Silver Miners' Q1'22 Fundamentals
The silver miners' stocks collapsed from mid-April to mid-May, suffering heavy collateral damage from a serious stock-market selloff. The big fear that spawned sucked in gold, hammering silver and therefore its miners' stocks sharply lower. That carnage left them battered technically, looking like huge bargains. Silver stocks' latest earnings season wrapping up in mid-May revealed whether fundamentals justify big upside.
Unfortunately silver and its miners' stocks have long failed to generate much excitement, which have left them deeply out of favor with traders. In 2021, gold slumped a modest 3.6% while silver amplified that to a considerably-worse 11.7% calendar-year loss. The dominant GDX gold-stock ETF amplified gold's grind lower falling 11.1%. But the leading SIL Global X Silver Miners ETF fared worse like its metal, losing 19.6%.
That relative underperformance has continued festering in 2022. Gold blasted 12.1% higher year-to-date by early March, major gains accelerated by Russia invading Ukraine. Silver only rallied 13.0% in that same span, failing to show its historical upside leverage to gold that made it so attractive. Since the world silver market is vastly-smaller and easier to move, normally its gains tend to at least double material gold rallies.
The gold and silver stocks achieved their latest interim highs later in mid-April. While GDX was up an impressive 27.6% YTD then, SIL had merely achieved pathetic 7.8% parallel gains! Silver and its stocks are exceedingly-dependent on herd sentiment. They can rocket parabolic only when traders rarely wax super-bullish on gold's near-term upside potential, which drives the entire precious-metals complex.
But when gold enthusiasm is lacking, silver and its miners' stocks bear the brunt of resulting selling. From early March to mid-May, gold dropped 11.7% mostly in response to the serious stock-market selloff. That ignited major safe-haven capital flows into the US dollar, and its monster surge spawned heavy selling by gold-futures speculators. Despite silver well-underperforming on the way up, it still plunged 21.6% in that span!
At worst between mid-April to mid-May, that GDX gold-stock ETF plummeted 26.2%. Yet even though the SIL silver stocks had only enjoyed just over a quarter of the preceding upside of the GDX gold stocks, SIL still cratered 30.0% during that selloff! Silver stocks have been hard to love for a long time, leaving them increasingly-less-appealing to analyze and trade. I wonder if each essay I write on them will be my last.
Yet silver and its miners' stocks have seen stratospheric moonshots in the past, and will likely again in the future. And the greatest buying opportunities with real potential for generating life-changing wealth only happen when sectors are despised, which sure describes silver! And after 23 quarters in a row analyzing the latest quarterly results from SIL's 15-largest component stocks, I hate to let this big research thread die.
So somewhat grudgingly, I extended it to 24 consecutive quarters in recent weeks. Silver and thus silver stocks still have great prospects to outperform gold and gold stocks with the right sentiment backdrop. And surprisingly quarterly results aren't always available indefinitely. When competitors acquire mining companies, their websites are soon killed. Then their historical results data mostly vanishes from the internet.
This table summarizes the operational and financial highlights from the SIL top 15 during Q1'22. These major silver miners' stock symbols aren't all US listings, and are preceded by their rankings changes within SIL over this past year. The shuffling in their ETF weightings reflects shifting market caps, which reveal both outperformers and underperformers since Q1'21. Those symbols are followed by current SIL weightings.
Next comes these miners' Q1'22 silver and gold production in ounces, along with their year-over-year changes from the comparable Q1'21. Output is the lifeblood of this industry, with investors generally prizing production growth above everything else. After that is a measure of silver miners' relative purity, their percentage of quarterly sales actually derived from silver. Most silver miners also produce gold or base metals.
Generally the more silver-centric a miner, the more responsive its stock price is to changing silver prices. So traders looking for leveraged silver exposure via its miners' stocks should stick to the purer producers. Then the costs of wresting that silver from the bowels of the earth are shown in per-ounce terms, both cash costs and all-in sustaining costs. The latter subtracted from silver prices help illuminate profitability.
That is followed by these miners' hard quarterly revenues and earnings reported to national securities regulators. Blank data fields mean companies hadn't reported that particular data as of mid-May when Q1's earnings season was winding down. The annual percentage changes are excluded if they would prove misleading, like comparing two negative numbers or data shifting from positive to negative or vice versa.
Last quarter the major silver miners' latest fundamental read again proved mixed. Both their silver and gold outputs declined considerably, and their collective silver purity fell to the lower-end of precedent. Yet they did mostly hold the line on costs despite lower production. And their accounting results were fairly-good considering the relatively-weak silver-price environment. But that's not enough to change traders' minds.
Unfortunately the world silver market is very opaque. Comprehensive global silver supply-and-demand data is only published once a year by the Silver Institute in its excellent World Silver Surveys. The newest covering 2021 was just released in late April. It continued illuminating a major silver-mining peculiarity. Fully 72% of worldwide silver mined last year came as byproductsfrom lead-zinc, copper, and gold mines!
Geologically silver deposits large-enough with high-enough grades to economically exploit are usually mixed in with other metals. That makes primary silver mines generating over half their revenues from silver relatively-rare. And for years silver miners have been increasingly diversifying into gold, which has superior economics. So the major silver miners dominating SIL are becoming more-and-more gold-centric.
This leading silver ETF's 15-largest component stocks collectively produced 72,120k ounces of silver last quarter. That fell a sizable 9.7% year-over-year from Q1'21, which wasn't encouraging. And shockingly their aggregate gold output fared much worse, plunging 31.4% YoY to just 1,075k ounces! That proved the lowest by far in the 24 quarters I've been advancing this research. The previous worst was 1,207k in Q4'21.
While that seems troubling, the SIL top 15's declining output is somewhat anomalous and exaggerated by a couple key factors. The world's largest silver-producing country is Mexico, which accounted for 23.9% of global output last year. China and Peru came in second and third at 13.7% and 13.1%. As I waded through the major silver miners' latest quarterly reports, a clear thread emerged on a shared challenge.
Back in January, the latest omicron variant of COVID-19 was big global news with cases of this highly-infectious virus skyrocketing. Many mining companies implemented extensive testing protocols back in 2020 during earlier COVID-19 waves. Those were attempts to stay open while government officials were threatening to mandate shutterings. While omicron is much-milder, its wide spread was reflected in testing.
Those positive tests required mine employees to stay home, particularly in Mexico which took a harder line on COVID-19. So the world's silver capital suffered flagging outputin Q1'22. Pan American Silver led off its results report with "our operations experienced high levels of workforce absenteeism in January and early February due to the Omicron variant of COVID-19." Fewer workers impaired operational efficiencies.
First Majestic Silver had a similar disclosure. "Worker availability was limited by the Omicron COVID-19 variant in Q1 2022 as the Company's screening processes identified a spike in cases in January and February. Mine development rates were reduced in Mexico which negatively impacted ore extraction rates and grade in the quarter." There were plenty of staffing shortfalls reported at individual mines too.
Fortuna Silver Mines said in Q1 its gold mine in Argentina "lost man-hours in January as a result of the sudden surge in COVID-19 cases causing a 14% shortfall in ore placed on the pad, compared to plan for the quarter." So both silver and gold production among these SIL-top-15 silver miners would've been higher in Q1'22 had COVID-19-omicron not involuntarily furloughed significant fractions of their workforces.
The good news is omicron flared fast then quickly passed. Right after warning on COVID-19's Q1 impact, PAAS reassured "Workforce deployment is now back to more normal levels, and we are maintaining our guidance for 2022 with production weighted to the second half of the year." AG, which is listed under its Canadian symbol in SIL, declared "By March, all operations workforce levels had returned to normal."
So Q1'22's SIL-top-15 silver-output decline was somewhat similar to those seen in the initial pandemic lockdowns during 2020's first couple of quarters. Production rebounded sharply when those ended. The silver miners generally reaffirmed their full-year-2022 guidancesdespite slower Q1 production. Plenty of them had previously forecast this year's output would be back-half-weighted anyway even before omicron hit.
The other driver of last quarter's big overall SIL-top-15 production drop was geopolitical, an indirect result of Russia invading Ukraine. For years SIL's second-largest component had been the Russian-owned UK-traded Polymetal International. As world outrage mounted over the horrific devastation the Russian military has cruelly inflicted on Ukrainian cities, Russian stocks were universally dumped crushing their market caps.
Like most ETFs, SIL is effectively market-capitalization-weighted. So POLY quickly plummeted out of its upper rankings. And as Q1'22's earnings season wound down in mid-May, this company was no longer an SIL component at all. Polymetal's auditor Deloitte resigned in early April, saying it couldn't audit that company's extensive Russian operations. POLY now faces delisting in London if it can't soon find a new auditor!
In the earlier Q1'21, Polymetal produced 4,600k and 337k ounces of silver and gold. Those need to be excluded to make Q1'22 more comparable. If POLY is replaced with SIL's 16th-largest component a year ago, Endeavour Silver which now ranks as 14th, the SIL top 15's total silver and gold production just fell a much-milder 5.5% and 13.4% YoY. And most of that is explainable by the omicron employee shortages.
So the major silver miners' production is nowhere near as bad as it looks. We should see big rebounds in the currently-underway Q2. And Polymetal will roll off of SIL-top-15 comparable ranks in coming quarters, eliminating that distortion. An interesting question is how all that will affect these mining stocks' silver-purity levels. As those proved pretty-low last quarter, SIL effectively remains just another smaller gold-stock ETF.
These miners' percentages of Q1'22 revenues actually derived from silver are implied two ways. For the great majority of SIL-top-15 components that reported total sales, their silver ounces produced multiplied by quarterly-average silver prices are divided by those revenues. This superior measure properly reflects gold and base-metals byproducts. But a couple companies still hadn't reported their sales by mid-May.
Their silver-purity percentages are implied on their estimated total sales based on silver and gold outputs at last quarter's average prices. But that inferior ratio ignores any base-metals byproducts. Overall the SIL top 15 only averaged 37.1% of their Q1'22 revenues coming from silver! That's on the lower side of the 24-quarter range running from 51.4% to 34.2%. Traders must realize SIL is more levered to gold than silver.
Over the last six years, this SIL purity percentage has merely averaged 39.3%. So last quarter's wasn't substantially below that. Two main variables will impact how that evolves in coming quarters. How silver production recovers compared to gold after the omicron slowdowns, and how silver prices fare compared to gold prices. Silver's performance last quarter was poor, which helped drive down miners' silver revenues.
In Q1'22 average silver prices dropped a sizable 8.2% YoY to $24.03 per ounce. Yet average gold prices climbed 4.8% YoY to $1,879! Silver effectively acts like a gold sentiment gauge, it usually only catches a material bid if traders are bullish on gold's fortunes. So in order to outperform gold again, silver probably needs to see gold's interrupted bull upleg resume. Silver gains outpacing gold's would improve silver purity.
Interestingly just threeof SIL's 15-largest component stocks qualified as primary silver miners in Q1, their purity percentages are highlighted in blue. Fresnillo is a Mexican silver behemoth that trades in London, making it difficult for most American traders to own. MAG Silver is a smaller miner with a minority stake in a large new silver mine Fresnillo is ramping up in Mexico. And EXK is an-even-littler silver and gold miner.
Long-term silver-stock price levels ultimately depend on miners' profitability, which is directly driven by the difference between prevailing silver prices and silver-mining costs. In unit terms these are generally inversely proportional to silver production. That's because silver mines' total operating costs are largely fixed during planning stages, their designed throughputs limit the amounts of silver-bearing ore they can process.
That doesn't change quarter-to-quarter, and requires about the same levels of infrastructure, equipment, and employees. The only real variable is the ore grades run through the fixed-capacity mills. Richer ores yield more silver ounces to spread the big fixed expenses of mining across, lowering unit costs which boosts profitability. With SIL-top-15 silver output falling considerably in Q1, unit costs should've risen proportionally.
Cash costs are the classic measure of silver-mining costs, including all cash expenses necessary to mine each ounce of silver. But they are misleading as a true cost measure, excluding the big capital needed to explore for silver deposits and build mines. So cash costs are best viewed as survivability acid-test levels for the major silver miners. They illuminate the minimum silver prices required to keep the mines running.
The SIL top 15's average cash costs only inched up 0.3% YoY, which was much better than lower output implied they should've done. But coming in at $10.55 per ounce, those were still narrowly the highest on record. There were no wild outliers skewing this, it was righteous. The mining companies are facing big inflationary pressures forcing costs higher, fueled by central banks' enormous money printing in recent years.
Q1'22 results were full of warnings on inflation and resulting uncertainties for cost guidances. PAAS advised "We are currently experiencing higher than expected overall inflationary pressures, particularly for diesel and certain consumables, as well as disruptions in the supply chain." AG blamed rising expenses on "higher labour, consumables and energy costs primarily due to inflationary pressures during the quarter".
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 the major silver miners' true operating profitability.
The SIL top 15's average AISCs climbed a comparatively-tame 5.3% YoY, but hit $15.08 which was the third-highest on record after Q3'21's $15.78 and Q3'18's $15.36. There were no real skewing outliers on that front either, those high all-in sustaining costs were evenly-distributed. But high costs combined with lower average silver prices weren't good news for implied sector unit profits, which weakened sharply last quarter.
The best proxy for per-ounce silver-mining earnings simply subtracts the SIL top 15's average AISCs from a quarter's average silver prices. That resulted in implied unit profits of $8.95 per ounce in Q1'22, which plunged 24.5% YoY. That is the second-lowest seen in the last seven quarters, and way below the Q3'20 peak of $14.77 per ounce in earnings. But these remain solid profits levels from a longer-term perspective.
Before Q3'20, prevailing silver prices were much lower. So for three years prior to that, this SIL-top-15 implied-unit-earnings metric averaged just $3.82 per ounce. Last quarter's $8.95 remained more than double those pre-silver-surge levels. But the last couple years or so have seen that average soar dramatically to $11.17 per ounce. And Q1'22's silver-mining profits were certainly weaker by that better recent standard.
They ought to improve as 2022 marches onthough. Recovering silver production with most of omicron's disruptions passing will yield more silver ounces to spread the big fixed costs of mining across, hopefully lowering AISCs. But these mounting inflationary cost pressures threaten to overcome benefits from better output. And surprisingly silver itself wasn't faring horribly as of mid-May when earnings season ended.
About halfway through Q2'22, silver was still averaging $23.63 quarter-to-date. That was merely down 1.7% sequentially from Q1'22's levels! And when gold reverses hard to mean revert sharply higher as heavy gold-futures selling yields to big proportional buying, silver's parallel surge should outpace gold's gains. In mid-May the silver-futures speculators had even-more-bullish-for-silver positioning than the gold ones!
On the hard-accounting front under Generally Accepted Accounting Principles or their equivalents in other countries, the SIL top 15's Q1'22 results were fairly-good compared to their production declines. Their total revenues fell 4.6% YoY to $5,739m, but that was skewed by Polymetal. If that big falling-from-grace Russian gold-and-silver miner is excluded from the comparable Q1'21, SIL-top-15 sales actually rose 5.2%.
Since Polymetal just disclosed revenue a year ago, it didn't distort any other key accounting metrics. The SIL top 15 reported total bottom-line profits of $1,190m last quarter, which skyrocketed 108.9% YoY! But that is heavily-distorted by a colossal $480m one-time gain reported by Peru's Buenaventura from selling discontinued operations. Yet even excluding that, these major silver miners' earnings still surged 24.6% YoY!
That should help push down their lofty valuations in classic trailing-twelve-month price-to-earnings-ratio terms, which averaged 71.8x in mid-May. But removing the 200ish P/Es of brand-new silver miner MAG and GoGold Resources which just edged into the SIL top 15 for the first time last quarter, the rest of these major silver miners averaged far-more-reasonable 32.7x P/Es. The silver stocks certainly aren't richly-valued.
The SIL top 15's cash flows generated from operations plunged 42.9% YoY to $392m. But that sharp decline was exacerbated by all those additional COVID-19-omicron costs and operational inefficiencies. OCFs should rebound dramatically with that virus wave now long passed. These silver miners still reported total cash treasuries up 12.3% YoY to $6,268m, plenty of capital to invest in expanding their outputs.
There are likely still big gains to be won in silver stocks as their metal powers higher with gold in coming years. This raging inflation unleashed by epic Fed money printing is wildly-bullish for gold, and silver will likely ride its coattails higher. But traders need to be selective, picking the best fundamentally-superior silver miners to amplify silver's upside. Their performances should trounce that of silver ETFs like SIL.
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The bottom line is silver miners reported a decent first quarter. While their silver-and-gold production fell, that mostly resulted from COVID-19-omicron disruptions to operations. Plenty of silver miners expect to see improving outputs as 2022 marches on. More ounces to bear the big fixed costs of mining ought to lower unit costs, boosting profitability. But raging price inflation could dampen the positive effects of that.
While the silver miners' fundamentals are solid, traders have avoided their underperforming stocks. That won't change until gold sentiment improves enough to fuel herd bullishness. Silver investment demand surges when traders expect gold to continue powering higher. That's when big-and-fast buying can flare in silver and its miners' stocks catapulting up their prices. Buying low before that can lead to colossal gains!
May 27, 2022
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