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Silver Miners' Q2'20 Fundamentals

Adam Hamilton
Aug 28, 2020

The silver miners' stocks have had a roller-coaster ride of a year, getting sucked into March's stock panic before skyrocketing out in a massive upleg. While much-higher prevailing silver prices radically improve silver-stock fundamentals, Q2's national economic lockdowns to fight COVID-19 wreaked havoc on this sector. The silver miners' latest quarterly results recently released revealed unprecedented challenges.

The silver-stock realm is tiny, as there aren't many major silver miners in the world. Only a handful are primary silver producers, companies deriving over half their revenues from silver. So in mid-August as silver miners finished reporting their latest Q2'20 operational and financial results, this sector's leading benchmark and trading vehicle only held $1.1b in net assets. It is the SIL Global X Silver Miners ETF.

2020's silver-stock price action has proven neck-snappingly violent. In just several weeks into mid-March, SIL plummeted 43.8% as silver got entangled in that government-lockdown-spawned stock panic. That climaxed in a full-blown crash, with SIL cratering 27.4% in the final couple trading days alone! Silver and its miners' stocks were extraordinarily out of favor, an exceptional buying opportunity for contrarian traders.

Silver ferociously V-bounced out of those extreme stock-panic lows, sending silver stocks stratospheric. Over the next 4.8 months into early August, SIL skyrocketed 176.9% higher! While any sector nearly tripling in such a short period of time is incredible, the silver stocks were actually underperforming. The metal they mine blasted 142.8% higher during that span, so SIL's upside leverage was quite weak at 1.2x.

In late July, silver started shooting parabolic as stock traders flooded into its leading SLV ETF. That left silver exceedingly overbought, so a correction was necessary to bleed off the euphoria and rebalance sentiment. That started with a bang, silver cratering 15.2% in a single trading day! That hammered SIL 13.1% lower by mid-August, silver stocks entered their own correction as their Q2 results were being released.

And they sure weren't going to be pretty! Last quarter's national-economic-lockdown orders to slow the spread of COVID-19 hit major silver-producing countries disproportionally hard. According to the latest comprehensive data from the venerable Silver Institute, the world's top two silver-mining jurisdictions are Mexico and Peru. In 2019 they accounted for 23% and 16% of the total global mined silver output, 4/10ths!

Unlike the Silver Institute which only publishes global silver supply-and-demand numbers annually, the World Gold Council updates its best-available gold fundamental data quarterly. In its Q2 Gold Demand Trends report, WGC analysts revealed the stunning magnitude of the countrywide lockdowns officials imposed on Mexico and Peru. Their gold production plummeted a catastrophic 62% and 45% YoY in Q2!

Mining in Mexico was suspended for a jaw-dropping 60 days last quarter! And with that leading silver-producing country being the primary mining destination for American and Canadian silver miners, their forced production hits were colossal. Adding to Q2's unprecedented operational challenges, silver prices were relatively anemic. While silver did soar 30.7% in Q2 proper, its quarterly average price merely rose 9.9% YoY.

That way underperformed the enormous 30.9% gain in average gold prices from Q2'19 to Q2'20! The recent parabolic fireworks in silver didn't start until mid-July after quarter-end. Of that gargantuan 142.8% silver upleg after the stock panic, only 1/4th happened during Q2. With silver averaging just $16.36 last quarter, I started my usual deep dive into the major silver miners' latest results with plenty of trepidation.

This was my 17th quarter in a row analyzing how the world's biggest and best silver miners are faring fundamentally. While SIL included 27 component stocks in mid-August as Q2's earnings season was wrapping up, I limited my research to its top 15 holdings. They commanded a dominant 90.8% of SIL's total weighting. These silver giants mostly trade on stock exchanges in the US, UK, Canada, and Mexico.

That makes amassing their quarterly data somewhat challenging, with reporting varying considerably in different countries and companies. In cases where half-year data was all that was offered, I split it in half to approximate Q2 results. The highlights of all those quarterly reports are included in this table. Stock symbols are listings from companies' primary exchanges, with the majority of the SIL top 15's outside the US.

That's preceded by their ranking changesin terms of SIL weightings between Q2'19 to Q2'20. And it is followed by these major silver miners' current SIL weightings as the Q2 earnings season concluded in mid-August. Then each company's quarterly silver and gold production in ounces is shown, followed by their year-over-year changes from Q2'19. Their silver output can be used to gauge relative silver purity.

The higher their percentage of quarterly revenues derived from silver production, the more responsive miners' stock prices are to silver price action. The next column shows this metric of silver-centricness. It is mostly calculated by multiplying companies' quarterly silver outputs by silver's average price in Q2, then dividing those results by quarterly revenues. When sales aren't reported, this can instead be approximated.

For half-year-reporting silver miners where Q2 was an interim quarter, those implied silver revenues can be divided by implied gold-plus-silver sales. But that method is inferior since it excludes base-metals byproducts. According to the Silver Institute, only 29% of all the silver mined worldwide in 2019 came from primary silver mines. 32% was a byproduct from mining lead and zinc, with another 23% from copper.

The rare primary silver miners' silver-purity percentages are highlighted in blue. Their stock prices often show the highest leverage to silver. That is followed by cash costs per ounce and all-in sustaining costs per ounce, along with their year-over-year changes. They reveal how much it costs the SIL-top-15 silver miners to blast their metal loose from the earth and process it. Finally comes quarterly revenues and profits.

Blank data fields mean a company hadn't reported that particular data by mid-August as Q2's earnings season was ending. And percentage changes aren't included if they would either be misleading or not meaningful. The main examples are comparing two negative numbers and when data shifts from positive to negative or vice versa over this past year. As feared given Q2's lockdown environment, operations were ugly!

Together the SIL-top-15 silver miners only produced 53.9m ounces of silver last quarter. That was the lowest by far in the 17 quarters I've been working on this research thread, collapsing 26.0% YoY! The major silver miners naturally have big exposure in Mexico and Peru, where governments forced national lockdowns to combat COVID-19. Those sweeping orders included the usually-remote silver miners.

Some of these major silver miners pushed hard for exemptions, as their operations are highly pandemic-resistant. Silver mines are usually way out in the mountains, with access limited and tightly controlled. The silver miners quickly implemented mitigation efforts to detect any infected workers and quarantine them. Forcing silver mines into care and maintenance made little sense economically or epidemiologically.

First Majestic Silver, which SIL includes through its Canadian listing FR, operates exclusively in Mexico where the lockdowns persisted for 2/3rds of Q2. Early last quarter this company had already "been 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".

But those efforts to persuade the Mexican government to reopen the mines mostly proved unsuccessful. First Majestic's silver output plummeted 42.6% YoY with its Mexican operations arbitrarily mothballed! Other SIL-top-15 silver miners saw similar collapses in their output from Mexico, including Pan American Silver. Its overall Q2 silver production cratered 56.9% YoY, because of its mining operations in Mexico and Peru.

31% and 43% of this company's 2019 sales came from those countries, so their long national lockdowns slammed its production. In its Q2 report Pan American warned, "The global COVID-19 pandemic had a significant impact on Q2 results, with all our Latin American operations placed in care and maintenance mode for periods of time during the quarter." Buenaventura, Peru's largest gold miner, fared even worse.

Its silver production crashed 63.9% YoY in Q2 due to its Peruvian mining concentration! That country declared an extended State of Emergency, crushing the miners operating there. There has been a huge global silver-supply impact from governments' draconian overreactions to COVID-19. Those severe supply constraints imposed by decree likely contributed to silver's parabolic surge to extreme overboughtness.

Rather troublingly in Mexico, some large politically-connected miners appeared more equal than others in apparently being largely exempted from the lockdowns. The Mexican Fresnillo is the world's largest silver miner, producing about 1/16th of the total global output in 2019. Despite extensive operations in Mexico, somehow its silver output only slipped 5.7% YoY! That seems impossible with 2/3rds of Q2 locked down.

That company reported "Production at our underground mines was relatively unaffected by COVID-19 in 2Q20" and "Production at our underground mines remains broadly in line with plan, despite a reduction in the number of workers on site. The impact on our open pit gold mines has been greater, as mining activities had to cease for around six weeks, although processing continued." Did Fresnillo get a special deal?

Mexico has long been notorious for rampant government corruption, and such a giant mining company has to have high-level political connections. Another Mexican mining giant, Industrias Penoles which spun off Fresnillo back in May 2008, also reported a mere 4.6% YoY decline in silver output last quarter. That stable production through the lockdown orders sure seems suspicious given other miners' collapsing output.

The SIL top 15's gold output wasn't slammed as hard as silver in Q2, falling 17.8% YoY to hit 1.2m ounces. That was also a new low out of the last 17 quarters. Gold production was more resilient than silver output partially because these companies' gold mines generally aren't quite as concentrated in Mexico and Peru as their silver operations. But it also reflects the traditional silver miners' ongoing shift into gold.

Recent years' prevailing gold and silver prices have made the former much more profitable to mine, so the SIL top 15 have long been shifting more resources into expanding gold production. I've analyzed this in much detail in past essays on major silver miners' quarterly results. The COVID-19 disruptions aren't likely to accelerate that strategic change, but they did drive the major silver miners' silver purity to new lows.

Last quarter the SIL top 15 only averaged 34.5% of their quarterly revenues from silver, the lowest levels in at least 17 quarters. The only major primary silver miners left are First Majestic with 86.0% of its Q2 sales from silver and Silvercorp Metals at 65.6%. The former's silver purity is abnormally high because its gold production plunged even more than silver in Q2. As output resumes, that should return near Q1's 61.5%.

While COVID-19 national lockdowns ravaged Q2 silver output, thankfully those heavy-handed reactions to this pandemic have largely ended. Governments started realizing the economic, social, political, and health damage from garroting their economies is vastly worse than anything COVID-19 could do. So they are unlikely to order more blanket lockdowns in the future, instead narrowly targeting any to outbreak areas.

A common theme in the SIL top 15's Q2 reports is that most of their silver mines started ramping back up before Q2 ended. So that staggering production hit is likely an isolated anomaly limited to Q2. While Q3 output may be marginally weaker with some mines not yet running full-speed for the entire quarter, odds are Q4 will be back to normal. Thus major silver miners' fundamentals should radically improve going forward.

In silver mining, output and costs are inversely proportional. The more silver mined, the more ounces to spread this industry's big fixed costs across. Those generally don't change much from quarter to quarter regardless of prevailing silver prices. Quarter after quarter individual mines require the same levels of infrastructure, equipment, and employees to feed their fixed-capacity mills. So lower outputs mean higher unit costs.

And that doesn't even include all the new costs for managing this pandemic, something the silver miners have never had to do. Testing for the virus, quarantining the afflicted, and relentlessly social distancing and cleaning to limit its spread all require more resources and people. So silver-mining operating costs had to increase with these many new COVID-19 burdens, completely independent from silver production.

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 necessary to keep the mines running.

In Q2'20 the SIL-top-15 major silver miners reported average cash costs of $7.53, which merely climbed 9.5% YoY. That wasn't even the top of the 17-quarter range running from $5.67 to $7.97. So despite all those government-imposed operating restrictions, cash costs didn't soar proportionally with the cratering silver output. And silver miners face no existential threat with silver averaging an impressive $23.44 so far in Q3!

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 keep silver mines as ongoing concerns, and reveal the major silver miners' true operating profitability.

Incredibly the elite silver miners did such a good job holding the line on costs that Q2's collapsing output didn't lead to proportionally-higher AISCs. The SIL top 15 reporting these averaged only $12.21 last quarter, merely up 6.1% YoY! That was amazingly in the lower half of their 17-quarter range running from $10.63 to $15.36. With silver again averaging $16.36 in Q2, that implies sector profitability of $4.15 per ounce.

Astoundingly that actually grew a healthy 23.1% YoY from Q2'19's earnings! That is certainly unexpected given the COVID-19 lockdowns gutting these miners' silver and gold production. But quarterly average silver and gold prices climbing about 10% and 31% YoY really helped. And some companies shrewdly delayed selling some of their silver mined in Q1, when the panic crushed silver to deep 10.9-year secular lows.

They deferred those silver sales into Q2, when silver rebounded strongly to much-higher prices. So the SIL top 15's financial results were nowhere near as bad as their cratering silver production suggested. And that industry implied profitability should improve dramatically in coming quarters. Silver production levels recovering, stable-to-lower AISCs, and much-higher prevailing silver prices should drive soaring earnings.

Again silver has averaged a lofty $23.44 so far in Q3. Assuming SIL-top-15 AISCs retreat modestly this quarter back to their past-year average of $11.90, that implies the major silver miners could be earning an enormous $11.54 per ounce in this current quarter. That would catapult Q3'20 profits a whopping 85.2% higher YoY! The major silver miners' fundamental trough hit and passed last quarter with the lockdowns.

On the hard financial-results front under Generally Accepted Accounting Principles reported to securities regulators, or their foreign equivalents, the major silver miners reported a much-better Q2 financially than their operating results implied. The SIL top 15's total revenues only fell 10.3% YoY to $3.2b, much better than 26%-lower silver and 18%-lower gold output indicated thanks to Q2's higher precious-metals prices.

Again last quarter's $16.36 average silver prices were 9.9% better than Q2'19's, and gold's record $1714 average soared a massive 30.9% YoY. As the major silver miners' silver and gold outputs rebound, their revenues are going to blast higher. Last quarter's collective earnings from the SIL top 15 added up to a fairly-small $69m. But that was still much better than the $120m total loss they reported a year earlier in Q2'19.

Operating-cash-flow generation proved strong in Q2'20, bucking the operational weakness to soar 46.4% YoY to $815m. That helped the major silver miners grow their collective cash hoards by 32.0% to $3.1b. With the unprecedented challenges plaguing this industry last quarter, the SIL top 15's financial results proved incredibly resilient. That shows this sector has a strong fundamental foundation for big future upside.

Given governments' heavy-handed extended lockdowns in major silver-producing countries, Q2'20 could've been a disaster for the silver miners. Having a quarter to half of their output shuttered was an unprecedented operational shock! Yet the SIL top 15 still reported solid financial results as higher silver prices and much-higher gold prices helped offset some of the adverse impacts of that shut-in production.

The silver miners have huge earnings-growth potential at the higher prevailing silver prices seen in Q3. As their silver production normalizes with the universal lockdowns behind us, big additional gains are sure fundamentally justified in the silver stocks. Despite SIL skyrocketing 176.9% in its first post-panic upleg, this bull's next upleg is likely to prove big too. But silver stocks first have to bleed off extreme overboughtness.

All bull markets naturally flow then ebb, taking two steps forward before retreating one step back. Their price action gradually meanders around uptrends. This normal upleg-correction pattern keeps sentiment balanced, extending bull markets' longevity. And it is a huge boon for traders, offering excellent mid-bull opportunities to buy relatively low before later selling relatively high. That greatly expands bulls' potential gains!

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The bottom line is major silver miners suffered an exceedingly-challenging Q2. Extended national lockdown orders in major silver-producing countries slashed many silver miners' outputs by a quarter to a half! Yet these companies still managed to keep production costs in check. Higher prevailing silver and gold prices offset a big chunk of that, driving surprisingly-solid Q2 financial results given these crazy circumstances.

The silver miners were quick to restart operations once the lockdowns passed, and are ramping outputs back to full-speed. That should lower costs, which along with much-higher silver prices should greatly amplify profits going forward. So big additional silver-stock gains are fully justified fundamentally. This sector just has to work off its overboughtness first, through a healthy sentiment-rebalancing correction.


Aug 28, 2020
Adam Hamilton, CPA

Thoughts, comments, or flames? Fire away at zelotes@zealllc.com. Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally. I will read all messages though and really appreciate your feedback!

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