Silver Miners’ Q4’19 Fundamentals

March 27, 2020

The carnage in the silver miners’ stocks has been apocalyptic, fueled by the astounding COVID-19 stock panic.  As terrified traders frantically dumped everything and ran for the hills, silver and its miners’ stocks crashed.  That catastrophic anomaly has potentially created epic contrarian buying opportunities.  The silver miners’ recently-reported Q4’19 results reveal whether their fundamentals support a massive rebound.

As long-time silver-stock traders are painfully aware, this tiny sector is no stranger to adversity.  Only the most-hardened contrarians dare chasing the white metal’s occasional monster skyrocketings.  Back in late February, silver was rallying nicely as gold surged over $1600 on mushrooming COVID-19 fears.  But over the next 17 trading days silver collapsed 35.8%, with nearly 3/4ths of that loss in the final week alone!

Silver’s primary driver is gold, which plunged 9.3% in that devastating mid-March week crashing silver 28.5%.  That blasted the Gold/Silver Ratio to a crazy new all-time-record high of 124.1x, silver had never been more undervalued compared to gold!  In late February with gold near $1650, I had warned its $1600 breakout surge was peculiar and precarious lacking normal drivers.  Risks were high for a major selloff.

While that would hammer silver lower like usual, its resulting 10.9-year secular low of $11.96 on March 18th was shocking.  If sub-$12 silver somehow persisted, it would threaten the viability of many of the world’s silver mines.  But if the silver miners’ latest fundamental results suggest they can likely weather this pandemic superstorm, their upside potential as silver mean reverts much higher relative to gold is huge!

Because most silver miners logically run calendar financial years, Q4 reporting has an extended deadline up to 60 days after quarter-end in the US.  In other countries including Canada where silver stocks trade, the full-year due dates extend out to 90 days.  Annual reports including final quarters are bigger, more complex, and must be audited by independent CPAs.  Now major silver miners have finally reported Q4’19 results.

The definitive list of major silver stocks to analyze comes from this sector’s leading benchmark, the SIL Global X Silver Miners ETF.  Launched way back in April 2010, it has maintained a big first-mover lead ever since.  After every quarterly earnings season, I delve into the latest results from the top 17 SIL silver stocks.  That arbitrary number fits neatly in the table below, and represents a commanding 94.8% of SIL’s weighting.

With these miners trading around the world, amassing this valuable dataset for analysis is challenging.  In different countries the major silver miners report different data in different ways.  Half-year reporting is common across the globe, necessitating splitting data in half for quarterly approximations.  And each SIL-top-17 company has its own unique reporting peculiarities, which take time to understand and make comparable.

The more quarterly iterations of this complex research thread I run, the better the results get.  Q4’19 was my 15th quarter in a row of this deep fundamental SIL-silver-stock analysis, adding on to my massive spreadsheets.  The highlights of the major silver miners’ latest results make it into the table below, where blank fields mean a company hadn’t reported that particular data as of this essay’s mid-month cutoff.

Each company’s symbol and weighting within SIL is shown.  While most of these stocks trade on US exchanges, some symbols are listings from companies’ primary foreign stock exchanges.  These miners’ silver production in Q4’19 is followed by its year-over-year change from Q4’18.  Nearly all of the major silver miners also produce significant-to-large amounts of gold, which is increasingly important to them.

So their quarterly gold production is followed by a measure of their silver purity, approximating how much of their Q4’19 revenues were actually derived from silver.  The more silver-centric miners are, the more responsive their profits and stock prices are to major silver-price trends.  This gauge is simply calculated by dividing miners’ quarterly silver sales, based on silver’s average price last quarter, by miners’ total revenues.

Next cash costs and all-in sustaining costs per ounce reveal how much these SIL-top-17 miners spend to produce their silver.  That’s followed by the YoY changes in these companies’ operating cash flows and accounting earnings.  But raw underlying data is included instead if its percentage changes would be misleading or not meaningful, like if data shifts from positive to negative or vice versa from Q4’18 to Q4’19.

Or if both quarters show negative numbers.  Symbols highlighted in light-blue have newly climbed into the SIL-top-17 ranks over this past year.  Silver-purity percentages boldfaced in blue show the handful of true primary silver miners left, which actually generate over half their revenues from producing the white metal.  This entire dataset together offers a fantastic high-level read on how the silver miners are faring as a sector.

And despite silver’s COVID-19-spawned collapse, the major silver miners’ fundamentals greatly improved in Q4’19.  Much-higher average silver prices certainly contributed, but a bigger factor was these miners really growing their gold outputs.  That combined with much-higher average gold prices fueled way better financial results.  And based on the SIL-top-17’s mining costs, they can indeed weather $12 silver prices.

Silver mining is an interesting business, much more challenging than gold mining.  Silver’s perpetually-lagging prices make the economics of silver mining inferior to gold mining.  And silver-heavy deposits that are necessary to support primary silver miners are quite scarce.  So most of the world’s silver production comes as byproducts from other metals.  The Silver Institute has long tracked comprehensive global silver data.

Once a year it publishes must-read World Silver Survey reports, which are usually released in Aprils.  So the latest one is still 2019’s, which covered the world silver market in 2018.  That year only 26% of silver mined globally came from primary silver mines!  Nearly 3/4ths of silver output was byproducts from lead-zinc, copper, and gold mines.  So silver production growth is more complicated mostly involving other metals.

Before boosting output, the silver miners must consider the economics of the other metals most of their deposits contain.  In 2018, primary lead-zinc and copper mines yielded 38% and 23% of all silver mined in the world.  And those key base-metals prices skewed weaker in Q4’19, with quarterly average London Metal Exchange lead, zinc, and copper prices rising a modest 4.1%, falling 9.2%, and slumping 4.6% YoY.

SIL-top-17 component Coeur Mining is a great example of how base metals’ fortunes can affect silver output.  This company has a fairly-new mine called Silvertip located in northern British Columbia, which went live in Q3’18.  It is a primary zinc-lead mine with a modest silver byproduct.  In Q4’19 results, CDE warned it was “temporarily suspending” operations at Silvertip resulting in a massive $251m impairment charge.

The company blamed “further deterioration in zinc and lead market conditions” along with operational challenges.  In 2019 Silvertip produced 1.2m ounces of silver, about 1/10th of Coeur’s overall output.  Given the devastating economic slowdown governments’ draconian reactions to COVID-19 are spawning now, more base-metals mines could be mothballed this year further weighing on world silver production.

By late March, lead, zinc, and copper prices had plummeted 16.3%, 42.3%, and 25.0% quarter-to-date as quarantining strangled economies!  While less silver mined on waning base-metals demand is bullish for silver prices overall, it could weaken silver outputs for major silver miners that are running base-metals-heavy mines.  Unlike gold-mining decisions which depend solely on gold, byproduct silver’s are more complicated.

Nevertheless, the SIL-top-17 silver miners collectively produced 76.9m ounces of silver in Q4’19.  That climbed a solid 1.5% YoY, which may be relatively strong.  While the Silver Institute’s 2019 data isn’t out yet, world silver output shrunk by 0.0%, 1.8%, and 2.4% in 2016, 2017, and 2018.  I suspect it will have contracted again last year too, as the SIL-top-17’s silver output in Q1’19, Q2’19, and Q3’19 all fell sharply.

But Q4’19’s better production combined with much-higher average silver prices to really improve the SIL-top-17’s fundamentals.  Average silver prices soared 19.1% YoY from Q4’18 to $17.30 in Q4’19, making silver much more profitable to mine.  But interestingly even more important to the silver miners’ results were their big ongoing diversifications into gold.  That’s where most of their production growth came last quarter.

These SIL-top-17 major silver miners produced 1551k ounces of gold in Q4’19, which surged 8.8% YoY!  And average gold prices fared even better than silver’s, blasting 20.8% higher YoY last quarter.  That was actually the main driver behind these major silver miners’ fast-improving financial results.  While their silver production climbed modestly, their gold production surged benefitting from higher prevailing prices.

Production growth is truly the lifeblood of the mining industry.  The more individual miners can grow their outputs, the more capital they generate to continue expanding existing operations and building new mines.  It’s kind of ironic that the vast majority of production growth among the elite silver miners came on the long-expanding gold sides of their businesses.  They’ve been gradually yellowing for many years now.

Silver mining is as capital-intensive as gold mining, requiring similar large expenses to plan, permit, and construct new mines, mills, and expansions.  It needs similar fleets of heavy excavators and haul trucks to dig and move the silver-bearing ore.  Similar levels of employees are necessary to run silver mines.  But at recent years’ average precious-metals prices, silver mines generate far lower returns than gold mines.

So as silver wasted away in recent years, its bombed-out prices heavily impaired silver mines’ ability to generate sufficiently-robust operating cash flows and profits.  The silver miners were forced to adapt, and shifted their focus and capital into adding gold production rather than boosting silver output.  This trend is only going to continue after silver’s extreme crash this month on those suffocating COVID-19 fears globally.

The SIL-top-17’s gold production growing much faster than their silver output naturally forced these silver miners’ purity even lower.  They averaged just 37.4% of their revenues generated from silver in Q4’19, down from 40.0% a year earlier.  Most of these traditional silver miners are now primary gold miners based on their sales mix.  These companies’ ongoing shift from silver into gold is a double-edged sword.

Major primary silver miners are a dying breed, making it increasingly harder for traders to gain leveraged silver exposure through silver stocks.  The lower their percentages of sales actually derived from silver, the less responsive their stock prices become to silver-price moves.  The more gold-centric the traditional major silver miners become, the more their stock prices will follow gold while largely ignoring silver’s action.

But on the bright side, the silver miners’ shift into gold has really boosted their cash flows ensuring they can continue growing despite endlessly-lagging silver prices.  That will keep them in business, trading like mid-tier gold stocks, until higher prevailing silver prices return after it mean reverts higher relative to gold.  And most investors still trade traditional silver stocks on silver’s fortunes, not realizing the depth of this shift.

The best example last quarter is Pan American Silver, one of the classic major silver producers.  In Q4’19 its gold production skyrocketed 367.5% YoY to 174k ounces, putting it deep into mid-tier-gold territory.  PAAS has focused its investment capital on greatly expanding its gold output rather than silver.  Only 28% of its Q4’19 sales came from silver, compared to 51% in Q4’18 and 57% in Q4’16!  Gold has superior economics.

The only primary silver miners left in the SIL-top-17 are First Majestic Silver at 60% of Q4 revenues from silver, Silvercorp Metals at 66%, and Fortuna Silver at 57%.  But that will soon dwindle to two this year, as FSM is bringing its first new gold mine online which will morph it into a primary gold miner!  Silver needs to shoot higher relative to gold and remain relatively high for years to slow or reverse this yellowing trend.

But the SIL-top-17’s gold-output growth well exceeding silver’s has really improved the fundamentals of these miners.  Even if they don’t have major gold operations like PAAS, the sales of gold byproducts really reduce the silver-mining costs.  They greatly impact profitability along with production levels and prevailing precious-metals prices.  And these major silver miners reported excellent cost performance in Q4.

Cash costs are the classic measure of silver-mining costs, including all cash expenses necessary to mine each ounce of silver.  They are misleading as a true cost measure though, excluding big capital needed to explore for silver deposits and build mines.  Cash costs are best viewed as an acid test of survivability for the silver miners, revealing silver-price levels required to keep the mines running.  They retreated slightly in Q4.

The SIL-top-17 silver miners reported average cash costs of $6.39 per ounce last quarter, 1.1% lower than those seen in Q4’18.  But that’s still on the high side of their 15-quarter range running from $3.95 to $7.39.  And these were skewed higher by struggling Peruvian miner Buenaventura, which saw crazy-high $13.97 cash costs.  Excluding it, the rest of these SIL silver miners had much-lower $5.63 average cash costs.

All-in sustaining costs are far superior than cash costs, and were introduced by the World Gold Council in June 2013.  They add on to cash costs everything else that is necessary to maintain and replenish silver-mining operations at current output tempos.  AISCs give a much-better understanding of what it really costs to maintain silver mines as ongoing concerns, and reveal mid-tier silver miners’ true operating profitability.

These SIL-top-17 silver miners reporting AISCs averaged just $11.17 per ounce in Q4’19, which plunged a massive 15.9% YoY!  There were no skewing outliers either, with the major silver miners all holding the line on all-in sustaining costs.  The biggest contributor to this steep drop was SSR Mining.  A year earlier its AISCs soared over $20 as it wound down an old silver mine, which dragged the Q4’18 average higher.

But SSRM bucked its sector trend to reverse that silver depletion, using that old mine’s mill to process ore from a new mine nearby.  So that company’s silver production soared 139.1% higher YoY, spreading the big fixed costs across many more ounces.  PAAS also reined in its silver AISCs over this past year, while CDE simply quit reporting them entirely starting in Q1’19 because they were too high scaring investors!

The SIL-top-17’s AISCs around $11 show these companies could easily weather this COVID-19-panic-fueled $12 silver, even if it lasts awhile.  They face no existential threat even with silver prices crashing this month.  That means the resulting extremely-battered silver-stock prices recently will likely prove an outstanding contrarian buying opportunity.  Silver-stock prices will soar as silver mean reverts back higher.

And despite this brutal technical and sentimental carnage, the silver stocks’ fundamentals are very strong.  Q4’19’s much-higher prevailing silver prices combined with much-lower SIL-top-17 AISCs fueled massive implied profits growth.  $17.30 average silver less $11.17 AISCs yields fat earnings of $6.13 per ounce!  That skyrocketed a stupendous 390.4% YoY from Q4’18’s $1.25, pinched by lower silver and higher costs.

And surprisingly massive profits growth will likely persist into Q1’20 despite silver’s collapse.  Silver spent most of Q1 higher, so its average price with this quarter almost over is still $16.98.  Assuming these SIL-top-17 silver miners’ AISCs hold stable at their past-four-quarter average of $11.53, these miners might still earn $5.45 per ounce this quarter.  That would still be 91.9% higher YoY from Q1’19’s levels, huge growth!

The big wildcard is COVID-19-fear-driven government orders to shutter businesses.  A week ago that didn’t look like a threat due to most mines’ remote locations.  But since, governments have become way more aggressive in ordering countrywide shutdowns of businesses.  They will greatly impact affected mines and companies, especially if they last beyond a few weeks.  Politicians are risking spawning a depression!

With average silver and gold prices soaring 19.1% and 20.8% higher YoY, and the SIL-top-17’s collective production of each growing 1.5% and 8.8%, their Q4’19 financial results should’ve looked awesome.  And they did.  Total revenues surged 24.8% YoY to $4.4b, right in line with the growth they should’ve seen based on their key inputs.  They also fueled huge operating-cash-flow-generation growth of 61.5% YoY to $1.2b!

The higher the cash flows these major silver miners can spin off, the more capital they have to invest in growing their production by expanding existing mines and building or buying new ones.  And they were already spending that windfall, with their total treasuries actually slipping 1.0% YoY to $2.6b.  Since investors prize production growth above everything else, silver miners should always be investing in higher outputs.

On the accounting-earnings front, the SIL-top-17 actually reported a total loss of $35m to their national securities regulators based on those countries’ accounting rules.  That was disappointing given the rest of their operational and financial results.  But this was heavily skewed by 3 major impairment charges, including CDE’s already-discussed $251m on that zinc-lead mine it is mothballing due to low base-metals prices.

AG and PAAS also reported $59m and $40m noncash impairment charges.  All these can be reversed out since estimated changes in assets’ carrying values have no operational impact, yielding total SIL-top-17 earnings of $315m last quarter.  Mining profits are often heavily distorted by flushing impairments and impairment reversals through income statements when gold and silver prices have moved dramatically.

Backing out big impairment charges for Q4’18 yields SIL-top-17 accounting earnings of $62m.  So in Q4’19 on that noncash-impairment-adjusted basis, profits more than quintupled year-over-year!  Greatly-improving profitability was also reflected in valuations, with these silver miners’ average trailing-twelve-month price-to-earnings ratios falling 59.9% YoY to 31.9x earlier this month with Q4’19 results included in them.

So silver stocks weren’t only just annihilated technically, but they look relatively cheap fundamentally!  That gives them huge upside potential to mean revert radically higher as silver recovers with gold in the coming months.  While you could ride that higher with SIL, the best gains will be won in individual silver stocks with superior fundamentals.  SIL is burdened with deadweight stocks that aren’t responsive to silver.

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The bottom line is the major silver miners reported excellent results in Q4, directly driven by its much-higher prevailing silver and gold prices.  The silver miners continued shifting into gold, while still modestly growing their collective silver production.  That helped fuel soaring revenues, operating cash flows, and earnings.  And massive implied earnings growth should persist with silver and gold remaining relatively high.

While governments panicking and ordering national shutdowns to slow COVID-19’s spread are a near-term fundamental threat, this too shall pass.  As fears inevitably fade ahead, silver and its miners’ stocks will rebound and mean revert way higher.  That will yield huge gains for early contrarians tough enough to fight the herd and buy low.  The silver stocks were bludgeoned to deeply-undervalued levels fundamentally.

Adam Hamilton, CPA

Copyright 2000 - 2020 Zeal LLC (www.ZealLLC.com

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Adam Hamilton, CPA, is a principal of Zeal LLC, which he co-founded in early 2000 as a pro-free market, pro-capitalism, and pro-laissez faire contrarian investing and speculating Information Age financial-services company. Hamilton is a lifelong contrarian student of the markets who lives for studying and trading them.

US silver mining began on a large scale with the discovery of the Comstock Lode in Nevada in 1858.

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