Silver Mining Stocks Q4'21 Fundamentals / Commodities / Gold and Silver 2022
The silver miners’stocks have rallied in recent months, but are still underperforming gold stocks. Silver lagging gold is mostly responsible, drivenby big stock-market down days dampening enthusiasm for speculation. But silver will ultimately mirror and amplifygold’s bull upleg, fueling strong leveraged gains in its miners’ stocks. Their just-finishing Q4’21 earnings seasonreveals they are faring well fundamentally.
With the subsequent Q1’22ended, looking at the prior quarter’s operational and financial reports seemsdated. But because most companies run oncalendar years, the Q4 reporting deadlines are extended. In the US companies don’t have to reportfull-year 10-K results until 60 days after quarter-ends, compared to 40 daysfor 10-Q quarterlies. In Canada, theepicenter of the silver-mining universe, year-ends extend to 90 days!
Since many of the majorsilver miners have primary stock listings in that Great White North, late Marchis about the earliest enough of them have reported to analyze their collectiveQ4 results. Soon after each quarterlyearnings season, I dig into the latest reports from the top-15 componentcompanies of the SIL Global X Silver Miners ETF. Despite just $1.1b in net assets, SIL remainsthe leading ETF in this small sector.
SIL’s lackluster performancerecently reflects the ongoing apathy plaguing silver stocks. Between late January to early March, SILrallied a solid 18.3%. But that provedpoor relatively, since silver marched 17.7% higher in roughly that samespan. If silver miners’ stocks can’tleverage their metal’s upside, they aren’t worth the sizable additional risksthey bear compared to silver. They must doubleto triple silver’s gains.
Silver in turn has along history of well-outperforming gold when sentiment is favorable. Yet that recent young 17.7% silver upleg wasn’tmuch better than gold’s parallel 14.6% surge. The seriously-weak stock markets were to blame. At worst when gold was powering higher partiallyon safe-haven buying, the US flagship S&P 500 stock index plunged 9.1%! Silver tends to get sucked into materialstock-market selling.
That’s because silveris far-more-speculative than gold, making it more susceptible to flaring fear whenstock markets tumble. On days when theS&P 500 plunges yet gold rallies, silver tends to split the differencebetween them. But silver sentiment growsmore favorable the longer gold climbs, unwinding much of that decoupling. Because silver lagged recently, SIL also way-underperformedthe GDX gold-stock ETF.
That blasted 32.8% higherat best between late January to early March, amplifying gold’s gains by a solid2.3x! That trounced the poor 1.0x SILachieved relative to silver. So thesilver-mining stocks sure haven’t been very popular lately. Nevertheless, their newest fundamentals fromQ4’21 are important to consider for gaming this sector’s near-future direction. This is now my 23rd quarter in a row doing this SIL analysis.
This table summarizesthe operational and financial highlights from the SIL top 15 during Q4’21. These major silver miners’ stock symbols aren’tall US listings, and are preceded by their rankings changes within SIL over thispast year. The shuffling in their ETF weightingsreflects shifting market caps, which reveal both outperformers and underperformerssince Q4’20. Those symbols are followedby current SIL weightings.
Next comes these miners’Q4’21 silver and gold production in ounces, along with their year-over-year changesfrom the comparable Q4’20. Output is thelifeblood of this industry, with investors generally prizing production growthabove everything else. After that is ameasure of silver miners’ relative purity, their percentage of quarterlysales actually derived from silver. Mostsilver miners also produce gold or base metals.
Generally the moresilver-centric a miner, the more responsive its stock price is to changing silverprices. So traders looking for leveragedsilver exposure via its miners’ stocks should stick to the purer producers. Then the costs of wresting that silver fromthe bowels of the earth are shown in per-ounce terms, both cash costs and all-insustaining costs. The latter subtractedfrom silver prices help illuminate profitability.
That is followed by theseminers’ hard quarterly revenues and earnings reported to securities regulators. Blank data fields mean companies hadn’treported that particular data as of late March when Q4’s earnings season waswinding down. The annual percentage changesare excluded if they would prove misleading, like comparing two negativenumbers or data shifting from positive to negative or vice versa.
2021’s final quarterproved interesting for the major silver miners. They faced inflationary cost pressures and drifting-lower silver pricesthat squeezed profitability. Yet the SILtop 15’s average mining costs still retreated, keeping their collectiveper-ounce earnings strong! That provedmuch better fundamentally than the major gold miners of GDX and mid-tiers ofGDXJ, which I analyzed in depth in recent weeks’ essays.
Much to the chagrin oflong-time silver-stock investors, primary silver miners are becoming ever-rarerand threatening to go extinct. For manyyears now, major silver miners have been increasingly diversifying into gold. The economics of mining the yellow metal havelong proven superior to those of the white one, and will stay that way unless silversoars to and sustains much-higher levels. Miners are adapting to that.
In Q4’21, these SIL-top-15silver miners produced 77,231k ounces of their namesake metal. Although that slumped 4.1% year-over-yearfrom Q4’20, it was still robust. Duringthe past 23 quarters where I’ve been advancing this deep-research thread, theSIL top 15’s aggregate silver output ranged from 61,471k up to 84,962kounces. The average was 73,455k, so thislatest-reported quarter’s results proved better than typical.
Surprisingly these majorsilver miners’ total gold output crumbled 24.1% YoY to just 1,207k ounces in Q4’21! That was the biggest decline by far since atleast Q2’16. During the preceding fourquarters, the SIL top 15’s gold mined had grown 3.7%, 8.3%, 20.2%, and 11.8%YoY. Gold’s drop doesn’t reflect silverregaining managements’ favor from gold, but largely a key change in SIL’s componentrankings recently.
For years one of SIL’stop components had been the Russian-owned UK-traded Polymetal International. It long commanded this ETF’s second-largestweighting. But since Russia invaded Ukraine,destroyed its cities, and slaughtered its people, all Russian stocks have beendumped like they are radioactive. ThusPolymetal’s market capitalization collapsed enough to hammer it from second totwentieth in SIL’s weightings!
This company isoverwhelmingly a primary gold miner, which produced 322k ounces in Q4’20 and399k in the preceding Q3’21. Polymetal waseffectively replaced in the SIL top 15 by the small primary silver miner Aya Gold& Silver, which produced no gold in Q4’21. So if Polymetal’s gold and silver output is excluded from the comparableQ4’20, the SIL top 15 actually saw gold retreat just 4.8% while silver grew1.4%.
So the ongoingyellowing of the major silver miners didn’t slow much if any during 2021’sfinal quarter. SIL remained a primarygold miners’ ETF, with just 42.5% of its top-15 companies’ revenues thatquarter actually derived from silver. That’s calculated by multiplying their Q4’21 silver production by thatquarter’s average silver price, then dividing that by total sales. While 42.5% improved 2.4% YoY, it is skewed high.
Polymetal’s percent ofsales from silver in Q4’20 was just 12.7%, it really had no place in a silverminers’ ETF despite the 4,400k ounces of the white metal it mined. That super-low relative silver purity hasbeen replaced with Aya’s running at 100%. But that small silver junior merely mined 434k ounces during thatquarter, which is the lowest among the SIL-top-15 producers by far. Ex-Aya, the silver purity only ran 38.1%.
Just four of these silverminers qualified as primary silver producers in Q4’21, and their silver-puritypercentages are highlighted in blue. Butbecause ETF companies need more than a handful of stocks to create exchange-tradedfunds, they stuffed SIL with primary gold miners. But at least those are also all sizable-to-largesilver miners. Still their gold-centricoutput makes them more responsive to gold than silver.
Even with Polymetal flusheddown the toilet with the rest of the world’s Russian stocks, SIL remains very-concentratedand risky. This ETF’s top-two holdingsalone account for a staggering 38.1% of its total weighting! While both Wheaton Precious Metals and PanAmerican Silver are great companies that I’ve owned and recommended in ournewsletters for 13.4 and 19.7 years now, they aren’t primary silver miners.
Wheaton is actually asilver-and-gold streamer, a mine-finance business. It helps other companies build silver andgold mines by pre-purchasing fractions of their future silver or gold outputs. In return for big upfront capital paymentsused to construct those mines, WPM gets to later buy parts of their productionfor low per-ounce payments. Thesestreaming deals have proven a fantastic very-profitable business model.
Silver streamingexclusively was Wheaton’s original focus, but it changed its name from SilverWheaton to Wheaton Precious Metals in May 2017 to reflect its increasingreliance on gold deals. Silver streamsare still easier to procure though, as nearly 3/4ths of all the silver minedglobally is a byproduct of base-metals and gold mines! Companies are more willing to pre-sellbyproduct metals than their primary ones.
Meanwhile Pan AmericanSilver’s increasingly-heavy focus on gold will likely necessitate its own namechange sooner or later. Just 29.2% ofPAAS’s Q4’21 revenues came from silver, on the lower side for SIL-top-15stocks. SIL’s third-largest componentSSR Mining has diversified even more aggressively into gold in recent years,driving down its latest-reported quarterly silver purity to an utterly-gold-dominated11.7%!
Given prevailing goldand silver prices and mining economics, this yellowing of silver miners makesgood sense. Augmenting major silverproduction with increasing gold output greatly boosts these companies’operating-cash-flow generation and profits. But becoming more gold-centric leaves their stock prices lessresponsive to silver, making it more difficult to get purer leveragedsilver exposure through mining stocks.
Long-term silver-stockprice levels ultimately depend on miners’ profitability, which is directlydriven by the difference between prevailing silver prices and silver-miningcosts. In unit terms these are generally inversely proportional to silver production. That’s because silver mines’ total operatingcosts are largely fixed during planning stages, their designed throughputslimit the amounts of silver-bearing ore they can process.
That doesn’t change quarterto quarter, and requires about the same levels of infrastructure, equipment,and employees. The only real variableis the ore grades run through the fixed-capacity mills. Richer ores yield more silver ounces tospread the big fixed costs of mining across, lowering unit costs which boostsprofitability. The SIL top 15’s lowersilver output should’ve driven modestly-higher costs in Q4’21, yet they fell!
Cash costs are theclassic measure of silver-mining costs, including all cash expenses necessaryto mine each ounce of silver. But they aremisleading as a true cost measure, excluding the big capital needed to explorefor silver deposits and build mines. Socash costs are best viewed as survivability acid-test levels for the major silverminers. They illuminate the minimum silverprices required to keep the mines running.
Rather impressively,the SIL top 15’s average cash costs in Q4’21 retreated 3.0% YoY to merely$8.61 per ounce. That proved a huge18.0% sequential drop from the preceding quarter’s $10.50! The primary driver of these lower silver-miningcash costs was Hecla Mining’s collapsing 77.1% YoY to just $1.69. That super-low result was driven by hugebyproduct credits from lead and zinc mined along with the silver.
Despite the SIL silverstocks’ performances really lagging the GDX gold stocks’ lately, these elitemajor silver miners fared much better fundamentally on the costfront. The SIL top 15’s cash costs retreating3.0% YoY were far better than the GDX-top-25 major gold miners’ soaring 21.8% YoY while the GDXJ-top-25mid-tiers’ surged 9.2% YoY! This surprisingcost dichotomy persisted through broader measures.
All-in sustaining costsare far superior than cash costs, and were introduced by the World Gold Councilin June 2013. They add on to cash costseverything else that is necessary to maintain and replenish silver-miningoperations at current output tempos. AISCsgive a much-better understanding of what it really costs to maintain silver minesas ongoing concerns, and reveal the major silver miners’ true operating profitability.
These elite majorsilver miners of the SIL top 15 reporting AISCs for Q4’21 averaged $13.54per ounce, which declined an even-better 5.4% YoY. Those also collapsed 14.2% quarter-on-quarterfrom Q3’21, a heck of an improvement! The comparable GDX- and GDXJ-top-25-component average AISCs climbed 14.5%and 8.7% YoY. It’s rare to see the elitesilver miners report better fundamental progress than gold miners.
And silver AISCs could’vebeen better. The Chinese silver andbase-metals miner Silvercorp Metals often oscillates between the 15th- and 16th-largestholding of SIL. It barely missed the cutfor Q4’21 results, with Aya muscling its way in. Had Silvercorp taken its place, its very-low$8.82 AISCs driven by massive lead and zinc byproducts would’ve dragged the SILtop 15’s average AISCs down to $12.76 per ounce in Q4’21.
Silver prices averaged$23.33 in that final quarter of last year, slumping 4.5% YoY. That was in-line with average gold priceslosing 4.3% YoY. Subtracting the SIL-top-15average AISCs from the same quarter’s average silver price is a great proxy for sector unit profitability. Theseelite silver miners earned a hefty $9.79 per ounce in Q4’21 by that metric,which only retreated a slight 3.3% YoY. Again silver stocks outperformed.
The top-25 gold minersof GDX and GDXJ saw their sector per-ounce earnings plunge 27.5% and 21.9% YoY thatquarter. So the SIL top 15’s reallystand out. $9.79 unit profits are highabsolutely too, the fifth-best seen out of at least the last 23 quarters. The major silver miners only did betterbetween Q3’20 to Q2’21, where unit earnings averaged $12.75. That was vastly better than the $3.82 in thepreceding 12 quarters.
So despite being out offavor with investors because silver has lagged gold’s recent geopolitical surgeon Russia’s invasion of Ukraine, the major silver miners are faring really welloperationally. Sooner or later traderswill realize this, and start flocking back. Silver better-leveraging gold’s accruing gains in its young upleg wouldgreatly accelerate that essential sentiment shift. The longer gold climbs, the more silver joinsit.
The SIL top 15’s hard financialresults under Generally Accepted Accounting Principles or other countries’ equivalentslooked less impressive than sector unit earnings. But Polymetal’s plummeting from grace was abig driver of that. These elite silvermajors collectively reported $6,580m in revenues in 2021’s final quarter, whichdrooped 6.8% YoY. But if Polymetal isremoved from the comparable Q4’20, they grew 5.9%.
Bottom-line earningsplunged an ugly 66.1% YoY to $458m, or down 54.2% if Polymetal isexcluded. But as is typical inprecious-metals mining, some companies reported large unusual one-time itemsskewing this comparison. Netting those outwould boost Q4’21 SIL-top-15 profits to $523m, which fell 47.7% YoY withoutPolymetal. That’s sure not good, but itis in-line with GDX and GDXJ gold miners’ -47.8% and -67.2%.
These earnings fueled sky-hightraditional trailing-twelve-month price-to-earnings ratios averaging 120.9x forthese SIL-top-15 silver stocks! Butextreme P/Es from long-time explorer MAG Silver transitioning into an actual minerand junior miner Aya Gold & Silver heavily distorted that average. Excluding those two little companies, therest of the SIL top 15 averaged more-reasonable-yet-still-not-cheap 42.5x TTMP/Es.
Operating cash flowsare often a better measure of how miners are actually doing than accounting profits,since way-fewer estimates feed into them. While not included in this table, during Q4’21 these elite major silverminers reported total operating cash flows of $1,483m. While down 22.9% YoY, they actually grew aslight 0.3% if Polymetal is again excluded from the comparable Q4’20. Strong OCFs fed nice treasuries.
As last year wounddown, these SIL-top-15 silver miners collectively held $7,361m in cash. That actually grew 8.8% YoY even withPolymetal, and surged 15.4% YoY without it! Bigger cash hoards mean more capital available to invest in growingproduction, including expanding existing mines, developing new ones, andbuying other mines and mining companies. Output growth attracts investors to bid stock prices higher.
There are still big gainsto be won in silver stocks as their metal powers higher with gold in comingyears. But traders have to be selective, picking the best fundamentally-superior silver miners. We currently own just six of these SIL-top-15stocks in our newsletters. Six others Iwouldn’t touch with a ten-foot pole due to various operational challenges. A carefully-handpicked subset of SIL stocksis far better than this whole ETF!
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The bottom line is themajor silver miners reported a surprisingly-good fourth quarter. Lower mining costs bucking inflationary pressureslargely offset lower average silver prices, keeping sector unit profits strong. That enabled the silver miners to fundamentally-outperformthe gold miners in Q4’21, which is unusual. Yet because silver has lagged gold in recent months, silver-stocksentiment has languished in worse shape.
Recent big stock-market down days tarnished traders’ interest in silver,but that will improve the longer gold’s upleg powers higher on balance. Increasing capital inflows will drive silverhigher, with that upside momentum feeding on itself as traders chase gains. Higher silver prices amplifying gold’s advancewill entice speculators and investors back into silver-mining stocks, whichhave a long ways to rally to catch up.Adam Hamilton, CPA
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