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.

The large majority of these SIL silver miners reported total Q3 revenues. Quarterly silver production multiplied by silver’s average price in Q3 can be divided by these sales to yield an accurate relative-purity gauge. When Q3 sales weren’t reported, I estimated them by adding silver sales to gold sales based on their production and average quarterly prices. But that’s less optimal, as it ignores any base-metals byproducts.

Next comes the major silver miners’ most-important fundamental data for investors, cash costs and all-in sustaining costs per ounce mined. The latter directly drive profitability which ultimately determines stock prices. These key costs are also followed by YoY changes. Last but not least the annual changes are shown in operating cash flows generated and hard GAAP earnings, with a couple exceptions necessary.

Percentage changes aren’t relevant or meaningful if data shifted from positive to negative or vice versa, or if derived from two negative numbers. So in those cases I included raw underlying data rather than weird or misleading percentage changes. Companies with symbols highlighted in light-blue have newly climbed into the elite ranks of SIL’s top 17 over this past year. This entire dataset together is quite valuable.

It offers a fantastic high-level read on how the major silver miners are faring fundamentally as an industry and individually. Q3’19’s higher prevailing silver prices thanks to gold’s bull-breakout rally greatly improved silver miners’ fundamentals. Their revenues and earnings surged higher, despite lower silver production as they continue diversifying into gold. Their stock prices aren’t reflecting huge earnings-growth potential.

Silver’s Q3’19 performance was interesting, looking impressive on the surface while also disappointing. Between late May and early September, silver blasted 36.6% higher. That amplified gold’s big 21.5% gain in that span by 1.7x. Silver peaked the same day gold did in early September, soaring 28.1% Q3-to-date! But silver also slumped with gold into quarter-end, rallying 11.2% in Q3 proper which trounced gold.

That was 2.5x gold’s 4.4% Q3 advance, excellent silver leverage to gold. But since silver’s recent surge began near those extreme quarter-century-plus lows relative to gold, its gains were more muted. Q3’19’s average silver price of $16.97 was only 13.4% better than Q3’18’s average. Meanwhile the average gold price soared 21.7% YoY last quarter. So silver miners’ fundamental boost considerably lagged the gold miners’.

And the silver miners desperately needed higher metal prices much more than the gold miners. In late May nearing Q3, SIL slumped to a miserable 3.3-year secular low. Meanwhile the leading GDX gold-stock ETF had merely retreated to a 4.4-month low in early May. Silver acts like a gold sentiment gauge, only rallying materially when traders expect higher gold prices. When they don’t, silver seriously languishes.

And when silver is down and out, the silver miners’ stocks are all but abandoned. That bearish psychology takes some time to reverse, as reflected in SIL’s performance. While this leading silver-stock ETF surged 46.6% higher between late May to early September, that was a measly 1.3x silver’s own advance. The major silver miners need to amplify silver uplegs by 2x to 3x to be worth the big additional risks they bear.

Despite the silver stocks’ strong summer rally, much residual pessimism remained. After SIL surged 20.2% quarter-to-date by that early-September peak, it plunged 12.8% into quarter-end. That left this key silver-stock benchmark with a poor 4.8% gain in Q3 proper. That was absolutely terrible, running just 0.4x silver’s own Q3’19 rally! So the silver-stock-price performance last quarter was relatively weak.

But the silver miners’ recently-released Q3’19 results prove the silver stocks should’ve enjoyed much-bigger gains. They enjoyed a massive fundamental boost from the higher prevailing silver prices, despite this metal not performing as well as it ought to compared to gold. That gives the silver miners’ stocks big upside potential once traders figure this out, as current silver-stock levels don’t yet reflect higher silver prices.

Since production is the lifeblood of silver mining, that’s the best place to start in analyzing how the major silver miners fared in Q3. The SIL-top-17 silver miners again collectively produced 72.2m ounces of silver last quarter, which was actually down 4.4% YoY. Meanwhile their total gold output surged 11.9% higher YoY to 1,619k ounces. That was the highest SIL-top-17 gold output in the 14 quarters I’ve done this research!

The major silver miners continued their long-term trend of increasingly diversifying into gold. As silver wasted away in recent years, its bombed-out prices heavily impaired silver mines’ ability to generate operating cash flows and profits. The silver miners were forced to adapt, and shifted their focus and capital into adding gold production rather than boosting silver output. The major silver miners are yellowing.

Silver mining is as capital-intensive as gold mining, requiring similar large expenses to plan, permit, and construct new mines, mills, and expansions. It needs similar fleets of heavy excavators and haul trucks to dig and move the silver-bearing ore. Similar levels of employees are necessary to run silver mines. But at recent years’ average precious-metals prices, silver mines generate far lower returns than gold mines.

So even longtime traditional silver miners have reallocated much of their capital investments into growing gold mined, at silver’s expense. According to the Silver Institute’s latest World Silver Survey, 2018 was the third year in a row of waning global silver mine production. The mined-silver-supply shrinkage is even accelerating, running 0.0% in 2016, 1.8% in 2017, and 2.4% in 2018! Peak silver could really be upon us.

Over this past year Pan American Silver has most exemplified the traditional major silver miners moving into gold. Back in mid-November 2018, PAAS acquired troubled silver miner Tahoe Resources. Tahoe had owned what was once the world’s largest primary silver mine, Escobal in Guatemala. That behemoth produced 5.7m ounces of silver in Q1’17, the last quarter before that country’s government unjustly shut it down.

That was in response to a frivolous lawsuit brought against Guatemala’s mining regulator, not Tahoe or Escobal, for a trivial bureaucratic misstep! Pan American hoped to work through all the red tape to win approval to restart that huge silver mine. But the real prize in that fire-sale buyout was Tahoe’s gold production from other mines. Q3’19 is only the second quarter that acquisition is fully reflected in PAAS’s results.

While its silver output climbed a solid 6.6% YoY to 6.7m ounces, Pan American’s gold production soared 256.8% YoY to 150k ounces! Interestingly that huge jump in PAAS’s gold accounted for nearly 2/3rds of the total gold increase across the entire SIL-top-17 silver miners. PAAS is forecasting full-year-2019 production of 575k ounces of gold, which makes it a sizable mid-tier gold miner, and 25.8m ounces of silver.

Last quarter only 32.1% of Pan American’s revenues came from silver, so its days as a primary silver miner running over 50% are long gone. I wonder if Pan American Silver will follow in Wheaton Precious Metals’ footsteps and change its name and symbol to reflect its new gold-dominated future. Prior to May 2017 WPM, SIL’s largest component, used to be a pure silver-streaming play known as Silver Wheaton.

SIL’s second-largest component in mid-November was the Russian-founded but UK-listed Polymetal. In Q3’19 its silver output plunged 19.4% YoY to 5.4m ounces, yet its gold production surged 12.9% YoY to hit a massive 402k ounces. That annualizes to way over 1m ounces per year, making POLY a major gold miner. Last quarter just 14.0% of its sales were derived from silver, the lowest silver purity in the SIL top 17.

Other elite SIL-component silver miners had gold output rising faster than silver production, like Coeur Mining. Its 3.5% YoY silver-production growth in Q3 was dwarfed by its 14.1% YoY gold-production growth. Unfortunately the major primary silver miners are a dying breed, since the economics of silver mining are far inferior to gold mining. SIL’s managers can’t even find enough silver miners to fill out their ETF.

Inexplicably Korea Zinc remains SIL’s third-largest component, which is a base-metals smelter that has nothing to do with silver mining! While its financial reporting in English is atrocious, it smelted about 64.0m ounces of silver in 2018 which approximated roughly 17% of its full-year revenue. It ought to be kicked out of SIL posthaste, as its presence and big 1/11th weighting really retards SIL’s sensitivity to silver.

Global X was really scraping the bottom of the barrel to include a company like Korea Zinc in SIL. I’m sure there’s not a single SIL investor who wants base-metals-smelting exposure in what is advertised as a “Silver Miners ETF”. The weighting and capital wasted in Korea Zinc should be reallocated and spread proportionally across the other SIL stocks. The ranks of major silver miners are becoming more rarefied.

Despite their shifting-into-gold trend, the SIL-top-17 silver miners averaged 40.4% of their sales from silver in Q3’19! That was a big improvement over Q3’18’s 36.9%, and SIL’s highest overall silver purity since Q4’16. I was certainly surprised to see that given silver’s relative underperformance compared to gold in Q3, and the SIL top 17’s lower silver production. But higher silver prices really boosted silver revenues.

SIL’s upper ranks still include just 3 primary silver miners, with their silver-purity percentages highlighted in blue in this table. They are First Majestic Silver at 82.6%, Silvercorp Metals at 64.4%, and Fortuna Silver Mines at 53.6%. The individual stocks of these silver-centric miners will be far more responsive to silver prices than SIL as a whole. Despite their inclusion, SIL essentially remains another gold miners’ ETF.

With SIL-top-17 silver production sliding 4.4% YoY in Q3’19, the per-ounce mining costs should’ve risen proportionally. Silver-mining costs are largely fixed quarter after quarter, with actual mining requiring the same levels of infrastructure, equipment, and employees. So the lower production, the fewer ounces to spread mining’s big fixed costs across. Yet impressively the SIL-top-17 silver miners’ costs fell sharply in Q3.

There are two major ways to measure silver-mining costs, classic cash costs per ounce and the superior all-in sustaining costs. Both are useful metrics. Cash costs are the acid test of silver-miner survivability in lower-silver-price environments, revealing the worst-case silver levels necessary to keep the mines running. All-in sustaining costs show where silver needs to trade to maintain current mining tempos indefinitely.

Cash costs naturally encompass all cash expenses necessary to produce each ounce of silver, including all direct production costs, mine-level administration, smelting, refining, transport, regulatory, royalty, and tax expenses. In Q3’19 these SIL-top-17 silver miners reported cash costs averaging $6.61 per ounce, up a trivial 0.5% YoY. SVM was a major contributor, reporting negative cash costs due to big byproduct credits.

Way more important than cash costs are the far-superior all-in sustaining costs. They were introduced by the World Gold Council in June 2013 to give investors a much-better understanding of what it really costs to maintain silver mines as ongoing concerns. AISCs include all direct cash costs, but then add on everything else that is necessary to maintain and replenish operations at current silver-production levels.

These additional expenses include exploration for new silver to mine to replace depleting deposits, mine-development and construction expenses, remediation, and mine reclamation. They also include the corporate-level administration expenses necessary to oversee silver mines. All-in sustaining costs are the most-important silver-mining cost metric by far for investors, revealing silver miners’ true operating profitability.

The SIL-top-17 silver miners reporting AISCs in Q3’19 averaged just $10.74 per ounce, which was down a massive 20.6% YoY! That was really impressive considering their waning silver production. SVM’s huge byproduct credits again played a role, driving super-low best-in-sector AISCs of only $4.15. But most of the other major silver miners also saw sharply-lower AISCs last quarter, including SSR Mining.

SSRM’s 16.7%-lower AISCs compared to Q3’18 were a big factor in the SIL top 17’s plunging AISCs, as that came from anomalously-high levels. SSR Mining was winding down an old silver mine a year ago, leading to soaring unit costs as production dwindled. But last December SSRM spun up a new silver mine near that old mine site, and is trucking the ore to its existing processing facilities. So silver output soared.

That is forcing SSRM’s high AISCs back down, really improving the SIL-top-17 average. Interestingly if SSRM’s new silver mine hadn’t come online, the SIL top 17’s total silver output would’ve declined 5.9% YoY. Lower AISCs are good news anytime, but greatly boost the implied profitability of major silver miners when silver itself is rallying. Silver’s $16.97 average price in Q3’19 made for hefty profit margins.

That less the SIL top 17’s average $10.74 AISCs yielded big earnings of $6.23 per ounce. That was up a stupendous 335.7% YoY compared to Q3’18’s mere $1.43! Silver averaged just $14.96 in that year-ago comparable quarter, while SIL-top-17 average AISCs were much higher at $13.53. The sequential profits growth from Q2’19 was epic too, soaring 84.9% QoQ from implied profit margins of $3.37 before silver surged.

This incredible gargantuan earnings growth among the major silver miners certainly isn’t anywhere near yet reflected in their stock prices. So the silver stocks have to soar far higher during their metal’s next upleg, which will again be driven by gold. Even though silver’s advance straddling Q3’19 lagged gold’s relatively, the combination of higher prevailing silver prices and lower costs was still a potent earnings multiplier.

Q3’s 13.4%-higher average silver prices and 20.6%-lower SIL-top-17 average all-in sustaining costs were certainly reflected in the hard accounting numbers too. These elite silver miners’ collective sales jumped 21.1% YoY to $3,289m last quarter. That generated operating cash flows of $771m, which was down 7.1% YoY. Mexico’s Industrias Peñoles was solely responsible, with OCFs collapsing 46.9% YoY or $258m!

Still the SIL top 17’s total cash hoard grew 5.9% YoY to $2,561m. And the hard GAAP earnings were radically better as implied by that big spread between prevailing silver prices and AISCs. These SIL-top-17 miners’ total profits ran $66m in Q3’19, compared to a $243m loss in the year-ago comparable quarter. So these higher prevailing silver prices are indeed turning things around for the long-stressed silver miners.

While the silver miners’ stocks have massive pent-up rallying to do to reflect these radically-improving fundamentals, that’s not going to happen until gold’s correction runs its course. Silver rarely advances materially if gold isn’t powering higher in its own upleg. But once gold turns north decisively and gives the green light to silver, the silver stocks should catch really-strong bids. Unfortunately SIL isn’t the way to play them.

While it is the world’s leading “Silver Miners ETF”, it is increasingly burdened with primary gold miners with waning silver exposure. The smaller the fractions of revenues miners derive from silver, the less responsive their stock prices are to silver-price moves. And having 1/11th of SIL’s capital squandered in Korea Zinc is madness. It’s far better to avoid SIL and deploy capital in smaller purer primary silver miners.

Silver’s previous major upleg erupted in essentially H1’16, when silver soared 50.2% higher on a parallel 29.9% gold upleg. SIL blasted 247.8% higher in just 6.9 months, a heck of a gain for major silver stocks. But the purer primary silver miners did far better. The purest major silver miner First Majestic’s stock was a moonshot, skyrocketing a staggering 633.9% higher in that same short span! SIL’s gains are relatively muted.

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The bottom line is the major silver miners had an incredible Q3, despite silver’s anemic rally straddling that quarter compared to gold’s. The higher prevailing silver prices combined with lower costs still worked wonders for silver miners’ profitability, both implied as an industry and actual per GAAP earnings. That drove radical fundamental improvements in the silver miners, even as they continued diversifying into gold.

But silver’s recent upleg was truncated way before silver-stock prices really started to reflect the miners’ wildly-better fundamentals. That portends big outsized silver-stock gains during silver’s next upleg. As long as prevailing silver prices continue advancing on balance with gold’s secular bull, the silver miners are going to keep looking better and better fundamentally. Their upside potential is massive, well worth riding.