The
major silver miners’ stocks remain deeply out of favor, languishing
near multi-year lows. Of course that reflects investors’ lack of
interest in silver itself. It has greatly lagged, not following
gold higher like usual over the past year and a half. That’s really
torpedoed silver-stock sentiment, making for a challenging
environment for silver miners. But they’re weathering it as their
recently-released Q1’18 results show.
Four
times a year publicly-traded companies release treasure troves of
valuable information in the form of quarterly reports. Companies
trading in the States are required to file 10-Qs with the US
Securities and Exchange Commission by 45 calendar days after
quarter-ends. Canadian companies have similar requirements. In
other countries with half-year reporting, many companies still
partially report quarterly.
Unfortunately the universe of major silver miners to analyze and
invest in is pretty small. Silver mining is a tough business both
geologically and economically. Primary silver deposits, those with
enough silver to generate over half their revenues when mined, are
quite rare. Most of the world’s silver ore formed alongside base
metals or gold. Their value usually well outweighs silver’s,
relegating it to byproduct status.
The
Silver Institute has long been the authority on world silver
supply-and-demand trends. It published its latest annual World
Silver Survey covering 2017 in mid-April. Last year only 28%
of the silver mined around the globe came from primary silver
mines! 36% came from primary lead/zinc mines, 23% copper, and 12%
gold. That’s nothing new, the silver miners have long supplied less
than a third of world mined supply.
It’s
very challenging to find and develop the scarce silver-heavy
deposits supporting primary silver mines. And it’s even harder
forging them into primary-silver-mining businesses. Since silver
isn’t very valuable, most silver miners need multiple mines in order
to generate sufficient cash flows. Traditional major silver miners
are increasingly diversifying into gold production at
silver’s expense, chasing its superior economics.
So
there aren’t many major silver miners left out there, and their
purity is shrinking. The definitive list of these companies to
analyze comes from the most-popular silver-stock investment vehicle,
the SIL Global X Silver Miners ETF. In mid-May at the end of Q1’s
earnings season, SIL’s net assets were running 6.4x greater than its
next-largest competitor’s. So SIL continues to dominate this small
niche contrarian sector.
While SIL has its flaws, it’s the closest thing we have to a
silver-stock index. As ETF investing continues to eclipse
individual-stock picking, SIL inclusion is very important for silver
miners. It grants them better access to the vast pools of
stock-market capital. Differential SIL-share buying by investors
requires this ETF’s managers to buy more shares in its underlying
component companies, bidding their stock prices higher.
In
mid-May as the major silver miners were finishing reporting their
Q1’18 results, SIL included 24 “Silver Miners”. Unfortunately the
great majority aren’t primary silver miners, most generate well
under half their revenues from silver. That’s not necessarily
an indictment against SIL’s stock picking, but a reflection of the
state of this industry. There aren’t enough significant primary
silver miners left to fully flesh out an ETF.
This
disappointing reality makes SIL somewhat problematic. The only
reason investors would buy SIL is they want silver-stock exposure.
But if SIL’s underlying component companies generate well under 40%
of their sales from silver mining, they aren’t going to be very
responsive to silver price moves. And most of that capital intended
to go into primary silver miners is instead diverted into byproduct
silver miners.
So
the silver-mining ETFs sucking in capital investors thought they
were allocating to real primary silver miners effectively starves
them. Their stock prices aren’t bid high enough to attract in
more investors, so they can’t issue sufficient new shares to finance
big silver-mining expansions. This is exacerbating the
silver-as-a-byproduct trend. Only sustained much-higher silver
prices for years to come could reverse this tragedy.
Every quarter I dig into the latest results from the major silver
miners of SIL to get a better understanding of how they and this
industry are faring fundamentally. I feed a bunch of data into a
big spreadsheet, some of which made it into the table below. It
includes key data for the top 17 SIL component companies, an
arbitrary number that fits in this table. That’s a commanding
sample at 95.1% of SIL’s total weighting!
While most of these top 17 SIL components had reported on Q1’18 by
mid-May, not all had. Some of these major silver miners trade in
the UK or Mexico, where financial results are only required in
half-year increments. If a field is left blank in this table, it
means that data wasn’t available by the end of Q1’s earnings
season. Some of SIL’s components also report in gold-centric terms,
excluding silver-specific data.
The
first couple columns of this table show each SIL component’s symbol
and weighting within this ETF as of mid-May. While most of these
stocks trade on US exchanges, some symbols are listings from
companies’ primary foreign stock exchanges. That’s followed by each
miner’s Q1’18 silver production in ounces, along with its absolute
year-over-year change. Next comes this same quarter’s gold
production.
Nearly all the major silver miners in SIL also produce
significant-to-large amounts of gold! That’s truly a double-edged
sword. While gold really stabilizes and boosts silver miners’ cash
flows, it also retards their stocks’ sensitivity to silver itself.
So the next column reveals how pure these elite silver miners
are, approximating their percentages of Q1’18 revenues actually
derived from silver. This is calculated two ways.
The
large majority of these top SIL silver miners reported total Q1
sales. Those are divided by quarterly silver production multiplied
by silver’s average price in Q1, yielding an accurate
relative-purity gauge. In cases where Q1 sales weren’t reported, I
estimated them by adding silver sales to gold sales based on their
production and average quarterly prices. That’s less optimal, since
it ignores any base-metals production.
Next
comes the major silver miners’ most-important fundamental data for
investors, cash costs and all-in sustaining costs per ounce mined.
The latter directly drives profitability which ultimately determines
stock prices. These key costs are also followed by YoY changes.
Last but not least the annual changes are shown in operating cash
flows generated and hard GAAP earnings, with a couple exceptions
necessary.
Percentage changes aren’t relevant or meaningful if data shifted
from positive to negative or vice versa, or if derived from two
negative numbers. So in those cases I included raw underlying data
rather than weird or misleading percentage changes. This whole
dataset together offers a fantastic high-level read on how the major
silver miners are faring fundamentally as an industry. They kept
hanging in there in Q1’18.
Silver has always been
driven by gold,
effectively acting like a gold sentiment gauge. Generally
big silver uplegs only happen after gold has rallied long enough and
high enough to convince traders its gains are sustainable. Then the
way-smaller silver market tends to start leveraging and amplifying
gold’s moves by 2x to 3x. But strangely gold’s strength over the
past year didn’t spill into silver, leaving its miners struggling.
Silver’s average price actually fell 4.1% between Q1’17 and
Q1’18, despite a sizable 8.9% YoY rally in gold’s average price!
Normally silver would’ve powered 18% to 27% higher on such a
meaningful gold advance. But it went the other way because gold
sentiment remained poor. Investors spent 2017 deeply enamored with
the extraordinary
levitating general stock markets, ignoring everything else
including gold and silver.
With
investors not interested, the already-battered silver stocks
continued to languish near lows for most of 2017. These miners had
insufficient capital and incentives to grow production, which is the
lifeblood of mining. So unfortunately these top 17 SIL components
collectively suffered sharp declines in both silver and gold
production over the past year. That naturally hurt their operating
and financial results in Q1’18.
These elite major silver miners’ total silver mined last quarter
fell 5.3% YoY to 72.0m ounces! That was certainly not offset by
higher gold production, which dropped an even-worse 8.1% YoY to
1243k ounces. And sadly those production declines are actually
skewed smaller than sector reality. Note above the only big
absolute gains in silver production came from two silver behemoths,
Fresnillo and Industrias Peñoles.
Their silver production soared 14.0% and 13.1% YoY in Q1, bucking
the weakening trend seen in many of the rest of these major miners.
Together Fresnillo and Peñoles added 3.9m ounces of silver mined to
the SIL-top-17 total. Without that huge boost, the overall silver
production for these elite miners would’ve fallen a huge 10.4%
YoY. And I suspect these Mexican giants’ silver production may
be double-counted.
Fresnillo and Industrias Peñoles have an incestuous relationship, as
the former used to be wholly owned by the latter. Industrias
Peñoles spun off Fresnillo back in May 2008 on the London Stock
Exchange. While Fresnillo’s financial reporting is decent,
Industrias Peñoles’ is murky. Neither my decades studying financial
statements as a Certified Public Accountant nor my rudimentary
Spanish can penetrate very deep.
So I
haven’t been able to track down how much of Fresnillo that
Industrias Peñoles still owns, nor whether the silver production
reported by these silver-mining monsters is actually fully
mutually exclusive. I’m assuming it is for this analysis, but
I’m skeptical. Both companies reported their huge YoY growth in
silver production was the result of Fresnillo’s new San Julián
silver mine ramping up, which is a big one.
San
Julián produced 3568k ounces of silver in Q1’18 alone, along with
fairly-large gold, zinc, and lead byproducts. It’s anticipated to
produce 11.6m and 63.7k ounces of silver and gold annually for 12
years. Without San Julián, which could be double-reported between
Fresnillo and Industrias Peñoles, the top SIL silver miners’
production would look very different. These elite silver miners
have had a challenging year.
Fully excluding Fresnillo and Peñoles, the rest of these top SIL
components saw their collective silver production plunge 16.8% YoY
to 39.2m ounces! The mediocre silver-mining economics from these
weak silver prices combined with company-specific problems have
really hit this industry. Leading the drop in silver production
were a couple of long-time American favorites, Tahoe Resources and
SSR Mining.
Tahoe was originally spun off by Goldcorp to develop the incredible
high-grade Escobal silver mine in Guatemala. Everything went well
for its first few years, with this mine providing 1000+ great
high-paying jobs to locals and contributing big taxes to the
national economy. Then a group of anti-mining activists filed a
frivolous and baseless lawsuit with the intent of shutting down
Escobal. The whole thing was a farce.
Tahoe wasn’t even the target, Guatemala’s Ministry of Energy and
Mines was. This regulator allegedly did not sufficiently consult
with the Xinca indigenous people before granting Escobal’s permits!
Only in a third-world country plagued with rampant government
corruption would that be Tahoe’s problem instead of bureaucrats’.
They apparently didn’t hold enough meetings, so Escobal’s mining
license was actually suspended.
Tahoe was forced to temporarily mothball its crown-jewel silver
mine, and eventually fire many of its local Guatemalan employees.
The dishonorable Guatemalan government continues to drag its feet on
this case, inexplicably strangling one of its largest taxpayers. It
has even allowed violent anti-mine militants to illegally blockade
the road to Escobal, often physically attacking trucks and
drivers supplying this mine!
Thus
Tahoe’s silver production plummeted 100% YoY from 5700k ounces to
zero! That’s certainly not an existential threat, as Tahoe still
has other sizable gold-mining operations. In early May’s Q1’18
report, Tahoe’s management is still optimistic a court ruling in its
favor is soon coming. Then its licenses will be reinstated and it
can slowly resume mining at Escobal. Hopefully this whole mess
isn’t a stealth expropriation.
SSR
Mining’s silver production fell a less-extreme-but-still-huge 38.3%
YoY to 938k ounces in Q1’18. This has nothing to do with
geopolitics like Tahoe’s nightmare, but is simply the forecast
depletion of its old Pirquitas silver mine. SSR Mining, which
used to be called Silver Standard Resources, is exploring in the
area trying to extend the life of this mine. But most of its
financial resources are being poured into its gold mines.
That
gold focus among these top silver miners is common across SIL’s
components. As the silver-percentage column above shows, most of
these elite silver miners are actually primary gold miners by
revenue! Only 3 of these 17 earned more than half of their Q1’18
sales from mining silver, and they are highlighted in blue. WPM,
HL, PAAS, CDE, and TAHO are also top-34 components in the leading
GDX gold miners’
ETF!
While they only comprised 8.7% of GDX’s total weighting in mid-May,
this highlights how difficult it is to find primary silver miners.
SIL’s managers have an impossible job these days with the major
silver miners increasingly shifting to gold. They are really
scraping the bottom of the barrel to find more silver miners. In
Q3’17 they added Korea Zinc, and it’s now SIL’s 3rd-biggest holding
with a hefty 11.9% total weighting.
That
was intriguing, as I’d never heard of this company after decades of
intensely studying and actively trading silver stocks. So I looked
into Korea Zinc and found it was merely a smelter, not even a
miner! The latest financial data I could find in English was
2015’s. That year Korea Zinc “produced” 63.3m ounces of silver,
which was largely a byproduct from its main business of smelting
zinc, lead, copper, and gold.
I
ran the numbers for the heck of it, and silver was implied as 32% of
Korea Zinc’s 2015 revenues. The fact SIL’s managers included a
company like this that doesn’t even mine silver as a top SIL
component shows how rare major silver miners have become. The
economics of silver mining at today’s prices are inferior to gold
mining. Thus the average silver-purity percentage of revenues of
these SIL miners is only 36.8%.
That’s right in line with the past year’s trend, with 2017 seeing
38.5%, 37.6%, 40.1%, and 35.8% from Q1 to Q4. This reflects gold
mining’s economics being superior to silver mining’s these days.
Silver mining is as capital-intensive as gold mining, requiring
similar large expenses for planning, permitting, and constructing
mines and mills. It needs similar heavy excavators and haul trucks
to dig and move the silver-bearing ore.
But
silver generates much lower cash flows due to its lower
price. Consider hypothetical mid-sized silver and gold miners,
which might produce 10m and 300k ounces annually. At last quarter’s
average metals prices, these silver and gold mines would yield $167m
and $399m of yearly sales. It’s far easier to pay the bills mining
gold than silver, which is unfortunate. But until silver surges
again, that’s the way things are.
While I understand this, as a long-time silver-stock investor it
saddens me primary silver miners have apparently become a dying
breed. When silver starts powering higher in one of its gigantic
uplegs and way outperforms gold again, this industry’s silver-purity
percentage will rise. But unless silver not only shoots far ahead
but stays there while gold lags, it’s hard to see
major-silver-mining purity significantly reversing.
Unfortunately SIL’s mid-May composition was such that there wasn’t a
lot of Q1 cost data reported by its top component miners. A
half-dozen of these top SIL companies trade in the UK, South Korea,
Mexico, and Peru, where reporting only comes in half-year
increments. There are also primary gold miners that don’t report
silver costs, and a silver explorer with no production. So silver
cost data remains scarce.
Nevertheless it’s always useful to look at what we have.
Industrywide silver-mining costs are one of the most-critical
fundamental data points for silver-stock investors. As long as the
miners can produce silver for well under prevailing silver prices,
they remain fundamentally sound. Cost knowledge helps
traders weather this sector’s occasional fear-driven plunges without
succumbing to selling low like the rest of the herd.
There are two major ways to measure silver-mining costs, classic
cash costs per ounce and the superior all-in sustaining costs. Both
are useful metrics. Cash costs are the acid test of silver-miner
survivability in lower-silver-price environments, revealing the
worst-case silver levels necessary to keep the mines running.
All-in sustaining costs show where silver needs to trade to maintain
current mining tempos indefinitely.
Cash
costs naturally encompass all cash expenses necessary to
produce each ounce of silver, including all direct production costs,
mine-level administration, smelting, refining, transport,
regulatory, royalty, and tax expenses. In Q1’18, these top 17
SIL-component silver miners that reported cash costs averaged $5.05
per ounce. That plunged a whopping 25.2% YoY, making it look like
silver miners are far more efficient.
But
that’s misleading. Because of hefty byproduct credits from gold and
base metals, Hecla Mining and Fortuna Silver Mines both reported
negative cash costs in Q1. They are an accounting fiction, as
mining silver still costs a lot of money. But crediting byproduct
sales to silver can slash reported cash costs. In the comparable
quarter a year earlier, there were no negative cash costs at any of
SIL’s top 17 miners.
Those super-low cash costs offset SSR Mining’s crazy-high $17.07 per
ounce. That’s not normal either, the result of that winding down of
its lone silver mine. Excluding these extreme outliers, the
remaining handful of silver miners had average cash costs of $5.50
per ounce. As long as silver prices stay above those levels, the
silver miners can keep the lights on at their mines. Sub-$6 silver
is wildly inconceivable.
Way
more important than cash costs are the far-superior all-in
sustaining costs. They were introduced by the World Gold Council in
June 2013 to give investors a much-better understanding of what it
really costs to maintain a silver mine as an ongoing concern. AISCs
include all direct cash costs, but then add on everything else that
is necessary to maintain and replenish operations at current
silver-production levels.
These additional expenses include exploration for new silver to mine
to replace depleting deposits, mine-development and construction
expenses, remediation, and mine reclamation. They also include the
corporate-level administration expenses necessary to oversee silver
mines. All-in sustaining costs are the most-important silver-mining
cost metric by far for investors, revealing silver miners’ true
operating profitability.
In
Q1’18 these top 17 SIL miners reporting AISCs averaged just $10.92
per ounce. That’s down 5.1% YoY, and still way below last quarter’s
low average silver price of $16.72. Excluding SSRM’s $18.37 which
is again a non-representative mine-depletion outlier, that slides to
$9.42. Despite all the tough challenges the major silver miners are
facing, they are still able to produce silver quite profitably
today.
All-in sustaining costs and production are inversely related. Lower
silver production, which many of SIL’s top components suffered last
quarter, leaves fewer ounces to spread the big fixed costs of mining
across. Yet average AISCs still retreated, showing these top silver
miners are getting more efficient at producing their metal.
That will grant the silver miners more upside profits leverage to
rising silver as this metal recovers.
With
last quarter’s $16.72 average silver price, $10.92 AISCs show the
silver miners still earning pretty-fat profits of $5.81 per ounce.
That’s actually only down 2.2% YoY because Q1’17’s higher silver
prices were paired with higher AISCs. Since mining costs are
largely fixed during planning and construction, these silver-mining
profits will explode as silver mean reverts higher. And silver has
vast room to run from here.
Today’s silver price remains crazy-low relative to prevailing gold
levels, portending huge mean-reversion upside. The long-term
average
Silver/Gold Ratio runs around 56, which means it takes 56 ounces
of silver to equal the value of one ounce of gold. Silver is
greatly underperforming gold so far in 2018, with the SGR averaging
a stock-panic-like 79.6 YTD as of late May! So silver is overdue
to catch up with gold.
At a
56 SGR and $1300 gold, silver is easily heading near $23.25. That’s
39% above its Q1 average. Assuming the major silver miners’ all-in
sustaining costs hold, that implies profits per ounce soaring 112%
higher! Plug in a higher gold price or the usual mean-reversion
overshoot after an SGR extreme, and the silver-mining profits
upside is far greater. Silver miners’ inherent profits leverage to
rising silver is incredible.
While all-in sustaining costs are the single-most-important
fundamental measure that investors need to keep an eye on, other
metrics offer peripheral reads on the major silver miners’
fundamental health. The more important ones include cash flows
generated from operations, GAAP accounting profits, revenues, and
cash on hand. They all deteriorated in Q1’18, as you’d
expect with lower silver production and prices.
Before we get into them, these comparisons are a bit misleading. In
Q1’18 12 of these SIL-top-17 silver miners reported quarterly
financial results, compared to 14 a year earlier. So it’s not quite
an apples-to-apples comparison. One reason is Silvercorp Metals,
which clawed its way back into SIL’s top 17 over the past year. SVM
tends to meander in and out of that 17th spot depending on its
market cap relative to its peers.
SVM
has a fiscal year ending March 31st, so its full-year results
that require more time to prepare and get audited come later than
normal quarterly results. I did all the underlying data collection
and analysis for this essay, and wrote the draft, before they were
reported in late May. Korea Zinc also doesn’t report in English as
far as I can tell. Both of these light-blue-highlighted stocks
weren’t in SIL’s top 17 a year ago.
Among these top SIL components reporting Q1’18 financial results,
operating cash flows plunged 33.6% YoY to $528m. That’s still a
strong number for such a small industry, proving that silver mines
are still heavily cash-flow positive in general. Since cash on
balance sheets actually slid 4.6% YoY to $2973m, the silver miners
were apparently spending that cash flow on expansions that have yet
to bear production fruit.
Overall sales among these elite silver miners dropped 13.0% YoY to
$2699m. That makes sense given their 5.3% lower silver production
and 4.1% lower average silver prices in Q1. Of course profits
amplify falling sales, so the top 17 SIL silver stocks saw earnings
plunge 24.1% YoY to $273m. But these silver miners were still
enjoying profitable operations even with silver mired near lows in
such miserable bearishness.
As
silver powers higher in coming quarters, silver-mining profits
will really leverage its advance. And that will fundamentally
support far-higher silver-stock prices. The investors who will make
out like bandits on this are the early contrarians willing to buy in
low, before everyone else realizes what is coming. By the time
silver surges higher with gold so silver stocks regain favor again,
the big gains will have already been won.
While investors
and speculators alike can certainly play the silver miners’
long-stalled
mean-reversion bull with this leading SIL ETF, individual silver
stocks with superior fundamentals will enjoy the best gains by far.
Their upside will trounce the ETFs, which are burdened by companies
that don’t generate enough of their sales from silver. A handpicked
portfolio of purer elite silver miners will yield much-greater
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The
bottom line is the major silver miners fared fine in Q1 despite some
real challenges. A combination of silver continuing to seriously
lag gold, along with anomalous company-specific problems, weighed on
miners’ collective results. Yet they continued to produce silver at
all-in sustaining costs way below Q1’s low prevailing silver
prices. And their ongoing diversification into gold leaves them
financially stronger.
With silver-stock
sentiment remaining excessively bearish, this sector is primed to
soar as silver itself resumes mean reverting higher to catch up with
gold’s young bull market. The silver miners’ profits leverage to
rising silver prices remains outstanding. After fleeing silver
stocks so relentlessly over the past 21 months, investors will have
to do big buying to reestablish silver-mining positions. That will
fuel major upside. | 
