The
silver miners’ stocks have rallied in recent months, but are still
underperforming gold stocks. Silver lagging gold is mostly
responsible, driven by big stock-market down days dampening
enthusiasm for speculation. But silver will ultimately mirror and
amplify gold’s bull upleg, fueling strong leveraged gains in its
miners’ stocks. Their just-finishing Q4’21 earnings season reveals
they are faring well fundamentally.
With
the subsequent Q1’22 ended, looking at the prior quarter’s
operational and financial reports seems dated. But because most
companies run on calendar years, the Q4 reporting deadlines are
extended. In the US companies don’t have to report full-year 10-K
results until 60 days after quarter-ends, compared to 40 days for
10-Q quarterlies. In Canada, the epicenter of the silver-mining
universe, year-ends extend to 90 days!
Since many of the major silver miners have primary stock listings in
that Great White North, late March is about the earliest enough of
them have reported to analyze their collective Q4 results. Soon
after each quarterly earnings season, I dig into the latest reports
from the top-15 component companies of the SIL Global X Silver
Miners ETF. Despite just $1.1b in net assets, SIL remains the
leading ETF in this small sector.
SIL’s lackluster performance recently reflects the ongoing apathy
plaguing silver stocks. Between late January to early March, SIL
rallied a solid 18.3%. But that proved poor relatively, since
silver marched 17.7% higher in roughly that same span. If silver
miners’ stocks can’t leverage their metal’s upside, they aren’t
worth the sizable additional risks they bear compared to silver.
They must double to triple silver’s gains.
Silver in turn has a long history of well-outperforming gold when
sentiment is favorable. Yet that recent young 17.7% silver
upleg wasn’t much better than gold’s parallel 14.6% surge. The
seriously-weak stock markets were to blame. At worst when gold was
powering higher partially on safe-haven buying, the US flagship S&P
500 stock index plunged 9.1%! Silver tends to get sucked into
material stock-market selling.
That’s because silver is far-more-speculative than gold, making it
more susceptible to flaring fear when stock markets tumble. On days
when the S&P 500 plunges yet gold rallies, silver tends to split
the difference between them. But silver sentiment grows more
favorable the longer gold climbs, unwinding much of that
decoupling. Because silver lagged recently, SIL also
way-underperformed the GDX gold-stock ETF.
That
blasted 32.8% higher at best between late January to early March,
amplifying gold’s gains by a solid 2.3x! That trounced the poor
1.0x SIL achieved relative to silver. So the silver-mining stocks
sure haven’t been very popular lately. Nevertheless, their newest
fundamentals from Q4’21 are important to consider for gaming this
sector’s near-future direction. This is now my 23rd quarter in a
row doing this SIL analysis.
This
table summarizes the operational and financial highlights from the
SIL top 15 during Q4’21. 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 shifting market caps, which reveal both
outperformers and underperformers since Q4’20. Those symbols are
followed by current SIL weightings.
Next
comes these miners’ Q4’21 silver and gold production in ounces,
along with their year-over-year changes from the comparable Q4’20.
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 late March when Q4’s
earnings season was winding down. The 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.
2021’s final quarter proved interesting for the major silver
miners. They faced inflationary cost pressures and drifting-lower
silver prices that squeezed profitability. Yet the SIL top 15’s
average mining costs still retreated, keeping their collective
per-ounce earnings strong! That proved much better fundamentally
than the major gold miners of GDX and mid-tiers of GDXJ, which I
analyzed in depth in recent weeks’ essays.
Much
to the chagrin of long-time silver-stock investors, primary silver
miners are becoming ever-rarer and threatening to go extinct. For
many years now, major silver miners have been increasingly
diversifying into gold. The economics of mining the yellow
metal have long proven superior to those of the white one, and will
stay that way unless silver soars to and sustains much-higher
levels. Miners are adapting to that.
In
Q4’21, these SIL-top-15 silver miners produced 77,231k ounces of
their namesake metal. Although that slumped 4.1% year-over-year
from Q4’20, it was still robust. During the past 23 quarters where
I’ve been advancing this deep-research thread, the SIL top 15’s
aggregate silver output ranged from 61,471k up to 84,962k ounces.
The average was 73,455k, so this latest-reported quarter’s results
proved better than typical.
Surprisingly these major silver miners’ total gold output crumbled
24.1% YoY to just 1,207k ounces in Q4’21! That was the biggest
decline by far since at least Q2’16. During the preceding four
quarters, the SIL top 15’s gold mined had grown 3.7%, 8.3%, 20.2%,
and 11.8% YoY. Gold’s drop doesn’t reflect silver regaining
managements’ favor from gold, but largely a key change in SIL’s
component rankings recently.
For
years one of SIL’s top components had been the Russian-owned
UK-traded Polymetal International. It long commanded this ETF’s
second-largest weighting. But since Russia invaded Ukraine,
destroyed its cities, and slaughtered its people, all Russian stocks
have been dumped like they are radioactive. Thus Polymetal’s market
capitalization collapsed enough to hammer it from second to
twentieth in SIL’s weightings!
This
company is overwhelmingly a primary gold miner, which produced 322k
ounces in Q4’20 and 399k in the preceding Q3’21. Polymetal was
effectively replaced in the SIL top 15 by the small primary silver
miner Aya Gold & Silver, which produced no gold in Q4’21. So if
Polymetal’s gold and silver output is excluded from the comparable
Q4’20, the SIL top 15 actually saw gold retreat just 4.8% while
silver grew 1.4%.
So
the ongoing yellowing of the major silver miners didn’t slow much if
any during 2021’s final quarter. SIL remained a primary gold
miners’ ETF, with just 42.5% of its top-15 companies’ revenues
that quarter actually derived from silver. That’s calculated by
multiplying their Q4’21 silver production by that quarter’s average
silver price, then dividing that by total sales. While 42.5%
improved 2.4% YoY, it is skewed high.
Polymetal’s percent of sales from silver in Q4’20 was just 12.7%, it
really had no place in a silver miners’ ETF despite the 4,400k
ounces of the white metal it mined. That super-low relative silver
purity has been replaced with Aya’s running at 100%. But that small
silver junior merely mined 434k ounces during that quarter, which is
the lowest among the SIL-top-15 producers by far. Ex-Aya, the
silver purity only ran 38.1%.
Just
four of these silver miners qualified as primary silver producers in
Q4’21, and their silver-purity percentages are highlighted in blue.
But because ETF companies need more than a handful of stocks to
create exchange-traded funds, they stuffed SIL with primary gold
miners. But at least those are also all sizable-to-large silver
miners. Still their gold-centric output makes them more
responsive to gold than silver.
Even
with Polymetal flushed down the toilet with the rest of the world’s
Russian stocks, SIL remains very-concentrated and risky. This ETF’s
top-two holdings alone account for a staggering 38.1% of its
total weighting! While both Wheaton Precious Metals and Pan
American Silver are great companies that I’ve owned and recommended
in our newsletters for 13.4 and 19.7 years now, they aren’t primary
silver miners.
Wheaton is actually a silver-and-gold streamer, a mine-finance
business. It helps other companies build silver and gold mines
by pre-purchasing fractions of their future silver or gold outputs.
In return for big upfront capital payments used to construct those
mines, WPM gets to later buy parts of their production for low
per-ounce payments. These streaming deals have proven a fantastic
very-profitable business model.
Silver streaming exclusively was Wheaton’s original focus, but it
changed its name from Silver Wheaton to Wheaton Precious Metals in
May 2017 to reflect its increasing reliance on gold deals. Silver
streams are still easier to procure though, as nearly 3/4ths of
all the silver mined globally is a byproduct of base-metals and
gold mines! Companies are more willing to pre-sell byproduct metals
than their primary ones.
Meanwhile Pan American Silver’s increasingly-heavy focus on gold
will likely necessitate its own name change sooner or later. Just
29.2% of PAAS’s Q4’21 revenues came from silver, on the lower side
for SIL-top-15 stocks. SIL’s third-largest component SSR Mining has
diversified even more aggressively into gold in recent years,
driving down its latest-reported quarterly silver purity to an
utterly-gold-dominated 11.7%!
Given prevailing gold and silver prices and mining economics, this
yellowing of silver miners makes good sense. Augmenting major
silver production with increasing gold output greatly boosts these
companies’ operating-cash-flow generation and profits. But becoming
more gold-centric leaves their stock prices less responsive to
silver, making it more difficult to get purer leveraged silver
exposure through mining stocks.
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 unit terms
these are generally inversely proportional to silver
production. That’s because silver mines’ total 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 Q4’21, yet they fell!
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.
Rather impressively, the SIL top 15’s average cash costs in Q4’21
retreated 3.0% YoY to merely $8.61 per ounce. That proved a
huge 18.0% sequential drop from the preceding quarter’s $10.50! The
primary driver of these lower silver-mining cash costs was Hecla
Mining’s collapsing 77.1% YoY to just $1.69. That super-low result
was driven by huge byproduct credits from lead and zinc mined along
with the silver.
Despite the SIL silver stocks’ performances really lagging the GDX
gold stocks’ lately, these elite major silver miners fared much
better fundamentally on the cost front. The SIL top 15’s cash
costs retreating 3.0% YoY were far better than the
GDX-top-25 major
gold miners’ soaring 21.8% YoY while the
GDXJ-top-25
mid-tiers’ surged 9.2% YoY! This surprising cost dichotomy
persisted through broader measures.
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.
These elite major silver miners of the SIL top 15 reporting AISCs
for Q4’21 averaged $13.54 per ounce, which declined an
even-better 5.4% YoY. Those also collapsed 14.2% quarter-on-quarter
from Q3’21, a heck of an improvement! The comparable GDX- and
GDXJ-top-25-component average AISCs climbed 14.5% and 8.7% YoY.
It’s rare to see the elite silver miners report better fundamental
progress than gold miners.
And
silver AISCs could’ve been better. The Chinese silver and
base-metals miner Silvercorp Metals often oscillates between the
15th- and 16th-largest holding of SIL. It barely missed the cut for
Q4’21 results, with Aya muscling its way in. Had Silvercorp taken
its place, its very-low $8.82 AISCs driven by massive lead and zinc
byproducts would’ve dragged the SIL top 15’s average AISCs down to
$12.76 per ounce in Q4’21.
Silver prices averaged $23.33 in that final quarter of last year,
slumping 4.5% YoY. That was in-line with average gold prices losing
4.3% YoY. Subtracting the SIL-top-15 average AISCs from the same
quarter’s average silver price is a great proxy for sector unit
profitability. These elite silver miners earned a hefty $9.79
per ounce in Q4’21 by that metric, which only retreated a slight
3.3% YoY. Again silver stocks outperformed.
The
top-25 gold miners of GDX and GDXJ saw their sector per-ounce
earnings plunge 27.5% and 21.9% YoY that quarter. So the SIL top
15’s really stand out. $9.79 unit profits are high absolutely too,
the fifth-best seen out of at least the last 23 quarters.
The major silver miners only did better between Q3’20 to Q2’21,
where unit earnings averaged $12.75. That was vastly better than
the $3.82 in the preceding 12 quarters.
So
despite being out of favor with investors because silver has lagged
gold’s recent geopolitical surge on Russia’s invasion of Ukraine,
the major silver miners are faring really well operationally.
Sooner or later traders will realize this, and start flocking back.
Silver better-leveraging gold’s accruing gains in its young upleg
would greatly accelerate that essential sentiment shift. The longer
gold climbs, the more silver joins it.
The
SIL top 15’s hard financial results under Generally Accepted
Accounting Principles or other countries’ equivalents looked less
impressive than sector unit earnings. But Polymetal’s plummeting
from grace was a big driver of that. These elite silver majors
collectively reported $6,580m in revenues in 2021’s final quarter,
which drooped 6.8% YoY. But if Polymetal is removed from the
comparable Q4’20, they grew 5.9%.
Bottom-line earnings plunged an ugly 66.1% YoY to $458m, or down
54.2% if Polymetal is excluded. But as is typical in
precious-metals mining, some companies reported large unusual
one-time items skewing this comparison. Netting those out would
boost Q4’21 SIL-top-15 profits to $523m, which fell 47.7% YoY
without Polymetal. That’s sure not good, but it is in-line with GDX
and GDXJ gold miners’ -47.8% and -67.2%.
These earnings fueled sky-high traditional trailing-twelve-month
price-to-earnings ratios averaging 120.9x for these SIL-top-15
silver stocks! But extreme P/Es from long-time explorer MAG Silver
transitioning into an actual miner and junior miner Aya Gold &
Silver heavily distorted that average. Excluding those two little
companies, the rest of the SIL top 15 averaged
more-reasonable-yet-still-not-cheap 42.5x TTM P/Es.
Operating cash flows are often a better measure of how miners are
actually doing than accounting profits, since way-fewer estimates
feed into them. While not included in this table, during Q4’21
these elite major silver miners reported total operating cash flows
of $1,483m. While down 22.9% YoY, they actually grew a slight 0.3%
if Polymetal is again excluded from the comparable Q4’20. Strong
OCFs fed nice treasuries.
As
last year wound down, these SIL-top-15 silver miners collectively
held $7,361m in cash. That actually grew 8.8% YoY even with
Polymetal, and surged 15.4% YoY without it! Bigger cash hoards mean
more capital available to invest in growing production,
including expanding existing mines, developing new ones, and buying
other mines and mining companies. Output growth attracts investors
to bid stock prices higher.
There are still big gains to be won in silver stocks as their metal
powers higher with gold in coming years. But traders have to be
selective, picking the best fundamentally-superior silver
miners. We currently own just six of these SIL-top-15 stocks in our
newsletters. Six others I wouldn’t touch with a ten-foot pole due
to various operational challenges. A carefully-handpicked subset of
SIL stocks is far better than this whole ETF!
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The
bottom line is the major silver miners reported a surprisingly-good
fourth quarter. Lower mining costs bucking inflationary pressures
largely offset lower average silver prices, keeping sector unit
profits strong. That enabled the silver miners to
fundamentally-outperform the gold miners in Q4’21, which is
unusual. Yet because silver has lagged gold in recent months,
silver-stock sentiment has languished in worse shape.
Recent big stock-market down days tarnished traders’ interest in
silver, but that will improve the longer gold’s upleg powers higher
on balance. Increasing capital inflows will drive silver higher,
with that upside momentum feeding on itself as traders chase gains.
Higher silver prices amplifying gold’s advance will entice
speculators and investors back into silver-mining stocks, which have
a long ways to rally to catch up. |