The
carnage in the silver miners’ stocks has been apocalyptic, fueled by
the astounding COVID-19 stock panic. As terrified traders
frantically dumped everything and ran for the hills, silver and its
miners’ stocks crashed. That catastrophic anomaly has potentially
created epic contrarian buying opportunities. The silver miners’
recently-reported Q4’19 results reveal whether their fundamentals
support a massive rebound.
As
long-time silver-stock traders are painfully aware, this tiny sector
is no stranger to adversity. Only the most-hardened contrarians
dare chasing the white metal’s occasional monster skyrocketings.
Back in late February, silver was rallying nicely as gold surged
over $1600 on mushrooming COVID-19 fears. But over the next 17
trading days silver collapsed 35.8%, with nearly 3/4ths of
that loss in the final week alone!
Silver’s primary
driver is gold, which plunged 9.3% in that devastating mid-March
week crashing silver 28.5%. That blasted the Gold/Silver Ratio to a
crazy new all-time-record high of 124.1x, silver had never been
more undervalued compared to gold! In late February with gold
near $1650, I had warned its $1600 breakout surge was
peculiar and
precarious lacking normal drivers. Risks were high for a major
selloff.
While that would hammer silver lower like usual, its resulting
10.9-year secular low of $11.96 on March 18th was shocking. If
sub-$12 silver somehow persisted, it would threaten the viability of
many of the world’s silver mines. But if the silver miners’ latest
fundamental results suggest they can likely weather this pandemic
superstorm, their upside potential as silver mean reverts much
higher relative to gold is huge!
Because most silver miners logically run calendar financial years,
Q4 reporting has an extended deadline up to 60 days after
quarter-end in the US. In other countries including Canada where
silver stocks trade, the full-year due dates extend out to 90 days.
Annual reports including final quarters are bigger, more complex,
and must be audited by independent CPAs. Now major silver miners
have finally reported Q4’19 results.
The
definitive list of major silver stocks to analyze comes from this
sector’s leading benchmark, the SIL Global X Silver Miners ETF.
Launched way back in April 2010, it has maintained a big first-mover
lead ever since. After every quarterly earnings season, I delve
into the latest results from the top 17 SIL silver stocks. That
arbitrary number fits neatly in the table below, and represents a
commanding 94.8% of SIL’s weighting.
With
these miners trading around the world, amassing this valuable
dataset for analysis is challenging. In different countries the
major silver miners report different data in different ways.
Half-year reporting is common across the globe, necessitating
splitting data in half for quarterly approximations. And each
SIL-top-17 company has its own unique reporting peculiarities, which
take time to understand and make comparable.
The
more quarterly iterations of this complex research thread I run, the
better the results get. Q4’19 was my 15th quarter in a row
of this deep fundamental SIL-silver-stock analysis, adding on to my
massive spreadsheets. The highlights of the major silver miners’
latest results make it into the table below, where blank fields mean
a company hadn’t reported that particular data as of this essay’s
mid-month cutoff.
Each
company’s symbol and weighting within SIL is shown. While most of
these stocks trade on US exchanges, some symbols are listings from
companies’ primary foreign stock exchanges. These miners’ silver
production in Q4’19 is followed by its year-over-year change from
Q4’18. Nearly all of the major silver miners also produce
significant-to-large amounts of gold, which is increasingly
important to them.
So
their quarterly gold production is followed by a measure of their
silver purity, approximating how much of their Q4’19 revenues
were actually derived from silver. The more silver-centric miners
are, the more responsive their profits and stock prices are to major
silver-price trends. This gauge is simply calculated by dividing
miners’ quarterly silver sales, based on silver’s average price last
quarter, by miners’ total revenues.
Next
cash costs and all-in sustaining costs per ounce reveal how much
these SIL-top-17 miners spend to produce their silver. That’s
followed by the YoY changes in these companies’ operating cash flows
and accounting earnings. But raw underlying data is included
instead if its percentage changes would be misleading or not
meaningful, like if data shifts from positive to negative or vice
versa from Q4’18 to Q4’19.
Or
if both quarters show negative numbers. Symbols highlighted in
light-blue have newly climbed into the SIL-top-17 ranks over this
past year. Silver-purity percentages boldfaced in blue show the
handful of true primary silver miners left, which actually
generate over half their revenues from producing the white metal.
This entire dataset together offers a fantastic high-level read on
how the silver miners are faring as a sector.
And
despite silver’s COVID-19-spawned collapse, the major silver miners’
fundamentals greatly improved in Q4’19. Much-higher average
silver prices certainly contributed, but a bigger factor was these
miners really growing their gold outputs. That combined with
much-higher average gold prices fueled way better financial
results. And based on the SIL-top-17’s mining costs, they can
indeed weather $12 silver prices.
Silver mining is an interesting business, much more challenging than
gold mining. Silver’s perpetually-lagging prices make the economics
of silver mining inferior to gold mining. And silver-heavy deposits
that are necessary to support primary silver miners are quite
scarce. So most of the world’s silver production comes as
byproducts from other metals. The Silver Institute has long
tracked comprehensive global silver data.
Once
a year it publishes must-read World Silver Survey reports, which are
usually released in Aprils. So the latest one is still 2019’s,
which covered the world silver market in 2018. That year only
26% of silver mined globally came from primary silver mines!
Nearly 3/4ths of silver output was byproducts from lead-zinc,
copper, and gold mines. So silver production growth is more
complicated mostly involving other metals.
Before boosting output, the silver miners must consider the
economics of the other metals most of their deposits contain. In
2018, primary lead-zinc and copper mines yielded 38% and 23% of all
silver mined in the world. And those key base-metals prices skewed
weaker in Q4’19, with quarterly average London Metal Exchange lead,
zinc, and copper prices rising a modest 4.1%, falling 9.2%, and
slumping 4.6% YoY.
SIL-top-17 component Coeur Mining is a great example of how base
metals’ fortunes can affect silver output. This company has a
fairly-new mine called Silvertip located in northern British
Columbia, which went live in Q3’18. It is a primary zinc-lead mine
with a modest silver byproduct. In Q4’19 results, CDE warned it was
“temporarily suspending” operations at Silvertip resulting in a
massive $251m impairment charge.
The
company blamed “further deterioration in zinc and lead market
conditions” along with operational challenges. In 2019 Silvertip
produced 1.2m ounces of silver, about 1/10th of Coeur’s overall
output. Given the devastating economic slowdown governments’
draconian reactions to COVID-19 are spawning now, more base-metals
mines could be mothballed this year further weighing on world silver
production.
By
late March, lead, zinc, and copper prices had plummeted 16.3%,
42.3%, and 25.0% quarter-to-date as quarantining strangled
economies! While less silver mined on waning base-metals demand is
bullish for silver prices overall, it could weaken silver outputs
for major silver miners that are running base-metals-heavy mines.
Unlike gold-mining decisions which depend solely on gold, byproduct
silver’s are more complicated.
Nevertheless, the SIL-top-17 silver miners collectively produced
76.9m ounces of silver in Q4’19. That climbed a solid 1.5% YoY,
which may be relatively strong. While the Silver Institute’s 2019
data isn’t out yet, world silver output shrunk by 0.0%, 1.8%, and
2.4% in 2016, 2017, and 2018. I suspect it will have contracted
again last year too, as the SIL-top-17’s silver output in Q1’19,
Q2’19, and Q3’19 all fell sharply.
But
Q4’19’s better production combined with much-higher average silver
prices to really improve the SIL-top-17’s fundamentals. Average
silver prices soared 19.1% YoY from Q4’18 to $17.30 in Q4’19, making
silver much more profitable to mine. But interestingly even more
important to the silver miners’ results were their big ongoing
diversifications into gold. That’s where most of their
production growth came last quarter.
These SIL-top-17 major silver miners produced 1551k ounces of gold
in Q4’19, which surged 8.8% YoY! And average gold prices
fared even better than silver’s, blasting 20.8% higher YoY last
quarter. That was actually the main driver behind these major
silver miners’ fast-improving financial results. While their silver
production climbed modestly, their gold production surged
benefitting from higher prevailing prices.
Production growth
is truly the lifeblood of the mining industry. The more individual
miners can grow their outputs, the more capital they generate to
continue expanding existing operations and building new mines. It’s
kind of ironic that the vast majority of production growth among the
elite silver miners came on the long-expanding gold sides of their
businesses. They’ve been gradually yellowing for many years now.
Silver mining is as capital-intensive as gold mining, requiring
similar large expenses to plan, permit, and construct new mines,
mills, and expansions. It needs similar fleets of heavy excavators
and haul trucks to dig and move the silver-bearing ore. Similar
levels of employees are necessary to run silver mines. But at
recent years’ average precious-metals prices, silver mines generate
far lower returns than gold mines.
So
as silver wasted away in recent years, its bombed-out prices heavily
impaired silver mines’ ability to generate sufficiently-robust
operating cash flows and profits. The silver miners were forced to
adapt, and shifted their focus and capital into adding gold
production rather than boosting silver output. This trend is only
going to continue after silver’s extreme crash this month on those
suffocating COVID-19 fears globally.
The
SIL-top-17’s gold production growing much faster than their silver
output naturally forced these silver miners’ purity even lower.
They averaged just 37.4% of their revenues generated from silver in
Q4’19, down from 40.0% a year earlier. Most of these traditional
silver miners are now primary gold miners based on their
sales mix. These companies’ ongoing shift from silver into gold is
a double-edged sword.
Major primary silver miners are a dying breed, making it
increasingly harder for traders to gain leveraged silver exposure
through silver stocks. The lower their percentages of sales
actually derived from silver, the less responsive their stock prices
become to silver-price moves. The more gold-centric the traditional
major silver miners become, the more their stock prices will follow
gold while largely ignoring silver’s action.
But
on the bright side, the silver miners’ shift into gold has really
boosted their cash flows ensuring they can continue growing despite
endlessly-lagging silver prices. That will keep them in business,
trading like
mid-tier gold stocks, until higher prevailing silver prices
return after it mean reverts higher relative to gold. And most
investors still trade traditional silver stocks on silver’s
fortunes, not realizing the depth of this shift.
The
best example last quarter is Pan American Silver, one of the classic
major silver producers. In Q4’19 its gold production skyrocketed
367.5% YoY to 174k ounces, putting it deep into mid-tier-gold
territory. PAAS has focused its investment capital on greatly
expanding its gold output rather than silver. Only 28% of
its Q4’19 sales came from silver, compared to 51% in Q4’18 and 57%
in Q4’16! Gold has superior economics.
The
only primary silver miners left in the SIL-top-17 are First Majestic
Silver at 60% of Q4 revenues from silver, Silvercorp Metals at 66%,
and Fortuna Silver at 57%. But that will soon dwindle to two this
year, as FSM is bringing its first new gold mine online which will
morph it into a primary gold miner! Silver needs to shoot higher
relative to gold and remain relatively high for years to slow
or reverse this yellowing trend.
But
the SIL-top-17’s gold-output growth well exceeding silver’s has
really improved the fundamentals of these miners. Even if they
don’t have major gold operations like PAAS, the sales of gold
byproducts really reduce the silver-mining costs. They greatly
impact profitability along with production levels and prevailing
precious-metals prices. And these major silver miners reported
excellent cost performance in Q4.
Cash
costs are the classic measure of silver-mining costs, including
all cash expenses necessary to mine each ounce of silver. They
are misleading as a true cost measure though, excluding big capital
needed to explore for silver deposits and build mines. Cash costs
are best viewed as an acid test of survivability for the silver
miners, revealing silver-price levels required to keep the mines
running. They retreated slightly in Q4.
The
SIL-top-17 silver miners reported average cash costs of $6.39 per
ounce last quarter, 1.1% lower than those seen in Q4’18. But that’s
still on the high side of their 15-quarter range running from $3.95
to $7.39. And these were skewed higher by struggling Peruvian miner
Buenaventura, which saw crazy-high $13.97 cash costs. Excluding it,
the rest of these SIL silver miners had much-lower $5.63 average
cash costs.
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 mid-tier
silver miners’ true operating profitability.
These SIL-top-17 silver miners reporting AISCs averaged just
$11.17 per ounce in Q4’19, which plunged a massive 15.9% YoY!
There were no skewing outliers either, with the major silver miners
all holding the line on all-in sustaining costs. The biggest
contributor to this steep drop was SSR Mining. A year earlier its
AISCs soared over $20 as it wound down an old silver mine, which
dragged the Q4’18 average higher.
But
SSRM bucked its sector trend to reverse that silver depletion, using
that old mine’s mill to process ore from a new mine nearby. So that
company’s silver production soared 139.1% higher YoY, spreading the
big fixed costs across many more ounces. PAAS also reined in its
silver AISCs over this past year, while CDE simply quit reporting
them entirely starting in Q1’19 because they were too high scaring
investors!
The
SIL-top-17’s AISCs around $11 show these companies could easily
weather this COVID-19-panic-fueled $12 silver, even if it lasts
awhile. They face no existential threat even with silver prices
crashing this month. That means the resulting extremely-battered
silver-stock prices recently will likely prove an outstanding
contrarian buying opportunity. Silver-stock prices will soar as
silver mean reverts back higher.
And
despite this brutal technical and sentimental carnage, the silver
stocks’ fundamentals are very strong. Q4’19’s much-higher
prevailing silver prices combined with much-lower SIL-top-17 AISCs
fueled massive implied profits growth. $17.30 average silver less
$11.17 AISCs yields fat earnings of $6.13 per ounce! That
skyrocketed a stupendous 390.4% YoY from Q4’18’s $1.25,
pinched by lower silver and higher costs.
And
surprisingly massive profits growth will likely persist into Q1’20
despite silver’s collapse. Silver spent most of Q1 higher, so its
average price with this quarter almost over is still $16.98.
Assuming these SIL-top-17 silver miners’ AISCs hold stable at their
past-four-quarter average of $11.53, these miners might still earn
$5.45 per ounce this quarter. That would still be 91.9% higher YoY
from Q1’19’s levels, huge growth!
The
big wildcard is COVID-19-fear-driven government orders to shutter
businesses. A week ago that didn’t look like a threat due to most
mines’ remote locations. But since, governments have become way
more aggressive in ordering countrywide shutdowns of
businesses. They will greatly impact affected mines and companies,
especially if they last beyond a few weeks. Politicians are risking
spawning a depression!
With
average silver and gold prices soaring 19.1% and 20.8% higher YoY,
and the SIL-top-17’s collective production of each growing 1.5% and
8.8%, their Q4’19 financial results should’ve looked awesome. And
they did. Total revenues surged 24.8% YoY to $4.4b, right in line
with the growth they should’ve seen based on their key inputs. They
also fueled huge operating-cash-flow-generation growth of 61.5% YoY
to $1.2b!
The
higher the cash flows these major silver miners can spin off, the
more capital they have to invest in growing their production by
expanding existing mines and building or buying new ones. And they
were already spending that windfall, with their total treasuries
actually slipping 1.0% YoY to $2.6b. Since investors prize
production growth above everything else, silver miners should
always be investing in higher outputs.
On
the accounting-earnings front, the SIL-top-17 actually reported a
total loss of $35m to their national securities regulators based on
those countries’ accounting rules. That was disappointing given the
rest of their operational and financial results. But this was
heavily skewed by 3 major impairment charges, including CDE’s
already-discussed $251m on that zinc-lead mine it is mothballing due
to low base-metals prices.
AG
and PAAS also reported $59m and $40m noncash impairment charges.
All these can be reversed out since estimated changes in assets’
carrying values have no operational impact, yielding total
SIL-top-17 earnings of $315m last quarter. Mining profits are often
heavily distorted by flushing impairments and impairment reversals
through income statements when gold and silver prices have moved
dramatically.
Backing out big impairment charges for Q4’18 yields SIL-top-17
accounting earnings of $62m. So in Q4’19 on that
noncash-impairment-adjusted basis, profits more than quintupled
year-over-year! Greatly-improving profitability was also reflected
in valuations, with these silver miners’ average
trailing-twelve-month price-to-earnings ratios falling 59.9% YoY to
31.9x earlier this month with Q4’19 results included in them.
So
silver stocks weren’t only just annihilated technically, but they
look relatively cheap fundamentally! That gives them huge
upside potential to mean revert radically higher as silver recovers
with gold in the coming months. While you could ride that higher
with SIL, the best gains will be won in individual silver stocks
with superior fundamentals. SIL is burdened with deadweight stocks
that aren’t responsive to silver.
Right after gold and silver stocks crashed last week, I started our
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is necessary to maximize later gains. During the last big
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The bottom line is
the major silver miners reported excellent results in Q4, directly
driven by its much-higher prevailing silver and gold prices. The
silver miners continued shifting into gold, while still modestly
growing their collective silver production. That helped fuel
soaring revenues, operating cash flows, and earnings. And massive
implied earnings growth should persist with silver and gold
remaining relatively high.
While governments
panicking and ordering national shutdowns to slow COVID-19’s spread
are a near-term fundamental threat, this too shall pass. As fears
inevitably fade ahead, silver and its miners’ stocks will rebound
and mean revert way higher. That will yield huge gains for early
contrarians tough enough to fight the herd and buy low. The silver
stocks were bludgeoned to deeply-undervalued levels fundamentally. |