The
silver miners’ stocks have really languished this year, grinding
sideways to lower 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 Q3’17 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 6.6x 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-November as the major silver miners finished reporting their
Q3’17 results, SIL included 29 “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 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 92.7% of SIL’s total weighting.
While most of these top 17 SIL components had reported on Q3’17 by
mid-November, 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 Q3’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-November. 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
Q3’17 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 Q3 silver
production, multiplying it by Q3’s average silver price, and then
dividing that by the company’s total quarterly sales. If miners
didn’t report Q3 revenues, I approximated them by adding the silver
sales to gold sales based on their quarterly production and these
metals’ average third-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 Q3’16.
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 Q3’17 after earning profits in Q3’16.
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 Q3, silver was only up 4.6% YTD compared to 11.3% for gold.
That’s horrendous 0.4x leverage! And by mid-November as Q3’s
earnings season wrapped up, silver’s YTD gain of 6.6% was still way
behind gold’s 11.1% for 0.6x leverage.
Production is the lifeblood of miners, and thus the best place to
start fundamental analysis. In Q3’17, these top 17 SIL components
collectively produced an impressive 79.0m ounces of silver. If
2016’s world-silver-mining run rate is applied to this year’s third
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 robust, surging 3.7% YoY
and climbing 0.6% sequentially quarter-on-quarter. Unfortunately
that is misleading, with huge growth in a couple mining
conglomerates masking sharp-to-catastrophic YoY declines for most of
the rest of these elite silver miners. Fresnillo and Industrias
Peñoles enjoyed gigantic 24% and 34% YoY gains in silver production
off already-massive 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 3499k ounces of silver in Q3’17 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 Industrias Peñoles, the rest of these top
SIL components saw their collective silver production fall a
sharp 9.3% YoY to 45.9m ounces! It’s been quite ugly out there
in silver-land, for both industry-wide and company-specific
reasons. Between Q3’16 and Q3’17, the average silver price dropped
13.9% YoY to just $16.84. That was far worse than gold’s 4.2% YoY
decline, 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 temporarily suspended. It has since
been reinstated, but the government is not breaking up an illegal
roadblock to the mine.
This
whole situation is ludicrous, highlighting why third-world countries
stay that way. The government of Guatemala isn’t respecting the
rule of law, which will greatly hurt future investment. It’s
allowing violent anti-mine militants to physically attack
trucks and their drivers heading to Escobal. They should be
arrested and the blockade cleared. Thus Tahoe’s silver production
collapsed 100% YoY from 5000k ozs in Q3’16!
SSR
Mining saw a similar sharp 62% YoY plummet in silver production to
just 1156k ounces in Q3’17. 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
component companies. As the silver-percentage column above shows,
most of these elite silver miners are actually primary gold
miners by revenue! Only 6 of these 17 earned more than half of
their Q3’17 sales from mining silver, and they are highlighted in
blue. 8 of SIL’s top 17 component stocks are also included in the
leading GDX gold
miners’ ETF.
While they only comprised 10.0% of GDX’s total weighting in
mid-November, 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, making it SIL’s 4th-largest
holding at 9.0% of this ETF’s 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” an incredible 63.3m ounces
of silver! But it also smelted large amounts of zinc, lead, copper,
and gold that same year.
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 40.1%.
That’s right in line with the trend over this past year, with
Q3’16,
Q4’16,
Q1’17, and
Q2’17 seeing
SIL’s top-component silver purity averaging 42.8%, 40.6%, 38.5%, and
37.6%. 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 $168m
and $384m 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-November composition was such that there
wasn’t a lot of Q3 cost data reported by its top component miners.
4 of its top 5 companies trade in the UK, South Korea, 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 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 Q3’17, these top 17
SIL-component silver miners that reported cash costs averaged $4.86
per ounce. That plunged a whopping 13.6% YoY, making it look like
silver miners are far more efficient.
But
that too is 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 $5.16 per ounce, which dragged
down SIL’s overall average. A year ago in Q3’16, SVM ranked 18th in
SIL and missed the top-17 cutoff.
Still even ex-SVM, these top SIL silver miners reporting cash costs
last quarter averaged just $6.54 per ounce. As long as silver
prices stay above those extreme levels, the silver miners can keep
the lights on. And there’s no way silver is going to plummet down
under $7 in any conceivable scenario. So even at 2017’s
vexingly-low gold-lagging silver prices, the major silver miners
face no existential threats today.
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
Q3’17, these top 17 SIL components reporting AISC averaged just
$9.73 per ounce. That was down 3.9% YoY, and far below last
quarter’s average silver price of $16.84. Again SVM’s incredible
byproduct production dragged down the average though. Ex-Silvercorp,
these top SIL silver miners’ AISC ran at an average of $10.98 in
Q3. That’s still well 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. Thus AISC surged at Pan American Silver, First
Majestic Silver, and SSR Mining. PAAS discontinued mining at an
older mine, while other mines processed lower-grade ore that was on
the way to better rock later.
AG’s
lower production was due to land-access issues and mine inspections
necessary following Mexico’s big earthquakes in mid-September. And
of course SSRM is winding down its lone primary silver mine. Yet
even with lower production driving higher per-ounce costs, the major
silver miners still enjoyed solid operating profits. That’s
certainly not apparent based on silver miners’ super-low stock
prices mired in bearishness.
At
$9.73 AISC, the major silver miners still earned big profits in the
third quarter. Once again silver averaged $16.84, implying fat
profit margins of $7.11 per ounce or 42%! 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
73.5 YTD as of mid-November. 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
38% above its Q3 average. Assuming the major silver miners’ all-in
sustaining costs hold, that implies profits per ounce soaring 90%
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 AISC in Q3’17, proving
silver miners are weathering low prices.
The
collective operating cash flows of these top 17 SIL silver miners
slumped 14.4% YoY to $1350m. That’s really impressive considering
the 13.9% YoY drop in average silver prices, so these miners are
holding their own despite silver really lagging gold this year.
GAAP accounting profits looked far worse though, plunging 77% to
just $88m. Many of these top SIL silver miners suffered net losses
in Q3’17.
That
was generally just the result of lower silver prices. There were
two outliers, Tahoe Resources and Coeur Mining. With its silver
mine temporarily shuttered by Guatemala, TAHO’s profits swung
massively from +$63m in Q3’16 to -$8m in Q3’17. That $71m drop
alone was responsible for 24% of the YoY drop in these top SIL
silver miners’ GAAP profits. CDE simply had higher costs as it
worked on expanding mines.
So
its profits plunged from +$68m in Q3’16 to -$17m in Q3’17, for an
$85m total drop. That accounted for another 29% of the total slide
in collective top SIL miners’ profits. Other than that, the YoY
declines were reasonable based on the lower silver prices.
Interestingly these top 17 SIL miners’ collective sales surged 15.2%
YoY to $3003m, driven by their aggregate silver and gold production
rising 3.7% and 2.4% YoY.
And
despite the weak silver prices, serious operational challenges, and
ongoing expansions especially on the gold side of their businesses,
these elite SIL miners’ total cash balances only edged 0.1% lower
YOY to $2682m. So overall the silver miners’ operating results were
pretty good in Q3’17 considering all the big trials they faced.
Based on the individual miners’ travails, I was steeling myself for
much worse.
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 enough of their sales from silver. A handpicked
portfolio of purer elite silver miners will yield much-greater
wealth creation.
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to trade and when. As of the end of Q3, this has resulted in 967
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The
bottom line is the major silver miners fared fine in Q3 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 Q3’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 resumes 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. | 
