The
battered silver miners’ stocks surged in recent months, staging a
strong rebound rally. That overdue turnaround was fueled by silver
mean reverting higher on improving sentiment after gold’s decisive
bull-market breakout. But silver miners still had a challenging Q2,
as most of silver’s gains came after last quarter ended. They
continued diversifying into gold to help weather silver’s
endlessly-languishing low prices.
Four
times a year publicly-traded companies release treasure troves of
valuable information in the form of quarterly reports. Required by
the US Securities and Exchange Commission, these 10-Qs and 10-Ks
contain the best fundamental data available to traders. They dispel
all the sentiment distortions inevitably surrounding prevailing
stock-price levels, revealing corporations’ underlying hard
fundamental realities.
The
definitive list of major silver-mining stocks to analyze comes from
the world’s most-popular silver-stock investment vehicle, the SIL
Global X Silver Miners ETF. Launched way back in April 2010, it has
maintained a big first-mover advantage. SIL’s net assets ran $476m
in mid-August near the end of Q2’s earnings season, 5.3x greater
than its next-biggest competitor’s. SIL is the leading
silver-stock benchmark.
In
mid-August SIL included 23 component stocks, which are weighted
somewhat proportionally to their market capitalizations. This list
contains the world’s largest silver miners, including the biggest
primary ones. Every quarter I dive into the latest operating and
financial results from SIL’s top 17 companies. That’s simply an
arbitrary number that fits neatly into the table below, but still a
commanding sample.
As
of mid-August these major silver miners accounted for fully 94.1% of
SIL’s total weighting. In Q2’19 they collectively mined 73.7m
ounces of silver. The latest comprehensive data available for
global silver supply and demand came from the Silver Institute in
April 2019. That covered 2018, when world silver mine production
totaled 855.7m ounces. That equates to a run rate around 213.9m
ounces per quarter.
Assuming that mining pace persisted in Q2’19, SIL’s top 17 silver
miners were responsible for over 34% of world production. That’s
fairly high considering just 26% of 2018’s global silver output was
produced at primary silver mines! 38% came from lead/zinc mines,
23% from copper, and 12% from gold. Nearly 3/4ths of all
silver produced worldwide is just a byproduct. Primary silver mines
and miners are quite rare.
Scarce silver-heavy deposits are required to support primary silver
mines, where over half their revenue comes from silver. They
are increasingly difficult to discover and ever-more expensive to
develop. And silver’s challenging economics of recent years argue
against miners even pursuing it. So even traditional major silver
miners have shifted their investment focus into actively
diversifying into far-more-profitable gold.
Silver price levels are best measured relative to prevailing gold
prices, which
overwhelmingly drive silver price action. In early July the
Silver/Gold Ratio
continued collapsing to its worst levels witnessed in 26.8 years,
since October 1992! Those secular extremes of the worst silver
price levels in over a quarter century sure added to the misery
racking this once-proud sector. That compounded miners’ challenges
in Q2.
The
largest silver miners dominating SIL’s ranks are scattered around
the world. 11 of the top 17 mainly trade in US stock markets, 3 in
the United Kingdom, and 1 each in South Korea, Mexico, and Canada.
SIL’s geopolitical diversity is good for investors, but makes it
difficult to analyze and compare the biggest silver miners’
results. Financial-reporting requirements vary considerably from
country to country.
In
the UK companies report in half-year increments instead of
quarterly. Some silver miners still publish quarterly updates, but
their data is limited. In cases where half-year data is all that
was made available, I split it in half for a Q2 approximation.
Canada has quarterly reporting, but the deadlines are looser than in
the States. Some Canadian miners really drag their feet, publishing
their quarterlies close to legal limits.
The
big silver companies in South Korea and Mexico present other
problems. Their reporting is naturally done in their own languages,
which I can’t decipher. Some release limited information in
English, but even those translations can be difficult to interpret
due to differing accounting standards and focuses. It is definitely
challenging bringing all the quarterly data together for these
diverse SIL-top-17 silver miners.
But
analyzing them in the aggregate is essential to understand
how they are faring. So each quarter I wade through all available
operational and financial reports and dump the data into a big
spreadsheet for analysis. Some highlights make it into this table.
Blank fields mean a company hadn’t reported that data by mid-August,
as Q2’s earnings season wound down. Some of SIL’s components report
in gold-centric terms.
The
first couple columns of this table show each SIL component’s symbol
and weighting within this ETF as of mid-August. 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 Q2’19 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 Q2’19 revenues actually
derived from silver. This is calculated one of two ways.
The
large majority of these SIL silver miners reported total Q2
revenues. Quarterly silver production multiplied by silver’s
average price in Q2 can be divided by these sales to yield an
accurate relative-purity gauge. When Q2 sales weren’t reported, I
estimated them by adding silver sales to gold sales based on their
production and average quarterly prices. But that’s less optimal,
as it ignores any base-metals byproducts.
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. Companies with
symbols highlighted in light-blue have newly climbed into the elite
ranks of SIL’s top 17 over this past year. This entire dataset
together is quite valuable.
It
offers a fantastic high-level read on how the major silver miners
are faring fundamentally as an industry and individually.
The super-low silver prices for most of Q2 really weighed on
operating cash flows and earnings last quarter. But the major
silver miners’ years-old and still-ongoing diversification into gold
helped them weather the brutal low-silver-price storm. They still
need silver to power far higher to thrive again.
The
silver miners had the cards stacked against them last quarter, so
their Q2 results weren’t going to look good. In addition to
slumping towards early July’s incredible 26.8-year secular low
relative to gold, silver languished for most of Q2. By late May it
had fallen 5.0% quarter-to-date, far worse than gold’s own 1.0% QTD
loss. While it did rally 6.6% into quarter-end from that nadir,
that lagged gold’s 10.2% rebound.
Overall in Q2’19, silver merely eked out a pathetic 1.3% gain
despite gold’s blistering 9.1% rally. And silver prices averaged a
miserable $14.88 last quarter, plunging 9.9% year-over-year from
Q2’18’s levels! Silver was about as deeply out of favor as it can
get, which naturally killed any interest at all in the silver-mining
stocks. At worst in late May, SIL had dropped 12.2% year-to-date on
silver’s own 7.2% YTD loss.
So
there weren’t going to be any silver-stock fireworks coming out of
such a dismal quarter. Considering that nigh-apocalyptic silver
backdrop, the major silver miners fared reasonably well in Q2. They
kept on plugging away despite the choking pall of despair. The
chronically-weak silver prices continued to justify the years-old
shift into gold by traditional silver miners, which was again
evident in the top SIL miners’ outputs.
That
73.7m ounces of silver these SIL-top-17 miners produced last quarter
fell 1.8% YoY from Q2’18’s levels. Over the 13 quarters since Q2’16
when I started this deep-quarterly-results research thread, the
SIL-top-17 peak was 78.6m ounces in Q4’17. Silver production is
waning even among traditional major silver miners, its economics
have been too constrained. They are increasingly shifting into
gold instead.
The
collective gold production from these elite silver majors ran 1.5m
ounces in Q2’19, shooting up 13.4% YoY! They’ve been increasingly
diversifying into gold in recent years as silver languished, since
the yellow metal has had way-superior economics. The bombed-out
silver prices have heavily impaired silver mines’ generation of
operating cash flows and profits. So the silver miners have been
forced to adapt.
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
even longtime traditional silver miners have reallocated much of
their capital investments into growing gold outputs at silver’s
expense. According to the Silver Institute’s latest World Silver
Survey, 2018 was the third year in a row of waning global silver
mine production. The mined-silver-supply shrinkage is even
accelerating, running 0.0% in 2016, 1.8% in 2017, and 2.4% in 2018!
Peak silver could really be upon us.
SIL’s top 3 component stocks commanding fully 38.9% of its total
weighting sure exemplify the yellowing of the major silver miners.
Pan American Silver currently crowns this leading silver-stock ETF,
and has a proud heritage of mining its namesake metal. Last quarter
its silver output only grew 2.9% YoY, yet its gold production
skyrocketed 190.1% higher to 155k ounces! Thus its silver purity
collapsed to merely 34.1%.
PAAS
acquired troubled silver miner Tahoe Resources back in
mid-November. Tahoe had owned what was once the world’s largest
primary silver mine, Escobal in Guatemala. It had produced 5.7m
ounces in Q1’17 before that country’s government
unjustly shut it
down after a frivolous lawsuit on a trivial bureaucratic misstep
by the regulator. PAAS hopes to work through the red tape to
win approval to restart Escobal.
But
the real prize in that fire-sale buyout was Tahoe’s gold production
from other mines. That deal closed in late February, so that new
gold wasn’t fully reflected until PAAS’s latest Q2 results. Now
this former silver giant is forecasting midpoint production of
575.0k ounces of gold and 25.8m ounces of silver in 2019. That is
actually deep into mid-tier-gold territory and a far cry from
2018’s output of 178.9k and 24.8m!
SIL’s second-largest component in mid-August as this latest earnings
season ended was the Russian-founded but UK-listed Polymetal. Its
silver production fell 11.8% YoY in Q2, yet its gold output soared
30.2% to 302k ounces. That actually makes this company a major
gold miner, exceeding 1m ounces annually! So not surprisingly
only 18.1% of its Q2 revenues were derived from silver, among the
lowest of SIL.
SIL’s third-largest component is Wheaton Precious Metals. It used
to be a pure silver-streaming play known as Silver Wheaton. Silver
streamers make big upfront payments to miners to pre-purchase some
of their future silver production at far-below-market unit prices.
This is beneficial to miners because they use the large initial
capital infusions to help finance mine builds, which banks often
charge usurious rates for.
Back
in May 2017 Wheaton changed its name and symbol to reflect its
increasing diversification into gold streaming. In Q2’19 WPM’s
silver output collapsed 20.6% YoY, but its gold surged 17.9%
higher! That pushed its silver-purity percentage in sales terms to
just 38.0%, way below the 50%+ threshold defining primary silver
miners. This gold-heavy ratio is forecast to persist, with WPM
allocating more capital to gold.
Pan
American will probably soon follow in Wheaton’s footsteps and change
its name and symbol to reflect its new gold-dominated future. As
miserable as silver has fared in recent years, I’m starting to
wonder if the word “silver” in a miner’s name has become a liability
with investors. The major primary silver miners are a dying
breed, as it’s exceedingly difficult to generate sufficient cash
flows and profits mining silver alone.
Major silver miners are becoming so scarce that SIL’s fourth-largest
component is Korea Zinc. Actually a base-metals smelter,
this company has nothing to do with silver mining. It ought to be
kicked out of SIL posthaste, as its presence and big 1/11th
weighting really retards this ETF’s performance. Korea Zinc smelted
about 64.0m ounces of silver in 2018, which approximates roughly 17%
of its full-year revenue.
Global X was really scraping the bottom of the barrel to include a
company like Korea Zinc in SIL. I’m sure there’s not a single SIL
investor who wants base-metals-smelting exposure in what is
advertised as a “Silver Miners ETF”. The weighting and capital
allocated to Korea Zinc should be reallocated and spread
proportionally across the other SIL stocks. The ranks of major
silver miners are becoming more rarefied.
In
Q2’19 the SIL-top-17 silver miners averaged just 36.4% of their
quarterly revenues from that metal! That was on the lower side of
the recent years’ range. Only 3 of SIL’s top-17 component stocks
were still primary silver miners last quarter, First Majestic
Silver, Silvercorp Metals, and Fortuna Silver Mines. SIL is
effectively another gold miners’ ETF, where its holdings
derive nearly 2/3rds of their revenues from gold!
With
SIL-top-17 silver production sliding 1.8% YoY in Q2’19, the
per-ounce mining costs should’ve risen proportionally.
Silver-mining costs are largely fixed quarter after quarter, with
actual mining requiring the same levels of infrastructure,
equipment, and employees. So the lower production, the fewer ounces
to spread mining’s big fixed costs across. But the major silver
miners’ Q2’19 costs surged disproportionally.
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 Q2’19 these SIL-top-17
silver miners reported cash costs averaging $6.88 per ounce, which
soared 73.9% YoY! While sounding catastrophic, that remains well
under Q2’s average silver price.
That
means the silver miners faced no existential threat last quarter
despite its terrible silver prices. The reason cash costs soared is
because Hecla Mining and Silvercorp Metals both reported negative
cash costs in Q2’18 due to big byproduct credits. Excluding
them, the comparable cash costs a year ago ran $6.49 which is much
closer to last quarter’s levels. The silver miners are doing well
holding the line on costs.
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 silver mines as ongoing concerns. 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.
The
SIL-top-17 silver miners reporting AISCs in Q2’19 averaged $11.51
per ounce, which was only up 5.3% YoY. That was really impressive
considering their waning silver production, and the challenges of
producing this metal at such low prices. That was well under late
May’s silver low of $14.34, as well as mid-November’s 2.8-year
secular low of $13.99. The silver miners are nicely navigating
silver’s vexing slump.
At
Q2’19’s average silver price of $14.88 and average SIL-top-17 AISCs
of $11.51, these miners were earning $3.37 per ounce. That’s not
bad for a sector that investors mostly left for dead, convinced it
must be doomed. Being so wildly undervalued relative to gold,
silver has the potential to surge much higher in this resurgent gold
bull. Historically the
Silver/Gold Ratio
has averaged around 55x, which has big implications.
At
early July’s apocalyptic 26.8-year low relative to gold, the SGR
plunged all the way to 93.5x! In other words, it took 93.5 ounces
of silver to equal the value of a single ounce of gold. But silver
was awoken from its zombified stupor soon after, thanks to gold’s
decisive
bull-market breakout to major new secular highs. So by
mid-August as Q2’s earnings season wrapped up, silver had clawed
back up to an 88.5x SGR.
By
August 15th silver had regained $17.22 at best, which was merely an
18.4-month high. That was still a joke compared to gold though,
which at $1524 had soared to its own 6.3-year secular high!
In order to mean revert back up to historical norms compared to
gold, silver has a long way to go. At $1524 gold, a 55x SGR implies
a silver price of $27.71. That’s another 61% higher from silver’s
still-weak mid-August levels.
Industry-wide all-in sustaining costs don’t change much regardless
of prevailing silver prices. That is because they are largely
determined during mine-planning stages, when engineers and
geologists decide which ores to mine, how to dig to them, and how to
process them to extract the silver. So higher silver prices yield
explosive profits growth, which is what makes the volatile
silver-mining stocks so alluring to traders.
A
silver mean reversion to 1/55th the price of gold at its mid-August
prices would catapult silver-mining profits 381% higher at Q2’s
AISCs! Capital would deluge into this forsaken sector if these
miners were earning $16.20 per ounce on $27.71 silver. And mean
reversions out of extreme lows never stop at the historical
averages, but their strong upside momentum carries them to
proportional upside overshoots.
So
the potential silver-miner earnings growth and thus stock-price
gains when silver normalizes relative to gold are colossal. But
lest that seem like a pie-in-the-sky pipe dream, consider just the
first half of Q3’19 already in the books when Q2’s earnings season
concluded. As of August 15th, silver had already risen to a $16.10
QTD average. That was 8.2% higher than Q2’s miserable $14.88, and
very bullish for the miners.
Assuming Q3’s AISCs stay in line with Q2’s which is highly likely,
silver-mining profits could be exploding 36.2% higher QoQ in this
current quarter! That of course supports much higher silver-stock
prices. All silver and its miners’ stocks need to thrive is for
traders to be convinced gold is likely to keep climbing on balance.
That necessary shift in overall precious-metals sentiment back to
bullish is finally underway.
The
caveat is the degree to which silver miners’ earnings amplify this
metal’s upside is dependent on how much of their sales are still
derived from silver as it reverts north. If the SIL top 17 are
still getting 36% of their sales from silver, their stocks should
surge with silver. But the more they diversify into gold, the more
dependent they will be on gold-price moves. Those aren’t as big as
silver’s since gold is a far-larger market.
Back
to Q2’19 results, the SIL-top-17 silver miners’ hard accounting
metrics mostly weakened. And that makes sense with average silver
prices falling 9.9% YoY and these elite silver miners producing 1.8%
less. They did manage to achieve a 2.4% gain in total revenues to
$3.6b last quarter. That was solely thanks to their collective gold
output growing 13.4% YoY. Without that gold, Q2 would’ve looked
terrible.
Operating-cash-flow generation was weak, plunging 43.8% YoY to $555m
across the SIL top 17. That makes it harder for these miners to
invest in future production growth. Their total cash treasuries
reported at the end of Q2 also fell 33.9% to $2.4b. Silver needs to
rally considerably and stay higher for at least a few quarters
before the silver miners can spin off strong cashflows again.
Hopefully that’s now underway.
These major silver miners’ hard GAAP earnings in Q2’19 proved really
weak, reflecting the miserable prevailing silver prices. Together
they reported a collective net loss of $134m, compared to a $463m
group profit in Q2’18. Out of the 13 of these SIL-top-17 miners
that reported last quarter’s earnings, 8 were losses. Leading the
way was the streaming giant Wheaton Precious Metals, which lost
$125m alone.
WPM
wrote down $166m on a streaming agreement it had overpaid for, a
massive non-cash charge that helped torpedo the silver miners’
profits. But I didn’t see any other major writedowns, which was on
the impressive side given last quarter’s super-low silver prices.
Thankfully traders don’t buy silver stocks for how they’re faring
today, but for how they are likely to do as silver mean reverts
higher. It’s all about potential.
Silver’s last major upleg erupted in essentially the first half of
2016, when silver soared 50.2% higher on a parallel 29.9% gold
upleg. SIL blasted 247.8% higher in just 6.9 months, a heck of a
gain for major silver stocks. But the purer primary silver miners
did far better. The purest major silver miner First Majestic’s
stock was a moonshot, skyrocketing a staggering 633.9% higher in
that same short span! SIL’s gains are muted.
The
key takeaway here is avoid SIL. The world’s leading “Silver
Miners ETF” is increasingly burdened with primary gold miners with
waning silver exposure. And having over 1/11th of your capital
allocated to silver miners squandered in Korea Zinc is sheer
madness! If you want to leverage silver’s long-overdue mean
reversion higher relative to gold, it’s far better to deploy in
smaller purer primary silver miners alone.
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The
bottom line is the major silver miners had a challenging Q2. Silver
languished the entire quarter, on its way to horrific
quarter-century-plus lows relative to gold. Silver didn’t start
perking up until mid-July, after gold’s decisive bull-market
breakout had lasted long enough to convince traders gold’s upside
was real and sustainable. So silver miners’ operating cash flows
and earnings were way down last quarter.
That
will really change in Q3 as long as silver doesn’t plummet into
quarter-end. It’s incredible how fast silver miners’ fundamentals
improve with higher silver prices. And silver’s upside potential is
enormous, as it has a vast way to go to normalize relative to
prevailing gold prices. The more that precious-metals sentiment
improves, the more capital will flow into the tiny silver sector
catapulting miners’ stocks far higher. |