Silver Miners Re-Allocating Capital Investments Towards Gold Mining, At Silver’s Expense


from Silver Doctors:

After three years of declining silver production, peak silver could really be upon us…

by Adam Hamilton of Zeal LLC

The silver miners are finally enjoying higher prevailing silver prices, a great boon for this sector.  Silver surged this past summer after gold’s first new bull-market highs in several years rekindled enthusiasm for precious metals.  The long-neglected silver stocks rallied strongly with their metal.  Their recently-reported Q3’19 results reveal whether those gains are justified, and how much fundamentals improved on higher silver.

Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports.  Required by the US Securities and Exchange Commission, these 10-Qs and 10-Ks contain the best fundamental data available to traders.  They dispel all the sentiment distortions inevitably surrounding prevailing stock-price levels, revealing corporations’ underlying hard fundamental realities.

The definitive list of major silver-mining stocks to analyze comes from the world’s most-popular silver-stock investment vehicle, the SIL Global X Silver Miners ETF.  Launched way back in April 2010, it has maintained a big first-mover advantage.  SIL’s net assets ran $515m in mid-November near the end of Q3’s earnings season, 4.6x greater than its next-biggest competitor’s.  SIL is the leading silver-stock benchmark.

In mid-November SIL included 25 component stocks, which are weighted somewhat proportionally to their market capitalizations.  This list contains the world’s largest silver miners, including the biggest primary ones.  Every quarter I dive into the latest operating and financial results from SIL’s top 17 companies.  That’s simply an arbitrary number that fits neatly into the table below, but still a commanding sample.

As of mid-November these major silver miners accounted for fully 93.9% of SIL’s total weighting.  In Q3’19 they collectively mined 72.2m ounces of silver.  The latest comprehensive data available for global silver supply and demand came from the Silver Institute in April 2019.  That covered 2018, when world silver mine production totaled 855.7m ounces.  That equates to a run rate around 213.9m per quarter.

Assuming that mining pace persisted in Q3’19, SIL’s top 17 silver miners were responsible for about 34% of world production.  That’s fairly high considering just 26% of 2018’s global silver output was produced at primary silver mines!  38% came from lead/zinc mines, 23% from copper, and 12% from gold.  Nearly 3/4ths of all silver produced worldwide is just a byproduct.  Primary silver mines and miners are quite rare.

Scarce silver-heavy deposits are required to support primary silver mines, where over half their revenue comes from silver.  They are increasingly difficult to discover and ever more expensive to develop.  And silver’s challenging economics of recent years argue against miners even pursuing it.  So even traditional major silver miners have shifted their investment focus into actively diversifying into far-more-profitable gold.

Silver price levels are best measured relative to prevailing gold prices, which overwhelmingly drive silver price action.  In early July the Silver/Gold Ratio continued collapsing to its worst levels witnessed in 26.8 years, since October 1992!  Those secular extremes of the worst silver price levels in over a quarter century sure added to the misery racking this once-proud sector.  So silver’s recent upleg is a godsend.

The largest silver miners dominating SIL’s ranks are scattered around the world.  11 of the top 17 mainly trade in US stock markets, 3 in the United Kingdom, and 1 each in South Korea, Mexico, and Canada.  SIL’s geopolitical diversity is good for investors, but makes it difficult to analyze and compare the biggest silver miners’ results.  Financial-reporting requirements vary considerably from country to country.

In the UK companies report in half-year increments instead of quarterly.  Some silver miners still publish quarterly updates, but their data is limited.  In cases where half-year data is all that was made available, I split it in half for a Q3 approximation.  Canada has quarterly reporting, but the deadlines are looser than in the States.  Some Canadian miners really drag their feet, delaying their quarterlies right up to legal limits.

The big silver companies in South Korea and Mexico present other problems.  Their reporting is naturally done in their own languages, which I can’t decipher.  Some release limited information in English, but even those translations can be difficult to interpret due to differing accounting standards and focuses.  It is definitely challenging bringing all the quarterly data together for these diverse SIL-top-17 silver miners.

But analyzing them in the aggregate is essential to understand how they are faring.  So each quarter I wade through all available operational and financial reports and dump the data into a big spreadsheet for analysis.  Some highlights make it into this table.  Blank fields mean a company hadn’t reported that data by mid-November, as Q3’s earnings season ended.  Some of SIL’s components report in gold-centric terms.

The first couple columns of this table show each SIL component’s symbol and weighting within this ETF as of mid-November.  While most of these stocks trade on US exchanges, some symbols are listings from companies’ primary foreign stock exchanges.  That’s followed by each miner’s Q3’19 silver production in ounces, along with its absolute year-over-year change.  Next comes this same quarter’s gold production.

Nearly all the major silver miners in SIL also produce significant-to-large amounts of gold!  That’s truly a double-edged sword.  While gold really stabilizes and boosts silver miners’ cash flows, it also retards their stocks’ sensitivity to silver itself.  So the next column reveals how pure these elite silver miners are, approximating their percentages of Q3’19 revenues actually derived from silver.  This is calculated one of two ways.

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