Silver SIL Global X Silver Miners ETF Fundamentals / Commodities / Gold and Silver Stocks 2021

The silver miners’ stockshave mostly been consolidating high since last summer.  While they’ve enjoyed some sharp rallies,those have been within that sideways-grind trend.  That lack of overall upside progress has leftthis tiny contrarian sector out of favor, with apathy reigning.  But as their recently-reported Q1’21 operatingand financial results revealed, silver stocks’ fundamentals and upsidepotential remain good.

There aren’t many majorsilver miners in the world, and only a handful are primary silver producersthat derive over half their revenues from silver.  With such a small population, there are onlya few silver-stock ETFs.  The leading oneis still the SIL Global X Silver Miners ETF, which is also this tiny sector’s bestbenchmark.  But nearing the end of Q1’21’searnings season in mid-May, it only held $1.3b in net assets.

Following a mightyupleg that peaked in early August at SIL $51.53, the silver stocks have largelydrifted laterally since.  But their hightrading range has been wide, encompassing both corrections and attempts at newuplegs.  Plenty of speculators andinvestors are still interested in this obscure sector, as evidenced by anamazing episode in late January.  Thatcatapulted SIL a blistering 23.9% higher in just three trading days!

That was when Reddit’sfamous wallstreetbets forum appeared to be starting to discuss engineering asilver short squeeze with massive retail buying.  At the time I wrote a whole essay analyzingthat.  For our purposes today, thatfascinating event proved that the right catalyst can still ignite big inflowsinto silver and its miners’ stocks. Unfortunately SIL resumed correcting after that, slumping on balanceinto late March.

But since then it hasrecovered, mirroring goldstocks’ march higher in a young upleg. By mid-May as last quarter’s earnings season was wrapping up, SIL hadrebounded 18.7% in six weeks to $45.97. While that lagged gold stocks, it still made for a technically-soundupleg carving series of higher lows and higher highs.  But back in Q1 SIL actually fell 12.5% despitethat Reddit spike, fueling much bearish sentiment.

How were the major silverminers actually faring fundamentally while their stocks corrected with silver?  Their weak stock-price performance was reasonable,as silver was dragged 7.4% lower that quarter by gold’s own 10.0% slide.  The silver stocks normally amplify material goldand silver moves due to their inherent profits leverage to those precious metals.  But SIL’s Q1 slide wasn’t fundamentally-justified.

For 20 quarters in arow now, soon after earnings seasons I’ve painstakingly analyzed the latestoperating and financial results from the top 15 SIL component companies.  These rarefied ranks include some of thebiggest silver miners on the planet, and command fully 87.0% of SIL’s totalweightings.  While it takes a lot oftime, effort, and expertise to digest these quarterly reports, the fundamentalinsights are well worth it.

This table summarizesthe operational and financial highlights from the SIL top 15 during Q1’21.  These major silver miners’ stock symbols aren’tall US listings, and are preceded by their rankings changes within SIL over thepast year.  The shuffling in their ETF weightingsreflect changing market caps, which reveal both outperformers and underperformerssince Q1’20.  The symbols are followed bycurrent SIL weightings.

Next comes these miners’Q1’21 silver and gold production in ounces, along with their year-over-yearchanges from the comparable Q1’20.  Outputis the lifeblood of this industry, with investors generally prizing productiongrowth above everything else.  After thatis a measure of silver miners’ relative purity, their percentage ofquarterly sales actually derived from silver. Most silver 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 mid-May when Q1’s earnings season waswinding down.  And annual percentage changesare also excluded if they would prove misleading, like comparing two negativenumbers or data shifting from positive to negative or vice versa.

With the average silverprice in Q1’21 rocketing up 55.8% year-over-year to $26.18, the silver minersshould have reported excellent results.  Theydelivered for the most part, although their silver production continued towane.  For many years now, the major silverminers have been increasingly shifting their capital into gold mining.  Primary silver miners are slowly going extinct since gold is more profitable to produce.

Overall the SIL-top-15silver miners produced 61,471k ounces in Q1’21. That slumped a modest 2.0% YoY, which was the slowest rate of decliningsilver output since Q2’19.  Out of thoselatest 20 quarters where I’ve been advancing this research thread, Q1’sSIL-top-15 production ranked near the bottom at 18th.  The major silver miners’ collective output oftheir namesake metal continues to trend lower on balance.

The SIL top 15’s collectiveoutput peaked at 77,432k ounces way back in Q2’17.  The last quarter where these major silverminers grew their silver production year-over-year was a slight positive blipin Q2’19.  For the last seven quarters ina row, their silver mined has relentlessly shrunk.  Relatively-pure silver deposits supportingprimary silver mines are getting rarer, and they are challenging to operateprofitably.

The best-availablefundamental data on global silver supply and demand is published once a year bythe venerable Silver Institute.  The latestWorld Silver Survey covering 2020 was just released about a month ago.  It revealed that only 27% of all the silvermined worldwide last year came from primary silver mines.  Nearly 3/4ths of all the silver producedwas merely the byproduct of lead/zinc, copper, and gold mines!

The major silver minerscontinued turning yellow last quarter, increasingly diversifying into gold withits superior economics.  The SIL top 15’stotal gold production surged 8.3% higher YoY to 1,454k ounces!  That is on the higher side, ranking as 6thout of the last 20 quarters.  Most of theproduction growth these major silver miners saw in Q1 came on the gold side.  A couple traditional silver miners led thatcharge.

For decades SSR Miningwas called Silver Standard Resources. While its silver production was flat last quarter, its gold outputrocketed up 93.5% YoY to 170k ounces! That mostly resulted from SSRM acquiring the gold miner Alacer Gold lastsummer.  Now this company operates threegold mines to just a single silver one. And that was an old mine winding down, although a new deposit nearbywill extend its life.

Fortuna Silver, whichis included in SIL under its Canadian symbol FVI, reported decent silver-productiongrowth of 5.2% YoY.  Yet its gold output soareda colossal 242.6% YoY to 35k ounces! This company is ramping up its new third mine which recently finishedconstruction, a gold operation.  Insteadof buying or building more silver mines, SSR Mining and Fortuna Silver both chose to buy or build gold ones instead.

They certainly aren’talone.  First Majestic Silver, also underits Canadian FR listing in this leading silver-stock ETF, has long been thepurest major silver miner in the world. But it just bought a company to acquire a gold mine which yielded113k ounces last year.  Once that deal isfinished and that gold attributed to First Majestic, it too will overwhelminglybe a primary gold miner.  The majorsilver miners are investing in gold.

After watching this ongoingshift away from the white metal for years now by its traditional major producers,every quarter I wonder if I should keep analyzing silver stocks.  As primary gold miners, the larger ones are alsoincluded in the big gold-stockETFs.  As that Reddit-silver-short-squeezeepisode proved, there is still plenty of investment demand for silverminers.  But their leverage to silverwanes with their purity.

In Q1’21, the SIL top15 averaged 47.8% of their quarterly sales coming from silver.  This was mostly figured by multiplying silverproduction by silver’s average price, then dividing that by revenues.  In some cases where companies didn’t report Q1sales, they were approximated using gold and silver outputs and their averageprices.  Interestingly that relativesilver purity was a considerable improvement, 4.6% better.

But a couple factorsskewed it higher.  First silver wayoutperformed gold in Q1 in average-price terms, as the white metal soared 55.8%YoY compared to the yellow one’s 13.4%. Thus silver’s contribution to total revenues surged.  Maybe this silver-outperformance trend willcontinue, but it is unusual compared to recent-years precedent.  Second, a long-time explorer MAG Silver istransitioning into a new silver miner.

It owns a minoritystake in a big new silver mine under construction by silver behemoth Fresnillo.  Even though that development ore only yielded203k ounces of silver last quarter, that was 90.8% of MAG’s implied sales.  Without that high purity read, the rest ofthe SIL top 15 averaged a much-lower 44.2% of their revenues from silver.  That is more in line with preceding quarters’trend of 43.7% and 44.0% purity.

Out of those 20 quartersI’ve been analyzing the SIL top 15’s latest results, only a single one clockedin over 50% in primary-silver-miner territory! The overall average was just 40.1% during that span.  The lower the major silver miners’ silverpurity falls, the less responsive their stock prices will be to silver’s action.  Silver stocks’ leverage to silver continuingto wane will likely erode investors’ interest in this sector.

Silver-miningproduction trends are usually inversely proportional to unit miningcosts, lower outputs lead to higher costs. That’s because silver mines’ operating costs are largely fixed.  They can only process so much silver-bearingore each quarter, which requires about the same levels of infrastructure,equipment, and employees.  So less silverrun through their fixed-capacity mills leaves fewer ounces to spread costsacross.

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 necessary to keep the mines running.

The SIL top 15’saverage cash costs blasted 16.8% higher YoY to $10.52 per ounce in Q1’21.  That was way faster than waning output wouldimply, and the highest cash costs by far in the last 20 quarters.  That dwarfed the previous record high of$9.01 in Q1’20.  But this sector costread was skewed high by Peru’s perpetually-struggling Buenaventura.  Excluding its extreme outlying $19.39, thataverage retreats to $9.26.

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 major silverminers’ AISCs climbed 6.6% YoY to an average of $14.33 per ounce in Q1’21.  That was still well under the peak of $15.36in Q3’18, and was skewed higher by First Majestic Silver.  It reported $19.35 AISCs, which were blamedon lower production to spread fixed costs across.  The SIL top 15’s average AISCs are generallyvolatile though, as the sample size of companies reporting them is small.

But with major silverminers morphing into gold producers, we have to take whatever data we can get.  At last quarter’s high average $26.18 silverprices, $14.33 AISCs are still very profitable. That implies these elite silver miners as an industry were earning$11.85 per ounce, which is the second-highest in the last 20 quarters afterQ3’20’s $14.77.  This profitability proxyskyrocketed 253.4% higher YoY from Q1’20’s $3.35!

That furthers afive-consecutive-quarter trend where the major silver miners’ implied earnings climbedat impressive double-digit rates.  Thatstreak achieved 18.2%, 23.1%, 137.2%, 65.6%, and 253.4% YoY growth in quarterlyaverage silver prices less SIL-top-15 average all-in sustaining costs!  And those big numbers will continue in the currentQ2, as silver was averaging a strong $26.12 quarter-to-date in mid-May.

That was in line with Q1’shigh prevailing prices, which will lead to more big unit profits.  While the major silver miners’ AISCs aresomething of a crapshoot since so few are reported, over the last four quartersthey averaged $12.62.  If Q2’21’s come inanywhere close to that, the SIL top 15 will enjoy huge earnings growth for another quarter.  The comparableearnings proxy a year earlier in Q2’20 was just $4.15 per ounce.

The SIL top 15’s hardfinancial results reported to their securities regulators under Generally AcceptedAccounting Principles or other countries’ equivalents confirmed their strongperformances last quarter.  These majorsilver miners’ collective revenues soared 40.8% YoY to $4,039m.  That was the second-highest seen in the last20 quarters, only trailing Q4’20’s $5,044m. Higher silver and gold prices are a big boon.

The major silver miners’actual total bottom-line accounting earnings were good too, improving radicallyfrom the comparable quarter.  The SIL top15 reporting those numbers by mid-May had total profits of $379m.  That was on the higher side of recent years’precedent, and a colossal improvement from the $274m loss these companiessuffered in Q1’20.  Their increasing focuson gold is likely a major driver of this.

Better precious-metalsprices also really boosted operating cash flows generated by the SIL top15.  In Q1’21 they blasted up 33.2% YoYto $687m.  That fed into the silverminers’ cash treasuries soaring 45.9% YoY to $3,968m.  Operations spinning off so much cash willcertainly drive more buying of mines and entire companies.  Based on recent-years precedent though, mostacquisitions will likely be gold-centric.

So the dwindling major silverminers are faring well, as they certainly should be with such high prevailingmetals prices.  Their latest quarterlyresults were strong in some ways, but lackluster in others.  Looking at this table, it is surprising howmany of the SIL top 15 reported lower silver and/or gold output compared to Q1’20.  That should’ve been an easy comp, as theCOVID-19 lockdowns were starting late in that quarter.

While we own a few ofthese better major silver miners in our trading books, it is hard to getexcited about this sector.  The long-timetraditional major silver miners are increasingly primary gold miners, givingtheir stocks more affinity to the yellow metal than the white one.  Maybe that doesn’t matter, as silver’s primary driver isgold’s fortunes.  But it is getting morechallenging to find pure silver-stock exposure for portfolios.

The SIL ETF itselfremains problematic too.  Without manymajor silver miners to pick from, there’s not a lot of options for this ETF’smanagers.  Yet some of SIL’s biggerpositions are confounding.  Russia’sPolymetal was this ETF’s second-largest holding at 11.5% in mid-May.  Yet silver accounted for just 20.3% of itssales last quarter.  And that’s high forthis company, as POLY’s silver purity ran just 13.6% in Q4’20.

And Korea Zinc at 5.1%should be booted from this silver-stock ETF posthaste.  It is a large base-metals smelter thathas nothing to do with mining silver! While it does smelt silver, that is still a relatively-small fraction ofits business.  Global X named their ETFthe “Silver Miners ETF”, so having a non-miner like Korea Zinc in it with ahigh weighting really hurts its credibility. SIL is really another gold miners’ ETF in disguise.

So despite excellentsilver prices, silver-stock investing is a lot harder than it used to be.  The major silver miners are pouring most oftheir growth capital into boosting their gold outputs.  The opportunity costs for that are much lessallocated to adding more silver production. The more gold traditional silver miners sell, the less silver drivestheir revenues.  That leaves their stockprices much less sensitive to silver action.

Straddling gold’s extended-correctionbottom in recent months, we gradually filled up the trading books of our newsletterswith fundamentally-superior precious-metals miners.  But for the major silver miners that madethat cut, I was more excited about their surging gold production from mine expansions,builds, and buys than their silver output. Silver is increasingly a byproduct even in this realm, fueling apathyamong traders.

At Zeal we walk the contrarianwalk, buying low when few others are willing before later selling high when fewothers can.  We overcome popular greedand fear by diligently studying market cycles. We trade on time-tested indicators derived from technical, sentimental,and fundamental research.  That hasalready led to unrealized gains in this current young upleg as high as +64.9%on our recent newsletter stock trades!

To multiply your wealthtrading high-potential gold stocks, you need to stay informed about what’sgoing on in this sector.  Stayingsubscribed to our popular and affordable weekly and monthly newsletters is agreat way.  They draw on my vast experience,knowledge, wisdom, and ongoing research to explain what’s going on in the markets,why, and how to trade them with specific stocks.  Subscribetoday while this gold-stock upleg remains young!  Our newly-reformatted newsletters have expandedindividual-stock analysis.

The bottom line is themajor silver miners of the leading silver-stock ETF generally reported good resultsin Q1.  Continuing their years-olddiversification trend, their silver production waned as their gold outputsurged.  This ongoing shift continued todilute the purity of the traditional silver miners, leaving their stock pricesmore dependent on gold than silver. While more profitable, these silver stocks trade more like gold stocks.

The high prevailing silverprices did help drive big year-over-year surges in revenues, earnings, operatingcash flows generated, and cash treasuries. Those good fundamentals should attract capital, especially as silverpowers higher with gold.  As thatReddit-silver-short-squeeze episode showed, traders still flock back to major silverminers when silver runs.  While thatlasts, these stocks should still amplify silver’s gains.

Adam Hamilton, CPA

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