top 15’s latest quarterly reports complained about
this raging inflation. Major silver miner Pan American Silver’s
inflation warning was representative, declaring “all operations were
negatively impacted by inflationary pressures, mainly reflecting
increased prices for diesel and certain consumables, including
cyanide, explosives, and steel products (such as grinding media), as
well as supply-chain shortages.”
PAAS’s explanation continued “We are also experiencing indirect cost
increases in other supplies and services due to the inflationary
impact of diesel and consumable prices on third-party suppliers.”
Inflation forcing mining costs higher makes it harder to profitably
produce silver. But the SIL top 15 did a great job tightening their
belts, as evident in relatively-constrained jumps in both of
their key unit costs last quarter.
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.
The
SIL top 15’s cash costs did surge 9.0% YoY to $11.03 per ounce in
Q3’22. That’s the highest on record, probably ever but definitely
in the 26 quarters I’ve been advancing this research thread. But
still that increase was much better than the GDX-top-25 gold miners’
blistering 22.4% YoY cash-cost surge last quarter! The major silver
miners appear to be managing their variable mining costs better than
gold miners.
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 silver miners’ AISCs climbed a similar 7.0% YoY to
$15.85 in Q3’22. That too proved the highest in the last 26
quarters and likely ever witnessed. But again this magnitude of
cost increase seems quite constrained given the severe inflation
ravaging silver miners. That alone is probably running well over
7%, so these companies are apparently controlling their costs much
more effectively than gold miners.
The
GDX top 25’s average AISCs in Q3’22 soared 21.9% YoY to their own
all-time-record peak of $1,391! That equated to 1.17x the prior
four quarters’ average AISCs. But the SIL top 15’s milder cost
increases left that same ratio better at 1.09x. The major silver
miners are either better managing their costs, or there are less
AISC outliers skewing their average than the GDX gold miners are
contending with today.
Still those high AISCs along with weaker silver prices largely
garroted silver-mining profits last quarter. Again
quarterly-average silver prices plunged 20.7% YoY in Q3’22 to just
$19.23. Subtracting those high average AISCs of $15.85 from silver
yields implied sector unit profits of just $3.38 per ounce.
That didn’t just collapse a brutal 64.2% YoY, but it is the SIL top
15’s worst by far since all the way back in Q1’20!
In
the eight quarters before Q3’22, this sector-unit-profits proxy
averaged a whopping $10.87 per ounce. So the major silver
miners’ profitability is definitely impaired by low silver prices
and surging inflation-fueled costs. But this pinching should really
moderate in coming quarters, enabling unit earnings to quickly soar
back near normal levels. Higher silver prices are coming as the
white metal amplifies the yellow’s surge.
With
the Fed’s parabolic US-dollar surge
rolling over and
unwinding, there’s no reason gold and silver can’t mean revert
back up near their Q1’22 averages before the Fed’s extreme
tightening. Those ran $1,879 and $24.03. Quarterly-average silver
prices would have to power up 25.0% from Q3’22 levels to
regain Q1’22 levels! Also some of the SIL-top-15 miners themselves
are forecasting lower AISCs ahead.
Pan
American Silver is a great example. Last quarter its AISCs climbed
a reasonable 10.2% YoY to hit $17.97. Yet this company just
reaffirmed its full-year AISC guidance in its Q3’22 results, at
$15.25 per ounce. In 2022’s first couple quarters, PAAS’s AISCs
averaged $15.36. To hit the that midpoint forecast of $15.25, Q4’s
would have to come in near $12.30. Expecting SIL-top-15
AISCs to retreat to $14.00 is conservative.
At
$24 silver and $14 AISCs, SIL-top-15 unit profits would nearly
triple back up near $10 per ounce! That isn’t likely in this
current Q4, as silver has only averaged $20.05 quarter-to-date. But
higher silver prices are very likely in 2023 and beyond as gold mean
reverts much higher to better reflect this raging inflation
unleashed by
extreme central-bank money printing. Silver-mining earnings are
destined to head much higher.
On
the hard-accounting front under Generally Accepted Accounting
Principles or their equivalents in other countries, the SIL top 15’s
revenues definitely suffered with lower silver prices and less gold
production. They plunged 22.1% YoY to $4,941m in Q3’22, reflecting
that 20.7% lower average silver and 5.5% lower adjusted gold
output. But if Polymetal’s sales are removed from Q3’21, that
revenue drop moderates to 10.5%.
Actual bottom-line accounting earnings reported to securities
regulators proved dismal for the SIL top 15 last quarter,
cratering 94.5% YoY to just $16m! And even that was skewed high
by Wheaton Precious Metals, which reported a $104m gain on selling a
mineral-stream interest. SilverCrest Metals also had a big $26m
forex gain as it ramps up its new silver-and-gold mine. So silver
miners’ GAAP profits were ugly.
But
higher silver prices will work wonders to catapult silver-miner
profitability higher. The SIL top 15’s cash flows generated from
operations are a better measure of their financial health than
easily-distorted earnings. OCFs blasted up 50.7% YoY to $471m in
Q3’22, but that too is skewed. In Q3’21, Buenaventura paid a
colossal $544m for tax litigation to the government of Peru!
Without that, overall OCFs fell 45.0% YoY.
But
the SIL top 15’s cash treasuries still remained robust, adding up to
$5,887m exiting Q3’22. That actually climbed a slight 2.6% YoY, and
wasn’t affected by Polymetal’s booting since it didn’t report cash
in its Q3’21 report. The major silver miners’ big cash hoards will
help them continue to grow their output, both by expanding existing
mines and developing or buying new ones. Higher silver prices will
accelerate that.
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The
bottom line is major silver miners are actually faring pretty well
fundamentally despite the depressed silver prices. They are growing
their collective silver production, which along with weaker gold
output is boosting their relative purity. That makes their stock
prices more responsive to the coming higher silver levels as gold
mean reverts higher to reflect this raging inflation. Silver will
amplify gold’s upside like usual.
The
silver miners are also doing a good job managing mining costs, which
only climbed by single-digit percentages last quarter. That was
just a third of what gold miners suffered! The silver miners are
also projecting lower costs in coming quarters, which along with
better silver prices will really boost profitability. The silver
stocks’ solid fundamentals even in this challenging Q3’22 support
much higher prices as silver recovers. | 
