The
silver miners’ stocks have largely languished this year, grinding
sideways near lows for months on end. This vexing consolidation has
fueled near-universal bearishness, leaving silver stocks deeply out
of favor. But once a quarter when earnings season arrives, hard
fundamentals pierce the obscuring veil of popular sentiment. The
silver miners’ recently-reported Q2’17 results reveal today’s silver
prices remain profitable.
Four
times a year publicly-traded companies release treasure troves of
valuable information in the form of quarterly reports. These are
generally due by 45 days after quarter-ends in the US and Canada.
They offer true and clear snapshots of what’s really going on
operationally, shattering the misconceptions bred by the
ever-shifting winds of sentiment. There’s no silver-miner data that
is more highly anticipated than quarterlies.
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. Last 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 6.0x greater than its next-largest competitor’s, so SIL
really dominates this space. With ETF investing now the norm, SIL
is a boon for its component miners.
While there aren’t many silver miners to pick from, major-ETF
inclusion shows silver stocks have been vetted by elite analysts.
Due to fund flows into top sector ETFs, being included in SIL is one
of the important considerations for
picking great
silver stocks. When the vast pools of fund capital seek
silver-stock exposure, their SIL inflows force it to buy shares in
its underlying companies bidding their prices higher.
Back
in mid-August as the major silver miners finished reporting their
Q2’17 results, SIL included 29 “silver miners”. This term is used
loosely, as SIL includes plenty of companies which can’t be
described as primary silver miners. Most generate well under
half their revenues from silver, which greatly 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 93.2% of SIL’s total weighting.
While most of these top 17 SIL components had reported on Q2’17 by
mid-August, 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 Q2’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-August. 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
Q2’17 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 Q2 silver
production, multiplying it by Q2’s average silver price, and then
dividing that by the company’s total quarterly sales. If miners
didn’t report Q2 revenues, I approximated them by adding the silver
sales to gold sales based on their quarterly production and these
metals’ average second-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 an exception is necessary for companies with numbers that
crossed zero since Q2’16.
Percentage changes aren’t relevant or meaningful if data shifted
from negative to positive or vice versa. Plenty of major silver
miners suffered net losses in Q2’17 after earning profits in Q2’16.
So in cases where data crossed that zero line, I included the raw
numbers instead. This whole dataset offers a fantastic high-level
fundamental read on how the major silver miners are faring today,
and it’s reasonably well.
That’s reassuring given silver’s serious underperformance relative
to gold this year. As a far-smaller market, silver usually
amplifies gold’s advances by at least 2x. But as of the end
of Q2, silver was only up 4.5% YTD compared to 7.9% for gold.
That’s dismal 0.6x leverage. And by mid-August as Q2’s earnings
season wrapped up, silver’s YTD gain of 4.6% fell even further
behind gold’s 10.6%. That’s horrible 0.4x leverage!
Production is the lifeblood of mining companies, and thus the best
place to start fundamental analysis. In Q2’17, these top 17 SIL
components collectively produced an impressive 78.6m ozs of silver.
If 2016’s world-silver-mining run rate is applied to this year’s
second quarter, that implies 221.5m ozs of silver mined. Thus these
top SIL silver miners would account for over 35% of that
total, they truly are major silver players.
But
these elites still weren’t able to significantly grow their
collective silver production, it was up just 0.9% YoY. Instead they
invested heavily in expanding their gold production, which
surged 6.4% YoY to 1354k ounces. Interestingly 10 of these top 17
SIL components, a majority representing 45.3% of SIL’s total
weighting, are also included in the leading
GDX gold miners’
ETF. SIL is mostly made up of primary gold miners!
Many
of these elite major silver miners don’t just mine gold as a silver
byproduct, but actually operate at least one primary gold mine.
The silver miners have collectively decided to diversify into gold
due to its superior economics. Consider hypothetical mid-sized
silver and gold miners, which might produce 10m and 300k ounces
annually. What would those cash flows look like at last quarter’s
average metals’ prices?
In
Q2’17, silver and gold averaged $17.18 and $1258. Silver was up
2.3% YoY, while gold slipped by a slight 0.1% YoY. At 10m ounces,
that silver miner would generate $172m in sales. But the
similar-sized gold miner’s sales of $377m more than doubles
that. At recent years’ prevailing prices, the cash flows from gold
mining are much more robust than those from silver mining. That
makes it easier to pay bills and expand.
Silver mining is often as capital-intensive as gold mining,
requiring similar large expenses for planning, permitting, and
constructing mines and mills to process ore. Similar heavy
excavators and haul trucks are necessary to dig and haul the ore,
along with similar staffing levels to run mines. So silver’s lower
cash flows to support all this activity make silver mining harder
than gold mining, which isn’t lost on silver miners.
Silver-mining profits do skyrocket when silver soars occasionally in
one of its massive bull markets. But during silver’s long
intervening drifts at relatively-low price levels, the silver miners
often can’t generate sufficient cash flows to finance expansions.
So the top silver miners are increasingly looking to gold, a trend
that isn’t likely to reverse given the relative economics of silver
and gold. Primary silver miners are getting rarer.
Technically a company isn’t a primary silver miner unless it derives
over half its revenues from silver. In Q2’17, the average
sales percentage from silver of these top SIL components was just
37.6%! That is right on trend over this past year, with
Q2’16,
Q3’16,
Q4’16, and
Q1’17
weighing in at 46.3%, 38.5%, 40.5%, and 37.9%. In Q2’17, only 5 of
the top SIL component companies qualified as primary silver miners!
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
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-August composition was such that there
wasn’t a lot of Q2 cost data reported by its top component miners.
3 of its top 4 companies trade in the UK and Mexico, where reporting
only comes in half-year increments. Lower down the list there are
more half-year reporters, an explorer with no production, and
primary gold miners that don’t report silver costs. So silver cost
data was fairly scarce.
Nevertheless, it’s always useful to look at the data 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 Q2’17, these top 17
SIL-component silver miners that reported cash costs averaged $6.34
per ounce. That surged a major 19.1% YoY from Q2’16’s $5.32, which
seems like a troubling omen.
But
it’s not. Flighty silver-stock investors are always on the verge of
panicking, fleeing this volatile and psychologically-challenging
sector. But the only event worthy of such extreme bearishness would
be prevailing silver prices falling near cash costs. And
even at $6.34-per-ounce cash costs and today’s low silver, a vast
buffer exists. There’s no way silver is going to plummet down under
$7 in any conceivable scenario!
These high cash costs are actually an anomaly mainly driven by two
companies. First SSR Mining is now winding down its
rapidly-depleting silver mine as planned. It produced 10.4m
ounces of silver in 2016, but only 5.5m is forecast this year! As
silver throughput drops each quarter, the per-ounce costs are
rising. Without SSRM’s outlying super-high cash costs, the rest of
these top SIL miners averaged just $5.51.
Another company Silvercorp Metals had slid out of SIL’s top 17
components as of mid-August. It was the 18th one, removing it from
this particular calculation. Due to SVM’s enormous lead and zinc
byproducts, its costs are the lowest in the industry. In Q2’16 it
reported cash costs of $0.08 per ounce, which really dragged down
that comp-quarter average. So the major silver miners’ collective
cash costs were just fine in Q2.
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
Q2’17, these top 17 SIL components reporting AISC averaged $11.66
per ounce. That was up 16.0% YoY from Q2’16s $10.05. Coeur Mining
was a big factor, with AISC surging 19% to a lofty $15.90 per
ounce! That was due to lower-grade ore on the way to better zones.
Ex-CDE, this average ran $10.96 which was closer to year-ago
levels. SVM was also a factor, with low $7.06 AISC feeding into
Q2’16 comps.
Two
other elite silver miners suffered major production problems in
Q2’17, resulting in big production drops. With fewer ounces to
spread mining’s heavy fixed costs across, all-in sustaining costs
soared. First
Majestic Silver, the purest major silver miner at 65.4% of Q2
revenues, saw production fall 20% YoY which forced AISC 33% higher.
Unprecedented labor unrest in Mexico temporarily halted 3 of its 6
silver mines.
Those issues have since been resolved, so AG’s production should
bounce back in Q3 which will push its AISC back down. Meanwhile
Tahoe Resources saw its Q2 production plunge 28% YoY forcing its own
AISC 23% higher. It got sucked into a legal battle between
anti-mining activists and the government of Guatemala where its
silver mine is. That mining license was temporarily suspended
for an unmerited lawsuit.
The
activists allege the government shouldn’t have granted Tahoe its
Escobal mining license in the first place because it didn’t consult
with a particular indigenous tribe first. But those people don’t
even live anywhere near the mine site, it’s ridiculous! Tahoe
doesn’t know when Escobal operations will be allowed to resume, but
estimates a range between a couple months from now out to 18 months
for a full resolution.
Tahoe’s large gold production from its two other gold mines in Peru,
110k ounces in Q2’17, ensures it won’t have any serious problems
weathering this Guatemalan nightmare. But the point for our
purposes today is that anomalous special situations fed the
steep jump in the major silver miners’ all-in sustaining costs in
Q2. But even at these elevated levels, this industry is still
enjoying hefty silver-mining margins.
At
$11.66 AISC, the major silver miners still earned big profits in the
second quarter. Once again silver averaged $17.18, implying fat
profit margins of $5.52 per ounce or 32%! 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 really low relative to prevailing gold
levels, which portends huge upside as it mean reverts higher. 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 2017, with the SGR averaging just
72.6 YTD as of mid-August. 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
35% above its Q2 average. Assuming the major silver miners’ all-in
sustaining costs hold, that implies profits per ounce soaring 110%
higher! Plug in a higher gold price or the typical
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.
Still Q2’17’s relatively-weak silver price weighed on miners’ cash
flows generated from operations and GAAP accounting profits.
Despite their big gold production, operating cash flows plunged
28.4% YoY to $1038m for these top SIL components. That’s not quite
a righteous comparison though, because only 13 of this year’s top 17
had reported Q2 financial results by mid-August. Last year that
number totaled 15.
And
one of the silver miners not reporting OCF by the usual Q2 deadline
this year was the Mexican silver giant Fresnillo. Its OCF last year
was fully 1/6th of these top SIL components’ total! So their
operating-cash-flows situation in Q2’17 is nowhere near as bad as
the drop implies. The same is true on the GAAP-earnings front.
Last year Fresnillo contributed nearly 22% of the profits of these
top 17 SIL components.
Another huge Mexican silver miner, the conglomerate Industrias
Penoles, saw its profits plunge about $140m YoY. These two Mexican
silver giants alone account for the entire drop in these top
SIL miners’ profits in Q2’17, which plummeted 57.5% YoY or $221m.
Without them, silver-mining profits were flat. That’s pretty darned
good considering all the super-anomalous company-specific problems
that plagued Q2 results.
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’ ongoing
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 much of their sales from silver. A handpicked
portfolio of purer elite silver miners will yield much-greater
wealth creation.
At
Zeal we’ve literally spent tens of thousands of hours
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decide what to trade and when. As of the end of Q2, this has
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newsletter subscribers since 2001. Fighting the crowd to buy low
and sell high is very profitable, as all these trades averaged
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The
key to this success is staying informed and being
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stocks before they grow popular again, when they’re still cheap. An
easy way to keep abreast is through our acclaimed
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The
bottom line is the major silver miners fared fine in Q2 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 Q2’s low prevailing silver
prices. And their accelerating gold-production growth leaves them
financially stronger.
With silver-stock
sentiment remaining excessively bearish, this sector is primed to
soar as silver itself continues mean reverting higher to catch up
with gold’s current upleg. The silver miners’ profits leverage to
rising silver prices remains outstanding. After fleeing silver
stocks so aggressively this year, investors and speculators alike
will have to do big buying to reestablish silver-mining positions.
That will fuel major upside. | 
