The silver miners’ stocks have surged higher since mid-March’s COVID-19 stock panic, clocking in some big and fast gains. Nevertheless, this long-struggling sector remains vexing. By mid-May as their latest earnings season was wrapping up, the silver stocks were lagging the gold stocks’ powerful upleg. And the silver miners’ Q1’20 operational and financial results were disappointing compared to the gold miners’.
Silver and its miners’ stocks have had one heck of a roller-coaster ride in recent months. With primary silver miners a dying breed, and silver stocks languishing deeply out of favor for years, there are only a couple silver-stock ETFs trading in the US. The leading one remains the SIL Global X Silver Miners ETF. And it is still tiny, a rounding error with just $527m in net assets in mid-May. Silver stocks are left for dead.
This sector naturally mirrors and amplifies material silver-price moves, and silver in turn is overwhelmingly driven by its dominant primary driver gold. So silver and silver stocks followed gold’s violent V-bounce into and out of mid-March’s COVID-19 stock-panic lows. Traders were warming to silver stocks again in late February, when SIL climbed to $33.11 as the metal they mine surged to $18.62 on a strong gold rally.
But silver started wavering even while gold initially fought the sharp stock-market selloff with the COVID-19 pandemic finally scaring American traders. Their selling snowballed into a suffocating fear maelstrom fierce enough to suck in gold. So by mid-March as the stock panic flared, silver had collapsed 35.8% in just several weeks! That sledgehammer to the skull bludgeoned SIL 43.8% lower in a similar short span.
But after that extreme fear anomaly, both silver and its miners’ stocks V-bounced to mean revert higher with gold. By mid-May, silver had powered 38.8% higher to $16.60. But those post-panic gains were anemic, with this white metal still 10.8% lower than late February’s pre-panic levels. While silver’s post-panic bounce amplified gold’s by a healthy 2.1x, gold had surged to 5.0% above its late-February high by mid-May.
The silver stocks as measured by SIL rocketed 89.0% higher in their similar 2.1-month post-stock-panic span ending May 15th, which sounds impressive. Yet that lagged the leading GDX major-gold-stock ETF which enjoyed huge 92.5% gains over that same short span! The major gold stocks are much larger and way less risky than silver stocks, which need to considerably outperform gold stocks to be worth trading.
The major silver miners’ Q1’20 results were released against this vexing backdrop of underperformance. After every quarterly earnings season, I wade through the latest results from the top 17 SIL silver stocks. That’s simply an arbitrary number that fits neatly into the table below, but still represents a commanding 94.3% of SIL’s total weighting. Given the COVID-19 disruptions, these results were exceptionally important.
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. Each individual company has its own unique reporting peculiarities that take time to understand. And unlike the superior quarterly reporting in the US and Canada, half-year reporting is common globally necessitating splitting some data.
While most of the SIL-top-17 silver miners had reported their Q1’20 results by mid-May, a couple were dragging their feet. That’s seriously disrespectful to their shareholders, who deserve timely quarterly results as early as possible. The highlights of the SIL top 17’s latest results reported as of May 15th are included in this table. Blank fields mean a company hadn’t reported that particular data by this essay’s 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 Q1’20 is followed by its year-over-year change from Q1’19. 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 Q1’20 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 mostly calculated by dividing miners’ quarterly silver sales, based on silver’s average price last quarter, by their 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 Q1’19 to Q1’20.
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.
Unfortunately the major silver miners’ fundamentals deteriorated last quarter despite higher prevailing silver prices! Government lockdowns to check COVID-19’s spread in major silver-producing countries were one reason. Those blanket countrywide shutdown orders started in the second half of March. They halted production at silver mines in affected countries, while raising costs to temporarily mothball them.
The best global silver supply-and-demand data available is released once a year by the Silver Institute in its awesome World Silver Survey reports. The latest read covering 2019 was published in late April. It includes a ranking of the top silver-producing countries which were crowned by Mexico, Peru, and China. Last year they accounted for 22.7%, 16.2%, and 13.2% of all the silver mined worldwide. That’s over half!
Government officials in this dominant silver triad locked down their economies in Q1 to retard COVID-19 ripping through their populaces. And most of the major silver miners in the SIL top 17 have operations in these countries. Mexico ordered all non-essential businesses including miners to close at the very end of Q1. So while last quarter largely escaped severe COVID-19 disruptions, they have hammered Q2 output.
Peru’s COVID-19 lockdown started earlier in mid-March, shuttering silver-mining operations in that country. And in epicenter China which birthed this global plague, silver mines were ordered closed for at least 6 weeks in the middle of Q1. But the largest share by far of the SIL top 17’s silver production from these leading silver countries comes from Mexican mines, which again were online through the entire quarter.
That fact makes the SIL top 17’s falling production look troubling. These elite silver miners collectively produced 65.5m ounces of silver in Q1’20, down a sharp 9.3% YoY! This is partially explainable by SIL’s two new stocks climbing into its top 17 over this past year being silver explorers with zero production. But even excluding the producers they replaced from Q1’19’s total, the SIL top 17’s silver output still slumped 3.9%.
While COVID-19 shutdowns are going to be huge in the current Q2’20, a bigger driver last quarter of this declining silver production is the major silver miners’ ongoing diversification into gold. I’ve written about this many times in the 16 quarters I’ve been working on this deep research thread. The economics of silver mining have been inferior to gold mining for years, since silver prices have long been languishing low.
So the long-term trend of yellowing major silver miners continued in Q1’20, with the SIL top 17’s aggregate gold output climbing 2.2% YoY to 1419k ounces. The traditional major silver miners have been allocating more capital into boosting more-profitable gold operations for years, at the expense of silver. The relative gold and silver performances in Q1 continued justifying that secular shift away from primary silver mining.
Silver’s $16.80 average price in Q1’20 was 8.1% higher than Q1’19’s, yet gold’s $1582 average soared by a whopping 21.4% YoY! Much-better gold prices and higher gold production combined with relatively-weaker silver prices and lower silver output to leave the SIL top 17 even less silver-centric in Q1. These elite silver stocks averaged just 35.4% of their Q1 revenues from silver, tying for the past 16 quarters’ low!
That’s a sharp drop from the SIL top 17’s 45.3% of sales from silver in Q2’16 when I started collating this quarterly data for this essay series. In that 3.8-year span, these traditional elite silver miners have upped their collective gold output by 11.4% while allowing their silver production to dwindle by 15.9%! There just aren’t many primary silver miners left, deriving over half their revenues from silver. Silver stocks are dying.
There are only two of these rare companies left in the SIL top 17 now, with their silver-purity percentages highlighted in blue. In Q1 First Majestic Silver and Fortuna Silver Mines generated 61.5% and 64.3% of their sales from silver. The rest of the SIL top 17 are now overwhelmingly primary gold miners. There just aren’t enough major silver miners left to build a true primary-silver-miners ETF, thus SIL is gold-centric.
Back to COVID-19’s impact on these SIL-top-17 companies, there were some common themes as I read and digested their Q1’20 results. The great majority of these companies withdrew their 2020 guidance for production and costs, which is definitely prudent given the extreme uncertainty. Governments have been capricious in shuttering businesses, garroting their economies at different times and changing their minds.
The silver miners have been trying to help, with many donating substantial sums of money to help local medical and food situations in communities around their operations. They’ve also implemented all kinds of procedures to slow COVID-19’s spread, including new social distancing for employees while working, relentless cleaning and disinfecting, testing for infections, and quarantining employees returning to mine sites.
But they’ve also taken a proactive approach in trying to convince national governments that silver mining is essential and should be exempt from blanket lockdown orders. First Majestic Silver led the charge on this, as its all-Mexico mining operations were dead in the water after that government’s decree to shutter everything at the end of March. Within days, AG’s management was campaigning to get silver mining exempted.
In early April First Majestic reported it was “working with local and state officials, industry task force groups and other mining companies to make the case to the Federal Government that mining, especially silver mining, is essential and critical to the medical industry given silver’s antibacterial properties which is proven to reduce the spread of viruses.” It pointed out the US and Canada had defined mining as essential businesses.
Surprisingly AG also said its staff included “17 full-time physicians and several health care professionals”. Precious-metals mining is ideally suited for social distancing, since these mines are usually way out in rural areas with employees relatively isolated. They either live in small local towns or travel to the mines to work long multi-week shifts. And access to mine sites is tightly-controlled, with only employees allowed in.
As I’ve written in our subscription newsletters since early April, I’ve never been too worried about mine shutdowns lasting long. Governments strangling their own economies to fight COVID-19 are struggling with collapsing tax revenues. Very few can print trillions of dollars like the US Federal Reserve to paper over their lockdown-imposed economic catastrophes! They need the big taxes gold and silver mines pay in!
Indeed governments soon relaxed restrictions on gold and silver mining, exempting them from lockdown orders. The Canadian province of Quebec was the first to execute a turn-one-eight. After forcing mines to shutter in late March in its provincial-wide lockdown, a few weeks later in mid-April Quebec reclassified mines as essential businesses. And world-silver-mining-dominating Mexico came to its senses in mid-May.
On May 13th, Mexican officials issued new guidelines declaring that mining is part of a critical group of industries that are “essential activities”! I’m sure the mining-company lobbying played a role in that key decision. Mexico also said that restrictions should be lifted in townships with low cases of COVID-19, which includes plenty remote areas near mines. So gold and silver miners were given the green light to reopen.
May 18th was the go date, with the silver miners raring to spin back up their operations in Mexico. So barring a big second wave of COVID-19 infections spooking that government, it looks like the worst of the disruptions have passed. But there’s going to be gaping holes in Q2’20’s silver output with those Mexican silver miners closed for the first half of this quarter! The silver miners’ Q2 results into mid-August will be ugly.
But back to Q1’20 for now, lower silver production should’ve led to proportionally-higher unit mining costs for the SIL top 17. Silver-mining costs are generally fixed quarter after quarter, with production requiring roughly the same levels of infrastructure, equipment, and employees. The better the ore grades chewed through by fixed-capacity mills, the more silver ounces yielded to spread mining’s big fixed costs across.
Those are largely determined during mine-planning stages, when engineers and geologists decide which silver-bearing ores to mine, how to dig to them, and how to process them to recover their silver. Indeed Q1’20’s sharply-lower silver production among the SIL top 17 boosted their unit mining costs. I’m sure COVID-19 also contributed significantly, as mitigating infection risks on mine sites is inefficient and expensive.
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 surged higher in Q1.
The SIL-top-17 silver miners reported average cash costs of $7.93 per ounce. That’s a new 16-quarter high, way above the previous trading range of $3.95 to $7.39. But Q1s usually tend to have higher cash costs due to a reporting peculiarity. Silvercorp Metals has such massive base-metals byproducts that its silver cash costs are negative! But with its fiscal year ending Q1, full-year results aren’t released until later.
Though SVM mines silver in China, it is a Canadian company operating under Canadian securities law. And that grants publicly-traded companies a super-leisurely 90 days after year-ends to report their annual results. In the US the audited annual-reports deadline is 60 days. But even without SVM’s negative contribution, the SIL top 17’s $7.93 average cash costs in Q1 remained way below its $16.80 average silver.
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 major silver miners’ true operating profitability.
The SIL top 17 reporting them in Q1’20 averaged $13.45 per ounce, which was 5.9% higher YoY. That was near the top end of their 16-quarter trading range from $9.73 to $13.53. But it was still well under Q1’s $16.80 average silver price, implying silver mining was profitable despite the COVID-19 shutdowns. That spread between selling prices and costs suggested the silver miners earned $3.35 per ounce last quarter.
That was really disappointing though, collapsing 45.4% sequentially from Q4’19’s hefty $6.13! And it was merely up 18.0% YoY from Q1’19’s $2.84 per ounce. While earnings growth is really hard to come by in this self-inflicted depression governments gone wild are plunging us into, silver miners’ performance was dwarfed by the major gold stocks’. The GDX-top-34 gold miners saw implied profits skyrocket 58.5% YoY!
The underway Q2 is unlikely to see a big recovery in silver-mining profitability either. As of May 15th, this current quarter’s average silver price was much worse at $15.17. Silver hasn’t recovered as far as gold relative to their pre-stock-panic highs. And if the COVID-19 shutdowns in Mexico, Peru, Argentina, and Bolivia slash the SIL top 17’s Q2 production by a third or more, AISCs will probably blast higher proportionally.
Make no mistake, the silver miners are still struggling. One thing that stuck out reading through the SIL top 17’s quarterly reports was a disclosure by SSR Mining, which has a silver mine in Argentina that was shut down. Like a small business, SSRM’s management said it was evaluating whether it qualified for national business-support programs! Those are like the US’s massive $669b Paycheck Protection Program.
SSRM declared in its Q1 results that “We also are assessing our qualification for announced support programs in each country where our operations have been impacted. We intend to apply for such support if and when we meet the qualifying criteria.” I’ve never seen anything like that in my decades analyzing and trading mining stocks! The SIL top 17’s hard accounting results emphasized how poorly they have fared.
Their total sales dropped 8.5% YoY in Q1’20 to under $2.8b, in line with their 9.3%-lower silver output. Despite their ongoing shift into gold, their 2.2%-higher gold production wasn’t enough to make much of a difference. Skewing this drop a bit was Buenaventura. Things are so bad in Peru’s lockdown where BVN mines that it suspended dividend payments and delayed reporting its Q1’20 results until the second half of May.
Excluding BVN’s sales from Q1’19’s total, the SIL top 17’s YoY drop moderated considerably to just 2.5%. The inclusion of two new explorers with zero sales also pushed that lower. But the major silver miners’ operating-cash-flow generation was a bright spot, soaring 106.9% YoY to $490m! That helped push their collective treasuries up 17.2% YoY to nearly $2.7b. But that’s still just mid-range relative to the past 16 quarters.
The SIL top 17’s hard accounting profits under Generally Accepted Accounting Principles and rules from other countries were flat-out terrible in Q1’20. They collectively weighed in at a $78m loss, a serious deterioration from Q1’19’s total $123m earnings! Out of the 9 silver miners releasing earnings as of mid-May, fully 7 of them reported bottom-line losses. And unusual non-cash items driving them were modest.
They included plenty of currency losses since the Mexican peso plummeted in Q1, losing more than a third of its value relative to the US dollar intra-quarter! Hecla Mining was so bold as to include a big COVID-19 line item on its income statement, a $13.0m charge for “Ramp-up and suspension-related costs”. Silver miners just aren’t profitable, and generally haven’t been for years. That’s sure a strike against them.
Nevertheless, the better major silver miners are still worth buying in this environment. During that brutal mid-March stock panic, silver plummeted to an absurd all-time low relative to gold. Silver still needs to mean revert dramatically higher relative to its primary driver. And much-higher silver prices will radically improve the fundamentals of the struggling silver miners. Mid-2016 proved a great example of this dynamic.
The last time silver was really in favor was that summer four years ago, when silver averaged $16.79 in Q2’16 and $19.55 in Q3’16. Those made for Silver/Gold Ratios of 75.0x and 68.2x, and the SIL top 17 earned total hard accounting profits of $384m and $382m in those quarters. As of mid-May 2020, the quarter-to-date SGR was averaging just 111.7x. To return to 70x at $1750 gold, silver would have to soar to $25!
Silver-mining fundamentals turn vastly better with much-higher silver prices. And those are coming given silver’s deep undervaluation relative to gold, the big ongoing silver investment buying as evident in its leading SLV silver ETF, and speculators remaining nearly all-out silver-futures longs in mid-May giving them vast room to buy back in accelerating silver’s upleg. As silver mean reverts higher, silver stocks will follow.
And even though the major silver miners’ silver purity is dropping, they are still the only game in town for traders looking to leverage silver rallies in silver-mining stocks. So the traditional major silver miners are still aggressively bid higher as silver climbs. Thus we’ve included fundamentally-superior silver stocks in our many new precious-metals-stocks trades added in recent months, as they still have huge potential to soar.
The bottom line is the major silver miners’ results were very disappointing in Q1, despite higher prevailing silver prices. Even before COVID-19 mine shutdowns became widespread, silver production plunged leading to lower revenues. That drove industrywide losses, although operating cash flows managed to soar on higher gold output. The silver miners’ latest fundamentals are certainly nothing to write home about.
Nevertheless, this long-struggling sector still has great potential. Silver remains far too cheap compared to gold, and is mean reverting higher to restore their normal historical relationship. Silver stocks will be bid higher regardless of how they are faring as silver’s young post-panic upleg continues growing. And higher prevailing silver prices will greatly improve silver miners’ fundamentals in future quarters after Q2’s hit.
At Zeal we started aggressively buying and recommending fundamentally-superior gold and silver miners in our weekly and monthly subscription newsletters back in mid-March right after the stock-panic lows. We’ve been layering into new positions ever since, with unrealized gains already growing huge. And they will likely get much bigger in coming months as this gold-stock upleg keeps powering higher on big gold investment.
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