The
silver miners’ stocks have mostly consolidated high over the past
half-year or so, mirroring resilient price action in the metal they
produce. But this relative strength has been overshadowed by the
extended correction in gold, which forced gold stocks lower. The
resulting bearish sentiment engulfed silver stocks, leaving them out
of favor. But their recently-reported Q4’20 results reveal they are
fundamentally-strong.
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 nearing the end of Q4’20’s earnings season in
mid-March, it only held $1.2b in net assets.
SIL’s super-volatile price action since early 2020 reflects the wild
ride this sector has seen. A bit over a year ago, the silver stocks
got sucked into the broader stock panic fueled by
government-lockdown fears. In just a few weeks into mid-March, SIL
plummeted 43.8%! The major silver miners were following silver,
which cratered a brutal 35.2% over a slightly-longer span. And
silver in turn was amplifying gold’s panic plunge.
But
just as traders assumed this sector was doomed, the precious metals
reversed hard to soar into huge post-panic uplegs. Over the next
4.8 months into early August, SIL skyrocketed 176.9% higher!
That was far better than the +134.1% clocked in by GDX, the
leading gold
miners’ ETF. Normally silver stocks do follow gold stocks, as
gold’s fortunes are
silver’s primary
driver. Thus silver stocks are usually slaved to gold.
Indeed SIL corrected with the gold stocks into late November,
retreating 23.5% over 3.6 months. But the silver miners have proven
far more resilient since, well outperforming the gold
miners. Into early January with silver handily besting gold, SIL
surged 26.2% in 1.4 months. And unlike gold stocks which suffered a
failed correction-low retest in late February and early March, SIL’s
original late-November low has mostly held.
The
main reason was outsized silver strength in late January fueled by
speculation Reddit’s famous wallstreetbets’ traders would attempt to
force a silver
short squeeze. Thus unlike gold stocks which have ground lower
on balance since their last bull upleg peaked in early August, the
silver stocks have been consolidating high. Do their latest
Q4’20 operational and financial fundamentals support such
outperformance?
For
19 quarters in a row now, I’ve painstakingly analyzed the major
silver miners’ latest quarterly results soon after they are
reported. While SIL contained a crazy 42 component stocks in
mid-March, I’m limiting my analysis to its top 15 holdings.
These are the world’s biggest and best silver miners, which command
a dominant 87.9% of SIL’s total weighting. The lion’s share of
capital chasing silver stocks ends up in them.
Unfortunately Q4 results closing out calendar years arrive much
later than normal quarterlies. Since the annual reports containing
Q4 numbers are bigger, more complex, and must be audited by
independent CPAs, securities regulators grant extended filing
deadlines. Those are 60 days after year-ends in the US, and a
ridiculous 90 days in Canada where many of the world’s silver stocks
trade! So Q4 analysis runs later.
Some
Canadian silver miners rather disrespectfully force their
shareholders to wait three full months for Q4 results, after Q1
is nearly finished! The major silver miners trade in the US,
UK, Mexico, and Canada, which makes amassing this data somewhat
challenging. There are different financial-reporting requirements
around the globe, and even within the same country miners report
different data in different ways.
Some
annual reports are well-laid-out and easy to parse, while others
seem intentionally opaque requiring lots of digging and calculations
to tease out comparable data. The United Kingdom requires half-year
reporting instead of quarterly, although its silver miners usually
still give supplemental quarterly updates. But in cases where
six-month data was all that was available, it is split in half to
approximate Q4’20 results.
This
table summarizes the operational and financial highlights from the
SIL top 15 in Q4’20. These elite silver miners’ symbols are listed,
some of which are from their primary foreign stock exchanges. That
is preceded by their ranking changes in terms of SIL
weightings from Q4’19. Then their current weightings as of
mid-March follow those stock symbols. This ETF generally weights
silver stocks by market capitalizations.
Next
each company’s quarterly silver and gold production in ounces is
shown, followed by their year-over-year changes from Q4’19. 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. Traders buy silver stocks because they want
leveraged exposure to silver.
So
the next column reveals how silver-centric miners actually
were last quarter. It is mostly calculated by multiplying
companies’ quarterly silver outputs by silver’s average price in Q4,
then dividing those results by quarterly revenues. When sales
aren’t reported, this ratio can be approximated by dividing implied
silver revenues by implied gold-plus-silver sales. But that isn’t
optimal since it excludes base-metals byproducts.
The
rare primary silver miners’ silver-purity percentages are
highlighted in blue. Their stock prices usually show superior
leverage to silver compared to their lower-purity peers. 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, on a comparable unit basis.
Next
quarterly revenues and hard GAAP earnings are shown, along with
their YoY changes. Blank data fields mean companies hadn’t reported
that particular data as of this essay’s mid-March cutoff nearing the
end of Q4’s earnings season. Blank percentage fields indicate those
changes would be either misleading or not meaningful, like comparing
two negative numbers or data shifting from positive to negative and
vice versa.
Thanks to quarterly average silver prices rocketing up 41.2% YoY to
$24.43 in Q4’20, major silver miners ought to have reported awesome
results last quarter. But disappointingly they came in mixed
instead, strong financially yet weaker operationally. While silver
miners certainly aren’t struggling with such high prevailing silver
prices, their overall silver production continues to wane in favor
of way-more-profitable gold.
For
the years I’ve been advancing this
silver-stock-quarterly-fundamentals thread, the overarching theme
has definitely been silver miners actively diversifying into gold.
That still hasn’t changed despite the last two quarters enjoying
excellent high average silver prices. For many years now, gold has
simply proven much more lucrative to mine than silver. So
silver-company managements have invested in more gold output.
The
SIL-top-15 major silver miners collectively produced 63,212k ounces
of their white metal in Q4’20, which was down a major 10.0% YoY!
And that was much farther under the 77,432k high-water mark in the
last 19 quarters, which was achieved way back in Q2’17. These elite
silver miners’ output of their traditional metal has been trending
lower on balance for years now, because of gold’s superior
economics.
The
SIL top 15’s gold production weighed in at 1,480k ounces last
quarter, which also slumped from Q4’19’s levels. But that was only
down 3.4% YoY, much less than silver’s output plunge. Governments’
COVID-19 lockdowns certainly contributed to less silver and gold
mined. Some of the longest economic shutdowns came in Mexico and
Peru, the world’s top-two silver-producing countries hosting many
larger mines.
Many
silver-mining operations run by these SIL-top-15 miners were ordered
shuttered back in late Q1 and early Q2. Most of those mines
remained close until late Q2 or early Q3. Even after those
lockdowns were lifted, it takes time to ramp mine throughput back to
full-speed. Those slow processes ran into Q4 for some silver mines,
which contributed to last quarter’s overall decline in major silver
miners’ production.
And
necessary COVID-19 mitigation measures remaining in place left
mining operations less efficient and more expensive. A quarterly
report I read from an unrelated gold miner blamed rising production
costs partially on “the inherent inefficiencies of social distancing
in underground operations”. But despite these big challenges, the
major silver miners have still rapidly bounced back from the
worst of the lockdown orders.
In
Q4’20, the SIL top 15’s total silver and gold output had already
rebounded a sharp 17.2% and 22.7% from their deep pandemic nadirs in
Q2’20. That production recovery should continue. In the four
quarters ending in Q1’20 before the pandemic slammed silver mining,
these major miners averaged quarterly silver production of 69,275k
ounces. Gold has already recovered to that same-period mean
of 1,482k ounces!
The
composition changes among the SIL top 15 also skewed their silver
and gold output lower in Q4’20. A year earlier in Q4’19, producers
Hochschild Mining and Silvercorp Metals ranked 13th and 14th. But
they drooped to 17th and 16th in mid-March, partially displaced by
SilverCrest Metals which is an explorer with no production.
Removing HOC and SVM output from the year-earlier quarter makes them
more comparable.
Adjusted for this ranking change alone, the SIL top 15’s silver
production only retreated a far-milder 2.4% YoY. And their gold
output actually grew 0.8%. That makes last quarter’s production
declines look much less problematic. But individual major silver
miners were still struggling, with a majority of the SIL top
15 seeing significant-to-serious declines in their own silver and/or
gold outputs in Q4’20 compared to Q4’19.
Interestingly these major silver miners’ overall purity still
improved considerably last quarter even with their silver production
lagging gold. The SIL top 15 averaged 41.5% of their Q4’20 revenues
from silver, the best in five quarters and way better than Q4’19’s
35.8%. That leaves these companies’ stock prices more responsive
to silver, helping explain why they’ve generally outperformed
their gold-stock peers recently.
Three primary silver miners greatly contributed, with Wheaton
Precious Metals, First Majestic Silver, and MAG Silver deriving
55.6%, 72.0%, and 86.8% of their Q4 sales from silver! That makes
them the only primary silver miners in SIL’s larger holdings,
generating over half their revenues from it. MAG dragged the
overall average higher, but its new silver mine is only slowly
spinning up months away from commercial.
A
bigger factor in this improving silver purity is the white metal’s
outperformance of the yellow one in Q4. Last quarter’s average
silver price soared 41.2% YoY to $24.43, much better than gold’s
still-impressive 26.5%-YoY surge to a $1,876 average price. The
major miners would have to see silver’s gains outpace gold’s for
years before their investment focus would swing substantially back
from gold to silver again.
In
silver mining, output levels and unit costs are usually inversely
proportional. The more silver mined, the more ounces to spread
this industry’s big fixed costs across. Those are generally
determined when mines are being planned, then don’t change much.
Quarter after quarter, individual mines require about the same
levels of infrastructure, equipment, and employees to feed their
fixed-capacity mills with ores to process.
Those fixed costs staying roughly steady regardless of prevailing
silver prices is what gives silver miners’ earnings big leverage
to the white metal. With overall SIL-top-15 silver output
coming in about 10% lower last quarter, these silver miners’ unit
costs should’ve risen proportionally. But unfortunately they proved
far worse on average, surging dramatically on soaring costs from the
miners suffering larger output drops.
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 cash costs soared 41.0% higher in Q4’20 to $8.88 per
ounce! That proved the highest by far in the 19 quarters I’ve been
doing this research. Nevertheless, this isn’t troubling since these
are still way below prevailing silver prices. These lofty cash
costs are skewed abnormally high as well. One reason is Peru’s
perpetually-struggling Buenaventura reporting absurd $21.31 cash
costs last quarter!
BVN’s silver output collapsed 34.7% YoY in Q4, the worst among these
major silver miners. With way fewer ounces to bear big fixed costs,
they soared on a unit basis. Excluding this extreme anomaly, the
rest of the SIL top 15 averaged much-more-reasonable $7.49 cash
costs. Coeur Mining’s also came in really high. CDE’s costs are so
excessive that it stopped reporting all-in sustaining costs entirely
to hide them!
Finally the SIL top 15’s average costs change considerably based on
how Chinese silver miner Silvercorp Metals ranks. After applying
credits from its massive lead and zinc byproducts to silver output,
SVM’s unit silver costs are very low or even negative. This
company ranked as 14th in SIL a year ago, but slipped to 16th for
Q4’20. Had SVM been in the top 15, its -$2.76 cash costs would’ve
sunk the overall average to $7.82.
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.
Last
quarter’s AISCs reported by the SIL top 15 averaged $14.31 per
ounce, which also surged 27.9% YoY. But these still weren’t
excessive like cash costs, well below the 19-quarter peak of $15.36
seen in Q3’18. Buenaventura didn’t distort them, because it is a
primary gold miner only reporting AISCs on its gold operations. And
had Silvercorp’s $6.92 AISCs made the top 15, this average would’ve
run lower at $13.39.
The
major silver miners’ average all-in sustaining costs can also be
subtracted from average silver prices for a great proxy of industry
earnings trends. Silver again averaged $24.43 last quarter, which
proved the highest in the last 19 quarters edging out Q3’20’s
$24.39. That less the SIL top 15’s average AISCs of $14.31 yields
hefty $10.12 unit profits for the major silver miners!
That’s the second-highest since at least Q2’16.
Only
the prior quarter’s $14.77 was better, fueled by anomalously-low
$9.62 AISCs among the SIL top 15 then. But Q4’20’s $10.12 still
rocketed up 65.6% year-over-year! Such explosive sector
earnings growth has to be among the best in the entire stock
markets. That argues that much-higher silver-stock prices are
fundamentally-justified, even with declining output. This awesome
outsized profits growth should continue.
Silver has proven very resilient in Q1’21, mostly shrugging off
gold’s vexing extended correction. So as of mid-March, silver was
averaging a fantastic $26.38 quarter-to-date in Q1. That is another
8.0% higher quarter-on-quarter from Q4’20, and up a magnificent
57.0% YoY! If the SIL top 15’s Q1’21 AISCs come in around their
last four quarters’ $12.40 average, sector per-ounce profits could
skyrocket 317% YoY to $13.98!
With
silver prices so high relative to recent years, the major silver
miners are going to report fat profits in Q1 regardless of where
their all-in sustaining costs shake out. So silver stocks have
great potential to surge dramatically higher around their upcoming
Q1 earnings season, which will run from mid-April to mid-May. That
coincides with gold stocks’
big seasonal
spring rally, which should amplify silver stocks’ upside.
The
major silver miners’ strong fundamentals last quarter were confirmed
in their hard accounting results reported to national
securities regulators. These conservative numbers are based on
Generally Accepted Accounting Principles in the US or their
equivalents in other countries. Despite lower production, the SIL
top 15 reported blowout financial results last quarter!
Silver-stock prices certainly aren’t reflecting those yet.
These elite silver miners totaled $5,044m in revenues in Q4’20, the
best sales by far in the 19 quarters I’ve been analyzing the SIL top
15’s results! That surged 22.1% YoY, with the much-higher average
silver and gold prices more than offsetting waning output. With
that 41.5% silver purity among these silver miners, they are really
mostly primary gold miners. So better gold prices help more
than better silver ones.
Those strong quarterly revenues for the SIL top 15 yielded
outstanding hard GAAP profits of $1,216m in Q4’20, fantastically
better than Q4’19’s $3m! Those were the highest accounting earnings
by far in the last 19 quarters, dwarfing the previous high of
$455m. Bigger profits give silver miners much more capital to grow
their outputs, fueling a virtuous circle of production and earnings
growth greatly boosting stock prices.
Stronger earnings also lower valuations, making silver miners look
more attractive fundamentally to big institutional investors. That
generally wasn’t reflected in trailing-twelve-month
price-to-earnings ratios yet, as the SIL top 15’s profits were weak
over this past year around those COVID-19 lockdowns. But after the
likely-blowout results from Q1’21, the major silver miners’
valuations ought to plunge dramatically lower.
The
high silver and gold prices last quarter drove massive
operating-cash-flow generation of $1,924m among the SIL top 15,
soaring 76.4% YoY. That too was a record high within the last 19
quarters. That helped these elite silver miners’ cash treasuries
also rocket 89.6% higher YoY to $5,271m at the end of Q4’20. Those
rich cash hoards will finance output growth, through mine
expansions, builds, and acquisitions.
So
despite lower silver and gold output, the major silver miners’
fundamentals proved incredibly strong in their recently-reported
Q4’20 results. That supports and justifies much-higher
silver-stock price levels in coming months, as silver continues
powering higher on balance with gold’s next bull upleg. And
silver’s parallel bull has great potential to grow much larger in
coming years, as this metal is nowhere near highs.
Back
in Q2’11, silver rocketed parabolic in one of its periodic
speculative manias. It peaked over $48 per ounce, and silver
averaged $38.33 in that quarter. Today there is vastly more
money in the system to chase silver once it regains favor among
speculators and investors. The Fed’s balance sheet alone has
ballooned 2.86x since then! So today’s silver bull has excellent
potential to ultimately soar way higher.
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The
bottom line is the major silver miners just achieved some of their
best financial results ever in Q4, despite waning production. Their
revenues, earnings, and operating cash flows soared to
at-least-19-quarter record highs on better prevailing silver and
gold prices. And that massive profits growth is likely to
accelerate even more in Q1, with silver continuing to grind higher
on balance despite gold’s extended correction.
That
will force valuations dramatically lower, leaving this sector more
attractive to mainstream institutional investors. And silver and
silver stocks will increasingly return to favor as the next bull
uplegs in gold and gold stocks grow. So this silver realm will
likely see major capital inflows in coming months, catapulting
silver-stock prices much higher. Big coming gains are totally
justified given silver miners’ strong fundamentals. |