The
silver miners’ stocks have really languished since mid-2016,
relentlessly grinding sideways to lower. With gold out of favor,
silver and its miners have largely been left for dead and
forgotten. This sector is deeply mired in universal apathy and
bearishness. But since silver stocks can skyrocket when silver
decisively rallies again, it’s important to keep an eye on silver
miners’ fundamentals like their recent Q4’17 results.
Four
times a year publicly-traded companies release treasure troves of
valuable information in the form of quarterly reports. Required by
securities regulators, these quarterly results are exceedingly
important for investors and speculators. They dispel all the
sentimental distortions surrounding prevailing stock-price levels,
revealing the underlying hard fundamental realities. They
serve to re-anchor perceptions.
Normally quarterlies are due 45 calendar days after quarter-ends, in
the form of 10-Qs required by the SEC for American companies. But
after the final quarter of fiscal years, which are calendar years
for most silver miners, that deadline extends out up to 90 days
depending on company size. The 10-K annual reports required once a
year are bigger, more complex, and need fully-audited numbers unlike
10-Qs.
So
it takes companies more time to prepare full-year financials and
then get them audited by CPAs right in the heart of their busy
season. The additional delay in releasing Q4 results is certainly
frustrating, as that data is getting stale approaching the end of
Q1. While most silver miners report their Q4 and/or full-year
results by 7 to 9 weeks after year-ends, some disrespect their
investors by pushing that 13-week limit.
And
some silver miners only publish full-year results without breaking
out Q4, masking what happened in the latest quarter. All this
unfortunately makes Q4 results the hardest to analyze out of all
quarterlies. But delving into them is still well worth the
challenge. Quarterly results offer a very valuable true snapshot of
what’s really going on, shattering all the misconceptions bred by
the ever-shifting winds of sentiment.
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, and
their value usually well outweighs silver’s. So typically in any
given year, less than a third of the global mined silver
supply actually comes from primary silver mines!
The
world authority on silver supply-and-demand fundamentals is the
Silver Institute. Back in mid-May it released its latest annual
World Silver Survey, which covered 2016. That year only 30% of
silver mined came from primary silver mines, a slight increase. The
remaining 70% of silver produced was simply a byproduct. 35%
of the total mined supply came from lead/zinc mines, 23% from
copper, and 12% from gold.
As
scarce as silver-heavy deposits supporting primary silver mines are,
primary silver miners are even rarer. Since silver is so
much less valuable than gold, most silver miners need multiple mines
in order to generate sufficient cash flows. These often include
non-primary-silver ones, usually gold. More and more traditional
elite silver miners are aggressively bolstering their gold
production, often at silver’s expense.
So
the universe of major silver miners is pretty small, 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. This week its net assets are
running 6.8x greater than its next-largest competitor’s, so SIL
really dominates this space. As investors buy SIL, it in turn buys
shares in the companies it holds.
Back
in mid-March as the major silver miners were finishing reporting
their Q4’17 results, SIL included 25 “silver miners”. This term is
used loosely, as SIL holds plenty of companies which can’t be
described as primary silver miners. Most generate well under
half their revenues from silver, which really limits their stock
prices’ leverage to silver rallies. Nevertheless, SIL is today’s
leading silver-stock ETF and benchmark.
The
higher the percentage of sales any miner derives from silver,
naturally the greater its exposure to silver-price moves. If a
company only earns 20%, 30%, or even 40% of its revenues from
silver, it’s not a primary silver miner and its stock price won’t be
very responsive to silver itself. But as silver miners are
increasingly actively diversifying into gold, there aren’t
enough big primary silver miners left to build an ETF alone.
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 94.6% of SIL’s total weighting.
While most of these top-17 SIL components had reported on Q4’17 by
late March, 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 Q4’s earnings
season. Some of SIL’s components also report in gold-centric terms,
excluding silver-specific data.
In
this table the first couple columns show each SIL component’s symbol
and weighting within this ETF as of mid-March. While most of these
silver stocks trade in the States, not all of them do. So if you
can’t find one of these symbols, it’s a listing from a company’s
primary foreign stock exchange. That’s followed by each company’s
Q4’17 silver production in ounces, along with its absolute
year-over-year change.
After that comes this same quarter’s gold production. Pretty much
every major silver miner in SIL also produces
significant-if-not-large amounts of gold! While gold stabilizes and
augments the silver miners’ cash flows, it also retards their
stocks’ sensitivity to silver itself. Naturally investors and
speculators buy silver stocks and their ETFs because they want
leveraged upside exposure to silver’s price, not gold’s.
So
the next column reveals how pure the elite SIL silver miners
are. This is mostly calculated by taking a company’s Q4 silver
production, multiplying it by Q4’s average silver price, and then
dividing that by the company’s total quarterly sales. If miners
didn’t report Q4 revenues, I approximated them by adding the silver
sales to gold sales based on their quarterly production and these
metals’ average fourth-quarter prices.
Then
comes the most-important fundamental data for silver miners, cash
costs and all-in sustaining costs per ounce mined. The latter
determines their profitability and hence ultimately stock prices.
Those are also followed by YoY changes. Finally comes the YoY
changes in cash flows generated from operations and GAAP profits.
But there are a couple exceptions where YoY changes just wouldn’t
yield useful results.
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
results instead of weird or misleading percentage changes. This
whole dataset offers a great high-level read on how the major silver
miners are faring today as an industry. They’re doing pretty well
in this weak-silver-price environment.
That’s reassuring given silver’s serious underperformance relative
to gold. As a far-smaller market, silver usually amplifies gold’s
advances by 2x to 3x. Yet in 2017, silver only rallied 6.4%
despite a much-bigger 13.2% gold rally. That vexing trend has
continued in 2018, with silver down 3.8% year-to-date while gold is
1.8% higher. With silver itself really sucking wind, investors sure
aren’t motivated to buy silver stocks.
Production is the lifeblood of miners, and thus the best place to
start fundamental analysis. In Q4’17, these top-17 SIL components
collectively produced an impressive 78.6m ounces of silver. If
2016’s world-silver-mining run rate is applied to last year’s fourth
quarter, that implies 221.5m ounces of silver mined. Thus these top
SIL silver miners would account for nearly 36% of that total,
they truly are major silver players.
Their collective silver production looks solid, climbing 3.0% YoY.
But unfortunately that’s misleading, as huge growth in a couple
mining conglomerates is masking sharp-to-catastrophic declines
for some of the rest of these SIL-component miners struggling with
low silver prices. Fresnillo and Industrias Peñoles enjoyed major
20% and 19% YoY gains in silver production off their
already-gigantic world-leading bases!
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 behemoths is actually 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
coming online, which is a big one.
San
Julián produced 4057k ounces of silver in Q4’17 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.
Excluding Fresnillo and Peñoles, the rest of these top SIL
components saw their collective silver production fall a sizable
6.8% YoY to 44.5m ounces! It’s been quite ugly out there in
silver-land, for both industry-wide and company-specific reasons.
Between Q4’16 and Q4’17, the average silver price retreated 2.5% to
just $16.69. That was far worse than average gold’s 4.8% YoY gain,
testing silver’s economics.
With
silver prices so weak, sentiment so bearish, and silver-stock prices
so darned low, silver miners are both starved of capital for
expansions and reluctant to invest heavily in the silver side of
their businesses. Mining gold is far more profitable at today’s
precious metals’ prices, so they continue to allocate scarce
resources to growing their gold production. That certainly isn’t
helping the purity of the major silver miners.
A
couple long-time favorites of American investors saw silver
production plummet over this past year. Tahoe Resources was
originally spun off by Goldcorp to develop the incredible high-grade
Escobal silver mine in Guatemala. Over the past year that country’s
corrupt government shut this mine down after a frivolous and
baseless lawsuit by anti-mining activists. They sued the government
regulator, not Tahoe itself!
That
lawsuit claimed Guatemala’s Ministry of Energy and Mines did not
properly consult with the Xinca indigenous people before granting
Escobal’s permits! That shouldn’t even be Tahoe’s problem if the
government bureaucrats didn’t hold enough meetings, yet Escobal’s
mining license was still suspended. The dishonorable
Guatemalan government has been dragging its feet ever since, so
Escobal is frozen in stasis.
The
government’s lack of respect for the rule of law shows why
third-world countries stay that way. For many months it allowed
violent anti-mine militants to illegally blockade the road to
Escobal and physically attack trucks and their drivers!
Tahoe eventually had to fire about half of the 1000+ local employees
who had high-paying jobs at that mine. Tahoe’s silver production
cratered 100% YoY from 4827k ounces to zero.
SSR
Mining saw a similar sharp 60% YoY plummet in silver production to
just 877k ounces in Q4’17. It had nothing to do with geopolitics
like Tahoe’s mess, but is simply due to 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 Q4’17
sales from mining silver, and they are highlighted in blue. WPM,
CDE, PAAS, TAHO, and HL are also top-34 components in the leading
GDX gold miners’
ETF.
While they only comprised 8.3% of GDX’s total weighting in late
March, 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 2nd-largest holding
with a large 12.7% 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 35.8%.
That’s right in line with the downtrend over this past year, with
Q4’16,
Q1’17,
Q2’17, and
Q3’17 seeing
SIL’s top-component silver purity averaging 40.6%, 38.5%, 37.6%, and
40.1%. 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 $383m 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-March composition was such that there wasn’t
a lot of Q4 cost data reported by its top component miners. A
half-dozen of these top SIL companies trade in South Korea, the UK,
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 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 Q4’17, these top-17
SIL-component silver miners that reported cash costs averaged $4.66
per ounce. That plunged a whopping 11.6% YoY, making it look like
silver miners are far more efficient.
But
that’s misleading. This past quarter SIL’s 17th-largest component
was Silvercorp Metals, which enjoys big lead and zinc byproducts at
its China silver mines. These base metals are sold and used to
offset the costs of silver mining. That forced SVM’s cash costs
down to negative $5.92 per ounce, which dragged down SIL’s
overall average. Hecla Mining also enjoyed negative cash costs due
to byproduct credits.
Those super-low cash costs help offset SSR Mining’s super-high
$16.36 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 $5.69 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 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. AISC
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
Q4’17 these top-17 SIL components reporting AISCs averaged just
$10.16 per ounce. That was down 3.8% YoY, and far below last
quarter’s average silver price of $16.69. Again SVM’s incredible
byproduct production dragged down the average though. Ex-Silvercorp,
these top SIL silver miners’ AISCs ran at an average of $11.33 in
Q4. That’s still way below prevailing silver prices, generating
nice operating profits.
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.
At
$10.16 AISCs, the major silver miners still earned big profits in
the fourth quarter. Once again silver averaged $16.69, implying fat
profit margins of $6.53 per ounce or 39%! Most industries would
kill for such margins, yet silver-stock investors are always worried
silver prices are too low for miners to thrive. That’s why it’s so
important to study fundamentals, because technical price
action fuels misleading sentiment.
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 really
underperforming gold so far in 2018, with the SGR averaging a
stock-panic-like 79.5 YTD as of late March. So silver is overdue
to catch up with gold.
At a
56 SGR and $1325 gold, silver is easily heading near $23.66. That’s
42% above its Q4 average. Assuming the major silver miners’ all-in
sustaining costs hold, that implies profits per ounce soaring 107%
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, actual accounting profits, revenues, and
cash on hand. They generally corroborated AISCs in Q4’17, proving
silver miners are weathering low prices fine.
The
collective operating cash flows generated by these top-17 SIL silver
miners grew 2.2% YoY to $590m. That’s not bad considering the 2.5%
YoY drop in quarterly average silver prices and the 6.8% YoY lower
silver production not including Fresnillo and Peñoles. These strong
positive OCFs prove the major silver mines are generating much more
cash than they cost to run even at these depressed silver prices.
But
the elite silver miners’ GAAP accounting profits looked horrendous,
weighing in at a huge $703m loss in Q4’17 compared to $157m earned a
year earlier! The vast majority of that is due to a single colossal
$547m loss from a company that newly climbed into SIL’s top 17
components over the past year. In the table above these new
companies that weren’t among SIL’s leading stocks a year ago are
highlighted in light blue.
Volcan Compañia Minera mines base metals, silver, and gold in the
central highlands of Peru. In Q4 it reported a gargantuan net loss
of $547m, driven entirely by a negative $570m “Exceptional
adjustments”. This was described in the management discussion and
analysis of quarterly results as necessary “to meet the corporate
policies and accounting standards of Glencore”, which bought 55% of
Volcan’s stock in November.
Pulling out that one-time Volcan loss to consolidate its financial
results with its new parent’s, the top-17 SIL silver miners lost
$156m in Q4’17. That’s still a major YoY drop, but is reasonable
given the weak silver prices and their resulting ongoing non-cash
writedowns of silver mines and deposits that look less economical.
With lower silver prices and lower production, it wouldn’t have
surprised me to see far-bigger losses.
The
revenue front was interesting, with these top-17 SIL silver miners
reporting overall sales of $3331m in Q4’17. That soared 26.6% YoY
despite generally-lower production and prices. Peñoles was
definitely a factor, but Fresnillo doesn’t break out Q4 sales so
they weren’t included in Q4’17 or Q4’16. The primary driver was the
UK’s Polymetal reporting $586m in sales in Q4’17 after breaking out
none a year earlier.
These top SIL components’ collective cash on hand at the end of Q4
was largely flat at $3715m. That means the strong cash flows
generated from operations were plowed back into exploring for more
silver and gold to mine, expanding existing mines, and developing
new ones. That’s still a big pile of cash for this small industry,
giving silver miners flexibility to grow their production and ride
out any unforeseen challenges.
Silver miners’ earnings power and thus stock-price upside potential
will only grow as silver mean reverts higher. In mining, costs are
largely fixed during the mine-planning stages. That’s when
engineers decide which ore bodies to mine, how to dig to them, and
how to process that ore. Quarter after quarter, the same numbers of
employees, haul trucks, excavators, and mills are generally used
regardless of silver prices.
So
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
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The
bottom line is the major silver miners fared fine in Q4 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 Q4’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 19 months, investors will have
to do big buying to reestablish silver-mining positions. That will
fuel major upside. | 
