Silver Miners’ Q1’17 Fundamentals

The silver miners’ stocks have been slowly grinding higher this year, but it’s been a volatile ride.  This sector’s alternating surges and plunges have spawned outsized swings in sentiment, really distorting investors’ perceptions of the major silver miners.  But once a quarter earnings season arrives, revealing their hard fundamental realities which dispel the obscuring sentiment fogs.  The silver miners reported a solid Q1.

Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports.  These are generally due by 45 days after quarter-ends in the US and Canada.  They offer true and clear snapshots of what’s really going on operationally, shattering the misconceptions bred by the ever-shifting winds of sentiment.  There’s no silver-miner data that is more highly anticipated than quarterlies.

Silver mining is a tough business both geologically and economically.  Primary silver deposits, those with enough silver to generate over half their revenues when mined, are quite rare.  Most of the world’s silver ore formed alongside base metals or gold, and their value usually well outweighs silver’s.  So typically in any given year, less than a third of the global mined silver supply actually comes from primary silver mines!

The world authority on silver supply-and-demand fundamentals is the Silver Institute.  It recently released its highly-anticipated World Silver Survey 2017, which covers 2016.  Last year only 30% of silver mined came from primary silver mines, a slight increase.  The remaining 70% of silver produced was simply a byproduct.  35% of the total mined supply came from lead/zinc mines, 23% from copper, and 12% from gold.

As scarce as silver-heavy deposits supporting primary silver mines are, primary silver miners are even rarer.  Since silver is so much less valuable than gold, most silver miners need multiple mines in order to generate sufficient cash flows.  These often include non-primary-silver ones, usually gold.  More and more traditional elite silver miners are aggressively bolstering their gold production, often at silver’s expense.

So the universe of major silver miners is pretty small, and their purity is shrinking.  The definitive list of these companies to analyze comes from the most-popular silver-stock investment vehicle, the SIL Global X Silver Miners ETF.  This week its net assets are running 5.5x greater than its next-largest competitor’s, so SIL really dominates this space.  With ETF investing now the norm, SIL is a boon for its component miners.

While there aren’t many silver miners to pick from, major-ETF inclusion shows silver stocks have been vetted by elite analysts.  Due to fund flows into top sector ETFs, being included in SIL is one of the important considerations for picking great silver stocks.  When the vast pools of fund capital seek silver-stock exposure, their SIL inflows force it to buy shares in its underlying companies bidding their prices higher.

Back in mid-May as the major silver miners finished reporting their Q1’17 results, SIL included 29 “silver miners”.  This term is used rather loosely, as SIL includes plenty of companies which can’t be described as primary silver miners.  Most generate well under half their revenues from silver, which greatly limits their stock prices’ leverage to silver rallies.  Nevertheless, SIL is today’s leading silver-stock ETF and benchmark.

The higher the percentage of sales any miner derives from silver, naturally the greater its exposure to silver-price moves.  If a company only earns 20%, 30%, or even 40% of its revenues from silver, it’s not a primary silver miner and its stock price won’t be very responsive to silver itself.  But as silver miners are increasingly actively diversifying into gold, there aren’t enough big primary silver miners left to build an ETF alone.

Every quarter I dig into the latest results from the major silver miners of SIL to get a better understanding of how they and this industry are faring fundamentally.  I feed a bunch of data into a spreadsheet, some of which made it into the table below.  It includes key data for the top 17 SIL component companies, an arbitrary number that fits in this table.  That is a commanding sample at 93.8% of SIL’s total weighting.

While most of these top 17 SIL components had reported on Q1’17 by mid-May, not all had.  Some of these major silver miners trade in the UK or Mexico, where financial results are only required in half-year increments.  If a field is left blank in this table, it usually means that data wasn’t available by the end of Q1’s earnings season.  Some percentage changes are also blank if their data went from positive to negative.

In these tables the first couple columns show each SIL component’s symbol and weighting within this ETF as of mid-May.  Just under a third of these stocks don’t trade normally in the States.  So if you can’t find a symbol, it’s a listing from a company’s primary foreign stock exchange.  That’s followed by each SIL component’s Q1’17 silver production in ounces, along with its absolute percentage change from Q4’16.

Quarter-on-quarter changes offer a more-granular read on companies’ ongoing operating and financial performance trends than year-over-year comparisons.  QoQ changes are also included for the key data in this table’s right half of cash costs per ounce of silver mined, all-in sustaining costs per ounce, and operating cash flows generated.  Together costs and cash flows reveal the financial health of silver miners.

The Q1’17 silver production is followed by this same quarter’s gold production.  Almost every major silver miner in SIL also produces significant-if-not-large amounts of gold!  While gold stabilizes and augments the silver miners’ cash flows, it also retards their stocks’ sensitivity to silver itself.  Naturally investors and speculators buy silver stocks and their ETFs because they want leveraged exposure to silver’s price, not gold’s.

So a final column reveals how pure the elite SIL silver miners are.  This is mostly calculated by taking a company’s Q1 silver production, multiplying it by the average silver price in Q1, and dividing that by the company’s total quarterly sales.  If miners didn’t report Q1 revenues, I approximated them by adding the silver sales to gold sales based on their quarterly production and these metals’ average first-quarter prices.

After spending lots of time digesting these elite silver miners’ latest quarterly results, it’s fully apparent their stocks’ sharp selloff from mid-April to early May wasn’t fundamentally-righteous at all!  The major silver miners remain fundamentally strong, which isn’t reflected in their fear-battered stock prices these days.  The silver miners are poised to see exploding profits as silver mean reverts higher with gold this year.

Production is the lifeblood of mining companies, and thus the best place to start fundamental analysis.  In Q1’17, these top 17 SIL components collectively produced an impressive 75.9m ozs of silver.  If 2016’s world-silver-mining run rate is applied to this year’s first quarter, that implies 221.5m ozs of silver mined.  Thus these top SIL silver miners would account for over 34% of that total, so they truly are major silver players.